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 29, 2001 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 14, 2001 was 1,018.87 shares of Class A, 1,078.87 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.
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 29, 2001 and
December 31, 2000............................................... 3
b.) Consolidated Statements of Operations for the quarter and
nine months ended September 29, 2001, the quarter ended
September 30, 2000, the period from January 1, 2000 to
February 1, 2000 and the period from February 2, 2000
through September 30, 2000...................................... 4
c.) Consolidated Statements of Cash Flows for the nine months
ended September 29, 2001, the period from February 2, 2000
to September 30, 2000 and the period from January 1, 2000
through February 1, 2000........................................ 5
d.) Notes to Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 18
Part II. Other Information
Item 1. Legal Proceedings................................................. 23
Item 5. Other Information................................................. 23
Item 6. Exhibits and Reports on Form 8-K.................................. 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 29, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 15,177 $ 23,849
Accounts receivable-trade, net 35,620 49,094
Inventories 16,893 25,203
Prepaid and other current assets 5,071 4,625
--------- ---------
Total current assets 72,761 102,771
Property, plant and equipment, net 49,097 57,013
Goodwill, net 145,611 162,430
Developed technology and assembled workforce, net 40,844 49,015
Other assets, net 7,542 15,059
--------- ---------
Total assets $ 315,855 $ 386,288
========= =========
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDER'S EQUITY
Revolving line of credit $ 17,000 $ --
Term loan 41,000 10,000
Other short term debt obligations 368 768
Accounts payable - trade 13,537 18,582
Income taxes payable 5,428 6,250
Restructuring charges 2,630 1,274
Deferred revenue 9,720 9,390
Deferred income taxes 1,741 1,741
Accrued expenses and other current liabilities 21,843 29,998
--------- ---------
Total current liabilities 113,267 78,003
Revolving line of credit -- 7,700
Term loan -- 41,000
12 3/4% senior subordinated notes 119,511 144,290
Other long term debt obligations 277 244
Deferred income taxes 9,784 9,977
--------- ---------
Total liabilities 242,839 281,214
--------- ---------
Commitments and Contingencies
Minority interests in consolidated subsidiaries 1,527 4,915
Stockholder's equity:
Class A Common Stock, $.0001 par value; authorized 1,200 shares;
1,018.71 and 940 shares issued and outstanding at
September 29, 2001 and December 31, 2000, respectively -- --
Class B Common Stock, $.0001 par value; authorized 1,200 shares;
1,078.71 and 1,000 shares issued and outstanding at
September 29, 2001 and December 31, 2000, respectively -- --
Class H Common Stock, $.0001 par value; authorized 1,000 shares;
40 shares issued and outstanding -- --
Warrants to purchase 49.52 shares and 60 shares of Class A common
stock and 49.52 and 60 shares of Class H common stock at
September 29, 2001 and December 31, 2000, respectively 3,764 4,560
Additional paid-in capital 176,007 147,187
Cumulative translation adjustment (2,578) (1,608)
Accumulated deficit (105,704) (49,980)
--------- ---------
Total stockholder's equity 71,489 100,159
--------- ---------
Total liabilities, minority interests and stockholder's equity $ 315,855 $ 386,288
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
3
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
PERIOD FROM PERIOD FROM
QUARTER QUARTER NINE MONTHS FEBRUARY 2, JANUARY 1,
ENDED ENDED ENDED TO TO
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30, FEBRUARY 1,
2001 2000 2001 2000 2000
------------ ------------- ------------- ------------- -------------
(COMPANY) (COMPANY) (COMPANY) (COMPANY) (PREDECESSOR)
Net sales $ 46,473 $ 68,908 $ 161,402 $ 201,886 $ 23,442
Cost of goods sold 32,676 43,106 105,959 133,934 15,516
--------- --------- --------- --------- ---------
Gross profit 13,797 25,802 55,443 67,952 7,926
Selling, general and administrative expenses 15,333 16,999 47,213 47,862 5,032
Amortization of intangible assets 8,564 7,413 25,685 19,998 182
Acquired in-process research and development -- -- -- 15,000 --
Research and development 3,454 2,660 9,982 6,787 752
Restructuring charges 1,640 -- 14,505 -- --
--------- --------- --------- --------- ---------
Income (loss) from operations (15,194) (1,270) (41,942) (21,695) 1,960
Interest expense, net (5,157) (6,463) (18,329) (16,766) (816)
Other income (expense), net (213) 348 (283) 284 22
--------- --------- --------- --------- ---------
Income (loss) before income taxes, minority
interest and extraordinary item (20,564) (7,385) (60,554) (38,177) 1,166
Income tax expense (699) (2,173) (3,228) (5,324) (547)
--------- --------- --------- --------- ---------
Income (loss) before minority interest and
extraordinary item (21,263) (9,558) (63,782) (43,501) 619
Minority interest in (income) loss of
consolidated subsidiaries (35) (78) 3,079 (120) 6
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item (21,298) (9,636) (60,703) (43,621) 625
Extraordinary item:
Gain on extinguishment of debt -- -- 4,979 -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (21,298) $ (9,636) $ (55,724) $ (43,621) $ 625
========= ========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
4
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
PERIOD FROM
FOR THE NINE FEBRUARY 2, PERIOD FROM
MONTHS ENDED TO JANUARY 1, TO
SEPTEMBER 29, SEPTEMBER 30, FEBRUARY 1,
2001 2000 2000
------------ ------------- -------------
(COMPANY) (COMPANY) (PREDECESSOR)
Cash flows (used in) provided by operating activities:
Net income (loss) $ (55,724) $ (43,621) $ 625
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 37,072 27,974 1,155
Loss (gain) on sale of fixed assets 94 (135) --
Acquired in-process research and development -- 15,000 --
Charge from inventory write-up to fair value -- 4,532 569
Deferred income taxes 54 (464) (22)
Accretion of discount on 12 3/4% senior
subordinated notes to interest expense 452 392 --
Minority interest in (loss) income (3,079) 120 (6)
Restructuring charges 14,505 -- --
Extraordinary gain on early extinguishment of debt (4,979) -- --
Changes in assets and liabilities:
Accounts receivable - trade 12,680 2,540 (578)
Inventories 8,026 5,131 (499)
Prepaid and other current assets (541) (2,735) (53)
Other long term assets 182 688 137
Accounts payable - trade (4,790) (6,585) 2,346
Income taxes payable (664) 3,345 337
Deferred revenue 467 (105) 109
Accrued expenses and other current liabilities (11,516) 3,349 (473)
--------- --------- ---------
Total adjustments 47,963 53,047 3,022
--------- --------- ---------
Net cash (used in) provided by operating
activities (7,761) 9,426 3,647
Cash flows used in investing activities:
Proceeds from sale of fixed assets 133 1,119 --
Purchase of minority interest in Curamik (882) -- --
Purchase of property, plant & equipment (6,712) (8,391) (308)
--------- --------- ---------
Net cash used in investing activities (7,461) (7,272) (308)
Cash flows provided by (used in) financing
activities:
Issuance of common stock, net of expenses -- -- 349
Advances under line of credit 9,334 7,700 --
Repayments of line of credit (396) (8,182) --
Advances under other debt obligations -- 53,936 --
Principal payments under debt obligations (10,341) (80,000) (25)
Payment of merger and financing expenses -- (17,192) --
Repurchase of common stock, options and warrants -- (261,267) --
Make-well contribution 34,028 -- --
Retirement of 12 3/4% senior subordinated notes
and warrants (26,028) -- --
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 6,597 (4,693) 324
Foreign exchange rate effect on cash and cash
equivalents (47) (407) (89)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (8,672) (2,946) 3,574
Cash and cash equivalents, beginning of period 23,849 21,847 18,273
--------- --------- ---------
Cash and cash equivalents, end of period $ 15,177 $ 18,901 $ 21,847
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 21,498 $ 14,552 $ 834
========= ========= =========
Income taxes paid $ 3,270 $ 2,834 $ 117
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements
5
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 February 2, 2000, the Company was acquired by Heat Holdings Corp., a
corporation newly formed by Willis Stein & Partners II, L.P. Pursuant to the
merger, Aavid stockholders received $25.50 in cash for each outstanding share of
common stock. In addition, all 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 Heat Holdings and an affiliate 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 $4,653 of cash on hand.
