1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended SEPTEMBER 30, 2000 Commission File NO 000-27308.
AAVID THERMAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 02-0466826
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE EAGLE SQUARE, SUITE 509, CONCORD, NH 03301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 224-1117
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Aggregate market value of the Registrant's common stock held by non-affiliates:
N/A. The number of outstanding shares of the registrant's Common Stock as of
November 10, 2000 was 940 shares of Class A, 1,000 shares of Class B and 40
shares of Class H, all of which are owned by Heat Holdings Corp. On February 2,
2000, a wholly-owned subsidiary of Heat Holdings Corp. was merged with and into
the Registrant with the Registrant becoming a wholly-owned subsidiary of Heat
Holdings Corp. and each share of Registrant's then outstanding common stock was
converted into $25.50 in cash. The Registrant's Common Stock is no longer
publicly traded; however, the Registrant's Senior Notes are publicly traded.
2
AAVID THERMAL TECHNOLOGIES, INC.
INDEX TO FORM 10-Q
PAGE
----
Part I. Financial Information
Item 1. Financial Statements
a.) Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999.................................................3
b.) Consolidated Statements of Operations for the quarter ended
September 30, 2000, the periods ended February 1, 2000 and
September 30, 2000, and the quarter and nine months ended
October 2, 1999...................................................4
c.) Consolidated Statements of Cash Flows for the periods ended
February 1, 2000 and September 30, 2000, and the nine months
ended October 2, 1999.............................................5
d.) Notes to Consolidated Financial
Statements........................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................16
Part II. Other Information
Item 1. Legal Proceedings..................................................20
Item 5. Other Information..................................................20
Item 6. Exhibits and Reports on Form 8-K...................................21
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
------------- -------------
(COMPANY) (PREDECESSOR)
ASSETS
Cash and cash equivalents $ 18,901 $ 18,273
Accounts receivable-trade, net 51,821 53,583
Inventories 24,905 30,059
Refundable income taxes -- 333
Deferred income taxes 2,789 1,963
Prepaid and other current assets 6,143 4,099
--------- ---------
Total current assets 104,559 108,310
Property, plant and equipment, net 56,973 60,955
Goodwill, net 189,866 50,330
Developed technology and assembled workforce, net 22,500 --
Other assets, net 14,692 9,357
--------- ---------
Total Assets $ 388,590 $ 228,952
========= =========
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY
Current portion of debt obligations $ 8,005 $ 2,337
Accounts payable - trade 17,416 21,805
Income taxes payable 9,196 4,637
Restructuring charges 1,749 2,333
Deferred revenue 7,769 7,765
Accrued expenses and other current liabilities 26,976 22,383
--------- ---------
Total current liabilities 71,111 61,260
Revolving line of credit 7,700 8,182
Term loan 45,000 78,000
12 3/4% senior subordinated notes 144,144 --
Other long term debt obligations 1,766 426
Deferred income taxes 6,506 707
--------- ---------
Total liabilities 276,227 148,575
--------- ---------
Commitments and Contingencies
Minority interests in consolidated subsidiaries 5,735 809
Stockholders' equity:
Common Stock, $0.01 par value; authorized 25,000,000 shares;
9,608,868 shares issued and outstanding
at December 31, 1999 -- 96
Class A Common Stock, $.0001 par value; authorized
1,000 shares; 940 shares issued and outstanding at
September 30, 2000 -- --
Class B Common Stock, $.0001 par value; authorized
1,000 shares; 1,000 shares issued and outstanding
at September 30, 2000 -- --
Class H Common Stock, $.0001 par value; authorized
1,000 shares; 40 shares issued and outstanding at
September 30, 2000 -- --
Warrants to purchase 60 shares of Class A common stock
and 60 shares of Class H common stock 4,560 --
Additional paid-in capital 147,187 58,660
Cumulative translation adjustment (1,495) (1,294)
Retained earnings (deficit) (43,624) 22,106
--------- ---------
Total stockholders' equity 106,628 79,568
--------- ---------
Total liabilities, minority interests and
stockholders' equity $ 388,590 $ 228,952
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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4
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
PERIOD FROM PERIOD FROM
FEBRUARY 2, JANUARY 1, FOR THE NINE
QUARTER ENDED TO TO MONTHS ENDED
SEPTEMBER 30, OCTOBER 2, SEPTEMBER FEBRUARY 1, OCTOBER 2,
2000 1999 30, 2000 2000 1999
------------- ------------ ----------- ------------- --------------
(COMPANY) (PREDECESSOR) (COMPANY) (PREDECESSOR) (PREDECESSOR)
Net sales $ 68,908 $ 47,611 $ 201,886 $ 23,442 $ 145,239
Cost of goods sold 43,106 30,262 133,934 15,516 90,769
-------- -------- --------- -------- ---------
Gross profit 25,802 17,349 67,952 7,926 54,470
Selling, general and administrative expenses 16,999 10,658 47,862 5,032 33,122
Amortization of intangible assets 7,413 316 19,998 182 932
Acquired in-process research and development -- -- 15,000 -- --
Research and development 2,660 1,689 6,787 752 5,154
-------- -------- --------- -------- ---------
Income (loss) from operations (1,270) 4,686 (21,695) 1,960 15,262
Interest expense, net (6,463) (71) (16,766) (816) (257)
Other income (expense), net 348 212 284 22 (277)
-------- -------- --------- -------- ---------
Income (loss) before income taxes and minority interest (7,385) 4,827 (38,177) 1,166 14,728
Income tax expense (2,173) (1,641) (5,324) (547) (5,241)
-------- -------- --------- -------- ---------
Income (loss) before minority interest (9,558) 3,186 (43,501) 619 9,487
Minority interest in (income) loss of consolidated
subsidiaries (78) -- (120) 6 --
-------- -------- --------- -------- ---------
Net income (loss) $ (9,636) $ 3,186 (43,621) $ 625 $ 9,487
======== ======== ========= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
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5
AAVID THERMAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
PERIOD FROM
FEBRUARY 2, PERIOD FROM
TO JANUARY 1, TO FOR THE NINE
SEPTEMBER 30, FEBRUARY 1, MONTHS ENDED
2000 2000 OCTOBER 2, 1999
------------- ------------- ---------------
(COMPANY) (PREDECESSOR) (PREDECESSOR)
Cash flows provided by operating activities:
Net income (loss) $ (43,621) $ 625 $ 9,487
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization 27,974 1,155 5,836
Acquired in-process research and development 15,000 -- --
Charge from inventory write-up to fair value 4,532 569 --
Gain on sale of property, plant and equipment (135) -- (268)
Deferred income taxes (464) (22) (311)
Accretion of discount on 12 3/4% senior subordinated
notes to interest expense 392 -- --
Minority interest in (loss) income 120 (6) --
Changes in assets and liabilities:
Accounts receivable - trade 2,540 (578) (4,448)
Inventories 5,131 (499) 1,061
Prepaid and other current assets (2,735) (53) (972)
Other long term assets 688 137 794
Accounts payable - trade (6,585) 2,346 (4,517)
Income taxes payable 3,345 337 3,446
Deferred revenue (105) 109 1,104
Accrued expenses and other current liabilities 3,349 (473) (1,825)
--------- -------- --------
Total adjustments 53,047 3,022 (100)
--------- -------- --------
Net cash provided by operating activities 9,426 3,647 9,387
Cash flows used in investing activities:
Purchase of property, plant & equipment (8,391) (308) (6,062)
Net proceeds from sale of fixed assets 1,119 -- 190
--------- -------- --------
Net cash used in investing activities (7,272) (308) (5,872)
Cash flows used in financing activities:
Issuance of common stock, net of expenses -- 349 1,806
Advances under line of credit 7,700 -- --
Repayments of line of credit (8,182) -- --
Advances under other debt obligations 53,936 -- 481
Principal payments under debt obligations (80,000) (25) (2,150)
Payment of merger and financing expenses (17,192) -- --
Repurchase of common stock, options and warrants (261,267) -- --
Net proceeds from 12 3/4% senior subordinated
notes and warrants 148,312 -- --
Proceeds from investors 152,000 -- --
--------- -------- --------
Net cash provided by (used in) financing activities (4,693) 324 137
Foreign exchange rate effect on cash and cash equivalents (407) (89) 132
Net increase (decrease) in cash and cash equivalents (2,946) 3,574 3,784
Cash and cash equivalents, beginning of period 21,847 18,273 20,027
--------- -------- --------
Cash and cash equivalents, end of period $ 18,901 $ 21,847 $ 23,811
========= ======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 14,552 $ 834 $ 368
========= ======== ========
Income taxes paid $ 2,834 $ 117 $ 1,776
========= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
(1) ORGANIZATION AND MERGER
Aavid Thermal Technologies, Inc. (the "Company" or "Aavid") is the leading
global provider of thermal management solutions for electronic products and the
leading developer and marketer of Computational Fluid Dynamics (CFD) software.
