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 March 30, 2002 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
May 14, 2002 was 1,019 shares of Class A, 1,079 shares of Class B and 40 shares
of Class H, all of which are owned by Heat Holdings Corp. The Registrant's
Common Stock is no longer publicly traded; however, the Registrant's Senior
Subordinated 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 March 30, 2002 and
December 31, 2001 ............................................. 3
b.) Consolidated Statements of Operations for the quarters
ended March 30, 2002 and March 31, 2001 ...................... 4
c.) Consolidated Statements of Cash Flows for the quarters
ended March 30, 2002 and March 31, 2001 ....................... 5
d.) Notes to Consolidated Financial Statements ..................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 16
Part II. Other Information
Item 1. Legal Proceedings ................................................. 22
Item 5. Other Information ................................................. 22
Item 6. Exhibits and Reports on Form 8-K .................................. 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 30,
2002 DECEMBER 31,
(UNAUDITED) 2001
---------- ----------
ASSETS
Cash and cash equivalents $ 16,322 $ 16,059
Accounts receivable-trade, net 34,888 32,930
Notes receivable 403 480
Inventories 11,420 12,560
Refundable taxes 205 118
Deferred financing fees 5,140 5,385
Prepaid and other current assets 4,972 4,099
---------- ----------
Total current assets 73,350 71,631
Property, plant and equipment, net 38,270 39,269
Goodwill, net 48,769 45,055
Developed technology and assembled workforce, net 11,143 15,738
Other assets, net 1,506 1,585
---------- ----------
Total assets $ 173,038 $ 173,278
========== ==========
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' DEFICIT
Accounts payable - trade $ 12,340 $ 14,505
Current portion of debt obligations 173,621 175,382
Income taxes payable 4,984 4,680
Restructuring charges 1,118 2,387
Deferred revenue 7,923 8,428
Accrued expenses and other current liabilities 19,476 22,938
---------- ----------
Total current liabilities 219,462 228,320
Other long term debt obligations 678 450
Deferred income taxes 15 --
---------- ----------
Total liabilities 220,155 228,770
---------- ----------
Commitments and Contingencies
Minority interests in consolidated subsidiaries 1,421 1,464
Stockholders' deficit:
Series A Preferred Stock, $.0001 par value; authorized 100 shares;
67.71 shares issued and outstanding at March 30, 2002, none at
December 31, 2001; liquidation preference $5,231 at March 30,
2002, none at December 31, 2001 -- --
Series B Preferred Stock, $.0001 par value; authorized 100 shares;
67.71 shares issued and outstanding at March 30, 2002, none at
December 31, 2001; liquidation preference $5,231 at March 30,
2002, none at December 31, 2001 -- --
Class A Common Stock, $.0001 par value; authorized 1,400 shares;
1,018.87 shares issued and outstanding -- --
Class B Common Stock, $.0001 par value; authorized
1,400 shares; 1,078.87 shares issued and outstanding -- --
Class H Common Stock, $.0001 par value; authorized
200 shares; 40 shares issued and outstanding -- --
Warrants to purchase 49.52 shares of Class A common stock
and 49.52 shares of Class H common stock 3,764 3,764
Additional paid-in capital 188,007 176,007
Cumulative translation adjustment (3,056) (2,678)
Accumulated deficit (237,253) (234,049)
---------- ----------
Total stockholders' deficit (48,538) (56,956)
---------- ----------
Total liabilities, minority interests and
stockholders' deficit $ 173,038 $ 173,278
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
3
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
QUARTER QUARTER
ENDED ENDED
MARCH 30, MARCH 31,
2002 2001
---------- ----------
Net sales $ 47,261 $ 61,611
Cost of goods sold 25,745 38,144
---------- ----------
Gross profit 21,516 23,467
Selling, general and administrative expenses 14,073 17,964
Amortization of intangible assets 920 8,560
Research and development 3,380 2,884
Restructuring charge -- 12,457
---------- ----------
Income (loss) from operations 3,143 (18,398)
Interest expense, net (5,216) (6,278)
Other income (expense), net 22 (145)
---------- ----------
Loss before income taxes and
