<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 2000
REGISTRATION NO. 333-33126
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AAVID THERMAL TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3679 02-0466826
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
AAVID THERMAL PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 91-2028288
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
THERMALLOY, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 91-2028285
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
THERMALLOY INVESTMENT CO., INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 91-2028280
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
AAVID THERMALLOY, LLC
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 91-2028289
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
APPLIED THERMAL TECHNOLOGIES, LLC
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE PENDING
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
AAVID THERMALLOY OF TEXAS, LLC
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 91-2028292
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
(CONTINUED ON NEXT PAGE)
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
(CONTINUED FROM FRONT PAGE)
AAVID THERMALLOY SW, LLC
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 91-2028297
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
FLUENT HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 91-2028283
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
------------------------
ONE EAGLE SQUARE, SUITE 509
CONCORD, NEW HAMPSHIRE 03301
(Address, including zip code, and telephone number, including
area code of Registrant's principal executive offices)
------------------------------
JOHN W. MITCHELL,
VICE PRESIDENT AND GENERAL COUSNEL
AAVID THERMAL TECHNOLOGIES, INC.
ONE EAGLE SQUARE, SUITE 509
CONCORD, NEW HAMPSHIRE
(603) 224-6191
(Name, address, including zip code, and telephone number, including
area code of agent for service)
------------------------------
COPY OF ALL COMMUNICATIONS TO:
POLLY S. SWARTZFAGER
BARTLIT BECK HERMAN PALENCHAR & SCOTT
511 16(TH) STREET, SUITE 700
DENVER, COLORADO 80202
(303) 592-3100
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
<PAGE>
PROSPECTUS
$150,000,000
AAVID THERMAL TECHNOLOGIES, INC.
OFFER TO EXCHANGE
OUR 12 3/4% SENIOR SUBORDINATED NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR
ANY AND ALL OF OUR OUTSTANDING
12 3/4% SENIOR SUBORDINATED NOTES DUE 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON APRIL 27, 2000, UNLESS EXTENDED.
We are offering to exchange our 12 3/4% Senior Subordinated Notes due 2007
which have been registered under the Securities Act of 1933 for any and all of
our outstanding 12 3/4% Senior Subordinated Notes due 2007 issued in a private
offering on February 2, 2000.
THE EXCHANGE NOTES
- The terms of the registered exchange notes to be issued are substantially
identical to the terms of the outstanding notes that we issued on
February 2, 2000, except for transfer restrictions, registration rights
and liquidated damages provisions relating to the outstanding notes which
will not apply to the exchange notes.
- Interest on the exchange notes accrues at the rate of 12 3/4% per year,
payable in cash every six months on February 1 and August 1, with the
first interest payment on August 1, 2000.
- We may redeem any of the exchange notes beginning on February 1, 2004 at
specified prices. In addition, before February 1, 2003, we may redeem up
to 35% of the exchange notes (together with any outstanding notes that are
not exchanged in the exchange offer) at a redemption price of 112.75% of
their face amount, plus accrued interest, with money raised in one or more
equity offerings by us, our parent Heat Holdings Corp., or our affiliate
Heat Holdings II Corp.
- If we experience a change of control, we must give holders of the exchange
notes the opportunity to sell us their exchange notes at 101% of their
face amount, plus accrued interest. If we sell assets, we may have to
offer to buy back some of the notes at their face amount, plus accrued
interest.
- The exchange notes will rank equally with all of our other unsecured
senior subordinated debt and will be junior to our senior debt. The
exchange notes are guaranteed on a senior subordinated basis by our
present and future domestic restricted subsidiaries.
MATERIAL TERMS OF THE EXCHANGE OFFER
- The exchange offer expires at 5:00 p.m., New York City time, on April 27,
2000, unless extended.
- All outstanding notes that are validly tendered and not validly withdrawn
will be exchanged for an equal principal amount of exchange notes which
are registered under the Securities Act.
- Tenders of outstanding notes may be withdrawn at any time prior to the
expiration of the exchange offer.
- The exchange offer is not subject to any minimum tender condition, but is
subject to the terms of the registration rights agreement that we entered
into on February 2, 2000 with the initial purchasers of the outstanding
notes and the subsidiary guarantees.
- We will not receive any proceeds from the exchange offer.
- We will pay the expenses of the exchange offer.
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BEGINNING ON PAGE 18
BEFORE TENDERING YOUR NOTES.
WE ARE NOT MAKING AN OFFER TO EXCHANGE NOTES IN ANY JURISDICTION WHERE THE
OFFER IS NOT PERMITTED.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE NOTES TO BE DISTRIBUTED IN THE
EXCHANGE OFFER, NOR HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is March 29, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Forward-Looking Statements.................................. i
Where You Can Find More Information......................... ii
Industry Data............................................... iii
Prospectus Summary.......................................... 1
Risk Factors................................................ 18
The Exchange Offer.......................................... 29
Use of Proceeds............................................. 38
Capitalization.............................................. 39
Unaudited Pro Forma Consolidated Financial Data............. 40
Selected Historical Consolidated Financial Data............. 52
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 54
Industry Overview........................................... 64
Business.................................................... 67
Management.................................................. 78
Certain Relationships and Related Transactions.............. 82
Security Ownership of Certain Beneficial Owners and
Management................................................ 83
Description of Senior Credit Facilities..................... 85
Description of the Notes.................................... 86
Notes Exchange Offer; Registration Rights................... 129
Certain United States Federal Income Tax Considerations..... 131
Plan of Distribution........................................ 136
Legal Matters............................................... 136
Experts..................................................... 136
Index to Consolidated Financial Statements.................. F-1
</TABLE>
<PAGE>
FORWARD-LOOKING STATEMENTS
WE MAKE "FORWARD-LOOKING STATEMENTS" THROUGHOUT THIS PROSPECTUS. WHENEVER
YOU READ A STATEMENT THAT IS NOT SIMPLY A STATEMENT OF HISTORICAL FACT (SUCH AS
WHEN WE DESCRIBE WHAT WE "BELIEVE," "EXPECT" OR "ANTICIPATE" WILL OCCUR AND
OTHER SIMILAR STATEMENTS), YOU MUST REMEMBER THAT OUR EXPECTATIONS MAY NOT BE
CORRECT, EVEN THOUGH WE BELIEVE THEY ARE REASONABLE. WE DO NOT GUARANTEE THAT
THE TRANSACTIONS AND EVENTS DESCRIBED IN THIS PROSPECTUS WILL HAPPEN AS
DESCRIBED (OR THAT THEY WILL HAPPEN AT ALL). YOU SHOULD READ THIS PROSPECTUS
COMPLETELY AND WITH THE UNDERSTANDING THAT ACTUAL FUTURE RESULTS MAY BE
MATERIALLY DIFFERENT FROM WHAT WE EXPECT. WE WILL NOT UPDATE THESE FORWARD-
LOOKING STATEMENTS, EVEN THOUGH OUR SITUATION MAY CHANGE IN THE FUTURE.
Whether actual results will conform with our expectations and predictions is
subject to a number of risks and uncertainties including:
- our outstanding indebtedness and our leverage;
- restrictions imposed by the terms of our indebtedness;
- risks associated with our holding company structure;
- our ability to integrate our recent acquisition;
- managing our internal growth;
- changes in our markets, particularly the semiconductor market;
- changes in the availability and price of raw materials used in our
products;
- changes in pricing or other actions by our competitors;
- loss of key employees;
- risk of international operations and markets;
- the impact of litigation and environmental and other regulations;
- future capital requirements;
- general risks associated with the effect of economic conditions;
- additional risks discussed in this prospectus; and
- other factors.
i
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Aavid Thermal Technologies, Inc. and the subsidiary guarantors have filed a
registration statement on Form S-4 with the SEC under the Securities Act of 1933
to register the exchange notes to be issued in this exchange offer. As allowed
by the SEC's rules, this prospectus does not contain all of the information that
you can find in the registration statement and its exhibits. You will find
additional information about Aavid, the subsidiary guarantors and the exchange
notes in the registration statement. Any statements made in this prospectus
concerning the contents of a contract, agreement or other document are not
necessarily complete. If we have filed any contract, agreement or other document
as an exhibit to the registration statement, you should read the exhibit for a
more complete understanding of the document or matter involved.
The indenture governing the outstanding notes will also govern the exchange
notes. The outstanding notes and the exchange notes, together, are a single
series of debt securities. The indenture requires us to provide quarterly and
annual financial reports to holders of the exchange notes.
The SEC allows us to "incorporate by reference" information into this
document, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this document, except for any
information superseded by information in, or incorporated by reference in, this
document. This document incorporates by reference the documents set forth below
that we have previously filed with the SEC:
- Our annual report on Form 10-K for the year ended December 31, 1998, as
amended by Form 10-K/A filed on April 30, 1999;
- Our quarterly report on Form 10-Q for the fiscal quarter ended April 3,
1999;
- Our quarterly report on Form 10-Q for the fiscal quarter ended July 3,
1999;
- Our quarterly report on Form 10-Q for the fiscal quarter ended October 2,
1999;
- Our current report on Form 8-K dated August 23, 1999, and filed on
September 1, 1999, relating to the proposed merger with Heat Merger Corp.
and the proposed Thermalloy acquisition;
- Our current report on Form 8-K dated October 21, 1999 and filed on
November 5, 1999, as amended, reporting our acquisition of Thermalloy and
containing (1) audited financial statements of Thermalloy for each of the
years in the three year period ended December 31, 1998, (2) unaudited
financial statement of Thermalloy for the nine months ended September 30,
1998 and 1999 and (3) pro forma financial statements giving effect to our
acquisition of Thermalloy for the year ended December 31, 1998 and the
nine months ended October 2, 1999; and
- Our current report on Form 8-K dated February 2, 1999 and filed on
February 17, 1999, reporting our merger with Heat Merger Corp., a wholly
owned subsidiary of Heat Holdings Corp.
We are also incorporating by reference additional documents that we file
with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 after the date of this prospectus and prior to the filing
of a post-effective amendment which indicates that all securities offered hereby
have been sold or which deregisters all securities remaining unsold.
Aavid is subject to the informational requirements of the Exchange Act and
files periodic reports, statements and other information with the SEC. We do not
expect that the subsidiary guarantors will be subject to the informational
requirements of the Exchange Act. You may inspect and copy the registration
statement, including exhibits, and, when filed, our periodic reports, statements
and other information filed with the SEC at the public reference facilities
maintained by the SEC at Room 1024,
ii
<PAGE>
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's
regional offices located at 7 World Trade Center, New York, New York 10048 and
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies may be obtained from the Public Reference Section of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The SEC also
maintains a Web site at http://www.sec.gov which will contain, when filed, our
reports, statements and other information filed with the SEC.
If we are not required to be subject to the reporting requirements of the
Exchange Act in the future, we will be required under the indenture for the
exchange notes and the outstanding notes to continue to file with the SEC and to
furnish to holders of the exchange notes and the outstanding notes the reports,
statements and other information specified in Sections 13 and 15(d) of the
Exchange Act, including annual reports containing audited consolidated financial
statements of Aavid and quarterly reports containing unaudited condensed
consolidated financial data for the first three quarters of each fiscal year.
You should not assume that the information in this prospectus is accurate as
of any date other than the date of this prospectus, or the respective dates of
those documents we incorporate herein by reference, regardless of when you
received this prospectus. You should rely only on the information provided in
the registration statement. We have not authorized anyone else to provide you
with different information. In deciding whether to tender your outstanding notes
in the exchange offer, you must rely upon your own examination of this
prospectus and the terms of the exchange offer and the exchange notes, including
the merits and risks involved. The exchange offer is being made to, and we will
accept surrender for exchange from, holders of outstanding notes only in
jurisdictions where the exchange offer is permitted.
You might not be legally able to participate in the exchange offer--we are
not giving you legal, business, financial or tax advice about any matter. You
should consult with your own attorney, accountant and other advisors about those
matters.
INDUSTRY DATA
Unless otherwise indicated, all industry data and statistics relating to the
thermal management industry and its segments contained in this prospectus are
management estimates that are based on its experience and independent reports on
the electronics industry periodically issued by Electronics Industry Outlook,
together with a study on thermal content in electronics products conducted by
International Interconnection Intelligence for Aavid in 1996. Information
relating to the existing computational fluid dynamics, or CFD, software market
is based on publicly available information about our key competitors and
internal management estimates; and information relating to the potential CFD
software market is based on a study we conducted at the time we acquired our CFD
software business. Although we believe the information on which we have based
our estimates is reliable, we cannot guarantee the accuracy or completeness of
such information and have not independently verified any of it.
iii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. THIS
PROSPECTUS INCLUDES SPECIFIC TERMS OF THE EXCHANGE OFFER AND THE EXCHANGE NOTES
AS WELL AS INFORMATION REGARDING OUR BUSINESS AND DETAILED FINANCIAL DATA. WE
ENCOURAGE YOU TO READ THIS PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS"
AND FINANCIAL STATEMENTS. IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE
REQUIRES, THE WORDS "AAVID," "WE," "US," "OUR" AND SIMILAR TERMS REFER TO AAVID
THERMAL TECHNOLOGIES, INC. AND ITS SUBSIDIARIES, INCLUDING THOSE ACQUIRED IN OUR
ACQUISITION OF THERMALLOY, THE THERMAL MANAGEMENT DIVISION OF BOWTHORPE PLC, ON
OCTOBER 21, 1999. FOR PURPOSES OF THIS PROSPECTUS, WHEN WE DESCRIBE INFORMATION
ON A "PRO FORMA" BASIS, UNLESS OTHERWISE INDICATED, WE ARE GIVING EFFECT TO THE
THERMALLOY ACQUISITION, THE MERGER OF AAVID WITH A TRANSITORY MERGER COMPANY
FORMED BY WILLIS STEIN & PARTNERS AND CO-INVESTORS ON FEBRUARY 2, 2000 AS
DESCRIBED IN THIS PROSPECTUS, THE ISSUANCE OF THE OUTSTANDING NOTES AND OTHER
FINANCING TRANSACTIONS RELATED TO THE MERGER. AAVID'S FIRST THREE FISCAL
QUARTERS CONSIST OF APPROXIMATELY 13 WEEKS EACH, ENDING ON THE SATURDAY CLOSEST
TO THE END OF SUCH 13 WEEK PERIOD, AND AAVID'S FOURTH FISCAL QUARTER AND FISCAL
YEAR END ON DECEMBER 31. AAVID'S FISCAL THIRD QUARTERS FOR 1998 AND 1999 ENDED
ON SEPTEMBER 26 AND OCTOBER 2, RESPECTIVELY.
THE COMPANY
Aavid Thermal Technologies, Inc. is the leading global provider of thermal
management solutions for electronic products and the leading developer and
marketer of computational fluid dynamics (CFD) software. Each of these
businesses has an established reputation for high product quality, service
excellence and engineering innovation in its market. We design, manufacture and
distribute on a worldwide basis thermal management products that dissipate
unwanted heat, which can degrade system performance and reliability, from
microprocessors and industrial electronics products. Our products, which include
heat sinks, interface materials and attachment accessories, fans, heat spreaders
and liquid cooling and phase change devices that we configure to meet
customer-specific needs, serve the critical function of conducting, convecting
and radiating away unwanted heat. CFD software is used in complex
computer-generated modeling of fluid flows, heat and mass transfer and chemical
reactions. Our CFD software is used in a variety of industries, including the
automotive, aerospace, chemical processing, power generation, material
processing, electronics and HVAC industries.
We believe the demand for thermal management products and CFD software is
growing. The increase in unwanted heat generated in electronic and other
products is primarily a result of more powerful semiconductors and the growing
number of semiconductors being used in individual products. The growing demand
for our thermal management products is driven by the need to dissipate the
increasing amount of heat generated by electronic products, as well as strong
unit growth. The increase in heat requires more complex thermal solutions, which
in turn is driving the trend among our customers and other electronics
manufacturers to outsource development of thermal management solutions. Through
our product design capabilities and customer relationships, we lead the thermal
management industry in meeting this growing demand. The demand for CFD software
is driven by the need to reduce product development costs, minimize
time-to-market for new products and improve product performance. Through our
technological leadership in CFD software, we will continue to develop software
to meet the needs of our customers and others in this growing market. These
trends have contributed to the growth in combined net sales of Aavid and
Thermalloy from $187.9 million for the fiscal year ended December 31, 1996, to
$296.4 million for the twelve months ended October 2, 1999. For the twelve
months ended October 2, 1999, our pro forma adjusted EBITDA was $45.2 million.
Our thermal management products are used in a wide variety and growing
number of computer and networking and industrial electronics applications,
including computer systems (desktops, laptops, disk drives, printers and
peripheral cards), network devices (servers, routers, set top boxes and local
area networks), telecommunications equipment (wireless base stations, satellite
stations and PBXs),
1
<PAGE>
instrumentation (semiconductor test equipment, medical equipment and power
supplies), transportation and motor drives (braking and traction systems) and
consumer electronics (stereo systems and video games). Our CFD software is used
for a variety of computer-based analyses, including the design of electronic
components and systems, automotive design, combustion systems modeling and
process plant troubleshooting. We have longstanding relationships with a highly
diversified base of more than 3,500 national and international customers,
including many of the leading original equipment manufacturers (commonly
referred to as OEMs) in the industries we serve, electronics distributors and
contract manufacturers. Our customers include Acer, Apple, Arrow, AT&T, Cisco
Systems, Compaq Computer, DaimlerChrysler, Dell, Dow Chemical, Ericsson, Ford,
Fujitsu, General Electric, Harmon-Kardon, Hewlett-Packard, IBM, Intel, Lockheed
Martin, Lucent, Motorola, Nortel, Rockwell Automation, Rolls Royce, SCI Systems,
Siemens, Silicon Graphics, Solectron and Sun Microsystems.
INDUSTRY OVERVIEW
THERMAL MANAGEMENT
In today's electronic environment, microprocessors and their associated
power supplies, hard drives, advanced video chips and other peripheral devices,
semiconductors, integrated circuits, motor controls and telecommunications
switches draw large amounts of power and, consequently, must dissipate a
significant amount of heat. Because these electronic components can only operate
efficiently in narrow temperature bands, heat is an absolute constraint in
electronic system design. The excessive heat generated within a component not
only degrades semiconductor and system performance and reliability, but can also
cause semiconductor and system failure. The complexity of thermal management
problems has been intensified by the increasing amounts of heat to be
dissipated, reductions in system size, shorter time-to-market, shorter product
life cycles and more demanding operating environments of electronic products.
We estimate that the worldwide electronic thermal management market, which
is comprised of all thermal management solutions for electronic products, was
approximately $4.1 billion in 1999 and is expected to grow at a compound annual
growth rate of approximately 12.8% to $6.6 billion in 2003. This market is
divided between solutions that are internally designed and produced by
OEMs (I.E., "in-house" thermal solutions) and those that are externally supplied
by thermal management companies (I.E., "outsourced" thermal solutions). Based on
our experience in the industry and industry data, we estimate that the size of
the in-house thermal solutions market is approximately $1.2 billion and the size
of the outsourced thermal solutions market is approximately $2.9 billion, or 72%
of the worldwide electronic thermal management market. As thermal management
problems become increasingly complex, we believe that manufacturers will
increasingly outsource their thermal management design and production in order
to focus on their core competencies. We further believe that the market for the
types of thermal management products and services we offer in our existing
geographic locations comprises approximately 45% of the $2.9 billion outsourced
thermal solutions market. We believe that, as the market leader, we will benefit
from the expected growth in the worldwide electronic thermal management market
and that, through geographic and product expansion, we have a significant
opportunity to address a larger portion of the outsourced segment of this market
than we currently address.
COMPUTATIONAL FLUID DYNAMICS SOFTWARE
CFD software is used in a wide range of industries for complex
computer-based analysis of engineering designs involving fluid flows, heat and
mass transfer, chemical reaction and other fluid flow phenomena. CFD software
tools allow the analysis and evaluation of design modifications without physical
prototyping of each design modification, thereby reducing engineering cost,
improving product performance, and decreasing time-to-market for new products.
Specific uses of CFD-based flow analysis
2
<PAGE>
include the design of electronic components and systems, automotive design,
combustion systems modeling and process plant troubleshooting.
Over the past decade, increases in computing power have made CFD-based
computer analysis of complex fluid flows feasible on computers that are readily
available to research and development and engineering departments. Development
of CFD software technology is expanding the market beyond its traditional user
base of Ph.D.-level engineers in corporate research and development centers to
the larger base of design engineers working in product development. Finally, CFD
software tools are part of the growing trend toward improved engineering
efficiency through computer-aided analysis and design by integrating CFD
software with geometric modeling and design.
The CFD software market has been growing rapidly during the past decade.
Based on publicly available information from a number of our key competitors and
internal management estimates, we believe that in 1998 the size of the developed
market for CFD software applications was approximately $100 million. We further
believe that this market has grown approximately 20% annually since 1992 and we
expect to benefit from the anticipated continued growth of this market. Based on
a market study we conducted in connection with the acquisition of our CFD
software business, we estimate that the size of the potential market for CFD
software products is currently approximately $500 million.
COMPETITIVE STRENGTHS
We believe that the following competitive strengths have enabled us to
become a worldwide leader in both the thermal management market and the CFD
software market.
TOTAL INTEGRATED SOLUTIONS PROVIDER. The increasing complexity of heat
dissipation problems and the growing trend among manufacturers to outsource
development of thermal management solutions has stimulated demand for total
integrated solutions. We provide total integrated solutions by analyzing
customers' thermal management problems at the device-, board- and system-level,
designing, simulating and prototyping thermal management solutions and
manufacturing, distributing and supporting these solutions worldwide.
VALUE-ADDED PARTNERING WITH OUR CUSTOMERS. We work closely with our
customers to develop customized thermal management solutions. We believe that
our close relationships with customers and their design and development teams,
as well as our worldwide manufacturing capabilities, allow us to anticipate
customers' needs and, through our engineering expertise and experience, provide
quality product solutions more quickly than our competitors.
WORLDWIDE LOW COST MANUFACTURER. We have state-of-the-art manufacturing
operations in the United States, Canada, Mexico, Europe and Asia, including
China. As an increasing number of electronics systems are being manufactured
outside the United States, our low cost foreign manufacturing operations enable
us to supply products directly to our customers at their geographically
dispersed manufacturing locations.
LEADERSHIP IN CFD TECHNOLOGY. We believe that we are the technology leader
in CFD software. As a result of our technological leadership, we develop
software that enables our customers to generate the increasingly complex
computer models they demand for more cost-efficient product design. This factor,
as well as the relative ease-of-use and predictive accuracy of our CFD software,
are of primary importance to our customers.
RECURRING REVENUES FROM SOFTWARE BUSINESS. Our CFD software business is
characterized by high customer retention and recurring revenues. In recent
years, approximately 80% of our annual software license revenue was renewed in
the following year. This is driven by the significant value added by our CFD
software to the design process and the high cost of switching to a competitor's
software.
3
<PAGE>
EXPERIENCED MANAGEMENT TEAM. Our senior management team has extensive
operating and marketing experience in the thermal management and CFD software
markets. This management team has grown our business, both organically and
through strategic acquisitions, and has been responsible for improving operating
efficiencies. Bharatan R. Patel, our chief executive officer who founded our CFD
software business, has 27 years of experience in the area of fluid flows and
thermal management, George P. Dannecker, president of our thermal management
business, has 27 years of electronics industry experience and H. Ferit Boysan,
president of our CFD software business, has 20 years of experience in the area
of fluid flows and CFD software.
BUSINESS STRATEGY
Our business strategy is to continue to be the market leader in both the
thermal management and CFD software markets. We have developed a strong set of
business practices that have enabled us to achieve this leading market position
and a strong track record of profitable growth. We intend to continue this
business strategy and strengthen our competitive position through the following
initiatives:
CAPITALIZE ON STRONG THERMAL MANAGEMENT INDUSTRY GROWTH. We believe that
our existing thermal management markets will continue to experience strong
growth. Growth will be driven by the need to dissipate the increasing amount of
heat being generated by electronic products, as well as unit growth in these
products. We believe our competitive strengths position us to capitalize on
these growth trends.
TAKE ADVANTAGE OF OUTSOURCING TREND. The increasing complexity of heat
dissipation problems is driving a trend among manufacturers to outsource the
development of thermal management solutions to companies with high levels of
expertise in solving these problems. We intend to capitalize on this trend by
leveraging our technical expertise in designing thermal management products and
through continuing to partner with our customers in creating customized
solutions.
EXPAND OUR ADDRESSED THERMAL MANAGEMENT MARKET. We believe we have
significant opportunities to expand the portion of the outsourced thermal
management market that we address. Our strategy is to expand into the
$1.6 billion part of the outsourced thermal management market that we do not
currently serve by entering into new geographic markets and introducing new
products that complement our existing product offerings.
ACCELERATE GROWTH IN THE COMPUTATIONAL FLUID DYNAMICS SOFTWARE
MARKET. Growth in the CFD software market will be driven by customers' needs to
reduce product development costs, minimize the time-to-market for their new
products and improve product performance, as well as by increasing applications
for CFD software. We intend to grow our CFD software business through internal
product development and possibly strategic acquisitions to leverage our core
technological competence in the development of computerized design and
simulation software. Our goal is to further expand this market beyond its
traditional user base of Ph.D.-level engineers in corporate research and
development centers to the larger base of design engineers by providing them
relatively easy-to-use industry-specific software.
PROVIDE TOTAL THERMAL MANAGEMENT SOLUTIONS ON A GLOBAL BASIS. We intend to
continue capitalizing on our state-of-the-art worldwide manufacturing
capabilities and to further leverage our expertise and technology to offer our
customers a complete global solution to their thermal management problems. The
increasing number of electronics systems manufactured outside of the United
States has forced many electronics manufacturers to seek a highly integrated,
worldwide provider of thermal solutions. We plan to continue to expand our
quick-ramp, high-volume manufacturing and our design, sales and distribution
activities globally as our customers continue to expand their operations
overseas.
LEVERAGE OUR TECHNOLOGICAL LEADERSHIP. Our approximately 100 Ph.D.s and 230
engineers focus on new technology initiatives as well as developing new and
enhancing existing products, processes and
4
<PAGE>
materials to address the evolving needs of our customers. We seek to enhance our
internal research and development activities through collaborations with our
customers and third parties in order to gain access to, or to pursue the
development of, new technologies for thermal management applications and CFD
software.
THERMALLOY ACQUISITION
On October 21, 1999, we acquired our largest competitor, Thermalloy, the
thermal management division of Bowthorpe plc. Thermalloy designs, manufactures
and sells a wide variety of standard and proprietary heat sinks and associated
products, similar to those produced by our thermal management business, within
the computer and networking and industrial electronics (including
telecommunications) industries. This acquisition expanded our worldwide
manufacturing capabilities by providing us with facilities in Dallas, Texas;
Monterrey, Mexico; Corby and Swindon, England; Bologna, Italy; and Malacca,
Malaysia. In connection with this transaction, we also acquired 85.4% of Curamik
Electronics GmbH, a German corporation that manufactures direct bonded copper
ceramic substrates that are used in the power semiconductor and other industrial
electronics industries. The total purchase price for Thermalloy (including
Curamik) was $82.7 million, including estimated transaction costs of
$1.5 million. Thermalloy (including Curamik) had net sales of approximately
$100.8 million and EBITDA of approximately $13.5 million (adjusted to exclude
management fees paid to Bowthorpe by Thermalloy of $2.2 million) for the twelve
months ended September 30, 1999. We believe that the acquisition of Thermalloy
will create significant opportunities to realize cost savings through plant
closings, the elimination of duplicative selling, general and administrative
functions and the reduction of unnecessary corporate expenses.
The acquisition of Thermalloy was financed by borrowings under a senior
secured credit facility. The credit facility was amended and restated in
connection with the merger and related financing transactions described below
under "--The Merger and Related Transactions" to, among other things, add Heat
Holdings Corp. and its affiliate, Heat Holdings II Corp., as guarantors, permit
the issuance of the outstanding notes and amend certain of the financial ratios
and restrictive covenants to reflect such issuance. This credit facility is
described under "Description of Senior Credit Facilities."
THE MERGER AND RELATED TRANSACTIONS
On August 23, 1999, we entered into an agreement and plan of merger with
Heat Holdings Corp. and Heat Merger Corp., a transitory wholly owned merger
subsidiary of Holdings, providing for the merger of Heat Merger with and into
Aavid, with Aavid being the surviving corporation. The merger was approved by
our 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.
In connection with the merger, the purchase price, repayment of indebtedness
and fees and expenses of approximately $366.9 million were provided through:
- an equity investment in Holdings and its affiliate, Holdings II of
approximately $152.0 million in the aggregate from Willis Stein & Partners
and co-investors;
- $148.3 million from the sale of units, consisting of the outstanding notes
and warrants to purchase up to 3% of our common stock (on a fully diluted
basis);
- borrowings under an amended and restated credit facility of approximately
$54.7 million; and
- cash on hand of approximately $11.9 million.
5
<PAGE>
THE SPONSOR
Willis Stein & Partners, a private equity investment fund, together with
some co-investors, beneficially own all of the outstanding capital stock of
Aavid (excluding warrants granted to noteholders in connection with the sale of
the outstanding notes to acquire, in the aggregate, shares of Class A and
Class H common stock representing 3% of the common stock of Aavid (on a fully
diluted basis)). With committed capital of approximately $1.2 billion, Willis
Stein targets investments in United States-based middle-market companies in the
manufacturing, business services, telecommunications, media and health care
industries. Its investments have included Advantage Business Services, Inc.; CTN
Media Group, Inc.; Franklin Health Inc.; InterLink Communications Partners,
LLLP; Interval International, Inc.; LISN, Inc.; National Veterinary Associates,
Inc.; Neoplan USA Corporation; One, Inc.; Petersen Publishing Company, L.L.C.;
Racing Champions Corporation; Troll Communications LLC; and USApubs.com.
THE EXCHANGE OFFER
On February 2, 2000, we issued 150,000 units, consisting of $150,000,000
aggregate principal amount of our 12 3/4% senior subordinated notes due 2007 and
150,000 warrants to purchase an aggregate of 60 shares of our Class A common
stock and 60 shares of our Class H common stock, to CIBC World Markets and
FleetBoston Robertson Stephens in a private offering. These initial purchasers
sold the units to institutional investors in transactions exempt from the
registration requirements of the Securities Act.
When we issued the units, we entered into a registration rights agreement
covering the notes in which we agreed to file a registration statement covering
the exchange notes within 60 days of the original issuance date of the
outstanding notes and to use our reasonable best efforts to have such
registration statement declared effective within 150 days of the original
issuance date of the notes. The outstanding notes and warrants will be
separately transferable upon the effectiveness of the registration statement of
which this prospectus is a part, or at such earlier time as specified in the
warrant agreement.
<TABLE>
<S> <C>
Outstanding Notes......................... 12 3/4% senior subordinated notes due 2007, which were
issued on February 2, 2000.
Exchange Notes............................ 12 3/4% senior subordinated notes due 2007, which have
been registered under the Securities Act. The terms of
the exchange notes are substantially identical to those
of the outstanding notes, except that the transfer
restrictions, registration rights and liquidated damages
provisions relating to the outstanding notes do not
apply to the exchange notes.
The Exchange Offer........................ Up to $150,000,000 aggregate principal amount of
exchange notes registered under the Securities Act are
being offered in exchange for the same principal amount
of the outstanding notes. Outstanding notes may be
tendered for exchange in whole or in part in any
integral multiple of $1,000. We are making the exchange
offer in order to satisfy our obligations under the
registration rights agreement relating to the
outstanding notes.
Expiration Date........................... 5:00 p.m., New York City time, on April 27, 2000, unless
the exchange offer is extended, in which case the
expiration date will be the latest date and time to
which the exchange offer is extended.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Conditions to the Exchange Offer.......... The exchange offer is subject to customary conditions.
See the discussion under the caption "The Exchange
Offer--Conditions to the Exchange Offer" for more
information regarding the conditions to the exchange
offer. The exchange offer is not conditioned upon any
minimum principal amount of outstanding notes being
tendered. We reserve the right in our sole and absolute
discretion, subject to applicable law, at any time and
from time to time:
- to delay the acceptance of the outstanding notes
for exchange;
- to terminate the exchange offer if one or more
specific conditions have not been satisfied;
- to extend the expiration date of the exchange
offer and retain all outstanding notes tendered
pursuant to the exchange offer, subject, however,
to the right of holders of outstanding notes to
withdraw their tendered outstanding notes; or
- to waive any condition or otherwise amend the
terms of the exchange offer in any respect.
Withdrawal Rights......................... Tenders of outstanding notes may be withdrawn at any
time on or prior to the expiration date by delivering a
written notice of withdrawal to the exchange agent in
conformity with the procedures discussed under the
caption "The Exchange Offer--Withdrawal of Tenders."
Procedures for Tendering Outstanding
Notes................................... Unless you comply with the procedures described below
under the caption "The Exchange Offer--Guaranteed
Delivery Procedures," you must do one of the following
on or prior to the expiration of the exchange offer to
participate in the exchange offer:
- tender your outstanding notes by sending the
certificates for your outstanding notes, in proper
form for transfer, a properly completed and duly
executed letter of transmittal, with any required
signature guarantees, and all other documents
required by the letter of transmittal, to Bankers
Trust Company, as exchange agent, at the address
listed under the caption "The Exchange
Offer--Exchange Agent;" or
- tender your outstanding notes by using the
book-entry transfer procedures described under the
caption "The Exchange Offer--Procedures for
Tendering Outstanding Notes" and transmitting a
properly completed and duly executed letter of
transmittal, with any required signature
guarantees, or an agent's message instead of
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
the letter of transmittal, to the exchange agent.
In order for a book-entry transfer to constitute a
valid tender of your outstanding notes in the
exchange offer, the exchange agent must receive a
confirmation of book-entry transfer of your
outstanding notes into its account at The
Depository Trust Company prior to the expiration
of the exchange offer. For more information
regarding the use of book-entry transfer
procedures, including a description of the
required agent's message, see the discussion under
the caption "The Exchange Offer--Procedures for
Tendering Outstanding Notes."
Guaranteed Delivery Procedures............ If you are a registered holder of the outstanding notes
and wish to tender your outstanding notes in the
exchange offer, but
- your outstanding notes are not immediately
available,
- time will not permit your outstanding notes or
other required documents to reach the exchange agent
before the expiration of the exchange offer, or
- the procedure for book-entry transfer cannot be
completed prior to the expiration of the exchange
offer, you may tender outstanding notes by
following the procedures described below under the
caption "The Exchange Offer--Guaranteed Delivery
Procedures."
Acceptance of Outstanding Notes and
Delivery of Exchange Notes.............. Upon consummation of the exchange offer, we will accept
any and all outstanding notes that are properly tendered
in the exchange offer and not withdrawn prior to 5:00
p.m., New York City time, on the expiration date. The
exchange notes issued pursuant to the exchange offer
will be delivered promptly after acceptance of the
outstanding notes.
Resales of Exchange Notes................. We believe that you will be able to offer for resale,
resell or otherwise transfer exchange notes issued in
the exchange offer without compliance with the
registration and prospectus delivery provisions of the
federal securities laws, provided that:
- you are not a broker-dealer;
- you are not participating in a distribution of the
exchange notes; and
- you are not an "affiliate" of Aavid Thermal
Technologies, Inc., as the term is defined in Rule
144 under the Securities Act.
Our belief is based on interpretations by the staff of
the SEC, as set forth in no-action letters issued to
third parties unrelated to us. The staff has not
considered this exchange
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
offer in the context of a no-action letter, and we
cannot assure you that the staff would make a similar
determination with respect to this exchange offer. If
our belief is not accurate and you transfer an exchange
note without delivering a prospectus meeting the
requirements of the federal securities laws or without
an exemption from these laws, you may incur liability
under the federal securities laws. We do not and will
not assume, or indemnify you against, this liability.
Each broker-dealer that receives exchange notes for its
own account in exchange for outstanding notes which were
acquired by the broker-dealer as a result of
market-making or other trading activities must agree to
deliver a prospectus meeting the requirements of the
federal securities laws in connection with any resale of
the exchange notes. A broker-dealer may use this
prospectus in connection with an offer to resell, resale
or other retransfer of the exchange notes issued to it
in the exchange offer for a period of 180 days following
the expiration date.
Exchange Agent............................ The exchange agent with respect to the exchange offer is
Bankers Trust Company.
Use of Proceeds........................... We will not receive any cash proceeds from the issuance
of the exchange notes offered hereby.
Some Federal Income Tax Consequences...... The exchange of outstanding notes for exchange notes in
the exchange offer will not be a taxable transaction for
United States federal income tax purposes. You should
review the information set forth under "Certain United
States Federal Income Tax Consequences" prior to
tendering outstanding notes in the exchange offer.
Consequences of Not Exchanging Outstanding
Notes................................... If you do not exchange your outstanding notes in the
exchange offer, your outstanding notes will continue to
be subject to the restrictions on transfer described in
the legend on the certificate for your outstanding
notes. In general, you may offer or sell your
outstanding notes only:
- if they are registered under the Securities Act
and applicable state securities laws;
- if they are offered or sold under an exemption
from registration under the Securities Act and
applicable state securities laws; or
- if they are offered or sold in a transaction not
subject to the Securities Act and applicable state
securities laws.
We do not currently intend to register the outstanding
notes under the Securities Act. For more information
regarding the
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
consequences of not tendering your outstanding notes,
see "The Exchange Offer--Consequences of Failure to
Exchange."
</TABLE>
TERMS OF THE EXCHANGE NOTES
The exchange offer applies to an aggregate principal amount of $150,000,000
of the outstanding notes. The form and terms of the exchange notes will be
identical in all material respects to the form and terms of the outstanding
notes, except:
- the exchange notes have been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer;
- holders of exchange notes will not be entitled to any liquidated damages
under the registration rights agreement relating to the outstanding notes;
and
- holders of the exchange notes will not be, and upon consummation of the
exchange offer, holders of the outstanding notes will no longer be,
entitled to specific rights under the registration rights agreement for
the outstanding notes intended for the holders of unregistered securities.
The exchange notes will be our obligations entitled to the benefits of the
indenture. See "Description of the Notes."
<TABLE>
<S> <C>
Exchange Notes Offered.................... $150,000,000 aggregate principal amount of 12 3/4%
senior subordinated notes due 2007.
Maturity Date............................. February 1, 2007.
Interest Rate............................. 12 3/4% per year.
Interest Payment Dates.................... Each February 1 and August 1, beginning August 1, 2000.
Security and Ranking...................... The exchange notes will not be secured by any
collateral.
The exchange notes will rank junior in right of payment
to all of our senior debt and will rank equal in right
of payment to future senior subordinated debt.
Therefore, if we default, your right to payment under
the exchange notes will be junior to the rights of
holders of our senior debt to collect money we owe them
at the time.
We estimate that as of October 2, 1999, on a pro forma
basis, we would have had $198.4 million of debt
(excluding the original issue discount attributable to
the notes), of which $54.7 million would have been
senior debt.
Guarantees................................ Our present and future domestic restricted subsidiaries
will guarantee the exchange notes with unconditional
guarantees of payment that will rank junior in right of
payment to then senior debt, but will rank equal in
right of payment to their other senior subordinated
debt. Our foreign restricted subsidiaries will not
guarantee the exchange notes.
Optional Redemption....................... Except in the case of one or more public equity
offerings by us, Holdings or Holdings II, we cannot
redeem the exchange notes prior to February 1, 2004.
At any time from and after that date (which may be more
than once), we can choose to redeem some or all of the
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
exchange notes at certain specified prices, plus accrued
interest.
Optional Redemption after Equity
Offerings............................... At any time (which may be more than once) before
February 1, 2003, we can choose to buy back up to 35% of
the aggregate principal amount at maturity of the
exchange notes (and any outstanding notes that remain
after consummation of the exchange offer) with money
that we raise (or that Holdings or Holdings II raise and
contribute to us) in one or more public equity
offerings, as long as:
- we pay 112.75% of the face amount of the exchange
notes bought, plus accrued interest;
- we buy the exchange notes back within 60 days of
completing the equity offering; and
- at least 65% principal amount of the exchange notes
(together with any outstanding notes that are not
exchanged in the exchange offer) originally issued
remain outstanding afterwards.
Change of Control Offer................... If we experience a change in control, we must give
holders of the exchange notes the opportunity to sell us
their exchange notes at 101% of their face amount, plus
accrued interest.
We might not be able to pay you the required price for
exchange notes you present to us at the time of a change
in control, because:
- we might not have enough funds at that time; or
- the terms of our senior debt may prevent us from
paying.
Asset Sale Proceeds....................... We may have to use the net cash proceeds from selling
assets to offer to buy back exchange notes at their face
amount, plus accrued interest.
Certain Indenture Provisions.............. The indenture governing the notes and the exchange notes
limits what we and our restricted subsidiaries may do.
The provisions of the indenture limit our ability to:
- incur more debt;
- pay dividends and make distributions;
- issue stock of subsidiaries;
- make certain investments;
- repurchase stock;
- create liens;
- enter into transactions with affiliates;
- enter into sale-leaseback transactions;
- merge or consolidate; and
- transfer and sell assets.
These covenants are subject to a number of important
exceptions.
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
Registration Rights....................... Holders of exchange notes (other than as set forth
below) are not entitled to any registration rights with
respect to the exchange notes. Pursuant to the
registration rights agreement, we agreed, for the
benefit of all holders of outstanding notes, to file an
exchange offer registration statement. The registration
statement of which this prospectus is a part constitutes
the exchange offer registration statement. Under certain
circumstances, certain holders of notes (including
holders who may not participate in the exchange offer or
who may not freely resell exchange notes received in the
exchange offer) may require us to file, and cause to
become effective, a shelf registration statement under
the Securities Act, which would cover resales of notes
by such holders.
</TABLE>
For more complete information about the exchange offer and the exchange
notes, see "The Exchange Offer" and "Description of the Notes" sections of this
prospectus.
RISK FACTORS
You should consider carefully the information included in the "Risk Factors"
section of this prospectus, as well as other information contained in this
prospectus, before tendering your notes in the exchange offer.
ADDITIONAL INFORMATION
We were incorporated under the laws of the State of Delaware on October 8,
1993. Our principal executive office is located at One Eagle Square, Suite 509,
Concord, New Hampshire 03301, and our telephone number is (603) 224-1117. We
maintain websites on the Internet at:
- www.aatt.com,
- www.aavid.com,
- www.fluent.com,
- www.thermalcooling.com and
- www.icepak.com.
Our websites and the information contained therein shall not be deemed to be
part of this prospectus.
12
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The summary unaudited pro forma combined financial data set forth below are
derived from, and should be read in conjunction with, the Unaudited Pro Forma
Consolidated Financial Data and the notes thereto included elsewhere in this
prospectus. The summary unaudited pro forma combined balance sheet data reflect
the Thermalloy acquisition, the merger and related transactions as if they had
occurred on October 2, 1999. The summary unaudited pro forma combined statements
of operations data give effect to the same transactions as if they had occurred
on January 1, 1998. The Thermalloy acquisition and the merger will be accounted
for using the purchase method. The summary unaudited pro forma combined
financial data are presented for illustrative purposes only and are not
necessarily indicative of the results of operations or financial position of
Aavid that would have actually resulted had the Thermalloy acquisition, the
merger and related transactions been consummated as of the date and for the
periods indicated, nor are they intended to project Aavid's financial position
or results of operations for any future period.
<TABLE>
<CAPTION>
TWELVE
FISCAL YEAR NINE MONTHS ENDED MONTHS
ENDED ---------------------------- ENDED
DECEMBER 31, SEPTEMBER 26, OCTOBER 2, OCTOBER 2,
1998 1998 1999 1999(1)
------------ -------------- ----------- ----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales....................................... $311,410 $234,946 $219,926 $296,390
Cost of goods sold.............................. 207,269 157,005 143,312 193,576
Gross profit.................................... 104,141 77,941 76,614 102,814
Income from operations.......................... 2,446 1,374 3,060 4,132
Interest expense, net........................... 25,844 19,468 19,004 25,380
Other income (expense), net..................... 322 (385) 104 811
Net income (loss)............................... (23,302) (18,698) (18,409) (23,013)
OTHER FINANCIAL DATA:
Adjusted EBITDA(2).............................. $ 44,994 $ 33,749 $ 33,957 $ 45,202
Adjusted EBITDA margin(3)....................... 14.4% 14.4% 15.4% 15.3%
Depreciation and amortization................... $ 37,042 $ 27,323 $ 26,886 $ 36,605
Capital expenditures............................ 25,780 18,835 10,856 17,801
Cash interest expense(4)........................ 24,284 18,213 18,213 24,284
Ratio of earnings to fixed charges(5)........... -- -- -- --
Ratio of adjusted EBITDA to cash interest expense............................................ 1.9x
Ratio of total debt to adjusted EBITDA....................................................... 4.4x
BALANCE SHEET DATA (END OF PERIOD):
Working capital.............................................................................. $ 43,196
Total assets................................................................................. 412,748
Total debt, including current maturities(6).................................................. 198,440
Stockholders' equity(6)...................................................................... 155,431
</TABLE>
(SEE FOOTNOTES ON FOLLOWING PAGES)
13
<PAGE>
NOTES TO SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(1) Information for the twelve months ended October 2, 1999 represents the sum
of the pro forma fiscal year ended December 31, 1998 and the pro forma nine
months ended October 2, 1999, less the pro forma nine months ended
September 26, 1998.
(2) Represents net income before interest, income taxes, depreciation and
amortization and extraordinary items, each of which can significantly affect
our results of operations and liquidity and should be considered in
evaluating our financial performance. EBITDA is included because we
understand that such information is considered to be an additional basis on
which to evaluate our ability to pay interest, repay debt and make capital
expenditures. EBITDA is not intended to represent and should not be
considered more meaningful than, or as an alternative to, measures of
performance, profitability or liquidity determined in accordance with
generally accepted accounting principles.
The following table sets forth a reconciliation of historical EBITDA to
adjusted EBITDA:
<TABLE>
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS
YEAR ENDED ---------------------------- ENDED
DECEMBER 31, SEPTEMBER 26, OCTOBER 2, OCTOBER 2,
1998 1998 1999 1999
------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Historical EBITDA................................. $38,326 $27,683 $28,714 $39,357
Elimination of Thermalloy management
fee (a)..................................... 1,484 629 1,336 2,191
Indirect manufacturing cost savings from plant
closings (b)................................ 1,532 1,129 998 1,401
Selling, general and administrative
savings (c)................................. 3,124 2,255 2,299 3,168
Corporate office and public company
expense (d)................................. 1,188 913 1,210 1,485
Intel Special Product EBITDA (e).............. (6,400) (4,600) (600) (2,400)
Intel Special Product restructuring
charge (f).................................. 4,882 4,882 -- --
Termination settlement (g).................... 858 858 -- --
------- ------- ------- -------
Adjusted EBITDA................................... $44,994 $33,749 $33,957 $45,202
======= ======= ======= =======
</TABLE>
(a) Adjustments to eliminate historical expenses associated with fees paid by
Thermalloy to Bowthorpe plc for management advice and consultation. These
management fees ceased to be paid upon our acquisition of Thermalloy on
October 21, 1999. We believe that net sales and expenses would not have
materially changed if Bowthorpe plc did not provide these management
services.
(b) Adjustments to record cost savings associated with the closure of our
manufacturing facilities in Santa Ana, California and High Wycombe, U.K. and
Thermalloy's facility in Hong Kong, China. Approximately one-half of the
cost savings are due to the elimination of payroll and benefits expenses
relating to indirect manufacturing, net of certain supervisors and engineers
who may remain with Aavid. The remainder of the cost savings are related to
rent, utilities and other expenses eliminated upon closure of the
aforementioned facilities.
(c) Adjustments to record cost savings due to the elimination of employee
payroll and benefits costs and duplicative advertising, computer systems,
accounting and other functions at Thermalloy's corporate office in Dallas,
Texas pursuant to our integration plan with Thermalloy. The adjustments also
include the elimination of duplicative selling, general and administrative
costs from the closure of the High Wycombe, Hong Kong and Santa Ana
facilities.
(d) Adjustments to record cost savings relating to the elimination of the
salaries, bonuses and benefits associated with certain members of management
and certain employees of Aavid's corporate office who will cease to be our
employees, as well as certain nonrecurring expenses relating to public
company expenses, travel and entertainment expenses and legal costs
eliminated upon consummation of the merger.
14
<PAGE>
NOTES TO SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA (CONTINUED)
(e) Adjustments to eliminate the estimated cash flow contribution relating to
production of the Intel Special Product which ended in the first quarter of
fiscal 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" for a discussion of the Intel
Special Product.
(f) Reflects a non-recurring restructuring charge recorded during the third
quarter of 1998 when we closed our Manchester facility as a result of
Intel's decision to significantly reduce its purchases of the Intel Special
Product.
(g) Adjustments reflect the add-back of non-recurring charges associated with
the termination of the management agreement with Sterling Ventures Limited
and a one-time bonus (based upon profits earned in excess of certain
thresholds) due Mr. Alan Beane, our former President and Chief Executive
Officer.
(3) Represents adjusted EBITDA as a percentage of pro forma net sales.
(4) See note (k) of notes to our unaudited pro forma combined and condensed
statements of income adjustments for a calculation of cash interest expense.
(5) The ratio of earnings to fixed charges is calculated by dividing earnings
before income taxes and fixed charges by fixed charges. Fixed charges
consist of interest expense, including amortization of deferred financing
costs, and the component of capitalized lease expense which we believe
represents an appropriate interest factor. Earnings were insufficient to
cover fixed charges by $23,076 for the fiscal year ended December 31, 1998,
$18,479 and $15,840 for the nine months ended September 26, 1998 and
October 2, 1999, respectively, and $20,437 for the twelve months ended
October 2, 1999.
(6) Under generally accepted accounting principles, approximately $4.6 million
of the proceeds from the sale of the units has been allocated to the fair
value of the warrants and approximately $143.8 million has been allocated to
the notes, net of original issue discount of approximately $1.7 million.
15
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The summary historical financial data set forth below for each of the years
in the five year period ended December 31, 1998 have been derived from our
audited consolidated financial statements for the periods indicated. The summary
historical financial data for the nine months ended September 26, 1998 and
October 2, 1999 are unaudited, have been prepared on the same basis as our
audited consolidated financial statements and, in the opinion of management,
reflect all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly our results of operations for the periods then ended
and our financial position as of such dates. Operating results for the nine
months ended October 2, 1999 are not necessarily indicative of the results that
may be expected for the entire fiscal year. The summary historical financial
data does not reflect the acquisition of Thermalloy, which occurred on
October 21, 1999, or the merger, which occurred on February 2, 2000. The
following summary historical financial data should be read in conjunction with
our consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, --------------------------
---------------------------------------------------- SEPTEMBER 26, OCTOBER 2,
1994 1995(1) 1996(2) 1997 1998 1998 1999
-------- -------- -------- -------- -------- ------------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................... $ 61,620 $ 90,944 $106,995 $167,745 $209,078 $158,682 $145,239
Cost of goods sold.............. 41,132 60,680 66,002 107,401 138,431 106,222 90,769
-------- -------- -------- -------- -------- -------- --------
Gross profit.................. 20,488 30,264 40,993 60,344 70,647 52,460 54,470
Selling, general and
administrative expenses....... 13,246 19,347 27,562 36,709 43,783 32,224 34,054
Research and development........ 1,158 2,594 5,674 6,939 6,756 4,846 5,154
Restructuring and buyout of
compensation agreement
charges(3).................... -- 2,770 -- -- 5,740 5,740 --
Purchased undeveloped technology
charge(4)..................... -- 2,649 3,446 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income from operations........ 6,084 2,904 4,311 16,696 14,368 9,650 15,262
Interest expense, net........... (1,567) (2,611) (1,591) (2,178) (1,342) (1,155) (257)
Other expense, net.............. (5) (177) (577) (1,201) (520) (486) (277)
-------- -------- -------- -------- -------- -------- --------
Income before income taxes and
extraordinary item.......... 4,512 116 2,143 13,317 12,506 8,009 14,728
Provision for income tax
expense....................... (1,677) (831) (2,002) (4,824) (4,385) (2,832) (5,241)
-------- -------- -------- -------- -------- -------- --------
Income before extraordinary
item........................ 2,835 (715) 141 8,493 8,121 5,177 9,487
Extraordinary item(5)........... -- -- (171) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)............. $ 2,835 $ (715) $ (30) $ 8,493 $ 8,121 $ 5,177 $ 9,487
======== ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(6)....................... $ 7,556 $ 5,228 $ 7,836 $ 23,135 $ 23,728 $ 16,545 $ 20,821
EBITDA margin(7)................ 12.3% 5.7% 7.3% 13.8% 11.3% 10.4% 14.3%
Depreciation and amortization... $ 1,477 $ 2,501 $ 4,102 $ 7,640 $ 9,880 $ 7,381 $ 5,836
Capital expenditures............ 3,808 8,454 7,029 15,992 10,407 7,291 6,062
BALANCE SHEET DATA (END OF PERIOD):
Working capital................. $ 6,506 $ 1,974 $ 9,374 $ 22,296 $ 35,959 $ 39,613 $ 44,760
Total assets.................... 32,561 56,499 80,221 110,796 129,084 123,947 136,375
Stockholders' equity............ 4,541 5,433 29,353 50,415 71,351 67,593 82,588
</TABLE>
(SEE FOOTNOTES ON FOLLOWING PAGE)
16
<PAGE>
NOTES TO SUMMARY HISTORICAL FINANCIAL DATA
(1) Includes the results of operations of Fluent from August 24, 1995 (the date
of acquisition of Fluent).
(2) Includes the results of operations of Fluid Dynamics International from
May 16, 1996 (the date of acquisition of Fluid Dynamics International).
(3) Represents the expense for (a) the buyout in 1995 of a portion of the
expected future payments required under the employment agreement with
Mr. Beane, our former President and Chief Executive Officer, and the
bonus-based portion of the management fee due Sterling Ventures Limited,
each of which was established at the time of the acquisition of Aavid
Thermal Products in October 1993, and (b) in 1998, (i) the charge related to
the estimated restructuring costs incurred with our closure of our
Manchester, New Hampshire facility, (ii) the termination of the management
agreement with Sterling Ventures and (iii) a bonus due Mr. Beane based on
profits in excess of specified thresholds.
(4) Represents a non-recurring charge equal to the amount of the purchase price
allocated to technology acquired in the acquisition of Fluent in 1995 and
the acquisition of Fluid Dynamics International in 1996, which was not fully
commercially developed and had no alternative future use at the time of
acquisition.
(5) Represents charge related to early retirement of debt, net of related tax
effect.
(6) Represents net income before interest, income taxes, depreciation and
amortization and extraordinary items, each of which can significantly affect
our results of operations and liquidity and should be considered in
evaluating our financial performance. EBITDA is included because we
understand that such information is considered to be an additional basis on
which to evaluate our ability to pay interest, repay debt and make capital
expenditures. EBITDA is not intended to represent and should not be
considered more meaningful than, or as an alternative to, measures of
performance, profitability or liquidity determined in accordance with
generally accepted accounting principles.
(7) Represents EBITDA as a percentage of net sales.
17
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS WHEN YOU EVALUATE
TENDERING YOUR NOTES IN THE EXCHANGE OFFER.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT OUR COMPANY AND OUR
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-
LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS DESCRIBED IN THIS SECTION AND
ELSEWHERE IN THIS PROSPECTUS. WE UNDERTAKE NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW INFORMATION BECOMES
AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
RISKS RELATING TO OUR INDEBTEDNESS
OUR SUBSTANTIAL DEBT COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND PREVENT
US FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES.
We have a substantial amount of debt. The following chart shows certain
important credit statistics and is presented assuming we had completed the
Thermalloy acquisition, the merger and related financing transactions as of the
date specified below and applied the proceeds as intended:
<TABLE>
<CAPTION>
AS OF OCTOBER 2, 1999
-----------------------
ACTUAL PRO FORMA
-------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total debt (including current portion)...................... $13,215 $198,440
Stockholders' equity........................................ 82,588 155,431
Debt to total capitalization................................ 13.8% 56.1%
</TABLE>
On a pro forma basis, our earnings would have been inadequate to cover fixed
charges by approximately $20.4 million for the twelve months ended October 2,
1999.
The indenture allows us to borrow a significant amount of additional money,
subject to certain conditions. See "Description of the Notes-Certain Covenants."
Our substantial indebtedness could have important consequences to you. For
example, it could:
- make it more difficult for us to satisfy our obligations with respect to
the notes and our obligations under our amended and restated credit
facility;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, which will reduce amounts available
for working capital, capital expenditures, research and development and
other general corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- increase our vulnerability to general adverse economic and industry
conditions;
- place us at a competitive disadvantage compared to our competitors with
less debt; and
- limit our ability to borrow additional funds.
In addition, a portion of our debt, including debt incurred under our
amended and restated credit facility, bears interest at variable rates. An
increase in the interest rates on our debt will reduce the funds available to
repay the notes and our other debt and for operations and future business
18
<PAGE>
opportunities and will intensify the consequences of our leveraged capital
structure. See "Description of Senior Credit Facilities" for a description of
the amended and restated credit facility.
OUR ABILITY TO INCUR SUBSTANTIALLY MORE DEBT COULD FURTHER INCREASE THE RISKS
DESCRIBED ABOVE.
The terms of the indenture governing the notes do not fully prohibit us or
our subsidiaries from incurring substantial additional debt in the future. Our
amended and restated credit facility permits additional borrowing of
approximately $20.3 million. All of the borrowings under the amended and
restated credit facility are senior to the notes. If new debt is added to our
current debt levels, the related risks that we now face could intensify.
TO SERVICE OUR DEBT, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH, WHICH DEPENDS
ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our debt, including the
notes and the amended and restated credit facility, will depend on our ability
to generate cash in the future. This, to an extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control.
We cannot assure you that our business will generate sufficient cash flow or
that future borrowings will be available to us in an amount sufficient to enable
us to pay our debt, including the notes, or to fund our other liquidity needs.
If our future cash flow from operations and other capital resources are
insufficient to pay our obligations as they mature or to fund our liquidity
needs, we may be forced to reduce or delay our business activities and capital
expenditures, sell assets, obtain additional equity capital or restructure or
refinance all or a portion of our debt, including the notes, on or before
maturity. We cannot assure you that we will be able to refinance any of our
debt, including the notes, on a timely basis or on satisfactory terms if at all.
In addition, the terms of our existing debt, including the notes and the amended
and restated credit facility, and other future debt may limit our ability to
pursue any of these alternatives.
THE NOTES ARE CONTRACTUALLY SUBORDINATED IN RIGHT OF PAYMENT TO OUR SENIOR DEBT.
The notes are senior subordinated obligations of Aavid ranking junior to all
of our existing and future senior debt, equal in right of payment with all of
our existing and future senior subordinated debt and senior in right of payment
to any of our subordinated debt. The notes are contractually subordinated in
right of payment to borrowings under our amended and restated credit facility.
As of October 2, 1999, on a pro forma basis, we would have had $54.7 million of
senior debt outstanding, all of which would have been secured debt. The
indenture limits, and in some (but not all) instances prohibits, the incurrence
of additional debt.
In addition, all payments on the notes will be blocked in the event of a
payment default under the amended and restated credit facility and may be
blocked for up to 179 consecutive days in any given year in the event of
non-payment defaults on senior debt. In the event of a default on the notes and
any resulting acceleration of the notes, the holders of senior debt then
outstanding will be entitled to payment in full in cash of all obligations in
respect of such senior debt before any payment or distribution may be made with
respect to the notes.
In a bankruptcy, liquidation or reorganization or similar proceeding
relating to us, holders of the notes will participate with trade creditors and
all other holders of subordinated debt in the assets remaining after we have
paid all of the senior debt. However, because the indenture requires that
amounts otherwise payable to holders of the notes in a bankruptcy or similar
proceeding be paid to holders of senior debt instead, holders of the notes may
receive proportionately less than holders of
19
<PAGE>
trade payables in any such proceeding. In any of these cases, we cannot assure
you that sufficient assets will remain to make any payments on the notes.
WE ARE A HOLDING COMPANY AND OUR ONLY SOURCE OF CASH TO PAY INTEREST ON AND THE
PRINCIPAL OF THE NOTES IS DISTRIBUTIONS FROM OUR SUBSIDIARIES.
We are a holding company with no business operations of our own. Our only
significant asset is and will be our equity interests in our subsidiaries. We
conduct all of our business operations through our subsidiaries. Accordingly,
our only source of cash to make payments of interest on and principal of the
notes is distributions with respect to our ownership interest in our
subsidiaries from the net earnings and cash flows generated by such
subsidiaries.
OUR AMENDED AND RESTATED CREDIT FACILITY AND THE INDENTURE IMPOSE OPERATIONAL
AND FINANCIAL RESTRICTIONS ON US.
Our amended and restated credit facility and the indenture include
restrictive covenants that, among other things, restrict our ability to:
- incur more debt;
- pay dividends and make distributions;
- issue stock of subsidiaries;
- make certain investments;
- repurchase stock;
- create liens;
- enter into transactions with affiliates;
- enter into sale-leaseback transactions;
- merge or consolidate; and
- transfer and sell assets.
Our amended and restated credit facility also requires us to maintain
financial ratios. All of these restrictive covenants may restrict our ability to
expand or to pursue our business strategies. Our ability to comply with these
and other provisions of our indenture and amended and restated credit facility
may be affected by changes in our business condition or results of operations,
adverse regulatory developments or other events beyond our control. The breach
of any of these covenants would result in a default under our debt. If we
default, we could be prohibited from making payments with respect to the notes
until the default is cured or all debt under the amended and restated credit
facility or other senior debt is paid in full. This default could allow our
creditors to accelerate the related debt, as well as any other debt to which a
cross-acceleration or cross-default provision applies. If our indebtedness were
to be accelerated, we cannot assure you that we would be able to repay it. In
addition, a default could give the lenders the right to terminate any
commitments they had made to provide us with further funds.
20
<PAGE>
RISKS RELATING TO OUR BUSINESS
WE MAY FAIL TO SUCCESSFULLY INTEGRATE THERMALLOY.
The success of the Thermalloy acquisition will depend, in part, on our
ability to fully integrate the operations and management of Thermalloy. A
successful integration requires, among other things, the integration of
Thermalloy's product offerings and technology into ours and the coordination of
their sales and marketing and financial reporting efforts with ours. We cannot
assure you that we will accomplish the integration smoothly or successfully.
Therefore, we cannot assure you that we will realize the anticipated benefits of
the Thermalloy acquisition. The success of the integration will require the
dedication of management and other personnel resources, which may temporarily
distract their attention from our day-to-day business and could adversely affect
our financial results. We may experience reductions in our combined revenue as a
result of potential customer dislocation and loss due to the integration of
Thermalloy's operations with ours, plant closures and the merger.
WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR INTERNAL GROWTH.
We have recently experienced substantial growth in our thermal management
products business and have significantly expanded our operations through
manufacturing capacity additions, the acquisition of Thermalloy and geographic
expansion. We intend to continue to increase our thermal products and software
businesses overseas, expand the products and services we offer, and possibly
make selective acquisitions. This growth and expansion has placed, and will
continue to place, a significant strain on our production, technical, financial
and other management resources. To manage growth effectively, we must maintain a
high level of manufacturing quality, efficiency, delivery and performance and
must continue to enhance our operational, financial and management systems, and
attract, train, motivate and manage our employees. We may not be able to
effectively manage this expansion, and any failure to do so could have a
material adverse effect on our business and financial condition.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
Our quarterly and annual operating results are affected by a wide variety of
factors, many of which are outside our control, that have in the past and could
in the future materially and adversely affect our net sales, gross margins and
profitability. These factors include:
- the volume and timing of orders received;
- competitive pricing pressures;
- the availability and cost of raw materials;
- changes in the mix of products and services sold;
- potential cancellation or rescheduling of orders;
- changes in the level of customer inventories of our products;
- the timing of new product and manufacturing process technology
introductions by us or our competitors;
- the availability of manufacturing capacity; and
- market acceptance of new or enhanced products introduced by us.
21
<PAGE>
Additionally, our growth and results of operations have in the past been,
and would in the future be, adversely affected by downturns in the semiconductor
or electronics industries. Our ability to reduce costs quickly in response to
revenue shortfalls is limited, and this limitation will be exacerbated to the
extent we continue to add additional manufacturing capacity. The need for
continued investment in research and development could also limit our ability to
reduce expenses accordingly. As a result of these factors, we expect our
operating results to continue to fluctuate. Results of operations in any one
quarter should not be considered indicative of results to be expected for any
future period, and fluctuations in operating results may also cause fluctuations
in the market price of the notes. We cannot assure you that the overall thermal
management market, the segments of the market served by us or we will continue
to grow in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OUR BUSINESS IS DEPENDENT ON THE SEMICONDUCTOR MARKET.
A significant portion of our net sales has been, and is expected to continue
to be, dependent upon sales of thermal management products for industrial
electronics applications, consisting primarily of integrated circuits. However,
a significant portion of the recent growth in our net sales has been, and is
expected to continue to be, dependent upon sales of thermal management products
for computer and networking applications, consisting primarily of
microprocessors and related chip sets. Our sales for industrial electronics
applications accounted for approximately 47%, 44%, 37% and 34% of our net sales
(excluding sales of the Intel Special Product) in 1996, 1997, 1998 and the nine
months ended October 2, 1999, respectively. Our sales for computer and
networking applications (excluding sales of the Intel Special Product) accounted
for approximately 29%, 33%, 38% and 40% of our net sales in 1996, 1997, 1998 and
the nine months ended October 2, 1999, respectively. The thermal management
market for computer and networking applications is characterized by rapid
technological change, short product life cycles, greater pricing pressure and
increasing foreign and domestic competition as compared to the thermal
management market for industrial electronics applications.
Our continued growth will, to a significant extent, depend upon increased
demand for semiconductor devices and products that require thermal solutions.
The semiconductor industry (both computer and networking and industrial) has
historically been cyclical and subject to significant economic downturns
characterized by diminished product demand and eroding average selling prices. A
decrease in demand for semiconductor products would reduce demand for our
products and have an adverse impact on our results of operations. Further,
semiconductor manufacturers and their customers, in developing and designing new
products, typically seek to eliminate or minimize thermal problems, and such
efforts could have the effect of reducing or eliminating demand for certain of
our products. Additionally, we believe that many of our OEM customers compete in
intensely competitive markets characterized by declining prices and low margins.
These OEMs apply continued pricing pressure on their component suppliers,
including us. We cannot assure you that we will not be adversely affected by
cyclical conditions in the semiconductor and electronics industries.
CHANGES IN THE AVAILABILITY OR PRICE OF ALUMINUM CAN SIGNIFICANTLY AFFECT OUR
BUSINESS AND RESULTS OF OPERATIONS.