On August 23, 1999, the Company entered into an Agreement and Plan of
Merger ("Merger Agreement") with Heat Holdings Corp., a corporation newly formed
by Willis Stein & Partners II, L.P. (the "Purchaser"), and Heat Merger Corp., a
wholly-owned subsidiary of the Purchaser ("Merger Sub"), providing for the
merger of the Merger Sub with and into Aavid (the "Merger"), with Aavid being
the surviving corporation. The Merger was approved by the Company's stockholders
on January 29, 2000 and consummated on February 2, 2000. Pursuant to the Merger,
Aavid stockholders received $25.50 in cash for each outstanding share of common
stock, and outstanding stock options and warrants were cashed out. The Merger
was accounted for using the purchase method.
The Merger and related transaction costs were funded by a cash contribution
from the Purchaser of $152,000, proceeds of $148,312, net of original issue
discount, from the sale by the Company of 12 3/4% senior subordinated notes and
warrants due 2007, $54,700 pursuant to a new credit facility entered into by the
Company, and approximately $13,300 of cash on hand. Net stockholders' equity on
the date of acquisition was $156,560. Based upon estimates of the fair value of
assets acquired and liabilities assumed, goodwill of approximately $205,100 was
established. Approximately $142,300 of this goodwill is attributable to Aavid
Thermalloy, the hardware business, and will be amortized over 20 years. The
remainder, $62,800, is attributable to Fluent, the CFD software business, and
will be amortized over 4 years.
The Company recorded a valuation allowance of $12,163 to fully reserve the
unutilized net operating loss carryforwards outstanding at the time of the
acquisition. The Company now believes that the future utilization of those tax
loss carryforwards is now uncertain given that the Company expects to incur U.S.
tax losses resulting from the incremental interest expense arising from the debt
incurred to fund the merger. If the net operating losses are utilized, the
reversal of the valuation allowance will be recorded as a reduction of goodwill.
Of the $152,000 cash contribution from the Purchaser, $4,811 was invested
by Heat Holdings II Corp., a wholly-owned subsidiary of the Purchaser, to
acquire 95% of the common equity of Aavid Thermalloy, LLC, the thermal
management hardware business. The Company controls Aavid Thermalloy, LLC through
a preferred equity interest and holds a 5% common equity interest and thus
consolidates Aavid Thermalloy LLC in its results within the accompanying
financial statements.
On February 2, 2000, as part of the transactions relating to the Merger,
the Company issued 150,000 units (the "Units"), consisting of $150,000 aggregate
principal amount of its 12 3/4% Senior Subordinated Notes due 2007 (the "Notes")
and warrants (the "Warrants") to purchase an aggregate of 60 shares of the
Company's Class A Common Stock, par value $0.0001 per share, and 60 shares of
the Company's Class H Common Stock, par value $0.0001 per share. The Notes are
fully and unconditionally guaranteed on a joint and several basis by each of the
Company's domestic subsidiaries (the "Subsidiary Guarantors") (see note (9) for
selected consolidating financial statements of parent, guarantors and
non-guarantors). The Notes were issued pursuant to an Indenture (the
"Indenture") among the Company, the Subsidiary Guarantors and Bankers Trust
Company, as trustee. Approximately $4,600 of the proceeds from the sale of the
Units was allocated to the fair value of the Warrants and approximately $143,700
was allocated to the Notes, net of original issue discount of approximately
$1,700. The total discount of $6,300 is being accreted over the term of the
notes, using the effective interest rate method. This accretion is recorded as
interest expense within the accompanying statement of operations for the period
February 2, 2000 to September 30, 2000 and for the quarter ended September 30,
2000.
In connection with the Merger, the Company repaid all of the outstanding
term loan and revolving line of credit under its existing credit facility, which
aggregated approximately $88,200 at December 31, 1999, and entered into an
amended and restated credit facility (the "Amended and Restated Credit
Facility"). The Amended and Restated Credit Facility provides for a $22,000
revolving credit facility (the "Revolving Facility") (of which $1,700 was drawn
at the closing of the Merger) and a $53,000 term loan facility (the "Term
Facility") (which was fully drawn at the closing of the Merger). Subject to
compliance with the terms of the Amended and Restated Credit Facility,
borrowings under the Revolving Facility are available for working capital
purposes, capital expenditures and future acquisitions. The Revolving Facility
will terminate, and all amounts outstanding thereunder will be payable, on March
31, 2005. Principal on the Term Facility is required to be repaid in quarterly
installments commencing December 31, 2000 and ending
6
7
March 31, 2005 as follows: five installments of $2,000; four installments of
$2,500; four installments of $2,750; two installments of $3,200; two
installments of $3,900; and a final installment of $7,800. In addition,
commencing with our fiscal year ending December 31, 2001, the Company is
required to apply 50% of excess cash flow, as defined, to permanently reduce the
Term Facility. The Amended and Restated Credit Facility bears interest at a rate
equal to, at the Company's option, either (1) in the case of Eurodollar loans,
the sum of (x) the interest rate in the London interbank market for loans in an
amount substantially equal to the amount of borrowing and for the period of
borrowing selected by Aavid and (y) a margin of between 1.50% and 2.25%
(depending on the Company's consolidated leverage ratio (as defined in the
Amended and Restated Credit Facility)) or (2) the sum of the higher of (x)
Canadian Imperial Bank of Commerce's prime or base rate or (y) one-half percent
plus the latest overnight federal funds rate plus (z) a margin of between .25%
and 1.00% (depending on the Company's consolidated leverage ratio). At September
30, 2000, the interest rates on the Term Facility and the Revolving Facility
were 8.85%.
The Amended and Restated Credit Facility may be prepaid at any time in
whole or in part without penalty, and must be prepaid to the extent of certain
equity or asset sales. The Amended and Restated Credit Facility limits the
Company's ability to incur additional debt, to sell or dispose of assets, to
create or incur liens, to make additional acquisitions, to pay dividends, to
purchase or redeem its stock and to merge or consolidate with any other party.
In addition, the Amended and Restated Credit Facility requires that the Company
meet certain financial ratios, and provides the lenders with the right to
require the payment of all amounts outstanding under the facility, and to
terminate all commitments thereunder, if there is a change in control of Aavid.
The Amended and Restated Credit Facility is guaranteed by each of Heat Holdings
Corp. and Heat Holdings II Corp., and all of the Company's domestic subsidiaries
and secured by the Company's assets (including the assets and stock of its
domestic subsidiaries and a portion of the stock of its foreign subsidiaries).
As of September 30, 2000, $7,700 was outstanding under the revolving credit
facility and $53,000 was outstanding under the term facility, of which $8,000
was classified as current within the accompanying balance sheet.
The Company incurred approximately $7,085 in underwriting, legal and other
professional fees in connection with the issuance of the Notes and the
establishment of the Amended and Restated Credit Facility. These costs, in
addition to the $1,624 of unamortized costs associated with the original Credit
Facility, have been capitalized as deferred financing fees and are being
amortized over the respective terms of the related debt. This amortization is
recorded in interest expense in the accompanying statement of operations from
February 2, 2000 to September 30, 2000 and for the quarter ended September 30,
2000.
(2) BASIS OF PRESENTATION
These financial statements reflect the consolidated financial position of
the Company as of December 31, 1999 and the consolidated results of operations
and cash flows of the Company for the period from January 1, 2000 to February 1,
2000 and the quarter and nine months ended October 2, 1999 (collectively
"Predecessor financial statements"). The Predecessor financial statements have
been prepared using the historical cost of the Company's assets and have not
been adjusted to reflect the merger with Heat Holdings Corp. The accompanying
financial statements as of September 30, 2000, for the quarter ended September
30, 2000 and for the period from February 2, 2000 to September 30, 2000 reflect
the consolidated financial position, results of operations, and cash flows of
the Company subsequent to the date of the merger and include adjustments
required under the purchase method of accounting.
In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments, consisting only of normal
adjustments, necessary to present fairly the financial position of Aavid Thermal
Technologies, Inc. and its consolidated subsidiaries at September 30, 2000 and
December 31, 1999, and the results of operations and cash flows for the period
from January 1, 2000 to February 1, 2000, the period from February 2, 2000 to
September 30, 2000 and the quarter and nine months ended October 2, 1999. The
results of operations for the period from January 1, 2000 to February 1, 2000
and the period from February 2, 2000 to September 30, 2000 should not
necessarily be taken as indicative of the results of operations that may be
expected for the entire 2000 year.
Certain reclassifications have been made to the 1999 financial statements
to conform to the 2000 presentation.
The financial information as of and for the period ended September 30, 2000
should be read in conjunction with the financial statements contained in the
Company's Form 10-K Annual Report for 1999.