minority interest (2,051) (24,821)
Income tax expense (1,196) (911)
---------- ----------
Loss before minority interest (3,247) (25,732)
Minority interest in loss of consolidated
subsidiaries 43 3,171
---------- ----------
Net loss $ (3,204) $ (22,561)
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
4
AAVID THERMAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE FOR THE
QUARTER ENDED QUARTER ENDED
MARCH 30, 2002 MARCH 31, 2001
-------------- --------------
Cash flows (used in) provided by operating activities:
Net loss $ (3,204) $ (22,561)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,477 11,876
Loss on sale of property, plant and equipment 6 --
Deferred income taxes 18 (59)
Accretion of discount on 12 3/4% senior subordinated
notes to interest expense 151 147
Minority interest in loss of consolidated subsidiaries (43) (3,171)
Restructuring charges -- 12,457
Changes in assets and liabilities:
Accounts receivable - trade (2,253) 5,060
Inventories 1,033 1,582
Prepaid and other current assets (863) (681)
Notes receivable 77 --
Other long term assets 68 596
Accounts payable - trade (2,077) (1,567)
Income taxes payable 315 (67)
Deferred revenue (452) 469
Accrued expenses and other current liabilities (4,545) (8,042)
---------- ----------
Total adjustments (5,088) 18,600
---------- ----------
Net cash used in operating activities (8,292) (3,961)
Cash flows (used in) provided by investing activities:
Purchases of property, plant & equipment (1,322) (2,612)
Proceeds from sale of property, plant and equipment 6 --
---------- ----------
Net cash used in investing activities (1,316) (2,612)
Cash flows provided by (used in) financing activities:
Issuance of preferred stock and warrant 12,000 --
Advances under line of credit 233 --
Principal payments under debt obligations (2,154) (2,080)
---------- ----------
Net cash provided by (used in) financing activities 10,079 (2,080)
Foreign exchange rate effect on cash and cash equivalents (208) (723)
Net increase (decrease) in cash and cash equivalents 263 (9,376)
Cash and cash equivalents, beginning of period 16,059 23,849
---------- ----------
Cash and cash equivalents, end of period $ 16,322 $ 14,473
========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 8,745 $ 10,859
========== ==========
Income taxes paid $ 965 $ 843
========== ==========
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 was being amortized over 20 years through
December 31, 2001. The remainder, $69,971, is attributable to Fluent, the CFD
software business, and was being amortized over 4 years through December 31,
2001. During the fourth quarter of 2001, the Company wrote off the goodwill
attributable to Aavid Thermalloy after performing a review for impairment under
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The impairment charge recorded in the fourth quarter of 2001 related to the
goodwill attributable to Aavid Thermalloy was $94,233. The Company adopted SFAS
142, "Goodwill and Other Intangible Assets," on January 1, 2002. Under the
provisions of SFAS 142, the remaining goodwill attributable to Fluent is no
longer amortized, but instead will be tested for impairment at least annually.
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 (10) for
selected consolidating financial statements of parent, guarantors and
non-guarantors). The Notes were issued pursuant to an Indenture (the
"Indenture") among the Company, the Subsidiary Guarantors and Bankers Trust
Company, as trustee. $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 quarters ended March 30, 2002 and March 31,
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
6
$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 March 30,
2002, the interest rates on the Term Facility and the Revolving Facility were
6.50%.
On May 4, 2001, in response to the Company not being in compliance with a
leverage ratio covenant at December 31, 2000, 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 12-3/4% senior subordinated notes. 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 were
prepaid with $6,000 of the proceeds of the equity contribution, and the four
required principal payments in 2002 were 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.
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 for the
quarters ended March 30, 2002 and March 31, 2001.