Additionally, the Company used $7,085 of cash on hand to pay financing fees
associated with the senior credit facility and 12 3/4% senior subordinated
notes. Net assets on the date of acquisition were $156,560. Based upon fair
value of assets acquired and liabilities assumed, goodwill of $183,676 was
established. Approximately $113,705 of this goodwill is attributable to Aavid
Thermalloy, the hardware business, and will be amortized over 20 years. The
remainder, $69,971, is attributable to Fluent, the CFD software business, and
will be amortized over 4 years.
Of the $152,000 cash contribution, $4,811 was invested by Heat Holdings II
Corp., an affiliate of Heat Holdings, 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. The investment by Heat
Holdings II Corp. has been recorded as minority interests 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 (11) 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. $4,560 of the proceeds from the sale of the Units was
allocated to the fair value of the Warrants and $143,752 was allocated to the
Notes, net of original issue discount of $1,688. The total discount of $6,248 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 and nine months ended September 29, 2001.
In connection with the Merger, the Company repaid all of the outstanding
term loan and revolving line of credit under its existing credit facility, which
aggregated approximately $88,200 at December 31, 1999, and entered into an
amended and restated credit facility (the "Amended and Restated Credit
Facility"). The Amended and Restated Credit Facility provides for a $22,000
revolving credit facility (the "Revolving Facility") (of which $1,700 was drawn
at the closing of the Merger) and a $53,000 term loan facility (the "Term
Facility") (which was fully drawn at the closing of the Merger). Subject to
compliance with the terms of the Amended and Restated Credit Facility,
borrowings under the Revolving Facility are available for working capital
purposes, capital expenditures and future acquisitions. The Revolving Facility
will terminate, and all amounts outstanding thereunder will be payable, on March
31, 2005. Principal on the Term Facility is required to be repaid in quarterly
installments commencing December 31, 2000 and ending March 31, 2005 as follows:
five installments of $2,000; four installments of $2,500; four installments of
$2,750; two installments of $3,200; two installments of $3,900; and a final
installment of $7,800. In addition, commencing with our fiscal year ending
December 31, 2001, 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 29, 2001, the weighted average interest rate on
the Term Facility and the Revolving Facility was 5.67%.
6
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).
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 and nine months ended
September 29, 2001.
At December 31, 2000 the Company was not in compliance with the leverage
ratio covenant required by the amended and restated credit facility and the
Indenture under which the Notes were issued. As a result, the Company's
stockholders were required to make an equity contribution, up to $25,000, to
allow the Company to reduce debt to achieve a 4.5 to 1 leverage ratio based on
total leverage at December 31, 2000. On May 4, 2001 certain of the Company's
stockholders and their affiliates made an equity contribution of $8,000 in cash
and $26,191 in principal amount of senior subordinated notes in full
satisfaction of this obligation. In addition, the Company and the lenders
amended the facility to provide that the last three required quarterly principal
payments in 2001 under the facility will be prepaid with $6,000 of the proceeds
of the equity contribution, and the four required principal payments in 2002
will be reduced by $500 each, reflecting application of the remaining cash
equity contribution. Further, certain covenant ratios and ratio definitions were
amended and the available line of credit was reduced to $17,000 from $22,000.
Based on the equity contribution, the Company's event of non-compliance with the
leverage ratio at December 31, 2000 was cured.
As part of the equity contribution discussed above, Heat Holdings
contributed to Aavid Thermal Technologies, Inc. an aggregate of $8,000 in cash
and $26,191 in principal amount of Aavid Thermal Technologies, Inc.'s 12 -3/4%
senior subordinated notes due 2007 in exchange for: (a) a warrant to purchase
2,224,472.5 Series B Preferred Units of Aavid Thermalloy, LLC held beneficially
and of record by Aavid Thermal Technologies, Inc. and (b) 78.871 shares of Aavid
Thermal Technologies, Inc. Class A Common Stock and 78.871 shares of Aavid
Thermal Technologies, Inc. Class B Common Stock, par value $.01 per share. The
portion of the equity contribution related to the warrants has been recorded in
additional paid in capital in the accompanying balance sheet as of September 29,
2001. The Company recognized a gain on the retirement of senior subordinated
notes of $4,979, which is recorded as an extraordinary gain on extinguishment of
debt in the accompanying statement of operations for the nine months ended
September 29, 2001.
As of September 29, 2001, the Company was not in compliance with certain
financial covenants under the amended and restated credit facility. The Company
has notified its lenders concerning the noncompliance. The resulting event of
default has not been waived by the Company's lenders, accordingly, the lenders
could demand full payment of all amounts outstanding under the amended and
restated credit facility. As a result of the event of default, the Company
classified $17,000 outstanding under the revolving credit facility and $41,000
outstanding under the term facility as current within the accompanying balance
sheet. The Company and its lenders are currently in negotiations to address this
issue. There can be no assurance that the Company will be successful in securing
an amended or alternative financing arrangement. The Company has sufficient
cash to meet its scheduled obligations through the end of this year. The Company
may require additional funds to meet its scheduled interest payment due in the
first quarter of 2002 under the 12 3/4% Senior Subordinated Notes Indenture.
The Company is exploring various alternatives to provide the liquidity to make
the payment.