7
8
(3) ACCOUNTS RECEIVABLE
The components of accounts receivable at September 30, 2000 and December
31, 1999 are as follows:
SEPTEMBER 30, DECEMBER 31,
2000 1999
(COMPANY) PREDECESSOR)
------------- ------------
(UNAUDITED)
Accounts receivable $ 54,399 $ 55,765
Allowance for doubtful accounts (2,578) (2,182)
-------- -------
Net accounts receivable $ 51,821 $ 53,583
======== ========
(4) INVENTORIES
Inventories are valued at the lower of cost or market (first-in,
first-out), and consist of materials, labor and overhead. The components of
inventories at September 30, 2000 and December 31, 1999 are as follows:
SEPTEMBER 30, DECEMBER 31,
2000 1999
(COMPANY) (PREDECESSOR)
------------- -------------
(UNAUDITED)
Raw materials $ 12,629 $ 15,983
Work-in-process 5,874 5,245
Finished goods 6,402 8,831
-------- --------
$ 24,905 $ 30,059
======== ========
(5) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which specifies the presentation and
disclosure requirements for comprehensive income. The following details
comprehensive income for the periods reported herein:
PERIOD FROM PERIOD FROM
FEBRUARY 2, JANUARY 1, FOR THE NINE
2000 TO 2000 MONTHS ENDED
QUARTER ENDED SEPTEMBER 30, TO FEBRUARY 1, OCTOBER 2,
SEPTEMBER 30, OCTOBER 2000 2000 1999
2000 2, 1999 (COMPANY) PREDECESSOR) (PREDECESSOR)
------------- ------------- ------------- -------------- -------------
(COMPANY) (PREDECESSOR) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net income (loss) $ (9,636) $ 3,186 $ (43,621) $ 625 $9,487
Foreign currency translation adjustment, net
of taxes (350) 416 (68) (53) (56)
--------- -------- ---------- ------- -------
Comprehensive income (loss) $ (9,986) $ 3,602 $ (43,689) $ 572 $9,431
========= ======== ========== ======= ======
(6) IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the Merger, the Company allocated $15,000 of the
purchase price to in-process research and development projects. This allocation
represented the estimated fair value based on risk-adjusted cash flows related
to the incomplete software research and development projects of Fluent, Inc. At
the date of the merger, the development of these projects had not yet reached
technological feasibility and the research and development in progress had no
alternative future uses. Accordingly, these costs were expensed as of the merger
date.
The Company allocated values to the in-process research and development
based on an in-depth assessment of the R&D projects. The value assigned to these
assets was limited to significant research projects for which technological
feasibility had not been established, including development, engineering and
testing activities associated with the introduction of the acquired in-process
technologies.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the acquired technology into commercially viable
products, estimating the resulting net cash flows from the projects, and
discounting the net cash flows to
8
9
their present value. The revenue projection used to value the in-process
research and development was based on historical results, estimates of relevant
market sizes and growth factors, expected trends in technology, and the nature
and expected timing of new product introductions by the Company and its
competitors. The resulting net cash flows from such projects are based on
management's estimates of cost of sales, operating expenses, and income taxes
from such projects.
The nature of the efforts to develop the acquired in-process technologies
into commercially viable products and services principally related to the
completion of certain planning, designing, coding, prototyping, and testing
activities that were necessary to establish that the developmental software
technologies met their design specifications including functional, technical,
and economic performance requirements. At the merger date, the technologies
under development were between 40% and 80% complete, based upon project
man-month and cost data. Anticipated completion dates ranged from 6 to 18
months, at which times the Company expects to begin selling the developed
products. Development costs to complete the R&D were estimated at approximately
$4,000.
Fluent's primary in-process R&D projects involved developing: (i) Fluent
version 6.0; (ii) Gambit version 2.0; (iii) materials processing functionality;
and, (iv) advanced infrastructure technology. Fluent 6.0 represents the
Company's next-generation computational fluid dynamics (CFD) software engine.
Gambit 2.0 includes new pre-processor CFD technologies. The development of
materials processing technologies is designed to address CFD needs in new
markets. The advanced infrastructure technology establishes a new platform upon
which future products will be more efficiently and rapidly developed.
Aggregate revenues for the developmental Fluent products were estimated to
peak within three years of acquisition and then decline steadily as other new
products and technologies are expected to enter the market. Operating expenses
were estimated based on historical results and management's analysis of Fluent's
cost structure. Projected operating expenses as a percentage of revenues were
expected to be stable for the foreseeable future.
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. A discount rate of 18
percent was considered appropriate for the in-process R&D, and a discount rate
of 15 percent was appropriate for the existing products and technologies. These
discount rates were commensurate with the Fluent's long history and market
leadership position. The discount rate utilized for the in-process technology
was higher than Aavid's cost of capital due to the inherent uncertainties
surrounding the successful development of the purchased in-process technology,
the useful life of such technology, the profitability levels of such technology
and the uncertainty of technological advances that are unknown at this time.
With respect to the acquired in-process technology, the calculations of
value were adjusted to reflect the development efforts of Fluent prior to the
close of the merger. In doing so, consideration was given to each major
project's stage of completion, the complexity of the work completed to date, the
difficulty of completing the remaining development, costs already incurred, and
the projected cost to complete the projects.
The Company believes that the foregoing assumptions used in the forecasts
were reasonable at the time of the merger. No assurance can be given, however,
that the underlying assumptions used to estimate sales, development costs or
profitability, or the events associated with such projects, will transpire as
estimated. For these reasons, actual results may vary from projected results.
The most significant and uncertain assumptions relating to the in-process
projects relate to the projected timing of completion of, and revenues
attributable to, each project.
If these projects are not successfully developed, the sales and
profitability of the Fluent division may be adversely affected in future
periods. Additionally, the value of other acquired intangible assets may become
impaired.
(7) NON-RECURRING CHARGES AND RESTRUCTURING RESERVES
During the third quarter of 1998, the Company recorded a non-recurring
pre-tax charge of $4,882 reflecting the costs associated with the closure of the
Company's Manchester, New Hampshire facility. The restructuring was completed in
1999 except for final net lease payments.
9
10
The following amounts have been charged against the Manchester
restructuring reserves during the period ended September 30, 2000:
CHARGES AGAINST
RESERVES FOR RESTRUCTURING
THE RESERVES
RESTRUCTURING PERIOD ENDED BALANCE
RESERVES BALANCE AT SEPTEMBER 30, AT SEPTEMBER
DECEMBER 31, 1999 2000 30, 2000
------------------- --------------- -------------
Lease terminations and leasehold improvements reserve 203 (36) 167
---- ---- ----
Total $203 $(36) $167
==== ==== ====
Approximately $2,130 of restructuring charges have been recorded in
connection with the Company's October 1999 acquisition of Thermalloy, the
thermal management business of Bowthorpe plc. The restructuring plan includes
initiatives to integrate the operations of the Company and Thermalloy and reduce
overhead. The primary components of these plans relate to (a) the closure of
duplicative Thermalloy operations in Hong Kong and the United Kingdom, (b) the
elimination of duplicative selling, general and administration functions of
Thermalloy on a global basis and (c) the termination of certain contractual
obligations. The Company expects these activities to result in a workforce
reduction of approximately 128 individuals. Management is in the process of
implementing its restructuring plans related to Thermalloy, and, accordingly,
the amounts recorded are based on management's current estimates of those costs.
The majority of the restructuring activities are expected to be completed by the
end of 2000. During the nine months ended September 30, 2000, 96 individuals
were terminated. The following amounts have been charged against the Thermalloy
restructuring reserves during the period ended September 30, 2000:
INCREASES TO
RESERVES
CHARGED TO
CHARGES AGAINST GOODWILL FOR
RESTRUCTURING RESERVES FOR THE THE RESTRUCTURING
RESERVES BALANCE PERIOD ENDED PERIOD ENDED RESERVES BALANCE
AT SEPTEMBER 30, SEPTEMBER 30, AT SEPTEMBER 30,
DECEMBER 31, 1999 2000 2000 2000
----------------- ---------------- ------------- ----------------
Lease terminations and leasehold improvements reserve $ 670 $ (95) $141 $ 716
Employee separation 1,460 (1,488) 639 611
------ ------- ---- ------
Total $2,130 $(1,583) $780 $1,327
====== ======= ==== ======
Approximately $433 of restructuring charges were recorded in connection
with the merger of Aavid with the Purchaser. The restructuring plans include
initiatives to integrate the operations of the Company and reduce overhead. The
primary components of these plans relate to (a) the closure of operations in
California and the United Kingdom and (b) the termination of certain contractual
obligations. The Company expects these activities to result in a workforce
reduction of approximately 90 individuals. Management is in the process of
finalizing its plans related to this restructuring, and, accordingly, the
amounts recorded are based on management's current estimates of those costs. The
Company will finalize these plans during 2000 and the majority of the
restructuring activities are expected to be completed by the end of 2000. During
the nine months ended September 30, 2000, 89 individuals were terminated. The
following amounts have been charged against the merger restructuring reserves
during the nine months ended September 30, 2000:
INCREASES TO
RESERVES
CHARGED TO
CHARGES AGAINST GOODWILL FOR RESTRUCTURING
RESERVES FOR THE THE RESERVES
RESTRUCTURING PERIOD ENDED PERIOD ENDED BALANCE
RESERVES BALANCE AT SEPTEMBER 30, SEPTEMBER 30, AT SEPTEMBER
APRIL 1, 2000 2000 2000 30, 2000
------------------- ---------------- ------------- -------------
Lease terminations and leasehold improvements reserve $ 30 $(357) $463 $136
Employee separation 403 (299) 15 119
---- ----- ---- ----
Total $433 $(656) $478 $255
==== ===== ==== ====
(8) SEGMENT REPORTING
Aavid provides thermal management solutions for microprocessors and
integrated circuits ("ICs") for computer and network and industrial
applications. The Company consists of three distinct reportable segments: (1)
thermal management products; (2) computational fluid dynamics ("CFD") software;
and (3) thermal design services. Aavid's thermal management products consist of
products and services that solve problems associated with the dissipation of
unwanted heat in electronic and electrical components and systems. The Company
develops and offers CFD software for computer modeling and fluid flow analysis
of products and processes that reduce time and expense associated with physical
models and the facilities to test them. The Company also provides thermal design
services to customers who choose to outsource their thermal design needs.