As of December 31, 2001 and continuing through March 30, 2002, the Company
was not in compliance with certain financial covenants under the Amended and
Restated Credit Facility. The Company notified its lenders concerning the
noncompliance. The resulting event of default has not been waived by the
Company's lenders; accordingly, the lenders could have demanded 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, $36,207 outstanding under the term facility and
$119,804 of 12-3/4 % Senior Subordinated Notes as current within the
accompanying balance sheet. On January 29, 2002 the Company and its Senior
lenders entered into a forbearance agreement with an expiration date of May 31,
2002. The forbearance agreement, among other things, required the Company's
owners to contribute $12.0 million of additional equity and allowed the Company
to pay its semi-annual interest payment due February 1, 2002 on its 12-3/4%
Senior Subordinated Notes. The forbearance agreement also required the Company
to accelerate a principal payment of $1,985 on the term loan that was originally
due on March 31, 2002. This payment of $1,985 was made at the time of the
signing of the forbearance agreement.
The Company is currently negotiating with its senior lenders and is also
seeking alternative financing sources as well as other options to provide
liquidity to the Company. There can be no assurance that the Company will be
successful in these endeavors. Management is also actively reviewing its
strategic plan to attempt to bring the Company back to profitability. As
discussed in Notes (6) and (9), the Company has restructured its operations and
is seeking alternative sources of liquidity. There can be no assurance that
management's plan will be successful in returning the Company to profitability.
7
On January 30, 2002, as part of the equity contribution required under the
forbearance agreement discussed above, Heat Holdings contributed to Aavid
Thermal Technologies, Inc. an aggregate of $12,000 in cash in exchange for: (a)
a warrant to purchase 174,389 Series B Preferred Units of Aavid Thermalloy, LLC
held beneficially and of record by Aavid Thermal Technologies, Inc. and (b)
67.71 shares of Aavid Thermal Technologies, Inc. Series A Preferred Stock, par
value $.0001 per share and 67.71 shares of Aavid Thermal Technologies, Inc.
Series B Preferred Stock, par value $.0001 per share. The portion of the equity
contribution related to the warrant has been recorded in additional paid in
capital in the accompanying balance sheet as of March 30, 2002.
Dividends on the Company's Series A and Series B Preferred Stock
(Preferred Stock) shall be paid at the rate of 12% per annum, compounded
annually, of the Liquidation Value of such shares (plus any accrued and unpaid
dividends as of the end of the previous anniversary of the date of issuance of
such shares) from and including the date of issuance of such shares of Preferred
Stock to and including the first to occur of: (i) the date on which the
Liquidation Value (plus all accrued and unpaid dividends thereon) of such shares
of Preferred Stock is paid to the holder thereof in connection with the
liquidation of the Corporation or the redemption of such shares of Preferred
Stock by the Company or; (ii) the date on which such shares are otherwise
acquired by the Company. Such dividends shall accrue whether or not they have
been declared and whether or not there are profits, surplus or other funds of
the Company legally available for the payment of dividends, and such dividends
shall be cumulative such that all accrued and unpaid dividends shall be fully
paid or declared with funds irrevocably set apart for payment thereof and shall
be paid before any dividends, distributions, redemptions or other payments may
be made with respect to any Junior Securities, other than Participating
Dividends.
On all matters submitted to a vote of the stockholders, each holder of
outstanding shares of Preferred Stock shall have the number of votes such holder
would have had if such holder had converted such holder's Preferred Stock into
Common Stock on the record date of such vote (or, if no record date is
established, immediately prior to such vote).
Upon any liquidation, dissolution or winding up of the Company, each
holder of Preferred Stock shall be entitled to be paid, before any distribution
or payment is made upon any Junior Securities, an amount in cash equal to the
greater of (i) the aggregate Liquidation Value of all Shares of Preferred Stock
held by such holder (plus any accrued and unpaid dividends) or (ii) the amount
such holder of Preferred Stock would receive if the holder converted all of such
holder's shares of Preferred Stock into shares of Common Stock immediately prior
to such liquidation, dissolution or winding up of the Company.