Aluminum is the principal raw material used in our products and represents a
significant portion of our cost of goods sold. We purchase raw aluminum,
aluminum extrusion, aluminum coil and various components from a limited number
of outside sources. During the year ended December 31, 1998 and the nine months
ended October 2, 1999, we purchased a significant portion of our aluminum coil
stock from a single supplier. We believe that purchasing aluminum extrusion and
coil stock from a limited number of suppliers is necessary in order to obtain
lower prices and to achieve, consistently, the tolerances and design and
delivery flexibility that we require. If the available supply of aluminum
declines, or if one or more of our current suppliers is unable for any reason to
meet our requirements,
22
<PAGE>
is acquired by a competitor or determines to compete with us, we could
experience cost increases, a deterioration of service from our suppliers, or
interruptions, delays or a reduction in raw material supply that may cause us to
fail to meet delivery schedules to customers. Although we believe that viable
alternate suppliers exist for the aluminum coil stock and components, any
unanticipated interruption of supply would have a short-term material adverse
effect on us.
In addition, our ability to pass price increases for aluminum or other raw
materials along to our customers may be limited by competitive pressures,
customer resistance and price adjustment limitations in our product purchase
contracts with our customers. Even if we are able to pass along all or a portion
of raw material price increases, there is typically a lag of three to twelve
months between the actual cost increase of raw material and the corresponding
increase in the prices of our products. We cannot assure you that in the future
we will be able to recover increased aluminum or other raw material costs
through higher prices to our customers. Market prices for raw aluminum, which
have historically been cyclical and highly volatile, have a significant effect
on our gross margin. An increase in the market price for aluminum could have a
material adverse effect upon our results of operations and business. See "--Our
operating results may fluctuate significantly."
WE SUPPLY PRODUCTS AND SERVICES TO INDUSTRIES THAT EXPERIENCE RAPID
TECHNOLOGICAL CHANGE, WHICH MAY MAKE OUR PRODUCTS OBSOLETE.
The markets for our products are characterized by rapidly changing
technology, frequent new product introductions and enhancements and rapid
product obsolescence. Our future success will be highly dependent upon our
ability to continually enhance or develop new thermal and software products,
materials, manufacturing processes and services in order to keep pace with the
technological advancements of our customers and their corresponding increasingly
complex thermal management and computational fluid dynamics software needs. We
may not be able to identify new product trends or opportunities, develop and
bring to market new products or respond effectively to new technological changes
or product announcements by others, develop or obtain access to advanced
materials, or achieve commercial acceptance of our products. In addition, other
companies, including our customers, may develop products or technologies which
render our products or technologies noncompetitive or obsolete.
WE FACE INTENSE COMPETITION, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO
MAINTAIN OR INCREASE SALES OF OUR PRODUCTS.
The markets for thermal management products and computational fluid dynamics
software are highly competitive. Certain of our competitors, which include
divisions or subsidiaries of large companies, may have greater technical,
financial, research and development and marketing resources than we do. Further,
we expect that as the trend toward outsourcing continues, a number of new
competitors may emerge, some of which may have greater technical, financial,
research and development and marketing resources than we do. Our ability to
compete successfully depends upon a number of factors, including price, customer
acceptance of our products, cost effective high-volume manufacturing, proximity
to customers, lead times, ease of installation of our products, new product and
manufacturing process technology introductions by us and our competitors, access
to new technologies and general market and economic conditions. We cannot
provide assurance that we will be able to compete successfully in the future
against existing or potential competitors, or that our operating results will
not be adversely affected by increased price competition. In addition, our
customers for thermal management and software products may manufacture or
develop such products internally or actively support new entrants into our
market rather than purchase thermal products from us. Further, many of our
customers like to maintain dual sources for thermal management products. To the
extent that we and Thermalloy serve as the two sources of supply for customers,
it is possible that
23
<PAGE>
these customers will use one of our competitors as a second source of supply and
our combined business with these customers may decrease.
OUR BUSINESS EXPERIENCES SEASONAL VARIATIONS.
Our CFD software business has experienced and is expected to continue to
experience significant seasonality due to, among other things, the second and
third quarter slowdown in software revenues primarily due to the purchasing and
budgeting patterns of Fluent's software customers. In addition, our thermal
management business has experienced slight seasonal variations due to the
slowdown during the third quarter's summer months which historically has
occurred in the electronics industry. Typically, our revenues are lowest during
the second and third quarters of the fiscal year, which ends in December.
WE DEPEND ON KEY PERSONNEL AND SKILLED EMPLOYEES WHO MAY NOT REMAIN WITH US IN
THE FUTURE.
Our success depends to a large extent upon the continued services of our
senior management and technical personnel. Ronald Borelli resigned from his
position as Chief Executive Officer when his employment agreement expired in
December 1999. Additionally, we cannot assure you that our senior management
will remain with us following the merger. The loss of such personnel,
particularly before Thermalloy's operations are integrated with ours, could have
a material adverse effect on our business and our ability to realize the
benefits of the Thermalloy acquisition. Our business also depends upon our
ability to retain skilled and semi-skilled employees. There is intense
competition for qualified management and skilled and semi-skilled employees and
our failure to recruit, train and retain such employees could adversely affect
our business.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO ADDITIONAL RISKS.
We have been expanding our manufacturing capacity internationally to better
service our customers, many of whom have moved their manufacturing operations
and expanded their business overseas. Our acquisition of Thermalloy
significantly increases the scope of our international operations. We have had
only limited experience to date operating outside the United States. We cannot
assure you that the expansion of our international operations will be
successful. International operations are subject to a number of risks,
including:
- greater difficulties in controlling and administering business;
- less familiarity with business customs and practices;
- increased reliance on key local personnel;
- the imposition of tariffs and import and export controls;
- changes in governmental policies (including U.S. policy toward these
countries);
- difficulties caused by language barriers;
- increased difficulty in collecting receivables;
- availability of, and time required for, the transportation of products to
and from foreign countries;
- political instability;
- foreign currency fluctuations; and
24
<PAGE>
- expropriation and nationalization.
The occurrence of any of these or other factors may have a material adverse
effect on our results of operations and could have an adverse effect on our
relationships with our customers. Furthermore, the occurrence of certain of
these factors in countries in which we operate could result in the impairment or
loss of our investment in such countries. The trend by our customers to move
manufacturing operations and expand their business overseas may have an adverse
impact on our sales of domestically manufactured products.
WE DEPEND ON A LIMITED NUMBER OF MANUFACTURING FACILITIES.
A significant part of our net sales is currently derived from products
manufactured at our manufacturing facility in Guang Dong Province in The
People's Republic of China. We commenced manufacturing at this facility in early
1998 and have expanded this facility to 120,000 square feet. This facility has
grown to generate significant revenues for us, representing 6.4% of net sales in
1998 and 14.5% of net sales in the nine months ended October 2, 1999. We only
have limited experience in managing operations in China and, although we have
focused significant management resources on this operation, we cannot assure you
that this business will be successful. Because of the growth of our operations
in China and the increasing percentage of net sales from China, an inability to
successfully manage this business or an interruption in the operations at this
facility could have a material adverse effect on our overall financial
performance until we are able to obtain substitute production capability with
similar low operating costs.
We produce approximately 50% of our domestic aluminum extrusion requirements
on two presses at our extrusion facility in Franklin, New Hampshire. Any
extended interruptions to the operation of the presses could have a material
adverse on our business and results of operations.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY.
Our success depends in part on our proprietary technology. We attempt to
protect our proprietary technology through patents, copyrights, trademarks,
trade secrets and license agreements. We believe, however, that our success will
depend to a greater extent upon innovation, technological expertise and
distribution strength. We cannot assure you that we will be able to protect our
technology, or that our competitors will not be able to develop similar
technology independently. We cannot give you assurance that the claims allowed
on any patents held by us will be sufficiently broad to protect our technology.
In addition, no assurance can be given that any patents issued to us will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide competitive advantages to us. In addition, effective patent,
copyright and trade secret protection may be unavailable or limited in certain
foreign countries in which we conduct business. Although we believe that our
products and technology do not infringe upon proprietary rights of others, there
can be no assurance that third parties will not assert infringement claims in
the future. Moreover, litigation may be necessary in the future to enforce our
patents, copyrights and other intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our financial condition and results of
operations.
WE ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL AND OTHER REGULATIONS.
We are subject to a variety of United States and foreign environmental laws
and regulations, including those relating to the use, storage, treatment,
discharge and disposal of hazardous materials, substances and wastes used to
manufacture our products and remediation of soil and groundwater contamination.
Public attention has increasingly been focused on the environmental impact of
25
<PAGE>
operations that use hazardous materials. Some of the environmental laws impose
strict, and in certain cases joint and several, liability for response costs at
contaminated properties on their owners or operators, or on persons who arranged
for the disposal of regulated materials at these properties. Our operations are
also governed by laws and regulations relating to workplace safety and worker
health, principally the Occupational Safety and Health Act and regulations
thereunder which, among other requirements, establish noise and dust standards.
We believe we are in material compliance with applicable environmental, health
and safety requirements. Our failure to comply with present or future laws or
regulations could result in substantial liability to us. We cannot predict the
nature, scope or effect of legislation or regulatory requirements that could be
imposed or how existing or future laws or regulations will be administered or
interpreted with respect to products or activities to which they have not
previously applied. Enactment of more stringent laws or regulations, as well as
more vigorous enforcement policies of regulatory agencies or discovery of
previously unknown conditions requiring remediation, could require substantial
expenditures by us and could adversely affect our results of operations.
RISKS RELATING TO THE NOTES
IF YOU DO NOT PARTICIPATE IN THE EXCHANGE OFFER, YOUR NOTES WILL CONTINUE TO BE
SUBJECT TO TRANSFER RESTRICTIONS.
Notes that are not tendered or are tendered but not accepted will, following
the completion of the exchange offer, continue to be subject to existing
restrictions on transfer and, upon completion of the exchange offer,
registration rights with respect to the outstanding notes will terminate. In
addition, any outstanding noteholder who tenders in the exchange offer for the
purposes of participating in a distribution of the registered exchange notes may
be deemed to have received restricted securities, and if so, will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
To the extent that outstanding notes are tendered and accepted in the
exchange offer, the trading market for the remaining untendered or tendered but
not accepted outstanding notes could be adversely affected. Because we
anticipate that most holders of the outstanding notes will elect to exchange the
outstanding notes for these notes due to the absence of restrictions on the
resale of these notes under the Securities Act, we anticipate that the liquidity
of the market for any outstanding notes remaining after the consummation of the
exchange offer will be substantially limited.
OUR CONTROLLING STOCKHOLDER, WILLIS STEIN, MAY HAVE INTERESTS THAT CONFLICT WITH
HOLDERS OF THE NOTES.
We are a wholly owned subsidiary of Holdings, whose equity securities are
held by Willis Stein and some co-investors. Through its controlling interest in
Aavid and pursuant to the terms of the securityholders' agreement among the
equity investors, Holdings and Holdings II as more fully described under the
section "Certain Relationships and Related Transactions," Willis Stein has the
ability to control the operations and policies of Aavid. Circumstances may occur
in which the interests of Willis Stein, as the controlling equity holder, could
be in conflict with the interests of the holders of the notes. In addition, the
equity investors may have an interest in pursuing acquisitions, divestitures or
other transactions that, in their judgment, could enhance their equity
investment, even though such transactions might involve risks to the holders of
the notes.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURE.
If we undergo a "change of control," as defined later in this prospectus
under the heading "Description of the Notes-Certain Definitions," we must offer
to buy back your notes for a price equal
26
<PAGE>
to 101% of the principal amount, plus interest that has accrued but has not been
paid as of the repurchase date. We cannot assure you that we will have
sufficient funds available to make the required repurchases of the notes in that
event, or that we will have sufficient funds to pay our other debts. In
addition, our amended and restated credit facility prohibits us from
repurchasing the notes after a change of control until we have repaid in full
our debt under such credit facility. If we fail to repurchase the notes upon a
change of control, we will be in default under both the notes and our amended
and restated credit facility. Any future debt that we incur may also contain
restrictions on repurchases in the event of a change of control or similar
event. These purchase requirements may delay or make it harder for others to
obtain control of Aavid.
THE NOTES AND THE GUARANTEES COULD BE VOIDED OR SUBORDINATED TO OUR OTHER DEBT
IF THE ISSUANCE OF THE NOTES OR THE GUARANTEES CONSTITUTED A FRAUDULENT
CONVEYANCE.
If a bankruptcy case or lawsuit is initiated by our unpaid creditors, the
debt represented by the notes and the guarantees may be reviewed under the
federal bankruptcy laws and comparable provisions of state fraudulent transfer
laws. Under these laws, the debt could be voided, or claims in respect of the
notes and the guarantees could be subordinated to all other debts of Aavid or
its subsidiaries if, among other things, the court found that, at the time we
incurred the debt represented by the notes and the subsidiaries incurred the
debt represented by the guarantee, we or any subsidiary:
- received less than reasonably equivalent value or fair consideration for
the incurrence of such debt; and
- were insolvent or rendered insolvent by reason of such incurrence; or
- were engaged in a business or transaction for which the remaining
assets constituted unreasonably small capital; or
- intended to incur, or believed that we or a subsidiary executing a
guarantee thereof would incur, debts beyond the ability to pay such
debts as they matured; or
- intended to hinder, delay or defraud creditors.
The measure of insolvency for purposes of fraudulent transfer laws varies
depending on the law applied. Generally, however, a debtor would be considered
insolvent if:
- the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets; or
- the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
- it could not pay its debts as they become due.
EFFECT OF ORIGINAL ISSUE DISCOUNT ON HOLDERS OF THE NOTES.
The notes are considered to have been issued with original issue discount.
Holders of the notes will be required to include the accretion of the original
issue discount in gross income for U.S. federal income tax purposes in advance
of receipt of the cash payments to which such income is attributable. See
"Certain United States Federal Income Tax Considerations" for a more detailed
discussion of the U.S. federal income tax consequences to holders of the notes
of the purchase, ownership and disposition of the notes. If a bankruptcy case is
commenced by or against us under the United States Bankruptcy Code, the claim of
a holder of notes with respect to the principal amount thereof may be
27
<PAGE>
limited to an amount equal to the sum of (i) the purchase price and (ii) that
portion of the original issue discount which has been amortized as of the date
of any such bankruptcy filing.
YOU CANNOT BE SURE THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE EXCHANGE
NOTES, WHICH HAD NO PRIOR MARKET.
The outstanding notes were issued to, and we believe the outstanding notes
are currently owned by, a relatively small number of beneficial owners. The
outstanding notes have not been registered under the Securities Act or under any
applicable state securities laws and will be subject to restrictions on
transferability to the extent that they are not exchanged for the exchange
notes. Although the exchange notes will generally be permitted to be resold or
otherwise transferred by the holders (who are not our affiliates) without
compliance with the registration requirements under the Securities Act, they
will constitute a new issue of securities with no established trading market. We
have been advised by the initial purchasers that the initial purchasers
presently intend to make a market in the exchange notes, as permitted by
applicable laws and regulations. However, the initial purchasers are not
obligated to do so and any market-making activity with respect to the exchange
notes may be discontinued at any time without notice. In addition, such
market-making activity will be subject to the limits imposed by the Securities
Act and the Exchange Act and may be limited during the exchange offer.
Accordingly, no assurance can be given that an active public or other market
will develop for the exchange notes or the outstanding notes or as to the
liquidity of or the trading market for the exchange notes or the outstanding
notes. If an active public market does not develop, the market price and
liquidity of the exchange notes may be adversely affected.
If a public trading market develops for the exchange notes, the liquidity of
such market and future trading prices of such exchange notes will depend on many
factors, including, among other things, prevailing interest rates, our results
of operations and the market for similar securities. Depending on prevailing
interest rates, the market for similar securities and other factors, including
our financial condition, the exchange notes may trade at a discount.
28
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
On February 2, 2000, we sold 150,000 units, consisting of $150,000,000
aggregate principal amount at maturity of notes and 150,000 warrants to purchase
an aggregate of 60 shares of our Class A common stock and 60 shares of our
Class H common stock, in a private placement through CIBC World Markets Corp.
and FleetBoston Robertson Stephens Inc. to a limited number of "qualified
institutional buyers," as defined under the Securities Act. In connection with
the sale of the outstanding notes, we, CIBC and FleetBoston entered into a
registration rights agreement, pursuant to which we agreed, among other things,
to use our reasonable best efforts to file with the SEC a registration statement
under the Securities Act covering the exchange offer and to cause that
registration statement to become effective under the Securities Act. Upon the
effectiveness of that registration statement, we must offer each holder of the
outstanding notes the opportunity to exchange its securities for an equal
principal amount of exchange notes. You are a holder with respect to the
exchange offer if you are a person in whose name any outstanding notes are
registered on our books or any other person who has obtained a properly
completed assignment of outstanding notes from the registered holder.
We are making the exchange offer to comply with our obligations under the
registration rights agreement. A copy of the registration rights agreement has
been filed as an exhibit to the registration statement of which this prospectus
is a part.
In order to participate in the exchange offer, you must represent to Aavid,
among other things, that:
- you acquired the exchange notes in the ordinary course of your business;
- you are not participating in a distribution of the exchange notes; and
- you are not an "affiliate" of Aavid, as the term is defined in Rule 144
under the Securities Act.
RESALE OF THE EXCHANGE NOTES
Based on previous interpretations by the staff of the SEC set forth in
no-action letters issued to third parties, we believe that the exchange notes
issued in the exchange offer may be offered for resale, resold and otherwise
transferred by you (except if you are our affiliate) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the representations set forth in "Purpose and Effect of the Exchange Offer"
above apply to you.
If you tender in the exchange offer with the intention of participating in a
distribution of the exchange notes, you cannot rely on the interpretation by the
staff of the SEC as set forth in the no-action letters and you must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. In the event that our belief
regarding resale is inaccurate, those who transfer exchange notes in violation
of the prospectus delivery provisions of the Securities Act and without an
exemption from registration under the federal securities laws may incur
liability under these laws. We do not assume, nor will we indemnify you against,
this liability.
The exchange offer is not being made to, nor will we accept surrenders for
exchange from, holders of outstanding notes in any jurisdiction in which the
exchange offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of the particular jurisdiction. Each broker-dealer
that receives exchange notes for its own account in exchange for outstanding
notes, where the outstanding notes were acquired by that broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of the exchange
notes. In order to facilitate the disposition of exchange notes by
broker-dealers participating in the exchange offer, we have agreed, subject to
specific conditions, to make this
29
<PAGE>
prospectus, as it may be amended or supplemented from time to time, available
for delivery to those broker-dealers to satisfy their delivery obligations under
the Securities Act.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions in this prospectus and in the
accompanying letter of transmittal, we will accept any and all outstanding notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
April 27, 2000, or a later date and time as to which the exchange offer has been
extended. In that case, the expiration date will be the latest date and time to
which the exchange offer is open, which will not be more than 60 days after the
original expiration date. We will issue $1,000 principal amount of exchange
notes in exchange for each $1,000 principal amount of outstanding notes accepted
in the exchange offer. You may tender some or all of your outstanding notes
pursuant to the exchange offer in any denomination of $1,000 or in integral
multiples of $1,000.
In addition, in connection with any resales of exchange notes, any
broker-dealer who acquired outstanding notes for its own account as a result of
market-making activities or other trading activities must deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale of
the exchange notes. The SEC has taken the position that participating
broker-dealers may fulfill their prospectus delivery requirements for the
exchange notes, other than a resale of an unsold allotment from the original
sales of outstanding notes, with the prospectus contained in the exchange offer
registration statement. Under the registration rights agreement we are required
to allow participating broker-dealers, and other persons, if any, subject to
similar prospectus delivery requirements, to use this prospectus in connection
with the resale of exchange notes. However, we are not required to amend or
supplement this prospectus for a period exceeding 180 days after the date the
exchange offer has been completed. We have also agreed that in the event that we
do not consummate the exchange offer or, if we are required to file a shelf
registration statement, it is not filed or declared effective, in each case,
within the time periods set forth in the registration rights agreement (each a
"registration default"), then the annual interest rate on the outstanding notes
will increase by 0.50%. The annual interest rate on the outstanding notes will
increase by an additional 0.25% for each subsequent 90 day period during which
the registration default continues, up to a maximum additional interest rate of
2.00% per year over the annual interest rate of 12 3/4% on the outstanding
notes.
The exchange offer will be deemed to have been consummated upon our having
exchanged, pursuant to the exchange offer, exchange notes for all outstanding
notes that have been properly tendered and not withdrawn by the expiration date.
Following this event, holders of outstanding notes not participating in the
exchange offer who are seeking liquidity in their investment would have to rely
on exemptions to registration requirements under the securities laws, including
the Securities Act.
The form and terms of the exchange notes are substantially the same as the
form and terms of the outstanding notes, except that:
- the exchange notes bear an exchange note designation and a different CUSIP
number from the outstanding notes;
- the exchange notes have been registered under the Securities Act and hence
will not bear legends restricting their transfer as the outstanding notes
do; and
- the holders of the exchange notes will generally not be entitled to rights
under the registration rights agreement, which rights generally will be
satisfied when the exchange offer is consummated.
The exchange notes will evidence the same debt as the tendered outstanding
notes and will be entitled to the benefits of the indenture under which the
outstanding notes were issued. As of the date of this prospectus, $150,000,000
aggregate principal amount of outstanding notes are outstanding. In connection
with the issuance of the outstanding notes, we arranged for the outstanding
notes to be
30
<PAGE>
eligible for trading in the Private Offering, Resale and Trading through
Automated Linkages Market. The PORTAL market is the National Association of
Securities Dealers' screen-based, automated market for trading of securities
eligible for resale under Rule 144A. The exchange notes will be issuable and
transferable in book-entry form through DTC, but will not be eligible for
trading in the PORTAL market.
Holders of outstanding notes do not have any appraisal or dissenters' rights
under the General Corporation Law of the State of Delaware or the indenture
relating to the outstanding notes in connection with the exchange offer. We
intend to conduct the exchange offer in accordance with the provisions of the
registration rights agreement and the applicable requirements of the Securities
Act and the Exchange Act, and the rules and regulations of the SEC thereunder.
We shall be deemed to have accepted validly tendered outstanding notes when,
as and if we have given oral or written notice of acceptance, such notice if
given orally, to be confirmed in writing, to the exchange agent. The exchange
agent will act as agent for the tendering holders of outstanding notes for the
purpose of receiving the exchange notes from us and delivering exchange notes to
the holders.
If any tendered existing notes are not accepted for exchange because of an
invalid tender, the occurrence of other events described herein or otherwise,
the certificates for any unaccepted outstanding notes will be returned, without
expense, to the tendering holder as promptly as practicable after the expiration
date.
Holders of outstanding notes who tender in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the accompanying letter of transmittal, transfer taxes with respect to the
exchange of outstanding notes pursuant to the exchange offer. We will pay all
charges and expenses, other than transfer taxes in some circumstances, in
connection with the exchange offer. For additional information, please refer to
the "--Fees and Expenses" section of this prospectus.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The expiration date is 5:00 p.m., New York City time, on April 27, 2000,
unless we extend the exchange offer, in which case the expiration date will be
the latest date and time to which the exchange offer is extended.
If we extend the expiration date, we will notify the exchange agent of such
extension by oral or written notice, which notice if given orally, to be
confirmed in writing, and will issue a press release or other public
announcement of such extension prior to 9:00 a.m., New York City time, on the
next business day after the previously scheduled expiration date.
We reserve the right:
- to delay accepting any outstanding notes, to extend the exchange offer or
to terminate the exchange offer if any of the conditions described below
under "conditions" shall not have been satisfied, by giving oral or
written notice, which notice, if given orally, to be confirmed in writing,
of the delay, extension or termination to the exchange agent, or
- to amend the terms of the exchange offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice to the exchange
agent. If the exchange offer is amended in a manner we determine constitutes a
material change, we will promptly disclose the amendment in any way reasonably
calculated to inform you of the amendment.
31
<PAGE>
INTEREST ON THE EXCHANGE NOTES
The exchange notes will bear interest at a rate of 12 3/4% per annum.
Interest on the exchange notes will be payable semi-annually, in arrears, on
each February 1 and August 1 following the consummation of the exchange offer.
Untendered outstanding notes that are not exchanged for exchange notes pursuant
to the exchange offer will bear interest at a rate of 12 3/4% per annum after
the expiration date.
The exchange notes will bear interest from the last interest payment date on
which interest was paid on the outstanding notes. If interest has not yet been
paid, the exchange notes will bear interest from February 2, 2000. Interest will
be paid with the first interest payment on the exchange notes. Interest on the
outstanding notes accepted for exchange will cease to accrue upon issuance of
the exchange notes.
PROCEDURES FOR TENDERING OUTSTANDING NOTES
Only a registered holder of outstanding notes may tender those notes in the
exchange offer. To tender in the exchange offer, you must do the following:
- complete, sign and date the letter of transmittal, or a facsimile of it;
- have the signatures guaranteed, if required by the letter of transmittal;
and
- mail or deliver the letter of transmittal, or the facsimile, together with
the outstanding notes and any other required documents, to the exchange
agent.
The exchange agent must receive these documents by 5:00 p.m., New York City
time, on the expiration date.
Any financial institution that is a participant in The Depository Trust
Company's (DTC's) Book-Entry Transfer Facility system may make book-entry
delivery of the outstanding notes by causing DTC to transfer the outstanding
notes into the exchange agent's account via the ATOP system in accordance with
DTC's transfer procedure. Although delivery of outstanding notes may be effected
through book-entry transfer into the exchange agent's account at DTC, the letter
of transmittal, or its facsimile, with any required signature guarantees, or any
agent's message instead of the letter of transmittal, and documents, must, in
any case, be transmitted to and received or confirmed by the exchange agent at
its addresses in the prospectus prior to 5:00 p.m., New York City time, on the
expiration date. The term "agent's message" means a message, transmitted by DTC
and received by the exchange agent and forming a part of the book-entry
confirmation, which states that DTC has received an express acknowledgment from
you that you have received and agreed to be bound by the letter of transmittal.
If you use this procedure, we may enforce the letter of transmittal against you.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Your tender of outstanding notes will constitute an agreement between you
and us in accordance with the terms and subject to the conditions in this
prospectus and the letter of transmittal.
Delivery of all documents must be made to the exchange agent at its address
listed in this prospectus. Holders may also request that their respective
brokers, dealers, commercial banks, trust companies or nominees effect the
tender for them. The method of delivery of outstanding notes and the letter of
transmittal or agent's message and all other required documents to the exchange
agent up to you. However, you also bear the risks of non-delivery. As an
alternative to delivery by mail, you may wish to consider overnight or hand
delivery service. In all cases, you should allow sufficient time to assure
delivery to the exchange agent before the expiration date. No letter of
transmittal or outstanding notes should be sent to us.
32
<PAGE>
Only a holder of outstanding notes may tender outstanding notes in the
exchange offer. The term "holder" with respect to the exchange offer means any
person in whose name outstanding notes are registered on our books or any other
person who has obtained a properly completed bond power from the registered
holder or any person whose outstanding notes are held of record by DTC who
desires to deliver the outstanding notes by book-entry transfer at DTC.
Any beneficial owner whose outstanding notes are registered in the name of
the holder's broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender should contact the registered holder promptly and instruct
the registered holder to tender on the beneficial owner's behalf. If the
beneficial owner wishes to tender on the beneficial owner's own behalf, the
beneficial owner must, prior to completing and executing the letter of
transmittal and delivering the outstanding notes, either make appropriate
arrangements to register ownership of the outstanding notes in the holder's name
or obtain a properly completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an eligible institution (as defined below) unless
the outstanding notes tendered are:
- tendered by a registered holder who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the
letter of transmittal; or
- tendered for the account of an eligible institution.
An eligible institution is:
- a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc.;
- a commercial bank or trust company having an office or correspondent in
the United States, or an "eligible guarantor institution" within the
meaning of Rule 17Ad-15 under the Exchange Act; or
- an "eligible institution" that is a participant in a recognized medallion
signature guarantee program.
If the letter of transmittal is signed by a person other than the registered
holder of any outstanding notes listed therein, the outstanding notes tendered
must be endorsed or accompanied by properly completed bond powers which
authorize that person to tender the outstanding notes on behalf of the
registered holder, in either case signed as the registered holder's name appears
on the outstanding notes with the signature on those notes guaranteed by an
eligible institution.
If the letter of transmittal or any outstanding notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should indicate this when signing, and unless waived by
us, submit evidence satisfactory to us of that person's authority to so act with
the letter of transmittal.
We will determine, in our sole discretion, all questions as to the validity,
form, eligibility, including time of receipt, acceptance of tendered outstanding
notes and withdrawal of tendered outstanding. Our determination will be final
and binding. We reserve the absolute right to reject any and all outstanding
notes not properly tendered or any outstanding notes of which our acceptance
would, in the opinion of our counsel, be unlawful. We also reserve the right to
waive any defects, irregularities or conditions of tender as to particular
outstanding notes. Our interpretation of the terms and conditions of the
exchange offer, including the instructions in the letter of transmittal, will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of outstanding notes must be cured within such time
as we determine. Neither we, the exchange agent nor any other person
33
<PAGE>
is under any duty to give notification of defects or irregularities with respect
to tenders of outstanding notes. Additionally, none of them will incur any
liability for failure to give this notification. A tender of outstanding notes
will not be deemed to have been made until the defects or irregularities have
been cured or waived. Any outstanding notes received by the exchange agent that
are not properly tendered and have defects or irregularities not cured or waived
by us will be returned to you without cost by the exchange agent, unless
otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.
GUARANTEED DELIVERY PROCEDURES
If you wish to tender your outstanding notes and either your outstanding
notes are not immediately available, or you cannot deliver your outstanding
notes, the letter of transmittal or any other required documents to the exchange
agent prior to the expiration date, or if you cannot complete the procedures for
book-entry transfer on a timely basis, you may effect a tender if:
- the tender is made through an eligible institution;
- prior to the expiration date, the exchange agent receives by facsimile
transmission, mail or hand delivery from such eligible institution a
properly completed and duly executed notice of guaranteed delivery,
setting forth the name and address of the holder of the outstanding notes,
the certificate number(s) of the outstanding notes and the principal
amount of outstanding notes tendered, stating that the tender is being
made, and guaranteeing that, within three New York Stock Exchange trading
days after the expiration date, the letter of transmittal, or facsimile
thereof, or, in the case of a book-entry transfer, an agent's message,
together with the certificate(s) representing the outstanding notes, or a
confirmation of book-entry transfer of the outstanding notes into the
exchange agent's account at the book-entry transfer facility, and any
other documents required by the letter of transmittal will be deposited by
the eligible institution with the exchange agent; and
- the certificate(s) representing all tendered outstanding notes in proper
form for transfer, or a confirmation of a book-entry transfer of the
outstanding notes into the exchange agent's account at the book-entry
transfer facility, together with a letter of transmittal, or facsimile
thereof, properly completed and duly executed, with any required signature
guarantees, or, in the case of a book-entry transfer, an agent's message,
are received by the exchange agent within three New York Stock Exchange
trading days after the expiration date of the exchange offer.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, tenders of outstanding
notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the expiration date of the exchange offer.
To withdraw a tender of outstanding notes in the exchange offer, a written
or facsimile transmission notice of withdrawal must be received by the exchange
agent at its address given in this prospectus prior to 5:00 p.m., New York City
time, on the expiration date of the exchange offer. Any notice of withdrawal
must:
- specify the name of the person having deposited the outstanding notes to
be withdrawn;
- identify the outstanding notes to be withdrawn, including the certificate
number(s) and principal amount of those notes, or, in the case of
outstanding notes transferred by book-entry transfer, the name and number
of the account at the book-entry transfer facility to be credited;
- be signed by the holder in the same manner as the original signature on
the letter of transmittal by which those notes were tendered, including
any required signature guarantees, or be accompanied by documents of
transfer sufficient to have the trustee with respect to the
34
<PAGE>
outstanding notes register the transfer of those notes into the name of
the person withdrawing the tender; and
- specify the name in which any of the outstanding notes are to be
registered, if different from that of the depositor.
All questions as to the validity, form and eligibility, including time of
receipt, of notices will be determined by us and shall be final and binding on
all parties. Any outstanding notes so withdrawn will be deemed not to have been
validly tendered for purposes of the exchange offer and no exchange notes will
be issued with respect thereto unless the outstanding notes previously withdrawn
are validly retendered. Any outstanding notes that have been tendered but which
are not accepted for exchange will be returned to the holder without cost to the
holder as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. Properly withdrawn outstanding notes may be
retendered by following one of the procedures described above under
"--Procedures for Tendering Outstanding Notes" at any time prior to the
expiration date.
CONDITIONS TO THE EXCHANGE OFFER
Regardless of any other term of the exchange offer, we are not required to
accept for exchange, or exchange notes for, any outstanding notes, and we may
terminate or amend the exchange offer as provided herein before the acceptance
of the outstanding notes, if:
- any action or proceeding is instituted or threatened in any court or by or
before any governmental agency with respect to the exchange offer which,
in our judgment, might materially impair our ability to proceed with the
exchange offer, or
- any material adverse development has occurred in any existing action or
proceeding with respect to us or any of our subsidiaries; or
- any law, statute, rule, regulation or interpretation by the staff of the
SEC is proposed, adopted or enacted which, in our judgment, might
materially impair our ability to proceed with the exchange offer or
materially impair the contemplated benefits of the exchange offer; or
- any governmental approval has not been obtained, which approval we shall,
in our discretion, deem necessary for the consummation of the exchange
offer as contemplated hereby.
These conditions are for our sole benefit. We may assert them in whole or in
part at any time and from time to time in our sole discretion. Our failure at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
any right and the right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, we will not accept for exchange any outstanding notes tendered
and no exchange notes will be issued in exchange for any outstanding notes if at
the time of tender:
- a stop order is threatened by the SEC or is in effect for the registration
statement that this prospectus is a part of, or
- a stop order is threatened or in effect regarding qualification of the
indenture under the Trust Indenture Act of 1939, as amended.
If we determine that we may terminate or amend the exchange offer, we may:
- refuse to accept any outstanding notes and return all tendered outstanding
notes to the tendering holders;
- extend the exchange offer and retain all outstanding notes tendered prior
to the expiration of the exchange offer, subject, however, to the rights
of holders to withdraw the outstanding notes;
35
<PAGE>
- waive the unsatisfied conditions with respect to the exchange offer and
accept all properly tendered outstanding notes which have not been
withdrawn; or
- amend the exchange offer at any time prior to 5:00 p.m., New York City
time, on the expiration date.
If the waiver or amendment constitutes a material change in the exchange
offer, we will disclose the change by means of a supplement to this prospectus
that will be distributed to each registered holder of outstanding notes, and we
will extend the exchange offer for a period of five to ten business days, if the
exchange offer would otherwise expire during that period, depending on the
significance of the waiver or amendment and the manner of disclosure to the
registered holders of the outstanding notes.
The exchange offer is not conditioned on any minimum principal amount of
outstanding notes being tendered for exchange.
EXCHANGE AGENT
Bankers Trust Company has been appointed as exchange agent for the exchange
offer. Questions and requests for assistance, requests for additional copies of
this prospectus or of the letter of transmittal and requests for notice of
guaranteed delivery should be directed to the exchange agent addressed as
follows:
<TABLE>
<S> <C> <C>
BY MAIL: BY OVERNIGHT MAIL OR COURIER: BY HAND:
BT Services Tennessee, Inc. BT Services Tennessee, Inc. Bankers Trust Company
Reorganization Unit Corporate Trust & Agency Corporate Trust & Agency
P.O. Box 292737 Services Services
Nashville, TN 37229-2737 Reorganization Unit Attn: Reorganization
648 Grassmere Park Road Department
Fax: (615) 835-3701 Nashville, TN 37211 Receipt & Delivery Window
123 Washington Stree, 1(st)
Confirm by Telephone Floor
(615) 835-3572 New York, NY 10006
Information (800) 735-7777
</TABLE>
Delivery to an address other than those above will not constitute a valid
delivery.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders pursuant to the exchange
offer. The principal solicitation for tenders pursuant to the exchange offer is
being made by mail. Additional solicitations may be made by our officers and
regular employees and our affiliates in person, by telecopy or by telephone.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers, or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection with the exchange offer. We may
also pay brokerage houses and other custodians, nominees and fiduciaries the
reasonable out-of-pocket expenses they incur in forwarding copies of this
prospectus, letter of transmittal and related documents to the beneficial owners
of the outstanding notes and in handling or forwarding tenders for exchange.
We will pay the cash expenses to be incurred in connection with the exchange
offer. These expenses include fees and expenses of the exchange agent and
trustee, accounting and legal fees and printing costs, among others.
36
<PAGE>
We will pay all transfer taxes, if any, applicable to the exchange of
outstanding notes pursuant to the exchange offer. The amount of these transfer
taxes, whether imposed on the registered holder or any other persons, will be
payable by the tendering holder if:
- certificates representing exchange notes or outstanding notes not tendered
or accepted for exchange are to be delivered to, or are to be registered
or issued in the name of, any person other than the registered holder of
the outstanding notes tendered;
- tendered outstanding notes are registered in the name of any person other
than the person signing the letter of transmittal; or
- a transfer tax is imposed for any reason other than the exchange of
outstanding notes pursuant to the exchange offer.
If satisfactory evidence of payment, or exemption from, these taxes is not
submitted with the letter of transmittal, the amount of these transfer taxes
will be billed directly to the tendering holder.
ACCOUNTING TREATMENT
The exchange notes will be recorded at the same carrying value as the
outstanding notes, which is face value net of issue discount, as reflected in
our accounting records on the date of the exchange. Accordingly, no gain or loss
for accounting purposes will be recognized by us upon consummation of the
exchange offer. The expenses of the exchange offer will be expensed over the
term of the exchange notes under generally accepted accounting principles.
CONSEQUENCES OF FAILURE TO EXCHANGE
Participation in the exchange offer is voluntary. You are urged to consult
with your financial and tax advisors in making your decision on what action to
take.
The outstanding notes that are not exchanged for exchange notes pursuant to
the exchange offer will remain restricted securities. These outstanding notes
may be resold only:
- to us, upon redemption or otherwise,
- so long as the outstanding notes are eligible for resale under Rule 144A
under the Securities Act, to a person inside the United States whom the
seller reasonably believes is a "qualified institutional buyer" within the
meaning of Rule 144A under the Securities Act, in a transaction meeting
the requirements of Rule 144A,
- in accordance with Rule 144 under the Securities Act,
- outside the United States to a foreign person in an "offshore transaction"
meeting the requirements of Rule 904 under the Securities Act,
- pursuant to another exemption from the registration requirements of the
Securities Act, and, at our option, based on an opinion of counsel
reasonably acceptable to us, or
- pursuant to an effective registration statement under the Securities Act.
In any case, the outstanding notes may only be sold in accordance with any
applicable securities laws of any state of the United States or any other
applicable jurisdiction. We do not currently anticipate that we will register
the outstanding notes under the Securities Act.
As a result of the making of, and upon acceptance for exchange of all
validly tendered outstanding notes pursuant to the terms of, this exchange
offer, we will have fulfilled a covenant contained in the registration rights
agreement. Holders of outstanding notes who do not tender their outstanding
notes in the exchange offer will continue to hold such outstanding notes and
will be entitled to all the rights
37
<PAGE>
and limitations applicable thereto under the indenture, except for any such
rights under the registration rights agreement that by their terms terminate or
cease to have further effectiveness as a result of the making of this exchange
offer. All untendered outstanding notes will continue to be subject to the
restrictions on transfer set forth in the indenture. To the extent that
outstanding notes are tendered and accepted in the exchange offer, the trading
market for untendered outstanding notes could be adversely affected.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes in the exchange offer. In consideration for issuing these notes as
contemplated in this prospectus, we will receive outstanding notes in like
principal amount, the terms of which are the same in all material respects to
the exchange notes. The outstanding notes surrendered in exchange for the
exchange notes will be retired and canceled and not reissued. Accordingly, the
issuance of the exchange notes will not result in any increase or decrease in
our debt.
38
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents and our
capitalization as of October 2, 1999 on an actual basis, on a pro forma basis
after giving effect to the Thermalloy acquisition and related financings as if
they had been consummated on October 2, 1999 and on a pro forma as adjusted
basis for the merger and related financing transactions, including the issuance
of the outstanding notes and the consummation of the exchange offer, as if they
had occurred on October 2, 1999. You should read the information contained in
the following table in conjunction with "Use of Proceeds," "Unaudited Pro Forma
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited financial statements of
Aavid and Thermalloy and their related notes, which appear elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF OCTOBER 2, 1999
--------------------------------------------------
PRO FORMA
FOR THE
THERMALLOY PRO FORMA
ACTUAL ACQUISITION AS ADJUSTED
-------- ----------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents....................... $23,811(1) $ 11,747 $ 3,350
======= ======== ========
Long-term debt:
Senior credit facilities (including current
portion) (2)................................ $12,619(1) $ 84,713 $ 54,688
Notes(3)...................................... -- -- 143,752
Other debt.................................... 596 723 --
------- -------- --------
Total debt................................ 13,215 85,436 198,440
Total stockholders' equity(3)................... 82,588 79,539 155,431
------- -------- --------
Total capitalization...................... $95,803 $164,975 $353,871
======= ======== ========
</TABLE>
- ------------------------
(1) Immediately prior to our acquisition of Thermalloy, we used $12.6 million of
our cash on hand to repay all amounts outstanding under our senior credit
facility.
(2) In connection with the Thermalloy acquisition, we entered into a new senior
credit facility, consisting of a fully drawn term loan of $80.0 million and
a revolving credit loan of $20.0 million, of which $4.3 million was drawn in
connection with this acquisition. Pro Forma for the Thermalloy Acquisition
includes $400,000 of senior debt not incurred under the new senior credit
facility. We amended and restated this credit facility in connection with
the closing of the merger. The amended and restated credit facility consists
of a $53.0 million term loan, which was fully drawn at closing, and a
$22.0 million revolving credit loan, of which $1.7 million was drawn at
closing and $20.3 million was undrawn at closing.
(3) Under generally accepted accounting principles, approximately $4.6 million
of the proceeds from the sale of the units was allocated to the fair value
of the warrants and approximately $143.8 million was allocated to the notes,
net of original issue discount of approximately $1.7 million.
39
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma financial data present the unaudited pro
forma combined and condensed balance sheet of Aavid as of October 2, 1999 and
the unaudited pro forma combined and condensed statements of income of Aavid for
the nine month periods ended September 26, 1998 and October 2, 1999, and for the
year ended December 31, 1998. The unaudited pro forma combined and condensed
balance sheet reflects the Thermalloy acquisition, the merger and related
transactions as if they had occurred on October 2, 1999. The unaudited combined
and condensed statements of income give effect to the same transactions as if
they had occurred on January 1, 1998. The Thermalloy acquisition and the merger
will be accounted for using the purchase method. The unaudited pro forma
combined and condensed statements of income do not give pro forma effect to
anticipated cost savings related to the Thermalloy acquisition and the merger,
primarily through closure of duplicative plants, a reduction of selling, general
and administrative costs through elimination of overlapping functions, the
elimination of certain public company expenses and operating improvements such
as purchasing synergies, improved leverage of existing resources, implementation
of best practices or similar efficiencies. The pro forma financial statements do
not give effect to possible revenue reductions that may result from potential
customer dislocation and loss due to the merger and plant closures.
The information contained herein has been prepared utilizing preliminary
purchase price allocations subject to refinement until pertinent information
related to the Thermalloy acquisition and the merger has been obtained. The pro
forma adjustments discussed herein are based on available information and
assumptions that we believe are reasonable under the circumstances. We believe
that the final allocation of the purchase price for Thermalloy and the merger
will not differ materially from the preliminary estimated amounts. We estimate
that the final purchase price allocation for Thermalloy and the merger will be
completed once the final integration plan for the Thermalloy acquisition and the
merger, respectively, is completed. We expect to have substantially completed
the final integration plan for Thermalloy no later than October 20, 2000, one
year after the closing of the acquisition, and for the merger no later than one
year after the closing of the merger.
The unaudited pro forma consolidated financial data are based on the
historical financial statements of Aavid and Thermalloy and the adjustments
described in the accompanying notes. The unaudited pro forma financial data do
not purport to represent what Aavid's financial position or results of
operations would actually have been if the transactions had in fact occurred on
the dates indicated and are not necessarily representative of Aavid's financial
position or results of operations at any future date or for any future period.
The unaudited pro forma consolidated financial data should be read in
conjunction with "Capitalization," "Selected Historical Consolidated Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements and related notes
thereto included elsewhere in this prospectus.
40
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED AND CONDENSED BALANCE SHEET
AS OF OCTOBER 2, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL THERMALLOY FOR THE PRO FORMA
---------------------- ACQUISITION THERMALLOY MERGER RELATED PRO
AAVID THERMALLOY* ADJUSTMENTS ACQUISITION ADJUSTMENTS FORMA
-------- ----------- ----------- ----------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......... $ 23,811 $ 1,670 $(12,619)(a) $ 11,747 $ (8,397)(m) $ 3,350
(1,115)(b)
Accounts receivable, net........... 35,476 17,997 (444)(b) 53,029 53,029
Inventories........................ 14,593 12,952 3,049 (c) 27,545 1,722 (n) 27,545
(3,049)(d) (1,722)(o)
Deferred income taxes.............. 9,357 -- 9,357 9,357
Prepaids and other current
assets........................... 3,845 952 (372)(b) 4,425 4,425
-------- ------- -------- -------- -------- --------
Total current assets............. 87,082 33,571 (14,550) 106,103 (8,397) 97,706
Property, plant and equipment, net
of accumulated depreciation...... 41,758 27,409 (1,938)(e) 67,229 (4,362)(p) 62,867
Other assets....................... 7,535 9,866 33,733 (f) 49,970 233,276 (q) 252,175
1,650 (g) 5,875 (r)
5,889 (h) (36,946)(s)
(8,703)(i)
-------- ------- -------- -------- -------- --------
Total assets......................... $136,375 $70,846 $ 16,081 $223,302 $189,446 $412,748
======== ======= ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................... $ 13,212 $ 7,108 $ 20,320 $ 20,320
Current portion of long-term
debt............................. 3,939 4,255 $ (3,939)(a) 4,000 $ (4,000)(m) --
(4,255)(b)
4,000 (a)
Accrued expenses and other current
liabilities...................... 25,171 8,353 575 (j) 32,690 1,500 (t) 34,190
(1,409)(b)
-------- ------- -------- -------- -------- --------
Total current liabilities........ 42,322 19,716 (5,028) 57,010 (2,500) 54,510
Senior credit facility and other
long-term debt................... 9,276 14,833 80,313 (a) 81,436 (81,436)(m) 54,688
(14,306)(b) 54,688 (m)
(8,680)(a)
Senior subordinated notes.......... -- -- -- 143,752 (m) 143,752
Deferred income taxes.............. 2,189 -- 2,520 (k) 4,709 (950)(u) 3,759
Minority interests................. -- 1,428 (820)(l) 608 608
-------- ------- -------- -------- -------- --------
Total liabilities................ 53,787 35,977 53,999 143,763 113,554 257,317
Total stockholders' equity....... 82,588 34,869 (34,869)(l) 79,539 (79,539)(v) 155,431
152,592 (m)
(3,049)(d) 4,561 (m)
(1,722)(o)
-------- ------- -------- -------- -------- --------
Total liabilities and stockholders'
equity............................. $136,375 $70,846 $ 16,081 $223,302 $189,446 $412,748
======== ======= ======== ======== ======== ========
</TABLE>
- ------------------------
* As of September 30, 1999.
41
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED AND CONDENSED
BALANCE SHEET ADJUSTMENTS
(DOLLARS IN THOUSANDS)
(a) Adjustment to reflect the use of cash on hand and $84,313 in borrowings
under our new senior credit facility to repay existing debt, fund the
acquisition of Thermalloy and the purchase of an additional 20.2% of Curamik
shares and pay estimated transaction costs as follows:
<TABLE>
<S> <C>
Sources of funds:
Cash on hand.............................................. $12,619
New senior credit facility................................ 84,313
-------
Total sources of funds.................................. $96,932
=======
Uses of funds:
Thermalloy purchase price................................. $78,484
Additional Curamik GmbH purchase price.................... 2,679
Repay Aavid existing debt................................. 12,619
Estimated transaction costs............................... 3,150
-------
Total uses of funds..................................... $96,932
=======
</TABLE>
(b) Adjustment to eliminate assets not acquired and liabilities not assumed by
Aavid.
(c) Adjustment to record inventory at fair value.
(d) Represents non-recurring $3,049 charge resulting from the write-up of
inventory to fair value that occurred as a result of purchase accounting for
Thermalloy's opening balance sheet. Actual cost of sales in the 12 months
following the acquisition will reflect this additional charge.
(e) Adjustment to record fixed assets at fair value.
(f) Adjustment to record the goodwill resulting from the acquisition of
Thermalloy and an additional 20.2% of Curamik. The goodwill is calculated as
follows:
<TABLE>
<S> <C>
Cash paid for Thermalloy.................................... $78,484
Cash paid for additional 20.2% of Curamik................... 2,679
Estimated transaction costs (excluding bank fees of
$1,650)................................................... 1,500
-------
82,663
Less: estimated fair value of net tangible assets
acquired.................................................. 42,705
Less: estimated fair value of identifiable intangible assets
acquired.................................................. 6,225
-------
Goodwill.................................................... $33,733
=======
</TABLE>
(g) Adjustment to record $1,650 in deferred financing fees related to additional
borrowings discussed in (a) above.
(h) Adjustment to record an asset of $5,889 related to present value of
estimated market value rent expense related to Thermalloy's Dallas facility,
which is being made available to us on a rent free basis through 2008.
(i) Adjustment to eliminate existing Thermalloy goodwill of $8,703.
42
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED AND CONDENSED
BALANCE SHEET ADJUSTMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(j) Adjustment to record accrued liabilities related to severance costs
associated with the closure of certain offices and operations of Thermalloy,
which is estimated to be $575. These amounts are preliminary estimates of
management. Management is currently in the process of finalizing their
assessment of these costs and committing to a final integration plan, which
is expected to be completed and communicated to employees as soon as
possible, but in no event later than one year from the date of the
Thermalloy acquisition. The exact amount and type of severance benefits to
be received by each employee is unknown at this time. Once the nature of the
actual severance benefits has been determined, actual severance liabilities
arising from this restructuring may differ from the amount included within
these pro forma financial statements.
(k) Adjustment to record the deferred tax liability on the write-up of assets
which are not recognized for corporate income tax purposes.
(l) Adjustment to eliminate Thermalloy equity.
(m) Adjustment to reflect the use of $8,397 of cash on hand, $54,688 in
borrowings under our amended and restated senior credit facility, the
issuance of $150,000 of units (net of original issue discount of $1,688),
and a contribution of equity in the amount of $152,741 to repay existing
debt, pay the merger consideration and pay estimated transaction costs as
follows:
<TABLE>
<S> <C>
Sources of funds:
Cash on hand.............................................. $ 8,397
Amended and restated credit facility...................... 54,688
Units..................................................... 148,312
Equity contribution....................................... 152,741
--------
Total sources of funds.................................. $364,138
========
Uses of funds:
Merger consideration...................................... $261,054
Repay existing indebtedness............................... 85,436
Estimated transaction costs............................... 17,648
--------
Total uses of funds..................................... $364,138
========
</TABLE>
Under generally accepted accounting principles, $4,560 of the proceeds from
the sale of the units has been allocated to the fair value of the warrants
and $143,752 has been allocated to the notes.
(n) Adjustment to record inventory at fair value.
(o) Represents non-recurring $1,722 charge resulting from the write-up of
inventory to fair value that occurred during purchase accounting for Aavid's
opening balance sheet. Actual cost of sales in the 12 months following the
acquisition will reflect this additional charge. This amount has not been
reflected in the pro forma statements of income.
(p) Adjustment to record fixed assets at fair value.
43
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED AND CONDENSED
BALANCE SHEET ADJUSTMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(q) Adjustment to record the goodwill resulting from the acquisition of Aavid.
The goodwill is calculated as follows:
<TABLE>
<S> <C>
Cash to be paid for Aavid................................... $261,054
Estimated transaction costs (excluding bank and underwriting
fees of $6,023)........................................... 11,625
--------
272,679
Less: estimated fair value of net tangible assets
acquired.................................................. 33,148
Less: estimated fair value of identifiable intangible assets
acquired.................................................. 6,255
--------
Goodwill.................................................... $233,276
========
</TABLE>
(r) Adjustment to record $6,023 in deferred financing fees related to additional
borrowings discussed in (m) above.
(s) Adjustment to eliminate existing Aavid goodwill of $36,946 arising from
their prior acquisitions.
(t) Adjustment to record accrued liabilities for severance and other costs
associated with the closure of certain offices and operations of Aavid,
which is estimated to be $1,500. This amount is a preliminary estimate of
management. Management is currently in the process of finalizing their
assessment of these costs and committing to a final integration plan, which
is expected to be completed and communicated to employees as soon as
possible, but in no event later than one year from the date of the merger.
The exact amount and type of severance benefits to be received by each
employee is unknown at this time. Once the nature of the actual severance
benefits has been determined, actual severance liabilities arising from this
restructuring may differ from the amount included within these financial
statements.
(u) Adjustment to record the deferred tax asset on the write-up of assets which
are not recognized for corporate income tax purposes.
(v) Adjustment to eliminate Aavid's equity.
44
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED AND CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA
HISTORICAL THERMALLOY FOR THE MERGER
--------------------- ACQUISITION THERMALLOY RELATED PRO
AAVID THERMALLOY ADJUSTMENTS ACQUISITION ADJUSTMENTS FORMA
-------- ---------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................. $209,078 $102,332 $311,410 $311,410
Cost of goods sold......... 138,431 69,755 $ (480)(a) 208,360 $ (1,091)(h) 207,269
654 (b)
-------- -------- ------- -------- -------- --------
Gross profit............... 70,647 32,577 (174) 103,050 1,091 104,141
Selling, general and
administrative
expenses................. 43,783 21,307 1,687 (c) 64,254 23,326 (i) 85,617
(1,484)(d) (1,963)(j)
(1,039)(e)
Research and development... 6,756 3,582 10,338 10,338
Restructuring and buyout of
compensation agreement... 5,740 -- 5,740 5,740
-------- -------- ------- -------- -------- --------
Income from operations..... 14,368 7,688 662 22,718 (20,272) 2,446
Interest expense, net...... (1,342) (1,147) (3,986)(f) (6,475) (19,369)(k) (25,844)
Other income (expense),
net...................... (520) 842 322 322
-------- -------- ------- -------- -------- --------
Income before taxes........ 12,506 7,383 (3,324) 16,565 (39,641) (23,076)
Provision for income
taxes.................... (4,385) (2,947) 589 (g) (6,743) 6,517 (l) (226)
-------- -------- ------- -------- -------- --------
Net income (loss).......... $ 8,121 $ 4,436 $(2,735) $ 9,822 $(33,124) $(23,302)
======== ======== ======= ======== ======== ========
OTHER DATA:
Adjusted EBITDA................................................................................ $ 44,994 (m)
</TABLE>
45
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED AND CONDENSED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED OCTOBER 2, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA
HISTORICAL THERMALLOY FOR THE MERGER
---------------------- ACQUISITION THERMALLOY RELATED
AAVID THERMALLOY* ADJUSTMENTS ACQUISITION ADJUSTMENTS PRO FORMA
-------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales................... $145,239 $74,687 $219,926 $219,926
Cost of goods sold.......... 90,769 53,230 $ (360)(a) 144,130 $ (818)(h) 143,312
491 (b)
-------- ------- ------- -------- -------- --------
Gross profit................ 54,470 21,457 (131) 75,796 818 76,614
Selling, general and
administrative expenses... 34,054 16,290 1,265 (c) 49,514 17,495 (i) 65,537
(1,336)(d) (1,472)(j)
(759)(e)
Research and development.... 5,154 2,863 8,017 8,017
-------- ------- ------- -------- -------- --------
Income from operations...... 15,262 2,304 699 18,265 (15,205) 3,060
Interest expense, net....... (257) (996) (3,145)(f) (4,398) (14,606)(k) (19,004)
Other income (expense),
net....................... (277) 381 104 104
-------- ------- ------- -------- -------- --------
Income before taxes......... 14,728 1,689 (2,446) 13,971 (29,811) (15,840)
Provision for income
taxes..................... (5,241) (1,848) 425 (g) (6,664) 4,095 (l) (2,569)
-------- ------- ------- -------- -------- --------
Net income (loss)........... $ 9,487 $ (159) $(2,021) $ 7,307 $(25,716) $(18,409)
======== ======= ======= ======== ======== ========
OTHER DATA:
Adjusted EBITDA.................................................................................. $ 33,957 (m)
</TABLE>
- ------------------------
* For the nine months ended September 30, 1999.
46
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED AND CONDENSED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 26, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA
HISTORICAL THERMALLOY FOR THE MERGER
---------------------- ACQUISITION THERMALLOY RELATED
AAVID THERMALLOY* ADJUSTMENTS ACQUISITION ADJUSTMENTS PRO FORMA
-------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales................... $158,682 $76,264 $234,946 $234,946
Cost of goods sold.......... 106,222 51,470 $ (360)(a) 157,823 $ (818)(h) 157,005
491 (b)
-------- ------- ------- -------- -------- --------
Gross profit................ 52,460 24,794 (131) 77,123 818 77,941
Selling, general and
administrative expenses... 32,224 15,067 1,265 (c) 47,148 17,495 (i) 63,171
(629)(d) (1,472)(j)
(779)(e)
Research and development.... 4,846 2,810 -- 7,656 7,656
Restructuring and buyout of
compensation agreement
charges................... 5,740 -- -- 5,740 -- 5,740
-------- ------- ------- -------- -------- --------
Income from operations...... 9,650 6,917 12 16,579 (15,205) 1,374
Interest expense, net....... (1,155) (836) (2,932)(f) (4,923) (14,545)(k) (19,468)
Other income (expense),
net....................... (486) 101 -- (385) (385)
-------- ------- ------- -------- -------- --------
Income before taxes......... 8,009 6,182 (2,920)(g) 11,271 (29,750) (18,479)
Provision for income
taxes..................... (2,832) (2,719) 596 (4,955) 4,736 (l) (219)
-------- ------- ------- -------- -------- --------
Net income (loss)........... $ 5,177 $ 3,463 $(2,324) $ 6,316 $(25,014) $(18,698)
======== ======= ======= ======== ======== ========
OTHER DATA:
Adjusted EBITDA.................................................................................. $ 33,749 (m)
</TABLE>
- ------------------------
* For the nine months ended September 30, 1998.
47
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED AND CONDENSED
STATEMENTS OF INCOME ADJUSTMENTS
(DOLLARS IN THOUSANDS)
(a) Adjustment to record the decrease in depreciation resulting from the write
down of fixed assets to fair value that occurred in purchase accounting, in
the amounts of $480 in the year ended December 31, 1998 and $360 in the nine
months ended October 2, 1999 and September 26, 1998. These amounts assume an
estimated remaining useful life of 4 years.
(b) Adjustment to record amortization of the prepaid rent asset resulting from
Thermalloy's Dallas facility being made available to us on a rent free basis
through 2008. This asset is being amortized over the life of the lease,
9 years, in the amounts of $654 for the year ended December 31, 1998 and
$491 for the nine months ended October 2, 1999 and September 26, 1998.
(c) Adjustment to record the straight line amortization on the excess of
purchase price over the tangible and intangible assets acquired (goodwill),
calculated on a straight line basis over 20 years as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED ------------------------------------
DECEMBER 31, 1998 OCTOBER 2, 1999 SEPTEMBER 26, 1998
----------------- --------------- ------------------
<S> <C> <C> <C>
Goodwill amortization related
to the Thermalloy
acquisition.................. $1,594 $1,195 $1,195
Goodwill amortization related
to the acquisition of
additional shares of
Curamik...................... 93 70 70
------ ------ ------
New goodwill amortization...... $1,687 $1,265 $1,265
====== ====== ======
</TABLE>
The actual amortization recorded after consummation of the acquisition of
Thermalloy may differ from these amounts due to the final allocation of
purchase price to assets and liabilities pursuant to Accounting Principles
Board Opinion No. 16.
(d) Adjustment to eliminate management fees paid by Thermalloy to Bowthorpe plc
in the amount of $1,484 for the year ended December 31, 1998, $1,336 for the
nine months ended September 30, 1999 and $629 for the nine months ended
September 30, 1998. This charge relates to management advice and
consultation provided by Bowthorpe plc and does not consist of any direct
expenses that would be incremental to Aavid under the combination. We
believe that net sales and expenses would not have materially changed if
Bowthorpe plc did not provide the management services.
(e) Adjustment to record the amortization related to the write-off of existing
Thermalloy goodwill of $1,039 for the year ended December 31, 1998, $759 for
the nine months ended September 30, 1999 and $779 for the nine months ended
September 30, 1998 arising from Thermalloy's prior acquisitions.
(f) Adjustments to interest expense (not including interest income) resulting
from the elimination of interest expense associated with Thermalloy's
borrowings, additional interest and amortization of
48
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED AND CONDENSED
STATEMENTS OF INCOME ADJUSTMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
deferred financing costs associated with our additional borrowings used to
fund the acquisitions of Thermalloy and additional Curamik shares as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED ------------------------------------
DECEMBER 31, 1998 OCTOBER 2, 1999 SEPTEMBER 26, 1998
----------------- --------------- ------------------
<S> <C> <C> <C>
Interest on the new senior credit facility at
7.43% (which represents the interest rate on
the loans at the date of borrowing) and fees
to lenders................................... $6,414 $4,792 $4,792
Interest expense saved on Thermalloy's existing
indebtedness................................. (1,147) (996) (836)
Interest expense saved on Aavid's existing
indebtedness................................. (1,611) (899) (1,272)
Amortization of deferred financing fees........ 330 248 248
------ ------ ------
Net incremental interest expense............... $3,986 $3,145 $2,932
====== ====== ======
</TABLE>
Pro forma interest expense would be as follows if interest rates on bank
borrowings were to decrease or increase 1/8%:
<TABLE>
<CAPTION>
ASSUMED INTEREST EXPENSE
ASSUMED CHANGE IN INTEREST RATE --------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED ------------------------------------
DECEMBER 31, 1998 OCTOBER 2, 1999 SEPTEMBER 26, 1998
----------------- --------------- ------------------
<S> <C> <C> <C>
Increase of 1/8%............... $6,580 $4,477 $5,002
Decrease of 1/8%............... 6,370 4,319 4,844
</TABLE>
(g) Adjustment to the income tax provision to reflect the tax effect of pro
forma adjustments and the impact of non-deductible goodwill.
(h) Adjustment to record the decrease in depreciation resulting from the
write-down of fixed assets to fair value that occurred in purchase
accounting, in the amounts of $1,091 in the year ended December 31, 1998 and
$818 in the nine months ended September 26, 1998 and October 2, 1999. These
amounts assume an estimated remaining useful life of 4 years for the assets
written off.
(i) Adjustment to record the straight line amortization on the excess of
purchase price over the tangible and intangible assets acquired (goodwill),
calculated on a straight line basis as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED ------------------------------------
DECEMBER 31, 1998 OCTOBER 2, 1999 SEPTEMBER 26, 1998
----------------- --------------- ------------------
<S> <C> <C> <C>
Amortization related to
goodwill allocated to Aavid
Thermal Products and
Thermalloy amortized over a
useful life of 20 years...... $ 7,776 $ 5,832 $ 5,832
Amortization related to
goodwill allocated to Fluent
amortized over a useful life
of 5 years................... 15,550 11,663 11,663
------- ------- -------
Total goodwill amortization $23,326 $17,495 $17,495
======= ======= =======
</TABLE>
The actual amortization recorded after consummation of the merger may differ
from these amounts due to the full allocation of purchase price to assets
and liabilities pursuant to Accounting Principles Board Opinion No. 16.
49
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED AND CONDENSED
STATEMENTS OF INCOME ADJUSTMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(j) Adjustment to eliminate Aavid's goodwill amortization as previously existing
goodwill has been written off in connection with the merger in the amounts
of $1,963 for the year ended December 31, 1998 and $1,472 for the nine
months ended September 26, 1998 and October 2, 1999.
(k) Adjustments to interest expense resulting from the elimination of interest
expense associated with Aavid's pre-existing debt and additional interest
and amortization of deferred financing costs associated with our additional
borrowings used to fund the acquisition of Aavid as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED ------------------------------------
DECEMBER 31, 1998 OCTOBER 2, 1999 SEPTEMBER 26, 1998
----------------- --------------- ------------------
<S> <C> <C> <C>
Interest on the new senior
subordinated notes at
12 3/4%...................... $19,125 $14,344 $14,344
Interest on the new senior term
loan and revolving line of
credit at 9.25% and fees to
lenders...................... 5,159 3,869 3,869
------- ------- -------
Total cash interest expense.... 24,284 18,213 18,213
Interest expense saved on
Aavid's existing
indebtedness................. (6,414) (4,792) (4,792)
Amortization of new deferred
financing fees............... 912 684 684
Accretion of discount on notes
offered hereby using an
effective interest rate of
13.713% 587 501 440
------- ------- -------
Net incremental interest
expense...................... $19,369 $14,606 $14,545
======= ======= =======
</TABLE>
The interest rate on the new senior term loan and revolving line of credit
of 9.25% is based on the lender's base rate and is the interest rate in
effect at the closing of this offering. We converted these loans to
LIBOR-based loans on the day after the closing of this offering. The
LIBOR-based rate is approximately 8.25%.
Pro forma interest expense would be as follows if interest rates on bank
borrowings were to decrease or increase 1/8%:
<TABLE>
<CAPTION>
ASSUMED INTEREST EXPENSE
ASSUMED CHANGE IN INTEREST RATE --------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED ------------------------------------
DECEMBER 31, 1998 OCTOBER 2, 1999 SEPTEMBER 26, 1998
----------------- --------------- ------------------
<S> <C> <C> <C>
Increase of 1/8%....................... $25,912 $19,055 $19,519
Decrease of 1/8%....................... 25,776 18,953 19,417
</TABLE>
(l) Adjustment to record the adjustment to the income tax provision related to
pro forma adjustments after considering the impact of non-deductible
goodwill.
50
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED AND CONDENSED
STATEMENTS OF INCOME ADJUSTMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(m) The following table sets forth a reconciliation of historical EBITDA to
adjusted EBITDA:
<TABLE>
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS
YEAR ENDED -------------------------- ENDED
DECEMBER 31, OCTOBER 2, SEPTEMBER 26, OCTOBER 2,
1998 1999 1998 1999
------------ ---------- ------------- -------------
<S> <C> <C> <C> <C>
Historical EBITDA........................... $ 38,326 $ 28,714 $ 27,683 $ 39,357
Elimination of Thermalloy management
fee (1)............................... 1,484 1,336 629 2,191
Indirect manufacturing cost savings
from plant closings (2)............... 1,532 998 1,129 1,401
Selling, general and administrative
savings (3)........................... 3,124 2,299 2,255 3,168
Corporate office and public company
expense (4)........................... 1,188 1,210 913 1,485
Intel Special Product EBITDA (5)........ (6,400) (600) (4,600) (2,400)
Intel Special Product restructuring
charge (6)............................ 4,882 -- 4,882 --
Termination settlement (7).............. 858 -- 858 --
-------- -------- -------- --------
Adjusted EBITDA............................. $ 44,994 $ 33,957 $ 33,749 $ 45,202
======== ======== ======== ========
</TABLE>
- ------------------------
(1) Adjustments to eliminate historical expenses associated with fees paid by
Thermalloy to Bowthorpe plc for management advice and consultation. These
management fees ceased to be paid upon our acquisition of Thermalloy on
October 21, 1999. We believe that net sales and expenses would not have
materially changed if Bowthorpe plc did not provide these management
services.