10
11
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies as disclosed in the Company's
Form 10-K for the year ended December 31, 1999.
The Company accounts for inter-segment sales and transfers as if the sales
or transfers were to third parties, that is, at current market prices.
Aavid's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment requires different marketing and sales strategies.
The following summarizes the operations of each reportable segment for the
quarters ending September 30, 2000 and October 2, 1999:
SEGMENT
REVENUES INCOME (LOSS)
FROM BEFORE TAXES ASSETS (NET OF
EXTERNAL AND MINORITY INTERCOMPANY
CUSTOMERS INTERESTS BALANCES)
--------- ------------- --------------
September 30, 2000 (COMPANY)
Thermal Products $55,398 $ 4,643 $ 186,091
CFD Software 12,999 2,242 31,638
Thermal Design Services 511 165 1,092
Corporate Office -- (14,435) 169,769
------- -------- ---------
Total................... $68,908 $ (7,385) $ 388,590
======= ======== =========
October 2, 1999 (PREDECESSOR)
Thermal Products $36,376 $ 3,386 $ 97,849
CFD Software 10,956 1,533 28,515
Thermal Design Services 279 (92) 902
Corporate Office -- -- 9,109
------- -------- ---------
Total................... $47,611 $ 4,827 $ 136,375
======= ======== =========
The following summarizes the operations of each reportable segment for the
periods from February 2, 2000 to September 30, 2000, January 1, 2000 to February
1, 2000 and the nine months ended October 2, 1999:
SEGMENT
REVENUES INCOME (LOSS)
FROM BEFORE TAXES
EXTERNAL AND MINORITY
CUSTOMERS INTERESTS
---------- -------------
February 2, 2000 to September 30, 2000 (COMPANY)
Thermal Products $ 163,363 $ 8,482
CFD Software 37,191 7,273
Thermal Design Services 1,332 539
Corporate Office -- (54,471)
--------- --------
Total....................................... $ 201,886 $(38,177)
========= ========
January 1, 2000 to February 1, 2000 (PREDECESSOR)
Thermal Products 18,144 --
CFD Software 5,208 1,840
Thermal Design Services 90 (43)
Corporate Office -- (631)
--------- --------
Total....................................... $ 23,442 $ 1,166
========= ========
Nine months ended October 2, 1999 (PREDECESSOR)
Thermal Products 108,477 8,770
CFD Software 35,899 6,032
Thermal Design Services 863 (74)
Corporate Office -- --
--------- --------
Total....................................... $ 145,239 $ 14,728
========= ========
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.
11
12
FOR THE FOR THE PERIOD
QUARTER ENDED FOR THE PERIOD FEBRUARY 2, JANUARY 1, 2000 FOR THE NINE
SEPTEMBER 30, 2000 TO FEBRUARY 1, FOR THE QUARTER ENDED MONTHS ENDED
2000 TO SEPTEMBER 30, 2000 2000 OCTOBER 2, 1999 OCTOBER 2, 1999
------------- -------------------------- --------------- ------------------------- ---------------
(COMPANY) (COMPANY) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
LONG-LIVED LONG-LIVED
ASSETS ASSETS
AS OF PERIOD AS OF PERIOD
REVENUES REVENUES END REVENUES REVENUES END REVENUES
------------- ----------- ------------ --------------- -------- ------------ ---------------
United States $ 46,252 $ 136,183 $263,611 $ 14,967 $ 31,559 $38,914 $ 99,738
Taiwan 3,131 10,026 1,885 1,193 4,531 1,339 13,818
China 5,045 18,813 2,611 1,796 8,405 1,947 21,015
United Kingdom 7,719 25,888 3,870 1,608 3,933 2,190 12,857
Other International 17,897 47,318 12,054 6,968 8,320 4,903 27,825
Intercompany
eliminations (11,136) (36,342) -- (3,090) (9,137) -- (30,014)
---------- ---------- -------- --------- --------- ------- ---------
Total $ 68,908 $ 201,886 $284,031 $ 23,442 $ 47,611 $49,293 $145,239
========= ========= ======== ========= ======== ======= ========
(9) SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (UNAUDITED)
The Company's wholly-owned domestic subsidiaries have jointly and severally
guaranteed, on a senior subordinated basis, the $150,000 principal amount of the
Company's 12 3/4% Senior Subordinated Notes, due 2007. The guarantors include
the combined domestic operations of Aavid Thermalloy, LLC and Fluent, Inc. and
the Company's subsidiary Applied Thermal Technologies, Inc. The non-guarantors
include the combined foreign operations of Aavid Thermalloy, LLC and Fluent,
Inc. The consolidating condensed financial statements of the 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.
CONDENSED CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
ASSETS
Cash and cash equivalents .............................. $ 1,200 $ 6,371 $ 11,330 $ -- $ 18,901
Accounts receivable-trade, net ......................... -- 26,459 24,329 1,033 51,821
Inventories ............................................ -- 14,075 10,474 356 24,905
Due (to) from affiliate, net ........................... 81,847 (8,836) 6,544 (79,555) --
Refundable taxes ....................................... (180) -- -- 180 --
Deferred income taxes .................................. 13,279 (1,636) 326 (9,180) 2,789
Prepaid and other current assets ....................... 351 2,676 5,383 (2,267) 6,143
--------- --------- -------- --------- ---------
Total current assets ................................... 96,497 39,109 58,386 (89,433) 104,559
Property, plant and equipment, net ..................... 85 40,289 14,344 2,255 56,973
Investment in subsidiaries ............................. 188,489 -- -- (188,489) --
Other assets, net ...................................... 20,333 171,953 4,853 29,919 227,058
--------- --------- -------- --------- ---------
Total assets ........................................... $ 305,404 $ 251,351 $ 77,583 $(245,748) $ 388,590
========= ========= ======== ========= =========
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY
Current portion of debt obligations .................... $ 8,000 $ -- $ 5 $ -- $ 8,005
Accounts payable-trade ................................. 202 7,686 10,834 (1,306) 17,416
Income taxes payable ................................... (11,261) 14,891 6,036 (470) 9,196
Deferred revenue ....................................... -- 4,439 3,330 -- 7,769
Accrued expenses and other current liabilities ......... 5,269 15,436 8,187 (167) 28,725
--------- --------- -------- --------- ---------
Total current liabilities .............................. 2,210 42,452 28,392 (1,943) 71,111
--------- --------- -------- --------- ---------
Debt obligations, net of current portion ............... 196,844 696 1,070 -- 198,610
Deferred income taxes ................................ (278) 11,479 (56) (4,639) 6,506
--------- --------- -------- --------- ---------
Total liabilities ...................................... 198,776 54,627 29,406 (6,582) 276,227
--------- --------- -------- --------- ---------
Commitments and contingencies
Minority interests ..................................... -- 4,994 1,132 (391) 5,735
Stockholders' equity:
Common Stock, par value ................................ -- -- -- -- --
Warrants ............................................... 4,560 -- -- -- 4,560
Additional paid-in capital ............................. 147,187 207,561 2,391 (209,952) 147,187
Cumulative translation adjustment ...................... (1,495) 1,861 (2,410) 549 (1,495)
Retained earnings (deficit) ............................ (43,624) (17,692) 47,064 (29,372) (43,624)
--------- --------- -------- --------- ---------
Total stockholders' equity ............................. 106,628 191,730 47,045 (238,775) 106,628
--------- --------- -------- --------- ---------
Total liabilities, minority interests and
stockholders' equity ................................ $ 305,404 $ 251,351 $ 77,583 $(245,748) $ 388,590
========= ========= ======== ========= =========
12
13
CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1999 (PREDECESSOR)
---------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
ASSETS
Cash and cash equivalents .............................. $ 148 $ 5,134 $ 13,040 $ (49) $ 18,273
Notes receivable ....................................... -- 200 (200) --
Accounts receivable-trade, less allowance for
doubtful accounts ................................... -- 27,294 26,606 (317) 53,583
Inventories ............................................ -- 17,372 13,041 (354) 30,059
Due (to) from affiliates, net .......................... 112,125 (28,289) (16,306) (67,530) --
Refundable taxes ....................................... (180) -- 333 180 333
Deferred income taxes .................................. 7,066 3,584 573 (9,260) 1,963
Prepaid and other current assets ....................... 160 1,746 2,192 1 4,099
--------- -------- -------- -------- ---------
Total current assets ................................... 119,319 27,041 39,479 (77,529) 108,310
Property, plant and equipment, net ..................... 146 41,952 20,023 (1,166) 60,955
Investment in subsidiaries ............................. 45,329 -- -- (45,329) --
Other assets, net ...................................... 1,138 23,352 10,962 24,235 59,687
--------- -------- -------- -------- ---------
Total assets ........................................... $ 165,932 $ 92,345 $ 70,464 $(99,789) $ 228,952
========= ======== ======== ======== =========
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY
Current portion of debt obligations .................... 2,000 317 20 -- 2,337
Accounts payable-trade ................................. 254 6,727 14,960 (136) 21,805
Income taxes payable ................................... (6,380) 10,840 4,221 (4,044) 4,637
Deferred revenue ....................................... -- 4,408 3,357 -- 7,765