At any time after April 13, 2022, the Company may redeem the Preferred
Stock by delivering a written notice of such redemption at least thirty days
prior to the redemption date. For each share of Preferred Stock which is to be
redeemed, the Company shall be obligated on the redemption date to pay the
holder of such share an amount equal to the Liquidation Value of such share
(plus any accrued and unpaid dividends).
At any time and from time to time, any holder of Preferred Stock may
convert all or any portion of the Preferred Stock (including a fraction of a
share) held by such holder into a number of shares of Common Stock computed by
multiplying the number of shares to be converted by $10.00 and dividing the
result by the applicable Conversion Price then in effect ($3.55 is the Initial
Conversion Price). The Initial Conversion Price may be adjusted from time to
time for certain dilutive events.
The Liquidation Value of any share of Preferred Stock as of any particular
date shall be $75,738.83 per share, as such amount is adjusted for stock splits,
stock dividends and similar transactions. The total liquidation value of the
Preferred Stock is $10,462 at March 30, 2002.
(2) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments, consisting only of normal
adjustments, necessary to present fairly the financial position of Aavid Thermal
Technologies, Inc. and its consolidated subsidiaries at March 30, 2002 and
December 31, 2001, and the results of operations and cash flows for the quarters
ended March 30, 2002 and March 31, 2001. Interim results are not necessarily
indicative of results for a full year.
The financial information as of and for the period ended March 30, 2002
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, 2001.
8
(3) ACCOUNTS RECEIVABLE
The components of accounts receivable at March 30, 2002 and December 31,
2001 are as follows:
MARCH 30, DECEMBER 31,
2002 2001
---------- ----------
(UNAUDITED)
Accounts receivable $ 38,108 $ 36,246
Allowance for doubtful accounts (3,220) (3,316)
---------- ----------
Net accounts receivable $ 34,888 $ 32,930
========== ==========
(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 March 30, 2002 and December 31, 2001 are as follows:
MARCH 30, DECEMBER 31,
2002 2001
---------- ----------
(UNAUDITED)
Raw materials $ 4,381 $ 4,804
Work-in-process 2,564 2,564
Finished goods 4,475 5,192
---------- ----------
$ 11,420 $ 12,560
========== ==========
(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:
QUARTER ENDED QUARTER ENDED
MARCH 30, MARCH 31,
2002 2001
---------- ----------
(UNAUDITED) (UNAUDITED)
Net loss $ (3,204) $ (22,561)
Foreign currency translation
adjustment, net of taxes (378) (1,713)
---------- ----------
Comprehensive loss $ (3,582) $ (24,274)
========== ==========
(6) 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 March 30, 2002:
CHARGES AGAINST
RESERVES FOR THE RESTRUCTURING
RESTRUCTURING QUARTER ENDED RESERVES BALANCE
RESERVES BALANCE AT MARCH 30, AT MARCH 30,
DECEMBER 31, 2001 2002 2002
----------------- ---- ----
Lease terminations and leasehold
improvements reserve $ 301 $ -- $ 301
Employee separation 139 -- 139
---------- ---------- ----------
Total $ 440 $ -- $ 440
========== ========== ==========
9
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 these actions, the Company recorded a restructuring charge
within the statement of operations for the first quarter of 2001. This
restructuring charge totaled $12,073 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 these restructuring reserves during
the first quarter of 2002:
CHARGES AGAINST RESTRUCTURING
RESERVES FOR THE RESERVES
RESTRUCTURING QUARTER ENDED BALANCE
RESERVES BALANCE MARCH 30, AT MARCH 30,
AT DECEMBER 31, 2001 2002 2002
-------------------- ---- ----
Employee separation $ 356 $ (266) $ 90
Fixed asset reserve -- -- --
Prepaid rent write-off -- -- --
---------- ---------- ----------
Total $ 356 $ (266) $ 90
========== ========== ==========
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 $1,222 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 charged against these
restructuring reserves during the first quarter of 2002:
CHARGES AGAINST RESTRUCTURING