(2) Adjustments to record cost savings associated with the closure of our
manufacturing facilities in Santa Ana, California and High Wycombe, U.K. and
Thermalloy's facility in Hong Kong, China. Approximately one-half of the
cost savings are due to the elimination of payroll and benefits expenses
relating to indirect manufacturing, net of certain supervisors and engineers
who may remain with Aavid. The remainder of the cost savings are related to
rent, utilities and other expenses eliminated upon closure of the
aforementioned facilities.
(3) Adjustments to record cost savings due to the elimination of employee
payroll and benefits costs and duplicative advertising, computer systems,
accounting and other functions at Thermalloy's corporate office in Dallas,
Texas pursuant to our integration plan with Thermalloy. The adjustments also
include the elimination of duplicative selling, general and administrative
costs from the closure of the High Wycombe, Hong Kong and Santa Ana
facilities.
(4) Adjustments to record cost savings relating to the elimination of the
salaries, bonuses and benefits associated with certain members of management
and certain employees of Aavid's corporate office who will cease to be our
employees, as well as certain nonrecurring expenses relating to public
company expenses, travel and entertainment expenses and legal costs
eliminated upon consummation of the merger.
(5) Adjustments to eliminate the estimated cash flow contribution relating to
production of the Intel Special Product which ended in the first quarter of
fiscal 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" for a discussion of the Intel
Special Product.
(6) Reflects a non-recurring restructuring charge recorded during the third
quarter of 1998 when we closed our Manchester facility as a result of
Intel's decision to significantly reduce its purchases of the Intel Special
Product.
(7) Adjustments reflect the add-back of non-recurring charges associated with
the termination of the management agreement with Sterling Ventures and a
one-time bonus (based upon profits earned in excess of certain thresholds)
due Mr. Alan Beane, our former President and Chief Executive Officer.
51
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following selected statement of operations and balance sheet data have
been derived from the consolidated financial statements of Aavid and its
predecessor for the periods indicated. The financial statements for the periods
through December 31, 1995 have been audited by PricewaterhouseCoopers LLP,
independent public accountants. The financial statements for each of the years
in the three year period ended December 31, 1998 have been audited by Arthur
Andersen LLP, independent public accountants. The report of Arthur Andersen LLP
with respect to the consolidated financial statements as of December 31, 1997
and December 31, 1998 and for each of the years in the three year period ended
December 31, 1998 is included in our consolidated financial statements appearing
elsewhere in this prospectus. The selected consolidated financial data for the
nine months ended September 26, 1998 and October 2, 1999 are unaudited and have
been prepared on the same basis as Aavid's audited consolidated financial
statements included elsewhere in this prospectus. In the opinion of management,
such unaudited financial data reflect all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly our results of operations for
the periods then ended and our financial position as of such dates. Operating
results for the nine months ended October 2, 1999 are not necessarily indicative
of the results that may be expected for the entire fiscal year. The selected
consolidated financial data should be read in conjunction with our consolidated
financial statements, related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, --------------------------
---------------------------------------------------- SEPTEMBER 26, OCTOBER 2,
1994 1995(1) 1996(2) 1997 1998 1998 1999
-------- -------- -------- -------- -------- ------------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $61,620 $90,944 $106,995 $167,745 $209,078 $158,682 $145,239
Cost of goods sold........................ 41,132 60,680 66,002 107,401 138,431 106,222 90,769
------- ------- -------- -------- -------- -------- --------
Gross profit............................ 20,488 30,264 40,993 60,344 70,647 52,460 54,470
Selling, general and administrative
expenses................................ 13,246 19,347 27,562 36,709 43,783 32,224 34,054
Research and development.................. 1,158 2,594 5,674 6,939 6,756 4,846 5,154
Restructuring and buyout of compensation
agreement charges(3).................... -- 2,770 -- -- 5,740 5,740 --
Purchased undeveloped technology
charge(4)............................... -- 2,649 3,446 -- -- -- --
------- ------- -------- -------- -------- -------- --------
Income from operations.................. 6,084 2,904 4,311 16,696 14,368 9,650 15,262
Interest expense, net..................... (1,567) (2,611) (1,591) (2,178) (1,342) (1,155) (257)
Other expense, net........................ (5) (177) (577) (1,201) (520) (486) (277)
------- ------- -------- -------- -------- -------- --------
Income before income taxes and
extraordinary item.................... 4,512 116 2,143 13,317 12,506 8,009 14,728
Provision for income tax expense.......... (1,677) (831) (2,002) (4,824) (4,385) (2,832) (5,241)
------- ------- -------- -------- -------- -------- --------
Income before extrordinary item......... 2,835 (715) 141 8,493 8,121 5,177 9,487
Extraordinary item(5)..................... -- -- (171) -- -- -- --
------- ------- -------- -------- -------- -------- --------
Net income (loss)......................... $ 2,835 $ (715) $ (30) $ 8,493 $ 8,121 $ 5,177 $ 9,487
======= ======= ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(6)................................. $ 7,556 $ 5,228 $ 7,836 $ 23,135 $ 23,728 $ 16,545 $ 20,821
EBITDA margin(7).......................... 12.3% 5.7% 7.3% 13.8% 11.3% 10.4% 14.3%
Depreciation and amortization............. $ 1,477 $ 2,501 $ 4,102 $ 7,640 $ 9,880 $ 7,381 $ 5,836
Capital expenditures...................... 3,808 8,454 7,029 15,992 10,407 7,291 6,062
Ratio of earnings to fixed charges(8)..... 3.9x 1.0x 2.3x 7.1x 8.8x 7.3x 17.4x
BALANCE SHEET DATA (END OF PERIOD):
Working capital........................... $ 6,506 $ 1,974 $ 9,374 $ 22,296 $ 35,959 $ 39,613 $ 44,760
Total assets.............................. 32,561 56,499 80,221 110,796 129,084 123,947 136,375
Stockholders' equity...................... 4,541 5,433 29,353 50,415 71,351 67,593 82,588
</TABLE>
(SEE FOOTNOTES ON FOLLOWING PAGE)
52
<PAGE>
NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(1) Includes the results of operations of Fluent from August 24, 1995 (date of
the acquisition of Fluent).
(2) Includes the results of operations of Fluid Dynamics International from
May 16, 1996 (the date of the acquisition of Fluid Dynamics International).
(3) Represents the expense for (a) the buyout in 1995 of a portion of the
expected future payments required under the employment agreement with
Mr. Beane, our former President and Chief Executive Officer, and the
bonus-based portion of the management fee due Sterling Venture Limited, each
of which was established at the time of the acquisition of Aavid Thermal
Products in October 1993, and (b) in 1998 (i) the charge related to the
estimated restructuring costs incurred with our closure of our Manchester,
New Hampshire facility, (ii) the termination of the management agreement
with Sterling Ventures and (iii) a bonus due Mr. Beane based on profits in
excess of certain thresholds.
(4) Represents a non-recurring charge equal to the amount of the purchase price
allocated to technology acquired in the acquisition of Fluent in 1995 and
the acquisition of Fluid Dynamics International in 1996, which was not fully
commercially developed and had no alternative future use at the time of
acquisition.
(5) Represents charge related to early retirement of debt, net of related tax
effect.
(6) Represents net income before interest, income taxes, depreciation and
amortization and extraordinary items, each of which can significantly affect
our results of operations and liquidity and should be considered in
evaluating our financial performance. EBITDA is included because we
understand that such information is considered to be an additional basis on
which to evaluate our ability to pay interest, repay debt and make capital
expenditures. EBITDA is not intended to represent and should not be
considered more meaningful than, or as an alternative to, measures of
performance, profitability or liquidity determined in accordance with
generally accepted accounting principles.
(7) Represents EBITDA as a percentage of net sales.
(8) The ratio of earnings to fixed charges has been calculated by dividing
earnings before income taxes and fixed charges by fixed charges. Fixed
charges consist of interest expense, including amortization of deferred
financing costs, and the component of capitalized lease expense which we
believe represents an appropriate interest factor.
53
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS TOGETHER WITH THE FINANCIAL STATEMENTS AND THE NOTES TO
SUCH STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT EXPECTATIONS, ASSUMPTIONS,
ESTIMATES AND PROJECTIONS ABOUT US AND OUR INDUSTRIES. THESE FORWARD-LOOKING
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, AS MORE FULLY DESCRIBED IN THE "RISK FACTORS" SECTION
AND ELSEWHERE IN THIS PROSPECTUS. WE UNDERTAKE 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. IN ADDITION, EXCEPT AS OTHERWISE
INDICATED, THE FOLLOWING DISCUSSION RELATES TO AAVID ON A HISTORICAL BASIS
WITHOUT GIVING EFFECT TO THE ACQUISITION OF THERMALLOY OR THE MERGER.
OVERVIEW
We are the leading global provider of thermal management solutions for
electronic products and the leading developer and marketer of CFD software.
Historically, we were organized as three operating segments: Aavid Thermal
Products, Fluent and Applied Thermal Technologies; however, in connection with
the merger, we consolidated our business into two operating units: Aavid Thermal
Products (including Applied Thermal Technologies), which following the merger is
known as Aavid Thermalloy, and Fluent. Aavid Thermalloy designs, manufactures
and distributes thermal management products that dissipate unwanted heat from
microprocessors and industrial electronics products. Fluent develops and markets
CFD software that is used in complex computer-generated modeling of fluid flows,
heat and mass transfer and chemical reactions for a variety of industries
including, among others, the automotive, aerospace, chemical processing, power
generation, material processing, electronics and HVAC industries. Applied
Thermal Technologies offers thermal design, validation and consulting services,
leveraging on technical and manufacturing capabilities gained from both Fluent
and Aavid Thermalloy, to develop, test and validate Thermal solutions for third
parties.
We and our predecessors have been engaged in the development and manufacture
of heat sinks and related thermal management products since 1964. In
August 1995, we acquired all the outstanding capital stock of Fluent for
$12.8 million. In February 1996, we completed our initial public offering,
whereby we sold an aggregate of 2,645,000 shares of common stock at a price of
$9.50 per share, from which we received net proceeds of approximately
$21.7 million. During 1996, we further expanded our operations through the
acquisitions of (1) Fluid Dynamics International, Inc., a provider of
computational fluid dynamics software, (2) an aluminum extrusion manufacturing
facility located in Franklin, New Hampshire and (3) Beaver Industries, a
manufacturer of heat sinks and related thermal management products for
electrical and electronics parts, components, ensembles and systems in Toronto,
Canada. See Note C of notes to our consolidated financial statements for
additional information about these acquisitions.
In 1997, we opened a facility in Manchester, New Hampshire specifically for
the production of a special heat dissipating plate for Intel Corporation (the
"Intel Special Product"). In the second half of July 1998, Intel notified us of
significant reductions in forecasts for purchase of the Intel Special Product.
As a result, during the third quarter of 1998, we decided to close our
Manchester facility and we recorded a non-recurring pre-tax charge of
$4.9 million, reflecting the costs associated with such closure. The
non-recurring revenues relating to the Intel Special Product were approximately
$47 million, or 22% of net sales, in 1998 and approximately $25 million, or 15%
of net sales, in 1997. The Intel Special Product had a lower gross margin than
our other thermal management products. Intel remains one of our significant
customers, although sales to Intel for the nine months ended October 2, 1999
were less than 5% of total net sales. No customer generated more than 5% of our
net sales for the same period.
54
<PAGE>
The increased goodwill amortization and other purchase accounting
adjustments resulting from our acquisition of Thermalloy and the merger will
decrease our net income in the fourth quarter of 1999 and in 2000 as compared to
the respective prior year periods.
THERMALLOY ACQUISITION
In October 1999, we completed the acquisition of Thermalloy for a total
purchase price of $80.0 million (including estimated transaction costs of
$1.5 million). Thermalloy designs, manufactures and sells a wide variety of
standard and proprietary heat sinks and associated products, similar to those
designed and manufactured by Aavid Thermal Products, within the computer and
networking and industrial electronics (including telecommunications) industries.
Thermalloy has manufacturing facilities in Dallas, Texas; Monterrey, Mexico;
Corby and Swindon, England; Bologna, Italy; and Malacca, Malaysia. As part of
this acquisition from Bowthorpe, we also acquired 65.2%, representing
Bowthorpe's entire shareholding, of Curamik Electronics GmbH, a German
corporation that manufactures direct bonded copper substrates used in the
packaging and cooling of high power electronic devices. In a separate
transaction, we purchased an additional 20.2% of Curamik from two minority
shareholders for approximately $2.7 million, thereby increasing our ownership to
85.4%. Thermalloy, including Curamik, had net sales of approximately
$100.8 million and EBITDA of approximately $13.5 million (adjusted to exclude
management fees of $2.2 million paid by Thermalloy to Bowthorpe) for the twelve
months ended September 30, 1999. We believe the acquisition of Thermalloy will
create significant opportunities to realize cost savings through certain plant
closings, the elimination of duplicative selling, general and administrative
functions and the reduction of unnecessary corporate expenses.
RESULTS OF OPERATIONS
The following table is derived from our consolidated statements of
operations and sets forth the percentage relationship of certain items to net
sales for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED(1)
YEAR ENDED DECEMBER 31, --------------------------
------------------------------ SEPTEMBER 26, OCTOBER 2,
1996 1997 1998 1998 1999
-------- -------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Net sales........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................... 61.7 64.0 66.2 66.9 62.5
----- ----- ----- ----- -----
Gross profit................................... 38.3 36.0 33.8 33.1 37.5
Selling, general and administrative expenses..... 25.8 21.9 20.9 20.3 23.5
Research and development......................... 5.3 4.1 3.2 3.1 3.5
Purchased undeveloped technology charge.......... 3.2 -- -- -- --
Restructuring and buyout of compensation
arrangements................................... -- -- 2.8 3.6 --
----- ----- ----- ----- -----
Income from operations......................... 4.0 10.0 6.9 6.1 10.5
Interest expense, net............................ (1.5) (1.3) (0.6) (0.7) (0.2)
Other income (expense), net...................... (0.5) (0.8) (0.3) (0.3) (0.2)
----- ----- ----- ----- -----
Income before taxes............................ 2.0 7.9 6.0 5.1 10.1
Provision for income taxes....................... (1.9) (2.8) (2.1) (1.8) (3.6)
----- ----- ----- ----- -----
Net income (loss).............................. 0.1 5.1 3.9 3.3 6.5
Extraordinary item, net of tax................... (0.1) -- -- -- --
----- ----- ----- ----- -----
Net income (loss).............................. 0.0% 5.1% 3.9% 3.3% 6.5%
===== ===== ===== ===== =====
</TABLE>
- ------------------------
(1) Aavid's first three fiscal quarters consist of periods of approximately 13
weeks each, ending on the Saturday closest to the end of such 13 week
period, and Aavid's fourth quarter and fiscal year end
55
<PAGE>
on December 31. The nine months ended October 2, 1999 contained six more
days than the first nine months of 1998.
NINE MONTHS ENDED OCTOBER 2, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 26,
1998
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 26, OCTOBER 2,
NET SALES (DOLLARS IN MILLIONS) 1998 1999 CHANGE
- ------------------------------- -------------- ------------ --------
<S> <C> <C> <C>
Computer and Networking............... $ 44.6 $ 56.8 27.6 %
Industrial Electronics................ 46.9 49.0 4.5 %
Consulting and Design (Applied)....... 0.7 1.0 42.9 %
------ ------ -----
92.2 106.8 15.8 %
Computer and Networking--Intel Special
Product............................. 38.5 2.6 (93.2)%
------ ------ -----
Total Aavid Thermal Products........ 130.7 109.4 (16.3)%
Total Fluent........................ 28.0 35.9 28.2 %
------ ------ -----
Total Aavid Thermal Technologies
(including Intel Special
Product).......................... $158.7 $145.3 (8.4)%
====== ====== =====
Total Aavid Thermal Technologies
(excluding Intel Special
Product).......................... $120.2 $142.7 18.7 %
====== ====== =====
</TABLE>
Net sales for the nine months ended October 2, 1999 were $145.3 million, a
decrease of $13.4 million, or 8.4%, compared with $158.7 million for the nine
months ended September 26, 1998. This reduction in net sales was the result of
the impact of the one-time reduction in sales volume of $35.9 million for the
Intel Special Product. Our net sales for the nine month period ended October 2,
1999, excluding net sales of the Intel Special Product, however, increased
$22.5 million, or 18.7%, over the same period in the prior year.
Aavid Thermal Products' net sales were $109.4 million for the nine months
ended October 2, 1999, a decrease of $21.3 million, or 16.3%, compared with
$130.7 million for the nine months ended September 26, 1998. This decrease was
the result of the one-time reduction in sales volume of $35.9 million for the
Intel Special Product. Net sales from the Intel Special Product accounted for
29.5% of Aavid Thermal Products' total net sales for the nine months ended
September 26, 1998. Excluding net sales from the Intel Special Product, Aavid
Thermal Products' net sales for the nine months ended October 2, 1999 increased
$14.6 million, or 15.8%, over the nine months ended September 26, 1998.
Net sales from computer and networking products (excluding the Intel Special
Product) showed strong growth in the nine months ended October 2, 1999,
increasing 27.6% over the nine months ended September 26, 1998. Industrial
electronics net sales increased 4.5% for the nine months ended October 2, 1999
compared to the nine months ended September 26, 1998. Industrial electronics net
sales were significantly impacted in the third quarter and fourth quarters of
1998 and to a lesser extent in the first quarter of 1999 by the Asian economic
slowdown.
Fluent's net sales were $35.9 million for the nine months ended October 2,
1999, an increase of $7.9 million, or 28.2%, over $28.0 million for the nine
months ended September 26, 1998. Of this increase, approximately 28% was the
result of net sales by Fluent's new subsidiary in Japan, which became
operational in the first quarter of 1999. The remaining 72% increase was spread
among all product offerings due primarily to increased sales to new customers
for computational fluid dynamics software, as well as the success of
application-specific products.
56
<PAGE>
Excluding net sales for the Intel Special Product, international net sales
(which include North American exports) increased to 37.9% of net sales for the
nine months ended October 2, 1999 as compared with 35.7% for the nine months
ended September 26, 1998.
Our gross profit for the nine months ended October 2, 1999 was
$54.5 million, an increase of $2.0 million, or 3.8% higher than $52.5 million
for the nine months ended September 26, 1998. Our gross margin increased from
33.1% in the nine months ended September 26, 1998 to 37.5% in the nine months
ended October 2, 1999. This increase in gross margin resulted from a decrease in
the percentage of overall gross profit derived from the Intel Special Product
(which had a lower gross margin than our other products) and an increase in the
percentage of overall gross margin derived from Fluent, which has significantly
higher overall gross margin percentages than Aavid Thermal Products.
Our selling, general and administrative expenses were $34.1 million, or
23.5% of net sales, for the nine months ended October 2, 1999 as compared to
$32.2 million, or 20.3% of net sales, for the nine months ended September 26,
1998. The increase in selling, general and administrative expenses resulted from
an increase of $3.7 million at Fluent (broadly in line with sales growth), which
was partially offset by a decline at Aavid Thermal Products resulting from cost
reductions in response to lower sales from the loss of the Intel Special
Product.
Our research and development expenses consist primarily of funding for
internal product development activities as well as product development
activities conducted by third parties on our behalf. Research and development
expenses also include the costs of obtaining patents on the technology developed
in research and development activities. Research and development expenses were
$5.2 million, or 3.5% of net sales, for the nine months ended October 2, 1999 as
compared to $4.8 million, or 3.1% of net sales, for the nine months ended
September 26, 1998. The increase in research and development expenses was
primarily due to increased expenditures at Fluent.
Our income from operations for the nine months ended October 2, 1999 was
$15.3 million, a decline of $0.1 million, or 0.8%, from $15.4 million for the
nine months ended September 26, 1998 (excluding non-recurring charges). Our
income from operations as a percentage of net sales was 10.5% for the nine
months ended October 2, 1999 as compared with 9.7% for the nine months ended
September 26, 1998 (excluding non-recurring charges). This improvement in income
from operations as a percentage of net sales is primarily the result of an
increase in the percentage of overall operating profit derived from Fluent.
Income from operations as a percentage of net sales at Aavid Thermal Products
for the nine months ended October 2, 1999 was 8.5%, which compares with 8.4% for
the nine months ended September 26, 1998. Fluent's income from operations as a
percentage of net sales increased to 17.0% for the nine months ended October 2,
1999, compared with 16.2% for the nine months ended September 26, 1998. Fluent's
operating margins increased primarily because net sales grew at a faster rate
than expenditures on research and development.
Our interest charges were $0.3 million for the nine months ended October 2,
1999, a $0.9 million decrease over interest charges of $1.2 million for the nine
months ended September 26, 1998, reflecting lower levels of indebtedness. The
effective tax rate for the nine months ended October 2, 1999 was 35.6%, compared
with 36.4% for the nine months ended September 26, 1998.
During the first quarter of 1998, we recorded a non-recurring pre-tax charge
of $1.9 million, which related to the termination of a management agreement and
an obligation to pay a former director a bonus based on 1998 profits in excess
of certain thresholds.
During the third quarter of 1998, we recorded a non-recurring pre-tax charge
of $4.9 million, reflecting the costs associated with the closure of our
Manchester, New Hampshire facility. This facility was dedicated to manufacturing
the Intel Special Product. The costs associated with the closure of the
Manchester facility included the write-down of surplus equipment of
$2.8 million, settlement of certain
57
<PAGE>
purchase commitments of $1.1 million, provisions for leased property expenses of
$0.4 million and employee separation costs of $0.6 million. We incurred charges
of $3.2 million related to this plant closure during the nine months ended
October 2, 1999. The charge was offset by a $1.0 million reduction in the
previous estimate of obligations to pay a former director a bonus, paid on
profits in excess of certain thresholds, as discussed above. The combination of
these two events resulted in a net third quarter non-recurring pre-tax charge of
$3.9 million.
Our net income for the nine months ended October 2, 1999 was $9.5 million,
an increase of $0.8 million, compared with net income for the nine months ended
September 26, 1998 of $8.7 million, excluding non-recurring charges.
1998 COMPARED WITH 1997
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
NET SALES (DOLLAR IN MILLIONS) 1997 1998 CHANGE
- ------------------------------ -------- -------- --------
<S> <C> <C> <C>
Computer and Networking............................. $ 47.4 $ 62.4 31.6 %
Industrial Electronics.............................. 62.6 60.2 (3.8)%
Consulting and Design (Applied)..................... 0.5 1.2 100 %
------ ------ -----
110.5 123.8 12.0 %
Computer and Networking--Intel Special Product...... 24.7 47.0 90.3 %
------ ------ -----
Total Aavid Thermal Products...................... 135.2 170.8 26.3 %
Total Fluent...................................... 32.5 38.3 17.8 %
------ ------ -----
Total Aavid Thermal Technologies
(including Intel Special Product)............... $167.7 $209.1 24.7 %
====== ====== =====
Total Aavid Thermal Technologies
(excluding Intel Special Product)............... $143.0 $162.1 13.4 %
====== ====== =====
</TABLE>
Our net sales for 1998 were $209.1 million, an increase of $41.4 million, or
24.7%, compared with $167.7 million for 1997. The increase in net sales was
primarily the result of the strong growth of both Aavid Thermal Products and
Fluent.
Net sales for Aavid Thermal Products were $170.8 million in 1998, an
increase of $35.5 million, or 26.3%, compared with $135.2 million in 1997. This
growth was primarily the result of increasing net sales of computer and
networking thermal management products, both to Intel and other customers. Net
sales in the industrial electronics markets were lower in 1998 than 1997
primarily due to customer inventory reductions in the second half of 1998,
reflecting less favorable economic conditions.
Despite the well publicized personal computer industry inventory correction
experienced in the first half of 1998, net sales for computer and networking
products (excluding the Intel Special Product) showed strong growth in 1998,
increasing 31.6% over 1997 primarily due to market share gains. Industrial
electronics net sales performed well in the first half of 1998, increasing 13.8%
over the first half of 1997. However, the Asian economic slowdown in 1998 caused
a sharp correction of customer inventories in the second half of 1998, leaving
total industrial electronics net sales down 3.8% in 1998 over 1997. Net sales of
the Intel Special Product grew strongly in the first half of 1998 reaching
$15.0 million for the second quarter of the year. Following Intel's decision to
phase out the Intel Special Product in July 1998, net sales to Intel declined
from $15.0 million for the second quarter of 1998 to $10.8 million and
$8.6 million for the third and fourth quarters, respectively.
Fluent's net sales were $38.3 million in 1998, an increase of $5.8 million,
or 17.8%, over $32.5 million in 1997. Strong growth in North America and Europe
was marginally offset by lower
58
<PAGE>
growth in the Far East. In general, increases were seen in all product offerings
due primarily to increased sales to new customers in the market for CFD design
software, as well as the success of application-specific products.
Excluding sales of the Intel Special Product, international net sales (which
include North American exports) increased to 36.4% of net sales for 1998
compared with 34.7% in 1997. This increase in the level of international net
sales is primarily the result of both additional product manufactured within
North America and shipped to customers' offshore manufacturing and assembly
operations and higher product net sales from our expanded Far East manufacturing
operations.
Our gross profit for 1998 was $70.6 million, an increase of $10.3 million,
or 17.1%, over $60.3 million in 1997. Our gross margin as a percentage of net
sales decreased from 36.0% in 1997 to 33.8% for 1998. Approximately two-thirds
of this change was derived from a higher proportion of lower gross margin
business related to the Intel Special Product in 1998 than in 1997. The
remaining one-third of this decrease was predominantly due to reduced levels of
higher gross margin industrial electronics sales in the second half of 1998.
Our selling, general and administrative expenses were $43.8 million, or
20.9% of net sales, for 1998 as compared to $36.7 million, or 21.9% of net
sales, for 1997. The decrease in selling, general and administrative expense as
a percentage of net sales resulted principally from the faster rate of growth in
net sales at Aavid Thermal Products, which has a lower selling, general and
administrative expense as a percentage of net sales, than at Fluent.
Our research and development expenses were $6.8 million, or 3.2% of net
sales, in 1998 as compared to $6.9 million, or 4.1% of net sales, in 1997. The
decrease in research and development expenses as a percentage of net sales is
primarily due to lower research and development expenditures at Aavid Thermal
Products.
Our 1998 income from operations of $20.1 million (excluding the
non-recurring charge) was $3.4 million, or 20.4%, higher than $16.7 million in
1997. Our income from operations as a percentage of net sales for 1998 (prior to
the non-recurring charge) was 9.6% as compared with 10.0% for the prior year.
Fluent's income from operations as a percentage of net sales was maintained at
16.8%. Aavid Thermal Products' income from operations as a percentage of net
sales for 1998 was 8.0%, compared to 8.4% for 1997. Substantially all of this
decrease was the result of an approximate 1% reduction in operating margin in
the second half of 1998, which resulted from lower sales volume of the Intel
Special Product.
Our interest charges were $1.3 million in 1998, a $0.9 million, or 38.3%,
decrease over interest charges of $2.2 million for 1997, reflecting lower levels
of indebtedness. Our effective tax rate in 1998 was 35.1%, compared with 36.2%
in 1997.
Our net income for 1998 prior to non-recurring charges was $11.7 million, an
increase of $3.2 million over our 1997 net income of $8.5 million.
During the first quarter of 1998, we recorded a non-recurring pre-tax charge
of $1.9 million, which related to the termination of a management agreement and
an obligation to pay a former director a bonus based on 1998 profits in excess
of certain thresholds.
During the third quarter of 1998, we recorded a non-recurring pre-tax charge
of $4.9 million, reflecting the costs associated with the closure of our
Manchester, New Hampshire facility. We incurred charges of $0.7 million related
to this plant closure during 1998. The charge was offset by a $1.0 million
reduction in the previous estimate of obligations to pay a former director a
bonus, paid on profits in excess of certain thresholds, as discussed above.
59
<PAGE>
1997 COMPARED WITH 1996
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
NET SALES (DOLLARS IN MILLIONS) 1996 1997 CHANGE
- ------------------------------- -------- -------- --------
<S> <C> <C> <C>
Computer and Networking...................... $ 30.5 $ 47.4 55.4%
Industrial Electronics....................... 49.4 62.6 26.7%
Consulting and Design (Applied).............. 0.0 0.5 N/A
-------- -------- --------
79.9 110.5 38.3%
Computer and Networking--Intel Special
Product.................................... 2.0 24.7 1,135.0%
-------- -------- --------
Total Aavid Thermal Products............... 81.9 135.2 65.1%
Total Fluent............................... 25.1 32.5 29.5%
-------- -------- --------
Total Aavid Thermal Technologies
(including the Intel Special Product).... $ 107.0 $ 167.7 56.7%
======== ======== ========
Total Aavid Thermal Technologies
(excluding the Intel Special Product).... $ 105.0 $ 143.0 36.2%
======== ======== ========
</TABLE>
Net sales in 1997 were $167.7 million, an increase of $60.7 million, or
56.7%, compared with $107.0 million for 1996. The increase in net sales was
primarily the result of the strong growth of both Aavid Thermal Products and
Fluent.
Net sales for Aavid Thermal Products were $135.2 million in 1997, an
increase of $53.3 million, or 65.1%, compared with $81.9 million in 1996. This
growth was primarily due to increasing demand for heat dissipation solutions for
computer and networking components, resulting in higher domestic and overseas
sales to computer OEM's and semiconductor companies. Net sales of thermal
products to the telecommunications, industrial electronics and instrumentation
markets were also higher due to underlying market growth.
Net sales for computer and networking products (excluding the Intel Special
Product) showed strong growth in 1997, increasing 55.4% over 1996 due to
increasing demand for heat dissipation solutions associated with computer and
networking components, resulting in higher domestic and overseas sales to
computer OEM's. Industrial electronics net sales performed well in 1997,
increasing 26.7% over 1996 due primarily to increased sales to new customers.
Net sales of the Intel Special Product grew to $24.7 million in 1997 as
production of the Intel Special Product was ramped up to full capacity.
Fluent's net sales of $32.5 million in 1997 were $7.4 million, or 29.5%,
higher than $25.1 million in 1996. Of this increase, 8.6% was the result of the
acquisition of Fluid Dynamics in May 1996.
Excluding sales of the Intel Special Product, international net sales (which
include North American exports) increased $17.8 million to 34.7% of net sales
for 1997 compared with 29.8% in 1996. This growth largely reflected higher net
sales from products manufactured within North America and shipped to customers'
offshore manufacturing and assembly operations. To a lesser extent, growth in
international net sales also reflected increased net sales from our European and
Asian operations.
Our gross profit for 1997 was $60.3 million, an increase of $19.3 million,
or 47.2%, over 1996. Gross profit as a percentage of net sales decreased from
38.3% in 1996 to 36.0% for 1997. This decrease in gross margin was primarily due
to Aavid Thermal Products accounting for a higher percentage of net sales than
Fluent, which has significantly higher gross margins than Aavid Thermal
Products. The remaining change in gross margin was predominantly the result of
higher sales volumes of lower gross margin computer and networking (including
the Intel Special Product) sales.
60
<PAGE>
Our selling, general and administrative expenses were $36.7 million, or
21.9% of net sales, for 1997, as compared to $27.6 million, or 25.8% of net
sales, for 1996. The decrease in selling, general and administrative expenses as
a percentage of net sales resulted principally from a faster rate of net sales
growth at Aavid Thermal Products, which has lower selling, general and
administrative expenses as a percentage of net sales than does Fluent.
Our research and development expenses were $6.9 million, or 4.1% of net
sales, in 1997 as compared to $5.7 million, or 5.3% of net sales, in 1996. The
decrease in research and development expenses as a percentage of net sales is
primarily due to the faster rate of growth in net sales at Aavid Thermal
Products, which has lower research and development expenses as a percentage of
net sales than Fluent.
1996 comparative amounts are exclusive of a non-recurring, one-time charge
of $3.4 million relating to purchased undeveloped technology arising out of the
acquisition of Fluid Dynamics.
Our income from operations of $16.7 million for 1997 was $8.9 million, or
115.2%, higher than for 1996. Our income from operations as a percentage of net
sales for 1997 was 10.0% compared with 7.2% for 1996. This improvement largely
reflected the significant improvement at Aavid Thermal Products, where the
growth in net sales and gross profit exceeded the increase in selling, general
and administrative and research and development expenses.
Our interest charges were $2.2 million in 1997, a $0.6 million increase over
interest charges of $1.6 million for 1996, reflecting the higher indebtedness
resulting from the increased level of capital expenditures and the increase in
working capital through 1997. Our effective tax rate in 1997 was 36.2%, compared
with 35.8% in 1996.
Our net income for 1997 was $8.5 million, compared to our net loss in 1996
of $30,000.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL
Historically, we have used internally generated funds and proceeds from
financing activities to meet our working capital and capital expenditure
requirements. As a result of the Thermalloy acquisition and the merger, we have
significantly increased our cash requirements for debt service relating to the
notes and our amended and restated credit facility. We intend to use amounts
available under our amended and restated credit facility, future debt and equity
financings and internally generated funds to finance our working capital
requirements, capital expenditures and potential acquisitions. As of October 2,
1999, after giving pro forma effect to the Thermalloy acquisition and the merger
and related transactions, we would have had $198.4 million of debt outstanding
and $20.3 million of additional availability under our revolving credit
facility.
Net cash provided by operating activities for the nine month period ended
October 2, 1999 was $9.4 million compared to $13.8 million for the nine month
period ended September 26, 1998. We had $44.8 million in working capital as of
October 2, 1999 compared with $39.6 million for the prior year period. At
October 2, 1999, accounts receivable days sales outstanding ("DSO") were
67 days, which compares with 54 days at December 31, 1998. While the number of
days sales outstanding are up from the end of 1998, the 65 days at July 4, 1999
is consistent with the average DSO in 1998 as a whole. The increase during the
third quarter of 1999 from 65 to 67 days is due to an increase in Fluent's DSO
due to longer receivable days experienced in the new subsidiary in Japan. At
October 2, 1999, inventory turns were 7.4 times, which compares with 7.7 times
at December 31, 1998. This reduction in turns is primarily the result of the
elimination of high turnover business related to the Intel Special Product.
During the nine months ended October 2, 1999, we made capital expenditures
of $6.1 million compared with $7.3 million in the first nine months of 1998. The
higher level of capital expenditures in
61
<PAGE>
the prior year period was primarily attributable to above average investment in
additional capacity. At October 2, 1999, we had no material purchase
commitments.
AFTER THE MERGER AND RELATED TRANSACTIONS
In connection with the merger, we repaid all outstanding debt under our
existing credit facility, which aggregated approximately $88.2 million at
February 2, 2000, and amended and restated this credit facility to, among other
things, add Holdings as a guarantor, permit the issuance of the outstanding
notes and amend certain of the financial ratios and restrictive covenants to
reflect such issuance. The amended and restated credit facility provides for a
$22.0 million revolving credit facility (of which $1.7 million was drawn at
closing) and a $53.0 million term loan facility (which was fully drawn at
closing). Subject to compliance with the terms of the amended and restated
credit facility, borrowings under the revolving credit facility will be
available for working capital purposes, capital expenditures and future
acquisitions. The revolving credit facility will terminate, and all amounts
outstanding thereunder will be payable, on March 31, 2005.
Principal on the term loan facility will be required to be repaid in
quarterly installments commencing December 31, 2000 and ending March 31, 2005 as
follows: five installments of $2,000,000; four installments of $2,500,000; four
installments of $2,750,000; two installments of $3,200,000; two installments of
$3,900,000; and a final installment of $7,800,000. In addition, commencing with
our fiscal year ending December 31, 2001, we will be required to apply 50% of
our excess cash flow to permanently reduce the term loan.
The amended and restated credit facility and the notes each contain certain
covenants that limit, among other things, our ability to incur additional debt.
In addition, the amended and restated credit facility requires that we maintain
certain financial ratios.
We believe that existing sources of liquidity and funds expected to be
generated from operations will be sufficient to meet our debt service, capital
expenditure and working capital requirements for the foreseeable future. Further
expansion of our business or the completion of any material strategic
acquisitions may require additional funds which, to the extent not provided by
internally generated sources, could require us to seek access to debt and equity
markets.
YEAR 2000
The year 2000 problem was to have resulted from computer programs and
devices that did not differentiate between the year 1900 and the year 2000
because they were written using two digits rather than four to define the
applicable year; accordingly, computer systems that have time-sensitive
calculations potentially would not properly recognize the year 2000. This could
have resulted in system failures or miscalculations causing disruptions of our
operations. The year 2000 problem potentially affected us across our worldwide
locations and within substantially all of our business activities. We believe
that as a result of our year 2000 remediation and planning programs, the year
2000 problem has not, as of March 15, 2000, had a material adverse effect on our
operations or financial results. As of December 31, 1999, we estimate that we
had incurred approximately $150,000 in our year 2000 efforts, including without
limitation, outside consulting fees and computer systems upgrades, but excluding
internal staff costs, all of which has been expensed. It is possible that we
will experience year 2000 related problems in the future, particularly with our
non-business critical systems, which may result in failures or miscalculations
resulting in inaccuracies in computer output or disruptions of operations.
However, we believe that the year 2000 problem will not pose significant
operational problems for our business critical computer systems and equipment.
The financial impact of future remediation activities that may become necessary,
if any, cannot be known precisely at this time, but it is not expected to be
material.
62
<PAGE>
INDUSTRY OVERVIEW
THERMAL MANAGEMENT
In today's electronic environment, microprocessors and their associated
power supplies, hard drives, advanced video chips and other peripheral devices
draw large amounts of power and, consequently, must dissipate a significant
amount of heat. The same heat generation occurs in semiconductors and integrated
circuits in motor controls, telecommunications switches and other electronics.
Because these electronic components can only operate efficiently in narrow
temperature bands, heat is an absolute constraint in electronic system design.
The excessive heat generated within a component not only degrades semiconductor
and system performance and reliability, but can also cause semiconductor and
system failure.
Increasingly, neither externally generated off-the-shelf thermal management
products nor internally designed and produced parts have been able to
effectively address the expanding complexity of thermal management problems
resulting from the increasing amount of heat required to be dissipated by
electronic products. The complexity of thermal management problems has been
intensified by reductions in system size, shorter time-to-market, shorter
product life cycles and more demanding operating environments.
These factors have led to the development and growth of the thermal
management industry. We estimate that the size of the worldwide thermal
management market was approximately $4.1 billion in 1999. This $4.1 billion
market can be broken down into eight industry types as illustrated in the table
below. We further estimate that the worldwide thermal management market will
grow at a compound annual growth rate of approximately 12.8% to $6.6 billion in
2003.
WORLDWIDE ELECTRONIC THERMAL MARKET
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
DOLLARS IN BILLIONS
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1998 1999 2000 2001 2002 2003
Communication 701 733 836 964 1,129 1,320 1,528
Consumer 390 368 386 405 446 493 536
Auto electronics 197 198 220 245 273 298 322
Computer 1,596 1,535 1,634 1,836 2,115 2,433 2,767
Industrial 316 316 343 389 442 498 565
Instrument 209 210 220 241 269 303 336
Gov/Military 374 371 386 407 429 452 473
Business 38 38 40 44 48 53 56
</TABLE>
The worldwide electronic thermal management market is divided between
solutions that are internally designed and produced by OEMs (I.E., "in-house"
thermal solutions) and those that are externally supplied by thermal management
companies (I.E., "outsourced" thermal solutions). Based on our experience in the
industry and industry data, we estimate that the size of the in-house thermal
solutions market is approximately $1.2 billion and the size of the outsourced
thermal solutions market is approximately $2.9 billion, or 72% of the worldwide
electronic thermal management market. As thermal management problems become
increasingly complex, we believe that manufacturers will increasingly outsource
their thermal management design and production in order to focus on their core
competencies. We further believe that the market for the types of thermal
management products and services we offer in our existing geographic locations
comprises only 45% of the $2.9 billion outsourced thermal solutions market. We
believe that, as the market leader, we will benefit from the expected growth in
the worldwide electronic thermal management market and that, through geographic
and product expansion, we have a significant opportunity to address a larger
portion of the outsourced
63
<PAGE>
segment of this market than we currently address. The following graphs show our
estimate of the size and composition of the worldwide electronic thermal
management market.
<TABLE>
<S> <C>
OUTSOURCED VS. IN-HOUSE MARKET ADDRESSED VS. UNADDRESSED MARKET
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
OUTSOURCED 72%
<S> <C>
In-house 28%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
UNADDRESED BY AAVID 55%
<S> <C>
Addresed by Aavid 45%
</TABLE>
Electronics manufacturers seek to respond to end user demands and increasing
competition by offering new products with improved performance (functionality
and speed) and greater reliability in smaller forms and at lower prices. This
greater functionality, speed and the miniaturization of component housing has
resulted in an increase in unwanted heat generated by electronics products. The
demand for thermal management products is driven by the need to dissipate the
increasing amount of heat generated by electronic products.
We believe that future growth of the thermal management products market will
be driven by the following factors:
- Inherent unit growth in end-user products, such as desktop computers,
laptops and telecommunications equipment. In particular, the volume of
microprocessors and support chip units is increasing on an absolute and on
a per product basis.
- The wider use of electronic controls in numerous areas due to the general
increase in automation.
- The increasing use of microprocessors in industrial electronics
applications, fueling the need for thermal management products to manage
the different operating temperature characteristics of these devices.
- The increased need for reliable power supplies. The quality of power can
be adversely affected by thermal overload arising from ineffective thermal
management. This is becoming increasingly important within the industrial,
computer and telecommunications sectors where "irregular" power surges can
damage equipment and cause productivity loss.
- The complexity of thermal management problems, which has been intensified
by the increasing amount of heat to be dissipated, reductions in system
size, shorter time-to-market product cycles and more demanding temperature
operating environments.
COMPUTATIONAL FLUID DYNAMICS SOFTWARE
CFD software is used in a wide range of industries for complex
computer-based analysis of engineering designs involving fluid flows, heat and
mass transfer, chemical reaction and other fluid flow
64
<PAGE>
phenomena. CFD software tools allow the analysis and evaluation of design
modifications without the physical prototyping of each design modification,
thereby reducing engineering cost, improving product performance and decreasing
time-to-market for new products. Specific uses of CFD-based flow analysis
include the design of electronic components and systems, automotive design,
combustion systems modeling and process plant troubleshooting.
Over the past decade, increases in computing power have made CFD-based
computer analysis of complex fluid flows feasible on computers that are readily
available to research and development and engineering departments. Development
of CFD software technology is expanding that market beyond its traditional user
base of Ph.D-level engineers in corporate research and development centers to
the larger base of design engineers working in product development. Finally, CFD
software tools are part of the growing trend toward improved engineering
efficiency through computer-aided analysis and design by integrating CFD
software with geometric modeling and design.
The CFD software market has been growing rapidly during the past decade.
Based on publicly available information from a number of our key competitors and
internal management estimates, we believe that in 1998 the size of the developed
market for CFD software applications was approximately $100 million. We further
believe that this market has grown approximately 20% annually since 1992 and we
expect to benefit from the anticipated continued growth of this market. Based on
a market study we conducted in connection with our acquisition of Fluent, we
estimate that the size of the potential market for CFD software products is
currently approximately $500 million. We also believe that, through Fluent, we
have approximately 40% of the developed market for CFD software applications.
We expect that future growth of the CFD software market will be driven by
the following factors:
- The ability of customers using CFD software to reduce their product
development costs, minimize time-to-market for their new products and
improve product performance.
- The ability to analyze fluid flows is becoming increasingly important
across a wide range of industries.
- The development of more powerful and affordable computers that are capable
of running CFD software.
- The growing trend among customers to improve the engineering efficiency of
product development and improvement through computer-aided analysis and
design.
- Expansion of the traditional user base for CFD software beyond Ph.D.-level
engineers in corporate research and development centers to the larger base
of design engineers.
65
<PAGE>
BUSINESS
INTRODUCTION
We are the leading global provider of thermal management solutions for
electronic products and the leading developer and marketer of CFD software. Each
of these businesses has an established reputation for high product quality,
service excellence and engineering innovation in its market. We design,
manufacture and distribute on a worldwide basis thermal management products that
dissipate unwanted heat, which can degrade system performance and reliability,
from microprocessors and industrial electronics products. Our products, which
include heat sinks, interface materials and attachment accessories, fans, heat
spreaders and liquid cooling and phase change devices that we configure to meet
customer-specific needs, serve the critical function of conducting, convecting
and radiating away unwanted heat. CFD software is used in complex
computer-generated modeling of fluid flows, heat and mass transfer and chemical
reactions. Our CFD software is used in a variety of industries, including the
automotive, aerospace, chemical processing, power generation, material
processing, electronics and HVAC industries.
We believe the demand for thermal management products and CFD software is
growing. The increase in unwanted heat generated in electronic and other
products is primarily a result of more powerful semiconductors and the growing
number of semiconductors being used in individual products. The growing demand
for our thermal management products is driven by the need to dissipate the
increasing amount of heat generated by electronic products, as well as strong
unit growth. The increase in heat requires more complex thermal solutions, which
in turn is driving the trend among our customers and other electronics
manufacturers to outsource development of thermal management solutions. Through
our product design capabilities and customer relationships, we lead the thermal
management industry in meeting this growing demand. The demand for CFD software
is driven by the need to reduce product development costs, minimize
time-to-market for new products and improve product performance. Through our
technological leadership in CFD software, we will continue to develop software
to meet the needs of our customers and others in this growing market. These
trends have contributed to the growth in combined net sales of Aavid and
Thermalloy from $187.9 million for the fiscal year ended December 31, 1996, to
$296.4 million for the twelve months ended October 2, 1999. For the twelve
months ended October 2, 1999, our pro forma adjusted EBITDA was $45.2 million.
Our thermal management products are used in a wide variety and growing
number of computer and networking and industrial electronics applications,
including computer systems (desktops, laptops, disk drives, printers and
peripheral cards), network devices (servers, routers, set top boxes and local
area networks), telecommunications equipment (wireless base stations, satellite
stations and PBXs), instrumentation (semiconductor test equipment, medical
equipment and power supplies), transportation and motor drives (braking and
traction systems) and consumer electronics (stereo systems and video games). Our
CFD software is used for a wide variety of computer-based analyses, including
the design of electronic components and systems, automotive design, combustion
systems modeling and process plant troubleshooting. We have longstanding
relationships with a highly diversified base of more than 3,500 national and
international customers, including original equipment manufacturers (commonly
referred to as OEMs), electronics distributors and contract manufacturers. Our
customers include Acer, Apple, Arrow, AT&T, Cisco Systems, Compaq Computer,
DaimlerChrysler, Dell, Dow Chemical, Ericsson, Ford, Fujitsu, General Electric,
Harmon-Kardon, Hewlett-Packard, IBM, Intel, Lockheed Martin, Lucent, Motorola,
Nortel, Rockwell Automation, Rolls Royce, SCI Systems, Siemens, Silicon
Graphics, Solectron and Sun Microsystems.
COMPETITIVE STRENGTHS
We believe that the following competitive strengths have enabled us to
become a worldwide leader in both the thermal management market and the CFD
software market.
66
<PAGE>
TOTAL INTEGRATED SOLUTIONS PROVIDER. The increasing complexity of heat
dissipation problems and the growing trend among manufacturers to outsource
development of thermal management solutions has stimulated demand for total
integrated solutions. We provide total integrated solutions by analyzing
customers' thermal management problems at the device-, board- and system-level,
designing, simulating and prototyping thermal management solutions and
manufacturing, distributing and supporting these solutions worldwide.
VALUE-ADDED PARTNERING WITH OUR CUSTOMERS. We work closely with our
customers to develop customized thermal management solutions. We believe that
our close relationships with customers and their design and development teams,
as well as our worldwide manufacturing capabilities, allow us to anticipate
customers' needs and, through our engineering expertise and experience, provide
quality product solutions more quickly than our competitors.
WORLDWIDE LOW COST MANUFACTURER. We have state-of-the-art manufacturing
operations in the United States, Canada, Mexico, Europe and Asia, including
China. As an increasing number of electronics systems are being manufactured
outside the United States, our low cost foreign manufacturing operations enable
us to supply products directly to our customers at their geographically
dispersed manufacturing locations.
LEADERSHIP IN CFD TECHNOLOGY. We believe that we are the technology leader
in CFD software. As a result of our technological leadership, we develop
software that enables our customers to generate the increasingly complex
computer models they demand for more cost-efficient product design. This factor,
as well as the relative ease-of-use and predictive accuracy of our CFD software,
are of primary importance to our customers.
RECURRING REVENUES FROM SOFTWARE BUSINESS. Our CFD software business is
characterized by high customer retention and recurring revenues. In recent
years, approximately 80% of our annual software license revenue was renewed in
the following year. This is driven by the significant value added by our CFD
software to the design process and the high cost of switching to a competitor's
software.
EXPERIENCED MANAGEMENT TEAM. Our senior management team has extensive
operating and marketing experience in the thermal management and CFD software
markets. This management team has grown our business, both organically and
through strategic acquisitions, and has been responsible for improving operating
efficiencies. Bharatan R. Patel, our chief executive officer who founded our CFD
software business, has 27 years of experience in the area of fluid flows and
thermal management, George P. Dannecker, president of our thermal management
business, has 27 years of electronics industry experience, and H. Ferit Boysan,
president of our CFD software business, has 20 years of experience in the area
of fluid flows and CFD software.
BUSINESS STRATEGY
Our business strategy is to continue to be the market leader in both the
thermal management and CFD software markets. We have developed a strong set of
business practices that have enabled us to achieve this leading market position
and a strong track record of profitable growth. We intend to continue this
business strategy and strengthen our competitive position through the following
initiatives:
CAPITALIZE ON STRONG THERMAL MANAGEMENT INDUSTRY GROWTH. We believe that
our existing thermal management markets will continue to experience strong
growth. Growth will be driven by the need to dissipate the increasing amount of
heat being generated by electronic products, as well as unit growth in these
products. We believe our competitive strengths position us to capitalize on
these growth trends.
TAKE ADVANTAGE OF OUTSOURCING TREND. The increasing complexity of heat
dissipation problems is driving a trend among manufacturers to outsource the
development of thermal management solutions to companies with high levels of
expertise in solving these problems. We intend to capitalize on this
67
<PAGE>
trend by leveraging our technical expertise in designing thermal management
products and through continuing to partner with our customers in creating
customized solutions.
EXPAND OUR ADDRESSED THERMAL MANAGEMENT MARKET. We believe we have
significant opportunities to expand the portion of the outsourced thermal
management market that we address. Our strategy is to expand into the
$1.6 billion part of the outsourced thermal management market that we do not
currently serve by entering into new geographic markets and introducing new
products that complement our existing product offerings.
ACCELERATE GROWTH IN THE COMPUTATIONAL FLUID DYNAMICS SOFTWARE
MARKET. Growth in the CFD software market will be driven by customers' needs to
reduce product development costs, minimize the time-to-market for their new
products and improve product performance, as well as by increasing applications
for CFD software. We intend to grow our CFD software business through internal
product development and possibly strategic acquisitions to leverage our core
technological competence in the development of computerized design and
simulation software. Our goal is to further expand this market beyond its
traditional user base of Ph.D.-level engineers in corporate research and
development centers to the larger base of design engineers by providing them
relatively easy-to-use industry-specific software.
PROVIDE TOTAL THERMAL MANAGEMENT SOLUTIONS ON A GLOBAL BASIS. We intend to
continue capitalizing on our state-of-the-art worldwide manufacturing
capabilities and to further leverage our expertise and technology to offer our
customers a complete global solution to their thermal management problems. The
increasing number of electronics systems manufactured outside of the United
States has forced many electronics manufacturers to seek a highly integrated,
worldwide provider of thermal solutions. We plan to continue to expand our
quick-ramp, high-volume manufacturing and our design, sales and distribution
activities globally as our customers continue to expand their operations
overseas.
LEVERAGE OUR TECHNOLOGICAL LEADERSHIP. Our approximately 100 Ph.D.s and 230
engineers focus on new technology initiatives as well as developing new and
enhancing existing products, processes and materials to address the evolving
needs of our customers. We seek to enhance our internal research and development
activities through collaborations with our customers and third parties in order
to gain access to, or to pursue the development of, new technologies for thermal
management applications and CFD software.
MARKETS AND CUSTOMERS
We sell our thermal management products and services to a highly-diversified
base of customers across a wide range of industries and applications. We
currently sell our thermal management products and services to over 2,500
customers. The following chart shows our largest customers for thermal
management products and services by market sector:
<TABLE>
<CAPTION>
MARKET CUSTOMERS
- -------------------------------------------- ----------------------------------------------
<S> <C> <C>
COMPUTERS AND NETWORKING:
COMPUTERS................................. Acer Hewlett-Packard
Apple IBM
Compaq Computer Intel
Dell Silicon Graphics
Gateway
CONTRACT MANUFACTURING.................... Celestica SCI Systems
Jabil Circuit Solectron
NETWORKING................................ Cisco Systems Sun Microsystems
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
MARKET CUSTOMERS
- -------------------------------------------- ----------------------------------------------
<S> <C> <C>
INDUSTRIAL ELECTRONICS:
AUTOMOTIVE................................ DaimlerChrysler Motorola
COMMUNICATIONS............................ AT&T Motorola
Ericsson Nortel
Lucent
ELECTRONICS DISTRIBUTORS.................. Arrow Future Electronics
Avnet
INSTRUMENTATION (INCLUDING POWER AT&T Lucent
SUPPLY)................................. General Electric Motorola
Harmon-Kardon Nortel
TRANSPORTATION AND MOTOR DRIVES........... ABB Daimler Benz Rockwell Automation
General Electric Siemens
Marconi
</TABLE>
We currently have more than 2,000 licensees of our CFD software. License
revenue is diversified by market sector and geographical market. The following
chart shows our largest customers for CFD software applications by market
sector:
<TABLE>
<CAPTION>
MARKET CUSTOMERS
- ---------------------------------------- ----------------------------------------------------
<S> <C> <C>
AEROSPACE............................... Boeing Lockheed Martin
British Aerospace NASA
Komatsu
AUTOMOTIVE.............................. Cummins Engine Mitsubishi Motor Corporation
Ford Renault
General Motors
CHEMICAL PROCESS........................ Bayer 3M
Dow Chemical Shell KSLA
DuPont
ELECTRONICS............................. Fujitsu IBM
Hewlett-Packard Motorola
HVAC/APPLIANCE.......................... Carrier Welbilt
Hoover Whirlpool
Osram/Sylvania
POWER GENERATION........................ Asea Brown Boveri Mitsubishi Heavy Industries
General Electric Power Rolls Royce
Systems Westinghouse
</TABLE>
THERMAL MANAGEMENT PRODUCTS AND SERVICES
We provide total integrated solutions to our thermal management customers.
We have the thermal design know-how to first analyze customers' thermal
management problems at the device-, board- and system-level, to then design,
simulate and prototype thermal management solutions and to finally manufacture,
distribute and support these solutions around the world.
Our design and applications engineers work concurrently with our customers'
design teams to develop optimal thermal solutions, which are increasingly being
outsourced by our customers. Working as an extension of the product design team,
Applied Thermal Technologies' engineers give customers easy access to our system
design expertise in thermal management on a time-and-materials consulting
69
<PAGE>
basis. Additionally, Applied Thermal Technologies provides for a smooth
transition from system design and validation to complete outsourced product
solutions provided by Aavid Thermal Products.
We design, manufacture and sell both standard and customized thermal
management products. We seek to become a strategic supplier to our customers and
to differentiate ourselves from our competitors by offering a higher level of
service. We currently offer heat sinks, interface materials and attachment
accessories, fans, heat spreaders and liquid cooling and phase change devices
that we configure to meet customer-specific needs. The prices for our thermal
management products (including attachment devices and interface materials),
depend primarily on cost, the technology used to make the part and its value in
the customer's application. Because of the continued shrinking time-to-market
for most new products and the corresponding contraction of design cycles, we
also offer simulation and modeling software to assist our customers in handling
the complexity of the design of a thermal solution. The following is a brief
description of our thermal management products and services:
<TABLE>
<CAPTION>
PRODUCT OR SERVICE DESCRIPTION APPLICATION
- ---------------------- ---------------------------------- ----------------------------------
<S> <C> <C>
HEAT SINKS, FAN HEAT These products are typically made - Removes potentially damaging
SINKS AND HEAT from aluminum extrusions, heat from microprocessors and
SPREADERS stampings, castings or integrated circuits in
multi-technology assemblies. These electronics applications
products have high surface area to
volume ratios and may rely on a
fan mounted directly on the heat
sink to increase the movement of
air.
INTERFACE MATERIALS Attachment devices are the spring - Increases the effectiveness of
AND ATTACHMENT clips, tapes, adhesives, tabs and heat sinks
ACCESSORIES similar devices which are used to - Promotes a highly efficient
attach the heat sink to the thermal transfer between the
semiconductor or integrated microprocessor or integrated
circuit device and/or to the circuit and heat sink
customer's printed circuit board - Reduces the cost of the
or system chassis. Interface customer's installation and repair
materials include greases, silicon - Transfers heat from the
pads and other materials which component being cooled to the heat
have desirable thermal and sink
electrical properties. We purchase
most of these materials on a
private label basis from a number
of suppliers.
LIQUID COOLING AND These devices include cold plates, - Moves highly concentrated heat
PHASE CHANGE DEVICES heat pipes and other liquid from microprocessors and
cooling designs that dissipate integrated circuits to a
heat by conducting or convecting location where a traditional
the heat into a liquid, which then heat sink can dissipate heat
transfers the heat away from the
source to the ultimate heat sink.
APPLIED THERMAL Applied Thermal Technologies' - Analyzes customers' thermal
TECHNOLOGIES' DESIGN facilities are staffed by problems at the device-,
CENTERS technicians with thermal board-and system-level
engineering and flow analysis - Designs, simulates and
expertise and utilize a variety of prototypes thermal management
sophisticated design, test and solutions efficiently
validation hardware and software.
</TABLE>
70
<PAGE>
COMPUTATIONAL FLUID DYNAMICS SOFTWARE PRODUCTS
We are the leading provider of general purpose CFD software used to predict
fluid flow, heat and mass transfer, chemical reaction and related phenomena. We
provide CFD-based flow analysis software and consulting services that are used
by engineers in corporations worldwide for the design and analysis of products
and processes. Our software and services help engineers reduce engineering and
product development costs, improve product performance and reduce time-to-market
for new products.
We currently license our software products to more than 2,000 licensees
worldwide. In North America, we typically license our software products under
one year, renewable agreements. In Europe and the Far East, a significant
portion of our CFD software sales are derived from licenses of this software for
one-time fees; in such situations, we also typically receive annual maintenance
and support fees.
We have also introduced CFD-based industry-specific products, such as
Icepak, for use by designers and engineers in the electronics cooling industry,
and Mixsim, for use by designers and engineers in the chemical mixing industry.
We believe that our relatively easy-to-use, industry-specific products are
expanding the CFD total market beyond its traditional user base of Ph.D.-level
engineers in corporate research and development centers to the larger base of
design engineers.
We also market engineering consulting services. With over 15 years of CFD
and engineering consulting experience, our worldwide team of CFD professionals
supports clients with senior engineering consultants, experienced CFD analysts,
leading CFD software developers and mesh generation experts. Support services
include expertise in the physics of heat, fluid flow and related phenomena, in
CFD modeling and analysis, and in selection of engineering design solutions. In
addition to providing CFD software expertise and access to high-performance
computing systems, our CFD software consulting group works under contract to
develop software with specific features required by individual clients.
We provide a complete suite of CFD software products, with each product
designed for a specific task or for optimal performance on a specific class of
problems. The following is a brief description of our CFD software products:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION FEATURES
- ---------------------- ---------------------------------- ----------------------------------
<S> <C> <C>
FLUENT FLUENT is general purpose CFD - Provides a choice of solver
software used across a wide range options for optimum convergence
of industries and is ideally and accuracy for a wide range of
suited for incompressible and flow regimes
mildly compressible (transonic) - Structured and solution-adaptive
and highly compressible unstructured mesh capability
(supersonic and hypersonic) flows. - Enables easier problem setup
FLUENT contains physical models
for a wide range of applications
including turbulent flows, heat
transfer, reacting flows, chemical
mixing, combustion and multi-phase
flows.
FIDAP FIDAP is general purpose CFD - Offers complete mesh flexibility
software for the simulation of - Provides a wide range of
incompressible or compressible physical models, with particular
flows, including prediction of strength for application in the
liquid-free surfaces, materials processing,
non-Newtonion rheology and biomedical, semiconductor, food
advanced radiation modeling. paper and chemical industries
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION FEATURES
- ---------------------- ---------------------------------- ----------------------------------
<S> <C> <C>
ICEPAK ICEPAK is a fully-interactive, - Used for component-, board- and
object-based CFD software tool cabinet-level design
specifically designed to analyze - Reduces design costs
air flow and thermal management in - Reduces the time-to-market of
electronics design. high-performance electronic
systems
POLYFLOW POLYFLOW is CFD software capable - Analysis of polymer processing,
of "inverse" die design. This including extrusion die design,
allows designers to compute the blow molding, thermoforming,
die shape required for a desired plastic film casting, float
extrudate shape. POLYFLOW is used glass production, thin sheet
by major resin producers and major forming, fiber drawing, wire
plastics and rubber producers. coating and related materials
processing flows
MIXSIM Based on inputs from the designer, - Eliminates the need for process
MIXSIM automates the CFD model plant engineers to learn the
generation and simulation process more complex usage of general
for computer analysis of agitated purpose CFD software by building
mixing vessels used in the CFD software specifically for
chemical and process industries. computer analysis of agitated
mixing vessels
GAMBIT GAMBIT supports a single user - Reduces the time to create a CFD
interface for geometry creation model
and meshing. Different CFD - Allows users to import
problems require different mesh geometries created under other
types, and GAMBIT brings together CAD/CAE packages into the Fluent
all of Fluent's options in one suite of software products.
environment. - Enables users to automatically
create unstructured tetrahedral
meshes for extremely complex
geometries
- Provides a concise and powerful
set of solid modeling-based
geometry tools with both
geometry and "clean-up"
functions
</TABLE>
SALES AND SUPPORT
We sell our thermal management products and CFD software primarily through a
global network of direct sales personnel, manufacturers' representatives, agents
and a network of independent distributors. We provide support services to our
customers, particularly in the CFD software area where we believe that
high-quality support service is critical to the success of the CFD software
business. Aavid Thermalloy (including Applied Thermal Technolgies) and Fluent
both have their own sales, support and marketing personnel, all of whom
cross-sell each other's products and services where appropriate. We currently
employ approximately 243 sales, support and marketing personnel.
During 1997, 1998 and the nine months ended October 2, 1999, sales to
independent distributors accounted for 10.6%, 9.0% and 8.3%, respectively, of
our net sales. The largest single distributor accounted for less than 3% of our
net sales in each of those periods. In 1997, 1998 and the nine months ended
October 2, 1999, international sales (excluding sales of the Intel Special
Product) accounted for 34.7%, 36.4% and 37.9%, respectively, of our net sales.
72
<PAGE>
TECHNOLOGY
We believe that technology leadership is essential to our growth strategy
and have focused our approximately 100 Ph.D.s and 230 engineers on the
development of technology in two areas:
THERMAL MANAGEMENT TECHNOLOGY. We believe that we are a technology leader
in thermal management due to our extensive design expertise, technical
manufacturing capabilities and process technology. We intend to develop new
technologies and to enhance existing technologies in order to meet our
customers' needs for higher performance products on a timely basis.
We have developed proprietary software tools (analytical models) which
enable fast approximation answers for a large class of thermal management
problems which, in turn, permits quicker design and prototyping of thermal
solutions. We have extensive prototyping capabilities and state-of-the-art
thermal laboratory facilities, including a wind tunnel which allows us to test
and validate the design of thermal solutions.
As part of Aavid Thermalloy, Applied Thermal Technologies leverages Aavid
Thermalloy's capabilities and Icepak's technology to assist customers in
analyzing their thermal problems at the device-, board- and system-levels and to
efficiently design, simulate and prototype thermal management solutions. By
entering into the customer relationship at the onset of the product design
cycle, Applied Thermal Technologies greatly enhances our knowledge of future
industry trends, including technology development and acceptance. Additionally,
Applied Thermal Technologies provides a smooth transition from design and
validation to outsourced manufacturing with Aavid Thermalloy.
COMPUTATIONAL FLUID DYNAMICS SOFTWARE TECHNOLOGY. We believe that we are
the technology leader in CFD software. Fluent's CFD software includes:
- automatic unstructured mesh generation, which allows the automatic
creation of meshes,
- numerical algorithms for the accurate solution of fluid flow equations on
structured and unstructured meshes,
- solution adaptive mesh which allows for interactive mesh refinement to
provide improved solution accuracy,
- state-of-the-art physical models for important fluid flow phenomena such
as turbulence, turbulence-chemistry interactions, free surface flows and
multiphase flows,
- algorithms for efficient execution on multi-processor computers and
distributed computer networks,
- interactive client/server architecture with a flexible and customizable
user interface, and
- post-processing and data analysis tools.
PRODUCT DEVELOPMENT
Our thermal management product development activities are focused on
lowering production costs, improving thermal characteristics and ease of
attachment of conventional heat sinks, and developing new thermal management
products and technologies to address the emerging and anticipated thermal
management problems of our customers. We are developing new products, both
internally as well as through collaborative efforts with third parties. These
development efforts are directed toward: heat sink characterization and
optimization; fan designs; air flow management; boundary layer optimization and
focused flow; recirculating passive and active cooling systems including heat
pipes; thermoelectric coolers, which use electricity to create a temperature
difference across an interface between the electronic device and a heat sink;
liquid and sub-ambient cooling systems; tab and surface mount heat sink
attachment methods; vacuum die casting; engineered materials and net shape part
manufacturing technology; direct chip mounting to extruded heat sinks; and
highly thermally conductive adhesive and interface systems.
73
<PAGE>
Our CFD product development activities are focused on enhancing the
capabilities of its solvers, implementing new physical models to increase the
range of applications and developing front-end user interfaces that are easy to
use for engineers in specific industries. We are also focusing on various
application and industry-specific CFD software projects which we believe will
enable us to penetrate the design engineering market.
MANUFACTURING AND FACILITIES
A key element of our business strategy has been to expand internationally.
Many of our customers have short product cycles that demand facilities to
support quick-ramp, high-volume, high-quality manufacturing at their
geographically dispersed manufacturing locations. Our acquisition of Thermalloy,
which has manufacturing facilities in Italy, Malaysia, Mexico and the United
Kingdom, significantly expands our manufacturing operations outside the United
States. We plan to continue to build or acquire additional manufacturing
facilities overseas to better service our customers, many of whom have moved
manufacturing operations and expanded their business overseas.