Accrued expenses and other current liabilities ......... 4,586 12,890 7,219 21 24,716
--------- -------- -------- -------- ---------
Total current liabilities .............................. 460 35,182 29,777 (4,159) 61,260
Debt obligations, net of current portion ............... 86,182 1,253 5,295 (6,122) 86,608
Deferred income taxes .................................. (278) 5,725 (99) (4,641) 707
--------- -------- -------- -------- ---------
Total liabilities ...................................... 86,364 42,160 34,973 (14,922) 148,575
Commitments and contingencies
Minority interest in consolidated subsidiary ........... -- -- 809 -- 809
Stockholders' equity:
Common stock, $0.01 par value; authorized
25,000,000 Shares; 9,608,868 shares
issued and outstanding ............................... 96 -- -- -- 96
Additional paid-in capital ............................. 58,660 11,772 2,438 (14,210) 58,660
Cumulative translation adjustment ...................... (1,294) 148 (1,016) 868 (1,294)
Retained earnings ...................................... 22,106 38,265 33,260 (71,525) 22,106
--------- -------- -------- -------- ---------
Total stockholders' equity ............................. 79,568 50,185 34,682 (84,867) 79,568
--------- -------- -------- -------- ---------
Total liabilities and stockholders' equity ............. $ 165,932 $ 92,345 $ 70,464 $(99,789) $ 228,952
========= ======== ======== ======== =========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
----------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Net sales .............................................. $ -- $ 46,235 $ 33,792 $(11,119) $ 68,908
Cost of goods sold ..................................... -- 30,723 20,851 (8,468) 43,106
--------- -------- -------- -------- ---------
Gross profit ........................................... -- 15,512 12,941 (2,651) 25,802
Selling, general and administrative expenses ........... 1,092 18,604 6,419 (1,703) 24,412
Research and development ............................... -- 1,961 2,089 (1,390) 2,660
--------- -------- -------- -------- ---------
Income (loss) from operations .......................... (1,092) (5,053) 4,433 442 (1,270)
Interest income (expense) net .......................... (6,284) (146) (33) -- (6,463)
Other income (expense), net ............................ 613 111 277 (653) 348
Equity in income of subsidiaries ....................... (2,873) -- -- 2,873 --
--------- -------- -------- -------- ---------
Income (loss) before income taxes and minority
interests ............................................ (9,636) (5,088) 4,677 2,662 (7,385)
Income tax benefit (expense) ........................... -- (766) (1,282) (125) (2,173)
--------- -------- -------- -------- ---------
Income (loss) before minority interests ................ (9,636) (5,854) 3,395 2,537 (9,558)
Minority interests in income of consolidated
subsidiaries ......................................... -- (20) (58) -- (78)
--------- -------- -------- -------- ---------
Net income (loss) ...................................... $ (9,636) $ (5,874) $ 3,337 $ 2,537 $ (9,636)
========= ======== ======== ======== =========
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED OCTOBER 2, 1999 (UNAUDITED) (PREDECESSOR)
----------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Net sales .............................................. $ -- $ 31,662 $ 25,188 $ (9,239) $ 47,611
Cost of goods sold ..................................... -- 21,774 15,862 (7,374) 30,262
--------- -------- -------- -------- ---------
Gross profit ........................................... -- 9,888 9,326 (1,865) 17,349
Selling, general and administrative expenses ........... 858 7,601 4,319 (1,804) 10,974
Research and development ............................... -- 1,490 1,505 (1,306) 1,689
--------- -------- -------- -------- ---------
Income (loss) from operations .......................... (858) 797 3,502 1,245 4,686
Interest income (expense), net ......................... -- (81) 10 -- (71)
Other income (expense), net ............................ 858 26 2 (674) 212
Equity in income of subsidiaries ....................... 3,186 -- -- (3,186) --
--------- -------- -------- -------- ---------
Income (loss) before income taxes ...................... 3,186 742 3,514 (2,615) 4,827
Income tax benefit (expense) ........................... -- (686) (740) (215) (1,641)
--------- -------- -------- -------- ---------
Net income (loss) ...................................... $ 3,186 $ 56 $ 2,774 $ (2,830) $ 3,186
========= ======== ======== ======== =========
13
14
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD FROM FEBRUARY 2, TO SEPTEMBER 30, 2000 (UNAUDITED)
----------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Net sales .............................................. $ -- $136,696 $101,943 $(36,753) $ 201,886
Cost of goods sold ..................................... -- 96,838 65,965 (28,869) 133,934
--------- -------- -------- -------- ---------
Gross profit ........................................... -- 39,858 35,978 (7,884) 67,952
Selling, general and administrative expenses ........... 2,417 50,502 19,443 (4,502) 67,860
Acquired research and development ...................... -- 15,000 -- -- 15,000
Research and development ............................... -- 5,277 6,508 (4,998) 6,787
--------- -------- -------- -------- ---------
Income (loss) from operations .......................... (2,417) (30,921) 10,027 1,616 (21,695)
Interest income (expense) net .......................... (16,313) (333) (3) (117) (16,766)
Other income (expense), net ............................ 1,634 204 114 (1,668) 284
Equity in income of subsidiaries ....................... (30,898) -- -- 30,898 --
--------- -------- -------- -------- ---------
Income (loss) before income taxes and minority
interests ........................................... (47,994) (31,050) 10,138 30,729 (38,177)
Income tax benefit (expense) ........................... 4,373 (2,596) (3,523) (3,578) (5,324)
--------- -------- -------- -------- ---------
Income (loss) before minority interests ................ (43,621) (33,646) 6,615 27,151 (43,501)
Minority interests in income of consolidated
subsidiaries ........................................ -- (33) (91) 4 (120)
--------- -------- -------- -------- ---------
Net income (loss) ...................................... $ (43,621) $(33,679) $ 6,524 $ 27,155 $ (43,621)
========= ======== ======== ======== =========
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR
THE PERIOD FROM JANUARY 1, TO FEBRUARY 1, 2000 (UNAUDITED)(PREDECESSOR)
-----------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Net sales .............................................. $ -- $ 14,810 $ 11,662 $ (3,030) $ 23,442
Cost of goods sold ..................................... -- 9,912 7,796 (2,192) 15,516
--------- -------- -------- -------- ---------
Gross profit ........................................... -- 4,898 3,866 (838) 7,926
Selling, general and administrative expenses ........... 19 3,324 2,157 (286) 5,214
Research and development ............................... -- 577 824 (649) 752
--------- -------- -------- -------- ---------
Income (loss) from operations .......................... (19) 997 885 97 1,960
Interest (expense), net ................................ (818) (9) -- 11 (816)
Other income (expense), net ............................ 206 13 (21) (176) 22
Equity in income of subsidiaries ....................... 1,256 -- -- (1,256) --
--------- -------- -------- -------- ---------
Income (loss) before income taxes and minority interests 625 1,001 864 (1,324) 1,166
Income tax benefit (expense) ........................... -- (540) (419) 412 (547)
--------- -------- -------- -------- ---------
Income (loss) before minority interests ................ 625 461 445 (912) 619
Minority interests in loss of consolidated subsidiaries -- -- 6 -- 6
--------- -------- -------- -------- ---------
Net income (loss) ...................................... $ 625 $ 461 $ 451 $ (912) $ 625
========= ======== ======== ======== =========
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED OCTOBER 2, 1999 (UNAUDITED) (PREDECESSOR)
----------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Net sales .............................................. $ -- $102,745 $ 72,879 $(30,385) $ 145,239
Cost of goods sold ..................................... -- 67,530 47,226 (23,987) 90,769
--------- -------- -------- -------- ---------
Gross profit ........................................... -- 35,215 25,653 (6,398) 54,470
Selling, general and administrative expenses ........... 2,871 24,439 12,485 (5,741) 34,054
Research and development ............................... -- 4,742 4,777 (4,365) 5,154
--------- -------- -------- -------- ---------
Income (loss) from operations .......................... (2,871) 6,034 8,391 3,708 15,262
Interest income (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 (loss) before income taxes ...................... 9,438 6,036 8,471 (9,217) 14,728
Income tax benefit (expense) ........................... 49 (2,827) (2,029) (434) (5,241)
--------- -------- -------- -------- ---------
Net income (loss) ...................................... $ 9,487 $ 3,209 $ 6,442 $ (9,651) $ 9,487
========= ======== ======== ======== =========
14
15