(2) BASIS OF PRESENTATION
These financial statements reflect the consolidated results of operations
and cash flows of the Company for the period from January 1, 2000 to February 1,
2000 (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 29, 2001,
December 31, 2000 and for the quarter and nine months ended September 29, 2001
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 29, 2001 and
December 31, 2000, and the results of operations and cash flows for the quarter
and nine months ended September 29, 2001 and the period from January 1, 2000 to
February 1, 2000 and the period from February 2, 2000 to September 30, 2000.
7
The financial information as of and for the period ended September 29, 2001
should be read in conjunction with the financial statements contained in the
Company's Form 10-K Annual Report for the year ended December 31, 2000.
(3) ACCOUNTS RECEIVABLE
The components of accounts receivable at September 29, 2001 and December
31, 2000 are as follows:
SEPTEMBER 29, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
Accounts receivable $ 38,707 $ 52,187
Allowance for doubtful accounts (3,087) (3,093)
-------- --------
Net accounts receivable $ 35,620 $ 49,094
======== ========
(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 29, 2001 and December 31, 2000 are as follows:
SEPTEMBER 29, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
Raw materials $ 8,218 $12,675
Work-in-process 2,708 6,168
Finished goods 5,967 6,360
------- -------
$16,893 $25,203
======= =======
(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
NINE MONTHS FEBRUARY 2, JANUARY 1,
QUARTER ENDED QUARTER ENDED ENDED 2000 TO 2000
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30, TO FEBRUARY 1,
2001 2000 2001 2000 2000
(COMPANY) (COMPANY) (COMPANY) (COMPANY) (PREDECESSOR)
------------- ------------- ------------- ------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net income (loss) $(21,298) $ (9,636) $(55,724) $(43,621) $ 625
Foreign currency translation
adjustment, net of taxes 833 (350) (583) (68) (53)
-------- -------- -------- -------- --------
Comprehensive income (loss) $(20,465) $ (9,986) $(56,307) $(43,689) $ 572
======== ======== ======== ======== ========
(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 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.
8
(7) NON-RECURRING CHARGES AND RESTRUCTURING RESERVES
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. During the year ended December 31, 2000, 136 individuals were
terminated. The following amounts have been charged against the Thermalloy
restructuring reserves during the quarter ended September 29, 2001:
CHARGES AGAINST RESTRUCTURING
RESTRUCTURING RESERVES FOR THE RESERVES
RESERVES BALANCE QUARTER ENDED BALANCE
AT JUNE 30, SEPTEMBER 29, AT SEPTEMBER 29,
2001 2001 2001
---------------- ---------------- ----------------
Lease terminations and leasehold
improvements reserve $585 $ -- $585
Employee separation 334 (45) 289
---- ---- ----
Total $919 $(45) $874
==== ==== ====
During the first half of 2001 the Company ceased manufacturing activities
at its Dallas, Texas facility and reduced its New Hampshire workforce. In
connection with this action, the Company recorded a restructuring charge within
the statement of operations for the first quarter of 2001. This restructuring
charge totaled $12,457 and included estimated amounts related to employee
severance, write-off of fixed assets and write-off of a prepaid lease intangible
asset that was originally recorded as part of the Thermalloy acquisition. 81
individuals were terminated under the restructuring plan. The following amounts
have been charged against the restructuring reserves established in the first
quarter of 2001 during the third quarter of 2001:
RESTRUCTURING CHARGES AGAINST RESTRUCTURING
RESERVES RESERVES FOR THE RESERVES
BALANCE QUARTER ENDED BALANCE
AT JUNE 30, SEPTEMBER 29, AT SEPTEMBER 29,
2001 2001 2001
------------- ---------------- ----------------
Employee separation $ 2,042 $ (932) $ 1,110
Fixed asset reserve 5,500 (5,231) 269
------- ------- -------
Total $ 7,542 $(6,163) $ 1,379
======= ======= =======
During the second quarter of 2001 the Company ceased operations at its
Loudwater, United Kingdom facility and further reduced its New Hampshire
workforce. In connection with this action, the Company recorded a restructuring
charge within the statement of operations for the second quarter of 2001. This
restructuring charge totals $408 and includes estimated amounts related to
employee severance and the termination of certain contractual obligations.
During the quarter ended June 30, 2001, 68 individuals were terminated under the
restructuring plan. The following amounts have been recorded during the third
quarter of 2001 related to this restructuring:
RESTRUCTURING CHARGES AGAINST RESTRUCTURING
RESERVES RESERVES FOR THE RESERVES
BALANCE QUARTER ENDED BALANCE
AT JUNE 30, SEPTEMBER 29, AT SEPTEMBER 29,
2001 2001 2001
-------------- ---------------- ----------------
Employee separation $ 186 $(162) $ 24
Lease terminations and
leasehold improvements
reserve 45 (11) 34
----- ----- -----
Total $ 231 $(173) $ 58
===== ===== =====
During the third quarter of 2001 the Company made the decision to cease
manufacturing operations at its Terrell, Texas facility and further reduce its
New Hampshire workforce. In connection with this action, the Company recorded a
restructuring charge within the statement of operations for the third quarter of
2001. This restructuring charge totals $1,640 and includes estimated amounts
related to employee severance and the write-off of fixed assets. During the
quarter ended September 29, 2001, 105 individuals were terminated under the
restructuring plan. The following amounts have been recorded during the third
quarter of 2001 related to this restructuring:
RESTRUCTURING CHARGES AGAINST RESTRUCTURING
RESERVES RESERVES FOR THE RESERVES
ESTABLISHED QUARTER ENDED BALANCE
AT SEPTEMBER 29, SEPTEMBER 29, AT SEPTEMBER 29,
2001 2001 2001
---------------- ---------------- ----------------
Employee separation $ 990 $ (402) $ 588
Fixed asset reserve 650 -- 650
------ ------ ------
Total $1,640 $ (402) $1,238
====== ====== ======
9
(8) ASSET IMPAIRMENT
Statement of Financial Accounting Standards (SFAS) 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of"
established accounting standards related to the impairment of long-lived assets,
such as property, plant, equipment and intangibles. This statement requires that
long-lived assets, including intangibles, be reviewed for impairment whenever
events or 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 cashflows (without interest charges) from
the use and ultimate dispositions of assets are less than its carrying value, an
impairment loss is recognized. Impairment losses are measured based on the fair
value of the asset.
Due to the current economic situation within the electronics and
semi-conductor market place, Aavid's hardware business has experienced a
reduction in revenues and profitability. These poor economic conditions indicate
that the Company's goodwill and other intangible assets may not be recoverable.
The Company is currently in the process of developing its business plan for 2002
and beyond. As part of the planning process, the Company will review its
long-lived assets, including goodwill and other intangible assets, for the
existence of any potential impairment. The Company expects to have its business
plan, including the review of long-lived assets, completed prior to the end of
the fourth quarter of 2001.