Aavid Thermalloy has a total of approximately 1,335,000 square feet of
manufacturing facilities with locations in Laconia and Franklin, New Hampshire;
Santa Ana, California; Dallas and Terrell, Texas; Mexico; the United Kingdom (3
facilities); Italy; Germany (Curamik facility); Malaysia; Singapore; Taiwan;
China; and Toronto, Canada. We employ a broad range of aluminum fabrication and
processing capabilities. Manufacturing operations consist of extrusion, cutting,
stamping, machining, assembling and finishing, including anodizing capabilities.
We have a substantial in-house tool and die capability that enables us to create
our own extrusion and progressive stamping dies and other production tooling.
Recently, Aavid Thermal Products expanded to more than 120,000 square feet
of manufacturing operations in Guang Dong Province, China. The new facilities
support high-volume, quick-ramp manufacturing of thermal management solutions
primarily for Aavid's customers in the computer industry, which often face
volatile market demands and short product cycles. Aavid Thermal Products closed
down its manufacturing facility in Manchester, New Hampshire at the end of 1998
due to a change in product mix at a major customer. Fluent's total sales,
marketing, development, and support facilities consist of approximately 94,000
square feet.
We operate in the following locations:
<TABLE>
<CAPTION>
U.S. LOCATION PRINCIPAL ACTIVITY
- ------------- ------------------
<S> <C>
Concord, NH.................................. Corporate Offices
Chicago, IL.................................. Fluent-Software Development, Sales and
Marketing
Dallas, TX*.................................. Aavid Thermalloy-Manufacturing,
Curamik-Sales and Marketing
Franklin, NH................................. Aavid Thermalloy-Aluminum Extrusion
Laconia, NH.................................. Aavid Thermalloy-Manufacturing
Lebanon, NH.................................. Fluent-Software Development, Sales and
Marketing
Santa Ana, CA+............................... Aavid Thermalloy-Manufacturing
Santa Clara, CA.............................. Applied Thermal Technologies-Research and
Development and Consulting
Terrell, TX.................................. Aavid Thermalloy-Manufacturing
</TABLE>
- ------------------------
* Indicates facility acquired in the Thermalloy acquisition.
+ Indicates facility expected to be closed in 2000.
74
<PAGE>
<TABLE>
<S> <C>
INTERNATIONAL LOCATION PRINCIPAL ACTIVITY
- --------------------------------------------- ---------------------------------------------
Toronto, Canada.............................. Aavid Thermalloy-Manufacturing
Eschenbach, Germany*......................... Curamik-Manufacturing
Kowloon, Hong Kong*+......................... Aavid Thermalloy-Manufacturing
Pune, India.................................. Fluent-Software Development, Sales and
Marketing
Bologna, Italy*.............................. Aavid Thermalloy-Manufacturing
Malacca, Malaysia*........................... Aavid Thermalloy-Manufacturing
Monterrey, Mexico*........................... Aavid Thermalloy-Manufacturing
Guang Dong Prov., PRC........................ Aavid Thermalloy-Manufacturing
Singapore.................................... Aavid Thermalloy-Manufacturing
Taipei, Taiwan............................... Aavid Thermalloy-Manufacturing
Swindon, U.K.*............................... Aavid Thermalloy-Manufacturing
Corby, U.K.*+................................ Aavid Thermalloy-Manufacturing
High Wycombe, U.K.+.......................... Aavid Thermalloy-Manufacturing
Sheffield, U.K............................... Fluent-Software Development, Sales and
Marketing
</TABLE>
- ------------------------
* Indicates facility acquired in the Thermalloy acquisition.
+ Indicates facility expected to be closed in 2000.
SUPPLIERS
We purchase raw aluminum, aluminum extrusion, aluminum coil and various
components from a limited number of outside sources. We purchase substantially
all of our aluminum coil stock from a single supplier. We believe that
purchasing aluminum extrusion and coil stock from a limited number of suppliers
is necessary to obtain lower prices and to consistently achieve the tolerances
and design and delivery flexibility that we require.
For raw aluminum extrusion and coil stock, we typically make purchasing
commitments to key suppliers of up to 24 months. In return, these suppliers
commit to maintaining local inventory and to reserving run-time on their
critical machines. The cost of aluminum extrusion is generally negotiated
annually, with the price adjusted monthly, based upon the changes in the price
of aluminum ingot, which has historically been highly cyclical. In addition, we
produce approximately 50% of our domestic aluminum extrusion requirements at our
extrusion facility in Franklin, New Hampshire, which has two extrusion presses.
COMPETITION
Our thermal management products business competes with a number of major
providers of thermal management products located in the United States, Asia and
Europe. Two of our most significant competitors are Hon Hai Precision Components
Manufacturing (d/b/a Foxconn) and Wakefield Engineering, Inc. Foxconn is a
Taiwan-based company that sells thermal management products as part of its
broader electronic components products portfolio. Wakefield is a subsidiary of
publicly traded Alpha Technologies Group, Inc. and mainly focuses on thermal
management products for industrial electronics applications.
In addition, there are a large number of smaller heat sink companies, as
well as hundreds of machine shops, that fabricate heat sinks, usually under
subcontract with an OEM customer. Further, some aluminum die casters offer cast
heat sinks, and a number of aluminum extruders sell heat sink products and
fabrication capability, including aluminum extruders serving the automotive
industry and the power conversion market.
Fluent currently competes with a number of privately held companies,
primarily on the basis of product performance. To the extent that Fluent expands
into additional application and industry-specific markets, it will encounter
additional competition from software companies already serving such specific
markets. In addition, certain CFD software is available in the public domain.
75
<PAGE>
BACKLOG AND LICENSE RENEWAL
Our hardware products typically are produced and shipped within two months
of the receipt of orders and, accordingly, we operate with little backlog. As a
result, net sales in any quarter generally are dependent on orders booked and
shipped in that quarter. All orders are subject to cancellation or rescheduling
by customers. Because of our quick turn of orders to shipments, the timing of
orders, delivery intervals, customer and product mix and the possibility of
customer changes in delivery schedules, we do not believe our backlog at a
particular date is a reliable indicator of actual sales for any succeeding
period.
Our software products are typically sold under annual license agreements. In
recent years, approximately 80% of our annual software license revenue was
renewed in the following year.
LEGAL PROCEEDINGS
Following the public announcement of the merger with Heat Merger Corp.,
lawsuits were filed against us, Willis Stein, our directors and one former
director in the Court of Chancery of the State of Delaware by certain of our
stockholders. The complaints allege, among other things, that our 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 our public stockholders, also seek class action
certification for their lawsuits. We believe the actions to be without merit and
intend to contest the actions vigorously.
On March 4, 1998, Materials Innovation, Inc. of Lebanon, New Hampshire and
two of its principals, Alan Beane and Glenn Beane, filed a petition for
declaratory judgment against Aavid Thermal Products in Grafton County (New
Hampshire) Superior Court. The petitioners have asked the court to declare as
terminated an agreement between Petitioners and Aavid dated October 14, 1993.
Petitioner Alan Beane was formerly our Chief Executive Officer and one of our
directors, who, we believe, beneficially owns more than 10% of our common stock.
The agreement grants to Aavid Thermal Products licenses for two patents, one
involving a clamp for attaching heatsinks to semiconductors, and the other
involving a process to make heatsinks by vacuum die casting. The agreement also
provides Aavid Thermal Products with rights to potential technology of Materials
Innovation relating to its thermal products business, and prohibits Petitioners
from competing against Aavid Thermal Products for the ten-year term of the
Agreement. Petitioners claim that Aavid Thermal Products has failed to pay
royalties associated with the vacuum die cast patent. The petition does not seek
monetary damages from Aavid.
On January 29, 1999, the Grafton County Superior Court granted our motion to
dismiss the Petitioner's declaratory judgment petition. The petitioners appealed
that dismissal but then subsequently withdrew that appeal. Materials Innovation
then commenced arbitration of the same issue; however, the arbitration and a
related declaratory judgment action brought by us to have the Materials
Innovation vacuum die cast patent declared invalid was stayed by agreement
pending completion or termination of the merger. Although we believe that the
termination of the agreement with Materials Innovation would not have a
materially adverse effect on our business, there can be no assurance it will not
have such a materially adverse effect in the future.
We are involved in various other legal proceedings that are incidental to
the conduct of our business, none of which we believe could reasonably be
expected to have a materially adverse effect on our financial condition.
EMPLOYEES
As of October 31, 1999, we had a total of approximately 3,500 employees.
Except for the employees in our newly acquired manufacturing facility in Mexico,
none of our employees is represented by labor unions or collective bargaining
units. We believe that our relationship with our employees is good.
76
<PAGE>
MANAGEMENT
We are a wholly owned subsidiary of Holdings as a result of the merger.
Holdings is a corporation whose affairs are governed by a board of directors.
The following table sets forth certain information about Holdings' directors and
our directors and executive officers and their ages as of January 1, 2000. The
boards of directors of Holdings and Aavid are currently comprised of two
representatives of Willis Stein. In addition, we anticipate that Ronald F.
Borelli, Bharatan R. Patel and possibly other individuals will be elected to the
boards of directors of Holdings and Aavid. The election of directors will be
subject to the terms of the stockholders agreement. See "Certain Relationships
and Related Transactions-Stockholders Agreement."
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- -------- ------------------------------------------------
<S> <C> <C>
Bharatan R. Patel............................ 51 President and Chief Executive Officer, Aavid;
Chief Executive Officer, Fluent
John W. Mitchell............................. 50 Vice President and General Counsel, Aavid
H. Ferit Boysan.............................. 52 President and Chief Operating Officer, Fluent
George P. Dannecker.......................... 50 President and Chief Operating Officer, Aavid
Thermalloy
Peter Christie............................... 55 Vice President and Chief Financial Officer of
Fluent
Avy H. Stein................................. 45 Director
Daniel H. Blumenthal......................... 36 Director
</TABLE>
RONALD F. BORELLI served as our Chairman of the Board from October 15, 1996
until February 2, 2000 and was the Chief Executive Officer of Aavid and Chief
Executive Officer of Aavid Thermal Products, from October 15, 1996 until
December 31, 1999. He served as one of our directors from October 1993 until
February 2, 2000, and served as our President and President of Aavid Thermal
Products from October 15, 1996 to October 15, 1997. From March 1989 until he
joined Aavid, Mr. Borelli was the Chief Executive Officer and a Director of
Spectra, Inc., a hot melt ink jet company focusing on color printers. From 1982
to March 1989 Mr. Borelli was a Senior Vice President of SCI Systems. Prior to
that he spent 20 years at Honeywell in a variety of engineering and management
positions.
BHARATAN R. PATEL, PH.D. became our Chief Executive Officer on January 1,
2000. He served as one of our directors from April 1996 until February 2, 2000,
and has been President of Aavid since October 15, 1997 and Chief Executive
Officer of Fluent since he helped form it in 1988 as a subsidiary of
Creare, Inc. He served as our Chief Operating Officer from October 15, 1997
until December 31, 1999. Dr. Patel worked at Creare, Inc., an engineering
consulting firm, from 1976 to 1988, serving in various capacities including
Principal Engineer and Vice President. From 1971 to 1976, Dr. Patel was employed
as a Senior Engineer in the Power Systems Group of Westinghouse Electric
Corporation.
JOHN W. MITCHELL joined us in December 1995 as Vice President and General
Counsel. From 1979 until he joined us, Mr. Mitchell was a corporate and business
attorney at Sulloway & Hollis, a Concord, New Hampshire law firm, where he
served as Aavid Thermal Products' principal outside legal counsel since
May 1985.
H. FERIT BOYSAN, PH.D. became Chief Operating Officer of Fluent in
July 1997 and President of Fluent in December 1998. Since 1991, he had been
Managing Director of Fluent's European operations, headquartered in Sheffield,
England. From 1986 to 1991, Dr. Boysan was the Managing Director of Flow
Simulations, Ltd., the European distributor of Fluent products until the
formation of Fluent Europe in 1991. Dr. Boysan was one of the original
developers of Fluent's CFD software.
GEORGE P. DANNECKER became President and Chief Operating Officer of Aavid
Thermal Products in October 1997. Prior to that appointment, he had been Vice
President--Marketing and Sales of Aavid Thermal Products since February 1994.
Prior to joining Aavid Thermal Products, Mr. Dannecker was
77
<PAGE>
employed by Concord Communications, Inc., a telecommunications software company,
where he was Vice President-Sales and Service from March 1986 to February 1994.
PETER CHRISTIE joined Fluent in 1998 as its Vice President and Chief
Financial Officer. From 1984 to 1998, Mr. Christie held several senior
management positions, including President and Chief Financial Officer, at Verax
Corporation, a bioprocessing company. Prior to joining Verax, Mr. Christie was
employed at Creare Inc., an engineering consulting firm, where he held the
position of Chief Financial Officer from 1973 to 1978 and was President and
founder of Creare Products Inc., a medical instruments manufacturer, from 1978
to 1984.
AVY H. STEIN became a director upon consummation of the merger on
February 2, 2000. Mr. Stein has been a managing director of Willis Stein &
Partners since its inception in 1994. Prior to that time, he served as a
managing director of Continental Illinois Venture Corporation, or CIVC, a
venture capital investment firm, from 1989 to 1994. Prior to his tenure at CIVC,
Mr. Stein served as a special consultant for mergers and acquisitions to the
chief executive officer of NL Industries, Inc.; as the chief executive officer
and principal shareholder of Regent Corporation; as president of Cook Energy
Corporation and as an attorney with Kirkland & Ellis, a national law firm.
Mr. Stein also serves as a director of CTN Media Group, Inc., Racing Champions
Corporation and Tremont Corporation.
DANIEL H. BLUMENTHAL became a director upon consummation of the merger on
February 2, 2000. Mr. Blumenthal has been a managing director of Willis Stein &
Partners since its inception in 1994. Prior to that time, he served as vice
president of CIVC from 1993 to 1994, and as a corporate tax attorney with
Latham & Watkins, a national law firm, from 1988 to 1993.
COMPENSATION OF DIRECTORS
We will reimburse members of the board of directors for any out-of-pocket
expenses incurred by them in connection with services provided in such capacity.
In addition, we anticipate that outside directors will receive compensation for
serving as directors; however, the amount of compensation has not yet been
determined.
78
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table summarizes all compensation earned by or paid to our
former Chief Executive Officer and the four other most highly paid executive
officers whose annual salary and bonus exceeded $100,000 (collectively, the
"Named Executive Officers") for services rendered in all capacities to Aavid
during the fiscal years indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
COMPENSATION -------------------
------------------------- SECURITIES
ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS OPTIONS
- --------------------------- ----------- ----------- -------- -------------------
<S> <C> <C> <C> <C>
Ronald F. Borelli(1).................. 1999 $325,316 $150,000 50,000
Chairman of the Board and 1998 299,787 -- 100,000
Chief Executive Officer 1997 254,808 150,000 --
Bharatan R. Patel(3).................. 1999 $244,115 $125,000 24,950
President and Chief Operating 1998 225,000 -- 10,000
Officer 1997 200,000 83,744 --
George P. Dannecker(4)................ 1999 $212,000 $100,000 15,000
President and Chief Operating 1998 200,000 -- 24,900
Officer of Aavid Thermal Products 1997 174,237 59,100 17,320
H. Ferit Boysan(5).................... 1999 $169,365 $137,300 24,950
President and Chief Operating 1998 165,858 79,065 5,000
Officer of Fluent 1997 144,637 62,211 --
John W. Mitchell...................... 1999 $196,088 $ 75,000 10,000
Vice President, General 1998 185,228 -- 3,000
Counsel and Secretary 1997 172,774 34,650 2,393
</TABLE>
- ------------------------
(1) Mr. Borelli served as Aavid's President from October 15, 1996 to
October 15, 1997 and as Aavid's Chief Executive Officer from October 15,
1996 to December 31, 1999 and as Aavid's Chairman of the Board from
October 15, 1996 to February 2, 2000.
(3) Mr. Patel became President and Chief Operating Officer of Aavid in
October 1997, and became Chief Executive Officer of Aavid on January 1,
2000.
(4) Mr. Dannecker became President and Chief Operating Officer of Aavid Thermal
Products in October 1997.
(5) Mr. Boysan became President of Fluent in December 1998.
EMPLOYMENT AGREEMENTS
Aavid has entered into an employment agreement with Mr. Mitchell, which
currently expires on December 5, 2001. Aavid Thermal Products has entered into
an employment agreement with Mr. Dannecker, which currently expires on June 30,
2002; and Fluent has entered into an employment agreement with Mr. Patel, which
currently expires on May 1, 2001, and with Mr. Boysan, which currently expires
on August 24, 2002. Each of these employment agreements provides for automatic
renewal for successive two year terms (one year in the case of Mr. Dannecker)
unless either party gives written notice to the other to the contrary at least
180 days prior to its expiration; however, each of Messrs. Mitchell, Dannecker,
Patel and Boysan are entitled to terminate his employment at any time by giving
90 days' notice to Aavid.
79
<PAGE>
The employment agreements require each employee to devote his full business
time and best efforts, business judgment, skill and knowledge exclusively to the
advancement of the business and interests of Aavid. The employment agreements
currently provide for the payment of a base salary to Messrs. Patel, Boysan,
Mitchell and Dannecker equal to $250,000, $180,000, $195,000, and $212,000,
respectively, subject to increase at the discretion of the board of directors of
their respective employers. Each employment agreement provides that the employee
will continue to receive his base salary, bonuses, benefits and other
compensation for a specified period in the event their respective employers
terminate their employment other than for "cause" or under certain other
circumstances.
Each of Messrs. Dannecker, Mitchell, Boysan and Patel is entitled to an
annual bonus based on performance. Mr. Patel is entitled to a target annual
bonus of $125,000 based upon achievement in each fiscal year. Mr. Dannecker is
entitled to receive a target annual bonus of $100,000 based on Aavid Thermal
Products' actual performance measured against budgeted performance.
Mr. Mitchell is entitled to receive an annual bonus of up to $65,000 based on
his management of our legal expenses. Mr. Boysan is entitled to an annual bonus
based on our actual performance against budgeted performance. We may renegotiate
our obligation to make the payments under those employment agreements in
connection with certain public offering or acquisition transactions.
The employment agreements contain non-competition covenants, waivable by us,
which survive the termination of each employee's employment with us until two
years from the date the employee's employment terminates (the "non-competition
period"). In addition to other compensation payable to each of
Messrs. Dannecker, Mitchell, Patel and Boysan under their agreements, during the
non-competition period we are required to pay each employee one-half (75% of
base salary in the case of Mr. Boysan and $10,000 per month in the case of
Mr. Patel) of his highest prior base salary per annum.
80
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SECURITYHOLDERS' AGREEMENT
Holdings, Holdings II and Willis Stein and the other equity co-investors
entered into a securityholders' agreement concurrently with the closing of the
merger and related transactions. The securityholders' agreement provides for:
- the composition of the boards of directors of Holdings and Holdings II,
which are currently the same;
- restrictions on the transfer of equity securities of Holdings and Holdings
II, including rights of first refusal in favor of Holdings or Holdings II,
as applicable, and the other equity investors and "tag along" rights in
favor of the other equity investors;
- registration rights relating to the equity securities of Holdings and
Holdings II, covering up to four demand registrations in favor of Willis
Stein, two demand registrations in favor of a majority of the non-Willis
Stein equity investors at such time as Holdings or Holdings II is eligible
to use a "short-form" registration statement, and unlimited piggyback
registrations in favor of all of the equity investors;
- obligations of the equity investors to contribute additional capital to
Holdings to enable Holdings to satisfy its obligations under the Make-Well
Agreement decribed under "Description of the Notes--Make-Well Agreement";
- obligations of the equity investors upon a sale of Aavid (including a sale
of any of its subsidiaries); and
- pre-emptive rights in favor of the non-Willis Stein equity investors in
connection with issuances of equity to Willis Stein.
Under the terms of the securityholders' agreement, the equity investors have
agreed to vote their shares in favor of those individuals designated by Willis
Stein to serve on the respective boards of directors of Holdings and Holdings
II, and have further agreed that Willis Stein (through Holdings and/or Holdings
II, as the case may be) may control the circumstances and negotiate the terms
under which a sale of Aavid (or a sale of a subsidiary) may take place. Willis
Stein may also control the circumstances under which a public offering of
Holdings', Holdings II's, Aavid's or a subsidiary's equity securities may take
place.
CONVERSION OF AAVID THERMAL PRODUCTS TO LIMITED LIABILITY COMPANY STRUCTURE
For purposes of tax structuring, since the closing of the merger our thermal
management business has been operated by a newly formed limited liability
company, known as Aavid Thermalloy, LLC. Each of Aavid Thermalloy, LLC's
domestic subsidiaries were converted into a Delaware limited liability company.
We continue to control Aavid Thermalloy, LLC and the thermal management business
through a preferred equity interest, having a liquidation value of approximately
$95 million, and a 5% common equity interest in Aavid Thermalloy, LLC. In
connection with this transaction, Holdings II invested approximately $5 million
to acquire 95% of the common equity of Aavid Thermalloy, LLC. The owners of the
equity of Holdings and Holdings II are currently the same.
81
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Holdings currently owns all of the issued and outstanding stock of Aavid
(excluding detachable warrants, sold to noteholders in connection with the sale
of the outstanding notes, to acquire, in the aggregate, 60 shares of Class A
common stock and 60 shares of Class H common stock, representing 3% of the
common stock of Aavid (on a fully diluted basis)).
The following table sets forth certain information regarding the beneficial
ownership of the issued and outstanding common stock of Holdings as of March 1,
2000. For a description of certain voting and other arrangements among such
holders, see "Certain Relationships and Related Transactions." None of our
officers or directors own any Holdings securities, except as set forth below.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
-----------------------------------------------------------------------
NUMBER OF SHARES NUMBER OF SHARES TOTAL NUMBER OF TOTAL
NAME AND ADDRESS OF OF CLASS A OF CLASS B SHARES OF PERCENTAGE OF
BENEFICIAL OWNER COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK(2)
- ---------------------------------- ---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Willis Stein(3)................... 4,938,500.0 4,938,500.0 9,877,000.0 67.10%
The Chase Manhattan Bank,
as trustee for First Plaza Group
Trust(3)........................ 1,210,416.5 1,210,416.5 2,420,833.0 16.45%
Nassau Capital(4)................. 484,167.0 484,167.0 968,334.0 6.58%
Abbott Capital Management(5)...... 484,167.0 484,167.0 968,334.0 6.58%
BancBoston Investments, Inc.(6)... 242,083.5 242,083.5 484,167.0 3.29%
</TABLE>
- ------------------------
(1) "Beneficial ownership" generally means any person who, directly or
indirectly, has or shares voting or investment power with respect to a
security or has the right to acquire such power within 60 days. Unless
otherwise indicated, we believe that each holder has sole voting and
investment power with regard to the equity interests listed as beneficially
owned.
(2) For each beneficial owner listed in the table above, the percentage of
outstanding Holdings' Class A common stock, Class B common stock and total
common stock owned by such holder is the same.
(3) Consists of 4,641,572.5 shares of each of Class A common stock and Class B
common stock directly beneficially held by Willis Stein & Partners II, L.P.
and 296,927.5 shares of each of Class A common stock and Class B common
stock directly beneficially held by Willis Stein & Partners Dutch, L.P.
Willis Stein & Partners Management II, L.L.C. is the general partner of both
partnerships and may be deemed to beneficially own such shares. Avy H. Stein
and Daniel H. Blumenthal, as managing directors of Willis Stein & Partners
Management II, L.L.C., may be deemed to beneficially own the shares of
common stock beneficially owned by the partnerships and their general
partner. Messrs. Stein and Blumenthal disclaim beneficial ownership of any
of such shares. Willis Stein's address is 227 West Monroe Street, Suite
4300, Chicago, Illinois 60606.
(4) The Chase Manhattan Bank acts as the trustee for the First Plaza Group
Trust, a trust under and for the benefit of certain employee benefit plans
of General Motors Corporation ("GM"), its subsidiaries and unrelated
employers. These shares may be deemed to be owned beneficially by General
Motors Investment Management Corporation ("GMIMCo"), a wholly-owned
subsidiary of GM. GMIMCo's principal business is providing investment advice
and investment management services with respect to the assets of certain
employee benefit plans of GM, its subsidiaries and unrelated employers, and
with respect to the assets of certain direct and indirect subsidiaries of GM
and associated entities. GMIMCo is serving as the trust's investment manager
with respect to these shares and in that capacity it has the sole power to
direct the trustee as to the voting and disposition of these shares. Because
of the trustee's limited role, beneficial ownership of the shares by the
trustee is disclaimed. First Plaza Group Trust's address is c/o GMIMCo, 767
Fifth Ave., 16th Floor, New York, NY 10153.
82
<PAGE>
(5) Consists of 480,455.0 shares of each of Class A common stock and Class B
common stock directly beneficially held by Nassau Capital Partners III L.P.
and 3,712.0 shares of each of Class A common stock and Class B common stock
directly beneficially held by NAS Partners I L.L.C. Such funds' address is
22 Chambers Street, Princeton, New Jersey 08542.
(6) Consists of 378,255.5 shares of each of Class A common stock and Class B
common stock directly beneficially held by Abbott Capital 1330 Investors II,
L.P., 75,651.0 shares of each of Class A common stock and Class B common
stock directly beneficially held by Abbott Capital Private Equity Fund III,
L.P. and 30,260.5 shares of each of Class A common stock and Class B common
stock directly beneficially held by BNY Partners Fund, L.L.C. The address of
such funds is c/o Abbott Capital Management, LLC, 1330 Avenue of the
Americas, Suite 2800, New York, New York 10019.
(7) BancBoston's address is 175 Federal Street, 10th Floor, Boston,
Massachusetts 02110.
Each of the stockholders listed in the table above currently holds an
equivalent percentage interest in the Class A common stock and Class B common
stock of Holdings II, which holds 95% of the outstanding common membership
interests in Aavid Thermalloy, LLC, as more fully described under the section
"Certain Relationships and Related Transactions--Conversion of Aavid Thermal
Products to Limited Liability Company Structure" in this prospectus.
MANAGEMENT EQUITY
At the time the merger was completed, all options to purchase shares of
Aavid common stock held by members of management were converted into the right
to receive cash equal to the product of the number of shares subject to each
option times the excess, if any, of $25.50 per share over the exercise price per
share for such option.
Willis Stein has advised us that it typically makes available, to management
and key employees of its portfolio companies, up to 10% of the fully-diluted
common equity of the portfolio company and the opportunity to co-invest in the
portfolio company on the same economic terms as Willis Stein. Our management and
key employees have not had any discussions with Willis Stein concerning any such
investment by them, and no agreements, arrangements or understandings have been
reached between Willis Stein and our management and key employees in this
regard.
83
<PAGE>
DESCRIPTION OF SENIOR CREDIT FACILITIES
On October 21, 1999, we entered into a new senior secured credit facility
providing for a term loan of $80.0 million, the proceeds of which were used to
finance the Thermalloy acquisition, and a $20.0 million revolving credit
facility, $5.3 million of which was drawn at the closing of the acquisition. As
part of the transactions relating to the merger, we repaid all of the
outstanding term loan and all of the outstanding revolving loan and entered into
an amended and restated credit facility. Under the amended and restated credit
facility, a syndicate of lenders, including Canadian Imperial Bank of Commerce,
as agent, agreed to loan us $75.0 million, consisting of $53.0 million in term
loans (which were fully drawn at closing) and $22.0 million in revolving loans
(of which $1.7 million was drawn at closing). The amended and restated credit
facility was used to repay existing indebtedness under the credit facility and
pay transaction fees and expenses, and amounts available under this facility may
in the future be used for working capital, capital expenditures and permitted
acquisitions and for general corporate purposes.
Principal on the term loan is repayable in 18 quarterly installments over a
period of approximately five years, commencing December 31, 2000 and ending
March 31, 2005 as follows: five installments of $2,000,000; four installments of
$2,500,000; four installments of $2,750,000; two installments of $3,200,000; two
installments of $3,900,000; and a final installment of $7,800,000. In addition,
commencing with the fiscal year ended December 31, 2001, we will be required to
apply 50% of our excess cash flow to permanently reduce the term loan. The
revolving loans mature on March 31, 2005.
At our option, the interest rates per annum applicable to the loans under
the amended and restated credit facility are a fluctuating rate of interest
measured by reference to one or a combination, at our election, of the following
rates plus the applicable borrowing margin: LIBOR plus 2.25% or the Adjusted
Base Rate (I.E., Canadian Imperial Bank of Commerce's announced prime commercial
lending rate or the federal funds rate plus 0.5%) plus 1.00% (in each case, the
applicable borrowing margin is subject to certain reductions if certain future
operating results are achieved).
Certain of our foreign subsidiaries may borrow a portion of the term loan
under the amended and restated credit facility.
The amended and restated credit facility:
- is guaranteed by each of Holdings and Holdings II, and all of our present
and future domestic and (solely with respect to borrowings by our foreign
subsidiaries) foreign subsidiaries;
- is secured by a pledge of substantially all of our tangible and intangible
assets, including a pledge of all of the shares of our present and future
domestic subsidiaries owned by us and, subject to certain exceptions, 65%
of the shares of any of their respective present and future foreign
subsidiaries;
- requires us to meet customary financial tests, including but not limited
to, maximum total and senior leverage, minimum interest coverage and fixed
charge coverage ratios;
- limits our ability to, among other things, incur additional indebtedness
and liens, make investments or merge or consolidate with other companies,
sell assets (other than in the ordinary course of business), enter into
different lines of business, enter into transactions with our affiliates,
or pay dividends or make other restricted payments; and
- contains customary events of default, including, without limitation,
payment defaults, breaches of representations and warranties, covenant
defaults, certain events of bankruptcy and insolvency, ERISA violations,
judgment defaults, cross-defaults to certain other indebtedness and a
change in control.
We agreed to pay some fees in connection with the amended and restated
credit facility, including arrangement fees, agency fees and commitment fees.
Commitment fees are payable at a rate per annum of 0.5% on the undrawn amounts
of the revolving loans.
84
<PAGE>
DESCRIPTION OF THE NOTES
Except as otherwise indicated below, the following summary applies to both
the outstanding notes and the exchange notes. For this section, the term "Notes"
means both the outstanding notes and the exchange notes unless otherwise
indicated. The Company issued the outstanding notes, and will issue the exchange
notes, under an Indenture, dated as of February 2, 2000 (the "Indenture") by and
among the Company, the Guarantors and Bankers Trust Company, as trustee (the
"Trustee"). The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (the "TIA"), as in effect on the date of the Indenture. The
Notes are subject to all such terms, and holders of the Notes are referred to
the Indenture and the TIA for a statement of them. The following is a summary of
the material terms and provisions of the Notes. This summary does not purport to
be a complete description of the Notes and is subject to the detailed provisions
of, and qualified in its entirety by reference to, the Notes and the Indenture
(including the definitions contained therein). The Indenture is filed as an
exhibit to the registration statement of which this prospectus forms a part.
Definitions relating to certain capitalized terms are set forth under "--Certain
Definitions." Capitalized terms that are used but not otherwise defined herein
have the meanings ascribed to them in the Indenture and such definitions are
incorporated herein by reference. For purposes of this Section, the term
"Company" refers to Aavid Thermal Technologies, Inc. and does not include its
Subsidiaries, except for purposes of financial data determined on a consolidated
basis.
The terms of the exchange notes are nearly identical to the outstanding
notes in all material respects, including interest rate and maturity, except
that the exchange notes will not be subject to:
- the restrictions on transfer; and
- the registration rights agreement's covenants regarding registration.
GENERAL
The Notes are limited in aggregate principal amount to $150,000,000. The
Notes are general unsecured obligations of the Company, subordinated in right of
payment to Senior Indebtedness of the Company and senior in right of payment to
any current or future subordinated indebtedness of the Company.
MATURITY, INTEREST AND PRINCIPAL
The Notes mature on February 1, 2007. The Notes bear interest at a rate of
12 3/4% per annum from the Issue Date until maturity. Interest is payable
semi-annually in arrears on each February 1 and August 1, commencing August 1,
2000, to holders of record of the Notes at the close of business on the
immediately preceding January 15 and July 15, respectively.
GUARANTEES
The Notes are jointly and severally guaranteed (a "Guarantee") on a senior
subordinated basis by existing or future domestic Restricted Subsidiaries of the
Company (each, a "Guarantor"). Each Guarantor has guaranteed to each holder of
the Notes and the Trustee the full and prompt performance of the obligations of
the Company under the Notes, including the payment of principal or premium, if
any, on and interest on the Notes pursuant to its Guarantee. Any of the
Restricted Subsidiaries that become Unrestricted Subsidiaries pursuant to the
terms and provisions of the Indenture shall be released from their obligations
under the Guarantees.
The obligation of each Guarantor is limited to the maximum amount as will,
after giving effect to all other contingent and fixed liabilities of such
Guarantor (including, without limitation, any guarantees of Senior Indebtedness)
and after giving effect to any collections from or payments made by
85
<PAGE>
or on behalf of any other Guarantor in respect of the obligations of such other
Guarantor under its Guarantee or pursuant to its contribution obligations under
the Indenture, result in the obligations of such Guarantor under the Guarantee
not constituting a fraudulent conveyance or fraudulent transfer under federal or
state law. Each Guarantor that makes a payment or distribution under a Guarantee
shall be entitled to a contribution from each other Guarantor in a pro rata
amount based on the Adjusted Net Assets of each Guarantor.
A Guarantor shall be released from all of its obligations under its
Guarantee if all of its assets or Capital Stock are sold, in each case in a
transaction in compliance with "--Certain Covenants--Limitation on Certain Asset
Sales" below, or the Guarantor merges with or into or consolidates with, or
transfers all or substantially all of its assets in compliance with "--Merger,
Consolidation or Sale of Assets" below, and such Guarantor has delivered to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent herein provided for relating to such transaction have
been complied with.
OPTIONAL REDEMPTION
The Notes are redeemable at the option of the Company, in whole or in part,
on or after February 1, 2004 until February 1, 2006 at a price equal to 100% of
the principal amount thereof, plus an applicable Make Whole Premium, and
thereafter are redeemable at 102% of the principal amount, in each case with
accrued and unpaid interest, if any, to the date of redemption; PROVIDED,
HOWEVER, that at maturity the Notes shall be redeemable at 100% of principal
amount outstanding.
For the purposes of the foregoing, the "Make Whole Premium" means, with
respect to a Note, an amount equal to the excess, if any, of (1) the present
value as of the date of such prepayment of the remaining semi-annual interest
payments, if any, and the principal payment including premium due on such Note
as if such Note were redeemed on February 1, 2006, computed using a discount
rate equal to the Treasury Rate plus 75 basis points, over (2) the outstanding
principal amount of such Note. In no case shall the Make Whole Premium be
negative.
Notwithstanding the foregoing, the Company may redeem in the aggregate up to
35% of the original principal amount of Notes at any time and from time to time
prior to February 1, 2003 at a redemption price equal to 112.75% of the
aggregate principal amount so redeemed, plus accrued and unpaid interest, if
any, to the redemption date, out of the Net Proceeds of one or more Public
Equity Offerings; PROVIDED that at least 65% of the principal amount of Notes
originally issued remains outstanding immediately after the occurrence of any
such redemption and that any such redemption occurs within 60 days following the
closing of any such Public Equity Offering.
In the event of a redemption of fewer than all of the Notes, the Trustee
shall select the Notes to be redeemed in compliance with the requirements of the
principal national securities exchange, if any, on which such Notes are listed,
or if such Notes are not then listed on a national securities exchange, on a pro
rata basis, by lot or in such other manner as the Trustee shall deem fair and
equitable. The Notes will be redeemable in whole or in part upon not less than
30 nor more than 60 days' prior written notice, mailed by first class mail to a
holder's last address as it shall appear on the register maintained by the
Registrar of the Notes. On and after any redemption date, interest will cease to
accrue on the Notes or portions thereof called for redemption unless the Company
shall fail to redeem any such Note.
SUBORDINATION
The indebtedness represented by the Notes is, to the extent and in the
manner provided in the Indenture, subordinated in right of payment to the prior
indefeasible payment and satisfaction in full in cash of all existing and future
Senior Indebtedness of the Company. As of October 2, 1999, after giving pro
forma effect to the Thermalloy acquisition, the merger and the financing
therefor, the principal
86
<PAGE>
amount of outstanding Senior Indebtedness of the Company, on a consolidated
basis, would have been $54.7 million.
In the event of any
(1) insolvency or bankruptcy case or proceeding, or any receivership,
arrangement or reorganization relating to the Company or its assets;
(2) liquidation, dissolution or other winding-up or other similar case
or proceeding in connection therewith, whether or not involving insolvency
or bankruptcy, relative to the Company or to its creditors, as such, or to
the Company's assets, whether voluntary or involuntary;
(3) general assignment by the Company for the benefit of its creditors;
or
(4) other marshalling of assets or liabilities of the Company (except in
connection with the merger or consolidation of the Company or its
liquidation or dissolution following the transfer of all or substantially
all of its assets, upon the terms and conditions permitted under the
circumstances described under "--Merger, Consolidation or Sale of Assets"
below)
(all of the foregoing events described in clauses (1) through (4) referred to
herein individually as a "Bankruptcy Proceeding" and collectively as "Bankruptcy
Proceedings"), the holders of Senior Indebtedness of the Company will be
entitled to receive payment and satisfaction in full in cash of all amounts due
on or in respect of all Senior Indebtedness of the Company before the holders of
the Notes are entitled to receive or retain any payment or distribution of any
kind on account of the Notes (except that Holders of the Notes may receive
payments of amounts previously deposited in trust in accordance with the
defeasance provisions of the Indenture described under "Defeasance and Covenant
Defeasance"). By reason of such subordination, in the event of any such
Bankruptcy Proceeding, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than other creditors of the Company,
including holders of the Notes.
Upon the occurrence of a Payment Default on Designated Senior Indebtedness,
no payment or distribution (other than a payment or distribution of amounts
previously deposited in trust in accordance with the defeasance provisions of
the Indenture described under "Defeasance and Covenant Defeasance") of any kind
or character (including, without limitation, cash, property and any payment or
distribution which may be payable or deliverable by reason of the payment of any
other indebtedness of the Company being subordinated to the payment of the Notes
by the Company) may be made by or on behalf of the Company or any Restricted
Subsidiary, including, without limitation, by way of set-off or otherwise, for
or on account of the Notes, or for or on account of the purchase, redemption or
other acquisition of any Notes, and neither the Trustee nor any holder or owner
of any Notes shall take or receive from the Company or any Restricted
Subsidiary, directly or indirectly in any manner, payment in respect of all or
any portion of Notes commencing on the date of receipt by the Trustee of written
notice from the representative of the holders of Designated Senior Indebtedness
(the "Representative") of the occurrence of such Payment Default, and in any
such event, such prohibition shall continue until such Payment Default is cured,
waived in writing or otherwise ceases to exist. At such time as the prohibition
set forth in the preceding sentence shall no longer be in effect, subject to the
provisions of the following paragraph, the Company shall resume making any and
all required payments in respect of the Notes, including any missed payments.
Upon the occurrence of a Non-Payment Event of Default on Designated Senior
Indebtedness, no payment or distribution of any kind or character (including,
without limitation, cash, property and any payment or distribution that may be
payable or deliverable by reason of the payment of any other indebtedness of the
Company being subordinated to the payment of the Notes by the Company) may be
made by the Company or any Restricted Subsidiary, including, without limitation,
by way of set-off or otherwise, for or on account of the Notes, or for or on
account of the purchase, redemption or other acquisition of any Notes, and
neither the Trustee nor any holder or owner of any Notes shall take
87
<PAGE>
or receive from the Company or any Restricted Subsidiary, directly or indirectly
in any manner, payment in respect of all or any portion of the Notes for a
period (a "Payment Blockage Period") commencing on the date of receipt by the
Trustee of written notice from the Representative of such Non-Payment Event of
Default unless and until (subject to any blockage of payments that may then be
in effect under the preceding paragraph) the earliest of
(1) more than 179 days shall have elapsed since receipt of such written
notice by the Trustee,
(2) such Non-Payment Event of Default shall have been cured or waived in
writing or otherwise shall have ceased to exist or such Designated Senior
Indebtedness shall have been paid in full, or
(3) such Payment Blockage Period shall have been terminated by written
notice to the Company or the Trustee from such Representative,
after which, in the case of clause (1), (2) or (3), the Company shall resume
making any and all required payments in respect of the Notes, including any
missed payments. Notwithstanding any other provision of the Indenture, in no
event shall a Payment Blockage Period commenced in accordance with the
provisions of the Indenture described in this paragraph extend beyond 179 days
from the date of the receipt by the Trustee of the notice referred to above (the
"Initial Blockage Period"). Any number of additional Payment Blockage Periods
may be commenced during the Initial Blockage Period; PROVIDED, HOWEVER, that no
such additional Payment Blockage Period shall extend beyond the Initial Blockage
Period. After the expiration of the Initial Blockage Period, no Payment Blockage
Period may be commenced until at least 180 consecutive days have elapsed from
the last day of the Initial Blockage Period. Notwithstanding any other provision
of the Indenture, no Non-Payment Event of Default with respect to Designated
Senior Indebtedness that existed or was continuing on the date of the
commencement of any Payment Blockage Period initiated by the Representative
shall be, or be made, the basis for the commencement of a second Payment
Blockage Period initiated by the Representative, whether or not within the
Initial Blockage Period, unless such Non-Payment Event of Default shall have
been cured or waived for a period of not less than 90 consecutive days.
In the event that, notwithstanding the foregoing, the Trustee or any holder
of Notes receives any payment or distribution of assets of the Company of any
kind, whether in cash, property or securities, including, without limitation, by
way of set-off or otherwise, in respect of the Notes before all Senior
Indebtedness of the Company is paid and satisfied in full in cash, then such
payment or distribution (other than a payment or distribution of amounts
previously deposited in trust in accordance with the defeasance provisions of
the Indenture described under "Defeasance and Covenant Defeasance") will be held
by the recipient in trust for the benefit of holders of Senior Indebtedness and
will be immediately paid over or delivered to the holders of Senior Indebtedness
or their representative or representatives to the extent necessary to make
payment in full of all Senior Indebtedness remaining unpaid, after giving effect
to any concurrent payment or distribution, or provision therefor, to or for the
holders of Senior Indebtedness.
Each Guarantee will, to the extent set forth in the Indenture, be
subordinate in right of payment to the prior indefeasible payment and
satisfaction in full in cash of all Senior Indebtedness of the respective
Guarantor, and will be subject to the rights of holders of Designated Senior
Indebtedness of such Guarantor to initiate blockage periods, upon terms
substantially comparable to the subordination of the Notes to all Senior
Indebtedness of the Company.
If the Company or any Guarantor fails to make any payment on the Notes or
any Guarantee when due or within any applicable grace period, whether or not on
account of payment blockage provisions, such failure would constitute an Event
of Default under the Indenture and would enable the holders of the Notes to
accelerate the maturity thereof. See "--Events of Default."
88
<PAGE>
A holder of Notes by its acceptance of Notes agrees to be bound by such
provisions and authorizes and expressly directs the Trustee, on its behalf, to
take such action as may be necessary or appropriate to effectuate the
subordination provided for in the Indenture and appoints the Trustee its
attorney-in-fact for such purpose.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON ADDITIONAL INDEBTEDNESS
The Company will not, and will not permit any of the Restricted Subsidiaries
to, directly or indirectly, incur (as defined) any Indebtedness (including
Acquired Indebtedness); PROVIDED that if no Default or Event of Default shall
have occurred and be continuing at the time or as a consequence of the
incurrence of such Indebtedness, the Company may incur Indebtedness (including
Acquired Indebtedness) if after giving effect to the incurrence of such
Indebtedness and the receipt and application of the proceeds thereof, the
Company's Consolidated Fixed Charge Coverage Ratio is greater than or equal to
2.0 to 1.
Notwithstanding the foregoing, the Company and, to the extent applicable,
the Restricted Subsidiaries may incur Permitted Indebtedness; PROVIDED that the
Company will not incur any Permitted Indebtedness that ranks junior in right of
payment to the Notes that has a maturity or mandatory sinking fund payment prior
to the maturity of the Notes. Notwithstanding any other provisions of this
"Limitation on Additional Indebtedness" covenant, (i) the maximum amount of
Indebtedness that the Company or a Restricted Subsidiary may incur pursuant to
this covenant shall not be deemed to be exceeded, with respect to any
outstanding Indebtedness, due solely to the result of fluctuations in the
exchange rates of currencies and (ii) in the event that an item of Indebtedness
meets the criteria of more than one of the categories of Permitted Indebtedness,
the Company may, in its sole discretion, classify (or reclassify) such item of
Indebtedness in any manner that complies with this covenant and such items of
Indebtedness will be treated as having been incurred pursuant to only one of
such categories. Accrual of interest, accretion or amortization of original
discount, and the payment of interest in the form of additional Indebtedness,
will not be deemed to be an incurrence of Indebtedness for purposes of this
covenant and accruals of dividends or the payment of dividends on Disqualified
Capital Stock in the form of additional shares of the same class of Disqualified
Capital Stock will not be deemed an issuance of Disqualified Capital Stock for
purposes of this covenant.
LIMITATION ON OTHER SENIOR SUBORDINATED INDEBTEDNESS
The Company will not, and will not permit any of the Restricted Subsidiaries
to, directly or indirectly, incur, contingently or otherwise, any Indebtedness
(other than the Notes and the Guarantees, as the case may be) that is both
(i) expressly subordinated in right of payment to any Senior Indebtedness of the
Company or any of the Restricted Subsidiaries, as the case may be, and
(ii) senior in right of payment to the Notes or the Guarantees, as the case may
be. For purposes of this covenant, Indebtedness is deemed to be senior in right
of payment to the Notes or the Guarantees if it is not expressly subordinated in
right of payment to Senior Indebtedness at least to the same extent as the Notes
and the Guarantees, as the case may be, are subordinated to such Senior
Indebtedness.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not make, and will not permit any of the Restricted
Subsidiaries to, directly or indirectly, make, any Restricted Payment, unless:
(1) no Default or Event of Default shall have occurred and be continuing
at the time of or immediately after giving effect to such Restricted
Payment;
89
<PAGE>
(2) immediately after giving PRO FORMA effect to such Restricted
Payment, the Company could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) under "--Limitation on Additional Indebtedness"
above; and
(3) immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared or made after the Issue Date
does not exceed the sum of
(a) 50% of the Company's Cumulative Consolidated Net Income (or minus
100% of any cumulative deficit in Consolidated Net Income during such
period),
(b) 100% of the aggregate Net Proceeds received by the Company from
the issue or sale after the Issue Date of Capital Stock (other than
Disqualified Capital Stock or Capital Stock of the Company issued to any
Subsidiary of the Company and other than from the issuance of Capital
Stock pursuant to the Make-Well Agreement) of the Company or any
Indebtedness or other securities of the Company convertible into or
exercisable or exchangeable for Capital Stock (other than Disqualified
Capital Stock) of the Company that has been so converted, exercised or
exchanged, as the case may be,
(c) without duplication of any amounts included in clause (3)(b)
above, 100% of the aggregate Net Proceeds received by the Company of any
equity contribution from a holder of the Company's Capital Stock,
excluding, in the case of clauses (3)(b) and (c) any Net Proceeds from a
Public Equity Offering to the extent used to redeem the Notes,
(d) without duplication, the sum of:
(i) the aggregate amount returned in cash on or with respect to
Investments (other than Permitted Investments) made subsequent to the
Issue Date whether through interest payments, principal payments,
dividends or other distributions;
(ii) the net proceeds received by the Company or any of the
Restricted Subsidiaries from the disposition, retirement or
redemption of all or any portion of such Investments (other than to a
Subsidiary of the Company); and
(iii) upon redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary, the fair market value of such Subsidiary at
the time of redesignation;
PROVIDED, HOWEVER, that the sum of clauses (i), (ii) and (iii) above shall
not exceed the aggregate amount of all such Investments made after the Issue
Date.
For purposes of determining under clause (3) above the amount expended for
Restricted Payments, cash distributed shall be valued at the face amount thereof
and property other than cash shall be valued at its fair market value.
The provisions of this covenant shall not prohibit:
(1) the payment of any distribution within 60 days after the date of
declaration thereof, if at such date of declaration such payment would
comply with the provisions of the Indenture;
(2) the repurchase, redemption or other acquisition or retirement of any
shares of Capital Stock of the Company or Indebtedness subordinated to the
Notes by conversion into, or by or in exchange for, shares of Capital Stock
of the Company (other than Disqualified Capital Stock), or out of the Net
Proceeds of the substantially concurrent sale (other than to a Subsidiary of
the Company) of other shares of Capital Stock of the Company (other than
Disqualified Capital Stock);
(3) the redemption, repurchase, defeasance or retirement of Indebtedness
of the Company subordinated to the Notes in exchange for, by conversion
into, or out of the Net Proceeds of, a substantially concurrent sale or
incurrence of Indebtedness of the Company (other than any
90
<PAGE>
Indebtedness owed to a Subsidiary) that is contractually subordinated in
right of payment to the Notes to at least the same extent as the
Indebtedness being redeemed or retired;
(4) the retirement of any shares of Disqualified Capital Stock of the
Company by conversion into, or by exchange for, shares of Disqualified
Capital Stock of the Company, or out of the Net Proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company) of
other shares of Disqualified Capital Stock of the Company;
(5) the payment to WSP and/or its Affiliates of no more than $300,000 in
the aggregate per year as reimbursement for expenses;
(6) repurchases by the Company of Capital Stock (other than Disqualified
Capital Stock) deemed to occur upon the exercises of stock options if such
Capital Stock represents a portion of the exercise price of such option;
(7) repurchases by the Company or the Restricted Subsidiaries of, or
loans, advances, dividends or distributions to Holdings or Holdings II to
the extent necessary to enable Holdings or Holdings II, as the case may be,
to repurchase or otherwise acquire, its Capital Stock, or options, stock
appreciation rights, or similar securities therefor, from directors,
officers, consultants or employees (or any authorized representative
thereof) of Holdings, Holdings II, the Company or any of the Restricted
Subsidiaries, upon the death, disability or termination of service or
employment of such directors, officers, consultants or employees; PROVIDED,
that the aggregate amount of Restricted Payments made pursuant to this
clause (8) shall not exceed $2.0 million in the aggregate during any fiscal
year after the Issue Date, except that any such unused portion in any fiscal
year may be rolled over into and used during the next fiscal year; PROVIDED,
however, that repurchases pursuant to this clause (8) may not exceed
$2.5 million in the aggregate in any fiscal year;
(8) loans, advances, dividends or distributions by the Company or any
Restricted Subsidiary to Holdings or Holdings II not to exceed an amount
necessary to permit Holdings or Holdings II, as the case may be, to
(A) make payments in respect of its indemnification obligations owing to
directors, officers, employees or other Persons under its charter or by-laws
or pursuant to written agreements with any such Person to the extent such
payments relate to the Company and its Subsidiaries, (B) pay all reasonable
fees and expenses payable by it in connection with the Merger and related
transactions (including without limitation the fees and expenses related to
the financing thereof), (C) pay its operational expenses (other than taxes)
incurred in the ordinary course of business and not exceeding $500,000 in
the aggregate in any fiscal year or (D) pay its costs (including all
reasonable professional fees and expenses) incurred to comply with its
reporting obligations under federal or state laws or under the Indenture;
(9) payments by the Company or any Restricted Subsidiary to Holdings or
Holdings II to pay or permit Holdings or Holdings II, as the case may be, to
pay (A) any taxes, charges or assessments required to be paid by Holdings or
Holdings II by virtue of its being incorporated or having Capital Stock
outstanding (but not by virtue of owning stock of any corporation other than
the Company or any of its Subsidiaries), or being a holding company or
receiving dividends from or other distributions in respect of the Capital
Stock of the Company or the Restricted Subsidiaries, or having guaranteed
any obligations of the Company or any of its Subsidiaries, or having made
any payment in respect of any of the items for which the Company is
permitted to make payments to Holdings or Holdings II pursuant to this
covenant, or (B) any other federal, state, foreign, provincial or local
taxes measured income of the Company or its Subsidiaries for which Holdings
or Holdings II is liable;
(10) other Restricted Payments in an aggregate amount not to exceed
$2.5 million; and
(11) any payments or distributions to be made as a payment of the Merger
consideration;
91
<PAGE>
PROVIDED that in calculating the aggregate amount of Restricted Payments made
subsequent to the Issue Date for purposes of clause (3) of the first paragraph
above, amounts expended pursuant to clauses (1), (2) and (10) shall be included
in such calculation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant described above were computed, which calculations may
be based upon the Company's latest available financial statements, and that no
Default or Event of Default has occurred and is continuing and no Default or
Event of Default will occur immediately after giving effect to any such
Restricted Payments.
LIMITATION ON INVESTMENTS
The Company will not, and will not permit any Restricted Subsidiary to, make
any Investment other than
(1) a Permitted Investment or
(2) an Investment that is made after the Issue Date as a Restricted
Payment in compliance with the "--Limitation on Restricted Payments"
covenant.
LIMITATION ON LIENS
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur or otherwise cause or suffer to exist or become effective any
Liens of any kind (other than Permitted Liens) upon any property or asset of the
Company or any of the Restricted Subsidiaries or any shares of Capital Stock or
Indebtedness of any Restricted Subsidiary that owns property or assets, now
owned or hereafter acquired, unless
(1) if such Lien secures Indebtedness that ranks equally with the Notes,
then the Notes are secured on an equal and ratable basis with the
obligations so secured until such time as such obligation is no longer
secured by a Lien or
(2) if such Lien secures Indebtedness that is subordinated to the Notes,
any such Lien shall be subordinated to the Lien granted to the holders of
the Notes to the same extent as such Indebtedness is subordinated to the
Notes.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any of the Restricted Subsidiaries
to, directly or indirectly, enter into or suffer to exist any transaction or
series of related transactions (including, without limitation, the sale,
purchase, exchange or lease of assets, property or services) with any Affiliate
(each an "Affiliate Transaction") or extend, renew, waive or otherwise modify
the terms of any Affiliate Transaction entered into prior to the Issue Date
unless
(1) such Affiliate Transaction is between or among the Company and the
Restricted Subsidiaries or
(2) the terms of such Affiliate Transaction are fair and reasonable to
the Company or such Restricted Subsidiary, as the case may be, and the terms
of such Affiliate Transaction are at least as favorable as the terms that
could be obtained by the Company or such Restricted Subsidiary, as the case
may be, in a comparable transaction made on an arm's-length basis between
unaffiliated parties.
In any Affiliate Transaction (or any series of related Affiliate
Transactions that are similar or part of a common plan) involving an amount or
having a fair market value in excess of $2.5 million that is not permitted under
clause (1) above, the Company must obtain a resolution of the Board of Directors
of the Company certifying that such Affiliate Transaction complies with
clause (2) above. In any
92
<PAGE>
Affiliate Transaction (or any series of related Affiliate Transactions that are
similar or part of a common plan) involving an amount or having a fair market
value in excess of $5.0 million that is not permitted under clause (1) above,
the Company must obtain a favorable written opinion as to the fairness of such
transaction or transactions, as the case may be, from an Independent Financial
Advisor.
The foregoing provisions will not apply to
(1) any Restricted Payment that is not prohibited by the provisions
described under "--Limitation on Restricted Payments" above or any Permitted
Investment;
(2) reasonable fees and compensation paid to, and indemnity provided on
behalf of, officers, directors or employees of the Company or any Restricted
Subsidiary as determined in good faith by the Company's Board of Directors
or senior management;
(3) any agreement as in effect as of the Issue Date or any amendment
thereto or any transaction contemplated thereby (including pursuant to any
amendment thereto) in any replacement agreement thereto so long as any such
amendment or replacement agreement is not more disadvantageous to the
holders in any material respect than the original agreement as in effect on
the Issue Date;
(4) any transaction permitted under the provision "Merger, Consolidation
or Sale of Assets"; or
(5) transactions with Affiliates solely in their capacity as holders of
Indebtedness or Capital Stock of the Company or any of its Subsidiaries
where such Affiliates are treated no more favorably than holders of such
Indebtedness or such Capital Stock generally.
LIMITATION ON CERTAIN ASSET SALES
The Company will not, and will not permit any of the Restricted Subsidiaries
to, consummate an Asset Sale unless
(1) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such sale or other disposition at
least equal to the fair market value of the assets sold or otherwise
disposed of (as determined in good faith by the Board of Directors of the
Company and evidenced by a board resolution);
(2) not less than 75% of the consideration received by the Company or
such Restricted Subsidiary, as the case may be, is in the form of cash or
Cash Equivalents; PROVIDED that the amount of
(a) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet) of the Company or any of the
Restricted Subsidiaries (other than contingent liabilities and
liabilities that are by their terms subordinated to the Notes) that are
assumed by the transferee of any such assets shall be deemed to be cash
for purposes of this clause (2); and
(b) any promissory notes and other non-cash consideration received by
the Company or any Restricted Subsidiary from such Asset Sale that are
converted by the Company or such Restricted Subsidiary into cash within
180 days of the applicable Asset Sale shall be deemed to be cash for
purposes of this clause (2);
(3) the Asset Sale Proceeds received by the Company or such Restricted
Subsidiary are applied
(a) first, to the extent the Company or any such Restricted
Subsidiary, as the case may be, elects, or is required, to prepay, repay
or purchase Indebtedness under any then existing Senior Indebtedness of
the Company or any such Restricted Subsidiary within 270 days
93
<PAGE>
following the receipt of the Asset Sale Proceeds from any Asset Sale;
PROVIDED that any such repayment shall result in a permanent reduction of
the commitments thereunder in an amount equal to the principal amount so
repaid;
(b) second, to the extent of the balance of Asset Sale Proceeds after
application as described above, to the extent the Company elects, to an
investment in assets (including Capital Stock or other securities
purchased in connection with the acquisition of Capital Stock or property
of another Person) used or useful in businesses similar or ancillary to
the business of the Company or any such Restricted Subsidiary as
conducted on the Issue Date; PROVIDED that
(i) such investment occurs or the Company or any such Restricted
Subsidiary enters into contractual commitments to make such
investment, subject only to customary conditions (other than the
obtaining of financing), within 270 days following receipt of such
Asset Sale Proceeds and
(ii) the Asset Sale Proceeds so contractually committed are so
applied within 360 days following the receipt of such Asset Sale
Proceeds; and
(c) third, if on such 270th day in the case of clauses (3)(a) and
(3)(b)(i) or on such 360th day in the case of clause (3)(b)(ii) with
respect to any Asset Sale, the Available Asset Sale Proceeds exceed
$7.5 million, the Company shall apply an amount equal to the Available
Asset Sale Proceeds to an offer to repurchase the Notes, at a purchase
price in cash equal to 100% of the principal amount thereof plus accrued
and unpaid interest, if any, to the purchase date (an "Excess Proceeds
Offer"). If an Excess Proceeds Offer is not fully subscribed, the Company
may retain the portion of the Available Asset Sale Proceeds not required
to repurchase Notes and use such proceeds for general corporate purposes
subject to the other provisions of the Indenture.
Pending the final application of any Asset Sale Proceeds, the Company or
such Restricted Subsidiary may temporarily reduce Indebtedness under a revolving
credit facility, if any, or otherwise invest such Asset Sale Proceeds in Cash
Equivalents.
If the Company is required to make an Excess Proceeds Offer, the Company
shall mail, within 30 days following the date specified in clause (3)(c) above,
a notice to the holders stating, among other things:
(1) that such holders have the right to require the Company to apply the
Available Asset Sale Proceeds to repurchase such Notes at a purchase price
in cash equal to 100% of the principal amount thereof plus accrued and
unpaid interest, if any, to the purchase date;
(2) the purchase date, which shall be no earlier than 30 days and not
later than 60 days from the date such notice is mailed;
(3) the instructions that each holder must follow in order to have such
Notes purchased; and
(4) the calculations used in determining the amount of Available Asset
Sale Proceeds to be applied to the purchase of such Notes.
In the event of the transfer of substantially all of the property and assets
of the Company and the Restricted Subsidiaries as an entirety to a Person in a
transaction permitted under "--Merger, Consolidation or Sale of Assets" below,
the successor Person shall be deemed to have sold the properties and assets of
the Company and the Restricted Subsidiaries not so transferred for purposes of
this covenant, and shall comply with the provisions of this covenant with
respect to such deemed sale as if it were an Asset Sale.
94
<PAGE>
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and other securities laws and regulations thereunder to the extent
such laws and regulations are applicable in connection with the repurchase of
Notes pursuant to an Excess Proceeds Offer. To the extent that the provisions of
any securities laws or regulations conflict with the "Asset Sale" provisions of
the Indenture, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
"Asset Sale" provisions of the Indenture by virtue thereof.
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary to issue any Preferred
Stock (except Preferred Stock issued to the Company or a Restricted Subsidiary
or to directors of a foreign Restricted Subsidiary as qualifying shares to the
extent required by applicable law), or permit any Person (other than the Company
or a Restricted Subsidiary or a director of a foreign Restricted Subsidiary) to
hold any such Preferred Stock unless (1) such Restricted Subsidiary would be
entitled to incur or assume Indebtedness (other than Permitted Indebtedness)
under "--Limitation on Additional Indebtedness" above in the aggregate principal
amount equal to the aggregate liquidation value of the Preferred Stock to be
issued or (2) such Preferred Stock is sold as part of a sale of all of the
Capital Stock of the Company or a Restricted Subsidiary in compliance with the
terms of the "Limitation on Certain Asset Sales" covenant.
LIMITATION ON CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company will not
(1) sell, pledge, hypothecate or otherwise convey or dispose of any
Capital Stock of a Restricted Subsidiary (other than any such transaction
resulting in a Lien which constitutes a Permitted Lien and other than the
sale of up to 40% of the outstanding Capital Stock of Thermalloy Malaysia
Sdn Bhd in accordance with Malaysian law) or
(2) permit any Restricted Subsidiary to issue any Capital Stock, other
than to the Company or a Restricted Subsidiary and other than issuances of
Capital Stock by a Restricted Subsidiary to its employees, officers,
directors or consultants in an aggregate amount not to exceed 10% of such
Restricted Subsidiary's outstanding Capital Stock.
The foregoing restrictions shall not apply to an Asset Sale made in
compliance with "--Limitation on Certain Asset Sales" above (provided that if
such Asset Sale is for less than all of the outstanding Capital Stock of any
Restricted Subsidiary held by the Company or any of the Restricted Subsidiaries,
such Asset Sale shall also comply with "--Limitation on Restricted Payments"
above), the issuance of Preferred Stock in compliance with "--Limitation on
Preferred Stock of Restricted Subsidiaries" above or the issuance of 95% of the
common membership interests of Aavid Thermalloy, LLC to Heat Holdings II Corp.
and the other restructuring transactions set forth in a schedule to the
Indenture.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction on the ability of any Restricted
Subsidiary to
(1) pay dividends or make any other distributions to the Company or any
Restricted Subsidiary
(a) on its Capital Stock or
(b) with respect to any other interest or participation in, or
measured by, its profits; or
95
<PAGE>
(2) repay any Indebtedness or any other obligation owed to the Company
or any Restricted Subsidiary; or
(3) make loans or advances or capital contributions to the Company or
any of the Restricted Subsidiaries; or
(4) transfer any of its properties or assets to the Company or any of
the Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of
(1) encumbrances or restrictions existing on the Issue Date (including
pursuant to the Senior Credit Facility) to the extent and in the manner such
encumbrances and restrictions are in effect on the Issue Date;
(2) the Indenture, the Note and the Guarantees;
(3) applicable law, rules, regulations or orders;
(4) any instrument governing Acquired Indebtedness, which encumbrance or
restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person
(including any Subsidiary of the Person), so acquired;
(5) customary non-assignment provisions in leases or other agreements
entered in the ordinary course of business and consistent with past
practices;
(6) Refinancing Indebtedness; PROVIDED that such restrictions are no
more restrictive than those contained in the agreements governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
(7) customary restrictions in security agreements or mortgages securing
Indebtedness of the Company or a Restricted Subsidiary to the extent such
restrictions restrict the transfer of the property subject to such security
agreements and mortgages;
(8) customary restrictions with respect to a Restricted Subsidiary
pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of
such Restricted Subsidiary;
(9) customary restrictions in Purchase Money Indebtedness, Capitalized
Lease Obligations or security agreements or mortgages securing Indebtedness
of the Company or a Restricted Subsidiary to the extent such restrictions
restrict the transfer of the property subject to such Purchase Money
Indebtedness, Capitalized Lease Obligations, security agreements or
mortgages; or
(10) any agreement or instrument governing Capital Stock of any Person
that is acquired by the Company or a Restricted Subsidiary; PROVIDED that no
such restriction is created in contemplation of the acquisition of such
Capital Stock.
LIMITATION ON CONDUCT OF BUSINESS
The Company and the Restricted Subsidiaries will not engage in any
businesses that are not the same, or reasonably similar, ancillary or related to
the businesses in which the Company and the Restricted Subsidiaries are engaged
in on the Issue Date, except to such extent as would not be material to the
Company and the Restricted Subsidiaries taken as a whole.
96
<PAGE>
LIMITATION ON SALE AND LEASE-BACK TRANSACTIONS
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any Sale and Lease-Back Transaction unless:
(1) the consideration received in such Sale and Lease-Back Transaction
is at least equal to the fair market value of the property sold, as
determined in good faith by the Board of Directors of the Company and
evidenced by a board resolution and
(2) the Company could incur the Attributable Indebtedness in respect of
such Sale and Lease-Back Transaction in compliance with "--Limitation on
Additional Indebtedness" above.
PAYMENTS FOR CONSENT
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the Notes unless such consideration is offered to be paid or
agreed to be paid to all holders of the Notes that so consent, waive or agree to
amend in the time frame set forth in solicitation documents relating to such
consent, waiver or agreement.
LIMITATION ON CREATION OF SUBSIDIARIES
The Company will not create or acquire, and will not permit any of its
Restricted Subsidiaries to create or acquire, any Subsidiary other than
(1) a Restricted Subsidiary existing as of the Issue Date,
(2) a Restricted Subsidiary that is acquired or created after the Issue
Date; PROVIDED, HOWEVER, that each domestic Restricted Subsidiary acquired
or created pursuant to this clause (2) shall have executed a Guarantee,
pursuant to which such domestic Restricted Subsidiary will become a
Guarantor; PROVIDED, FURTHER, in the event the Company or any of its
Restricted Subsidiaries incurs Acquired Indebtedness (assuming such
incurrence is in accordance with the convenant entitled "--LIMITATION ON
CERTAIN INDEBTEDNESS") as a result of the acquisition of a Restricted
Subsidiary and as long as the terms of such Acquired Indebtedness prohibits
the Guarantee of the Notes by such newly-acquired Restricted Subsidiary or
such newly-acquired Restricted Subsidiary would be in breach or default of
the terms of the Acquired Indebtedness as a result of such Guarantee, such
Restricted Subsidiary will not be required to execute a Guarantee; PROVIDED
that, until such domestic Restricted Subsidiary executes and delivers a
Guarantee in accordance with this covenant, (a) none of the Company or any
other Restricted Subsidiary of the Company will transfer any assets (other
than in the ordinary course of business) to such newly-acquired Restricted
Subsidiary; (b) such newly-acquired Restricted Subsidiary will not transfer
such Acquired Indebtedness to the Company or any other Restricted Subsidiary
and (c) neither the Company nor any Restricted Subsidiary of the Company
shall provide any guarantee of, or similar credit support for, or otherwise
become directly or indirectly liable for any Indebtedness of such
newly-acquired Restricted Subsidiary,
(3) an Unrestricted Subsidiary, or
(4) Restricted Subsidiaries created or acquired in connection with the
restructuring transactions set forth in a schedule to the Indenture.