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM FEBRUARY 2, 2000 TO SEPTEMBER 30, 2000 (UNAUDITED)
----------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Net cash provided by (used in) operating activities .... $ (6,404) $ 3,229 $ 12,648 $ (47) $ 9,426
Cash flows used in investing activities:
Notes receivable ....................................... -- -- -- -- --
Proceeds from sale of fixed assets ..................... -- -- 1,119 -- 1,119
Purchases of property, plant and equipment ............. -- (5,371) (3,004) (16) (8,391)
--------- -------- -------- -------- ---------
Net cash provided by (used in) investing activities .... -- (5,371) (1,885) (16) (7,272)
Cash flows provided by (used in) financing activities:
Advances under other debt obligations .................. 66,095 (5,839) (6,320) -- 53,936
Principal payments on other debt obligations ........... (80,000) -- -- -- (80,000)
Advances under line of credit .......................... 7,700 -- -- -- 7,700
Repayments of line of credit ........................... (8,182) -- -- -- (8,182)
Payment of merger and financing expense ................ (17,192) -- -- -- (17,192)
Repurchase of common stock, options and warrants ....... (261,267) -- -- -- (261,267)
Net proceeds from 12 3/4% senior subordinated notes .... 148,312 -- -- -- 148,312
Proceeds from investors ................................ 152,000 -- -- -- 152,000
--------- -------- -------- -------- ---------
Net cash provided by (used in) financing activities .... 7,466 (5,839) (6,320) -- (4,693)
Foreign exchange effect on cash and cash equivalents ... -- -- (407) -- (407)
--------- -------- -------- -------- ---------
Net increase (decrease) in cash and cash equivalents ... 1,062 (7,981) 4,036 (63) (2,946)
Cash and cash equivalents, beginning of period ......... 138 14,352 7,294 63 21,847
--------- -------- -------- -------- ---------
Cash and cash equivalents, end of period ............... $ 1,200 $ 6,371 $ 11,330 $ -- $ 18,901
========= ======== ======== ======== =========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR
THE PERIOD FROM JANUARY 1, TO FEBRUARY 1, 2000 (UNAUDITED) (PREDECESSOR)
------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Net cash provided by (used in) operating activities .... $ (363) $ 9,533 $ (5,614) $ 91 $ 3,647
Cash flows used in investing activities:
Proceeds from sale of property, plant and equipment
Note receivable ........................................ -- -- -- -- --
Purchases of property, plant and equipment ............. -- (288) (38) 18 (308)
--------- -------- -------- -------- ---------
Net cash used in investing activities .................. -- (288) (38) 18 (308)
Cash flows provided by (used in) financing activities:
Issuance of common stock, net of expenses .............. 349 -- -- -- 349
Advances under line of credit
Repayments of line of credit
Advances under debt obligations
Principal payments on debt obligations ................. -- (25) -- -- (25)
--------- -------- -------- -------- ---------
Net cash provided by (used in) financing activities .... 349 (25) -- -- 324
Foreign exchange effect on cash and cash equivalents ... -- -- (89) -- (89)
--------- -------- -------- -------- ---------
Net increase (decrease) in cash and cash equivalents ... (14) 9,220 (5,741) 109 3,574
Cash and cash equivalents, beginning of period ......... 152 5,132 13,035 (46) 18,273
--------- -------- -------- -------- ---------
Cash and cash equivalents, end of period ............... $ 138 $ 14,352 $ 7,294 $ 63 $ 21,847
========= ======== ======== ======== =========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 2, 1999 (UNAUDITED) (PREDECESSOR)
----------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Net cash provided by (used in) operating activities .... $ (1,859) $ 8,505 $ 2,369 $ 372 $ 9,387
Cash flows used in investing activities:
Notes receivable ....................................... -- -- -- -- --
Proceeds from sale of property, plant and equipment .... -- 3 126 61 190
Purchases of property, plant and equipment ............. (14) (3,972) (2,198) 122 (6,062)
--------- -------- -------- -------- ---------
Net cash used in investing activities .................. (14) (3,969) (2,072) 183 (5,872)
Cash flows provided by (used in) financing activities:
Issuance of common stock, net of expenses .............. 1,806 -- -- -- 1,806
Advances under line of credit .......................... -- -- -- -- --
Repayments of line of credit ........................... -- -- -- -- --
Advances under debt obligations ........................ -- 7 474 -- 481
Principal payments on debt obligations ................. -- (2,108) 657 (699) (2,150)
--------- -------- -------- -------- ---------
Net cash provided by (used in) financing activities .... 1,806 (2,101) 1,131 (699) 137
Foreign exchange effect on cash and cash equivalents ... -- (143) (47) 322 132
--------- -------- -------- -------- ---------
Net increase in cash and cash equivalents .............. (67) 2,292 1,381 178 3,784
Cash and cash equivalents, beginning of period ......... 84 12,971 6,985 (13) 20,027
--------- -------- -------- -------- ---------
Cash and cash equivalents, end of period ............... $ 17 $ 15,263 $ 8,366 $ 165 $ 23,811
========= ======== ======== ======== =========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this Quarterly Report on Form 10-Q concerning the Company's
business outlook or future economic performance; anticipated profitability,
revenues, expenses or other financial items; introductions and advancements in
development of products, and plans and objectives related thereto; and
statements concerning assumptions made or expectations as to any future events,
conditions, performance or other matters, are "forward-looking statements" as
that term is defined under the Federal Securities Laws. Forward-looking
statements are subject to risks, uncertainties and other factors that could
cause actual results to differ materially from those stated in such statements.
Such risks, uncertainties and factors include, but are not limited to, changes
in the Company's markets, particularly the potentially volatile semiconductor
market, changes in and delays in product development plans and schedules,
customer acceptance of new products, changes in pricing or other actions by
competitors, patents owned by the Company and its competitors, risk of foreign
operations and markets, the Company's substantial indebtedness, the Company's
ability to integrate its Thermalloy acquisition and general economic conditions,
as well as other risks detailed in the Company's filings with the Securities and
Exchange Commission, including the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
The Company undertakes no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
OVERVIEW
Aavid Thermal Technologies, Inc. (the "Company" or "Aavid") is the leading
global provider of thermal management solutions for electronics products and the
leading developer and marketer of computational fluid dynamics (CFD) software.
Each of these businesses has a leading reputation for high product quality,
service excellence and engineering innovation in its market. Aavid designs,
manufactures and distributes on a worldwide basis thermal management products
that dissipate heat from microprocessors and industrial electronics products.
Aavid's products include heat sinks, interface and attachment accessories, fans,
heat spreaders and liquid cooling and phase change devices that can be
configured to meet customer-specific needs. CFD software is used in complex
computer-generated modeling of fluid flows, heat and mass transfer and chemical
reactions. Aavid's CFD software is used in a variety of industries, including
the automotive, aerospace, chemical processing, power generation, electronics
and bio-medical industries.
On August 23, 1999, the Company entered into an Agreement and Plan of
Merger ("Merger Agreement") with Heat Holdings Corp., a corporation newly formed
by Willis Stein & Partners II, L.P. (the "Purchaser"), and Heat Merger Corp., a
wholly-owned subsidiary of the Purchaser ("Merger Sub"), providing for the
merger of the Merger Sub with and into Aavid (the "Merger"), with Aavid being
the surviving corporation. The Merger was approved by the Company's stockholders
on January 29, 2000 and consummated on February 2, 2000. Pursuant to the Merger,
Aavid stockholders received $25.50 in cash for each outstanding share of common
stock, and outstanding stock options and warrants were cashed out. The Merger
was accounted for using the purchase method.
The Merger and related transaction costs were funded by a cash contribution
from the Purchaser of $152,000,000, proceeds of $148,312,000, net of original
issue discount, from the sale by the Company of 12 3/4% senior subordinated
notes and warrants due 2007, $54,700,000 pursuant to a new credit facility
entered into by the Company, and approximately $13,300,000 of cash on hand. Net
stockholders' equity on the date of acquisition was $156,560,000. Based upon
estimates of the fair value of assets acquired and liabilities assumed, goodwill
of approximately $205,100,000 was established. Approximately $142,300,000 of
this goodwill is attributable to Aavid Thermalloy, the hardware business, and
will be amortized over 20 years. The remainder, $62,800,000, is attributable to
Fluent, the CFD software business, and will be amortized over 4 years.