(9) NEW ACCOUNTING PRONOUNCEMENTS
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, as
amended by SFAS 137 and 138, was adopted by the Company in the first quarter of
2001. The adoption of this Statement did not have a significant impact on the
Company.
In June, 2001 the Financial Accounting Standards Board issued SFAS 141,
"Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets".
SFAS 141 addresses financial accounting and reporting for business
combinations and supercedes APB Opinion No. 16, "Business Combinations" and SFAS
38, "Accounting for Preacquisition Contingencies of Purchased Enterprises". All
business combinations in the scope of this Statement are to be accounted for
using one method, the purchase method. The provisions of this Statement apply to
all business combinations initiated after June 30, 2001. This Statement also
applies to all business combinations accounted for using the purchase method for
which the date of acquisition is July 1, 2001, or later.
SFAS 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supercedes APB Opinion No. 17, "Intangible
Assets". It addresses how intangible assets that are acquired individually or
with a group of other assets (but not those acquired in a business combination)
should be accounted for in financial statements upon their acquisition. This
Statement also addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. Under SFAS 142, goodwill is no longer subject to amortization over
its estimated useful life. Rather, goodwill will be subject to at least an
annual assessment for impairment by applying a fair-value-based test. Similarly,
goodwill associated with the equity-method investments is no longer amortized.
Equity-method goodwill is not, however, subject to new impairment rules; the
impairment guidance in existing rules for equity-method investments continues to
apply. Intangible assets should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented, or exchanged,
regardless of the acquirer's intent to do so. The Company believes the adoption
of this statement will have a material effect to the Company's reported results.
Goodwill and the assembled workforce will no longer be amortized. However, the
Company has not yet determined the impact of any impairment of goodwill under
the statement, which could be significant. Because goodwill and some intangible
assets will no longer be amortized starting January 1, 2002, the reported
amounts of goodwill and intangible assets (as well as total assets) will not
decrease at the same time and in the same manner as under previous standards.
There may be more volatility in future earnings of the Company than under
previous standards because impairment losses are likely to occur irregularly and
in varying amounts.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of". This Statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The Company does not expect the adoption of
this Statement to have a significant impact on the Company.
10
(10) SEGMENT REPORTING
Aavid provides thermal management solutions for microprocessors and
integrated circuits ("ICs") for computer and network and industrial
applications. The Company consists of two distinct reportable segments: (1)
thermal management products and (2) computational fluid dynamics ("CFD")
software. 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 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, 2000.
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 29, 2001 and September 30, 2000 and the periods from
January 1, 2000 to February 1, 2000 and February 2, 2000 to September 30, 2000:
SEGMENT
REVENUES INCOME (LOSS)
FROM BEFORE TAXES ASSETS (NET OF
EXTERNAL AND MINORITY INTERCOMPANY
CUSTOMERS INTERESTS BALANCES)
--------- ------------- --------------
Quarter Ending September 29, 2001 (COMPANY)
Thermal Products ........................ $ 32,060 $(15,893) $203,938
CFD Software ............................ 14,413 (5,166) 87,976
Corporate Office ........................ -- 495 23,941
-------- -------- --------
Total ................................... $ 46,473 $(20,564) $315,855
======== ======== ========
Quarter Ending September 30, 2000 (COMPANY)
Thermal Products ........................ $ 55,909 $ 2,746 $259,140
CFD Software ............................ 12,999 (3,370) 103,519
Corporate Office ........................ -- (6,761) 25,931
-------- -------- --------
Total ................................... $ 68,908 $ (7,385) $388,590
======== ======== ========
SEGMENT
REVENUES INCOME (LOSS)
FROM BEFORE TAXES
EXTERNAL AND MINORITY
CUSTOMERS INTERESTS
--------- ---------
Nine Months Ended September 29, 2001 (COMPANY)
Thermal Products ........................................... $112,871 $(48,828)
CFD Software ............................................... 48,531 (11,832)
Corporate Office ........................................... -- 106
-------- --------
Total ...................................................... $161,402 $(60,554)
======== ========
February 2, 2000 to September 30, 2000 (COMPANY)
Thermal Products ........................................... $164,695 $ 1,611
CFD Software ............................................... 37,191 (22,693)
Corporate Office ........................................... -- (17,095)
-------- --------
Total ...................................................... $201,886 $(38,177)
======== ========
January 1, 2000 to February 1, 2000 (PREDECESOR)
Thermal Products............................................ $ 18,234 $ (43)
CFD Software................................................ 5,208 1,840
Corporate Office............................................ -- (631)
-------- --------
Total....................................................... $ 23,442 $ 1,166
======== ========
11
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.
THE PERIOD
FOR THE NINE MONTHS ENDED FOR THE PERIOD FEBRUARY 2, JANUARY 1, 2000
SEPTEMBER 29, 2001 2000 TO SEPTEMBER 30, 2000 FEBRUARY 1, 2000
------------------------------- ------------------------------ ----------------
(COMPANY) (COMPANY) (PREDECESSOR)
LONG-LIVED LONG-LIVED
ASSETS ASSETS
AS OF PERIOD AS OF PERIOD
REVENUES END REVENUES END REVENUES
--------- ------------ --------- ------------ ----------------
United States................ $ 96,683 $ 223,473 $ 136,458 $ 267,164 $ 14,978
Taiwan ...................... 7,019 1,498 10,021 1,684 1,193
China ....................... 9,770 3,462 18,813 2,611 1,796
United Kingdom .............. 16,455 1,735 24,454 1,500 3,051
Germany...................... 21,558 5,362 14,469 4,713 1,342
Other International.......... 43,847 7,629 34,335 6,430 4,228
Intercompany eliminations.... (33,930) (65) (36,664) (71) (3,146)
--------- --------- --------- --------- ---------
Total........................ $ 161,402 $ 243,094 $ 201,886 $ 284,031 $ 23,442
========= ========= ========= ========= =========
FOR THE QUARTER FOR THE QUARTER
ENDED ENDED
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
(COMPANY) (COMPANY)
REVENUES REVENUES
--------------- ----------------
United States ........... $ 25,689 $ 46,312
Taiwan .................. 1,983 3,131
China ................... 3,908 5,045
United Kingdom .......... 4,467 7,718
Germany ................. 7,125 5,536
Other International ..... 14,205 12,386
Intercompany eliminations (10,904) (11,220)
-------- --------
Total ................... $ 46,473 $ 68,908
======== ========
12
(11) 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 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 29, 2001 (UNAUDITED) (COMPANY)
------------------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- --------- --------- ---------
ASSETS
Cash and cash equivalents ............... $ 1,664 $ 4,034 $ 9,479 $ -- $ 15,177