CHANGE OF CONTROL OFFER
Upon the occurrence of a Change of Control, the Company shall be obligated
to make an offer to purchase (the "Change of Control Offer") each holder's
outstanding Notes at a purchase price (the
97
<PAGE>
"Change of Control Purchase Price") equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the Change of Control
Payment Date (as defined) in accordance with the procedures set forth below.
Within 20 days of the occurrence of a Change of Control, the Company shall
(i) cause a notice of the Change of Control Offer to be sent at least once to
the Dow Jones News Service or similar business news service in the United States
and (ii) send by first-class mail, postage prepaid, to the Trustee and to each
holder of the Notes, at the address appearing in the register maintained by the
Registrar of the Notes, a notice stating:
(1) that the Change of Control Offer is being made pursuant to this
covenant and that all Notes tendered will be accepted for payment;
(2) the Change of Control Purchase Price and the purchase date (which
shall be a Business Day no earlier than 30 days nor later than 60 days from
the date such notice is mailed (the "Change of Control Payment Date"));
(3) that any Note not tendered will continue to accrue interest;
(4) that, unless the Company defaults in the payment of the Change of
Control Purchase Price, any Notes accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the Change of
Control Payment Date;
(5) that holders accepting the offer to have their Notes purchased
pursuant to a Change of Control Offer will be required to surrender the
Notes to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day preceding the Change of Control
Payment Date;
(6) that holders will be entitled to withdraw their acceptance if the
Paying Agent receives, not later than the close of business on the third
Business Day preceding the Change of Control Payment Date, a telegram,
facsimile transmission or letter setting forth the name of the holder, the
principal amount of the Notes delivered for purchase, and a statement that
such holder is withdrawing his election to have such Notes purchased;
(7) that holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of the
Notes surrendered;
(8) any other procedures that a holder must follow to accept a Change of
Control Offer or effect withdrawal of such acceptance; and
(9) the name and address of the Paying Agent.
On the Change of Control Payment Date, the Company shall, to the extent
lawful,
(1) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer;
(2) deposit with the Paying Agent money sufficient to pay the purchase
price of all Notes or portions thereof so tendered; and
(3) deliver or cause to be delivered to the Trustee for cancellation
Notes so accepted together with an Officers' Certificate stating the Notes
or portions thereof tendered to the Company.
The Paying Agent shall promptly mail to each holder of Notes so accepted
payment in an amount equal to the purchase price for such Notes, and the Company
shall execute and issue, and the Trustee shall promptly authenticate and mail to
such holder, a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered; PROVIDED that each such new Note shall be issued in an
original principal amount in denominations of $1,000 and integral multiples
thereof.
98
<PAGE>
The Indenture requires that if the Senior Credit Facility is in effect, or
any amounts are owing thereunder or in respect thereof, at the time of the
occurrence of a Change of Control, prior to the mailing of the notice to holders
described in the second preceding paragraph, but in any event within 20 days
following any Change of Control, the Company covenants to
(1) repay in full all obligations and terminate all commitments under or
in respect of the Senior Credit Facility and all other Senior Indebtedness
the terms of which require repayment upon a Change of Control or offer to
repay in full all obligations and terminate all commitments under or in
respect of the Senior Credit Facility and all such Senior Indebtedness and
repay the Indebtedness owed to each such lender who has accepted such offer
or
(2) obtain the requisite consents under the Senior Credit Facility and
all such other Senior Indebtedness to permit the repurchase of the Notes as
described above. The Company must first comply with the covenant described
in the preceding sentence before it shall be required to purchase Notes in
the event of a Change of Control; PROVIDED that the Company's failure to
comply with the covenant described in the preceding sentence constitutes an
Event of Default described in clause (3) under "--Events of Default" below
if not cured within 60 days after the notice required by such clause. As a
result of the foregoing, a holder of the Notes may not be able to compel the
Company to purchase the Notes unless the Company is able at the time to
repay or refinance all of the obligations under or in respect of the Senior
Credit Facility and all such other Senior Indebtedness or obtain requisite
consents under the Senior Credit Facility and all such other Senior
Indebtedness.
The Indenture further provides that
(1) if the Company or any Restricted Subsidiary thereof has issued any
(a) outstanding indebtedness that is subordinated in right of payment to the
Notes or (b) Preferred Stock, and the Company or such Restricted Subsidiary
is required to make a change of control offer or to make a distribution with
respect to such subordinated indebtedness or Preferred Stock in the event of
a Change of Control, the Company shall not consummate any such offer or
distribution with respect to such subordinated indebtedness or Preferred
Stock until such time as the Company shall have paid the Change of Control
Purchase Price in full to the holders of Notes that have accepted the
Company's change of control offer and shall otherwise have consummated the
change of control offer made to holders of the Notes and
(2) the Company will not issue Indebtedness that is subordinated in
right of payment to the Notes or Preferred Stock with change of control
provisions requiring the payment of such Indebtedness or Preferred Stock
prior to the payment of the Notes in the event of a Change in Control under
the Indenture.
The Change of Control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving the Company. In determining
whether a sale, lease, conveyance or other disposition of all or substantially
all of the Company's assets as an entirety or substantially as an entirety
involves a Change in Control of the Company within the meaning of the Indenture,
several considerations may be relevant, including the percentage of the
Company's assets being disposed of, the percentage of the Company's revenues and
income generated by such assets and the effect of such disposition on the
Company's remaining operations. Accordingly, in certain circumstances it may be
unclear as to whether a Change of Control has occurred and whether the Holders
are therefore entitled to require a Change of Control Offer. Further, the term
Change of Control is limited to certain specified transactions and, depending on
the circumstances, may not include other events, such as highly leveraged
transactions, reorganizations, restructurings, mergers or similar transactions,
that might adversely affect the financial condition of the Company or result in
a downgrade in the credit rating of the Notes. The Company does not have any
current intention to enter into a transaction that would constitute a Change of
Control, other than the Merger and related transactions.
99
<PAGE>
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, assign,
transfer, lease, convey or otherwise dispose of (or cause or permit any
Restricted Subsidiary to sell, assign, transfer, lease, convey or otherwise
dispose of) all or substantially all of its assets (determined on a consolidated
basis for the Company and the Restricted Subsidiaries), whether as an entirety
or substantially as an entirety in one transaction or a series of related
transactions, to any Person unless:
(1) the Company shall be the continuing Person, or the Person (if other
than the Company) formed by such consolidation or into which the Company is
merged or to which the properties and assets of the Company are sold,
assigned, transferred, leased, conveyed or otherwise disposed of shall be a
corporation or a limited liability company organized and existing under the
laws of the United States or any State thereof or the District of Columbia
and shall expressly assume, by a supplemental indenture, executed and
delivered to the Trustee, in form satisfactory to the Trustee, all of the
obligations of the Company under the Indenture and the Notes and the
obligations thereunder shall remain in full force and effect;
(2) immediately before and immediately after giving effect to such
transaction, no Default or Event of Default shall have occurred and be
continuing;
(3) immediately after giving effect to such transaction on a pro forma
basis the Company or such Person could incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under "--Certain
Covenants--Limitation on Additional Indebtedness" above; and
(4) the Company shall deliver, or cause to be delivered, to the Trustee,
in form and substance reasonably satisfactory to the Trustee, an Officers'
Certificate and an opinion of counsel, each stating that such consolidation,
merger or transfer and the supplemental indenture in respect thereto comply
with this provision and that all conditions precedent herein provided for
relating to such transaction or transactions have been complied with.
Notwithstanding the foregoing, the Company or any Restricted Subsidiary may
merge or consolidate with or transfer substantially all of its assets to an
Affiliate that has no significant assets or liabilities and was formed solely
for the purpose of changing the jurisdiction of organization of the Company or
the form of organization of the Company so long as the amount of Indebtedness of
the Company and its Restricted Subsidiaries is not increased thereby and that
the successor assumes all obligations of the Company or such Restricted
Subsidiary, as the case may be, under the Indenture, the Notes and the
Registration Rights Agreement.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company shall be deemed to
be the transfer of all or substantially all of the properties and assets of the
Company.
Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture in connection
with any transaction complying with the provisions of "--Limitation on Certain
Asset Sales") will not, and the Company will not cause or
100
<PAGE>
permit any Guarantor to, consolidate with or merge with or into any Person other
than the Company or any other Guarantor unless:
(1) the entity formed by or surviving any such consolidation or merger
(if other than the Guarantor) or to which such sale, lease, conveyance or
other disposition shall have been made is a corporation or limited liability
company organized and existing under the laws of the United States or any
State thereof or the District of Columbia;
(2) such entity assumes by supplemental indenture all of the obligations
of the Guarantor on the Guarantee;
(3) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing; and
(4) immediately after giving effect to such transaction and the use of
any net proceeds therefrom on a PRO FORMA basis, the Company could satisfy
the provisions of clause (3) of the first paragraph of this covenant.
Any merger or consolidation of a Guarantor with and into the Company (with
the Company being the surviving entity) or another Guarantor that is a
Restricted Subsidiary of the Company need only comply with clause (4) of the
first paragraph of this covenant.
MAKE-WELL AGREEMENT
Pursuant to the Make-Well Agreement, Holdings has agreed that if at
December 31, 2000 the Company's total Indebtedness to EBITDA for fiscal 2000 is
greater than 4.5 to 1.0, Holdings will make an equity contribution in an amount
necessary to reduce such ratio to 4.5 to 1.0. In addition, if at December 31,
2001 the Company's total Indebtedness to EBITDA for fiscal 2001 is greater than
4.25 to 1.0, Holdings will make an equity contribution in an amount necessary to
reduce such ratio to 4.25 to 1.0. In no event will Holdings be required to
contribute more than $25.0 million in the aggregate pursuant to the Make-Well
Agreement. The Senior Credit Facility requires that contributions by Holdings to
the Company be used to repay Senior Indebtedness.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(1) default in payment of any principal of, or premium, if any, on the
Notes whether at maturity, upon redemption or otherwise (whether or not such
payment shall be prohibited by the subordination provisions of the
Indenture);
(2) default for 30 days in payment of any interest on the Notes (whether
or not such payment shall be prohibited by the subordination provisions of
the Indenture);
(3) default by the Company or any Restricted Subsidiary in the
observance or performance of any other covenant in the Notes or the
Indenture for 45 days after written notice from the Trustee or the holders
of not less than 25% in aggregate principal amount of the Notes then
outstanding (except in the case of a default with respect to the "--Change
of Control" or "--Merger, Consolidation or Sale of Assets" covenant which
shall constitute an Event of Default with such notice requirement but
without such passage of time requirement);
(4) failure to pay when due principal, interest or premium with respect
to any Indebtedness of the Company or any Restricted Subsidiary thereof,
which failure to pay, other than a failure to pay principal at the final
maturity thereof, shall not be cured, waived or postponed pursuant to an
agreement with the holders of such Indebtedness within 60 days after written
notice as provided in the Indenture, or the acceleration of any such
Indebtedness, which acceleration shall not be
101
<PAGE>
rescinded or annulled within 20 days after written notice as provided in the
Indenture, if the aggregate amount of such Indebtedness, together with the
amount of any other such Indebtedness in default for failure to pay
principal, interest or premium or that has been accelerated, aggregates
$7.5 million or more at any time;
(5) any final judgment or judgments not fully covered by insurance that
can no longer be appealed for the payment of money in excess of
$7.5 million shall be rendered against the Company or any Restricted
Subsidiary thereof, and shall not be discharged for any period of 60
consecutive days during which a stay of enforcement shall not be in effect;
(6) certain events involving bankruptcy, insolvency or reorganization of
the Company or any Significant Restricted Subsidiary thereof;
(7) any of the Guarantees ceases to be in full force and effect or any
of the Guarantees is declared to be null and void and unenforceable or any
of the Guarantees is found to be invalid or any of the Guarantors denies its
liability under its Guarantee, in each case other than by reason of release
of a Guarantor in accordance with the terms of the Indenture; and
(8) any failure to make contributions required under the Make-Well
Agreement.
The Indenture provides that the Trustee may withhold notice to the holders
of the Notes of any default (except in payment of principal or premium, if any,
or interest on the Notes) if the Trustee considers it to be in the best interest
of the holders of the Notes to do so.
The Indenture provides that if an Event of Default (other than an Event of
Default with respect to the Company of the type described in clause (6) above)
shall have occurred and be continuing, then the Trustee or the holders of not
less than 25% in aggregate principal amount of the Notes then outstanding may
declare to be immediately due and payable the entire principal amount of all the
Notes then outstanding plus accrued interest to the date of acceleration
(i) and the same shall become immediately due and payable or (ii) if there are
any amounts outstanding under the Senior Credit Facility, shall become
immediately due and payable upon the first to occur of an acceleration under the
Senior Credit Facility or 5 business days after receipt by the Company and the
representative under the Senior Credit Facility of a notice of acceleration;
PROVIDED, HOWEVER, that after such acceleration but before a judgment or decree
based on acceleration is obtained by the Trustee, the holders of a majority in
aggregate principal amount of outstanding Notes may rescind and annul such
acceleration if:
(1) all Events of Default, other than nonpayment of principal, premium,
if any, or interest that has become due solely because of the acceleration,
have been cured or waived as provided in the Indenture;
(2) to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal, which has become due
otherwise than by such declaration of acceleration, has been paid;
(3) if the Company has paid the Trustee its reasonable compensation and
reimbursed the Trustee for its expenses, disbursements and advances; and
(4) in the event of the cure or waiver of an Event of Default of the
type described in clause (6) of the above Events of Default, the Trustee
shall have received an Officers' Certificate and an opinion of counsel that
such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto. In case an Event of Default with respect to the Company of
the type described in clause (6) of the first paragraph above shall occur, the
principal, premium and interest amount with respect to all of the Notes shall be
due and payable immediately without any declaration or other act on the part of
the Trustee or the holders of the Notes.
102
<PAGE>
The holders of a majority in aggregate principal amount of the Notes then
outstanding have the right to waive, on behalf of all holders, any existing
default or compliance with any provision of the Indenture or the Notes and to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee, subject to certain limitations provided for in the
Indenture and under the TIA.
No holder of any Note has any right to institute any proceeding with respect
to the Indenture or for any remedy thereunder, unless such holder shall have
previously given to the Trustee written notice of a continuing Event of Default
and unless the holders of at least 25% in aggregate principal amount of the
outstanding Notes shall have made written request and offered reasonable
indemnity to the Trustee to institute such proceeding as Trustee, and unless the
Trustee shall not have received from the holders of a majority in aggregate
principal amount of the outstanding Notes a direction inconsistent with such
request and shall have failed to institute such proceeding within 60 days.
Notwithstanding the foregoing, such limitations do not apply to a suit
instituted on such Note on or after the respective due dates expressed in such
Note.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Company may elect either
(1) to defease and be discharged from any and all of its obligations
with respect to the Notes (except for the obligations to register the
transfer or exchange of such Notes, to replace temporary or mutilated,
destroyed, lost or stolen Notes, to maintain an office or agency in respect
of the Notes and to hold monies for payment in trust) ("defeasance") or
(2) to be released from its obligations with respect to the Notes under
certain covenants contained in the Indenture ("covenant defeasance")
upon the deposit with the Trustee (or other qualifying trustee), in trust for
such purpose, of money and/or non-callable U.S. government obligations which
through the payment of principal and interest in accordance with their terms
will provide money, in an amount sufficient to pay the principal of, premium, if
any, and interest on the Notes, on the scheduled due dates therefor or on a
selected date of redemption in accordance with the terms of the Indenture. Such
a trust may only be established if, among other things,
(1) the Company has delivered to the Trustee an opinion of counsel (as
specified in the Indenture)
(a) to the effect that neither the trust nor the Trustee will be
required to register as an investment company under the Investment
Company Act of 1940, as amended, and
(b) in the case of defeasance, describing either a private ruling
concerning the Notes or a published ruling of the Internal Revenue
Service, or confirming that since the date of the Indenture there has
been a change in the applicable federal income tax law, in either case to
the effect that holders of the outstanding Notes or persons in their
positions will not recognize income, gain or loss for federal income tax
purposes as a result of such defeasance and will be subject to federal
income tax on the same amount and in the same manner and at the same
times, as would have been the case if such defeasance had not occurred;
(c) in the case of covenant defeasance, confirming that the holders
of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such covenant defeasance and
will be subject to federal income tax on the same amount, in the same
manner and at the same times as would have been the case if such covenant
defeasance had not occurred;
103
<PAGE>
(2) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit or insofar as Events of Default from bankruptcy,
insolvency or reorganization events are concerned, at any time in the period
ending on the 91st day after the date of deposit;
(3) such defeasance or covenant defeasance shall not result in a breach
or violation of, or constitute a default under the Indenture or any other
material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any or its Subsidiaries
is bound;
(4) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the holders of the Notes over any other creditors of
the Company or with the intent of defeating, hindering, delaying or
defrauding any other creditors of the Company or others;
(5) the Company shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for or relating to the defeasance or the covenant
defeasance have been complied with;
(6) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that
(a) the trust funds will not be subject to any rights of holders of
Senior Indebtedness, including, without limitation, those arising under
the Indenture and
(b) assuming no intervening bankruptcy shall occur and that no Holder
is an insider of the Company, after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; and
(7) certain other customary conditions precedent are satisfied.
MODIFICATION OF INDENTURE
From time to time, the Company, the Guarantors and the Trustee may, without
the consent of holders of the Notes, amend or supplement the Indenture for
certain specified purposes, including providing for uncertificated Notes in
addition to certificated Notes, and curing any ambiguity, defect or
inconsistency, or making any other change that does not, in the opinion of the
Trustee, materially and adversely affect the rights of any holder. The Indenture
contains provisions permitting the Company, the Guarantors and the Trustee, with
the consent of holders of at least a majority in principal amount of the
outstanding Notes, to modify or supplement the Indenture, except that no such
modification shall, without the consent of each holder affected thereby,
(1) reduce the amount of Notes whose holders must consent to an
amendment, supplement or waiver to the Indenture;
(2) reduce the rate of or change the time for payment of interest,
including defaulted interest, on any Note;
(3) reduce the principal of or premium on or change the stated maturity
of any Note or change the date on which any Notes may be subject to
redemption or repurchase or reduce the redemption or repurchase price
therefor;
(4) make any Note payable in money other than that stated in the Note or
change the place of payment from New York, New York;
(5) waive a default in the payment of the principal of, interest on, or
redemption payment with respect to any Note;
104
<PAGE>
(6) make any change in provisions of the Indenture protecting the right
of each holder of Notes to receive payment of principal of and interest on
such Note on or after the due date thereof or to bring suit to enforce such
payment, or permitting holders of a majority in principal amount of Notes to
waive Defaults or Events of Default;
(7) amend, change or modify in any material respect the obligation of
the Company to make and consummate a Change of Control Offer in the event of
a Change of Control or make and consummate an Excess Proceeds Offer with
respect to any Asset Sale that has been consummated or modify any of the
provisions or definitions with respect thereto;
(8) modify or change any provision of the Indenture or the related
definitions affecting the subordination or ranking of the Notes or any
Guarantee in a manner that adversely affects the holders of Notes; and
(9) release any Guarantor from any of its obligations under its
Guarantee or the Indenture otherwise than in accordance with the terms of
the Indenture.
REPORTS TO HOLDERS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes:
(i) all quarterly and annual financial information that would be required to
be contained in a filing with the Commission on Forms 10-Q and 10-K if
the Company were required to file such forms, and
(ii) all current reports that would be required to be filed with the
Commission on Form 8-K (excluding reports filed in connection with
events reported solely pursuant to Item 5 thereof) if the Company were
required to file such reports.
In addition, following consummation of the exchange offer contemplated by
this prospectus, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability within the time periods specified in
the Commission's rules and regulations (unless the Commission will not accept
such a filing).
COMPLIANCE CERTIFICATE
The Company will deliver to the Trustee on or before 90 days after the end
of the Company's fiscal year and on or before 45 days after the end of each of
the first, second and third fiscal quarters in each year an Officers'
Certificate stating whether or not the signers know of any Default or Event of
Default that has occurred. If they do, the certificate will describe the Default
or Event of Default, its status and the intended method of cure, if any.
THE TRUSTEE
The Trustee under the Indenture will be the Registrar and Paying Agent with
regard to the Notes. The Indenture provides that, except during the continuance
of an Event of Default, the Trustee will perform only such duties as are
specifically set forth in the Indenture. During the existence of an Event of
Default, the Trustee will exercise such rights and powers vested in it under the
Indenture and use the same degree of care and skill in its exercise as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
105
<PAGE>
TRANSFER AND EXCHANGE
Holders of the Notes may transfer or exchange Notes in accordance with the
Indenture. The Registrar under such Indenture may require a holder, among other
things, to furnish appropriate endorsements and transfer documents, and to pay
any taxes and fees required by law or permitted by the Indenture. The Registrar
is not required to transfer or exchange any Note selected for redemption and,
further, is not required to transfer or exchange any Note for a period of
15 days before selection of the Notes to be redeemed.
The registered holder of a Note may be treated as the owner of it for all
purposes.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, MEMBERS OR STOCKHOLDERS
No director, officer, employee, member or stockholder of the Company or any
Subsidiary thereof shall have any liability for any obligation of the Company or
any Restricted Subsidiary under the Indenture or the Notes or for any claim
based on, in respect of, or by reason of, any such obligation or its creation.
Each holder of the Notes, by accepting the Notes, waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes.
GOVERNING LAW
The Indenture provides that it, the Notes and the Guarantees will be
governed by, and constructed in accordance with, the laws of the State of New
York.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms as well as any other capitalized terms used herein for which no
definition is provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person (including an
Unrestricted Subsidiary) existing at the time such Person becomes a Restricted
Subsidiary or is merged into or consolidated with any other Person or that is
assumed in connection with the acquisition of assets from such Person and, in
each case, not incurred by such Person in connection with, or in anticipation or
contemplation of, such Person becoming a Restricted Subsidiary or such merger,
consolidation or acquisition.
"ADJUSTED NET ASSETS" of any Person at any date shall mean the lesser of the
amount by which the fair value of the property of such Person exceeds the total
amount of liabilities, including, without limitation, contingent liabilities
(after giving effect to all other fixed and contingent liabilities), but
excluding liabilities under the Guarantee of such Person at such date and the
present fair saleable value of the assets of such Person at such date exceeds
the amount that will be required to pay the probable liability of such Person on
its debts (after giving effect to all other fixed and contingent liabilities and
after giving effect to any collection from any Subsidiary of such Person in
respect of the obligations of such Person under the Guarantee of such Person),
excluding Indebtedness in respect of the Guarantee of such Person, as they
become absolute and matured.
"AFFILIATE" means, with respect to any specific Person, any other Person
that directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. For the
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlling," "controlled by," and "under common control with"), as
used with respect to any Person, means the possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies of
such Person, whether through the ownership of voting securities, by agreement or
otherwise; PROVIDED that, for purposes of the covenant described under
"--Certain Covenants--Limitation on Transactions with Affiliates" beneficial
ownership of at least 10% of the voting securities of a Person, either directly
or indirectly, shall be deemed to be control.
106
<PAGE>
"ASSET ACQUISITION" means
(1) an Investment by the Company or any Restricted Subsidiary in any
other Person pursuant to which such Person shall become a Restricted
Subsidiary or shall be merged with or into the Company or any Restricted
Subsidiary or
(2) the acquisition by the Company or any Restricted Subsidiary of the
assets of any Person (other than a Restricted Subsidiary) which constitute
all or substantially all of the assets of such Person or comprise any
division or line of business of such Person or any other properties or
assets of such Person or any other properties or assets of such Person other
than in the ordinary course of business.
"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
assignment, transfer, lease or other disposition (including any Sale and
Lease-Back Transaction), other than to the Company or any of its Restricted
Subsidiaries, in any single transaction or series of related transactions of
(1) any Capital Stock of or other equity interest in any Restricted
Subsidiary, or
(2) any other property or assets, other than in the ordinary course of
business, of the Company or of any Restricted Subsidiary;
PROVIDED that Asset Sales shall not include
(1) a transaction or series of related transactions for which the
Company or the Restricted Subsidiaries receive aggregate consideration of
less than $1 million,
(2) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company as permitted under "--Merger,
Consolidation or Sale of Assets,"
(3) any Permitted Investment and any Restricted Payment permitted by
"--Certain Covenants--Limitation on Restricted Payments";
(4) any disposition of obsolete or unnecessary equipment or assets;
(5) the sale of up to 40% of the outstanding Capital Stock of Thermalloy
Malaysia Sdn Bhd in accordance with Malaysian law;
(6) the licensing of intellectual property in the ordinary course of
business;
(7) sales of Cash Equivalents; and
(8) the sale of 95% of the outstanding common membership interests of
Aavid Thermalloy, LLC to Heat Holdings II Corp. or the other restructuring
transactions set forth in a schedule to the Indenture.
"ASSET SALE PROCEEDS" means, with respect to any Asset Sale,
(1) cash received by the Company or any Restricted Subsidiary from such
Asset Sale (including cash received as consideration for the assumption of
liabilities incurred in connection with or in anticipation of such Asset
Sale), after
(a) provision for all income or other taxes measured by or resulting
from such Asset Sale,
(b) payment of all brokerage commissions and underwriting, legal,
accounting and other fees and expenses related to such Asset Sale,
(c) provision for minority interest holders in any Restricted
Subsidiary as a result of such Asset Sale,
(d) repayment of Indebtedness that is secured by the assets subject
to such Asset Sale or otherwise required to be repaid in connection with
such Asset Sale,
107
<PAGE>
(e) deduction of appropriate amounts to be provided by the Company or
a Restricted Subsidiary as a reserve, in accordance with GAAP, against
any liabilities associated with the assets sold or disposed of in such
Asset Sale and retained by the Company or a Restricted Subsidiary after
such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities and liabilities related to
environmental matters or against any indemnification obligations
associated with the assets sold or disposed of in such Asset Sale and
(f) deduction of any consideration (that would otherwise constitute
Asset Sale Proceeds) that is held in escrow, or otherwise reserved by the
Company or a Restricted Subsidiary, pending determination of whether a
purchase price adjustment will be made; PROVIDED, HOWEVER, that following
such determination and release of the amount in escrow to pay the
remaining consideration, such proceeds are applied in accordance with the
"Certain Covenants--Limitation on Certain Asset Sales"; and
(2) promissory notes and other non-cash consideration received by the
Company or any Restricted Subsidiary from such Asset Sale or other
disposition upon the liquidation or conversion of such notes or non-cash
consideration into cash.
"ATTRIBUTABLE INDEBTEDNESS" in respect of a Sale and Lease-Back Transaction
means, as at the time of determination, the greater of
(1) the fair value of the property subject to such arrangement and
(2) the present value of the total obligations (discounted at the rate
borne by the Notes, compounded semi-annually) of the lessee for rental
payments during the remaining term of the lease included in such Sale and
Lease-Back Transaction (including any period for which such lease has been
extended).
"AVAILABLE ASSET SALE PROCEEDS" means, with respect to any Asset Sale, the
aggregate Asset Sale Proceeds from such Asset Sale that have not been applied in
accordance with clauses (3)(a) or (3)(b) of the first paragraph of "--Certain
Covenants--Limitation on Certain Assets Sales", and that have not yet been the
basis for an Excess Proceeds Offer in accordance with clause (3)(c) of the first
paragraph of "--Certain Covenants--Limitation on Certain Asset Sales."
"BOARD OF DIRECTORS" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"CAPITAL STOCK" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated and whether
or not voting) of corporate stock, partnership or limited liability company
interests or any other participation, right or other interest in the nature of
an equity interest in such Person including, without limitation, Common Stock
and Preferred Stock of such Person, or any option, warrant or other security
convertible into any of the foregoing.
"CAPITALIZED LEASE OBLIGATIONS" means, with respect to any Person,
Indebtedness represented by obligations under a lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP, and the
amount of such Indebtedness shall be the capitalized amount of such obligations
determined in accordance with GAAP.
"CASH EQUIVALENTS" means
(1) marketable direct obligations issued by, or unconditionally
guaranteed by, the United States Government or issued by any agency or
instrumentality thereof and backed by the full faith and credit of the
United States, in each case maturing within one year from the date of
acquisition thereof;
108
<PAGE>
(2) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either Standard & Poor's Corporation ("S&P")
or Moody's Investors Service, Inc. ("Moody's");
(3) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of at
least A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances maturing within one
year from the date of acquisition thereof issued by any bank organized under
the laws of the United States of America or any state thereof or the
District of Columbia or any U.S. branch of a foreign bank having at the date
of acquisition thereof combined capital and surplus of not less than
$250,000,000;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause (4) above;
and
(6) investments in money market funds that invest substantially all
their assets in securities of the types described in clauses (1) through
(5) above.
A "CHANGE OF CONTROL" of the Company will be deemed to have occurred at such
time as
(1) any Person or group of related Persons for purposes of
Section 13(d) of the Exchange Act (a "Group"), other than a Permitted
Holder, becomes the beneficial owner (as defined under Rule 13d-3 or any
successor rule or regulation promulgated under the Exchange Act, except that
a Person shall be deemed to have "beneficial ownership" of all securities
that such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time) of 50% or more of the total
voting or economic power of the Company's Capital Stock;
(2) any Person or Group, other than a Permitted Holder, becomes the
beneficial owner (as defined under Rule 13d-3 or any successor rule or
regulation promulgated under the Exchange Act, except that a Person shall be
deemed to have "beneficial ownership" of all securities that such Person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time) of more than 33 1/3% of the total voting power of
the Company's Capital Stock, and the Permitted Holders beneficially own, in
the aggregate, a lesser percentage of the total voting power of the Capital
Stock of the Company than such other Person or Group and do not have the
right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the Board of Directors of the Company;
(3) there shall be consummated any consolidation or merger of the
Company in which the Company is not the continuing or surviving Person or
pursuant to which the Common Stock of the Company would be converted into
cash, securities or other property, other than a merger or consolidation of
the Company in which the holders of the Capital Stock of the Company
outstanding immediately prior to the consolidation or merger hold, directly
or indirectly, at least a majority of the Capital Stock of the surviving
corporation immediately after such consolidation or merger;
(4) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the shareholders of the Company has been
approved by the Permitted Holders or a majority of the directors then still
in office who either were directors at the beginning of such period or whose
election or recommendation for election was previously so approved) cease to
constitute a majority of the Board of Directors of the Company; or
109
<PAGE>
(5) the approval by the holders of Capital Stock of the Company of any
plan or proposal for the liquidation or dissolution of the Company (whether
or not otherwise in compliance with the provisions of the Indenture).
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" of any Person means all Capital Stock of such Person that is
generally entitled to
(1) vote in the election of directors of such Person or
(2) if such Person is not a corporation, vote or otherwise participate
in the selection of the governing body, partners, managers or others that
will control the management and policies of such Person.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to any
Person, the ratio of EBITDA of such Person during the four full fiscal quarters
(the "Four Quarter Period") ending on or prior to the date of the transaction
giving rise to the need to calculate the Consolidated Fixed Charge Coverage
Ratio (the "Transaction Date") to Consolidated Fixed Charges of such Person for
the Four Quarter Period. In addition to and without limitation of the foregoing,
for purposes of this definition, "EBITDA" and "Consolidated Fixed Charges" shall
be calculated after giving effect on a PRO FORMA basis for the period of such
calculation to
(1) the incurrence or repayment of any Indebtedness of such Person or
any of the Restricted Subsidiaries or the issuance or redemption or other
repayment of Preferred Stock (and the application of the proceeds thereof)
giving rise to the need to make such calculation and any incurrence or
repayment of other Indebtedness and, in the case of any Restricted
Subsidiary, the issuance or redemption or other repayment of Preferred Stock
(and the application of the proceeds thereof), other than the incurrence or
repayment of Indebtedness in the ordinary course of business for working
capital purposes pursuant to working capital facilities, occurring during
the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date (except that, in
determining the Consolidated Fixed Charge Coverage Ratio as of any
Transaction Date, any Permitted Indebtedness that is incurred concurrently
with the Indebtedness giving rise to the need to calculate the Consolidated
Fixed Charge Coverage Ratio shall not be included for purposes of such
calculation on such date of issuance), as if such incurrence or repayment or
issuance or redemption or other repayment, as the case may be (and the
application of the proceeds thereof), occurred on the first day of the Four
Quarter Period and
(2) any asset sales or other disposition or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the
need to make such calculation as a result of such Person or one of the
Restricted Subsidiaries (including any Person who becomes a Restricted
Subsidiary as a result of the Asset Acquisition) incurring, assuming or
otherwise being liable for Acquired Indebtedness and also including any
EBITDA (PROVIDED that such EBITDA shall be included only to the extent
includable pursuant to the definition of "Consolidated Net Income")
(including any PRO FORMA expense and cost reductions calculated on a basis
consistent with Regulation S-X of the Exchange Act) attributable to the
assets that are the subject of the Asset Acquisition or asset sale or other
disposition during the Four Quarter Period) occurring during the Four
Quarter Period or at any time subsequent to the last day of the Four Quarter
Period and on or prior to the Transaction Date, as if such asset sale or
other disposition or Asset Acquisition (including the incurrence, assumption
or liability for any such Acquired Indebtedness) occurred on the first day
of the Four Quarter Period.
In making any calculation of the Consolidated Fixed Charge Coverage Ratio for
any Four Quarter Period commencing prior to the Merger, the Merger and the
financing thereof shall be deemed to have taken place on the first day of such
Four Quarter Period.
110
<PAGE>
If such Person or any of the Restricted Subsidiaries directly or indirectly
guarantees Indebtedness of a third Person, the preceding sentence shall give
effect to the incurrence of such guaranteed Indebtedness as if such Person or
any Restricted Subsidiary of such Person had directly incurred or otherwise
assumed such guaranteed Indebtedness. Furthermore, in calculating "Consolidated
Fixed Charges" for purposes of determining the denominator (but not the
numerator) of this "Consolidated Fixed Charge Coverage Ratio,"
(1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal
to the rate of interest on such Indebtedness in effect on the Transaction
Date;
(2) notwithstanding clause (1) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered by
one or more Interest Rate Agreements, shall be deemed to accrue at the rate
per annum resulting after giving effect to the operation of such agreements;
and
(3) interest accrued on outstanding Indebtedness incurred under a
revolving credit facility shall be computed based upon the average daily
balance of such Indebtedness during the Four Quarter Period.
"CONSOLIDATED FIXED CHARGES" means, with respect to any Person, for any
period, the sum, without duplication, of
(1) Consolidated Interest Expense, plus
(2) the product of
(a) the amount of all dividend payments on any series of Preferred
Stock of such Person and the Restricted Subsidiaries (other than
dividends paid in Capital Stock (other the Disqualified Capital Stock)
and other than dividends to the Company on Preferred Stock of the
Restricted Subsidiaries) paid, during such period times
(b) a fraction, the numerator of which is one and the denominator of
which is one minus the then current effective consolidated federal, state
and local tax rate of such Person, expressed as a decimal.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person, for any
period, the aggregate amount of interest that, in conformity with GAAP, would be
set forth opposite the caption "interest expense" or any like caption on an
income statement for such Person and the Restricted Subsidiaries on a
consolidated basis (including, but not limited to,
(1) Redeemable Dividends paid on Preferred Stock of a Restricted
Subsidiary (other than such dividends paid to the Company),
(2) imputed interest included in Capitalized Lease Obligations,
(3) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing,
(4) the net costs associated with Interest Rate Agreements, Currency
Agreements and other hedging obligations,
(5) amortization of other financing fees and expenses,
(6) the interest portion of any deferred payment obligation,
(7) amortization of discount (including without limitation all original
issue discount on the Notes) or premium, if any, and
111
<PAGE>
(8) all other non-cash interest expense (other than interest amortized
to cost of sales))
plus, without duplication,
(1) all net capitalized interest for such period,
(2) all interest incurred or paid under any guarantee of Indebtedness
(including a guarantee of principal, interest or any combination thereof) of
any Person, and
(3) the amount of all dividends or distributions paid on Disqualified
Capital Stock (other than dividends paid or payable in shares of Capital
Stock of the Company).
"CONSOLIDATED NET INCOME" means, with respect to any Person, for any period,
the aggregate of the Net Income of such Person and the Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED, HOWEVER, that
(1) the Net Income of (A) any Person (the "other Person") in which the
referent Person or any of the Restricted Subsidiaries has less than a 100%
interest (which interest does not cause the Net Income of such other Person
to be consolidated into the Net Income of the Person in question in
accordance with GAAP) and (B) any Unrestricted Subsidiary shall be included
only to the extent of the amount of dividends or distributions paid, and in
the case of (B) paid in cash, to the Person in question or the Restricted
Subsidiary;
(2) the Net Income of any Restricted Subsidiary of the Person in
question that is subject to any restriction or limitation on the payment of
dividends or the making of other distributions shall be excluded to the
extent of such restriction or limitation;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded;
(4) any net gain or net loss (in the case of any net loss only to the
extent that such determination of Consolidated Net Income is being made in
connection with the determination of amounts available for Restricted
Payments pursuant to the provision described under "--Certain
Covenants--Limitation on Restricted Payments" above) resulting from an Asset
Sale by the Person in question or any of the Restricted Subsidiaries other
than in the ordinary course of business shall be excluded;
(5) extraordinary gains and losses shall be excluded;
(6) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period whether or not
such operations were classified as discontinued) shall be excluded;
(7) in the case of a successor to the referent Person by consolidation
or merger or as a transferee of the referent Person's assets, any earnings
of the successor corporation prior to such consolidation, merger or transfer
of assets shall be excluded; and
(8) any charge for minority interest attributable to Heat Holding II
Corp.'s interest in Aavid Thermalloy, LLC shall be excluded.
"CUMULATIVE CONSOLIDATED NET INCOME" means, with respect to any Person, as
of any date of determination, Consolidated Net Income from February 2, 2000 to
the end of such Person's most recently ended full fiscal quarter prior to such
date, taken as a single accounting period.
"CURRENCY AGREEMENT" means, with respect to any Person, any foreign currency
exchange agreement, option or futures contract or other similar agreement or
arrangement designed to protect the party indicated therein against fluctuations
in foreign currency exchange rates.
112
<PAGE>
"DESIGNATED SENIOR INDEBTEDNESS," as to the Company or any Guarantor, as the
case may be, means
(1) Indebtedness under the Senior Credit Facility and
(2) any other Indebtedness that at the time of determination exceeds
$20.0 million in aggregate principal amount (or accreted value in the case
of Indebtedness issued at a discount) outstanding or available under a
committed facility, which is specifically designated in the instrument
evidencing such Senior Indebtedness as "Designated Senior Indebtedness" by
such Person and as to which the Trustee has been given written notice of
such designation.
"DISQUALIFIED CAPITAL STOCK" means any Capital Stock of a Person or a
Restricted Subsidiary thereof that, by its terms (or by the terms of any
security into which it is convertible or for which it is exchangeable at the
option of the holder), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, in whole or in part, on or
prior to the maturity date of the Notes, for cash or securities constituting
Indebtedness. Without limitation of the foregoing, Disqualified Capital Stock
shall be deemed to include any Preferred Stock of a Person or a Restricted
Subsidiary of such Person, with respect to either of which, under the terms of
such Preferred Stock, by agreement or otherwise, such Person or Restricted
Subsidiary is obligated to pay current dividends or distributions in cash during
the period prior to the maturity date of the Notes; PROVIDED, HOWEVER, that
Preferred Stock of a Person or any Restricted Subsidiary thereof that is issued
with the benefit of provisions requiring a change of control offer to be made
for such Preferred Stock in the event of a change of control of such Person or
Restricted Subsidiary, which provisions have substantially the same effect as
the provisions of the Indenture described under "Change of Control," shall not
be deemed to be Disqualified Capital Stock solely by virtue of such provisions
and, PROVIDED, further, that if such Capital Stock is issued pursuant to any
plan for the benefit of employees of the Company or its Subsidiaries or by any
such plan to such employees, such Capital Stock shall not constitute
Disqualified Capital Stock solely because it may be required to be repurchased
by the Company in order to satisfy applicable statutory or regulatory
obligations.
"EBITDA" means, with respect to any Person and the Restricted Subsidiaries,
for any period, an amount equal to
(1) the sum of
(a) Consolidated Net Income for such period, plus
(b) the provision for taxes for such period based on income or
profits to the extent such income or profits were included in computing
Consolidated Net Income and any provision for taxes utilized in computing
net loss under clause (a) hereof, plus
(c) Consolidated Interest Expense for such period, plus
(d) depreciation for such period on a consolidated basis, plus
(e) amortization of intangibles for such period on a consolidated
basis, plus
(f) any other non-cash items reducing Consolidated Net Income for
such period, except for any non-cash items that represent accruals of, or
reserves for, cash disbursements to be made in any future accounting
period or amortization of a prepaid cash expense that was paid in a prior
period, minus
(2) all non-cash items increasing Consolidated Net Income (other than
any non-cash items that were accrued in the ordinary course of business) for
such period, all for such Person and the Restricted Subsidiaries determined
on a consolidated basis in accordance with GAAP;
113
<PAGE>
PROVIDED, HOWEVER, that, for purposes of calculating EBITDA during any fiscal
quarter, cash income from a particular Investment (other than a Restricted
Subsidiary) of such Person shall be included only
(1) if cash income has been received by such Person with respect to such
Investment during each of the previous four fiscal quarters or
(2) if the cash income derived from such Investment is attributable to
Cash Equivalents.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a resolution of the Board of
Directors of the Company delivered to the Trustee.
"FOREIGN RESTRICTED SUBSIDIARY" means any Restricted Subsidiary of the
Company that is not a domestic Restricted Subsidiary.
"GAAP" means generally accepted accounting principles consistently applied
as in effect in the United States from time to time.
"GUARANTEE" means the guarantee of the obligations of the Company with
respect to the Notes by each Guarantor.
"GUARANTOR" means the issuer at any time of a Guarantee (so long as such
Guarantee remains outstanding), which shall consist of each of the Company's
domestic Restricted Subsidiaries (excluding domestic Subsidiaries of Foreign
Restricted Subsidiaries).
"INCUR" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or other obligation on the balance sheet of such Person (and
"incurrence," "incurred," "incurable," and "incurring" shall have meanings
correlative to the foregoing); PROVIDED that a change in GAAP that results in an
obligation of such Person that exists at such time becoming Indebtedness shall
not be deemed an incurrence of such Indebtedness.
"INDEBTEDNESS" means (without duplication), with respect to any Person, any
indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase price of any
property (excluding, without limitation, any balances that constitute accounts
payable or trade payables, and other accrued liabilities arising in the ordinary
course of business) if and to the extent any of the foregoing indebtedness would
appear as a liability upon a balance sheet of such Person prepared in accordance
with GAAP, and shall also include, to the extent not otherwise included,
(1) any Capitalized Lease Obligations of such Person;
(2) obligations secured by a Lien to which the property or assets owned
or held by such Person is subject (other than a Permitted Lien not securing
any liability that would itself constitute Indebtedness), whether or not the
obligation or obligations secured thereby shall have been assumed, PROVIDED
that if such obligations have not been assumed by such Person, the amount of
such Indebtedness shall be the lesser of (A) the fair market value of such
assets at such date of determination and (B) the amount of such obligations;
114
<PAGE>
(3) guarantees of items of other Persons which would be included within
this definition for such other Persons (whether or not such items would
appear upon the balance sheet of the guarantor);
(4) all obligations for the reimbursement of any obligor on any letter
of credit, banker's acceptance or similar credit transaction;
(5) Disqualified Capital Stock of such Person or any Subsidiary thereof;
and
(6) obligations of any such Person under any Currency Agreement or any
Interest Rate Agreement applicable to any of the foregoing (if and to the
extent such Currency Agreement or Interest Rate Agreement obligations would
appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP).
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation; PROVIDED that:
(1) the amount outstanding at any time of any Indebtedness issued with
original issue discount is the principal amount of such Indebtedness less
the remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP and
(2) Indebtedness shall not include any liability for federal, state,
local or other taxes.
Notwithstanding any other provision of the foregoing definition, any trade
payable arising from the purchase of goods or materials or for services obtained
in the ordinary course of business shall not be deemed to be "Indebtedness" of
the Company or any of the Restricted Subsidiaries for purposes of this
definition. Furthermore, guarantees of (or obligations with respect to letters
of credit supporting) Indebtedness otherwise included in the determination of
such amount shall not also be included.
"INDEPENDENT FINANCIAL ADVISOR" means an investment banking firm of national
reputation in the United States
(1) which does not, and whose directors, officers or Affiliates do not,
have a direct or indirect financial interest in the Company,
(2) which, in the judgment of the Board of Directors of the Company, is
otherwise independent and qualified to perform the task for which it is to
be engaged.
"INTEREST RATE AGREEMENT" means, with respect to any Person, any interest
rate swap agreement, interest rate cap agreement, interest rate collar agreement
or other similar agreement designed to protect the party indicated therein
against fluctuations in interest rates.
"INVESTMENTS" means, with respect of any Person, directly or indirectly, any
advance, account receivable (other than an account receivable arising in the
ordinary course of business of such Person), loan or capital contribution to (by
means of transfers of property to others, payments for property or services for
the account or use of others or otherwise), or any purchase or acquisition by
such Person of any Capital Stock, bonds, notes, debentures, partnership or joint
venture interests or other securities of, the acquisition, by purchase or
otherwise, of all or substantially all of the business or assets or stock or
other evidence of beneficial ownership of, any Person or the making of any
investment in any Person. Investments shall exclude
(1) extensions of trade credit on commercially reasonable terms in
accordance with normal trade practices of such Person,
115
<PAGE>
(2) endorsements for collection or deposit in the ordinary course of
business by such Person of bank drafts and similar negotiable instruments of
such other Person received as payment for ordinary course of business trade
receivables and
(3) the repurchase of securities of any Person by such Person.
For the purposes of the "--Limitation on Restricted Payments" covenant, the
amount of any Investment shall be the original cost of such Investment plus the
cost of all additional Investments by the Company or any of the Restricted
Subsidiaries, without any adjustments for increases or decreases in value, or
write-ups, write-downs or write-offs with respect to such Investment, reduced by
the payment of cash distributions which constitute a return of capital in
connection with such Investment; PROVIDED that the aggregate of all such
reductions shall not exceed the amount of such initial Investment plus the cost
of all additional Investments; PROVIDED, FURTHER that no such payment of
dividends or distributions or receipt of any such other amounts shall reduce the
amount of any Investment if such payment of distributions or receipt of any such
amounts would be included in Consolidated Net Income.
If the Company or any Restricted Subsidiary sells or otherwise disposes of
any Common Stock of any direct or indirect Restricted Subsidiary such that,
after giving effect to any such sale or disposition, the Company no longer owns,
directly or indirectly, greater than 50% of the outstanding Common Stock of such
Restricted Subsidiary, the Company shall be deemed to have made an Investment on
the date of any such sale or disposition equal to the fair market value of the
Common Stock of such Restricted Subsidiary not sold or disposed of.
"ISSUE DATE" means the date the Notes are first issued by the Company and
authenticated by the Trustee under the Indenture.
"LIEN" means, with respect to any property or assets of any Person, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement, encumbrance, preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including
without limitation, any Capitalized Lease Obligation, conditional sales or other
title retention agreement having substantially the same economic effect as any
of the foregoing).
"MAKE-WELL AGREEMENT" means that certain agreement among Holdings, the
Company and the Trustee dated as of the Issue Date and attached to the Indenture
as Exhibit G pursuant to which Holdings has committed to make additional equity
contributions to repay Senior Indebtedness in an amount necessary (not to exceed
$25.0 million in the aggregate) for the Company's Debt to EBITDA Ratio (as
defined therein) on a PRO FORMA basis after such debt reduction to be no more
than 4.5 to 1.0 for the twelve-month period ended December 31, 2000 and no more
than 4.25 to 1.0 for the twelve-month period ended December 31, 2001.
"MERGER" means the merger of Heat Merger Corp. with and into the Company
pursuant to the terms of the Agreement and Plan of Merger, dated as of
August 23, 1999.
"NET INCOME" means, with respect to any Person, for any period, the net
income (loss) of such Person determined in accordance with GAAP.
"NET PROCEEDS" means
(1) in the case of any sale of Capital Stock by or equity contribution
to any Person, the aggregate net proceeds received by such Person, after
payment of expenses, commissions and the like incurred in connection
therewith, whether such proceeds are in cash or in property (valued at the
fair market value thereof, as determined in good faith by the Board of
Directors of such Person, at the time of receipt) and
116
<PAGE>
(2) in the case of any exchange, exercise, conversion or surrender of
outstanding securities of any kind for or into shares of Capital Stock of
the Company which is not Disqualified Capital Stock, the net book value of
such outstanding securities on the date of such exchange, exercise,
conversion or surrender (plus any additional amount required to be paid by
the holder to such Person upon such exchange, exercise, conversion or
surrender, less any and all payments made to the holders, e.g., on account
of fractional shares and less all expenses incurred by such Person in
connection therewith).
"NON-PAYMENT EVENT OF DEFAULT" means any event (other than a Payment
Default) the occurrence of which entitles one or more Persons to accelerate the
maturity of any Designated Senior Indebtedness.
"OFFICERS' CERTIFICATE" means, with respect to any Person, a certificate
signed by two Officers of such Person that shall comply with applicable
provisions of the Indenture.
"PAYMENT DEFAULT" means any default, whether or not any requirement for the
giving of notice, the lapse of time or both, or any other condition to such
default becoming an event of default has occurred, in the payment of principal
of or premium, if any, or interest on or any other amount payable in connection
with Designated Senior Indebtedness.
"PERMITTED HOLDERS" means Willis Stein & Partners, investment funds managed
by Willis Stein & Partners, partners and limited partners of Willis Stein &
Partners and such investment funds, and any entity controlled by any of the
foregoing and/or by a trust for the benefit of any of the foregoing.
"PERMITTED INDEBTEDNESS" means:
(1) Indebtedness of the Company or any Restricted Subsidiary arising
under or in connection with the Senior Credit Facility in an aggregate
principal amount not to exceed $75 million outstanding at any time less any
mandatory prepayment actually made thereunder (to the extent, in the case of
payments of revolving credit borrowings, that the corresponding commitments
have been permanently reduced);
(2) Indebtedness under the Notes and the Guarantees;
(3) Indebtedness not covered by any other clause of this definition
which is outstanding on the Issue Date;
(4) Indebtedness of the Company to any Restricted Subsidiary and
Indebtedness of any Restricted Subsidiary to the Company or another
Restricted Subsidiary;
(5) Purchase Money Indebtedness and Capitalized Lease Obligations
incurred to acquire property in the ordinary course of business, which
Purchase Money Indebtedness and Capitalized Lease Obligations do not in the
aggregate exceed $5 million at any one time outstanding;
(6) Interest Rate Agreements and Currency Agreements;
(7) Refinancing Indebtedness;
(8) Indebtedness incurred in respect of (A) surety, judgment, appeal,
performance and other similar bonds, instruments or obligations provided in
the ordinary course of business or (B) letters of credit, bankers'
acceptances or other similar instruments or obligations issued in connection
with liabilities incurred in the ordinary course of business;
(9) Indebtedness consisting of guarantees made in the ordinary course
of business by the Company or any of its Restricted Subsidiaries in
accordance with the terms of the Indenture of obligations of the Company or
any of its Restricted Subsidiaries, which obligations are otherwise
permitted under the Indenture;
117
<PAGE>
(10) Indebtedness of the Company or any Restricted Subsidiary
consisting of indemnities or obligations in respect of purchase price
adjustments in connection with the acquisition or disposition of assets,
including pursuant to the Thermalloy acquisition and the Merger;
(11) Indebtedness incurred by Foreign Restricted Subsidiaries in an
amount not to exceed $20.0 million; PROVIDED, HOWEVER, that the amount of
any Indebtedness under this clause (11) shall reduce the amount of
Indebtedness permitted under clause (1) above; and
(12) additional Indebtedness of the Company and the Restricted
Subsidiaries not to exceed $10.0 million in aggregate principal amount at
any one time outstanding.
For purposes of determining compliance with any dollar-denominated
restriction on the incurrence of Indebtedness denominated in a foreign currency,
the dollar equivalent principal amount of such Indebtedness incurred pursuant
thereto shall be calculated based on the relevant currency exchange rate in
effect on the date that such Indebtedness was incurred, in the case of term
debt, or first committed, in the case of revolving credit debt, PROVIDED that
(x) the dollar-equivalent principal amount of any such Indebtedness outstanding
on the Issue Date shall be calculated based on the relevant currency exchange
rate in effect on the Issue Date and (y) if such Indebtedness is incurred to
refinance other Indebtedness denominated in a foreign currency, and such
refinancing would cause the applicable dollar-denominated restriction to be
exceeded if calculated at the relevant currency exchange rate in effect of the
date of such refinancing, such dollar-denominated restriction shall be deemed
not to have been exceeded so long as the principal amount of such refinancing
Indebtedness does not exceed the principal amount of such Indebtedness being
refinanced. The principal amount of any Refinancing Indebtedness, if incurred in
a different currency from the Indebtedness being refinanced, shall be calculated
based on the currency exchange rate applicable to the currencies in which such
respective Indebtedness in denominated that is in effect on the date of such
refinancing. Notwithstanding the foregoing, the dollar-equivalent principal
amount of Indebtedness incurred pursuant to the Senior Credit Facility shall be
calculated in accordance therewith.
"PERMITTED INVESTMENTS" means Investments made on or after the Issue Date
consisting of
(1) Investments by the Company, or by a Restricted Subsidiary, in the
Company or a Restricted Subsidiary;
(2) Investments by the Company, or by a Restricted Subsidiary, in a
Person, if as a result of such Investment (a) such Person becomes a
Restricted Subsidiary or (b) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary;
(3) Investments in cash and Cash Equivalents;
(4) reasonable and customary loans made to employees in connection with
their relocation not to exceed $500,000 in the aggregate at any one time
outstanding;
(5) an Investment that is made by the Company or a Restricted
Subsidiary in the form of any Capital Stock, bonds, notes, debentures,
partnership or joint venture interests or other securities that are issued
by a third party to the Company or such Restricted Subsidiary solely as
partial consideration for the consummation of an Asset Sale that is
otherwise permitted under "--Certain Covenants--Limitation on Certain Asset
Sales" above;
(6) Interest Rate Agreements and Currency Agreements entered into in
the ordinary course of the Company's or the Restricted Subsidiaries'
business;
(7) additional Investments not to exceed $1.0 million at any one time
outstanding;
(8) Investments existing on the Issue Date;
118
<PAGE>
(9) Investments in securities of trade creditors received pursuant to
any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of such trade creditors or customers;
(10) guarantees by the Company or any Restricted Subsidiary of
Indebtedness otherwise permitted to be incurred by Restricted Subsidiaries
under the Indenture; and
(11) Investments for which the sole consideration provided is Capital
Stock (other than Disqualified Capital Stock).
"PERMITTED LIENS" means
(1) Liens on property or assets of, or any shares of Capital Stock of
or secured indebtedness of, any Person existing at the time such Person
becomes a Restricted Subsidiary or at the time such Person is merged into
the Company or any of the Restricted Subsidiaries; PROVIDED that such Liens
are not incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or merging into the Company or any of the
Restricted Subsidiaries;
(2) Liens on Property acquired by the Company or a Restricted
Subsidiary; PROVIDED, that such Liens are not incurred in connection with,
or in contemplation of, such acquisition of Property;
(3) Liens securing Indebtedness under the Senior Credit Facility, which
Indebtedness is incurred in compliance with "--Certain Covenants--Limitation
on Additional Indebtedness" above;
(4) Liens securing Refinancing Indebtedness that is incurred to
Refinance any Indebtedness that has been secured by a Lien permitted under
the Indenture and that has been incurred in accordance with the provisions
of the Indenture; PROVIDED that any such Lien (i) is not less favorable to
the holders of the Notes and is not more favorable to the lienholders with
respect to such Lien than the Lien in respect of Indebtedness being
Refinanced; and (ii) does not extend to or cover any Property, Capital Stock
or Indebtedness other than the Property, shares or debt securing the
Indebtedness so refunded, refinanced or extended;
(5) Liens in favor of the Company or any of the Restricted
Subsidiaries;
(6) Liens securing industrial revenue bonds;
(7) Liens securing Purchase Money Indebtedness that is otherwise
permitted under the Indenture; PROVIDED that
(a) any such Lien is created solely for the purpose of securing
Indebtedness representing, or incurred to finance, refinance or refund,
the cost (including sales and excise taxes, installation and delivery
charges and other direct costs of, and other direct expenses paid or
charged in connection with, such purchase or construction) of such
Property,
(b) the principal amount of the Indebtedness secured by such Lien
does not exceed 100% of such costs and
(c) such Lien does not extend to or cover any Property other than
such item of Property and any improvements on such item;
(8) statutory liens or landlords', carriers', warehouseman's,
mechanics', suppliers', materialmen's, repairmen's or other like Liens
arising in the ordinary course of business which do not secure any
Indebtedness and with respect to amounts not yet delinquent or being
contested in good faith by appropriate proceedings, if a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made therefor;
119
<PAGE>
(9) Liens for taxes, assessments or governmental charges that are being
contested in good faith by appropriate proceedings;
(10) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company or
any of the Restricted Subsidiaries;
(11) Liens securing Capitalized Lease Obligations permitted to be
incurred under the Indenture; PROVIDED that such Lien does not extend to any
property other than that subject to the underlying lease;
(12) Liens existing on the Issue Date and Liens securing the Notes;
(13) Liens incurred or deposits made in the ordinary course of business
in connection with worker's compensation, unemployment insurance and other
types of social security, including landlord Liens on leased properties and
any Lien securing letters of credit issued in the ordinary course of
business consistent with past practice in connection therewith, or to secure
the performance of tenders, statutory obligations, surety and appeals bonds,
bids, leases, government contracts, performance bonds and other similar
obligations;
(14) attachment or judgment Liens not giving rise to an Event of
Default;
(15) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(16) Liens securing reimbursement obligations with respect to
commercial letters of credit that encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(17) Liens in respect of obligations under Interest Rate Agreements or
Currency Agreements;
(18) Liens securing Indebtedness of Foreign Restricted Subsidiaries
incurred in reliance on clause (11) of the definition of Permitted
Indebtedness;
(19) Liens in favor of the Trustee pursuant to the Indenture; and
(20) any extensions, substitutions, replacements or renewals of the
foregoing.
"PERSON" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization or government (including any agency or political subdivision
thereof).
"PREFERRED STOCK" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"PROPERTY" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in the
most recent consolidated balance sheet of such Person and its Subsidiaries under
GAAP.
"PUBLIC EQUITY OFFERING" means a public offering by the Company, Holdings or
Holdings II of shares of its Common Stock (however designated and whether voting
or not-voting) and any and all rights, warrants or options to acquire such
Common Stock and, in the case of a public offering by Holdings or Holdings II,
the proceeds thereof are contributed to the Company.
120
<PAGE>
"PURCHASE MONEY INDEBTEDNESS" means any Indebtedness incurred in the
ordinary course of business by a Person to finance the cost (including the cost
of construction) of an item of property, the principal amount of which
Indebtedness does not exceed the sum of
(1) 100% of such cost and
(2) reasonable fees and expenses of such Person incurred in connection
therewith.
"REDEEMABLE DIVIDEND" means, for any cash dividend or distribution with
regard to Preferred Stock, the quotient of the dividend or distribution divided
by the difference between one and the maximum statutory federal income tax rate
(expressed as a decimal number between 1 and 0) then applicable to the issuer of
such Preferred Stock.
"REFINANCING INDEBTEDNESS" means Indebtedness that refunds, refinances or
extends any Indebtedness of the Company outstanding on the Issue Date or other
Indebtedness permitted to be incurred by the Company or the Restricted
Subsidiaries pursuant to the terms of the Indenture (other than pursuant to
clauses 1, 5, 11 and 12 of the definition of Permitted Indebtedness), but only
to the extent that
(1) the Refinancing Indebtedness is subordinated to the Notes to at
least the same extent as the Indebtedness being refunded, refinanced or
extended, if at all;
(2) the Refinancing Indebtedness is scheduled to mature either
(a) no earlier than the Indebtedness being refunded, refinanced or
extended or
(b) after the maturity date of the Notes;
(3) the portion, if any, of the Refinancing Indebtedness that is
scheduled to mature on or prior to the maturity date of the Notes has a
Weighted Average Life to Maturity at the time such Refinancing Indebtedness
is incurred that is equal to or greater than the Weighted Average Life to
Maturity of the portion of the Indebtedness being refunded, refinanced or
extended that is scheduled to mature on or prior to the maturity date of the
Notes;
(4) such Refinancing Indebtedness is in an aggregate principal amount
that is equal to or less than the sum of
(a) the aggregate principal amount then outstanding under the
Indebtedness being refunded, refinanced or extended,
(b) the amount of accrued and unpaid interest, if any, and premiums
owed, if any, not in excess of preexisting prepayment provisions on such
Indebtedness being refunded, refinanced or extended, and
(c) the amount of customary fees, expenses and costs related to the
incurrence of such Refinancing Indebtedness; and
(5) such Refinancing Indebtedness is incurred by the same Person that
initially incurred the Indebtedness being refunded, refinanced or extended,
except that the Company may incur Refinancing Indebtedness to refund,
refinance or extend Indebtedness of any Restricted Subsidiary.
"RESTRICTED PAYMENT" means any of the following:
(1) the declaration or payment of any dividend or any other
distribution or payment on Capital Stock of the Company or any Restricted
Subsidiary or any payment made to the direct or indirect holders (in their
capacities as such) of Capital Stock of the Company or any Restricted
Subsidiary (other than (a) dividends or distributions payable solely in
Capital Stock (other than Disqualified Capital Stock) or in options,
warrants or other rights to purchase such Capital Stock
121
<PAGE>
(other than Disqualified Capital Stock), and (b) in the case of Restricted
Subsidiaries of the Company, dividends or distributions payable to the
Company or to a Restricted Subsidiary);
(2) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company or any of the Restricted
Subsidiaries (other than Capital Stock owned by the Company or a Restricted
Subsidiary, excluding Disqualified Capital Stock) or any option, warrants or
other rights to purchase such Capital Stock;
(3) the making of any principal payment on, or the purchase,
defeasance, repurchase, redemption or other acquisition or retirement for
value, prior to any scheduled maturity, scheduled repayment or scheduled
sinking fund payment, of any Indebtedness which is subordinated in right of
payment to the Notes (other than subordinated Indebtedness acquired in
anticipation of satisfying a scheduled sinking fund obligation, principal
installment or final maturity, in each case due within one year of the date
of acquisition);
(4) the making of any Investment or guarantee of any Investment in any
Person other than a Permitted Investment;
(5) any designation of a Restricted Subsidiary as an Unrestricted
Subsidiary (valued at the fair market value of the net assets of such
Restricted Subsidiary on the date of such designation); and
(6) forgiveness of any Indebtedness of an Affiliate of the Company to
the Company or a Restricted Subsidiary.
For purposes of determining the amount expended for Restricted Payments, cash
distributed or invested shall be valued at the face amount thereof and property
other than cash shall be valued at its fair market value.
"RESTRICTED SUBSIDIARY" means a Subsidiary of the Company other than an
Unrestricted Subsidiary and includes all of the Subsidiaries of the Company
existing as of the Issue Date.
"SALE AND LEASE-BACK TRANSACTION" means any arrangement with any Person
providing for the leasing by the Company or any Restricted Subsidiary of any
real or tangible personal property, which property has been or is to be sold or
transferred by the Company or such Restricted Subsidiary to such Person in
contemplation of such leasing.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
"SENIOR CREDIT FACILITY" means the Amended and Restated Credit Agreement
dated as of the Issue Date, by and among the Company, the lenders party thereto
in their capacities as lenders thereunder and Canadian Imperial Bank of
Commerce, as agent, together with the related documents thereto (including,
without limitation, any guarantee agreements and security documents), in each
case as such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including increasing the amount of available borrowings
thereunder (PROVIDED that such increase in borrowings is permitted by the
"--Limitation on Additional Indebtedness" covenant) or adding Restricted
Subsidiaries of the Company as additional borrowers or guarantors thereunder)
all or any portion of the Indebtedness under such agreement or any successor or
replacement agreement and whether by the same or any other agent, lender or
group of lenders.
"SENIOR INDEBTEDNESS" means the principal of and premium, if any, and
interest on, and any and all other fees, expense reimbursement obligations and
other amounts due pursuant to the terms of all agreements, documents and
instruments providing for, creating, securing or evidencing or otherwise entered
into in connection with
122
<PAGE>
(1) all Indebtedness of the Company owed to lenders under the Senior
Credit Facility;
(2) all obligations of the Company with respect to any Interest Rate
Agreement or Currency Agreement;
(3) all obligations of the Company to reimburse any bank or other
person in respect of amounts paid under letters of credit, acceptances or
other similar instruments;
(4) all other Indebtedness of the Company that does not provide that it
is to rank equally with or subordinate to the Notes; and
(5) all deferrals, renewals, extensions and refundings of, and
amendments, modifications and supplements to, any of the Senior Indebtedness
described above.
Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness
will not include
(1) Indebtedness of the Company to any of its Subsidiaries, or to any
Affiliate of the Company or any of such Affiliate's Subsidiaries;
(2) Indebtedness represented by the Notes and the Guarantees;
(3) any Indebtedness which by the express terms of the agreement or
instrument creating, evidencing or governing the same is junior or
subordinate in right of payment to any item of Senior Indebtedness;
(4) any trade payable arising from the purchase of goods or materials
or for services obtained in the ordinary course of business;
(5) Indebtedness incurred in violation of the Indenture;
(6) Indebtedness represented by Disqualified Capital Stock; and
(7) any Indebtedness to or guaranteed on behalf of, any shareholders,
director, officer or employee of the Company or any Subsidiary of the
Company.
"SIGNIFICANT RESTRICTED SUBSIDIARY" means, with respect to any Person, any
Restricted Subsidiary of such Person that satisfies the criteria for a
"significant subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the
Securities Act, as such Rule is in effect on the Issue Date.
"SUBSIDIARY" of any specified Person means any corporation, partnership,
limited liability company, joint venture, association or other business entity,
whether now existing or hereafter organized or acquired,
(1) in the case of a corporation, of which more than 50% of the total
voting power of the Capital Stock entitled (without regard to the occurrence
of any contingency) to vote in the election of directors, officers or
trustees thereof is held by such first-named Person or any of its
Subsidiaries; or
(2) in the case of a partnership, limited liability company, joint
venture, association or other business entity, with respect to which such
first-named Person or any of its Subsidiaries has the power to direct or
cause the direction of the management and policies of such entity by
contract or otherwise or if in accordance with GAAP such entity is
consolidated with the first-named Person for financial statement purposes.