RESERVES FOR THE RESERVES
RESTRUCTURING QUARTER ENDED BALANCE
RESERVES BALANCE MARCH 30, AT MARCH 30,
AT DECEMBER 31, 2001 2002 2002
-------------------- ---- ----
Employee separation $ 201 $ (125) $ 76
Fixed asset reserve -- -- --
Prepaid rent write-off -- -- --
---------- ---------- ----------
Total $ 201 $ (125) $ 76
========== ========== ==========
During the fourth quarter of 2001 the Company made the decision to cease
manufacturing operations at its fan facility in China and reduce its workforce
in North America, Europe and Asia. In connection with this action, the Company
recorded a restructuring charge within the statement of operations for the
fourth quarter of 2001. This restructuring charge totals $3,314 and includes
estimated amounts related to employee severance, the write-off of fixed assets
and charges related to certain contractual obligations. During the quarter ended
December 31, 2001, 253 individuals were terminated under this restructuring
plan. The following amounts have been charged against these restructuring
reserves during the first quarter of 2002:
CHARGES AGAINST RESTRUCTURING
RESERVES FOR THE RESERVES
RESTRUCTURING QUARTER ENDED BALANCE
RESERVES BALANCE MARCH 30, AT MARCH 30,
AT DECEMBER 31, 2001 2002 2002
-------------------- ---- ----
Employee separation $ 1,177 $ (785) $ 392
Fixed asset reserve 1,393 -- 1,393
Lease obligations 213 (93) 120
---------- ---------- ----------
Total $ 2,783 $ (878) $ 1,905
========== ========== ==========
(7) RECENT 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.
10
In December, 1999 the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB No. 101 provides interpretative guidance on the recognition, presentation
and disclosure of revenue. The Company adopted SAB No. 101 on January 1, 2000.
The application of SAB No. 101 did not have a material effect on the Company's
financial position or results of operations.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 141, "Business Combinations" and SFAS 142,
"Goodwill and Other Intangible Assets." SFAS 141 requires business combinations
initiated after June 30, 2001 to be accounted for using the purchase method of
accounting. It also specifies the types of acquired intangible assets that are
required to be recognized and reported separately from goodwill. SFAS 142
requires that goodwill and certain intangibles, including assembled workforce,
no longer be amortized, but instead tested for impairment at least annually. The
Company adopted SFAS 142 on January 1, 2002. The Company completed its initial
review during the first quarter of 2002 and determined its intangible assets
were not impaired. Because goodwill and some intangible assets are no longer
being amortized, 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. Additionally, the Company was required
to reclassify the net balance of its assembled workforce intangible asset of
$3,714 to goodwill upon adoption of the statement. In the first quarter of 2001,
the Company recorded $6,420 of amortization related to goodwill that was not
recorded in the first quarter 2002 under the provisions of SFAS No. 142.
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" and the accounting and reporting provisions
of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" for the disposal of a segment of
a business (as previously defined in that Opinion). The Company adopted SFAS No.
144 on January 1, 2002. The adoption of SFAS No. 144 did not have a material
effect on the Company's financial position or results of operations.
(8) SEGMENT REPORTING
Aavid provides thermal management solutions for microprocessors and
integrated circuits ("ICs") for computer and network and industrial
applications. The Company consists of three distinct reportable segments: (1)
thermal management products; (2) computational fluid dynamics ("CFD") software;
and (3) direct-bonded copper substrates (Curamik). 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. Curamik
manufactures and markets direct-bonded copper substrates used in power
electronics applications.
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, 2001.
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.