Accounts receivable-trade, net .......... -- 14,086 21,166 368 35,620
Inventories ............................. -- 6,927 9,953 13 16,893
Due (to) from affiliate, net ............ 80,987 (42,245) (4,751) (33,991) --
Refundable taxes ........................ (180) -- 139 180 139
Deferred income taxes ................... 10,761 (2,193) 391 (8,959) --
Prepaid and other current assets ........ 253 1,709 2,981 (11) 4,932
--------- --------- --------- --------- ---------
Total current assets .................... 93,485 (17,682) 39,358 (42,400) 72,761
Property, plant and equipment, net ...... 40 30,708 18,365 (16) 49,097
Investment in subsidiaries .............. 116,249 -- -- (116,249) --
Other assets, net ....................... 24,988 151,144 9,661 8,204 193,997
--------- --------- --------- --------- ---------
Total assets ............................ $ 234,762 $ 164,170 $ 67,384 $(150,461) $ 315,855
========= ========= ========= ========= =========
LIABILITIES, MINORITY INTERESTS AND
STOCKHOLDERS' EQUITY
Current portion of debt obligations ..... $ 58,000 $ 328 $ 40 $ -- $ 58,368
Accounts payable-trade .................. 310 3,145 10,082 -- 13,537
Income taxes payable .................... (15,358) 18,193 3,296 (703) 5,428
Deferred revenue ........................ -- 5,592 4,128 -- 9,720
Deferred income taxes ................... 1,741 -- -- -- 1,741
Accrued expenses and other current
liabilities............................. 3,159 12,905 8,346 63 24,473
--------- --------- --------- --------- ---------
Total current liabilities ............... 47,852 40,163 25,892 (640) 113,267
--------- --------- --------- --------- ---------
Debt obligations, net of current portion 119,511 179 98 -- 119,788
Deferred income taxes ................... (4,754) 19,167 7 (4,636) 9,784
--------- --------- --------- --------- ---------
Total liabilities ....................... 162,609 59,509 25,997 (5,276) 242,839
--------- --------- --------- --------- ---------
Commitments and contingencies
Minority interests ...................... 664 94 1,470 (701) 1,527
Stockholders' equity:
Common Stock ............................ -- -- -- -- --
Warrants ................................ 3,764 -- -- -- 3,764
Additional paid-in capital .............. 176,007 207,605 4,021 (211,626) 176,007
Cumulative translation adjustment ....... (2,578) 1,944 (2,747) 803 (2,578)
Retained earnings (deficit) ............. (105,704) (104,982) 38,643 66,339 (105,704)
--------- --------- --------- --------- ---------
Total stockholders' equity .............. 71,489 104,567 39,917 (144,484) 71,489
--------- --------- --------- --------- ---------
Total liabilities, minority interests
and stockholders' equity .............. $ 234,762 $ 164,170 $ 67,384 $(150,461) $ 315,855
========= ========= ========= ========= =========
13
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2000 (COMPANY)
--------------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
ASSETS
Cash and cash equivalents ............... $ 9,443 $ 4,193 $ 10,213 $ -- $ 23,849
Accounts receivable-trade, net .......... -- 25,904 22,822 368 49,094
Inventories ............................. -- 14,273 10,624 306 25,203
Due (to) from affiliate, net ............ 81,116 (8,630) (378) (72,108) --
Refundable taxes ........................ (180) -- -- 180 --
Deferred income taxes ................... 10,757 (2,194) 613 (9,176) --
Prepaid and other current assets ........ 201 1,882 2,551 (9) 4,625
--------- --------- --------- --------- ---------
Total current assets .................... 101,337 35,428 46,445 (80,439) 102,771
Property, plant and equipment, net ...... 536 40,613 15,875 (11) 57,013
Investment in subsidiaries .............. 168,457 -- -- (168,457) --
Deferred taxes .......................... 1,102 (1,102) -- -- --
Other assets, net ....................... 23,444 168,376 12,992 21,692 226,504
--------- --------- --------- --------- ---------
Total assets ............................ $ 294,876 $ 243,315 $ 75,312 $(227,215) $ 386,288
========= ========= ========= ========= =========
LIABILITIES, MINORITY INTERESTS AND
STOCKHOLDERS' EQUITY
Current portion of debt obligations ..... $ 10,000 $ 350 $ 418 $ -- $ 10,768
Accounts payable-trade .................. 103 7,381 11,098 -- 18,582
Income taxes payable .................... (15,253) 17,711 4,490 (698) 6,250
Deferred revenue ........................ -- 5,751 3,639 -- 9,390
Deferred income taxes ................... 1,741 -- -- -- 1,741
Accrued expenses and other current
liabilities ........................... 9,225 13,633 8,387 27 31,272
--------- --------- --------- --------- ---------
Total current liabilities ............... 5,816 44,826 28,032 (671) 78,003
--------- --------- --------- --------- ---------
Debt obligations, net of current portion 192,990 214 30 -- 193,234
Deferred income taxes ................... (4,753) 19,410 (41) (4,639) 9,977
--------- --------- --------- --------- ---------
Total liabilities ....................... 194,053 64,450 28,021 (5,310) 281,214
--------- --------- --------- --------- ---------
Commitments and contingencies
Minority interests ...................... 664 3,359 1,283 (391) 4,915
Stockholders' equity:
Common Stock ............................ -- -- -- -- --
Warrants ................................ 4,560 -- -- -- 4,560
Additional paid-in capital .............. 147,187 207,508 6,129 (213,637) 147,187
Cumulative translation adjustment ....... (1,608) 1,861 (2,638) 777 (1,608)
Retained earnings (deficit) ............. (49,980) (33,863) 42,517 (8,654) (49,980)
--------- --------- --------- --------- ---------
Total stockholders' equity .............. 100,159 175,506 46,008 (221,514) 100,159
--------- --------- --------- --------- ---------
Total liabilities, minority interests
and stockholders' equity ............... $ 294,876 $ 243,315 $ 75,312 $(227,215) $ 386,288
========= ========= ========= ========= =========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 29, 2001 (UNAUDITED) (COMPANY)
------------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
Net sales ................................. $ -- $ 25,684 $ 31,688 $(10,899) $ 46,473
Cost of goods sold ........................ -- 17,906 21,634 (6,864) 32,676
-------- -------- -------- -------- --------
Gross profit .............................. -- 7,778 10,054 (4,035) 13,797
Selling, general and administrative
expenses ................................ 179 18,006 7,421 (1,709) 23,897
Restructuring charges ..................... -- 1,615 25 -- 1,640
Research and development .................. -- 2,562 3,284 (2,392) 3,454
-------- -------- -------- -------- --------
Income (loss) from operations ............. (179) (14,405) (676) 66 (15,194)
Interest income (expense), net ............ 665 (5,803) (27) 8 (5,157)
Other income (expense), net ............... 2 (7) (101) (107) (213)
Equity in income (loss) of subsidiaries ... (21,786) -- -- 21,786 --
-------- -------- -------- -------- --------
Income (loss) before income taxes,
minority interests and extraordinary item (21,298) (20,215) (804) 21,753 (20,564)
Income tax benefit (expense) .............. -- (639) (60) -- (699)
-------- -------- -------- -------- --------
Income (loss) before minority interests
and extraordinary item .................. (21,298) (20,854) (864) 21,753 (21,263)
Minority interests in (income) loss of
consolidated subsidiaries ............... -- 6 (41) -- (35)
-------- -------- -------- -------- --------
Income (loss) before extraordinary item ... (21,298) (20,848) (905) 21,753 (21,298)
Gain on extinguishment of debt ............ -- -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) ......................... $(21,298) $(20,848) $ (905) $ 21,753 $(21,298)