"TREASURY RATE" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled by, and
published in, the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the date
fixed for redemption) most nearly equal to the period from February 1, 2004 to
such redemption; PROVIDED, HOWEVER, that if the period from February 1, 2004 to
such redemption is not equal
123
<PAGE>
to the constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yield of United States Treasury securities for which such yields are
given, except that if the period from February 1, 2004 to such redemption is
less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
"UNRESTRICTED SUBSIDIARY" means
(1) any Subsidiary of an Unrestricted Subsidiary and
(2) any Subsidiary of the Company which is classified after the Issue
Date as an Unrestricted Subsidiary by a resolution adopted by the Board of
Directors of the Company;
PROVIDED that a Subsidiary may be so classified as an Unrestricted Subsidiary
only if
(1) such classification is in compliance with the "--Limitation on
Restricted Payments" covenant,
(2) immediately after giving effect to such classification, the Company
could have incurred at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to "--Certain Covenants--Limitation on
Additional Indebtedness" above,
(3) no Default or Event of Default shall have occurred and be
continuing or result therefrom, and
(4) neither the Company nor any Restricted Subsidiary shall at any time
(a) provide a guarantee of, or similar credit support to, any
Indebtedness of such Subsidiary (including any undertaking, agreement or
instrument evidencing such Indebtedness),
(b) be directly or indirectly liable for any Indebtedness of such
Subsidiary or
(c) be directly or indirectly liable for any other Indebtedness that
provides that the holder thereof may (upon notice, lapse of time or both)
declare a default thereon (or cause the payment thereof to be accelerated
or payable prior to its final scheduled maturity) upon the occurrence of
a default with respect to any other Indebtedness that is Indebtedness of
such Subsidiary (including any corresponding right to take enforcement
action against such Subsidiary),
except in the case of clause (a) or (b) above to the extent
(a) that the Company or such Restricted Subsidiary could otherwise
provide such a guarantee or incur such Indebtedness (other than as
Permitted Indebtedness) pursuant to "--Certain Covenants--Limitation on
Additional Indebtedness" above and
(b) the provision of such guarantee and the incurrence of such
Indebtedness otherwise would be permitted under "--Certain
Covenants--Limitation on Restricted Payments" above.
The Board of Directors of the Company may designate any Unrestricted
Subsidiary or any Person that is to become a Subsidiary as a Restricted
Subsidiary if immediately after giving effect to such action (and treating any
Indebtedness of such Unrestricted Subsidiary or Person as having been incurred
at the time of such action),
(1) the Company could have incurred at least $1.00 of additional
Indebtedness (other that Permitted Indebtedness) pursuant to "--Certain
Covenants--Limitation on Additional Indebtedness" above, and
124
<PAGE>
(2) no Default or Event of Default shall have occurred and be
continuing or result therefrom.
The Trustee shall be given prompt notice by the Company of each resolution
adopted by the Board of Directors of the Company under this provision, together
with a copy of each such resolution adopted.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing
(1) the then outstanding aggregate principal amount of such
Indebtedness into
(2) the sum of the total of the products obtained by multiplying
(a) the amount of each then remaining installment, sinking fund, serial
maturity or other required payment of principal, including payment at final
maturity, in respect thereof and
(b) the number of years (calculated to the nearest one-twelfth) which
will elapse between such date and the making of such payment.
"WSP" means Willis Stein & Partners Management II, L.P.
BOOK ENTRY DELIVERY AND FORM
The exchange notes will be represented by one or more notes in registered,
global form without interest coupons. The global note will be deposited upon
issuance with the trustee as custodian for The Depository Trust Company, in New
York, New York, and registered in the name of DTC or its nominee, in each case
for credit to an account of a direct or indirect participant as described below.
Except as set forth below, the global notes may be transferred, in whole but
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the global notes may not be exchanged for Notes
in certificated form except in the limited circumstances described under the
caption "--Certificated Notes."
The Notes may be presented for registration of transfer and exchange at the
offices of the registrar.
DEPOSITORY PROCEDURES
DTC has advised us that DTC is a limited-purpose trust company created to
hold securities for its participating organizations and to facilitate the
clearance and settlement of transactions in those securities between the
participants through electronic book-entry changes in accounts of the
participants. The participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. Persons who are
not participants may beneficially own securities held by or on behalf of DTC
only through the participants or the indirect participants. The ownership
interest and transfer of ownership interest of each actual purchaser of each
security held by or on behalf of DTC are recorded on the records of the
participants and the indirect participants.
DTC has also advised us that pursuant to procedures established by it,
(a) upon deposit of the global note, DTC will credit the accounts of
participants with portions of the principal amount of the global note and
(b) ownership of such interests in the global note will be shown on, and the
transfer of ownership thereof will be effected only through, records maintained
by DTC, with respect to the participants, or by the participants and the
indirect participants with respect to other owners of beneficial interests in
the global notes.
125
<PAGE>
Upon the issuance of the global note, DTC will credit, on its book-entry
registration and transfer system, the principal amount at maturity of the notes
represented by such global note, to the accounts of participants. Ownership of
beneficial interests in the global note will be limited to participants or
persons that may hold interests through participants. Ownership of beneficial
interests in the global note will be shown on, and the transfer of those
ownership interests will be effected only through, records maintained by DTC,
with respect to participants' interest, and such participants, with respect to
the owners of beneficial interests in the global note other than participants.
The laws of some jurisdictions may require that certain securities purchasers
take physical delivery of such securities in definitive form. Such limits and
laws may impair the ability to transfer or pledge beneficial interests in the
global note.
So long as DTC, or its nominee, is the registered holder and owner of the
global note, DTC or such nominee, as the case may be, will be considered the
sole legal owner and holder of the related notes for all purposes of such notes
and the indenture. Except as set forth below, owners of beneficial interests in
the global note will not be entitled to have the notes represented by the global
note registered in their names, will not receive or be entitled to receive
physical delivery of certificated notes in definitive form, and will not be
considered to be the owners or holders of any notes under the global note. We
understand that under existing industry practice, in the event an owner of a
beneficial interest in the global note desires to take any action that DTC, as
the holder of the global note, is entitled to take, DTC would authorize the
participants to take such action, and the participants would authorize
beneficial owners, owning through such participants, to take such actions, or
would otherwise act upon the instructions of beneficial owners owing through
them.
Payments of principal of, and interest on, notes represented by the global
note registered in the name of, and held by, DTC or its nominee will be made to
DTC, or its nominee, as the case may be, as the registered owner and holder of
the global note.
We expect that DTC, or its nominee, upon receipt of any payments of
principal of, or interest on, the global note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of the global note as shown on the records of
DTC or its nominee. We also expect that payments by participants to owners of
beneficial interests in the global note held through such participants will be
governed by standing instructions and customary practices, and will be the
responsibility of such participants. We will not have any responsibility or
liability for any aspect of the records relating to, or payments made on
accounts of, beneficial ownership interest in the global note, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests, or for any other aspects of the relationship between DTC
and its participants, or the relationship between such participants and the
owners of beneficial interests in the global note owning through such
participants.
Unless and until it is exchanged in whole or in part for certificated notes
in definitive form, the global note may not be transferred, except as a whole,
by DTC to a nominee of such depository, or by a nominee of such depository to
such depository or another nominee of such depository.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the global note among participants of DTC, it is under
no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither we nor the trustee will have
any responsibility for the performance by DTC or its participants or indirect
participants, of their respective obligations, under the rules and procedures
governing their operations.
126
<PAGE>
CERTIFICATED NOTES
The notes represented by the global note are exchangeable for certificated
notes, in definitive form of like tenor as such notes, in denominations of U.S.
$1,000 and integral multiples thereof if:
- DTC notifies us that it is unwilling or unable to continue as depository
of the global note, or if at any time DTC ceases to be a clearing agency
registered under the Exchange Act and a successor depository is not
appointed by us within 90 days;
- we in our discretion at any time determine not to have all of the notes
represented by the global note; or
- an event of default has occurred and is continuing.
Any global note that is exchangeable according to the terms of the preceding
sentence is exchangeable for certificated notes, issuable in authorized
denominations and registered in such names as DTC shall direct. Subject to the
foregoing, the global note of the same aggregate denomination to be registered
in the name of DTC or its nominee.
127
<PAGE>
NOTES EXCHANGE OFFER; REGISTRATION RIGHTS
We and the guarantors entered into a registration rights agreement pursuant
to which we agreed, for the benefit of the holders of the outstanding notes,
that we will, at our cost,
(1) within 60 days after the Issue Date, file a registration with the
Commission with respect to a registered offer to exchange the outstanding
notes for the exchange notes, which will have terms substantially identical
in all material respects to the notes (except that the exchange notes will
not contain terms with respect to transfer restrictions),
(2) within 150 days after the Issue Date, use our reasonable best
efforts to cause the exchange offer registration statement to be declared
effective under the Securities Act. Upon the exchange offer registration
statement being declared effective, we will offer the exchange notes in
exchange for surrender of the outstanding notes, and
(3) keep the exchange offer open for not less than 20 Business Days (or
longer if required by applicable law) after the date notice of the exchange
offer is mailed to the holders of the outstanding notes. For each note
surrendered to us pursuant to the exchange offer, the holder of such
outstanding note will receive an exchange note having a principal amount
equal to that of the surrendered outstanding note.
Under existing Commission interpretations, the exchange notes would in
general be freely transferable after the exchange offer without further
registration under the Securities Act; provided that, in the case of
broker-dealers, a prospectus meeting the requirements of the Securities Act be
delivered as required. We will make available, for a period of 180 days after
the expiration date, this prospectus to any broker-dealer for use in connection
with any resale of any such exchange notes acquired as described below. A
broker-dealer that delivers such a prospectus to purchasers in connection with
such resales will be subject to certain of the civil liability provisions under
the Securities Act, and will be bound by the provisions of the registration
rights agreement (including certain indemnification rights and obligations).
Each holder of outstanding notes that wishes to exchange such notes for
exchange notes in the exchange offer will be required to make certain
representations including representations that
(1) any exchange notes to be received by it will be acquired in the
ordinary course of its business,
(2) it has no arrangement with any person to participate in the
distribution of the exchange notes, and
(3) it is not an "affiliate," as defined in Rule 405 of the Securities
Act, of Aavid, or if it is an affiliate, it will comply with the
registration and prospectus delivery requirements of the Securities Act to
the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
exchange notes. If the holder is a broker-dealer that will receive exchange
notes for its own account in exchange for outstanding notes that were acquired
as a result of market-making activities or other trading activities, it will be
required to acknowledge that it will deliver a prospectus in connection with any
resale of such exchange notes.
In the event that applicable interpretations of the staff of the Commission
do not permit us to effect such an exchange offer, or if for any other reason
the exchange offer is not consummated within 180 days of the Issue Date or,
under certain circumstances, if the initial purchasers shall so request, we and
the guarantors will, at our own expense,
(1) as promptly as practicable, file a shelf registration statement
covering resales of the outstanding notes;
128
<PAGE>
(2) use our reasonable best efforts to cause the shelf registration
statement to be declared effective under the Securities Act, and
(3) use our reasonable best efforts to keep effective the shelf
registration statement until the earlier of the disposition of the
outstanding notes covered by the shelf registration statement or two years
after the Issue Date.
We and the guarantors will, in the event of the shelf registration
statement, provide to each holder of the outstanding notes copies of the
prospectus which is a part of the shelf registration statement, notify each such
holder when the shelf registration statement for the outstanding notes has
become effective and take certain other actions as are required to permit
unrestricted resales of the outstanding notes. A holder of the notes that sells
such notes pursuant to the shelf registration statement generally would be
required to be named as a selling securityholder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the registration rights agreement which are
applicable to such a holder (including certain indemnification rights and
obligations).
The registration statement of which this prospectus is a part constitutes
the exchange offer registration statement referred to above. If we fail to
comply with the above provisions, then, as liquidated damages, additional
interest shall become payable in respect of the outstanding notes as follows:
(1) If notwithstanding that we have consummated or will consummate an
exchange offer, we are required to file a shelf registration statement and
such shelf registration statement is not filed on or prior to the date
required by the registration rights agreement;
(2) If notwithstanding that we have consummated or will consummate an
exchange offer, we are required to file a shelf registration statement and
such shelf registration statement is not declared effective by the
Commission on or prior to the date required by the registration rights
agreement; or
(3) If either (a) we have not exchanged the exchange notes for all
outstanding notes validly tendered in accordance with the terms of the
exchange offer on or prior to 180 days after the Issue Date, (b) the
exchange offer registration statement ceases to be effective at any time
prior to the time that the exchange offer is consummated or (c) if
applicable, the shelf registration statement ceases to be effective at any
time prior to the date that is two years from the Issue Date (or such
shorter period of time permitted under the registration rights agreement);
(each such event referred to in clauses (1) through (3) above is a registration
default), the sole remedy available to holders of the outstanding notes will be
the immediate assessment of additional interest as follows: the per annum
interest rate on the outstanding notes will increase at a rate of 0.50% per
annum, and the per annum interest rate will increase by an additional 0.25% per
annum for each subsequent 90-day period during which the registration default
remains uncured, up to a maximum additional interest rate of 2.00% per annum in
excess of the interest rate on the outstanding notes of 12 3/4% per annum. All
additional interest will be payable to holders of the outstanding notes in cash
on each interest payment date, commencing with the first such date occurring
after any such additional interest commences to accrue, until such registration
default is cured. After the date on which such registration default is cured,
the interest rate on the outstanding notes will revert to the interest rate
originally borne by the outstanding notes.
The summary herein of certain provisions of the registration rights
agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the registration rights
agreement, which is filed as an exhibit to the registration statement of which
this prospectus forms a part.
129
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax considerations relating to the exchange by an initial beneficial
owner of the outstanding notes for exchange notes and the ownership and
disposition of the exchange notes by an initial beneficial owner of the exchange
notes. This discussion is based upon the Internal Revenue Code of 1986 as
amended (the "Code"), existing and proposed Treasury Regulations, and judicial
decisions and administrative interpretations thereunder, as of the date hereof,
all of which are subject to change, possibly with retroactive effect, or
different interpretations. We cannot assure you that the Internal Revenue
Service (the "IRS") will not challenge one or more of the tax considerations
described herein, and we have not obtained, nor do we intend to obtain, a ruling
from the IRS or an opinion of counsel with respect to the United States federal
tax considerations resulting from acquiring, holding or disposing of the notes.
In this discussion, we do not purport to address all tax considerations that
may be important to a particular holder in light of the holder's circumstances
(such as the alternative minimum tax provisions of the Code), or to certain
categories of investors (such as certain financial institutions, insurance
companies, tax-exempt organizations, dealers in securities, persons who hold
notes through partnerships or other pass-through entities, U.S. expatriates, or
persons who hold the notes as part of a hedge, conversion transaction, straddle
or other risk reduction transaction) that may be subject to special rules. This
discussion is limited to initial holders who purchased the outstanding notes for
cash at the original offering price and who hold the outstanding notes (and
following the exchange offer, will hold the exchange notes) as capital assets.
This discussion also does not address the tax considerations arising under the
laws of any foreign, state or local jurisdiction.
YOU SHOULD CONSULT YOUR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSIDERATIONS TO YOU OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE
EXCHANGE NOTES, INCLUDING THE EFFECT AND APPLICABILITY OF STATE, LOCAL OR
FOREIGN TAX LAWS.
U.S. HOLDERS
As used herein, the term "U.S. Holder" means a beneficial owner of a note or
warrant that is:
(1) a citizen or resident of the United States for United States federal income
tax purposes, including an alien individual who is a lawful permanent
resident of the United States or meets the "substantial presence" test
prescribed under the Code;
(2) a corporation created or organized in or under the laws of the United States
or of any political subdivision thereof;
(3) an estate, the income of which is subject to United States federal income
taxation regardless of its source; or
(4) a trust, the administration of which is subject to the primary supervision
of a court within the United States and which has one or more United States
persons with authority to control all substantial decisions, or if the trust
was in existence on August 20, 1996 and has elected to continue to be
treated as a United States person.
As used herein, the term "Non-U.S. Holder" means a holder of a note that is
not a U.S. Holder.
THE EXCHANGE OFFER
The exchange of outstanding notes for exchange notes pursuant to this
exchange offer should not constitute a taxable disposition of the outstanding
notes for United States federal income tax purposes because the exchange notes
should not be considered to differ materially in kind or extent from the
outstanding notes. Rather, any exchange notes received by you should be treated
as a continuation of
130
<PAGE>
your investment in the outstanding notes. As a result, neither a U.S. Holder nor
a Non-U.S. Holder should recognize taxable income, gain or loss on such exchange
for United States federal income tax purposes. Such holder's holding period for
the exchange notes should generally include the holding period for the
outstanding notes and such holder's adjusted tax basis in the exchange notes
should generally be the same as such holder's adjusted tax basis in the
outstanding notes for United States federal income tax purposes.
TAXATION OF THE NOTES
INTEREST ON NOTES. Stated interest on the notes will be taxable to a U.S.
Holder as ordinary income at the time it is received or accrued, depending on
such holder's method of tax accounting.
ISSUE PRICE. The issue price of the exchange notes will be the amount of
the issue price for the outstanding notes. We allocated $969.60 of the issue
price to each $1,000 principal amount of the outstanding notes. A U.S. Holder of
a unit may not adopt a different allocation unless such holder properly
discloses such different allocation on such holder's United States federal
income tax return for the year in which the units were acquired. No assurance
can be given that the IRS will accept our allocation. If our allocation were
successfully challenged by the IRS, the issue price, original issue discount
accrual on the note and gain or loss on the sale or disposition of a note or
warrant would be different from that resulting under the allocation determined
by us.
ORIGINAL ISSUE DISCOUNT. Because the notes were sold as a part of a unit
including the warrants, a portion of the offering price for a unit was allocated
to the note and a portion to the warrants. Since the portion allocated to the
outstanding notes was less than the note's principal amount, the outstanding
notes were issued at a discount from their face amount, with the result that the
outstanding notes were considered to have been issued with original issue
discount ("OID"). Because any exchange notes received by you should be treated
as a continuation of your investment in the outstanding notes for the exchange
notes (because the exchange of the outstanding notes for the exchange notes
should not be treated as a taxable exchange), the exchange notes should also be
considered to have been issued with OID. As a result, a U.S. Holder would be
required to include in income (regardless of whether such U.S. Holder is a cash
or accrual taxpayer) in each taxable year, in advance of the receipt of any cash
attributable to such income, that portion of any such OID, computed on a
constant yield basis, attributable to each day during such year on which the
U.S. Holder held the notes.
The total amount of OID with respect to each note will be the difference
between the portion of the issue price of the units which is allocated to the
notes as described above and the stated redemption price at maturity. The stated
redemption price at maturity of a note is the sum of all payments provided by
the note other than "qualified stated interest" payments. Stated interest on the
notes will constitute "qualified stated interest." Thus, the stated redemption
price at maturity of a note will be equal to the principal amount of such note.
Under the OID rules, in general, holders of notes with OID must include in
gross income for United States federal income tax purposes the sum of the daily
portions of OID with respect to the note for each day during the taxable year or
portion of a taxable year on which such holder holds the note (such sum,
"Accrued OID"). The daily portions are determined by allocating to each day of
any accrual period within a taxable year a pro rata portion of an amount equal
to the adjusted issue price of the note at the beginning of the accrual period
multiplied by the yield to maturity of the note. For purposes of computing OID,
we will use six-month accrual periods that end on the days in the calendar year
corresponding to the maturity date of the notes and the date six months prior to
such maturity date, with the possible exception of the initial accrual period
for the notes. The adjusted issue price of a note at the beginning of any
accrual period is the issue price of the note increased by the Accrued OID for
all prior accrual periods (less all payments made on the notes other than
payments of qualified stated interest). The yield to maturity of a debt
instrument is the interest rate that will
131
<PAGE>
produce an amount equal to the issue price of the debt instrument when used in
computing the present value of all payments to be made pursuant to the debt
instrument. We will annually furnish to certain record holders of the notes and
to the IRS information with respect to any OID accruing during the calendar year
as may be required by applicable United States Treasury regulations. In
addition, each note will bear a legend setting forth the issue date, the issue
price, the total amount of OID, the yield-to-maturity and certain other
information.
EFFECT OF OPTIONAL REDEMPTIONS ON OID. In the event of a change of control
(as defined in the "Description of the Notes") or a sale of our assets under the
circumstances specified in the "Description of the Notes", we will be required
to give holders of the notes the opportunity to sell us their notes at the
redemption price specified elsewhere herein. In the event that we receive net
proceeds from one or more public equity offerings, we may, at any time prior to
February 1, 2003 and subject to certain limitations specified elsewhere herein,
use all or a portion of such net proceeds to redeem up to 35% of the aggregate
principal amount of the notes at redemption prices specified elsewhere herein.
Under the OID rules, computation of yield and maturity of the notes is not
affected by such redemption rights and obligations if, based on all the facts
and circumstances as of the issue date, the stated payment schedule of the notes
is significantly more likely than not to occur. We have determined that, based
on all of the facts and circumstances that are expected to exist as of the issue
date, it is significantly more likely than not that the notes will be paid
according to their stated schedule.
We may redeem the notes, in whole or in part, on or after February 1, 2004,
at redemption prices specified elsewhere herein. The OID rules contain rules for
determining the "maturity date" and the stated redemption price at maturity of
an instrument that may be redeemed prior to its stated maturity date at the
option of the issuer. Under the OID rules, solely for purposes of the accrual of
OID, it is assumed that the issuer will exercise any option to redeem a debt
instrument if such exercise will lower the yield-to-maturity of the debt
instrument. We anticipate that we will not be presumed to redeem the notes prior
to their stated maturity under the foregoing rules because the exercise of such
option would not lower the yield-to-maturity of the notes.
U.S. Holders may wish to consult their own tax advisors regarding the
treatment of such contingencies.
DISPOSITION OF NOTES. Generally, any sale or redemption or other
disposition of an exchange note will result in taxable gain or loss equal to the
difference between (i) the amount of cash and the fair market value of other
property received and (ii) the holder's adjusted tax basis in the note. In the
case of a holder who purchased a unit for the issue price of the unit, the
adjusted tax basis of an exchange note will initially equal the portion of the
issue price of the unit that was allocated to the outstanding note and will be
increased by any Accrued OID includable in such holder's gross income, and
decreased by all payments received by such holder on such note, other than a
payment of qualified stated interest. Any gain or loss upon a sale or other
disposition of a note will generally be capital gain or loss, which will be
long-term capital gain or loss if the note has been held by the holder for more
than one year.
AHYDO RULES. Sections 163(e)(5) and (i) of the Code affect the treatment of
interest on certain high yield OID debt instruments maturing more than five
years from the date of issuance ("AHYDOs"). The rules are complex and ambiguous
in many respects, and their full potential application to the notes cannot be
anticipated with precision.
Whether or not the exchange notes are characterized as AHYDOs, we would
continue to be able to deduct stated interest with respect to the notes as it
accrues, but may not be able to deduct OID with respect to the notes. A U.S.
Holder may be entitled to treat such OID as a dividend, which dividend may
qualify for the dividends received deduction generally available to U.S. Holders
that are
132
<PAGE>
corporations. Corporate holders of exchange notes should consult their own tax
advisors as to the applicability of the dividends received deduction.
NON-U.S. HOLDERS
In the following discussion, we summarize the principal United States
federal income tax considerations resulting from the acquisition, ownership and
disposition of the exchange notes by Non-U.S. Holders.
INTEREST ON NOTES. Subject to the discussion below of backup withholding,
interest paid on the notes (including OID) to a Non-U.S. Holder generally will
not be subject to United States federal income tax if:
(1) such interest is not effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Holder;
(2) the Non-U.S. Holder does not actually or constructively own 10% or more of
the total voting power of all classes of our stock entitled to vote;
(3) the Non-U.S. Holder is not a controlled foreign corporation with respect to
which we are a "related person" within the meaning of the Code;
(4) the Non-U.S. Holder is not a bank receiving interest pursuant to a loan
agreement entered into in the ordinary course of its trade or business; and
(5) the Non-U.S. Holder, under penalty of perjury, certifies that it is a
Non-U.S. Holder and provides its name and address.
If certain requirements are satisfied, the certification described in
clause (5) above may be provided by securities clearing organization, a bank, or
other financial institution that holds customers' securities in the ordinary
course of its trade or business.
Under new Treasury Regulations, which generally are effective for payments
made after December 31, 2000, subject to certain transition rules, the
certification described in clause (5) above may also be provided by a qualified
intermediary on behalf of one or more beneficial owners (or other
intermediaries), provided that such intermediary has entered into a withholding
agreement with the IRS and certain other conditions are met.
A holder that is not exempt from tax under these rules will be subject to
United States federal income tax withholding at a rate of 30% (or a lower
applicable treaty rate) on payments of interest and OID from the amount of
interest actually paid unless the interest is effectively connected with the
conduct of a United States trade or business of the holder and the holder timely
furnishes two duly executed copies of IRS Form 4224 (or any successor form) to
the withholding agent, in which case the interest will be subject to the United
States federal income tax on net income that applies to United States persons
generally (and, with respect to corporate holders and under certain
circumstances, the branch profits tax).
GAIN ON DISPOSITION OF THE NOTES. A Non-U.S. Holder generally will not be
subject to United States federal income or withholding tax on gain realized on
the sale, exchange, redemption, or other disposition of, a note, unless:
(1) in the case of an individual Non-U.S. Holder, such holder is present in the
United States for 183 days or more in the year of such sale, exchange or
redemption and certain other requirements are met; or
(2) the gain is effectively connected with the conduct of a United States trade
or business by the Non-U.S. Holder.
133
<PAGE>
BACKUP WITHHOLDING AND INFORMATION REPORTING
U.S. HOLDERS. In general, information reporting will apply to certain
payments made by us with respect to principal and interest on, and the proceeds
of the sale or other disposition of, the notes with respect to certain
non-corporate U.S. Holders. A U.S. Holder will further be subject to backup
withholding at the rate of 31% with respect to interest, principal and premium,
if any, we pay on a note, unless the holder (1) is an entity (including
corporations, tax-exempt organizations and certain qualified nominees) that is
exempt from withholding and, when required, demonstrates this fact; or
(2) provides us with a correct taxpayer identification number, certifies that
the taxpayer identification number is correct and that the holder has not been
notified by the IRS that it is subject to backup withholding due to
underreporting of interest or dividends, and otherwise complies with applicable
requirements of the backup withholding rules. Any amount withheld under the
backup withholding rules is allowable as a refund or credit against the U.S.
Holder's United States federal income tax liability, provided that the required
information is furnished to IRS.
NON-U.S. HOLDERS. We will, when required, report to the IRS and to each
Non-U.S. Holder the amount of any interest paid to, OID accruing to, and the tax
withheld with respect to, such holder, regardless of whether any tax was
actually withheld on such payments. Copies of these information returns may also
be made available to the tax authorities of the country in which the Non-U.S.
Holder resides under the provisions of a specific treaty or agreement.
Under current Treasury Regulations, backup withholding and information
reporting will not apply to payments of interest on or principal of the notes by
us or our agent to a Non-U.S. Holder if the Non-U.S. Holder certifies as to its
Non-U.S. Holder status under penalties of perjury and provides its name and
address, or otherwise establishes an exemption (provided that neither we nor our
agent have actual knowledge that the holder is a U.S. person or that the
conditions of any other exemptions are not in fact satisfied). The payment of
the proceeds on the disposition of notes to or through the United States office
of a United States or foreign broker will be subject to information reporting
and backup withholding unless the owner provides the certification described
above or otherwise establishes an exemption (provided that the broker does not
have actual knowledge that the holder is a U.S. person or that the conditions of
any other exemption are not in fact satisfied). The proceeds of the disposition
by a Non-U.S. Holder of to or through a foreign office of a broker generally
will not be subject to backup withholding or information reporting. However, if
such broker is a U.S. person, a controlled foreign corporation or a foreign
person deriving 50% or more of its gross income from all sources for certain
periods from activities that are effectively connected with the conduct of a
United States trade or business, information reporting, but not backup
withholding, will apply unless such broker has documentary evidence in its files
of the holder's status as a Non-U.S. Holder and has no actual knowledge to the
contrary or unless the holder otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Non-U.S.
Holder's United States federal income tax liability provided that the required
information is furnished to the IRS.
New Treasury Regulations relating to the withholding of tax and reporting
for certain amounts paid to Non-U.S. Holders will generally be effective for
payments made after December 31, 2000, subject to certain transition rules.
Among other things, these Treasury Regulations may require Non-U.S. Holders to
furnish new certification of their foreign status. Prospective Non-U.S. Holders
should consult their own tax advisors concerning the applicability and effect,
if any, of the Treasury Regulations on an investment in the exchange notes.
134
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of exchange notes received in exchange for outstanding
exchange notes where such outstanding exchange notes were acquired as a result
of market-making activities or other trading activities.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such exchange notes. Any broker-dealer
that resells exchange notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such exchange notes may be deemed to be an "underwriter" within
the meaning of the Securities Act, and any profit on any such resale of exchange
notes and any commissions or concessions received by such persons may be deemed
to be underwriting compensation under the Securities Act. The letter of
transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a priod of 180 days after consummation of the exchange offer (or such
shorter period during which broker-dealers are required to deliver this
prospectus, we will promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to any broker-dealer that requests
such documents in the letter of transmittal. We have agreed to pay all expenses
incident to the exchange offer other than commissions or concessions of any
brokers or dealers and will indemnify original holders of the outstanding
exchange notes, including any broker-dealers, against certain liabilities,
including certain liabilities under the Securities Act.
By acceptance of this exchange offer, each broker-dealer that receives
exchange notes for its own account pursuant to the exchange offer agrees that,
upon receipt of notice from us of the happening of any event which makes any
statement in this prospectus untrue in any material respect or which requires
the making of any changes in this prospectus in order to make the statements
herein not misleading (which notice we agree to deliver promptly to such
broker-dealer), such broker-dealer will suspend use of this prospectus until we
have amended or supplemented this prospectus to correct such misstatement or
omission and have furnished copies of the amended or supplemented prospectus to
such broker-dealer.
LEGAL MATTERS
Bartlit Beck Herman Palenchar & Scott, Denver, Colorado, will pass upon the
validity of the exchange notes offered hereby.
EXPERTS
The consolidated balance sheets of Aavid Thermal Technologies, Inc. and
subsidiaries as of December 31, 1998 and December 31, 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three year period ended December 31, 1998,
included in this prospectus, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The combined financial statements of Thermalloy Group at December 31, 1998
and 1997, and for each of the three years in the period ended December 31, 1998,
appearing in this prospectus have been audited by Ernst & Young, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
135
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
AAVID THERMAL TECHNOLOGIES, INC.
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998,
1997 AND 1996
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997, and 1996..... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
FINANCIAL STATEMENTS (UNAUDITED) FOR THE NINE MONTHS ENDED
OCTOBER 2, 1999 AND SEPTEMBER 26, 1998
Consolidated Balance Sheets as of October 2, 1999 and
December 31, 1998......................................... F-36
Consolidated Statements of Income for the nine months ended
October 2, 1999 and September 26, 1998.................... F-37
Consolidated Statements of Cash Flows for the nine months
ended October 2, 1999 and September 26, 1998.............. F-38
Notes to Consolidated Financial Statements.................. F-39
THERMALLOY GROUP
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998,
1997 AND 1996
Report of Independent Auditors.............................. F-50
Combined Profit and Loss Accounts for the years ended
December 31, 1998, 1997 and 1996.......................... F-51
Combined Statements of Total Recognized Gains and Losses for
the years ended December 31, 1998, 1997 and 1996.......... F-52
Combined Balance Sheets at December 31, 1998 and 1997....... F-53
Combined Statements of Movements in Invested Capital for the
years ended December 31, 1998, 1997 and 1996.............. F-54
Combined Cash Flow Statements for the years ended
December 31, 1998, 1997 and 1996.......................... F-55
Notes to Combined Financial Statements...................... F-56
FINANCIAL STATEMENTS (UNAUDITED) FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998
Condensed Combined Unaudited Profit and Loss Accounts for
the nine months ended September 30, 1999 and 1998......... F-71
Condensed Combined Unaudited Statements of Total Recognized
Gains and Losses for the nine months ended September 30,
1999 and 1998............................................. F-72
Condensed Combined Unaudited Balance Sheets at
September 30, 1999 and 1998............................... F-73
Condensed Combined Unaudited Statements of Movements in
Invested Capital for the nine months ended September 30,
1999 and 1998............................................. F-74
Condensed Combined Unaudited Cash Flow Statements for the
nine months ended September 30, 1999 and 1998............. F-75
Notes to Condensed Combined Unaudited Financial
Statements................................................ F-76
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO AAVID THERMAL TECHNOLOGIES, INC.:
We have audited the accompanying consolidated balance sheets of Aavid
Thermal Technologies, Inc. and Subsidiaries (a Delaware Corporation) as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the three years
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aavid Thermal
Technologies, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the three years ended
December 31, 1998, in conformity with generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
BOSTON, MASSACHUSETTS
FEBRUARY 1, 1999 (except with respect to the matter
discussed in Note P, as to which the date is February 2, 2000)
F-2
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 20,027 $ 6,919
Notes receivable............................................ 1,459 --
Accounts receivable-trade, less allowance for doubtful
accounts.................................................. 31,158 33,766
Inventories................................................. 15,283 13,368
Refundable taxes............................................ 370 1,138
Deferred income taxes....................................... 9,072 2,365
Prepaid and other current assets............................ 2,897 2,256
-------- --------
Total current assets........................................ 80,266 59,812
Property, plant and equipment, net.......................... 42,497 43,155
Other assets, net........................................... 6,321 7,829
-------- --------
Total assets................................................ $129,084 $110,796
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of debt obligations......................... $ 3,442 $ 3,360
Accounts payable-trade...................................... 17,377 16,378
Accrued expenses and other current liabilities.............. 23,488 17,778
-------- --------
Total current liabilities................................... 44,307 37,516
Debt obligations, net of current portion.................... 11,208 20,596
Deferred income taxes....................................... 2,218 2,269
-------- --------
Total liabilities........................................... 57,733 60,381
Commitments and contingencies (Note L)
Stockholders' equity:
Common stock, $0.01 par value; authorized 25,000,000 shares;
9,251,391 and 7,558,537 shares issued and outstanding at
December 31, 1998 and 1997, respectively.................. 93 76
Additional paid-in capital.................................. 56,740 43,793
Cumulative translation adjustment........................... (902) (753)
Retained earnings........................................... 15,420 7,299
-------- --------
Total stockholders' equity.................................. 71,351 50,415
-------- --------
Total liabilities and stockholders' equity.................. $129,084 $110,796
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales................................................ $ 209,078 $ 167,745 $ 106,995
Cost of goods sold....................................... 138,431 107,401 66,002
---------- ---------- ----------
Gross profit............................................. 70,647 60,344 40,993
Selling, general and administrative expenses............. 43,783 36,709 27,562
Research and development................................. 6,756 6,939 5,674
Restructuring and buyout of compensation agreement
charges................................................ 5,740 -- --
Purchased undeveloped technology charge.................. -- -- 3,446
---------- ---------- ----------
Income from operations................................... 14,368 16,696 4,311
Interest expense, net.................................... (1,342) (2,178) (1,591)
Other expense, net....................................... (520) (1,201) (577)
---------- ---------- ----------
Income before income taxes and extraordinary item........ 12,506 13,317 2,143
Provision for income tax expense......................... (4,385) (4,824) (2,002)
---------- ---------- ----------
Income before extraordinary item......................... 8,121 8,493 141
Extraordinary item, net of related tax effect............ -- -- (171)
---------- ---------- ----------
Net income (loss)........................................ $ 8,121 $ 8,493 $ (30)
========== ========== ==========
Net income (loss) per share, basic:
Income before extraordinary item......................... $ 0.94 $ 1.22 $ 0.02
Extraordinary item....................................... -- -- (0.03)
---------- ---------- ----------
Net income (loss), basic................................. $ 0.94 $ 1.22 $ (0.01)
========== ========== ==========
Weighted average common shares........................... 8,668,368 6,945,339 6,251,385
========== ========== ==========
Net income (loss) per share, diluted:
Income before extraordinary item......................... $ 0.86 $ 0.98 $ 0.02
Extraordinary item....................................... -- -- (0.03)
---------- ---------- ----------
Net income (loss), diluted............................... $ 0.86 $ 0.98 $ (0.01)
========== ========== ==========
Weighted average common shares and equivalents........... 9,484,826 8,638,611 6,251,385
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK ADDITIONAL
-------------------- -------------------- -------------------- PAID-IN COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME
--------- -------- -------- --------- -------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995........ 835,514 $ 8 488,127 $ 5 50,000 $ 1 $ 6,583 $ --
Comprehensive income:
Net loss........................ -- -- -- -- -- -- -- (30)
Cumulative translation
adjustment.................... -- -- -- -- -- -- -- 228
------
Comprehensive income.............. -- -- -- -- -- -- $ 198
======
Conversion of preferred to
common.......................... 2,959,692 30 (488,127) (5) (50,000) (1) (24)
--------- --- -------- --------- ------- ---------
Expiration of warrant put
option.......................... -- -- -- -- -- -- 1,106
Initial public offering, net of
issuance -
Costs of $3,419................... 2,645,000 26 -- -- -- -- 21,681
Stock issued in acquisition of
FDI............................. 75,000 1 -- -- -- -- 899
Proceeds from exercise of
options......................... 1,925 -- -- -- -- -- 9
--------- --- -------- --------- ------- --------- -------
Balance, December 31, 1996........ 6,517,131 $65 -- $ -- -- $ -- $30,254
Comprehensive income:
Net income...................... -- -- -- -- -- -- -- $8,493
Cumulative translation
adjustment.................... -- -- -- -- -- -- -- (981)
------
Comprehensive income.............. -- -- -- -- -- -- $7,512
======
Proceeds from exercise of......... 626,930 6 -- -- -- -- 1,615
Options
Proceed from the issuance of
common stock.................... 339,476 4 -- -- -- -- 7,074
Issuance of shares related to
acquisition of joint venture.... 75,000 1 -- -- -- -- 1,124
Income tax benefit from stock
options......................... -- -- -- -- -- -- 3,726
--------- --- -------- --------- ------- --------- -------
Balance, December 31, 1997........ 7,558,537 $76 -- $ -- -- $ -- $43,793
Comprehensive income:
Net income...................... -- -- -- -- -- -- -- $8,121
Cumulative translation
adjustment.................... -- -- -- -- -- -- -- (149)
------
Comprehensive income.............. -- -- -- -- -- -- $7,972
======
Proceeds from exercise of
options......................... 1,192,117 12 -- -- -- -- 3,469
Proceeds from exercise of
warrants........................ 466,455 5 -- -- -- -- (5)
Proceeds from the issuance of
common stock.................... 34,282 -- -- -- -- -- 622
Income tax benefit from stock
options......................... -- -- -- -- -- -- 8,861
--------- --- -------- --------- ------- --------- -------
Balance, December 31, 1998........ 9,251,391 $93 -- $ -- -- $ -- $56,740
========= === ======== ========= ======= ========= =======
<CAPTION>
CUMULATIVE RETAINED
TRANSLATION EARNINGS
ADJUSTMENT (DEFICIT) TOTAL
----------- --------- --------
<S> <C> <C> <C>
Balance, December 31, 1995........ $ -- $(1,164) $ 5,433
Comprehensive income:
Net loss........................ -- (30) (30)
Cumulative translation
adjustment.................... 228 -- 228
Comprehensive income..............
Conversion of preferred to
common.......................... -- -- --
Expiration of warrant put
option.......................... -- -- 1,106
Initial public offering, net of
issuance -
Costs of $3,419................... -- -- 21,707
Stock issued in acquisition of
FDI............................. -- -- 900
Proceeds from exercise of
options......................... -- -- 9
----- ------- -------
Balance, December 31, 1996........ $ 228 $(1,194) $29,353
Comprehensive income:
Net income...................... -- 8,493 8,493
Cumulative translation
adjustment.................... (981) -- (981)
Comprehensive income..............
Proceeds from exercise of......... -- -- 1,621
Options
Proceed from the issuance of
common stock.................... -- -- 7,078
Issuance of shares related to
acquisition of joint venture.... -- -- 1,125
Income tax benefit from stock
options......................... -- -- 3,726
----- ------- -------
Balance, December 31, 1997........ $(753) $ 7,299 $50,415
Comprehensive income:
Net income...................... -- 8,121 8,121
Cumulative translation
adjustment.................... (149) -- (149)
Comprehensive income..............
Proceeds from exercise of
options......................... -- -- 3,481
Proceeds from exercise of
warrants........................ -- -- --
Proceeds from the issuance of
common stock.................... -- -- 622
Income tax benefit from stock
options......................... -- -- 8,861
----- ------- -------
Balance, December 31, 1998........ $(902) $15,420 $71,351
===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
\
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Cash flows provided by (used for) operating activities:
Net income (loss)........................................... $ 8,121 $ 8,493 $ (30)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization............................. 9,880 7,640 4,102
Purchased undeveloped technology charge................... -- -- 3,446
Loss on sale of property, plant and equipment............. 17 35 67
Deferred income taxes..................................... (2,172) (167) 26
Minority interest......................................... -- 198 213
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable-trade................................. 1,949 (11,685) (5,442)
Note receivable........................................... 86 -- --
Inventories............................................... (1,468) (4,288) (2,540)
Refundable taxes.......................................... 1,766 (1,138) --
Prepaid and other current assets.......................... (4,861) (588) 163
Other assets.............................................. 153 (540) (449)
Accounts payable-trade.................................... 1,201 5,559 3,523
Accrued expenses and other current liabilities............ 14,357 7,116 (1,051)
--------- --------- --------
Total adjustments....................................... 20,908 2,142 2,058
--------- --------- --------
Net cash provided by operating activities............... 29,029 10,635 2,028
Cash flows used in investing activities:
Payments for acquisitions, net of cash acquired........... -- (1,316) (10,776)
Proceeds from sale of property, plant and equipment....... 20 417 194
Purchases of property, plant and equipment................ (10,407) (15,992) (7,029)
--------- --------- --------
Net cash used in investing activities................... (10,387) (16,891) (17,611)
Cash flows provided by financing activities:
Issuance of common stock, net of expenses................. 4,103 8,699 21,716
Advances under line of credit............................. 128,366 124,073 95,921
Repayments of line of credit.............................. (133,898) (124,061) (96,470)
Advances under debt obligations........................... 581 17,876 6,659
Principal payments on debt obligations.................... (4,335) (17,258) (12,630)
--------- --------- --------
Net cash provided by (used in) financing activities..... (5,183) 9,329 15,196
Foreign exchange effect on cash and cash equivalents........ (351) (247) 153
--------- --------- --------
Net increase (decrease) in cash and cash equivalents........ 13,108 2,826 (234)
Cash and cash equivalents, beginning of period.............. 6,919 4,093 4,327
--------- --------- --------
Cash and cash equivalents, end of period.................... $ 20,027 $ 6,919 $ 4,093
========= ========= ========
Supplemental disclosure of cash flow information:
Interest paid............................................... $ 1,685 $ 2,316 $ 1,606
Income taxes paid........................................... 1,917 739 807
Supplemental disclosure of non-cash investing activities:
Reconciliation of assets acquired and liabilities assumed in
acquisitions:
Fair value of assets acquired........................... $ -- $ 3,163 $ 16,122
Cash paid for assets.................................... -- (1,316) (11,343)
Issuance of common stock................................ -- (1,125) (900)
--------- --------- --------
Liabilities assumed....................................... $ -- $ 722 $ 3,879
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
A. OPERATIONS
Aavid Thermal Technologies, Inc. (the "Company" or "Aavid") is the leading
provider of thermal management solutions for digital and power electronics
applications. In today's electronic equipment environment, microprocessors and
their associated power supplies, hard drives, advanced video chips, and other
peripheral devices, draw large amounts of power, and consequently, dissipate a
significant amount of heat. The same heat generation occurs in power
semiconductors and integrated circuits in motor controls, telecommunications
switches and other smart electronics. Since microprocessors and power
semiconductors operate efficiently only in narrow temperature bands, heat is an
absolute constraint in electronic system design. The excessive heat generated
within the component not only degrades semiconductor and system performance and
reliability, but can also cause semiconductor and system failure.
Aavid, through its three subsidiaries, approaches these thermal challenges
from different perspectives. Fluent Inc.'s ("Fluent") sophisticated
computational fluid dynamics ("CFD") software models and analyzes heat transfer,
air and other fluid flows for virtual prototyping of products, processes, and
systems. This greatly reduces development time and expenses associated with
physical models and the facilities to test them.
Applied Thermal Technologies, Inc. ("Applied") designs integrated thermal
solutions at the component-, board-, and system-level. Applied works as an
extension of its clients' product design team, leveraging on technical and
manufacturing capabilities gained from both Fluent and Aavid Thermal Products to
develop, test, and validate thermal solutions.
Aavid Thermal Products, Inc. manufactures and supports customer application
of its thermal products around the globe.
Overall, the Company services a highly diversified base of more than 3,000
national and international customers including OEMs, distributors, and contract
manufacturers through a highly integrated network of software, development,
manufacturing, sales and distribution locations throughout North America,
Europe, and the Far East.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
transactions have been eliminated.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentration of credit risk consists principally of trade accounts receivable.
The risk is limited due to the relatively large number of customers comprising
the Company's customer base and their dispersion across many industries within
the United States, Europe, and Asia. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral from its customers. The Company maintains an allowance for
uncollectible accounts receivable based upon expected collectibility of all
accounts receivable. The Company's write-offs of accounts receivable have not
been significant during the periods presented. At December 31, 1998, accounts
receivable for one customer represented 12% of the total accounts receivable
balance. The Company's sales have been primarily denominated in U.S. dollars,
and the effects of foreign exchange fluctuations are not considered to be
material.
F-7
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under this
method, the amount of deferred tax liabilities or assets is calculated by
applying the provisions of enacted tax laws to determine the amount of taxes
payable or refundable currently or in future years. SFAS No. 109 requires a
valuation allowance against deferred tax assets if, based upon the available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realizable.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred. SFAS
No. 86, "Accounting for the Costs of Computer Software To Be Sold, Leased, or
Otherwise Marketed," requires capitalization of certain software development
costs subsequent to the establishment of technological feasibility. Based on the
Company's product development process, technological feasibility is established
upon completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready for
general release have not been material. Accordingly, all research and software
development costs have been expensed.
CASH AND CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS
For purposes of the consolidated statements of cash flows, cash and cash
equivalents consist of highly liquid investments with original maturities of
three months or less.
The estimated fair value of the Company's financial instruments including
accounts receivable, accounts payable and cash equivalents equals carrying
value. The fair value of the Company's long-term debt instruments is also
estimated at carrying value due to their variable interest rates and relatively
short maturities.
INVENTORIES
For the year ending December 31, 1998 and 1997, inventories were valued at
the lower of cost or market, with cost determined principally on the average
cost method. The cost of inventories of the foreign subsidiaries are valued on
the first-in, first-out (FIFO) basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are stated at cost. The Company depreciates
property, plant and equipment over their estimated remaining useful lives
(buildings--30 to 40 years; machinery, equipment, dies, and tooling--1 to
10 years; and vehicles--4 to 5 years) using both the straight-line and
accelerated methods of depreciation.
Repairs and maintenance are charged against income when incurred; renewals
and betterments are capitalized. When property, plant, and equipment are retired
or sold, their cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in other income.
INTANGIBLES
Costs incurred in connection with the issuance of the Company's debt
obligations have been deferred and are being amortized over the term of the
respective debt obligations.
F-8
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other intangibles, which consist principally of goodwill and patents are
being amortized on a straight-line basis over 7 to 15 years.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued SFAS
No. 121, "Accounting For the Impairment of Long-Lived Assets and For Long-Lived
Assets To Be Disposed Of." This statement addresses the accounting for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of.
This statement requires that long-lived assets including intangibles, be
reviewed for impairment whenever events or changes in circumstances, such as a
change in market value, indicate that the asset carrying amounts may not be
recoverable. In performing the review for recoverability, if future undiscounted
cash flows (without interest charges) from the use and ultimate dispositions of
the assets are less than its carrying value, an impairment loss is recognized.
Impairment losses are to be measured based on the fair value of the asset. To
date, the Company has not experienced any such impairments.
REVENUE RECOGNITION
THERMAL PRODUCTS
Revenue is recognized when products are shipped. The Company records an
estimate at that time for returns and warranty costs to be incurred.
SOFTWARE
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 97-2, "Software Revenue Recognition".
The statement provides specific industry guidance and stipulates that revenue
recognized from software arrangements is to be allocated to each element of the
arrangement based on the relative fair values of the elements, such as software
products, upgrades, enhancements, post-contract customer support, installation
or training. Under SOP 97-2, the determination of fair value is based on
objective evidence that is specific to the vendor. If such evidence of fair
value for each element of the arrangement does not exist, all revenue from the
arrangement is deferred until such time that evidence of fair value does exist
or until all elements of the arrangement are delivered. Revenue allocated to
software products, specified upgrades and enhancements is generally recognized
upon delivery of the related products, upgrades and enhancements. Revenue
allocated to post-contract customer support is generally recognized ratably over
the term of the support, and revenue allocated to service elements is generally
recognized as the services are performed. SOP 97-2 was adopted by the Company
effective January 1, 1998 and has not had a material effect on revenue
recognition.
The Company licenses its software products under both annual and perpetual
license arrangements. Software license revenue is recognized upon the execution
of the license arrangements and shipment of the product, provided that no
significant vendor post-contract support obligations remain outstanding, and
collection of the resulting receivable is deemed probable. The Company
recognizes revenue from post-contract support, which consists of telephone
support and the right to software upgrades, ratably over the period of the
post-contract arrangement.
F-9
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONTRACTS
Contract revenue is recognized based on the percentage-of-completion method.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance such as indirect labor, supplies, and
depreciation costs. Selling and general administrative costs are charged to
expense as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. Changes in contract
performance, conditions, and estimated profitability, including those arising
from contract penalty provisions and final contract settlements, may result in
revision to costs and income and are recognized in the period in which the
revisions are determined.
NET INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share," which specifies the computation, presentation,
and disclosure requirements for earnings per share ("EPS") and became effective
for both interim and annual periods ending after December 15, 1997. All prior
period EPS data has been restated to conform with the provisions of SFAS
No. 128. Basic earnings per share excludes dilution and is computed by dividing
net earnings by the weighted average number of common shares outstanding for the
period. Diluted earnings per share is computed based upon the weighted average
number of common shares outstanding and dilutive common stock equivalents. For
purposes of this calculation, outstanding stock options and warrants are
considered common stock equivalents (using the treasury stock method). The
following is a reconciliation of the numerators and denominators used to
calculate earnings per share in the Consolidated Statements of Operations:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
INCOME SHARES- PER- INCOME SHARES- PER- INCOME SHARES- PER-
(NUMER- (DENOM- SHARE (NUMER- (DENOM- SHARE (NUMER- (DENOM- SHARE
ATOR) INATOR) AMOUNT ATOR) INATOR) AMOUNT ATOR) INATOR) AMOUNT
-------- --------- -------- -------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income........... $ 8,121 $8,493 ($30)
BASIC EPS:
Income Available to
Common
Stockholders....... $ 8,121 8,668,368 $0.94 $8,493 6,945,339 $1.22 ($30) 6,251,385 ($0.01)
EFFECT OF DILUTIVE
SECURITIES:
Options and
Warrants........... 816,458 1,693,272 --
--------- --------- ---------
DILUTED EPS:
Income Available to
Common
Stockholders....... $ 8,121 9,484,826 $0.86 $8,493 8,638,611 $0.98 ($30) 6,251,385 ($0.01)
======= ========= ===== ====== ========= ===== ==== ========= ======
</TABLE>
Options and warrants to purchase 343,268 and 61,500 shares of common stock
were outstanding at December 31, 1998 and 1997, respectively, but were not
included in the computation of diluted earnings per share because the exercise
prices exceeded the average market price of common shares.
F-10
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ACCOUNTING ESTIMATES
The preparation of the consolidated financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
the reported amounts of revenues and expenses during the reporting period, and
to disclose contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
TRANSLATION OF FOREIGN CURRENCY
The financial statements of the Company's foreign subsidiaries are
translated in accordance with SFAS 52, "Foreign Currency Translation". The
financial statements of the Company's subsidiaries are translated from their
functional currency into U.S. dollars utilizing the current rate method.
Accordingly, assets and liabilities are translated at exchange rates in
effect at the end of the year, and revenues and expenses are translated at the
weighted average exchange rate during the year. All cumulative translation gains
and losses from the translation into U.S. dollars are included as a separate
component of stockholder's equity in the consolidated balance sheets.
Transaction gains and losses are included in the consolidated statements of
operations and have not been material.
RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130), which establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. Additionally, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). This Statement
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The Company adopted SFAS 130 and SFAS 131 effective January 1, 1998.
In June, 1998 the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". This statement
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the value of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS 133 is
required to be adopted by the Company in 2000. Although management is currently
reviewing the impact of the statement, it believes this statement will not have
a significant impact on the Company.
In March, 1998 the AICPA issued Statement of Position (SOP) 98-4, "Deferral
of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition,"
which amends certain provisions of SOP 97-2. The Company believes it is in
compliance with the provisions of SOP 97-2, as amended by 98-4. However,
detailed implementation guidelines for this standard have not been issued. It is
possible that once issued, such guidance could lead to unanticipated changes in
the Company's current revenue recognition practices, and such changes could be
material to the Company's results of operations. In December, 1998 the AICPA
issued Statement of Position 98-9, "Modification of SOP 97-2, Software
F-11
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition, with Respect to Certain Transactions," which amends certain
provisions of SOP 97-2 and extends the deferral of the application of certain
passages of SOP 97-2 provided by SOP 98-4 until the beginning of 2000. The
Company is currently evaluating the impact of SOP 98-9 on its financial
statements and related disclosures.
In March, 1998 the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use". This standard requires companies to capitalize
qualifying computer software costs which are incurred during the application
development stage and amortize them over the software's estimated useful life.
The Company is required to adopt this standard in 2000 and is currently
evaluating the impact that its adoption will have on the consolidated financial
position and results of operations of the Company.
C. ACQUISITION OF BUSINESSES
On May 16, 1996, the Company purchased all of the stock of Fluid
Dynamics, Inc. ("FDI"), a provider of computerized design and simulation
software used to predict fluid flow, heat and mass transfer, chemical reaction,
and related phenomena for a purchase price of $8,305. Prior to the acquisition,
FDI was a major competitor of the Company's software operations. The Company
acquired FDI through the issuance of 75,000 shares of its common stock (valued
at $12 per share), a cash payment of $3,757, assumed liabilities of $3,583, and
closing costs paid of $65. The Company also agreed to certain bonus payments
based upon achievement of defined annual operating results of FDI. Under this
bonus agreement, the Company paid out bonuses of $102 in 1997, but did not pay
out any bonuses in 1996 as the Company did not achieve the required operating
results. This acquisition has been accounted for under the purchase method of
accounting.
The allocation of the identifiable tangible and intangible assets and
undeveloped technology based on estimated fair market value as of the
acquisition date was as follows:
<TABLE>
<S> <C>
Cash........................................................ $ 529
Accounts receivable......................................... 1,462
Other current assets........................................ 167
Fixed assets................................................ 341
Goodwill.................................................... 1,249
Workforce................................................... 184
Existing technology......................................... 839
Other non-current assets.................................... 88
Undeveloped technology...................................... 3,446
------
$8,305
------
</TABLE>
The undeveloped technology acquired had not reached technological
feasibility, had no alternative future use, and was expensed at the time of the
acquisition. The allocation of fair value assigned to each intangible asset was
determined based on an independent appraisal. The appraisal incorporated proven
valuation procedures and techniques in determining the fair value of each
intangible asset including using a risk adjusted cash flow model, under which
cash flows were discounted taking into account risks related to existing and
future markets and an assessment of the life expectancy of the technology.
F-12
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
C. ACQUISITION OF BUSINESSES (CONTINUED)
In September 1996, the Company established a joint venture with a company
located in Taiwan. The purpose of the joint venture was to develop, manufacture,
produce and distribute thermal management products. The Company contributed
$1,423 in cash, which included pre-incorporation fees of $163, for a 51%
interest in the joint venture. This entity was controlled by the Company under
the terms of a stockholder agreement and, accordingly, the Company accounted for
this entity using the consolidation method of accounting. Effective July 17,
1997, the Company acquired the remaining 49% interest in the joint venture for
total consideration of $2,250, which was paid with $1,125 in cash and the
issuance of 75,000 shares of Common Stock.
On September 16, 1996, the Company acquired substantially all of the assets
of Alumax Extrusion's Franklin, New Hampshire aluminum extrusion manufacturing
facility, for a purchase price of $4,547, which includes acquisition costs of
$30. The acquisition has been accounted for under the purchase method of
accounting.
The allocation of the identifiable tangible assets based on estimated fair
market value as of the acquisition date was as follows:
<TABLE>
<S> <C>
Cash........................................................ $ 8
Accounts receivable......................................... 14
Inventory................................................... 461
Other assets................................................ 16
Fixed assets................................................ 4,048
------
$4,547
------
</TABLE>
On December 24, 1996, the Company purchased all of the assets of Beaver
Industries, Inc. through its wholly-owned subsidiary Aavid Thermal Products of
Canada, Inc. Beaver Industries manufactures heat sinks and provides related
thermal management products for electrical and electronic parts, components,
assemblies, and systems. The purchase price of $2,010 consisted of $1,650 cash
paid to the seller, $64 of closing costs, and $296 in liabilities assumed. This
acquisition has been accounted for under the purchase method of accounting. The
purchase price exceeded the fair value of net assets by $1,043.
The allocation of the identifiable tangible and intangible assets based on
estimated fair market value as of the acquisition date was as follows:
<TABLE>
<S> <C>
Cash........................................................ $ 29
Accounts receivable......................................... 153
Other current assets........................................ 128
Inventory................................................... 188
Fixed assets................................................ 469
Goodwill.................................................... 1,043
------
$2,010
</TABLE>
Presented below is the unaudited supplemental pro forma financial data for
the year ended December 31, 1996 reflecting the impact of the acquisitions of
FDI and Beaver Industries, Inc. as if they occurred as of January 1, 1995,
excluding the effects of the extraordinary item in 1996, and the
F-13
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
C. ACQUISITION OF BUSINESSES (CONTINUED)
purchased undeveloped technology charge in 1996. The Company believes that the
Alumax Extrusion facility operations would not materially impact the pro forma
disclosure.
<TABLE>
<S> <C>
Net sales................................................... $112,058
Net income.................................................. 3,433
Net income per share, diluted............................... $ 0.47
</TABLE>
This pro forma information has been prepared for comparative purposes only
and does not purport to be indicative of what would have occurred if the
acquisitions had been made on January 1, 1995, or of the results that may occur
in the future.
D. ACCOUNTS RECEIVABLE
The components of accounts receivable at December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Accounts receivable....................................... $31,895 $34,604
Allowance for doubtful accounts........................... (737) (838)
------- -------
Net Accounts Receivable................................... $31,158 $33,766
======= =======
</TABLE>
E. INVENTORIES
The components of inventories at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Raw materials............................................. $ 9,987 $ 6,753
Work-in-process........................................... 2,364 3,232
Finished goods............................................ 2,932 3,383
------- -------
$15,283 $13,368
------- -------
</TABLE>
F-14
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
F. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment, recorded at cost, by major classification as
of December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Land.................................................... $ 1,771 $ 1,649
Building and improvements............................... 16,756 15,209
Machinery and equipment................................. 42,115 34,932
Vehicles................................................ 563 171
Machinery-in-progress................................... 1,397 3,425
-------- --------
62,602 55,386
Less accumulated depreciation........................... (20,105) (12,231)
-------- --------
$ 42,497 $ 43,155
======== ========
</TABLE>
Substantially all property, plant, and equipment serve as collateral under
the Company's various borrowing arrangements.
G. OTHER ASSETS
Other long-term assets as of December 31, 1998 and 1997 consist principally
of the following intangible assets:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Goodwill.................................................... $6,283 $6,378
Patents..................................................... 724 631
Other intangibles........................................... 1,607 1,820
Deferred financing costs.................................... 53 245
Other--equity in affiliates................................. 257 303
------ ------
8,924 9,377
Less: accumulated amortization.............................. (2,603) (1,548)
------ ------
$6,321 $7,829
====== ======
</TABLE>
H. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Included in accrued expenses at December 31, 1998 and 1997 are the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Accrued bonus............................................. $ 1,500 $ 2,495
Deferred maintenance revenue.............................. 5,462 4,887
Income taxes payable...................................... 2,721 2,390
Restructuring charges..................................... 4,169 --
Other accrued expenses.................................... 9,636 8,006
------- -------
$23,488 $17,778
======= =======
</TABLE>
F-15
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
I. DEBT OBLIGATIONS
Debt obligations as of December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Notes payable in monthly installments of $11 to $18,
including interest at rates between prime minus 0.50% to the
prime rate, which equaled 8% and 8.5% at December 31, 1997
and 7.25% and 7.75% at December 31, 1998, respectively, due
June 2002; collateralized by a first mortgage on real
property.................................................... $ 2,757 $ 2,866
Notes payable in monthly installments of $21 to $91 plus
interest at 8.5%, due February through November of 1999..... 825 593
Consolidated term loan due November 2003, payable in monthly
installments of $186, including interest at either the prime
rate or the LIBOR rate plus 2.0%, subject to an election
made by the Company; as of December 31, 1998 and 1997 the
Company elected the prime rate which equaled 7.75% and 8.5%,
respectively................................................ 8,374 10,607
Notes payable in monthly installments of $4 to $12,
including interest at rates between 5.60% and the prime rate
plus 1.50%, which equaled 9.25% and 10% at December 31, 1998
and 1997, respectively, due June 30, 2008; collateralized by
mortgages on certain real property.......................... 2,570 2,760
Revolving credit facility, see note below................... -- 6,230
Note payable in monthly installments of $10, including
interest at the Lloyds Bank rate plus 2.50% which equaled
9.75% at December 31, 1997, due June 16, 2005;
collateralized by first mortgage on real property, repaid in
1998........................................................ -- 762
Other....................................................... 124 138
------- -------
14,650 23,956
Less current portion........................................ 3,442 3,360
------- -------
Debt obligations, net of current portion.................... $11,208 $20,596
======= =======
</TABLE>
In December 1997, the Company renegotiated its revolving credit facility and
refinanced certain term notes. The new Loan Agreement provided the Company with
a senior loan facility which includes a $20,000 revolving credit facility, a
$10,900 term loan, a $10,000 term loan and a $16,000 capital expenditure line of
credit, however, total combined outstanding borrowings under the Loan Agreement
are capped at $40,000. Previously outstanding term and acquisition loans were
refinanced into the $10,900 term loan, with monthly payments of $186 through
November 15, 2003 at which time the remaining balance is due and payable. Total
combined outstanding borrowings under the Loan Agreement at December 31, 1998
were $8,374. Borrowings under the Loan Agreement bear interest at either the
prime rate or LIBOR plus 2%, based on an election by the Company. At
December 31, 1998 and 1997 the Company elected the prime rate which equaled
7.75% and 8.5%, respectively. Total availability under the $20,000 revolving
credit facility, which is limited to levels of qualified inventory
F-16
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
I. DEBT OBLIGATIONS (CONTINUED)
and accounts receivable as defined, amounted to $13,510 at December 31, 1998.
The Loan Agreement is subject to various affirmative and negative covenants, the
most restrictive of which prohibits payment of dividends, additional
indebtedness and the sale of assets, which the Company met in 1998 and 1997. The
revolving credit facility contains a commitment fee of 0.25% at December 31,
1998 and 1997 of available borrowings under the line of credit as defined, and a
pre-payment penalty, as defined.
Substantially all of the Company's assets serve as collateral under these
debt obligations.
The Company was also contingently liable at December 31, 1998 and 1997 for
$200 and $350, respectively, related to outstanding letters of credit.
Debt maturities payable for the five years and thereafter subsequent to
December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 3,442
2000........................................................ 2,690
2001........................................................ 2,755
2002........................................................ 2,032
2003........................................................ 342
Thereafter.................................................. 3,389
-------
Total..................................................... $14,650
=======
</TABLE>
J. EQUITY
On January 29, 1996, the Company completed its initial public offering (IPO)
and sold an aggregate of 2,645,000 shares of common stock at $9.50 per share.
All of the then outstanding preferred stock automatically converted into
2,959,692 shares of common stock, as discussed below. In addition, the
authorized number of preferred shares increased from 1,100,000 to 4,000,000 upon
the conversion of the outstanding preferred stock to common stock and the number
of authorized shares of common stock was increased from 15,000,000 to
25,000,000.
STOCK SPLIT
The Board of Directors approved a 5.5-for-1 stock split (in the form of a
stock dividend) of its common stock to be effected immediately prior to the
effective date of the Registration Statement on Form S-1 filed by the Company
under the Securities Act of 1933 (Registration Statement) which occurred on
January 29, 1996. Accordingly, all common share and per share amounts in these
financial statements have been adjusted to reflect the stock dividend as though
it had occurred at the beginning of the initial period presented.
PREFERRED STOCK
Effective upon the closing of the initial public offering, the Company's
Series A and Series B Convertible Preferred Stock converted into common stock in
accordance with a formula, which resulted in a 5.5-for-1 exchange. In addition,
the Company authorized the issuance of 4,000,000 shares of $0.01 par value
Preferred Stock, none of which is outstanding as of December 31, 1998 and 1997.
The Preferred Stock shall have designations, preferences, powers, and rights as
may be authorized by the Board of Directors.
F-17
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
J. EQUITY (CONTINUED)
REDEEMABLE WARRANT
In connection with the issuance of a Senior Subordinated Note in 1993, the
Company granted the issuer a warrant to purchase 495,000 shares of its Common
Stock at an exercise price of $1.87, that would have expired October 2003. The
exercise price of the warrant represented the fair market value of the Common
Stock on the date of issuance. The warrant contained specific anti-dilutive
provisions and provided the holder with the right to participate in capital
distributions to stockholders. The warrant also contained affirmative and
negative covenants similar to those contained in the debt agreement for the
Senior Subordinated Note and included a restriction against dividend payments by
the Company. Through the date of the expiration of the put option, which
occurred at the closing of the Company's Initial Public Offering, the warrant
was accreted to the estimated redemption price. In March, 1998, the warrant was
exercised.
SALE OF COMMON STOCK
On November 14, 1997, the Company sold an aggregate of 297,872 shares of
Common Stock and a warrant to purchase 50,000 shares of Common Stock for $7,000
to a corporate investor. The warrant has an exercise price of $23.50 per share
and expires on November 14, 2000. The Company granted this investor certain
demand and "piggyback" registration rights with respect to the purchased shares
(including the shares underlying the warrant), although the investor had agreed
not to exercise these rights for a period of one year. The Company intends to
use the proceeds for general corporate purposes, including working capital.