Management does not believe that the final purchase price allocation will
produce materially different results than those reflected herein.
The Company recorded a valuation allowance of $12,163,000 to fully reserve
the unutilized net operating loss carryforwards outstanding at the time of the
acquisition. The Company believes the future utilization of those tax loss
carryforwards is uncertain given that the Company expects to incur U.S. tax
losses resulting from the incremental interest expense arising from the debt
incurred to fund the merger. If the net operating losses are utilized, the
reversal of the valuation allowance will be recorded as a reduction of goodwill.
Of the $152,000,000 cash contribution from the Purchaser, $4,811,000 was
invested by Heat Holdings II Corp., a wholly-owned subsidiary of the Purchaser,
to acquire 95% of the common equity of Aavid Thermalloy, LLC, the thermal
management hardware business. The Company controls Aavid Thermalloy, LLC through
a preferred equity interest and a 5% common equity interest. Since
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the Company was in a net loss position from February 2, 2000 through September
30, 2000, Heat Holding II's minority interest ownership as of September 30, 2000
did not change from February 2, 2000.
On February 2, 2000, as part of the transactions relating to the Merger,
the Company issued 150,000 units (the "Units"), consisting of $150,000,000
aggregate principal amount of its 12 3/4% Senior Subordinated Notes due 2007
(the "Notes") and warrants (the "Warrants") to purchase an aggregate of 60
shares of the Company's Class A Common Stock, par value $0.0001 per share, and
60 shares of the Company's Class H Common Stock, par value $0.0001 per share.
The Notes are fully and unconditionally guaranteed on a joint and several basis
by each of the Company's domestic subsidiaries (the "Subsidiary Guarantors").
The Notes were issued pursuant to an Indenture (the "Indenture") among the
Company, the Subsidiary Guarantors and Bankers Trust Company, as trustee.
Approximately $4,600,000 of the proceeds from the sale of the Units was
allocated to the fair value of the Warrants and approximately $143,700,000 was
allocated to the Notes, net of original issue discount of approximately
$1,700,000. The total discount of $6,300,000 is being accreted over the term of
the notes, using the effective interest rate method. This accretion is recorded
as interest expense within the accompanying statement of operations for the
period February 2, 2000 to September 30, 2000.
The Indenture limits the Company's ability to incur additional debt, to pay
dividends or make other distributions, to purchase or redeem our stock or make
other investments, to sell or dispose of assets, to create or incur liens, and
to merge or consolidate with any other person. The Indenture also contains
provisions requiring additional equity investments by Willis Stein & Partners in
the event the Company does not achieve certain leverage to EBITDA ratios, as
defined, in years 2000 and 2001. The Indenture provides that upon a change in
control of Aavid, the Company must offer to repurchase the Notes at 101% of the
face value thereof, together with accrued and unpaid interest. The Notes are
subordinated in right of payment to amounts outstanding under the Amended and
Restated Credit Facility and certain other permitted indebtedness.
In connection with the Merger, the Company repaid all of the outstanding
term loan and revolving line of credit under its existing credit facility, which
aggregated approximately $88,200,000 at December 31, 1999, and entered into an
amended and restated credit facility ("the Amended and Restated Credit
Facility"). The Amended and Restated Credit Facility provides for a $22,000,000
revolving credit facility ("the Revolving Facility") (of which $1,700,000 was
drawn at the closing of the Merger) and a $53,000,000 term loan facility ("the
Term Facility") (which was fully drawn at the closing of the Merger). Subject to
compliance with the terms of the Amended and Restated Credit Facility,
borrowings under the Revolving Facility are available for working capital
purposes, capital expenditures and future acquisitions. The Revolving Facility
will terminate, and all amounts outstanding thereunder will be payable, on March
31, 2005. Principal on the Term Facility is required to be repaid in quarterly
installments commencing December 31, 2000 and ending March 31, 2005 as follows:
five installments of $2,000,000; 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 are required to apply 50% of our
excess cash flow, as defined in the credit agreement, to permanently reduce the
Term Facility. The Amended and Restated Credit Facility bears interest at a rate
equal to, at the Company's option, either (1) in the case of Eurodollar loans,
the sum of (x) the interest rate in the London interbank market for loans in an
amount substantially equal to the amount of borrowing and for the period of
borrowing selected by Aavid and (y) a margin of between 1.50% and 2.25%
(depending on the Company's consolidated leverage ratio (as defined in the
Amended and Restated Credit Facility)) or (2) the sum of the higher of (x)
Canadian Imperial Bank of Commerce's prime or base rate or (y) one-half percent
plus the latest overnight federal funds rate plus (z) a margin of between .25%
and 1.00% (depending on the Company's consolidated leverage ratio). At September
30, 2000, the interest rates on the Term Facility and the Revolving Facility
were 8.85%.
The Amended and Restated Credit Facility may be prepaid at any time in
whole or in part without penalty, and must be prepaid to the extent of certain
equity or asset sales. The Amended and Restated Credit Facility limits the
Company's ability to incur additional debt, to sell or dispose of assets, to
create or incur liens, to make additional acquisitions, to pay dividends, to
purchase or redeem its stock and to merge or consolidate with any other person.
In addition, the Amended and Restated Credit Facility requires that the Company
meet certain financial ratios, and provides the lenders with the right to
require the payment of all amounts outstanding under the facility, and to
terminate all commitments thereunder, if there is a change in control of Aavid.
The Amended and Restated Credit Facility is guaranteed by each of Holdings Corp.
and Heat Holdings II Corp., and all of the Company's domestic subsidiaries and
secured by the Company's assets (including the assets and stock of its domestic
subsidiaries and a portion of the stock of its foreign subsidiaries). The
Company was in compliance with all covenants at September 30, 2000.
As of September 30, 2000, $7,700,000 was outstanding under the revolving
credit facility and $53,000,000 was outstanding under the term facility, of
which $8,000,000 was classified as current within the accompanying balance
sheet.
The Company incurred approximately $7,085,000 in underwriting, legal and
other professional fees in connection with the issuance of the Notes and the
obtainment of the Amended and Restated Credit Facility. These costs, in addition
to the $1,624,000 of
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unamortized costs associated with the original Credit Facility, have been
capitalized as deferred financing fees and are being amortized over the
respective terms of the related debt. This amortization is recorded in interest
expense in the statement of operations from February 2, 2000 to September 30,
2000.
As further discussed in Footnote (6) under "In-Process Research and
Development", in connection with the Merger, the Company allocated $15,000,000
of the purchase price to in-process research and development projects. This
allocation represented the estimated fair value based on risk-adjusted cash
flows related to the incomplete software research and development projects of
Fluent, Inc. At the date of the merger, the development of these projects had
not yet reached technological feasibility and the research and development in
progress had no alternative future uses. Accordingly, these costs were expensed
as of the date of the merger.
RESULTS OF OPERATIONS
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE
QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
The results of operations for the nine months ended September 30, 2000 are
the result of the combination of the results for the period from January 1, 2000
through February 1, 2000 and the period from February 2, 2000 through September
30, 2000. As a result of purchase accounting adjustments for the Merger, which
was consummated February 2, 2000, and the Thermalloy acquisition, which was
consummated in October 1999, the Company had a significant increase in goodwill
and interest expense, and incurred one-time restructuring charges and a charge
for acquired in-process research and development. In addition, the results of
operations for the quarter and nine months ended September 30, 2000 include the
results of operations of Thermalloy. Accordingly, a comparison of the results
for the quarters and nine months ended September 30, 2000 and October 2, 1999
may not necessarily be meaningful.
SALES (DOLLARS IN MILLIONS) FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
- --------------------------- ------------------------------------ ------------------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 CHANGE 2000 1999 CHANGE
------------- ---------- ------ ------------- ----------- ------
Computers and Network $ 18.6 $ 19.2 (0.6) $ 70.5 $ 56.8 13.7
Industrial Electronics 36.8 17.2 19.6 111.0 49.0 62.0
Consulting and Design
(Applied) 0.5 0.3 0.2 1.4 0.9 0.5
------ ------ ------ ------- ------ ------
55.9 36.7 19.2 182.9 106.7 76.2
Intel Special Product -- -- -- -- 2.6 (2.6)
------ ------ ------ ------ ------ ------
Total Aavid Thermalloy 55.9 36.7 19.2 182.9 109.3 73.6
Total Fluent 13.0 10.9 2.1 42.4 35.9 6.5
------ ------ ------ ------- ------ ------
Total Company $ 68.9 $ 47.6 $ 21.3 $ 225.3 $145.2 $ 80.1
====== ====== ====== ======= ====== ======
Sales in the third quarter of 2000 were $68.9 million, an increase of $21.3
million, or 44.7% from the comparable period of 1999. Sales for the first nine
months of 2000 were $225.3 million, an increase of $80.1 million, or 55.1% from
the comparable period of 1999. We estimate that of the increase, $24.3 million
for the quarter and $77.1 for the first nine months was attributable to acquired
Thermalloy entities.