======== ======== ======== ======== ========
14
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000 (UNAUDITED) (COMPANY)
------------------------------------------------------------------------------
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 (loss) 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) loss of
Consolidated subsidiaries ................ -- (20) (58) -- (78)
-------- -------- -------- -------- --------
Net income (loss) .......................... $ (9,636) $ (5,874) $ 3,337 $ 2,537 $ (9,636)
======== ======== ======== ======== ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2001 (UNAUDITED) (COMPANY)
-------------------------------------------------------------------------------
U.S.GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------- ------------- ------------ ------------
Net sales ................................. $ -- $ 96,678 $ 98,649 $ (33,925) $ 161,402
Cost of goods sold ........................ -- 66,159 62,449 (22,649) 105,959
--------- --------- --------- --------- ---------
Gross profit .............................. -- 30,519 36,200 (11,276) 55,443
Selling, general and administrative
expenses ................................ 468 56,294 20,541 (4,405) 72,898
Restructuring charges ..................... -- 14,304 201 -- 14,505
Research and development .................. -- 7,599 9,438 (7,055) 9,982
--------- --------- --------- --------- ---------
Income (loss) from operations ............. (468) (47,678) 6,020 184 (41,942)
Interest income (expense), net ............ 567 (18,781) (114) (1) (18,329)
Other income (expense), net ............... 8 18 (145) (164) (283)
Equity in income (loss) of subsidiaries ... (60,884) -- -- 60,884 --
--------- --------- --------- --------- ---------
Income (loss) before income taxes,
minority interests and extraordinary item (60,777) (66,441) 5,761 60,903 (60,554)
Income tax benefit (expense) .............. 74 (900) (2,402) -- (3,228)
--------- --------- --------- --------- ---------
Income (loss) before minority interests
and extraordinary item .................. (60,703) (67,341) 3,359 60,903 (63,782)
Minority interests in (income) loss of
consolidated subsidiaries ............... -- 3,266 (187) -- 3,079
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item ... (60,703) (64,075) 3,172 60,903 (60,703)
Gain on extinguishment of debt ............ 4,979 -- -- -- 4,979
--------- --------- --------- --------- ---------
Net income (loss) ......................... $ (55,724) $ (64,075) $ 3,172 $ 60,903 $ (55,724)
========= ========= ========= ========= =========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD FROM FEBRUARY 2, TO SEPTEMBER 30, 2000 (UNAUDITED) (COMPANY)
-------------------------------------------------------------------------------
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)
========= ========= ========= ========= =========
15
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 income (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 CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2001 (UNAUDITED) (COMPANY)
--------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
Net cash provided by (used in)
operating activities ................... $(14,197) $ 2,162 $ 4,275 $ (1) $ (7,761)
Cash flows used in investing activities:
Proceeds from sale of property, plant
and equipment .......................... -- -- 133 -- 133
Purchase of minority interest in Curamik . (882) -- -- -- (882)
Purchases of property, plant and equipment -- (2,072) (4,640) -- (6,712)
-------- -------- -------- -------- --------
Net cash used in investing activities .... (882) (2,072) (4,507) -- (7,461)
Cash flows provided by (used in) financing
activities:
Advanced under line of credit ............ 9,300 -- 34 -- 9,334
Repayments of line of credit ............. -- -- (396) -- (396)
Principal payments under debt obligations (10,000) (328) (13) -- (10,341)
Make-well contribution ................... 34,028 -- -- -- 34,028
Retirement of 12 3/4% senior subordinated
notes and warrants ..................... (26,028) -- -- -- (26,028)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities ............................. 7,300 (328) (375) -- 6,597
Foreign exchange effect on cash and cash
equivalents ............................ -- 82 (129) -- (47)
-------- -------- -------- -------- --------
Net increase in cash and cash equivalents (7,779) (156) (736) (1) (8,672)
Cash and cash equivalents, beginning of
period ................................. 9,443 4,190 10,215 1 23,849
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period . $ 1,664 $ 4,034 $ 9,479 $ -- $ 15,177
======== ======== ======== ======== ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM FEBRUARY 2, 2000 TO SEPTEMBER 30, 2000 (UNAUDITED)(COMPANY)
-------------------------------------------------------------------------------
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:
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
========= ========= ========= ========= =========
16
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:
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
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
======== ======== ======== ======== ========
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this Quarterly Report on Form 10-Q concerning the Company's
business outlook or future economic performance; anticipated profitability,
revenues, expenses or other financial items; introductions and advancements in
development of products, and plans and objectives related thereto; and
statements concerning assumptions made or expectations as to any future events,
conditions, performance or other matters, are "forward-looking statements" as
that term is defined under the Federal Securities Laws. Forward-looking
statements are subject to risks, uncertainties and other factors that could
cause actual results to differ materially from those stated in such statements.
Such risks, uncertainties and factors include, but are not limited to, changes
in the Company's markets, particularly the potentially volatile semiconductor
market, changes in and delays in product development plans and schedules,
customer acceptance of new products, changes in pricing or other actions by
competitors, patents owned by the Company and its competitors, risk of foreign
operations and markets, the Company's substantial indebtedness, the Company's
ability to integrate its 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, 2000.
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 a 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 February 2, 2000, the Company was acquired by Heat Holdings Corp., a
corporation newly formed by Willis Stein & Partners II, L.P. Pursuant to the
merger, Aavid stockholders received $25.50 in cash for each outstanding share of
common stock. In addition, all 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 $152.0 million, proceeds of $148.3 million, net of
original issue discount, from the sale by the Company of 12 3/4% senior
subordinated notes and warrants due 2007, $54.7 million pursuant to a new credit
facility entered into by the Company, and approximately $4.7 million of cash on
hand. Net stockholders' equity on the date of acquisition was $156.6 million.
Based upon fair value of assets acquired and liabilities assumed, goodwill of
$183.7 million was established. Approximately $113.7 million of this goodwill is
attributable to Aavid Thermalloy, the hardware business, and will be amortized
over 20 years. The remainder, $70.0 million, is attributable to Fluent, the CFD
software business, and will be amortized over 4 years.