STOCK OPTIONS
During 1993, an officer of the Company was granted non-qualified stock
options to acquire 249,205 shares of Common Stock at an exercise price of $0.19
per share, and 1,268,795 shares of Common Stock at an exercise price of $2.20
per share. These options vested and became exercisable as to 25% of the
applicable shares immediately, with the remainder ratably in October 1994, 1995,
and 1996, respectively. During 1998 and 1997, respectively, 1,025,000 and
225,000 options were exercised. All remaining options were outstanding and
exercisable as of December 31, 1998. In addition, since 1993, the Company has
issued 536,875 non-qualified stock options to Directors of the Company and
certain executives at exercise prices ranging from $0.19 to $9.50. As of
December 31, 1998, 433,375 of these options were outstanding and 352,594 were
exercisable. The exercise price of all these options equaled the fair market
value on the date of grant, as determined by the Board of Directors for
issuances prior to its initial public offering or market prices thereafter.
During 1994, the Company's Board of Directors adopted and approved a stock
option plan for officers and key employees (1994 Stock Option Plan). The 1994
Stock Option Plan provides for the grant to officers and key employees of the
Company of stock options intended to qualify as incentive stock options under
the applicable provisions of the Internal Revenue Code, as well as non-qualified
options. The Company has reserved 894,326 shares of its Common Stock for
issuance under this plan. As of December 31, 1998, 670,046 options were
outstanding, of which 273,883 were exercisable.
The 1994 Stock Option Plan provides that the exercise price of all options
shall be at least equal to the fair market value of the Company's shares, as of
the date on which the grant is made. The term of options issued under the plan
cannot exceed ten years. Options are generally exercisable in installments
beginning on the date of grant. With respect to incentive stock options granted
to a participant owning more than 10% of the Company's shares, the exercise
price thereof is at least 110% of the fair market value of the Company's stock.
F-18
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
J. EQUITY (CONTINUED)
During 1995, the Company's Board of Directors adopted and approved a stock
option plan for non-employee directors (Directors' Plan). The Company has
reserved 200,000 shares of its Common Stock for issuance under this plan. The
Directors' Plan provides for the automatic grant to non-employee directors of
options to purchase shares of Common Stock reserved for issuance under the
Directors' Plan. Options granted under the Directors' Plan do not qualify as
incentive stock options under the applicable provisions of the Internal Revenue
Code. The options have an exercise price of 100% of the fair market value of the
Common Stock on the date of grant and have a ten-year term. Initial options
become fully exercisable six (6) months after the date of grant. All other
options granted under the Directors' Plan become fully exercisable from and
after the first anniversary of the grant date. As of December 31, 1998, 58,750
options were outstanding, of which 38,125 were exercisable.
During 1995, the Company's Board of Directors adopted and approved an
employee stock purchase plan (Purchase Plan). Under the Purchase Plan, the
Company will grant rights to purchase shares of Common Stock to eligible
employees on a date or series of dates designated by the Board of Directors. The
Company has reserved 250,000 shares of its Common Stock for issuance under this
plan. The price per share with respect to each grant of rights under the
Purchase Plan is the lesser of:
(i) 85% of the fair market value on the offering date on which such rights
were granted, or
(ii) 85% of the fair market value on the date such right is exercised.
The Purchase Plan is intended to qualify as an employee stock purchase plan
under the applicable provisions of the Internal Revenue Code. During 1998, 1997
and 1996, the Company sold 34,282, 41,604 and 21,477 shares under this plan,
respectively.
A summary of all stock options activity follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding at December 31, 1995.......................... 2,111,240 $ 2.51
Granted during 1996....................................... 615,096 9.36
Exercised during 1996..................................... (1,925) 4.55
Canceled during 1996...................................... (22,822) 5.56
---------- ------
Outstanding at December 31, 1996.......................... 2,701,589 $ 4.04
Granted during 1997....................................... 289,779 15.22
Exercised during 1997..................................... (626,930) 2.59
Canceled during 1997...................................... (51,656) 7.51
---------- ------
Outstanding at December 31, 1997.......................... 2,312,782 $ 5.76
Granted during 1998....................................... 358,133 24.07
Exercised during 1998..................................... (1,191,659) 2.92
Canceled during 1998...................................... (49,085) 21.64
---------- ------
Outstanding at December 31, 1998.......................... 1,430,171 $12.16
========== ======
</TABLE>
At December 31, 1998, 1997, and 1996, options for 932,602, 1,814,021 and
2,043,524, shares were exercisable, respectively with weighted average exercise
prices of $8.53, $4.11 and $2.67, respectively.
F-19
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
J. EQUITY (CONTINUED)
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation", which defines a fair value based
method of accounting for employee stock options, or similar equity instruments,
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans; however, it also allows an entity to continue
to measure compensation costs for those plans using the intrinsic method of
accounting prescribed by APB Opinion 25. Entities electing to remain with the
accounting in APB Opinion 25 must make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting defined in
SFAS No. 123 has been applied.
The Company has elected to account for its stock-based compensation plan
under APB Opinion 25; however, the Company has computed, for pro forma
disclosure purposes, the value of all options granted during 1998, 1997, and
1996 using the Black-Scholes option-pricing model as prescribed by SFAS
No. 123, using the following weighted-average assumptions for grants in 1997,
1996, and 1995:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate................................ 5.35% 6.55% 6.18%
Expected dividend yield................................ -- -- --
Expected life.......................................... 4 years 4 years 5 years
Expected volatility.................................... 75% 50% 67%
</TABLE>
The weighted average fair value of options granted in 1998, 1997, and 1996
were $14.29, $7.61 and $4.59, respectively.
The total value of options granted during 1995 through 1998 would be
amortized on a pro forma basis over the vesting period of the options. Options
generally vest equally over two to four years. Because the SFAS No. 123 method
of accounting has not been applied to options granted prior to January 1, 1995,
the resulting pro forma compensation costs may not be representative of that to
be expected in future years. If the Company had accounted for these plans,
including the Employee Stock Purchase Plan, in accordance with SFAS No. 123, the
Company's net income or loss and net income or loss per share would have
decreased or increased, as reflected in the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) --
As reported....................................... $8,121 $8,493 $ (30)
Pro forma......................................... 4,322 6,761 (906)
Net income (loss) per share, diluted --
As reported....................................... $ 0.86 $ 0.98 $(0.01)
Pro forma......................................... 0.46 0.78 (0.15)
</TABLE>
F-20
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
J. EQUITY (CONTINUED)
Set forth is a summary of options outstanding and exercisable as of
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED NUMBER WEIGHTED
NUMBER OF REMAINING AVERAGE OF AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL LIFE EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES OPTIONS (YEARS) PRICE OPTIONS PRICE
- --------------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.20-$4.55 309,520 4.90 $ 2.30 309,520 $ 2.30
$7.38-$9.00 113,625 7.49 $ 8.84 44,876 $ 8.78
$9.50 440,837 7.74 $ 9.50 403,485 $ 9.50
9.875-$23.25 275,921 7.52 $14.53 129,829 $14.48
24.00-$32.63 290,268 9.11 $25.77 44,892 $25.29
------------ --------- ---- ------ ------- ------
2.20-$32.63 1,430,171 7.35 $12.16 932,602 $ 8.53
============ ========= ==== ====== ======= ======
</TABLE>
K. INCOME TAXES
Income (loss) before income taxes and extraordinary item for domestic and
foreign operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Domestic.......................................... $ 4,998 $ 7,321 $ (18)
Foreign........................................... 7,508 5,996 2,161
------- ------- ------
$12,506 $13,317 $2,143
======= ======= ======
</TABLE>
The income tax provision included in the consolidated statements of
operations, consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Federal provision (benefit):
Current........................................... $3,289 $2,723 $1,046
Deferred.......................................... (1,785) (291) 24
------ ------ ------
1,504 2,432 1,070
State provision:
Current........................................... 707 260 170
Deferred.......................................... (387) 124 2
------ ------ ------
320 384 172
Foreign provision:
Current........................................... 2,561 2,008 760
------ ------ ------
Total provision..................................... $4,385 $4,824 $2,002
====== ====== ======
</TABLE>
F-21
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
K. INCOME TAXES (CONTINUED)
The Company is in a net operating loss carryforward position for US tax
purposes due to the tax benefit associated with stock options which totaled
$8,861 and $3,726 for 1998 and 1997, respectively and was credited directly to
stockholders' equity. The Company has approximately $15,000 of U.S. federal net
operating loss carryforwards available to reduce future taxable income, if any.
These net operating loss carryforwards expire in 2018, and are subject to the
review and possible adjustment by the Internal Revenue Service. Section 382 of
the Internal Revenue Code also contains provisions that could place annual
limitations on the utilization of these net operating loss carryforwards in the
event of a change in ownership, as defined. A reconciliation of the income tax
expense at the statutory federal income tax rate to the Company's actual income
tax expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Expected federal tax.................................. $ 4,376 $ 4,528 $ 728
State income taxes, net............................... 208 387 112
Purchased undeveloped technology charge............... -- -- 1,172
Benefit of tax credits................................ (100) (150) (830)
Non-deductible goodwill............................... 270 48 84
Foreign sales corporation............................. (284) (96) (20)
Increase in valuation allowance....................... -- 56 575
Other................................................. (85) 51 181
------------ ------------ ------------
Total income tax expense.............................. $ 4,385 $ 4,824 $ 2,002
============ ============ ============
</TABLE>
Deferred tax assets and liabilities are measured as the difference between
the financial statement and the tax bases of assets and liabilities at the
applicable enacted tax rates. No provision has been made for U.S. income taxes
on the undistributed earnings in foreign subsidiaries as it is the Company's
intention to utilize those earnings in the foreign operations for an indefinite
period of time. As of December 31, 1998, undistributed earnings totaled
approximately $8,256, excluding amounts which, if remitted, generally would not
result in additional U.S. income taxes because of available foreign tax credits.
It is not practicable to determine the amount of income or withholding tax that
would be payable upon remittance of those earnings.
F-22
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
K. INCOME TAXES (CONTINUED)
The components of the net deferred asset consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Tax credits............................................. $ 1,449 $ 924
Inventory reserves and capitalization................... 346 375
Accounts receivable reserves............................ 530 504
Vacation and benefit reserves........................... 349 1,030
Net operating loss carryforwards........................ 5,324 --
Restructuring reserves.................................. 1,513 --
Other liabilities and reserves.......................... 485 456
------- -------
9,996 3,289
Valuation allowance....................................... (924) (924)
------- -------
Total deferred tax assets................................. 9,072 2,365
Deferred tax liabilities:
Depreciation............................................ (1,964) (1,959)
Acquired intangibles.................................... (254) (310)
------- -------
Total deferred tax liabilities............................ (2,218) (2,269)
------- -------
Net deferred tax asset.................................... $ 6,854 $ 96
======= =======
</TABLE>
In 1997, the Company increased its valuation allowance by $56 for tax credit
carryforwards, whose use is uncertain. In 1996, the Company recorded an increase
in its valuation allowance of $293 for tax credit carryforwards acquired in the
FDI acquisition, and an increase in its valuation allowance of $575 for tax
credit carryforwards generated, whose use is uncertain. The future benefit of
tax credits acquired in the FDI acquisition will be credited against goodwill,
if realized.
F-23
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
L. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases various equipment and facilities under the terms of
non-cancelable operating leases. Future lease commitments are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
1999........................................................ $3,148
2000........................................................ 2,248
2001........................................................ 1,596
2002........................................................ 855
2003........................................................ 193
Thereafter.................................................. 1
------
$8,041
======
</TABLE>
Lease expense was approximately $3,141, $2,556 and $1,426 for the years
ended December 31, 1998, 1997 and 1996, respectively.
LITIGATION
On March 4, 1998, Materials Innovation, Inc. of Lebanon, New Hampshire
("Mii") and two of its principals, Alan Beane and Glenn Beane (all three the
"Petitioners"), filed a petition for declaratory judgment against Aavid Thermal
Products, Inc. in Grafton County (New Hampshire) Superior Court. The Petitioners
have asked the court to declare as terminated a contract between Petitioners and
Aavid dated October 14, 1993 (the "Agreement"). Petitioner Alan Beane is a
former Director and Chief Executive Officer of the Company, and beneficially
owns more than 10% of the Company's common stock.
The Agreement grants to Aavid licenses for two patents, one involving a
clamp for attaching heatsinks to semiconductors, and the other involving a
process to make heatsinks by vacuum die casting. The Agreement also provides
Aavid with rights to potential technology of Mii relating to Aavid's thermal
products business, and prohibits Petitioners from competing against Aavid for
the ten-year term of the Agreement. Petitioners claim that Aavid has failed to
pay royalties associated with the vacuum die cast patent. The petition does not
seek monetary damages from Aavid.
Although the Company believes that the termination of the Mii Agreement
would not have a materially adverse effect on its business, results of
operations or financial condition, there can be no assurance it will not have
such a materially adverse effect in the future. On January 29, 1999, the Grafton
County Superior Court granted the Company's motion to dismiss the petitioner's
Declaratory Judgement petition. The petitioners have appealed that dismissal.
The Company is involved in various other legal proceedings that are
incidental to the conduct of its business, none of which the Company believes
could reasonably be expected to have a materially adverse effect on the
Company's financial condition, liquidity, or results of operations.
F-24
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
L. COMMITMENTS AND CONTINGENCIES (CONTINUED)
RELATED PARTY TRANSACTIONS
The Company licenses certain technologies and purchases specific products
from another company controlled by a former officer and director. The licensing
agreement calls for minimum royalties and variable amounts dependent on the
sales of licensed products as defined. In addition, the Company also contracts
certain research and development projects with this related party. For the years
ended December 31, 1997 and 1996, payments of $2, and $14 were made to this
entity. There were no royalties paid to this entity in 1998. See "Litigation"
above.
Through the first quarter of 1998, the Company had an agreement with an
entity controlled by certain directors under which it was obligated to pay an
annual management fee of $250. In the first quarter of 1998, the Company and the
related party agreed to terminate the agreement and discontinue the payment of
any future management charges (see Note O). The Company expensed $250 under this
agreement for the years ended December 31, 1997 and 1996.
PURCHASE COMMITMENT
The Company has an obligation to purchase from one of its key suppliers a
minimum quantity of aluminum coil stock. The Company believes that purchasing
aluminum coil stock from this supplier is necessary to achieve consistently low
tolerances, design, delivery flexibility, and price stability. Under the terms
of this agreement, which expires on August 31, 2000, the Company has agreed to
purchase certain minimum quantities on a quarterly basis which approximates
$480.
M. 401(K) PROFIT SHARING PLAN
The Company has profit sharing plans, which permit participants to make
contributions by salary reduction pursuant to Section 401(k) of the Internal
Revenue Code. Employee eligibility is based on a minimum age and employment
requirement. Annual employer contributions are determined by the Board of
Directors, but cannot exceed the amount allowable for federal income tax
purposes. The Company's contribution was approximately $280, $202 and $193 for
the years ended December 31, 1998, 1997 and 1996, respectively.
N. SEGMENT REPORTING
Aavid provides thermal management solutions for microprocessors and
integrated circuits ("ICs") for digital and power applications. The Company
consists of three distinct reportable segments: thermal management products,
computational fluid dynamics ("CFD") software, and 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.
F-25
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
N. SEGMENT REPORTING (CONTINUED)
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. Most of the
businesses were acquired as a unit and the management at the time of acquisition
has generally been retained.
The following summarizes the operations of each reportable segment for the
years ending December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
RESTRUCTURING PURCHASED
REVENUES FROM DEPRECIATION AND BUYOUT OF UNDEVELOPED
EXTERNAL INTEREST AND COMPENSATION TECHNOLOGY
CUSTOMERS EXPENSE AMORTIZATION ARRANGEMENTS CHARGE
------------- -------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
1998
Thermal Products................. $169,597 $1,087 $8,337 $5,740 $ --
CFD Software..................... 38,326 255 1,331 -- --
Thermal Design Services.......... 1,155 -- 15 -- --
Corporate Office................. -- -- 197 --
-------- ------ ------ ------ ------
Total............................ 209,078 1,342 9,880 5,740 --
======== ====== ====== ====== ======
1997
Thermal Products................. 134,719 1,729 6,366 -- --
CFD Software..................... 32,472 435 1,133 -- --
Thermal Design Services.......... 554 14 9 -- --
Corporate Office................. -- -- 132 -- --
-------- ------ ------ ------ ------
Total............................ 167,745 2,178 7,640 -- --
======== ====== ====== ====== ======
1996
Thermal Products................. 81,851 1,161 3,126 -- --
CFD Software..................... 25,144 430 976 -- 3,446
Thermal Design Services.......... -- -- -- -- --
Corporate Office................. -- -- -- -- --
-------- ------ ------ ------ ------
Total............................ $106,995 $1,591 $4,102 -- $3,446
======== ====== ====== ====== ======
</TABLE>
F-26
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
N. SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
SEGMENT
INCOME BEFORE
TAXES AND ASSETS(NET OF
INCOME TAX EXTRAORDINARY INTERCOMPANY CAPITAL
EXPENSE ITEMS BALANCES) EXPENDITURES
---------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
1998
Thermal Products........................... $2,070 $ 6,512 $ 94,774 $ 9,012
CFD Software............................... 2,311 6,036 25,497 1,153
Thermal Design Services.................... 4 (22) 570 26
Corporate Office........................... -- (20) 8,243 216
------ ------- -------- -------
Total...................................... 4,385 12,506 129,084 10,407
====== ======= ======== =======
1997
Thermal Products........................... 3,253 9,731 85,436 12,889
CFD Software............................... 1,569 4,238 22,384 2,817
Thermal Design Services.................... 2 (262) 582 60
Corporate Office........................... -- (390) 2,394 226
------ ------- -------- -------
Total...................................... 4,824 13,317 110,796 15,992
====== ======= ======== =======
1996
Thermal Products........................... 757 2,279 61,412 6,230
CFD Software............................... 1,245 (136) 18,809 799
Thermal Design Services.................... -- -- -- --
Corporate Office........................... -- -- -- --
------ ------- -------- -------
Total...................................... $2,002 $ 2,143 $ 80,221 $ 7,029
====== ======= ======== =======
</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>
YEAR ENDING DECEMBER 31,
---------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUES ASSETS REVENUES ASSETS REVENUES ASSETS
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States....................... $169,765 $43,431 $137,988 $44,185 $ 87,951 $35,053
Taiwan.............................. 18,789 1,271 19,407 1,272 3,502 1,478
China............................... 13,467 1,431 -- -- -- --
United Kingdom...................... 18,185 2,612 21,929 2,951 11,009 1,909
Other International................. 20,623 73 12,430 2,576 11,980 1,962
Intercompany eliminations........... (31,751) -- (24,009) -- (7,447) --
-------- ------- -------- ------- -------- -------
Consolidated Revenue................ $209,078 $48,818 $167,745 $50,984 $106,995 $40,402
======== ======= ======== ======= ======== =======
</TABLE>
F-27
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
N. SEGMENT REPORTING (CONTINUED)
Revenues from one customer of Aavid's thermal products division represents
approximately $47,000, $24,700 and $2,000 of the Company's consolidated revenues
for the years ending December 31, 1998, 1997 and 1996, respectively. Due to a
change in product mix at this customer, revenues from this customer are expected
to be less than 5% of total revenues in future years.
O. RESTRUCTURING AND BUYOUT OF COMPENSATION ARRANGEMENTS
During the first quarter of 1998, the Company recorded a non-recurring
pre-tax charge of $1,858, which related to financial obligations arising from
the Company's restructuring in 1993 and comprised two elements: First, the
Company terminated an arrangement with certain venture investors, under which it
was obligated to pay fixed fees until at least the year 2000. Second, the
Company provided for an obligation to pay a former director a bonus based on
profits in excess of certain thresholds.
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. This facility was dedicated to
manufacturing a specific large volume product for a single customer. Following a
change in product design by the customer, demand significantly decreased during
the fourth quarter of 1998 to $8,600, from a level of $15,000 in the second
quarter of 1998. The restructuring is expected to be concluded by the second
half of 1999.
The costs associated with the closure of the Manchester facility include the
write-down and disposal of surplus equipment, totaling $2,823, settlement of
certain purchase commitments of $1,127, provisions for leased property expenses
of $382, and employee separation costs of $550. While the number of employees
has been significantly reduced through natural attrition, the plan included the
termination of 120 employees comprised of 90 direct and 30 indirect employees.
The charge is offset by a $1,000 reduction in the previous estimate of
obligations to pay a former director a bonus, paid on profits in excess of
certain thresholds.
The following amounts have been provided to and charged against the
Manchester restructuring reserves as of December 31, 1998:
<TABLE>
<CAPTION>
INITIAL
PROVISION OF
RESTRUCTURING CHARGES AGAINST RESTRUCTURING
RESERVES RESERVES FOR THE RESERVES BALANCE
SEPTEMBER 30, THREE MONTHS ENDED AT DECEMBER 31,
1998 DECEMBER 31, 1998 1998
------------- ------------------ ----------------
<S> <C> <C> <C>
Surplus equipment............... $2,823 $ -- $2,823
Purchase commitments............ 1,127 (436) 691
Lease terminations and leasehold
improvements reserve.......... 382 (54) 328
Employee separation............. 550 (223) 327
------ ----- ------
Total........................... $4,882 $(713) $4,169
====== ===== ======
</TABLE>
F-28
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
P. SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS
The Company's wholly-owned domestic subsidiaries have jointly and severally
guaranteed, on a senior subordinated basis, the $150,000 aggregate principal
amount of 12 3/4% Senior Subordinated Notes due 2007 issued by the Company in
February 2000. The guarantors include the combined domestic operations of Aavid
Thermal Products, Inc. and Fluent, Inc. and the Company's subsidiary Applied
Thermal Technologies, Inc. The non-guarantors include the combined foreign
operations of Aavid Thermal Products, Inc. and Fluent, Inc. The condensed
consolidating financial statements do not include the operations of the
Thermalloy Division of Bowthorpe plc, which were acquired in October 1999. The
condensed consolidating financial statements of the 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. Separate
financial statements of the domestic guarantor subsidiaries and the
non-guarantor subsidiaries are not presented because management has determined
that such financial statements would not be material to investors.
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1998
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents..................... $ 84 $12,971 $ 6,960 $ 12 $ 20,027
Notes receivable.............................. -- 1,459 -- -- 1,459
Accounts receivable-trade, less allowance for
doubtful accounts........................... -- 18,294 13,327 (463) 31,158
Inventories................................... -- 8,155 6,573 555 15,283
Due (to) from affiliates, net................. 26,785 (25,379) 321 (1,727) --
Refundable taxes.............................. (129) -- -- 499 370
Deferred income taxes......................... 6,813 1,335 223 701 9,072
Prepaid and other current assets.............. 86 1,622 1,189 -- 2,897
------- ------- ------- -------- --------
Total current assets.......................... 33,639 18,457 28,593 (423) 80,266
Property, plant and equipment, net............ 223 35,132 7,214 (72) 42,497
Investment in subsidiaries.................... 32,286 -- -- (32,286) --
Other assets, net............................. 37 13,687 1,034 (8,437) 6,321
------- ------- ------- -------- --------
Total assets.................................. $66,185 $67,276 $36,841 $(41,218) $129,084
======= ======= ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of debt obligations........... $ -- $ 2,637 $ 805 $ -- $ 3,442
Accounts payable-trade........................ 125 6,648 10,604 -- 17,377
Accrued expenses and other current
liabilities................................. (5,061) 21,636 8,166 (1,253) 23,488
------- ------- ------- -------- --------
Total current liabilities..................... (4,936) 30,921 19,575 (1,253) 44,307
Debt obligations, net of current portion...... -- 11,892 2,546 (3,230) 11,208
Deferred income taxes......................... (230) 1,806 77 565 2,218
------- ------- ------- -------- --------
Total liabilities............................. (5,166) 44,619 22,198 (3,918) 57,733
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; authorized
25,000,000 shares; 9,251,391 shares issued
and outstanding............................. 93 -- -- -- 93
Additional paid-in capital.................... 56,740 11,772 2,443 (14,215) 56,740
Cumulative translation adjustment............. (902) 148 (884) 736 (902)
Retained earnings............................. 15,420 10,737 13,084 (23,821) 15,420
------- ------- ------- -------- --------
Total stockholders' equity.................... 71,351 22,657 14,643 (37,300) 71,351
------- ------- ------- -------- --------
Total liabilities and stockholders' equity.... $66,185 $67,276 $36,841 $(41,218) $129,084
======= ======= ======= ======== ========
</TABLE>
F-29
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
P. SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1997
------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents................... $ 68 $ 2,037 $ 4,814 $ -- $ 6,919
Notes receivable............................ -- 414 -- (414) --
Accounts receivable-trade, less allowance
for doubtful accounts..................... 4 22,053 13,238 (1,529) 33,766
Due (to) from affiliates, net............... 25,473 (23,418) (2,337) 282 --
Inventories................................. -- 9,668 3,825 (125) 13,368
Refundable taxes............................ 2,070 -- -- (932) 1,138
Deferred income taxes....................... -- 1,334 99 932 2,365
Prepaid and other current assets............ 80 1,539 637 -- 2,256
------- -------- ------- -------- --------
Total current assets........................ 27,695 13,627 20,276 (1,786) 59,812
Property, plant and equipment, net.......... 132 37,486 5,609 (72) 43,155
Investment in subsidiaries.................. 20,682 -- -- (20,682) --
Other assets, net........................... 115 13,830 1,197 (7,313) 7,829
------- -------- ------- -------- --------
Total assets................................ $48,624 $ 64,943 $27,082 $(29,853) $110,796
======= ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of debt obligations......... $ -- $ 2,625 $ 735 $ -- $ 3,360
Accounts payable-trade...................... 2 10,079 7,820 (1,523) 16,378
Accrued expenses and other current
liabilities............................... (2,209) 13,497 6,492 (2) 17,778
------- -------- ------- -------- --------
Total current liabilities................... (2,207) 26,201 15,047 (1,525) 37,516
Debt obligations, net of current portion.... -- 20,669 3,704 (3,777) 20,596
Deferred income taxes....................... 416 1,806 47 -- 2,269
------- -------- ------- -------- --------
Total liabilities........................... (1,791) 48,676 18,798 (5,302) 60,381
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; authorized
25,000,000 shares; 7,558,537 shares issued
and outstanding........................... 76 -- -- -- 76
Additional paid-in capital.................. 43,793 11,772 1,619 (13,391) 43,793
Cumulative translation adjustment........... (753) 150 (934) 784 (753)
Retained earnings........................... 7,299 4,345 7,599 (11,944) 7,299
------- -------- ------- -------- --------
Total stockholders' equity.................. 50,415 16,267 8,284 (24,551) 50,415
------- -------- ------- -------- --------
Total liabilities and stockholders'
equity.................................... $48,624 $ 64,943 $27,082 $(29,853) $110,796
======= ======== ======= ======== ========
</TABLE>
F-30
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
P. SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales......................... $ -- $169,717 $71,584 $(32,223) $209,078
Cost of goods sold................ -- 117,519 46,975 (26,063) 138,431
------- -------- ------- -------- --------
Gross profit...................... -- 52,198 24,609 (6,160) 70,647
Selling, general and
administrative expenses......... 3,881 32,788 12,229 (5,115) 43,783
Research and development.......... -- 6,033 4,823 (4,100) 6,756
Restructuring and buyout of
compensation agreement
charges......................... -- 5,740 -- -- 5,740
------- -------- ------- -------- --------
Income from operations............ (3,881) 7,637 7,557 3,055 14,368
Interest expense, net............. (3) (1,427) 88 -- (1,342)
Other income (expense), net....... (19) (490) (137) 126 (520)
Equity in income of
subsidiaries.................... 11,753 -- -- (11,753) --
------- -------- ------- -------- --------
Income before income taxes and
extraordinary item.............. 7,850 5,720 7,508 (8,572) 12,506
Provision for income tax
expense......................... 271 (4,277) (2,300) 1,921 (4,385)
------- -------- ------- -------- --------
Net income........................ $ 8,121 $ 1,443 $ 5,208 $ (6,651) $ 8,121
======= ======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales......................... $ 100 $137,988 $53,923 $(24,266) $167,745
Cost of goods sold................ -- 92,563 34,464 (19,626) 107,401
------- -------- ------- -------- --------
Gross profit...................... 100 45,425 19,459 (4,640) 60,344
Selling, general and
administrative expenses......... 1,963 28,415 9,665 (3,334) 36,709
Research and development.......... -- 6,504 3,210 (2,775) 6,939
------- -------- ------- -------- --------
Income from operations............ (1,863) 10,506 6,584 1,469 16,696
Interest expense, net............. (2) (2,146) (31) 1 (2,178)
Other income (expense), net....... (824) (649) (262) 534 (1,201)
Equity in income of
subsidiaries.................... 11,121 -- -- (11,121) --
------- -------- ------- -------- --------
Income before income taxes........ 8,432 7,711 6,291 (9,117) 13,317
Provision for income tax
expense......................... 61 (2,698) (2,187) -- (4,824)
------- -------- ------- -------- --------
Net income........................ $ 8,493 $ 5,013 $ 4,104 $ (9,117) $ 8,493
======= ======== ======= ======== ========
</TABLE>
F-31
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
P. SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.......................... $(101) $93,953 $22,657 $(9,514) $106,995
Cost of goods sold................. -- 59,645 13,336 (6,979) 66,002
----- ------- ------- ------- --------
Gross profit....................... (101) 34,308 9,321 (2,535) 40,993
Selling, general and administrative
expenses......................... 498 22,817 4,927 (680) 27,562
Research and development........... -- 5,045 1,941 (1,312) 5,674
Purchased undeveloped technology
charge........................... -- 3,446 -- -- 3,446
----- ------- ------- ------- --------
Income from operations............. (599) 3,000 2,453 (543) 4,311
Interest expense, net.............. (24) (1,519) (48) -- (1,591)
Other income (expense), net........ -- (399) (165) (13) (577)
Equity in income of subsidiaries... 344 -- -- (344) --
----- ------- ------- ------- --------
Income before income taxes and
extraordinary item............... (279) 1,082 2,240 (900) 2,143
Provision for income tax expense... 249 (1,851) (620) 220 (2,002)
----- ------- ------- ------- --------
Income before extraordinary item... (30) (769) 1,620 (680) 141
Extraordinary item, net of related
tax effect....................... -- (171) -- -- (171)
----- ------- ------- ------- --------
Net income (loss).................. $ (30) $ (940) $ 1,620 $ (680) $ (30)
===== ======= ======= ======= ========
</TABLE>
F-32
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
P. SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities............ $(3,871) $ 27,617 $5,799 $(516) $ 29,029
Cash flows used in investing
activities:
Proceeds from sale of property,
plant and equipment........... -- 20 -- -- 20
Purchases of property, plant and
equipment..................... (216) (7,420) (2,860) 89 (10,407)
------- -------- ------ ----- --------
Net cash used in investing
activities...................... (216) (7,400) (2,860) 89 (10,387)
Cash flows provided by (used in)
financing activities:
Issuance of common stock, net of
expenses...................... 4,103 -- -- -- 4,103
Advances under line of credit... -- 128,196 170 -- 128,366
Repayments of line of credit.... -- (133,898) -- -- (133,898)
Advances under debt
obligations................... -- 1,156 (764) 189 581
Principal payments on debt
obligations................... -- (4,468) (225) 358 (4,335)
------- -------- ------ ----- --------
Net cash provided by (used in)
financing activities............ 4,103 (9,014) (819) 547 (5,183)
Foreign exchange effect on cash
and cash equivalents.......... -- (384) 33 -- (351)
------- -------- ------ ----- --------
Net increase in cash and cash
equivalents................... 16 10,819 2,153 120 13,108
Cash and cash equivalents,
beginning of period........... 68 2,038 4,813 -- 6,919
------- -------- ------ ----- --------
Cash and cash equivalents, end
of period..................... $ 84 $ 12,857 $6,966 $ 120 $ 20,027
======= ======== ====== ===== ========
</TABLE>
F-33
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
P. SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities............ $(8,712) $ 14,138 $3,359 $1,850 $ 10,635
Cash flows used in investing
activities:
Payments for acquisitions, net
of cash acquired.............. -- (1,592) 276 -- (1,316)
Proceeds from sale of property,
plant and equipment........... -- 170 247 -- 417
Purchases of property, plant and
equipment..................... (96) (13,188) (2,619) (89) (15,992)
------- -------- ------ ------ --------
Net cash used in investing
activities...................... (96) (14,610) (2,096) (89) (16,891)
Cash flows provided by (used in)
financing activities:
Issuance of common stock, net of
expenses...................... 8,710 -- -- (11) 8,699
Advances under line of credit... -- 124,073 -- -- 124,073
Repayments of line of credit.... -- (124,061) -- -- (124,061)
Advances under debt
obligations................... -- 17,876 -- -- 17,876
Principal payments on debt
obligations................... -- (17,129) 1,784 (1,913) (17,258)
------- -------- ------ ------ --------
Net cash provided by (used in)
financing activities............ 8,710 759 1,784 (1,924) 9,329
Foreign exchange effect on cash
and cash equivalents.......... 5 678 (946) 16 (247)
------- -------- ------ ------ --------
Net increase (decrease) in cash
and cash equivalents.......... (93) 965 2,101 (147) 2,826
Cash and cash equivalents,
beginning of period........... 161 973 2,959 -- 4,093
------- -------- ------ ------ --------
Cash and cash equivalents, end
of period..................... $ 68 $ 1,938 $5,060 $ (147) $ 6,919
======= ======== ====== ====== ========
</TABLE>
F-34
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
P. SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities........... $(21,479) $15,091 $ (11) $8,427 $ 2,028
Cash flows used in investing
activities:
Payments for acquisitions, net
of cash acquired............. -- (11,390) 614 -- (10,776)
Proceeds from sale of property,
plant and equipment.......... -- 182 12 -- 194
Purchases of property, plant
and equipment................ (76) (4,628) (1,364) (961) (7,029)
-------- ------- ------ ------ --------
Net cash used in investing
activities..................... (76) (15,836) (738) (961) (17,611)
Cash flows provided by (used
in) financing activities:
Issuance of common stock, net
of expenses.................. 21,716 -- -- -- 21,716
Advances under line of
credit....................... -- 95,921 -- -- 95,921
Repayments of line of credit... -- (96,470) -- -- (96,470)
Advances under debt
obligations.................. -- 6,659 -- -- 6,659
Principal payments on debt
obligations.................. -- (12,661) 1,479 (1,448) (12,630)
-------- ------- ------ ------ --------
Net cash provided by (used in)
financing activities........... 21,716 (6,551) 1,479 (1,448) 15,196
Foreign exchange effect on cash
and cash equivalents......... -- 48 105 -- 153
-------- ------- ------ ------ --------
Net increase (decrease) in cash
and cash equivalents......... 161 (7,248) 835 6,018 (234)
Cash and cash equivalents,
beginning of period.......... -- 2,576 1,751 -- 4,327
-------- ------- ------ ------ --------
Cash and cash equivalents, end
of period.................... $ 161 $(4,672) $2,586 $6,018 $ 4,093
======== ======= ====== ====== ========
</TABLE>
F-35
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
OCTOBER 2, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 23,811 $ 20,027
Notes receivable............................................ -- 1,459
Accounts receivable......................................... 35,476 31,158
Inventories................................................. 14,593 15,283
Refundable income taxes..................................... 370 370
Deferred income taxes....................................... 9,357 9,072
Prepaid and other current assets............................ 3,475 2,897
-------- --------
Total current assets........................................ 87,082 80,266
Property, plant and equipment, net.......................... 41,758 42,497
Other assets, net........................................... 7,535 6,321
-------- --------
Total Assets................................................ $136,375 $129,084
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of debt obligations......................... $ 3,939 $ 3,442
Accounts payable--trade..................................... 13,212 17,377
Accrued expenses and other current liabilities.............. 25,171 23,488
-------- --------
Total current liabilities................................... 42,322 44,307
Debt obligations, net of current portion.................... 9,276 11,208
Deferred income taxes....................................... 2,189 2,218
-------- --------
Total liabilities........................................... 53,787 57,733
-------- --------
Commitments and Contingencies
Stockholders' equity:
Preferred Stock, $0.01 par value; authorized 4,000,000
shares;
0 outstanding at October 2, 1999 and December 31, 1998.... -- --
Common Stock, $0.01 par value; authorized 25,000,000 shares;
9,601,973 and 9,251,391 shares issued and outstanding at
October 2, 1999 and December 31, 1998, respectively....... 96 93
Additional paid-in capital.................................. 58,543 56,740
Cumulative translation adjustment........................... (958) (902)
Retained earnings........................................... 24,907 15,420
-------- --------
Total stockholders' equity.................................. 82,588 71,351
-------- --------
Total liabilities and stockholders' equity.................. $136,375 $129,084
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
OCTOBER 2, SEPTEMBER 26,
1999 1998
---------- -------------
<S> <C> <C>
Net sales................................................... $ 145,239 $ 158,682
Cost of goods sold.......................................... 90,769 106,222
--------- ---------
Gross profit................................................ 54,470 52,460
Selling general and administrative expenses................. 34,054 32,224
Research and development.................................... 5,154 4,846
Restructuring and buyout of compensation arrangement
charges................................................... -- 5,740
--------- ---------
Income from operations...................................... 15,262 9,650
Interest income (expense), net.............................. (257) (1,155)
Other income (expense), net................................. (277) (486)
--------- ---------
Income before income taxes.................................. 14,728 8,009
Income tax (expense) benefit................................ (5,241) (2,832)
--------- ---------
Net income.................................................. $ 9,487 $ 5,177
========= =========
Net income per share, basic................................. $ 1.01 $ 0.61
========= =========
Weighted average common shares.............................. 9,374,672 8,468,862
Net income per share, diluted............................... $ 0.97 $ 0.55
========= =========
Weighted average common shares and equivalents.............. 9,781,146 9,457,437
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
OCTOBER 2, SEPTEMBER 26,
1999 1998
---------- -------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income.................................................. $ 9,487 $ 5,177
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 5,836 7,381
(Gain) loss on sale of property, plant and equipment...... (268) 37
Deferred income taxes..................................... (311) (6,624)
Changes in assets and liabilities:
Accounts receivable....................................... (4,448) (3,060)
Note receivable........................................... 1,459 (2,307)
Inventories............................................... 1,061 528
Prepaid and other current assets.......................... (972) (797)
Other long term assets.................................... (665) 82
Accounts payable--trade................................... (4,517) (2,168)
Accrued expenses and other current assets................. 2,725 15,548
------- --------
Total adjustments....................................... (100) 8,620
------- --------
Net cash provided by operating activities............... 9,387 13,797
Cash flows used in investing activities:
Purchase of property, plant & equipment................... (6,062) (7,291)
Net proceeds from sale of fixed assets.................... 190 24
------- --------
Net cash used in investing activities................... (5,872) (7,267)
Cash flows provided by (used in) financing activities:
Issuance of common stock, net of expenses................. 1,806 3,853
Advances under line of credit............................. -- 128,366
Repayments of line of credit.............................. -- (133,898)
Advances under other debt obligations..................... 481 1,081
Principal payments under debt obligations................. (2,150) (3,901)
------- --------
Net cash provided by (used in) financing activities..... 137 (4,499)
Foreign exchange rate effect on cash and cash equivalents... 132 51
Net increase in cash and cash equivalents................... 3,784 2,082
Cash and cash equivalents, beginning of period.............. 20,027 6,919
------- --------
Cash and cash equivalents, end of period.................... $23,811 $ 9,001
------- --------
Supplemental disclosure of cash flow information:
Interest paid............................................... $ 368 $ 1,385
======= ========
Income taxes paid........................................... $ 1,776 $ 1,964
======= ========
Supplemental disclosure of non-cash investing activities:
Sale of equipment in exchange for note receivable........... $ -- $ 1,152
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(1) BASIS OF PRESENTATION
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 October 2, 1999, and the
results of operations and cash flows for the nine months ended October 2, 1999
and September 26, 1998. The results of operations for the nine months ended
October 2, 1999 should not necessarily be taken as indicative of the results of
operations that may be expected for the entire 1999 year.
The financial information as of and for the periods ended October 2, 1999
should be read in conjunction with the financial statements contained in the
Company's Form 10-K Annual Report for 1998.
(2) ACCOUNTS RECEIVABLE
The components of accounts receivable at October 2, 1999 and December 31,
1998 are as follows:
<TABLE>
<CAPTION>
OCTOBER 2, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Accounts receivable.................................. $36,530 $31,895
Allowance for doubtful accounts...................... (1,054) (737)
------- -------
Net accounts receivable.............................. $35,476 $31,158
------- -------
</TABLE>
(3) INVENTORIES
Inventories are valued at the lower of cost or market with cost determined
principally on the average cost method. The cost of inventories of foreign
subsidiaries are valued on the first-in, first-out basis.
<TABLE>
<CAPTION>
OCTOBER 2, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Raw materials....................................... $ 8,558 $ 9,987
Work-in-process..................................... 3,813 2,364
Finished goods...................................... 2,222 2,932
------- -------
$14,593 $15,283
======= =======
</TABLE>
F-39
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
(4) 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>
NINE MONTHS ENDED
---------------------------
OCTOBER 2, SEPTEMBER 26,
1999 1998
----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net Income.......................................... $9,487 $5,177
Foreign currency translation adjustment............. (56) (188)
------ ------
Comprehensive Income................................ $9,431 $4,989
------ ------
</TABLE>
(5) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share," which specifies the computation, presentation,
and disclosure requirements for earnings per share ("EPS"). Basic earnings per
share excludes dilution and is computed by dividing net earnings by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share is computed based upon the weighted average number of common shares
outstanding and dilutive common stock equivalents. For purposes of this
calculation, outstanding options are considered common stock equivalents (using
the treasury stock method).
The following is a reconciliation of the numerators and denominators used to
calculate earnings per share in the Consolidated Statements of Operations:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
---------------------------------------------------------------------------------------
OCTOBER 2, 1999 SEPTEMBER 26, 1998
--------------------------------------------- ---------------------------------------
PER- PER-
INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------------- -------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Income............................ $9,487 $5,177
====== ======
BASIC EPS:
Income Available to Common
Stockholders........................ $9,487 9,374,672 $ 1.01 5,177 8,468,862 $0.61
EFFECT OF DILUTIVE SECURITIES:
Options and Warrants.................. 406,474 988,575
--------- ----------
DILUTED EPS:
Income Available to Common
Stockholders........................ $9,487 9,781,146 $ 0.97 $5,177 $9,457,437 $0.55
====== ========= ======= ====== ========== =====
</TABLE>
(6) NON-RECURRING CHARGES AND RESTRUCTURING RESERVES
During the first quarter of 1998, the Company recorded a non-recurring
pre-tax charge of $1,900, which related to financial obligations arising from
the Company's restructuring in 1993 and comprised two elements: First, the
Company terminated a management agreement with certain investors, under which it
was obligated to pay fixed fees until at least the year 2000. Second, the
Company provided for an obligation to pay a former director a bonus based on
profits in excess of certain thresholds.
F-40
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
(6) NON-RECURRING CHARGES AND RESTRUCTURING RESERVES (CONTINUED)
During the third quarter of 1998, the Company recorded a non-recurring
pre-tax charge of $4,900 reflecting the costs associated with the closure of the
Company's Manchester, New Hampshire facility. This facility was dedicated to
manufacturing a specific large volume product for a single customer. Following a
change in product design by the customer, demand significantly decreased during
the fourth quarter of 1998 to $8,600, from a level of $15,000 in the third
quarter of 1998. The restructuring is expected to be concluded in the last
quarter of 1999.
The costs associated with the closure of the Manchester facility include the
write-down and disposal of surplus equipment, totaling $2,800, settlement of
certain purchase commitments of $1,100, provisions for leased property expenses
of $400, and employee separation costs of $600. While the number of employees
has been significantly reduced through natural attrition, the plan included the
termination of 120 employees comprised of 90 direct and 30 indirect employees.
The charge is offset by a $1,000 reduction in the previous estimate of
obligations to pay a former director a bonus paid on profits in excess of
certain thresholds.
The following amounts have been charged against the Manchester restructuring
reserves during the nine months ended October 2, 1999:
<TABLE>
<CAPTION>
RESTRUCTURING CHARGES AGAINST RESTRUCTURING
RESERVES BALANCE AT RESERVES FOR THE RESERVES BALANCE
DECEMBER 31, NINE MONTHS ENDED AT OCTOBER 2,
1998 OCTOBER 2, 1999 1999
------------------- ----------------- ----------------
<S> <C> <C> <C>
Surplus equipment........................... $2,823 $(2,316) $ 507
Purchase commitments........................ 691 (672) 19
Lease terminations and leasehold
improvements reserve...................... 328 (158) 170
Employee separation......................... 327 (21) 306
------ ------- ------
Total....................................... $4,169 $(3,167) $1,002
====== ======= ======
</TABLE>
(7) 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:
thermal management products, computational fluid dynamics ("CFD") software, and
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 ending December 31, 1998.
F-41
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
(7) SEGMENT REPORTING (CONTINUED)
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.
The following summarizes the operations of each reportable segment for the
nine months ending October 2, 1999 and September 26, 1998:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDING
--------------------------------
REVENUES SEGMENT INCOME
FROM BEFORE TAXES AND
EXTERNAL EXTRAORDINARY
CUSTOMERS ITEMS
--------- ----------------
<S> <C> <C>
October 2, 1999
Thermal Products............................... $108,477 $ 8,770
CFD Software................................... 35,899 6,032
Thermal Design Services........................ 863 (74)
Corporate Office............................... -- --
-------- -------
Total.......................................... $145,239 $14,728
======== =======
September 26, 1998
Thermal Products............................... 129,990 3,833
CFD Software................................... 28,000 4,161
Thermal Design Services........................ 692 15
Corporate Office............................... -- --
-------- -------
Total.......................................... $158,682 $ 8,009
======== =======
</TABLE>
The following table provides geographic information about the Company's
operations. Revenues are attributable to a location based on shipment source.
Long-lived assets are attributable to a location based on physical location.
<TABLE>
<CAPTION>
OCTOBER 2, 1999 SEPTEMBER 26, 1998
------------------------------------ ------------------------------------
REVENUES REVENUES
----------------------- LONG-LIVED ----------------------- LONG-LIVED
FOR THE FOR THE NINE ASSETS FOR THE FOR THE NINE ASSETS
QUARTER MONTHS AS OF QUARTER MONTHS AS OF
ENDED ENDED PERIOD END ENDED ENDED PERIOD END
-------- ------------ ---------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
United States........................... $31,559 $ 99,738 $38,914 $38,452 $131,010 $41,499
Taiwan.................................. 4,531 13,818 1,339 4,199 13,007 1,249
China................................... 8,405 21,015 1,947 4,863 8,441 988
United Kingdom.......................... 3,933 12,857 2,190 4,012 12,826 2,731
Other International..................... 8,320 27,825 4,903 4,561 14,044 2,791
Intercompany eliminations............... (9,137) (30,014) -- (7,250) (20,646) --
------- -------- ------- ------- -------- -------
Consolidated Revenue.................... $47,611 $145,239 $49,293 $48,837 $158,682 $49,258
======= ======== ======= ======= ======== =======
</TABLE>
Revenues from one customer of Aavid's thermal products division represent
approximately $38,500 of the Company's consolidated revenues for the nine months
ending September 26, 1998. No customer represented greater than 10% of the
Company's consolidated revenues for the nine months ended October 2, 1999.
F-42
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
(8) SUBSEQUENT EVENTS
ACQUISITION OF AAVID BY WILLIS STEIN & PARTNERS
On August 23, 1999 the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") by and among the Company, Heat Holdings Corp., a
corporation newly formed by Willis Stein & Partners II, L.P. ("Purchaser"), and
Heat Merger Corp., a wholly owned subsidiary of Purchaser ("Merger Sub"),
providing for the merger of Merger Sub with and into the Company (the "Merger"),
with the Company 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, the Company's stockholders received $25.50 per share in
cash and outstanding stock options and warrants were cashed out. The Merger will
be accounted for using the purchase method.
ACQUISITION OF THERMALLOY DIVISION
On October 21, 1999, Aavid Thermal Technologies, Inc. (the "Company")
acquired the Thermalloy Division of Bowthorpe plc. The Thermalloy Division's
business is substantially similar to the Company's thermal management products
business. As part of the acquisition from Bowthorpe, the Company also acquired
65.2%, representing Bowthorpe's entire shareholding, of Curamik Electronics
GmbH, a German corporation which manufactures direct bonded copper substrates
used in the packaging and cooling of high power electronic devices. The total
purchase price was $80,500 (including estimated transaction costs of $2,000),
and is subject to further adjustment based on changes in the value of the
Thermalloy Division's inventory between December 31, 1998 and July 31, 1999. The
purchase price paid at closing includes an estimate of the inventory related
purchase price adjustment. The Company used $13,800 of its cash on hand and
$79,300 of borrowings under its new credit facility described below to pay the
purchase price for the Thermalloy Division, repay $12,600 of outstanding debt
and pay estimated transaction costs. The Company paid $3,500 of the $80,500
purchase price into escrow pending receipt of the necessary Malaysian
governmental approvals of the transfer of the Thermalloy Division's Malaysian
operations to Aavid. In addition, on October 28, 1999 the Company purchased an
additional 20.2% of Curamik from the two minority shareholders of Curamik for
approximately $2,700, thereby increasing its ownership of Curamik to 85.4%.
AMENDED AND RESTATED CREDIT FACILITY
On October 21, 1999, in connection with the closing of the acquisition of
the Thermalloy Division, the Company entered into a $100,000 revolving credit
and term loan facility with Canadian Imperial Bank of Commerce, as
Administrative Agent, and certain other lenders (the "Credit Facility"),
consisting of an $80,000 term loan facility (which was fully drawn at closing)
and a $20,000 revolving credit facility ($5,300 of which was drawn at closing).
As part of the transactions relating to the Merger, the Company repaid all of
the outstanding term loan and all of the outstanding revolving loan and entered
into an amended and restated revolving credit and term loan 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 will be
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
will be required to be repaid in quarterly
F-43
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
(8) SUBSEQUENT EVENTS (CONTINUED)
installments commencing December 31, 2000 and ending March 31, 2005 as follows:
five quarterly installments of $2,000 each; four quarterly installments of
$2,500 each; four quarterly installments of $2,750 each; two quarterly
installments of $3,200 each; two quarterly installments of $3,900 each; and a
final installment of $7,800. In addition, commencing with the fiscal year ending
December 31, 2001, the Company will be required to apply 50% of its 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 (A) 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 (y) a
margin of between .25% and 1.00% (depending on the Company's consolidated
leverage ratio). 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 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).
UNITS
On February 2, 2000, as part of the transactions relating to the Merger, the
Company issued 150,000 of 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 $0.01 per share, and 60 shares of the
Company's Class H Common Stock, par value $0.01 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 $143,752 was allocated to the Notes, net
of original issue discount of approximately $1,700.
The Indenture limits the Company's ability to incur additional debt, to pay
dividends or make other distributions, to purchase or redeem its 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.
F-44
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
(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 aggregate principal
amount of 12 3/4% Senior Subordinated Notes due 2007 issued in February 2000.
The guarantors include the combined domestic operations of Aavid Thermal
Products, Inc. and Fluent, Inc. and the Company's subsidiary Applied Thermal
Technologies, Inc. The non-guarantors include the combined foreign operations of
Aavid Thermal Products, Inc. and Fluent, Inc. The condensed consolidating
financial statements do not include the operations of the Thermalloy Division,
which were acquired in October 1999. The consolidating condensed financial
statements of the 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. Separate financial statements of the
domestic guarantor subsidiaries and the
F-45
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
(9) SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (UNAUDITED) (CONTINUED)
non-guarantor subsidiaries are not presented because management has determined
that such financial statements would not be material to investors.
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING BALANCE SHEET AS OF OCTOBER 2, 1999 (UNAUDITED)
---------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- -------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............. $ 17 $15,263 $ 8,531 $ -- $ 23,811
Notes receivable...................... -- 700 -- (700) --
Accounts receivable-trade, less
allowance for doubtful accounts..... -- 17,319 18,792 (635) 35,476
Inventories........................... -- 6,799 8,014 (220) 14,593
Due (to) from affiliate, net.......... 32,937 (24,118) (3,167) (5,652) --
Refundable taxes...................... -- 370 -- -- 370
Deferred income taxes................. 7,066 1,178 411 702 9,357
Prepaid and other current assets...... 37 1,119 1,820 499 3,475
------- ------- ------- -------- --------
Total current assets.................. 40,057 18,630 34,401 (6,006) 87,082
Property, plant and equipment, net.... 165 33,610 7,861 122 41,758
Investment in subsidiaries............ 36,282 -- -- (36,282) --
Other assets, net..................... 686 12,792 2,518 (8,461) 7,535
------- ------- ------- -------- --------
Total assets.......................... $77,190 $65,032 $44,780 $(50,627) $136,375
======= ======= ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of debt obligations... $ -- $ 2,571 $ 1,368 $ -- $ 3,939
Accounts payable-trade................ 64 4,500 8,829 (181) 13,212
Accrued expenses and other current
liabilities......................... (5,186) 20,329 10,582 (554) 25,171
------- ------- ------- -------- --------
Total current liabilities............. (5,122) 27,400 20,779 (735) 42,322
Debt obligations, net of current
portion............................. -- 9,773 3,433 (3,930) 9,276
Deferred income taxes................. (276) 1,851 48 566 2,189
------- ------- ------- -------- --------
Total liabilities..................... (5,398) 39,024 24,260 (4,099) 53,787
------- ------- ------- -------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value;
authorized 25,000,000 shares;
9,601,973 shares issued and
outstanding......................... 96 -- -- -- 96
Additional paid-in capital............ 58,543 11,772 2,393 (14,165) 58,543
Cumulative translation adjustment..... (958) 148 (1,053) 905 (958)
Retained earnings..................... 24,907 14,088 19,180 (33,268) 24,907
------- ------- ------- -------- --------
Total stockholders' equity............ 82,588 26,008 20,520 (46,528) 82,588
------- ------- ------- -------- --------
Total liabilities and stockholders'
equity.............................. $77,190 $65,032 $44,780 $(50,627) $136,375
======= ======= ======= ======== ========
</TABLE>
F-46
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
(9) SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED OCTOBER 2, 1999 (UNAUDITED)
-----------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales......................... $ -- $102,745 $72,879 $(30,385) $145,239
Cost of goods sold................ -- 67,430 47,326 (23,987) 90,769
------- -------- ------- -------- --------
Gross profit...................... -- 35,315 25,553 (6,398) 54,470
Selling, general and
administrative expenses......... 2,871 24,547 12,377 (5,741) 34,054
Research and development.......... -- 4,645 4,874 (4,365) 5,154
------- -------- ------- -------- --------
Income from operations............ (2,871) 6,123 8,302 3,708 15,262
Interest expense, net............. -- (337) 80 -- (257)
Other income (expense), net....... 2,748 339 -- (3,364) (277)
Equity in income of
subsidiaries.................... 9,561 -- -- (9,561) --
------- -------- ------- -------- --------
Income before income taxes and
extraordinary item.............. 9,438 6,125 8,382 (9,217) 14,728
Provision for income tax
expense......................... 49 (2,628) (2,292) (370) (5,241)
------- -------- ------- -------- --------
Net income........................ $ 9,487 $ 3,497 $ 6,090 $ (9,587) $ 9,487
======= ======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 26, 1998 (UNAUDITED)
-----------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales......................... $ -- $131,077 $ 48,618 $(21,013) $158,682
Cost of goods sold................ -- 91,591 31,419 (16,788) 106,222
------- -------- -------- -------- --------
Gross profit...................... -- 39,486 17,199 (4,225) 52,460
Selling, general and
administrative expenses......... 2,349 25,257 8,230 (3,612) 32,224
Research and development.......... -- 4,219 3,242 (2,615) 4,846
Restructuring and buyout of
compensation arrangements....... -- 5,740 -- -- 5,740
------- -------- -------- -------- --------
Income from operations............ (2,349) 4,270 5,727 2,002 9,650
Interest expense, net............. (3) (1,199) 47 -- (1,155)
Other income (expense), net....... (20) (442) (106) 82 (486)
Equity in income of
subsidiaries.................... 7,240 -- -- (7,240) --
------- -------- -------- -------- --------
Income before income taxes........ 4,868 2,629 5,668 (5,156) 8,009
Provision for income tax
expense......................... 309 (3,344) (1,927) 2,130 (2,832)
------- -------- -------- -------- --------
Net income (loss)................. $ 5,177 $ (715) $ 3,741 $ (3,026) $ 5,177
======= ======== ======== ======== ========
</TABLE>
F-47
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
(9) SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 2, 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............ $(1,859) $ 8,621 $ 2,286 $ 339 $ 9,387
Cash flows used in investing
activities:
Proceeds from sale of property,
plant and equipment........... -- 4 126 60 190
Purchases of property, plant and
equipment..................... (14) (4,083) (2,185) 220 (6,062)
------- ------- ------- ----- -------
Net cash provided by (used in)
investing activities............ (14) (4,079) (2,059) 280 (5,872)
Cash flows provided by (used in)
financing activities:
Issuance of common stock, net of
expenses...................... 1,806 -- -- -- 1,806
Advances under debt
obligations................... -- 7 474 -- 481
Principal payments on debt
obligations................... -- (2,107) 657 (700) (2,150)
------- ------- ------- ----- -------
Net cash provided by (used in)
financing activities............ 1,806 (2,100) 1,131 (700) 137
Foreign exchange effect on cash
and cash equivalents.......... -- 32 109 (9) 132
------- ------- ------- ----- -------
Net increase (decrease) in cash
and cash equivalents.......... (67) 2,474 1,467 (90) 3,784
Cash and cash equivalents,
beginning of period........... 84 12,971 6,959 13 20,027
------- ------- ------- ----- -------
Cash and cash equivalents, end
of period..................... $ 17 $15,445 $ 8,426 $ (77) $23,811
======= ======= ======= ===== =======
</TABLE>
F-48
<PAGE>
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
(9) SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 26, 1998 (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............ $(3,629) $ 11,802 $ 2,506 $ 3,118 $ 13,797
Cash flows used in investing
activities:
Proceeds from sale of property,
plant and equipment........... -- 24 -- -- 24
Purchases of property, plant and
equipment..................... (206) (2,985) (1,793) (2,307) (7,291)
------- --------- ------- ------- ---------
Net cash used in investing
activities...................... (206) (2,961) (1,793) (2,307) (7,267)
Cash flows provided by (used in)
financing activities:
Issuance of common stock, net of
expenses...................... 3,853 -- -- -- 3,853
Advances under line of credit... -- 127,668 698 -- 128,366
Repayments of line of credit.... -- (133,898) -- -- (133,898)
Advances under debt
obligations................... -- 926 155 -- 1,081
Principal payments on debt
obligations................... -- (2,803) (1,229) 131 (3,901)
------- --------- ------- ------- ---------
Net cash provided by (used in)
financing activities............ 3,853 (8,107) (376) 131 (4,499)
Foreign exchange effect on cash
and cash equivalents.......... -- 64 26 (39) 51
------- --------- ------- ------- ---------
Net increase in cash and cash
equivalents................... 18 798 363 903 2,082
Cash and cash equivalents,
beginning of period........... 68 2,038 4,813 -- 6,919
------- --------- ------- ------- ---------
Cash and cash equivalents, end
of period..................... $ 86 $ 2,836 $ 5,176 $ 903 $ 9,001
======= ========= ======= ======= =========
</TABLE>
F-49
<PAGE>
THERMALLOY GROUP
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors
Bowthorpe plc
We have audited the combined balance sheets of Thermalloy Group as at
December 31, 1998 and 1997, and the related combined profit and loss accounts
and combined statements of total recognized gains and losses, movements in
invested capital and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of
Thermalloy Group's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with United Kingdom generally accepted
auditing standards which do not differ in any significant respect from United
States generally accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Thermalloy Group at
December 31, 1998 and 1997, and the combined results of its operations, and its
combined cash flows for each of the three years in the period ended
December 31, 1998 in conformity with accounting principles generally accepted in
the United Kingdom which differ in certain respects from those generally
accepted in the United States (see Note 21 of Notes to Combined Financial
Statements).
Ernst & Young
London, England
October 18, 1999
F-50
<PAGE>
THERMALLOY GROUP
COMBINED PROFIT AND LOSS ACCOUNTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
NOTES 1998 1997 1996
-------- -------- -------- --------
(US $000'S)
<S> <C> <C> <C> <C>
SALES....................................................... 3 102,332 94,668 80,885
Operating costs less other income........................... 4 92,763 85,074 71,359
------- ------ ------
OPERATING PROFIT............................................ 3,4 9,569 9,594 9,526
Finance costs (1)........................................... 7 1,147 658 569
------- ------ ------
Profit before taxation...................................... 8,422 8,936 8,957
Taxation.................................................... 8 2,947 3,424 3,545
------- ------ ------
Profit for the year (2)..................................... 5,475 5,512 5,412
======= ====== ======
</TABLE>
- ------------------------
(1) The finance costs are not necessarily representative of the charges that
would have been incurred by Thermalloy Group on a stand-alone basis.
(2) A summary of the significant adjustments to profit for the year that would
be required if United States generally accepted accounting principles were
applied, instead of those generally accepted in the United Kingdom, is set
forth in Note 21 of Notes to Combined Financial Statements.
The Notes to Combined Financial Statements form part of these Financial
Statements.
F-51
<PAGE>
THERMALLOY GROUP
COMBINED STATEMENTS OF TOTAL RECOGNIZED GAINS AND
LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER31
------------------------------
1998 1997 1996
-------- -------- --------
(US $000'S)
<S> <C> <C> <C>
PROFIT FOR THE YEAR......................................... 5,475 5,512 5,412
Currency translation........................................ 365 (235) 392
----- ----- -----
Total recognized gains and losses relating to the year
(1)....................................................... 5,840 5,277 5,804
===== ===== =====
</TABLE>
- ------------------------
(1) The combined statement of comprehensive income required under United States
generally accepted accounting principles is set forth in Note 21 of Notes to
Combined Financial Statements.
The Notes to Combined Financial Statements form part of these Financial
Statements
F-52
<PAGE>
THERMALLOY GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
NOTES 1998 1997
-------- -------- --------
(US $000'S)
<S> <C> <C> <C>
FIXED ASSETS
Intangible assets........................................... 9 $ 405 $ -
Tangible assets............................................. 10 28,656 17,770
------- -------
29,061 17,770
------- -------
CURRENT ASSETS
Inventories................................................. 11 12,279 12,264
Debtors: amounts falling due within one year................ 12 19,485 18,197
Debtors: amounts falling due after one year................. 12 22 412
Cash at bank and in hand.................................... 2,322 2,335
------- -------
34,108 33,208
------- -------
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR.............. 13 18,007 19,695
------- -------
NET CURRENT ASSETS.......................................... 16,101 13,513
------- -------
TOTAL ASSETS LESS CURRENT LIABILITIES....................... 45,162 31,283
------- -------
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR..... 14 20,603 9,594
PROVISIONS FOR LIABILITIES AND CHARGES...................... 17 229 753
MINORITY INTERESTS.......................................... (250) 11
------- -------
NET ASSETS.................................................. 24,580 20,925
======= =======
INVESTED CAPITAL (1)........................................ $24,580 $20,925
======= =======
</TABLE>
- ------------------------
(1) A summary of the significant adjustments to invested capital that would be
required if United States generally accepted accounting principles were
applied, instead of those generally accepted in the United Kingdom, is set
forth in Note 21 of Notes to Combined Financial Statements.
The Notes to Combined Financial Statements form part of these Financial
Statements
F-53
<PAGE>
THERMALLOY GROUP
COMBINED STATEMENTS OF MOVEMENTS IN INVESTED CAPITAL
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(US $000'S)
<S> <C> <C> <C>
At January 1................................................ $20,925 $19,476 $18,315
Profit for the year......................................... 5,475 5,512 5,412
Net distributions........................................... (2,185) (3,828) (4,643)
Currency translation........................................ 365 (235) 392
------- ------- -------
At December 31 (1).......................................... $24,580 $20,925 $19,476
======= ======= =======
</TABLE>
- ------------------------
(1) At December 31, 1998 the cumulative amount of goodwill charged to reserves
is $21,575,000 (1997 $21,445,000; 1996 $22,225,000).
The Notes to Combined Financial Statements form part of these Financial
Statements.
F-54
<PAGE>
THERMALLOY GROUP
COMBINED CASH FLOW STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(US $000'S)
<S> <C> <C> <C>
NET CASH INFLOW FROM OPERATING ACTIVITIES................... $ 14,505 $11,453 $10,893
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest paid (1)........................................... (1,247) (750) (670)
Interest received (1)....................................... 100 93 102
Minority dividend paid...................................... (257) (388) (493)
-------- ------- -------
(1,404) (1,045) (1,061)
TAX PAID.................................................... (3,604) (4,170) (3,059)
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets........................... (15,373) (8,433) (4,814)
Sale of tangible fixed assets............................... 203 2,050 134
Purchase of intangible fixed assets......................... (482) -- --
-------- ------- -------
(15,652) (6,383) (4,680)
FINANCING (1)
Distribution to Bowthorpe Group, net........................ (3,810) (3,496) (3,685)
Movement on external loans and finance lease obligations.... 4,620 2,567 814
Movement in amounts due to and from Bowthorpe Group......... 6,256 855 811
-------- ------- -------
7,066 (74) (2,060)
-------- ------- -------
INCREASE (DECREASE) IN CASH................................. $ 911 $ (219) $ 33
======== ======= =======
</TABLE>
The reconciliation of operating profit to net cash flow from operating
activities is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
-------- -------- --------
(US $000'S)
<S> <C> <C> <C>
OPERATING PROFIT............................................ $ 9,569 $ 9,594 $ 9,526
Depreciation charge......................................... 4,942 3,407 3,383
Amortization of other intangibles........................... 88 -- --
Decrease (increase) in inventories.......................... 130 (1,476) 31
Increase in debtors......................................... (268) (3,611) (2,781)
Increase in creditors and provisions........................ 44 3,539 734
------- -------- --------
NET CASH INFLOW FROM OPERATING ACTIVITIES................... $14,505 $ 11,453 $ 10,893
======= ======== ========
</TABLE>
- ------------------------
(1) Transactions with Bowthorpe Group, interest received (paid) and financing
cash flows are not necessarily representative of the amounts that would have
been borne by Thermalloy Group on a stand-alone basis.
(2) The significant differences between the cash flow statements presented above
and those required under United States generally accepted accounting
principles are set forth in Note 21 of Notes to Combined Financial
Statements.
The Notes to Combined Financial Statements form part of these Financial
Statements
F-55
<PAGE>
THERMALLOY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
These financial statements are a combination of the financial statements of
the thermal management companies of Bowthorpe Group comprising Thermalloy Inc.,
Redpoint Thermalloy Limited, Redpoint Limited, Thermalloy Investment
Company Inc., Thermalloy SA de CV, Thermalloy Limited, Thermalloy International
Limited, Elbomec Thermalloy SRL, Thermalloy (Malaysia) Sdn Bhd, Curamik
Electronics GmbH, Curamik Electronics Inc. (together, "Thermalloy Group") of
Bowthorpe plc, a UK company, including purchased goodwill arising on Bowthorpe's
acquisition of these companies. These financial statements have been prepared in
conjunction with the planned divestiture of Thermalloy Group.