Fluent software sales of $13.0 million in the third quarter of 2000 were
$2.1 million, or 18.6%, higher, than the third quarter of 1999. Fluent software
sales of $42.4 million for the first nine months of 2000 were $6.5 million, or
18.1%, higher, than the first nine months of 1999. The increase was spread among
all product offerings due to overall growth in the market for computational
fluid dynamics design software, as well as the success of application specific
products, such as "Icepak".
Aavid Thermalloy's sales were $55.9 million in the third quarter of 2000,
an increase of $19.2 million, or 52.5%, over the comparable period of 1999.
Aavid Thermalloy's sales were $182.9 million for the first nine months of 2000,
an increase of $73.6 million, or 67.3%, over the comparable period of 1999.
Excluding sales of the Intel Special Product, sales in first nine months of 2000
were $76.2 million or 71.4%, over the first nine months of 1999, reflecting both
added sales resulting from the Thermalloy acquisition and a strong recovery in
sales to industrial electronics customers in which third quarter 2000 sales
increased 114.0% over the third quarter of 1999. Revenue in Computer and Network
related products (excluding the Intel Special Product) in the third quarter of
2000 decreased 3.1% from the same period in the prior year. The Company has
taken steps to stop the erosion of sales by reinforcing its manufacturing,
engineering and sales and marketing efforts, particularly in Asia. The Company
has also deferred the expansion of its fan business and does not anticipate
significant revenues from the sale of fans until the second half of 2001.
International sales (which include North American exports) increased to 43%
of sales for the third quarter of 2000 compared with 37% in the third quarter of
1999.
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No customer generated greater than 10% of the Company's revenues in the
third quarter or first nine months of 2000 or 1999.
The Company's gross profit for the third quarter of 2000 was $25.8 million
compared with $17.3 million in the comparable period from 1999. Gross margin as
a percentage of sales increased from 36.4% in the third quarter of 1999 to 37.4%
for the comparable period of 2000. The Company's gross profit for first nine
months of 2000 was $75.9 million compared with $54.5 million in the comparable
period from 1999. For the first nine months of 2000, excluding $4.0 million of
additional cost of sales associated with the write-up of inventory to fair value
on the date of the Merger and $0.5 million of additional cost of sales
associated with the write-up of Thermalloy inventory to fair value in the fourth
quarter of 1999, gross margin was 35.7%, compared with 37.5% in the first nine
months of 1999. There was a slight decrease in gross margins due to the
acquisition of Thermalloy, which caused Fluent's higher gross margin business to
become a smaller percentage of the Company's overall gross profit. Furthermore,
underutilization of factories contributed to the decrease in margins; however,
this is being addressed through the on-going integration process. This
improvement can be seen when looking at the third quarter margin which is up an
entire percentage point over the third quarter of 1999.
In the third quarter of 2000 the Company's operating loss of $1.3 million
compares with operating income of $4.7 million in the third quarter of 1999. In
the first nine months of 2000 the Company's operating loss of $19.7 million
compares with operating income of $15.3 million in the comparable period of
1999. The decrease in operating income in the third quarter and first nine
months, respectively, in 2000 are primarily the result of $7.4 million and $20.2
of goodwill and other Merger related intangible amortization. Furthermore,
operating income for the first nine months of 2000 was impacted by $4.5 million
of additional cost of sales associated with the write-up of inventory to fair
value on the date of the Merger and a write-off of acquired in-process research
and development of $15.0 million.
Net interest charges for the Company were $6.5 million in the third quarter
of 2000 and $17.6 million for the first nine months, which compares with $0.1
million and $0.3 million, respectively, for the comparable period of 1999,
reflecting significantly increased levels of indebtedness, as further discussed
in Footnote (1) in the accompanying financial statements.
The Company recorded a $2.2 million income tax provision on a $7.4 million
pre-tax loss in the third quarter of 2000, and $5.9 million provision on a $37.0
million pre-tax loss for the first nine months of 2000. The provision differs
from the expected benefit because of non-deductible goodwill amortization, a
foreign tax provision of $1.7 million for the quarter and $4.4 million for the
first nine months of 2000 and required tax provisions on certain foreign
earnings which are expected to be repatriated into the U.S. to service debt. The
Company is in a net operating loss position for U.S. tax purposes and
accordingly will not receive any benefit for foreign tax credits. However, the
Company will receive a deduction for cash paid related to foreign taxes.
Repatriated earnings will therefore incur both foreign income taxes and U.S.
income taxes, thereby effectively doubling up the tax rate, to the extent that
foreign earnings exceed current U.S. tax losses. The significant net operating
loss carryforwards in the U.S. will help offset the actual cash paid for taxes
in the U.S. when foreign earnings are repatriated. In purchase accounting for
the Merger the Company recorded a full valuation allowance on net operating loss
carryforwards because their realization is now uncertain because the Company
expects U.S. tax losses resulting from increased interest expense from debt
incurred to fund the merger. If net operating losses are utilized, the reversal
of the valuation allowance will be recorded as a reduction to goodwill rather
than the income tax provision.
The Company's net loss for the third quarter of 2000 was $9.6 million,
versus net income for the comparable period of 1999 of $3.2 million. The
Company's net loss for the first nine months of 2000 was $43.0 million, versus
net income for the comparable period of 1999 of $9.5 million. The third quarter
of 2000 includes $7.4 million of amortization associated with goodwill and other
purchased intangibles. The first nine months of 2000 includes $ 20.2 million of
amortization associated with goodwill and other purchased intangibles, $15.0
million write-off of acquired in-process research and development and $4.5
million of additional cost of sales which represents the impact of the write-up
of inventory to fair value that occurred in conjunction with the Merger. The
written up inventory was sold during the first quarter of 2000, and so this
write-up is recorded as additional cost of sales. In both the three and nine
months ended September 30, 2000, the Company had significantly higher interest
expense than the comparable periods in 1999. Net interest expense increased $6.4
million in the three months and $17.6 million for the nine months ended
September 30, 2000 over the comparable periods of 1999.
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FINANCIAL CONDITION
SEPTEMBER 30, 2000 COMPARED WITH DECEMBER 31, 1999
Historically, the Company has used internally generated funds and proceeds
from financing activities to meet its working capital and capital expenditure
requirements. As a result of the Thermalloy acquisition and the Merger, the
Company has significantly increased its cash requirements for debt service
relating to the Notes and Amended and Restated Credit Facility described in
footnote (1) in the accompanying financial statements. The Company intends to
use amounts available under the Amended and Restated Credit Facility, future
debt and equity financings and internally generated funds to finance its working
capital requirements, capital expenditures and potential acquisitions. See
"Overview" for a discussion of the Notes and Amended and Restated Credit
Facility.
During the first nine months of 2000, the Company generated $13.1 million
of cash from operations. During the period, the Company used $4.4 million of
cash in connection with financing activities and $8.7 million for capital
expenditures.
Total indebtedness at September 30, 2000 was $206.6 million, which compares
with $88.9 million at December 31, 1999. Total indebtedness as a percent of
stockholders' equity at September 30, 2000 was 193.8%, compared with 111.8% at
December 31, 1999. Long-term debt at September 30, 2000 was $198.6 million, an
increase of $112.0 million from December 31, 1999. The Company had $7.7 million
outstanding under its line of credit as of September 30, 2000, which is
classified as long term debt on the accompanying balance sheet. $8.2 million of
borrowings were outstanding under the Company's revolving line of credit on
December 31, 1999.
As further discussed in Note (6) in the accompanying financial statements
development costs to complete ongoing development projects at Fluent are
estimated to be $2.6 million.
There were no material purchase commitments as of September 30, 2000.
At September 30, 2000, inventory turns were 6.2, which compare with 6.0 at
December 31, 1999.
At September 30, 2000, accounts receivable days sales outstanding ("DSO")
were 69, which compare with 71 days at December 31, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various other legal proceedings that are
incidental to the conduct of the Company's business, none of which the Company
believes could reasonably be expected to have a materially adverse effect on the
Company's financial condition.
ITEM 5. OTHER INFORMATION
On October 10, 2000, Bharatan Patel, the Company's Chief Executive Officer,
announced the expansion of his operational responsibilities to include the
positions of President and Chief Operating Officer of Aavid Thermalloy. George
Dannecker, Aavid Thermalloy's President and Chief Operating Officer resigned
these positions through mutual agreement with the Company.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial data schedule.
(b) Reports on Form 8-K
None.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNATURES
DATE: November 13, 2000 AAVID THERMAL TECHNOLOGIES, INC.
By: /s/ Brian A. Byrne
----------------------------------
Vice President and Chief Financial
Officer (Principal Financial
Officer)
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