Of the $152.0 million cash contribution, $4.8 million was invested by Heat
Holdings II Corp., an affiliate of Heat Holdings, 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. The investment by Heat
Holdings II Corp. has been recorded as minority interest 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 $150,000,000
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 $4.6 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. The total discount of $6.2 million 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
quarter ended and nine months ended September 29, 2001 and 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
18
the Company does not achieve certain leverage to EBITDA ratios, as defined, in
years 2000 and 2001. As described below, Willis Stein has made the maximum
required equity investment and is not required to make an additional equity
investment even if the Company does not achieve the required ratios in 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 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, the Company is 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
29, 2001 the interest rates on the Term Facility and the Revolving Facility were
5.67%.
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 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 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.
At December 31, 2000 the Company was not in compliance with the leverage
ratio covenant required by the Amended and Restated Credit Facility and the
Indenture under which the Notes were issued. As a result, the Company's
stockholders were required to make an equity contribution sufficient to allow
the Company to pay down enough debt to achieve a 4.5 to 1 leverage ratio based
on total leverage at December 31, 2000. On May 4, 2001 certain of the Company's
stockholders and their affiliates made an equity contribution of $8.0 million in
cash and $26.2 million in principal amount of senior notes in full satisfaction
of this obligation. In addition, the Company and the lenders amended the Amended
and Restated Credit Facility (Amendment No. 1) to provide that the last three
required quarterly principal payments in 2001 under the facility will be prepaid
with $6.0 million of the proceeds of the equity contribution, and the four
required principal payments in 2002 will be reduced by $0.5 million each,
reflecting application of the remaining cash equity contribution. Further,
certain covenant ratios and ratio definitions were amended and the available
line of credit was reduced to $17.0 million from $22.0 million. Based on the
equity contribution, the Company's events of non-compliance with its debt
covenants at December 31, 2000 was cured.
As part of the equity contribution discussed above, Heat Holdings
contributed to Aavid Thermal Technologies, Inc. an aggregate of $8,000,000 in
cash and $26,191,000 in principal amount of Aavid Thermal Technologies, Inc.'s
123/4% senior subordinated notes due 2007 which the Company retired in exchange
for: (a) a warrant to purchase 2,224,472.5 Series B Preferred Units of Aavid
Thermalloy, LLC held beneficially and of record by Aavid thermal Technologies,
Inc. and (b) 78.871 shares of Aavid Thermal Technologies, Inc. Class A Common
Stock and 78.871 shares of Aavid thermal Technologies, Inc. Class B Common
Stock, par value $.01 per share. The portion of the equity contribution related
to the warrants has been recorded in additional paid in capital in the
accompanying balance sheet as of September 29, 2001. The Company recognized a
gain on the retirement of senior subordinated
19
notes of $4,979,000, which is recorded as an extraordinary gain on early
extinguishment of debt in the accompanying statement of operations for the
quarter and nine months ended September 29, 2001.
As of September 29, 2001, the Company was not in compliance with certain
financial covenants under the amended and restated credit facility. The Company
has notified its lenders concerning the noncompliance. The resulting event of
default has not been waived by the Company's lenders, accordingly, the lenders
could demand full payment of all amounts outstanding under the amended and
restated credit facility. As a result of the event of default, the Company
classified $17,000,000 outstanding under the revolving credit facility and
$41,000,000 outstanding under the term facility as current within the
accompanying balance sheet. The Company and its lenders are currently in
negotiations to address this issue. There can be no assurance that the Company
will be successful in securing an amended or alternative financing arrangement.
The Company has sufficient cash to meet its scheduled obligations through the
end of this year. The Company may require additional funds to meet its scheduled
interest payment due in the first quarter of 2002 under the 12 3/4% Senior
Subordinated Notes Indenture. The Company is exploring various alternatives to
provide the liquidity to make the payment.
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 29, 2001 Compared With The
Quarter and Nine Months Ended September 30, 2000
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 (the Predecessor) 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, 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. Accordingly, a comparison of the results for the nine months ended
September 29, 2001 and September 30, 2000 may not necessarily be meaningful.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS END
---------------------------------------- -----------------------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
SALES (DOLLARS IN MILLIONS) 2001 2000 CHANGE 2001 2000 CHANGE
- --------------------------- ------------- ------------- ------ ------------- ------------- ------
Computers and Network ......... $ 7.0 $ 18.6 (62.4)% $ 25.0 $ 70.5 (64.5)%
Industrial Electronics ........ 24.6 36.8 (33.2)% 86.4 111.0 (22.2)%
Consulting and Design (Applied) 0.5 0.5 -- % 1.5 1.4 7.1 %
------- ------- ----- -------- -------- -----
Total Aavid Thermalloy ........ 32.1 55.9 (42.6)% 112.9 182.9 (38.3)%
Total Fluent .................. 14.4 13.0 10.8 % 48.5 42.4 14.4 %
------- ------- ----- -------- -------- -----
Total Company ................. $ 46.5 $ 68.9 (32.5)% $ 161.4 $ 225.3 (28.4)%
======= ======= ===== ======== ======== =====
Sales in the third quarter of 2001 were $46.5 million, a decrease of $22.4
million, or 32.5% from the comparable period of 2000. Sales for the first nine
months of 2001 were $161.4, a decrease of $63.9 million, or 28.4% from the first
nine months of 2000. This decrease stems from Aavid Thermalloy and is a direct
result of the decline experienced by the Technology sector, specifically in the
computer, networking and telecommunications industries during the first nine
months of 2001. The company has taken and will continue to take cost reduction
actions within Aavid Thermalloy such as personnel reductions and further
consolidation of manufacturing operations which will be completed prior to
December 31, 2001.
Fluent software sales of $14.4 million in the third quarter of 2001 were
$1.4 million, or 10.8%, higher than the third quarter of 2000. Fluent software
sales of $48.5 million in the first nine months of 2001 were $6.1 million or
14.4% higher than the comparable period in the prior year. 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" and "Airpak".
Aavid Thermalloy's sales were $32.1 million in the third quarter of 2001, a
decrease of $23.8 million, or 42.6%, over the comparable period of 2000. Aavid
Thermalloy's sales were $112.9 million in the first nine months of 2001, a
decrease of $70.0 million or 38.3% from the comparable period of 2000. The
Company has taken steps to stop the erosion of sales seen in the Computer and
Networking industry (and to a lesser extent the Industrial Electronics industry)
by reinforcing its manufacturing, engineering and sales and marketing efforts,
particularly in North America and Asia. The Company has also deferred the
expansion of its fan business and does not anticipate significant revenues from
the sale of fans in 2001.
International sales (which include North American exports) increased to 58%
of sales for the third quarter of 2001 compared with 43% in the third quarter of
2000.