These combined financial statements have been prepared in accordance with
accounting principles generally accepted in the United Kingdom ("UK GAAP"). All
intra-Thermalloy Group transactions and balances have been eliminated on
combination.
The combined financial statements include interest income and expense
actually earned or paid by Thermalloy Group. During the three years ended
December 31, 1998, Thermalloy Group's operations were principally funded by
share capital, loans from Bowthorpe Group companies and loans from third
parties. These financing arrangements were designed and implemented on a
Bowthorpe Group basis, rather than from the perspective of the financing needs
of Thermalloy Group. The decisions as to whether to finance companies with share
capital or loans and as to whether to charge interest on any particular loan
were taken based on the financial position of the companies and local taxation
considerations. Where interest was charged, the rate charged varied, but was
generally in line with commercial borrowing rates. The Bowthorpe Group loans
generally did not have set repayment terms.
The combined financial statements reflect the actual tax charges suffered by
the entities within Thermalloy Group.
The combined financial statements reflect management costs charged to the
Thermalloy Group by the Bowthorpe Group based either on direct costs incurred or
on assets employed. Management believes this is a reasonable basis.
The basis of funding, interest charges and financing cash flows and related
cash flows and management charges are not necessarily representative of those
that would have been incurred by Thermalloy Group on a stand alone basis, or of
those that may be incurred by Thermalloy Group in the future.
The combined financial statements are presented in US dollars, although
Bowthorpe Group's functional currency is the pound sterling. The following
exchange rates have been used to translate to US dollars:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Profit and loss account and cash flow--average
rate for the year............................ $ 1.66:L1 $ 1.64:L1 $ 1.56:L1
Balance sheet--year end rate................... $ 1.66:L1 $ 1.65:L1 $ 1.71:L1
</TABLE>
F-56
<PAGE>
THERMALLOY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The combined financial statements are prepared under the historical cost
convention and in accordance with applicable UK accounting standards and
specifically in accordance with the following accounting policies.
INTANGIBLE ASSETS
As permitted by FRS 10, goodwill arising on the acquisition of a subsidiary
undertakings prior to January 1, 1998 representing the excess of cost over the
fair value of the attributable assets and liabilities acquired has been written
off against profit and loss account reserve. In accordance with UITF 3, goodwill
which has been written off the profit and loss account reserve would be charged
to the profit and loss account on the subsequent disposal of the business to
which it related.
Other separately identifiable intangible assets such as patent fees, licence
fees and trade marks are capitalised in the balance sheet only when the value
can be measured reliably or the intangible asset is purchased in the acquisition
of a business. Such intangible assets are amortised over their useful economic
lives up to a maximum of 20 years. The carrying value of intangible assets is
reviewed for impairment at the end of the first full year following acquisition
and in other periods if events or changes in circumstances indicate the carrying
value may not be recoverable.
FOREIGN CURRENCIES
Transactions in foreign currencies are recorded at the rates of exchange
ruling at the date of the transaction. Assets and liabilities denominated in
foreign currencies are translated into sterling at the rates of exchange ruling
at the balance sheet date.
On combination, the results of overseas entities are translated into
sterling using average rates of exchange for the period. Exchange differences
arising from the translation of opening net assets of overseas entities are
taken directly into shareholders' equity. All other exchange differences are
changed to income.
SALES
Sales represent the amounts shipped and invoiced to customers for goods and
services during the year, excluding tax and intra-group transactions.
PRODUCT DEVELOPMENT
Product development expenditure is charged to profit and loss account in the
year in which it is incurred.
PENSION COSTS
In the United Kingdom the Bowthorpe Group operates two pension schemes for
the benefit of employees. These schemes require contributions to be made to
separately administered funds, based on triennial actuarial valuations.
F-57
<PAGE>
THERMALLOY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING POLICIES (CONTINUED)
PENSION COSTS
Contributions to the Bowthorpe Group United Kingdom and United States
defined benefit pension schemes are charged to the profit and loss account so as
to spread the cost of pensions over the employees' working lives within the
Bowthorpe Group. Differences between the amounts funded and the amounts charged
to profit and loss account are treated as either creditors or prepayments in the
balance sheet. Variations in the pension costs, which are identified as a result
of actuarial valuations, are amortised over the average expected working lives
of employees.
Contributions payable to Bowthorpe Group's other plans are charged to profit
and loss account in the year for which they are due.
DEFERRED TAXATION
Deferred taxation is provided using the liability method on all timing
differences to the extent that they are expected to reverse in the future,
calculated at the rate at which it is estimated that tax will be payable.
INVENTORIES
Inventories are valued at the lower of cost and estimated net realisable
value. Cost includes all costs in bringing each product to its present location
and condition, being the full manufacturing cost on a first in, first out basis,
including all attributable overheads based on a normal level of activity. Net
realisable value represents selling prices less further costs to be incurred to
completion and on sale.
TANGIBLE ASSETS
Depreciation is not provided on freehold land where the value is separately
identifiable. Depreciation is provided to write off all other assets over their
estimated useful lives at rates which take into account commercial conditions at
their location. Usual asset lives are as follows:
<TABLE>
<S> <C> <C>
Freehold buildings.......................................... 50 years
Leasehold properties........................................ 50 years or lease period if
less
Plant and machinery......................................... 3-8 years
Fixtures, fittings and Building installations....... 20 years or lease period if
equipment: less
Fittings and equipment....... 3-8 years
Motor vehicles............... 3-5 years
Business systems software.... 4 years
</TABLE>
The carrying values of tangible fixed assets are reviewed for impairment in
periods where events or changes in circumstances indicate the carrying value may
not be recoverable.
Assets obtained under finance leases and hire purchase contracts are
capitalised in the balance sheet and are depreciated over their estimated useful
lives. The interest elements of the rental obligations are charged to the profit
and loss account over the periods of the leases and hire purchase contracts in
proportion to the balance of capital repayments outstanding.
Operating lease rentals are charged to profit and loss account over the
period of the lease.
F-58
<PAGE>
THERMALLOY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. SEGMENT ANALYSIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(US $000'S)
<S> <C> <C> <C>
SALES
BY GEOGRAPHICAL AREA OF MARKET:
Europe...................................................... $ 42,144 $39,089 $35,873
United States............................................... 52,198 47,648 36,651
Rest of World............................................... 7,990 7,931 8,361
-------- ------- -------
$102,332 $94,668 $80,885
======== ======= =======
BY GEOGRAPHICAL AREA OF ORIGIN:
Europe...................................................... $ 42,755 $39,604 $36,608
United States............................................... 52,558 48,912 40,054
Rest of World............................................... 7,019 6,152 4,223
-------- ------- -------
$102,332 $94,668 $80,885
======== ======= =======
OPERATING PROFIT
BY GEOGRAPHICAL AREA OF ORIGIN:
Europe...................................................... $ 6,361 $ 5,825 $ 5,864
United States............................................... 2,856 3,026 3,116
Rest of World............................................... 352 743 546
-------- ------- -------
$ 9,569 $ 9,594 $ 9,526
======== ======= =======
</TABLE>
NET OPERATING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(US $000'S)
<S> <C> <C> <C>
Europe...................................................... $19,043 $11,972
United States............................................... 23,174 20,261
Rest of World............................................... 3,809 2,731
------- -------
$46,026 $34,964
======= =======
</TABLE>
F-59
<PAGE>
THERMALLOY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. OPERATING PROFIT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(US $000'S)
<S> <C> <C> <C>
ANALYSIS OF OPERATING COSTS LESS OTHER INCOME:
Cost of sales............................................... $69,755 $62,743 $53,898
Selling and distribution.................................... 14,025 13,813 10,514
Administration.............................................. 9,825 8,008 7,010
Other (income)/costs........................................ (842) 510 (63)
------- ------- -------
$92,763 $85,074 $71,359
======= ======= =======
OPERATING PROFIT IS STATED AFTER CHARGING:
Depreciation of owned tangible fixed assets................. $ 4,518 $ 3,187 $ 3,134
Depreciation of finance leased assets....................... 423 220 249
Amortization of other intangibles........................... 88 - -
Research and development.................................... 3,582 3,086 2,529
Auditors' remuneration...................................... 81 129 119
Other fees paid to Ernst & Young - 26 -
Operating lease rentals
Property.................................................. 751 629 160
Hire of plant and machinery............................... 776 275 182
</TABLE>
5. EMPLOYEES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(NUMBERS)
<S> <C> <C> <C>
The average number of people employed by the Thermalloy
Group during the year was:
Manufacturing............................................... $ 743 $ 697 $ 568
Selling and distribution.................................... 114 111 95
Administration.............................................. 46 39 34
------- ------- -------
$ 903 $ 847 $ 697
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(US $000'S)
<S> <C> <C> <C>
Their payroll costs were:
Remuneration................................................ $25,160 $23,707 $20,094
Social security costs....................................... 3,239 3,194 3,118
Other pension costs......................................... 666 733 564
------- ------- -------
$29,065 $27,634 $23,776
======= ======= =======
</TABLE>
F-60
<PAGE>
THERMALLOY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. PENSION AND OTHER POST-RETIREMENT BENEFITS
The principal Bowthorpe pension plans are a funded defined benefit plan and
a defined contribution plan with a defined benefit underpin in the United
Kingdom, and a defined contribution plan in the United States. Contributions to
the Bowthorpe UK plans are made in accordance with the recommendations of the
independent actuary of the relevant plan.
The latest actuarial valuations of the Bowthorpe UK defined benefit plans
were undertaken as at April 1, 1997 using the projected unit credit method and
the principal results and assumptions were as follows:
<TABLE>
<CAPTION>
ASSUMPTION STAFF PENSION PLAN RETIREMENT CASH PLAN
- ---------- ---------------------- --------------------
<S> <C> <C>
Return on investments..................................... 9.0% pa 9.0% pa
Salary inflation average.................................. 6.5% pa 6.0% pa
Price inflation........................................... 4.5% pa 4.5% pa
Pension increases......................................... 4.5% pa 4.5% pa
Dividend growth........................................... 4.75% pa 4.75% pa
Market value of assets.................................... L172.4million L3.8million
Level of funding.......................................... 114% 99%
Employer contribution rate................................ 7.5% 6%
</TABLE>
The level of funding represents the actuarial value of assets expressed as a
percentage of the value of liabilities that have accrued to members after
allowing for the assumed future increases in salary. For accounting purposes in
accordance with SSAP24, the actuarial surplus is being spread over the average
expected remaining service of plan members being 13 years.
With the exception of the United States defined benefit schemes,
contributions payable to other Bowthorpe Group overseas plans are charged to
profit and loss account in the year for which they are due.
7. FINANCE COSTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
(US $000'S)
<S> <C> <C> <C>
Interest payable on:
Bank overdrafts and loans................................... $ 283 $366 $393
Finance lease obligations................................... 562 260 277
Amounts due to Bowthorpe Group.............................. 402 125 -
------ ---- ----
1,247 751 670
Interest receivable on:
Bank and other deposits..................................... 68 57 71
Amounts due from Bowthorpe Group............................ 32 36 30
------ ---- ----
100 93 101
------ ---- ----
Net finance costs........................................... $1,147 $658 $569
====== ==== ====
</TABLE>
F-61
<PAGE>
THERMALLOY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. FINANCE COSTS (CONTINUED)
As explained in Note 1, finance costs are not necessarily representative of
those that would have been incurred by Thermalloy Group on a stand-alone basis
or that will be incurred by Thermalloy Group in the future.
8. TAXATION
The companies within Thermalloy Group have calculated tax on their own
results with no account taken of other Bowthorpe Group companies for the three
years ended December 31, 1998. Where tax has been borne by individual companies
within Thermalloy Group, these amounts are included in the combined financial
statements.
Taxation is analyzed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(US $000'S)
<S> <C> <C> <C>
UK current taxation......................................... $1,414 $1,402 $1,022
UK deferred taxation........................................ 33 (153) -
Overseas current taxation................................... 1,500 2,182 2,550
Over-provision in prior years - (7) (27)
------ ------ ------
$2,947 $3,424 $3,545
====== ====== ======
</TABLE>
9. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
(US $000'S)
-----------
<S> <C>
COST:
At January 1, 1997.......................................... $ -
Exchange adjustment......................................... -
Additions................................................... -
------
At December 31, 1997........................................ -
Exchange adjustment......................................... -
Additions................................................... 494
------
At December 31, 1998........................................ 494
------
AMORTIZATION:
At January 1, 1997.......................................... -
Exchange adjustment......................................... -
Charge for the year......................................... -
At December 31, 1997........................................ -
Exchange adjustment......................................... 1
Charge for the year......................................... 88
------
At December 31, 1998........................................ 89
------
NET BOOK VALUE:
At December 31, 1997........................................ -
======
At December 31, 1998........................................ $ 405
======
</TABLE>
F-62
<PAGE>
THERMALLOY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
10. TANGIBLE ASSETS
<TABLE>
<CAPTION>
FIXTURES
LAND AND AND
BUILDINGS PLANT FITTINGS,
-------------------- AND EQUIPMENT
FREEHOLD LEASEHOLD MACHINERY AND VEHICLES TOTAL
-------- --------- --------- ------------ --------
(US $000'S)
<S> <C> <C> <C> <C> <C>
COST:
At January 1, 1997.......................... $ 1,778 $4,514 $24,171 $ 8,325 $38,788
Exchange adjustment......................... (173) (11) (1,147) (211) (1,542)
Additions................................... - 870 5,813 1,587 8,270
Disposals................................... (1,459) - (1,293) (1,058) (3,810)
------- ------ ------- ------- -------
At December 31, 1997........................ 146 5,373 27,544 8,643 41,706
Exchange adjustment......................... 11 2 582 89 684
Additions................................... 46 4,395 8,252 3,060 15,753
Disposals................................... - - (1,882) (653) (2,535)
------- ------ ------- ------- -------
At December 31, 1998........................ 203 9,770 34,496 11,139 55,608
------- ------ ------- ------- -------
DEPRECIATION:
At January 1, 1997.......................... 336 2,760 14,490 5,566 23,152
Exchange adjustment......................... (47) (5) (697) (86) (835)
Charge for year............................. 8 215 2,249 935 3,407
Disposals................................... (297) - (706) (785) (1,788)
------- ------ ------- ------- -------
At December 31, 1997........................ - 2,970 15,336 5,630 23,936
Exchange adjustment......................... - 11 341 49 401
Charge for year............................. 1 409 3,307 1,224 4,941
Disposals................................... - - (1,722) (604) (2,326)
------- ------ ------- ------- -------
At December 31, 1998........................ 1 3,390 17,262 6,299 26,952
------- ------ ------- ------- -------
NET BOOK VALUE:
At December 31, 1997........................ 146 2,403 12,208 3,013 17,770
======= ====== ======= ======= =======
At December 31, 1998........................ $ 202 $6,380 $17,234 $ 4,840 $28,656
======= ====== ======= ======= =======
</TABLE>
11. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(US $000'S)
<S> <C> <C>
Raw materials............................................... $ 3,413 $ 2,819
Finished goods.............................................. 1,949 2,744
Work in progress............................................ 6,917 6,701
------- -------
$12,279 $12,264
======= =======
</TABLE>
The replacement cost of inventories as at December 31, 1998 and 1997
approximates to the value at which they are stated in the financial statements.
F-63
<PAGE>
THERMALLOY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. DEBTORS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(US $000'S)
<S> <C> <C>
Due within one year:
Trade debtors............................................. $17,198 $16,053
Other debtors............................................. 624 1,096
Amounts due from Bowthorpe Group.......................... 25 51
Tax recoverable........................................... 687 349
Prepayments and accrued income............................ 951 648
------- -------
$19,485 $18,197
======= =======
Due after more than one year:
Other debtors............................................. $ 22 $ 412
======= =======
</TABLE>
The balances due from Bowthorpe Group are not necessarily representative of
the amounts that would be due to Thermalloy Group on a stand-alone basis.
13. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(US $000'S)
<S> <C> <C>
Bank overdrafts........................................... $ 128 $ 1,083
Trade creditors........................................... 7,404 8,001
Amounts due to Bowthorpe Group............................ 1,539 488
Dividends payable-minority interest....................... 174 230
Distributions payable to Bowthorpe Group.................. 1,084 2,853
Bank loans................................................ 287 1,023
Other loans and finance leases............................ 614 366
Other creditors........................................... 1,769 771
Accruals and deferred income.............................. 2,711 2,638
Corporate taxation........................................ 1,418 1,747
Other taxes including VAT and social security............. 879 495
------- -------
$18,007 $19,695
======= =======
</TABLE>
Under their banking arrangements, certain entities accumulate overdraft and
cash balances which are offset. Such offsets are reflected in the combined
balance sheets as appropriate. Loans of $431,000 at December 31, 1998 are
secured by floating charges on the assets of the borrowing business.
F-64
<PAGE>
THERMALLOY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
14. CREDITORS: AMOUNTS FALLING DUE AFTER ONE YEAR
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(US $000'S)
<S> <C> <C>
Bank loans................................................ $ 5,351 $ 3,909
Other loans and finance leases............................ 7,317 3,074
Amounts due to Bowthorpe Group............................ 6,588 1,239
Other creditors........................................... 1,347 1,372
------- -------
$20,603 $ 9,594
======= =======
</TABLE>
The balances due to Bowthorpe Group are not necessarily representative of
the amounts that would be due by Thermalloy Group on a stand-alone basis. Loans
of $5,888,000 at December 31, 1998 are secured by floating charges on the assets
of the borrowing business. The long term bank and other loans bear interest at
an average rate of approximately 5.5%.
15. BORROWINGS
This analysis is not necessarily representative of the total level of the
net borrowings that would have been incurred by Thermalloy Group on a
stand-alone basis.
Maturity analysis of external borrowings:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(US $000'S)
<S> <C> <C>
Amounts falling due are repayable as follows:
Bank loans:
Amounts falling due
Between two and five years................................ $ 5,136 $ 3,499
Between one and two years................................. 215 410
Within one year........................................... 415 2,106
------- -------
5,766 6,015
------- -------
Other loans and finance leases:
Amounts falling due
After five years.......................................... 4,623 1,417
Between two and five years................................ 2,117 993
Between one and two years................................. 577 665
Within one year........................................... 614 366
------- -------
7,931 3,441
------- -------
Total loans and finance leases............................ $13,697 $ 9,456
======= =======
</TABLE>
F-65
<PAGE>
THERMALLOY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
16. NET DEBT
The following definitions have been used:
CASH: Cash in hand and deposits repayable on demand if available within
24 hours without penalty, less overdrafts.
EXTERNAL BORROWINGS: borrowings, less overdrafts which have been treated as
cash, and finance lease obligations.
ANALYSIS OF NET DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(US $000'S)
<S> <C> <C> <C>
Cash in hand................................................ $ 2,322 $ 2,335 $ 1,704
Overdrafts.................................................. (128) (1,083) (186)
-------- -------- -------
Net cash.................................................... 2,194 1,252 1,518
External borrowings......................................... (13,569) (8,372) (6,267)
Amounts due to Bowthorpe Group.............................. (8,102) (1,676) (1,127)
-------- -------- -------
Total borrowings............................................ (21,671) (10,048) (7,394)
-------- -------- -------
Total net debt.............................................. $(19,477) $ (8,796) $(5,876)
======== ======== =======
</TABLE>
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(US $000'S)
<S> <C> <C> <C>
Increase (decrease) in cash................................. $ 911 $ (219) $ 33
Cash inflow from increase in debt........................... (4,620) (2,567) (814)
Cash inflow from increase in group loan..................... (6,256) (855) (811)
-------- -------- -------
Change in net debt from cashflows........................... (9,965) (3,641) (1,592)
Exchange movements.......................................... (716) 721 (11)
-------- -------- -------
Movement in net debt in the year............................ (10,681) (2,920) (1,603)
Net debt at January 1....................................... (8,796) (5,876) (4,273)
-------- -------- -------
Net debt at December 31..................................... $(19,477) $ (8,796) $(5,876)
======== ======== =======
</TABLE>
F-66
<PAGE>
THERMALLOY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
17. PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
DEFERRED
PENSIONS TAXATION OTHER TOTAL
-------- -------- -------- --------
(US $000'S)
<S> <C> <C> <C> <C>
At January 1, 1997.......................................... $ 307 $ 382 $ 61 $ 750
Currency translation........................................ -- 9 (2) 7
Provisions utilized......................................... -- -- (11) (11)
Charged/(released) in the year.............................. 123 (153) 37 7
----- ----- ---- -----
At December 31, 1997........................................ 430 238 85 753
Currency translation........................................ -- 2 1 3
Provisions utilized......................................... (400) (306) (86) (792)
Charged/(released) in the year.............................. 265 -- -- 265
----- ----- ---- -----
At December 31, 1998........................................ $ 295 $ (66) $ -- $ 229
===== ===== ==== =====
</TABLE>
Other provisions relate to warranties and litigation.
18. FINANCIAL COMMITMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(US $000'S)
<S> <C> <C>
Contracted capital expenditure.............................. $1,848 $6,803
====== ======
Annual commitments under operating leases at December 31,
were as follows:
Land and buildings:
Expiring in the first year.................................. -- 299
Expiring in the second to fifth years inclusive............. -- 25
------ ------
Expiring after the fifth year............................... 257 83
------ ------
$ 257 $ 407
====== ======
Fixtures and fittings, equipment and vehicles:
Expiring in the first year.................................. 70 --
Expiring in the second to fifth years inclusive............. -- --
Expiring after the fifth year............................... -- --
------ ------
$ 70 $ --
====== ======
</TABLE>
19. CONTINGENT LIABILITIES
The management of Thermalloy Group is not aware of any legal or arbitration
proceedings pending or threatened against any member of Thermalloy Group which
may result in any liabilities significantly in excess of provisions in the
financial statements.
F-67
<PAGE>
THERMALLOY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
20. RELATED PARTY DISCLOSURE
Thermalloy Group does not operate as a separate group and consequently there
were a number of related party transactions between its companies and other
companies and businesses within Bowthorpe Group. These include transactions
relating to insurance, treasury and taxation, together with other central
services supplied by Bowthorpe Group to Thermalloy Group. These transactions
have not been identified individually as it is not practical to do so.
21. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The combined financial statements are prepared in accordance with accounting
principles generally accepted in the United Kingdom ("UK GAAP"), which differ in
certain respects from those generally accepted in the United States ("US GAAP").
The significant differences applicable to Thermalloy Group are described below.
GOODWILL
Under UK GAAP, goodwill arising on acquisitions prior to January 1, 1998 was
written off to reserves. Under US GAAP, such goodwill would be capitalized and
amortized to the income statement over the estimated useful lives of the assets
over its estimated useful lives not exceeding 40 years. For the purpose of the
US GAAP reconciliations, goodwill is amortized over 20 years.
Under US GAAP, if any impairment indicators were present, the Group would
evaluate the recoverability of goodwill and other intangible fixed assets, based
on undiscounted cash flows.
TAXATION
Under UK GAAP, deferred taxation is provided using the liability method in
respect of timing differences. Provision is made, or recovery anticipated, where
timing differences are expected to reverse without replacement in the
foreseeable future. US GAAP requires taxes to be computed on a stand-alone basis
by a member of a group if it issues separate financial statements.
Under US GAAP, deferred taxation is provided on the full liability basis on
all temporary differences between the tax and book bases of assets and
liabilities including the differences between the assigned fair values and tax
bases of assets and liabilities acquired. Future taxation benefits are
recognized as deferred taxation assets, subject to a valuation allowance to the
extent that it is more likely than not that any part will not be realized.
There are no material differences in deferred taxation resulting from the
application of US GAAP.
PENSIONS
The Group provides for the cost of retirement benefits based upon consistent
percentages of employees' pensionable pay as recommended by independent
qualified actuaries. Under US GAAP, the projected benefit obligation (pension
liability) in respect of the Group's defined benefit plans would be matched
against the fair value of the plans' assets and would be adjusted to reflect any
unrecognized obligations or assets in determining the pension cost or credit for
the year.
There are no material differences in pension costs resulting from the
application of US GAAP.
F-68
<PAGE>
THERMALLOY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
21. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
PROFIT FOR THE YEAR AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(US $000'S)
<S> <C> <C> <C>
Profit for the year as reported in the combined
profit and loss account in accordance with UK
GAAP............................................ $ 5,475 $ 5,512 $ 5,412
Adjustments:
Goodwill amortization............................. (1,039) (1,066) (1,014)
------- ------- -------
Net income as adjusted to accord with US GAAP..... 4,436 4,446 4,398
Items of comprehensive income:
Currency translation.............................. 365 (235) 392
------- ------- -------
US GAAP comprehensive income...................... $ 4,801 $ 4,211 $ 4,790
======= ======= =======
</TABLE>
INVESTED CAPITAL
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(US $000'S)
<S> <C> <C>
Invested capital as reported in the combined balance
sheet in accordance with UK GAAP...................... $ 24,580 $ 20,925
Adjustments:
Goodwill:
Cost.................................................... 21,575 21,445
Accumulated amortization................................ (12,023) (10,918)
-------- --------
Net book value.......................................... 9,552 10,527
-------- --------
Invested capital as adjusted to accord with US GAAP..... $ 34,132 $ 31,452
======== ========
</TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
The consolidated statements of cash flows prepared under UK GAAP present
substantially the same information as those required under US GAAP but they
differ, however, with regard to classification of items within them and as
regards the definition of cash and cash equivalents.
Under UK GAAP, cash is defined as cash in hand and deposits repayable on
demand less overdrafts repayable on demand. Under US GAAP, cash and cash
equivalents would not include bank overdrafts but would include cash deposits
repayable within three months. Under UK GAAP, cash flows are presented
separately for operating activities, returns on investments and servicing of
finance, taxation, capital expenditure and financial investment, acquisitions,
equity dividends, management of liquid resources and financing. US GAAP,
however, requires only three categories of cash flow activity to be reported:
operating, investing and financing. Cash flows from taxation and returns on
investments and servicing of finance shown under UK GAAP would be included as
operating activities under US
F-69
<PAGE>
THERMALLOY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
21. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
GAAP. The payment of dividends would be included as a financing activity under
US GAAP. Under US GAAP, capital expenditure and financial investment and
acquisitions would be reported within investing activities.
The categories of cash flow activity under US GAAP can be summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(US $000'S)
<S> <C> <C> <C>
Cash inflow from operating activities............ $ 8,799 $ 7,523 $ 6,621
Cash outflow on investing activities............. (15,652) (6,383) (4,680)
Cash inflow/(outflow) from financing
activities..................................... 6,809 (462) (2,553)
-------- ------- -------
(Decrease)/increase in cash and cash
equivalents.................................... (44) 678 (612)
Effect of foreign exchange rates changes......... 31 (47) (138)
Cash and cash equivalents at January 1........... 2,335 1,704 2,454
-------- ------- -------
Cash and cash equivalents at December 31......... $ 2,322 $ 2,335 $ 1,704
======== ======= =======
</TABLE>
F-70
<PAGE>
THERMALLOY GROUP
CONDENSED COMBINED UNAUDITED PROFIT AND LOSS ACCOUNTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
NOTES -------- --------
(US $000'S)
<S> <C> <C> <C>
SALES....................................................... 2 $ 74,687 $ 76,264
Operating costs less other income........................... 3 (71,243) (68,466)
-------- --------
OPERATING PROFIT............................................ 2 3,444 7,798
Finance costs (1)........................................... (996) (836)
-------- --------
Profit before taxation...................................... 2,448 6,962
Taxation.................................................... 1,848 2,719
-------- --------
Profit for the period (2)................................... $ 600 $ 4,243
======== ========
</TABLE>
- ------------------------
(1) The finance costs are not necessarily representative of the charges that
would have been incurred by Thermalloy Group on a stand-alone basis.
(2) A summary of the significant adjustments to profit for the year that would
be required is United States generally accepted accounting principles were
applied, instead of those generally accepted in the United Kingdom, is set
forth in Note 7 of Notes to Condensed Combined Unaudited Financial
Statements.
The Notes to Condensed Combined Unaudited Financial Statements form part of
these
Condensed Combined Unaudited Financial Statements
F-71
<PAGE>
THERMALLOY GROUP
CONDENSED COMBINED UNAUDITED STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
<TABLE>
<CAPTION>
NINE
MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
(US $000'S)
<S> <C> <C>
PROFIT FOR THE YEAR......................................... $ 600 $4,243
Currency translation........................................ (1,082) 211
------- ------
Total recognized gains and losses relating to the period
(1)....................................................... $ (482) $4,454
======= ======
</TABLE>
- ------------------------
(1) The combined statement of comprehensive income required under United States
generally accepted accounting principles is set forth in Note 7 of Notes to
Condensed Combined Unaudited Financial Statements.
The Notes to Condensed Combined Unaudited Financial Statements form part of
these Condensed Combined Unaudited Financial Statements
F-72
<PAGE>
THERMALLOY GROUP
CONDENSED COMBINED UNAUDITED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
NOTES 1999 1998
-------- -------- --------
(US $000'S)
<S> <C> <C> <C>
FIXED ASSETS
Intangible assets........................................... $ 366 $ 336
Tangible assets............................................. 27,409 26,610
------- -------
27,775 26,946
------- -------
CURRENT ASSETS
Inventories................................................. 12,952 14,068
Debtors: amounts falling due within one year................ 4 18,949 17,744
Debtors: amounts falling due after one year................. 4 797 404
Cash at bank and in hand.................................... 1,670 3,926
------- -------
34,368 36,142
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR.............. 5 19,210 25,274
------- -------
NET CURRENT ASSETS.......................................... 15,158 10,868
------- -------
TOTAL ASSETS LESS CURRENT LIABILITIES....................... 42,933 37,814
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR..... 6 14,833 13,361
PROVISIONS FOR LIABILITIES AND CHARGES...................... 506 236
MINORITY INTERESTS.......................................... 1,428 (202)
------- -------
NET ASSETS.................................................. $26,166 $24,419
======= =======
INVESTED CAPITAL (1)........................................ $26,166 $24,419
======= =======
</TABLE>
- ------------------------
(1) A summary of the significant adjustments to invested capital that would be
required if the United States generally accepted accounting principles were
applied, instead of those generally accepted in the United Kingdom, is set
forth in Note 7 of Notes to Condensed Combined Unaudited Financial
Statements.
The Notes to Condensed Combined Unaudited Financial Statements form part of
these Condensed Combined Unaudited Financial Statements.
F-73
<PAGE>
THERMALLOY GROUP
CONDENSED COMBINED UNAUDITED STATEMENTS OF MOVEMENTS
IN INVESTED CAPITAL
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
(US $000'S)
<S> <C> <C>
At beginning of period...................................... $24,580 $21,017
Profit for the period....................................... 600 4,243
Net receipts/(distributions)................................ 2,068 (1,052)
Currency translation........................................ (1,082) 211
------- -------
At September 30 (1)......................................... $26,166 $24,419
======= =======
</TABLE>
- ------------------------
(1) At September 30, 1999 the cumulative amount of goodwill charged to reserves
is $-- (1998 $--).
The Notes to Condensed Combined Unaudited Financial Statements form part of
these Condensed Combined Unaudited Financial Statements
F-74
<PAGE>
THERMALLOY GROUP
CONDENSED COMBINED UNAUDITED CASH FLOW STATEMENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
-------- --------
(US $000'S)
<S> <C> <C>
NET CASH INFLOW FROM OPERATING ACTIVITIES................... $ 4,371 $ 12,503
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest paid (1)........................................... (1,030) (896)
Interest received (1)....................................... 36 56
Minority dividends paid..................................... (310) (359)
------- --------
(1,304) (1,199)
TAX PAID.................................................... (2,379) (2,273)
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets........................... (4,794) (11,544)
Sale of tangible fixed assets............................... 671 240
Purchase of intangible fixed assets......................... (47) (387)
------- --------
(4,170) (11,691)
FINANCING (1)
Net Distributions........................................... 3,138 (1,816)
Movement on external loans and finance lease obligations.... (1,346) 1,839
Movement in amounts due to and from Bowthorpe Group......... 1,089 4,142
------- --------
2,881 4,165
------- --------
(DECREASE) INCREASE IN CASH................................. $ (601) $ 1,505
======= ========
</TABLE>
The reconciliation of operating profit to net cash flow from operating
activities is as follows:
<TABLE>
<S> <C> <C>
OPERATING PROFIT............................................ $3,444 $ 7,798
Depreciation charge......................................... 4,384 3,275
Amortization of other intangibles........................... 65 65
Increase in inventories..................................... (859) (1,597)
Increase in debtors......................................... (1,283) 1,036
Decrease in creditors and provisions........................ (1,380) 1,926
------ -------
NET CASH INFLOW FROM OPERATING ACTIVITIES................... $4,371 $12,503
====== =======
</TABLE>
- ------------------------
(1) Transactions with Bowthorpe Group, interest received (paid) and financing
cash flows are not necessarily representative of the amounts that would have
been borne by Thermalloy Group on a stand-alone basis.
(2) The significant differences between the cash flow statements presented above
and those required under United States generally accepted accounting
principles are set forth in Note 7 of Notes to Condensed Combined Unaudited
Financial Statements.
The Notes to Condensed Combined Unaudited Financial Statements form part of
these
Condensed Combined Unaudited Financial Statements
F-75
<PAGE>
THERMALLOY GROUP
NOTES TO CONDENSED COMBINED UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
These condensed combined financial statements are unaudited; however, in the
opinion of the management of Thermalloy Group, all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation have been made.
Operating results for the nine-month period ended September 30 are not
necessarily indicative of the results that may be expected for the full year.
The condensed combined unaudited financial statements have been prepared in
accordance with the basis of preparation of the Group's Combined Financial
Statements for the year ended December 31, 1998.
The condensed combined unaudited financial statements are presented in US
dollars, although Bowthorpe Group's functional currency is British pounds. The
following exchange rates have been used to translate to US dollars:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Profit and loss account and cash flow--average rate for the
period.................................................... 1.614 1.660
Balance sheet--period end rate.............................. 1.647 1.699
</TABLE>
2. SEGMENT ANALYSIS
SALES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
(US $000'S)
<S> <C> <C>
BY GEOGRAPHICAL AREA OF MARKET:
Europe...................................................... $28,791 $31,371
United States............................................... 37,864 37,425
Rest of World............................................... 8,032 7,468
------- -------
$74,687 $76,264
======= =======
BY GEOGRAPHICAL AREA OF ORIGIN:
Europe...................................................... $29,381 $31,605
United States............................................... 41,038 39,506
Rest of World............................................... 4,268 5,153
------- -------
$74,687 $76,264
======= =======
OPERATING PROFIT
BY GEOGRAPHICAL AREA OF ORIGIN:
Europe...................................................... $ 1,817 $ 4,305
United States............................................... 1,492 3,243
Rest of World............................................... 135 250
------- -------
$ 3,444 $ 7,798
======= =======
</TABLE>
F-76
<PAGE>
THERMALLOY GROUP
NOTES TO CONDENSED COMBINED UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
2. SEGMENT ANALYSIS (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
(US $000'S)
<S> <C> <C>
NET OPERATING ASSETS
Europe...................................................... $18,623 $18,879
United States............................................... 25,627 19,703
Rest of World............................................... 3,782 4,426
------- -------
$48,032 $43,008
======= =======
</TABLE>
3. OPERATING PROFIT
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
(US $000'S)
<S> <C> <C>
ANALYSIS OF OPERATING COSTS LESS OTHER INCOME:
Cost of sales............................................... $53,230 $51,470
Selling and distribution.................................... 10,310 10,393
Administration.............................................. 5,221 3,894
Research and development.................................... 2,863 2,810
Other income................................................ (381) (101)
------- -------
$71,243 $68,466
======= =======
Operating costs includes changes made by Bowthorpe Group.... 1,336 629
</TABLE>
4. DEBTORS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
(US $000'S)
<S> <C> <C>
Due within one year:
Trade debtors............................................... $18,552 $16,496
Other debtors............................................... 203 133
Amounts due from Bowthorpe Group............................ (758) 172
Tax recoverable............................................. 460 411
Prepayments and accrued income.............................. 492 532
------- -------
$18,949 $17,744
======= =======
Due after more than one year:
Other debtors............................................... $ 448 $ 404
Amounts due from Bowthorpe Group............................ 349 --
------- -------
$ 797 $ 404
======= =======
</TABLE>
The balances due from Bowthorpe Group are not necessarily representative of
the amounts that would be due to Thermalloy Group on a stand-alone basis.
F-77
<PAGE>
THERMALLOY GROUP
NOTES TO CONDENSED COMBINED UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
5. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
(US $000'S)
<S> <C> <C>
Bank overdrafts............................................. $ 1,046 $ 850
Trade creditors............................................. 7,108 8,995
Amounts due to Bowthorpe Group.............................. 3,493 2,997
Dividends payable-minority interest......................... -- --
Distributions payable to Bowthorpe Group.................... 1,179 2,204
Bank loans.................................................. 257 195
Other loans and finance leases.............................. 505 713
Other creditors............................................. 590 658
Accruals and deferred income................................ 3,390 4,936
Corporate taxation.......................................... 385 2,815
Other taxes including VAT and social security............... 1,257 911
------- -------
$19,210 $25,274
======= =======
</TABLE>
The balances due to Bowthorpe Group are not necessarily representative of
the amounts that would be due by Thermalloy Group on a stand-alone basis. Loans
are secured by floating charges on the assets of the borrowing business.
6. CREDITORS: AMOUNTS FALLING DUE AFTER ONE YEAR
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
(US $000'S)
<S> <C> <C>
Bank loans.................................................. $ 4,015 $ 3,920
Other loans and finance leases.............................. 5,614 6,193
Amounts due to Bowthorpe Group.............................. 5,167 3,170
Other creditors............................................. 37 78
------- -------
$14,833 $13,361
======= =======
</TABLE>
The balances due to Bowthorpe Group are not necessarily representative of
the amounts that would be due by Thermalloy Group on a stand-alone basis. Loans
are secured by floating charges on the assets of the borrowing business.
7. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The combined financial statements are prepared in accordance with accounting
principles generally accepted in the United Kingdom ("UK GAAP"), which differ in
certain respects from those generally accepted in the United States ("US GAAP").
The significant differences applicable to Thermalloy Group are described in
Note 21 of Notes to Combined Financial Statements for the year ended
December 31, 1998.
F-78
<PAGE>
THERMALLOY GROUP
NOTES TO CONDENSED COMBINED UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
7. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
PROFIT FOR THE YEAR AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
(US $000'S)
<S> <C> <C>
Profit for the year as reported in the combined
profit and loss account in accordance with UK GAAP.......... $ 600 $4,243
Adjustments:
Goodwill amortization....................................... (759) (780)
------- ------
Net income as adjusted to accord with US GAAP............... (159) 3,463
Items of comprehensive income:
Currency translation........................................ (1,082) 211
------- ------
US GAAP comprehensive income................................ $(1,241) $3,674
======= ======
</TABLE>
INVESTED CAPITAL
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------
1999 1998
-------- --------
(US $000'S)
<S> <C> <C>
Invested capital as reported in the combined balance sheet
in accordance with UK GAAP................................ $ 26,166 $ 24,419
Adjustments:
Goodwill:
Cost........................................................ 21,406 22,081
Accumulated amortization.................................... (12,703) (12,041)
-------- --------
Net book value.............................................. 8,703 10,040
-------- --------
Invested capital as adjusted to accord with US GAAP......... $ 34,896 $ 34,459
======== ========
</TABLE>
CASH FLOWS
The categories of cash flow activity under US GAAP can be summarized as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
(US $000'S)
<S> <C> <C>
Cash inflow from operating activities....................... $ 998 $ 9,390
Cash outflow on investing activities........................ (4,170) (11,691)
Cash inflow from financing activities....................... 2,571 3,806
------- --------
(Decrease)/increase in cash and cash equivalents............ (601) 1,505
Effect of foreign exchange rates changes.................... (49) 37
Cash and cash equivalents at January 1...................... 2,320 2,384
------- --------
Cash and cash equivalents at September 30................... $ 1,670 $ 3,926
======= ========
</TABLE>
F-79
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
AAVID THERMAL TECHNOLOGIES, INC., AAVID THERMAL PRODUCTS, INC.,
THERMALLOY, INC., THERMALLOY INVESTMENT CO., INC. AND FLUENT HOLDINGS, INC.
Section 145 of the Delaware General Corporation Law empowers a corporation,
subject to certain limitations, to indemnify its directors and officers against
expenses, including attorneys' fees, judgments, fines and certain settlements,
actually and reasonably incurred by them in connection with any suit or
proceeding to which they are a party so long as they acted in good faith and in
a manner reasonably to be in or not opposed to the best interests of the
corporation, and, with respect to a criminal action or proceeding, so long as
they had no reasonable cause to believe their conduct to have been unlawful. The
respective certificates of incorporation of each of Aavid Thermal
Technologies, Inc., Aavid Thermal Products, Inc., Thermalloy, Inc., Thermalloy
Investment Co., Inc and Fluent Holdings, Inc. provide that such registrant shall
indemnify all persons who it may indemnify pursuant to Section 145 of the
General Corporation Law of the State of Delaware, to the fullest extent
permitted by such Section. In addition, Aavid Thermal Technologies, Inc. has
entered into indemnification agreements with its officers and directors, a form
of which is included as Exhibit 10.62 to Aavid Thermal Technologies, Inc.'s
registration statement on Form S-1 (No. 33-99232).
Section 102 of the Delaware corporate laws permits a Delaware corporation to
include in its certificate of incorporation a provision eliminating or limiting
a director's liability to a corporation or its stockholders for monetary damages
for breaches of fiduciary duty. The enabling statute provides, however, that
liability for breaches of the duty of loyalty, acts or omissions not in good
faith or involving intentional misconduct, or knowing violation of the law, and
the unlawful purchase or redemption of stock or payment of unlawful dividends or
the receipt of improper personal benefits cannot be eliminated or limited in
this manner.
The respective certificates of incorporation of each of Aavid Thermal
Technologies, Inc., Aavid Thermal Products, Inc., Thermalloy, Inc., Thermalloy
Investment Co., Inc. and Fluent Holdings, Inc. include a provision which
eliminates, to the fullest extent permitted, director liability for monetary
damages for breaches of fiduciary duty.
In addition, the respective by-laws of each of Aavid Thermal
Technologies, Inc., Aavid Thermal Products, Inc., Thermalloy, Inc., Thermalloy
Investment Co. Inc and Fluent Holdings, Inc. provide for indemnification of
directors, officers, employees and agents of such registrant (in their capacity
as such), unless such indemnification is prohibited by the General Corporation
Law of the State of Delaware; provided, however, that, except as otherwise
provided in the by-laws, such registrant shall indemnify any such person seeking
indemnification in connection with a proceeding initiated by such person only if
such proceeding was authorized by the board of directors of such registrant.
AAVID THERMALLOY, LLC, APPLIED THERMAL TECHNOLOGIES, LLC, AAVID THERMALLOY OF
TEXAS, LLC AND AAVID THERMALLOY SW, LLC
Section 18-108 of the Delaware Limited Liability Company Act provides that,
subject to such standards and restrictions, if any, as are set forth in its
limited liability company agreement, a limited liability company may, and shall
have the power to, indemnify and hold harmless any member or manager or other
person from and against any and all claims and demands whatsoever.
The respective limited liability company agreements of each of Aavid
Thermalloy, LLC, Applied Thermal Technologies, LLC, Aavid Thermalloy of Texas,
LLC and Aavid Thermalloy SW, LLC provide that each person who shall be (or shall
have been) a member, officer, employee or agent of such registrant shall be
entitled to indemnification as and to the fullest extent permitted by the
provisions of
II-1
<PAGE>
Delaware law or any successor statutory provisions, as from time to time
amended. Such limited liability company agreements further provide that such
registrant shall indemnify, to the full extent not prohibited by law, any person
who is or was a member, officer employee or agent of such registrant against
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with any threatened, pending, or completed
action, suit or proceeding, if such person acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interest of such
registrant, and, with respect to any criminal action, had no reasonable cause to
believe such person's conduct was unlawful.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
3.1* Certificate of Incorporation of Aavid Thermal Technologies,
Inc.
3.2* Bylaws of Aavid Thermal Technologies, Inc.
3.3* Certificate of Incorporation of Aavid Thermal Products, Inc.
3.4* Bylaws of Aavid Thermal Products, Inc.
3.5* Certificate of Incorporation of Thermalloy, Inc.
3.6* Bylaws of Thermalloy, Inc.
3.7* Certificate of Incorporation of Thermalloy Investment Co.,
Inc.
3.8* Bylaws of Thermalloy Investment Co., Inc.
3.9* Certificate of Formation of Aavid Thermalloy, LLC
3.10* Limited Liability Company Agreement of Aavid Thermalloy, LLC
3.11* Certificate of Formation of Applied Thermal Technologies,
LLC
3.12* Limited Liability Company Agreement of Applied Thermal
Technologies, LLC
3.13* Certificate of Formation of Aavid Thermalloy of Texas, LLC
3.14* Limited Liability Company Agreement of Aavid Thermalloy of
Texas, LLC
3.15* Certificate of Formation of Aavid Thermalloy SW, LLC
3.16* Limited Liability Company Agreement of Aavid Thermalloy SW,
LLC
3.17* Certificate of Incorporation of Fluent Holdings, Inc.
3.18* By-laws of Fluent Holdings, Inc.
4.1 Indenture dated as of February 2, 2000, among Aavid Thermal
Technologies, Inc., the subsidiary guarantors and Bankers
Trust Company, as trustee. (Incorporated by reference to
Exhibit 4.1 of the Company's Form 8-K dated February 2,
2000.)
4.2 Warrant Agreement, dated as of February 2, 2000, by and
between Aavid Thermal Technologies, Inc. and Bankers Trust
Company, as Warrant Agent. (Incorporated by reference to
Exhibit 4.2 of the Company's Form 8-K dated February 2,
2000.)
5.1+ Opinion of Bartlit Beck Herman Palenchar & Scott
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.1 Amended and Restated Credit Agreement, dated as of February
2, 2000, among Aavid Thermal Technologies, Inc., Heat
Holdings Corp., Heat Holdings II Corp., the several lenders
from time to time parties hereto, CIBC World Markets Corp.,
as lead arranger and bookrunner, BankBoston, N.A., as
documentation agent, and Canadian Imperial Bank of Commerce,
as issuer and administrative agent. (Incorporated by
reference to Exhibit 10.1 of the Company's Form 8-K dated
February 2, 2000.)
10.2 Registration Rights Agreement dated as of February 2, 2000,
among Aavid Thermal Technologies, Inc., the subsidiary
guarantors, CIBC World Markets Corp. and Fleet Boston
Robertson Stephens Inc., as initial purchasers.
(Incorporated by reference to Exhibit 10.2 of the Company's
Form 8-K dated February 2, 2000.)
10.3 Common Stock Registration Rights Agreement dated as of
February 2, 2000, among Aavid Thermal Technologies, Inc.,
Heat Holdings Corp. and CIBC World Markets Corp. and Fleet
Boston Robertson Stephens Inc., as initial purchasers.
(Incorporated by reference to Exhibit 10.3 of the Company's
Form 8-K dated February 2, 2000.)
12.1* Ratio of Earnings to Fixed Charges
21.1+ Subsidiaries of Aavid Thermal Technologies, Inc., Aavid
Thermal Products, Inc., Thermalloy, Inc., Thermalloy
Investment Co., Inc., Aavid Thermalloy, LLC, Applied Thermal
Technologies of Texas, LLC, Aavid Thermalloy of Texas, LLC,
Aavid Thermalloy SW, LLC and Fluent Holdings, Inc.
23.1+ Consent of Arthur Andersen LLP
23.2+ Consent of Ernst & Young
23.3+ Consent of Bartlit Beck Herman Palenchar & Scott (included
in Exhibit 5.1 above)
23.4+ Consent of Bharatan Patel
23.5+ Consent of Ronald Borelli
25.1* Statement of Eligibility and Qualification on Form T-1 of
Bankers Trust Company
99.1* Form of Letter of Transmittal
99.2* Form of Notice of Guaranteed Delivery
99.3* Form of Letter to Registered Holders
</TABLE>
- ------------------------
* Previously filed
+ Filed herewith
(b) Financial Statement Schedules
None.
All schedules are omitted because the required information is not present in
amounts sufficient to require submission of the schedule or because the
information required is included in the financial statements or notes thereto.
II-3
<PAGE>
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 19(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any fact or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in the
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price represent
no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of the
Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
(4) If the registrant is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by Rule 3-19 of this chapter at the start of any delayed offering
or throughout a continuous offering. Financial statements and information
otherwise required by Section 10(a)(3) of the Act need not be furnished;
PROVIDED, that the registrant includes in the prospectus, by means of a
post-effective amendment, financial statements required pursuant to this
paragraph (a)(4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements. Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective amendment need not be
filed to include financial statements and information required b
Section 10(a)(3) of the Act or Rule 3-19 of this chapter if such financial
statements and information are contained in Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in
the Form F-3.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of
the Securities
II-4
<PAGE>
Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial BONA FIDE
offering thereof.
(g)(1)The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use
of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering prospectus will
contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the
applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed pursuant
to paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities, other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding,
is asserted by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed
in the Securities Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired therein, that was not the subject of and included in the
registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Concord, State of New
Hampshire, on March 29, 2000.
<TABLE>
<C> <S> <C>
AAVID THERMAL TECHNOLOGIES, INC.
BY: /S/ BHARATAN R. PATEL
-----------------------------------------
Bharatan R. Patel,
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ AVY H. STEIN Director
-------------------------------------- March 29, 2000
Avy H. Stein
/s/ DANIEL H. BLUMENTHAL Director
-------------------------------------- March 29, 2000
Daniel H. Blumenthal
Chief Executive Officer (Principal
/s/ BHARATAN R. PATEL Executive Officer, Principal
-------------------------------------- Financial Officer and Principal March 29, 2000
Bharatan R. Patel Accounting Officer)
</TABLE>
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Concord, State of New
Hampshire, on March 29, 2000.
<TABLE>
<S> <C> <C>
AAVID THERMAL PRODUCTS, INC.
BY: /S/ BHARATAN R. PATEL
-----------------------------------------
Bharatan R. Patel,
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
President and and Sole Director
/s/ BHARATAN R. PATEL (Principal Executive Officer,
-------------------------------------- Principal Financial Officer and March 29, 2000
Bharatan R. Patel Principal Accounting Officer)
</TABLE>
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Concord, State of New
Hampshire, on March 29, 2000.
<TABLE>
<S> <C> <C>
THERMALLOY, INC.
BY: /S/ BHARATAN R. PATEL
-----------------------------------------
Bharatan R. Patel,
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
President and and Sole
/s/ BHARATAN R. PATEL Director (Principal Executive
------------------------------------------- Officer, Principal Financial March 29, 2000
Bharatan R. Patel Officer and Principal
Accounting Officer)
</TABLE>
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Concord, State of New
Hampshire, on March 29, 2000.
<TABLE>
<S> <C> <C>
THERMALLOY INVESTMENT CO., INC.
By: /s/ BHARATAN R. PATEL
-----------------------------------------
Bharatan R. Patel,
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
President and and Sole
/s/ BHARATAN R. PATEL Director (Principal Executive
------------------------------------------- Officer, Principal Financial March 29, 2000
Bharatan R. Patel Officer and Principal
Accounting Officer)
</TABLE>
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Concord, State of New
Hampshire, on March 29, 2000.
<TABLE>
<S> <C> <C>
AAVID THERMALLOY, LLC
BY: /S/ BHARATAN R. PATEL
-----------------------------------------
Bharatan R. Patel,
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ BHARATAN R. PATEL March 29, 2000
-------------------------------------------
Bharatan R. Patel President (Principal Executive
Officer, Principal Financial
Officer and Principal
Accounting Officer) of the
registrant and Sole Director
of Aavid Thermal
Products, Inc., the
Managing Member of the
registrant
</TABLE>
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Concord, State of New
Hampshire, on March 29, 2000.
<TABLE>
<S> <C> <C>
APPLIED THERMAL TECHNOLOGIES, LLC
/S/ BHARATAN R. PATEL
-----------------------------------------
Bharatan R. Patel,
BY: PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ BHARATAN R. PATEL
------------------------------------------- March 29, 2000
Bharatan R. Patel President (Principal Executive
Officer, Principal Financial
Officer and Principal
Accounting Officer) of the
registrant and Sole Director
of Aavid Thermal
Products, Inc., the
Managing Member of Aavid
Thermalloy, LLC, which is
the Managing Member of the
registrant
</TABLE>
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Concord, State of New
Hampshire, on March 29, 2000.
<TABLE>
<S> <C> <C>
AAVID THERMALLOY OF TEXAS, LLC
BY: /S/ BHARATAN R. PATEL
-----------------------------------------
Bharatan R. Patel,
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ BHARATAN R. PATEL
------------------------------------------- March 29, 2000
Bharatan R. Patel President (Principal Executive
Officer, Principal Financial
Officer and Principal
Accounting Officer) of the
registrant and Sole Director
of Aavid Thermal
Products, Inc., the
Managing Member of the
registrant
</TABLE>
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Concord, State of New
Hampshire, on March 29, 2000.
<TABLE>
<S> <C> <C>
AAVID THERMALLOY SW, LLC
BY: /S/ BHARATAN R. PATEL
-----------------------------------------
Bharatan R. Patel,
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ BHARATAN R. PATEL
------------------------------------------- March 29, 2000
Bharatan R. Patel President (Principal Executive
Officer, Principal Financial
Officer and Principal
Accounting Officer) of the
registrant and Sole Director
of Aavid Thermal
Products, Inc., the
Managing Member of the
registrant
</TABLE>
II-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Concord, State of New
Hampshire, on March 29, 2000.
<TABLE>
<S> <C> <C>
FLUENT HOLDINGS, INC.
BY: /S/ BHARATAN R. PATEL
-----------------------------------------
Bharatan R. Patel,
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ BHARATAN R. PATEL Chief Executive Officer March 29, 2000
------------------------------------------- (Principal Executive Officer
Bharatan R. Patel and Sole Director)
Chief Financial Officer March 29, 2000
/s/ PETER CHRISTIE (Principal Financial Officer
------------------------------------------- and Principal Accounting
Peter Christie Officer)
</TABLE>
II-14
<PAGE>
EXHIBIT 5.1
[Bartlit Beck Herman Palenchar & Scott letterhead]
March 29, 2000
Aavid Thermal Technologies, Inc.
Aavid Thermal Products, Inc.
Thermalloy, Inc.
Thermalloy Investment Co., Inc.
Aavid Thermalloy, LLC
Applied Thermal Technologies, LLC
Aavid Thermalloy of Texas, LLC
Aavid Thermalloy SW, LLC
Fluent Holdings, Inc.
One Eagle Square, Suite 509
Concord, New Hampshire 03301
Re: Registration on Form S-4
Ladies and Gentlemen:
We have acted as special counsel to Aavid Thermal Technologies, Inc., a
Delaware corporation (the "Company"), Aavid Thermal Products, Inc., a Delaware
corporation ("ATP, Inc."), Thermalloy, Inc., a Delaware corporation
("Thermalloy"), Thermalloy Investment Co., Inc., a Delaware corporation ("TIC"),
Aavid Thermalloy, LLC, a Delaware limited liability company ("AT LLC"), Applied
Thermal Technologies, LLC, a Delaware limited liability company ("Applied"),
Aavid Thermalloy of Texas, LLC, a Delaware limited liability company ("Aavid
Texas"), Aavid Thermalloy SW, LLC, a Delaware limited liability company ("Aavid
SW"), and Fluent Holdings, Inc., a Delaware corporation ("Fluent" and, together
with ATP, Inc., Thermalloy, TIC, AT LLC, Applied, Aavid Texas, Aavid SW and
Fluent, the "Guarantors" and, together with the Company, the "Registrants"), in
connection with the proposed registration by the Company of up to $150,000,000
in aggregate principal amount of its 12 3/4% Senior Subordinated Notes due 2007,
Series B (the "Exchange Notes"), pursuant to a Registration Statement on Form
S-4 (No. 333- 33126) originally filed with the Securities and Exchange
Commission (the "Commission") on March 23, 2000, under the Securities Act of
1933, as amended (the "Act") (such Registration Statement, as amended or
supplemented, is hereinafter referred to as the "Registration Statement"). The
obligations of the Company under the Exchange Notes will be guaranteed by each
of the Guarantors (the "Guarantees"). The Exchange Notes and the Guarantees are
to be issued pursuant to the Indenture, dated as of February 2, 2000 (the
"Indenture"), among the Company, the Guarantors and Bankers Trust Company, as
trustee. The Exchange Notes and the Guarantees are to be issued in exchange for
and in replacement of the Company's outstanding 12 3/4% Senior Subordinated
Notes due 2007 (the "Old Notes"), of which $150,000,000 in aggregate principal
amount is outstanding.
This opinion is being furnished in accordance with the requirements of Item
601(b)(5) of Regulation S-K under the Act.
In arriving at the opinion expressed below we have examined and relied on,
among other things, the following:
- the Registration Statement;
<PAGE>
- executed copies of each of (i) the Indenture and (ii) the Registration
Rights Agreement, dated as of February 2, 2000, among the Company, the
Guarantors, CIBC World Markets Corp. and FleetBoston Robertson Stephens
Inc.;
- forms of the Exchange Notes and the Guarantees;
- the respective certificates of incorporation and by-laws or certificates
of formation and limited liability company agreements, as applicable, of
the Registrants, each as presently in effect; and
- minutes or records of the corporate or limited liability company
proceedings of the Registrants with respect to the issuance of the
Exchange Notes and the Guarantees.
In addition, we have examined and relied upon the originals or copies,
certified or otherwise identified to our satisfaction, of all such records of
the Company and the Guarantors and such other instruments and certificates of
public officials, officers and representatives of the Company and the Guarantors
and other persons, and we have made such investigations of facts and law, as we
have deemed appropriate as a basis for the opinions expressed below. In our
examination, we have assumed the legal capacity of all natural persons, the
genuineness of the signatures of persons signing all documents and instruments
in connection with which this opinion is rendered, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as copies and the authenticity of the originals of
all documents submitted to us as copies. In making our examination of documents,
we have assumed that the parties thereto (other than the Company and the
Guarantors) had the power (corporate or other) to enter into and perform all
obligations thereunder and have also assumed the due authorization by all
requisite action (corporate or other) and execution and delivery by such parties
of such documents and the validity and binding effect of such documents.
Our opinion expressed below is subject to the following further
qualifications that we express no opinion as to the applicability of, compliance
with, or effect of:
- any bankruptcy, insolvency, reorganization, arrangement, moratorium,
fraudulent conveyance or other similar laws affecting the enforcement of
creditors rights generally;
- general principles of equity (regardless of whether enforcement is
considered in a proceeding at law or in equity); or
- public policy considerations which may limit the rights of parties to
obtain certain remedies.
Based upon and subject to the foregoing, we are of the opinion that when (i)
the Registration Statement becomes effective, (ii) the Indenture has been
qualified under the Trust Indenture Act of 1939, as amended, and (iii) the
Exchange Notes and the Guarantees have been duly executed and, in the case of
the Exchange Notes, authenticated in accordance with the terms of the Indenture
and delivered to the purchasers thereof in exchange for the Old Notes, the
Exchange Notes and the Guarantees will be valid and binding obligations of the
Registrants, enforceable against the Registrants in accordance with their terms.
We are admitted to practice in the State of Colorado, and express no opinion
whatsoever with respect to any laws other than the internal laws of the State of
Colorado, the federal laws of the United States of America and the General
Corporation Law of the State of Delaware. For the purpose of furnishing this
letter, we have assumed that the internal law of the State of New York is the
same as the internal law of the State of Colorado in all respects material to
this letter.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement. We also consent to the reference to our
firm under the caption "Legal Matters" in the Registration Statement. In giving
this consent, we do not thereby admit that we are included in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.
<PAGE>
The foregoing opinions are limited to the specific issues addressed and to
laws existing on the date hereof. By rendering our opinion, we do not undertake
to advise you with respect to any other matter or of any change in such laws or
in the interpretations thereof which may occur after the date hereof.
This opinion is furnished to you in connection with the filing of the
Registration Statement and is not to be used, circulated, quoted or otherwise
relied upon for any other purpose.
Very truly yours,
/s/ BARTLIT BECK HERMAN PALENCHAR &
SCOTT
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES(1)
I. AAVID THERMAL TECHNOLOGIES, INC. (DELAWARE)
A. AAVID THERMAL PRODUCTS, INC. (Delaware)
1. Thermalloy Investment Co., Inc. (Delaware)
a. Thermalloy, Inc. (Delaware)
i. Aavid Thermalloy, LLC (Delaware)
(See Number V below)
b. Aavid Thermalloy, LLC (Delaware)
(See Number V below)
2. Aavid Thermalloy, LLC (Delaware)
(See Number V below)
B. FLUENT HOLDINGS, INC. (Delaware)
(See Number VI below)
II. AAVID THERMAL PRODUCTS, INC. (DELAWARE)
A. Thermalloy Investment Co., Inc. (Delaware)
1. Thermalloy, Inc. (Delaware)
a. Aavid Thermalloy, LLC (Delaware)
(See Number V below)
2. Aavid Thermalloy, LLC (Delaware)
(See Number V below)
B. AAVID THERMALLOY, LLC (Delaware)(2)
(See Number V below)
III. THERMALLOY INVESTMENT CO., INC. (DELAWARE)
A. THERMALLOY, INC. (Delaware)
a. Aavid Thermalloy, LLC (Delaware)
(See Number V below)
B. AAVID THERMALLOY, LLC (Delaware)(3)
(See Number V below)
IV. THERMALLOY, INC. (DELAWARE)
A. AAVID THERMALLOY, LLC (Delaware)(4)
(See Number V below)
- ------------------------
(1)Each Registrant is listed under Roman numerals I to IX. Listed below each
Registrant are direct subsidiaries and below each direct subsidiary, the
Registrants indirect subsidiaries. Unless otherwise noted, all subsidiaries are
wholly-owned by their respective parents.
(2)Aavid Thermal Products, Inc. owns approximately 4.3% of the Common Units and
approximately 85.7% of the Preferred Units of Aavid Thermalloy LLC.
(3)Thermalloy Investment Co., Inc. owns approximately 0.1% of the Common Units
and approximately 2.6% of the Preferred Units of Aavid Thermalloy LLC.
(4)Thermalloy, Inc. owns approximately 0.6% of the Common Units and
approximately 11.7% of the Preferred Units of Aavid Thermalloy LLC.
<PAGE>
V. AAVID THERMALLOY, LLC (DELAWARE)
A. Aavid Thermal Products UK Holdings, Ltd. (UK)
1. Aavid Thermalloy, Ltd. (UK)
2. Aavid Thermalloy Intl, Ltd. (UK)
3. Redpoint Thermalloy Ltd. (UK)
4. Redpoint Ltd (UK)
B. Aavid Thermalloy of Texas, LLC (Delaware)
C. Aavid Air Systems, Inc. (NH)(5)
D. Applied Thermal Technologies, LLC (Delaware)
E. Aavid Thermalloy SW LLC (Delaware)
F. Thermalloy, Ltd. (Hong Kong)
G. Aavid Engineering(s) Pte Ltd. (Singapore)
1. Thermalloy Malaysia Snd Bhd (Malaysia)
H. Aavid Engineering GmbH (Germany)
I. Thessalos GmbH (Germany)
1. Curamik Electronics GmbH (Germany)(6)
a. Curamik Electronics, Inc. (Texas)
J. Aavid Taiwan, Inc. (Taiwan)
K. Aavid China, Inc. (British Virgin Islands)
L. Aavid Thermal Products of Canada, Inc. (Canada)
M. Cinquelle Srl (Italy)
1. El.Bo.Mec.Thermalloy Srl (Italy)
N. Aavid Japan K.K. (Japan)
O. Aavid Thermalloy Export, Inc. (Barbados)
P. Aavid Thermalloy GmbH (Germany)
1. Thermalloy Branch (Germany)
Q. Thermalloy SA de CV (Mexico)
VI. FLUENT HOLDINGS, INC. (DELAWARE)
A. Fluent UK Holdings, Ltd.
1. Fluent Europe, Ltd. (UK)
a. Fluent France, S.A. (France)
b. Fluent Deutschland GmbH (Germany)
B. Polyflow, S.A. (Belgium)
C. Fluent Sweden, AB (Sweden)
D. Fluent Italia, Srl (Italy)
E. Fluent India Pvt Ltd. (India)
F. Fluent-Asia-Pacific Company Ltd. (Japan)
G. Fluid Dynamics International, SARL (France)
- ------------------------
(5)A 50% owned subsidiary of Aavid Thermalloy LLC.
(6)85.4% owned by Thessalos GmbH.
<PAGE>
VII. APPLIED THERMAL TECHNOLOGIES, LLC
None
VIII.AAVID THERMALLOY SW, LLC
None
IX. AAVID THERMALLOY OF TEXAS, LLC
None
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
Registration Statement on Form S-4 of our report, dated February 1, 1999 (except
with respect to the matter discussed in Note P, as to which the date is
February 2, 2000), covering the audited financial statements of Aavid Thermal
Technologies, Inc. as of December 31, 1998 and 1997 and for the three years then
ended, and to all references to our Firm included in or made a part of this
Registration Statement.
Arthur Andersen LLP
Boston, Massachusetts
March 28, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 18, 1999, with respect to the financial
statements of Thermalloy Group included in the Registration Statement
(Form S-4) and related Prospectus of Aavid Thermal Technologies, Inc. for the
registration of $150,000,000 of its 12 3/4% Senior Subordinated Notes due 2007.
Ernst & Young
London, England
March 28, 2000
<PAGE>
EXHIBIT 23.4
NEW DIRECTOR'S CONSENT
OF
AAVID THERMAL TECHNOLOGIES, INC.
To the Board of Directors of
Aavid Thermal Technologies, Inc.:
I acknowledge that Aavid Thermal Technologies, Inc., a Delaware corporation
(the "Company"), filed a Form S-4 Registration Statement under the Securities
Act of 1933 on March 23, 2000, as amended on March 29, 2000 (Registration No.
333-33126) (the "Registration Statement"). I hereby consent to be named as a
future director of the Company in the Registration Statement and any subsequent
amendments to the Registration Statement.
/s/ BHARATAN R. PATEL
Bharatan R. Patel
<PAGE>
EXHIBIT 23.5
NEW DIRECTOR'S CONSENT
OF
AAVID THERMAL TECHNOLOGIES, INC.
To the Board of Directors of
Aavid Thermal Technologies, Inc.:
I acknowledge that Aavid Thermal Technologies, Inc., a Delaware corporation
(the "Company"), filed a Form S-4 Registration Statement under the Securities
Act of 1933 on March 23, 2000, as amended on March 29, 2000 (Registration No.
333-33126) ("Registration Statement"). I hereby consent to be named as a future
director of the Company in the Registration Statement and any subsequent
amendments to the Registration Statement.
/s/ RONALD F. BORELLI_____
Ronald F. Borelli