20
No customer generated greater than 10% of the Company's revenues in the
quarter and nine months ended September 29, 2001 or September 30, 2000.
The Company's gross profit for the third quarter of 2001 was $13.8 million
compared with $25.8 million in the comparable period from 2000. Gross margin as
a percentage of sales decreased from 37.4% in the third quarter of 2000 to 29.7%
for the comparable period of 2001. Gross profit for the first nine months of
2001 was $55.4 million, compared with $75.9 million in the first nine months of
2000. Gross margin as a percentage of sales was 34.4% for the first nine months
of 2001. 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%. Gross margin in the third quarter of 2001 was
negatively impacted by approximately $2.4 million of inventory provisions
recorded during the quarter. These provisions were necessary to cover excess and
obsolete inventory arising from customer order cancellations and reduced demand.
For the first nine months of 2001, the Company has recorded nearly $3.5 million
of additional inventory reserves. In addition to inventory provisions, gross
margin for the first nine months of 2001 has been further impacted by excess
factory capacity caused by the erosion of sales volume in the primary industry
segments served by the Hardware business. This reduction in margin in the
Hardware business was partially offset by Fluent, and it's higher gross margin
business becoming a larger percentage of the Company's consolidated gross
margin.
In the third quarter of 2001 the Company's operating loss of $15.2 million
compares with an operating loss of $1.3 million in the third quarter of 2000. In
the first nine months of 2001, the Company's operating loss of $41.9 million
compares with an operating loss of $19.7 million for the first nine months of
2000. The magnitude of the operating loss in the first nine months of 2001 was
primarily impacted by a restructuring charge of $14.5 million that was recorded
in connection with the planned cessation of manufacturing activities at the
Dallas, Texas, Terrell, Texas and Loudwater, United Kingdom facilities and the
reduction of the New Hampshire workforce. Additionally, the results for 2001
contain three full quarters of amortization of intangibles that were established
as part of the merger. The large operating loss that occurred in the first nine
months of 2000 was primarily the result $4.5 million of additional cost of sales
associated with the write-up of inventory to fair value on the date of the
merger, and a $15 million one-time charge related to the write-off of acquired
in-process research and development related to Fluent.
The Company recognized a gain on the retirement of senior subordinated
notes of $4,979, which is recorded as an extraordinary gain on early
extinguishment of debt in the accompanying statement of operations for the nine
months ended September 29, 2001.
Net interest charges for the Company were $5.2 million in the third quarter
of 2001 which compares with $6.5 million for the comparable period of 2000. Net
interest charges for the first nine months of 2001 were $18.3 million, compared
with $17.6 million in the first nine of 2000.
The Company incurred a tax provision in the third quarter of 2001 despite
having significant operating losses in the United States because of significant
foreign tax provisions on foreign earnings. The Company's tax provision in 2001
represents the foreign tax provision on foreign earnings. The Company incurred
significant losses in the United States and the Company only benefits the U.S.
losses to the extent of foreign earnings which are expected to be repatriated in
the United States. Because the Company is in a net operating loss position for
U.S. tax purposes, the Company will not receive any tax benefit from foreign tax
credits. Accordingly, there is no net benefit recorded for the United States
losses, resulting in an overall tax provision for foreign taxes.
The Company's net loss for the third quarter of 2001 was $21.3 million,
versus a net loss for the comparable period of 2000 of $9.6 million. The
Company's net loss for the first nine months of 2001 was $55.7 million, versus
$43.0 million in the first nine months of 2000. As discussed above, the first
nine months of 2001 include a $14.5 million restructuring charge related to
facility closings and workforce reductions. The net loss in the first nine
months of 2000 includes a $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.
21
FINANCIAL CONDITION AND LIQUIDITY
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 2001, the Company used $7.8 million of cash
for operations, versus providing $13.1 million of cash from operations in the
first nine months of 2000. During the period, the Company provided $6.6 million
of cash in connection with financing activities. The Company used $6.7 million
for capital expenditures in the first nine months of 2001, versus $8.7 million
in the first nine months of 2000.
Total indebtedness at September 29, 2001 was $178.2 million, which compares
with $204.0 million at December 31, 2000. Total indebtedness as a percent of
stockholders' equity at September 29, 2001 was 249.2%, compared with 203.7% at
December 31, 2000. Long-term debt at September 29, 2001 was $119.8, which
compares with $193.2 million at December 31, 2000.
As of September 29, 2001, the Company was not in compliance with certain
financial covenants under the amended and restated credit facility. The Company
has notified its lenders concerning the noncompliance. The resulting event of
default has not been waived by the Company's lenders, accordingly, the lenders
could demand full payment of all amounts outstanding under the amended and
restated credit facility. As a result of the event of default, the Company
classified $17,000,000 outstanding under the revolving credit facility and
$41,000,000 outstanding under the term facility as current within the
accompanying balance sheet. The Company and its lenders are currently in
negotiations to address this issue. There can be no assurance that the Company
will be successful in securing an amended or alternative financing arrangement.
The Company has sufficient cash to meet its scheduled obligation through the end
of this year. The Company may require additional funds to meet its scheduled
interest payment due in the first quarter of 2002 under the 12 3/4% Senior
Subordinated Notes Indenture. The Company is exploring various alternatives to
provide the liquidity to make the payment.
As further discussed in Note (6) in the accompanying financial statements
development costs to complete ongoing development projects at Fluent are
estimated to be $0.9 million.
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, the Company has agreed to purchase certain minimum quantities
which approximates $1.4 million at September 29, 2001.
Due to the current economic situation within the electronics and
semi-conductor market place, Aavid's hardware business has experienced a
reduction in revenues and profitability. These poor economic conditions indicate
that the Company's goodwill and other intangible assets may not be recoverable.
The Company is currently in the process of developing its business plan for 2002
and beyond. As part of the planning process, the Company will review its
long-lived assets, including goodwill and other intangible assets, for the
existence of any potential impairment. The Company expects to have its business
plan, including the review of long-lived assets, completed prior to the end of
the fourth quarter of 2001.
22
At September 29, 2001, inventory turns were 6.1, which compare with 6.4 at
December 31, 2000.
At September 29, 2001, accounts receivable days sales outstanding ("DSO")
were 69, which compares to 66 at December 31, 2000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various 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
As of July 1, 2001, Mr. Ronald F. Borelli's term on the Company's Board of
Directors ended. He has not been replaced. On October 26, 2001, Mr. Avy Stein of
Willis Stein & Partners resigned from the Company's Board of Directors. The
Board replaced him with Mr. John Willis of Willis Stein & Partners.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
23
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, 2001 AAVID THERMAL TECHNOLOGIES, INC.
By: /s/ Brian A. Byrne
--------------------------------------
Brian A. Byrne
Vice President and Chief Financial Officer
(Principal Financial Officer)
24