11
The following summarizes the operations of each reportable segment for the
quarters ending March 30, 2002 and March 31, 2001:
SEGMENT
REVENUES INCOME (LOSS)
FROM BEFORE TAXES ASSETS (NET OF
EXTERNAL AND MINORITY INTERCOMPANY
CUSTOMERS INTERESTS BALANCES)
--------- --------- ---------
March 30, 2002
Thermal Products $ 22,311 $ (6,478) $ 36,808
CFD Software 20,748 4,878 86,082
Curamik 4,202 (320) 26,536
Corporate Office -- (131) 23,612
---------- ---------- ----------
Total ..................... $ 47,261 $ (2,051) $ 173,038
========== ========== ==========
March 31, 2001
Thermal Products $ 38,121 $ (21,069) $ 210,592
CFD Software 17,803 (3,031) 98,133
Curamik 5,687 1,537 19,935
Corporate Office -- (2,258) 21,856
---------- ---------- ----------
Total ..................... $ 61,611 $ (24,821) $ 350,516
========== ========== ==========
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.
FOR THE QUARTER ENDED FOR THE QUARTER ENDED
MARCH 30, 2002 MARCH 31, 2001
-------------------------------- --------------------------------
LONG-LIVED LONG-LIVED
ASSETS ASSETS
AS OF PERIOD AS OF PERIOD
REVENUES END REVENUES END
-------- --- -------- ---
United States $ 23,272 $ 82,559 $ 38,306 $ 246,401
Taiwan 2,968 1,410 2,680 1,567
China 2,749 1,718 3,099 3,692
United Kingdom 5,214 1,836 6,217 1,568
Germany 6,207 4,898 7,752 4,275
Other International 15,461 7,332 14,656 6,087
Intercompany
eliminations (8,610) (65) (11,099) (65)
---------- ---------- ---------- ----------
Total $ 47,261 $ 99,688 $ 61,611 $ 263,525
========== ========== ========== ==========
(9) SUBSEQUENT EVENTS
On April 1, 2002, the Company sold its Terrell, Texas manufacturing
facility for $1,500, of which $1,226 was used to pay down amounts owed on the
Senior Credit Facility. The balance of the proceeds was used to pay expenses of
the sale.
12
(10) 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 MARCH 30, 2002 (UNAUDITED)
----------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
ASSETS
Cash and cash equivalents ............... $ 562 $ 5,474 $ 10,286 $ -- $ 16,322
Accounts receivable-trade, net .......... -- 13,420 21,100 368 34,888
Notes receivable ........................ -- 403 -- -- 403
Inventories ............................. -- 3,343 7,894 183 11,420
Due (to) from affiliate, net ............ 100,649 (55,353) (13,641) (31,655) --
Refundable taxes ........................ (239) -- 264 180 205
Deferred income taxes ................... 11,688 (3,065) 89 (8,712) --
Prepaid and other current assets ........ 273 6,703 3,390 (254) 10,112
---------- ---------- ---------- ---------- ----------
Total current assets .................... 112,933 (29,075) 29,382 (39,890) 73,350
Property, plant and equipment, net ...... 25 22,182 16,079 (16) 38,270
Investment in subsidiaries .............. (31,346) -- -- 31,346 --
Other assets, net ....................... 24,775 45,697 15,276 (24,330) 61,418
---------- ---------- ---------- ---------- ----------
Total assets ............................ $ 106,387 $ 38,804 $ 60,737 $ (32,890) $ 173,038
========== ========== ========== ========== ==========
LIABILITIES, MINORITY INTERESTS AND
STOCKHOLDERS' DEFICIT
Accounts payable-trade .................. $ 139 $ 3,187 $ 9,014 $ -- $ 12,340
Current portion of debt obligations ..... 173,011 364 246 -- 173,621
Income taxes payable .................... (11,979) 14,821 2,845 (703) 4,984
Deferred revenue ........................ -- 4,160 3,763 -- 7,923
Accrued expenses and other current
liabilities .......................... 3,945 8,151 8,466 32 20,594
---------- ---------- ---------- ---------- ----------
Total current liabilities ............... 165,116 30,683 24,334 (671) 219,462
---------- ---------- ---------- ---------- ----------
Debt obligations, net of current
portion .............................. -- 376 302 -- 678
Deferred income taxes ................... (10,770) 15,463 (42) (4,636) 15
---------- ---------- ---------- ---------- ----------
Total liabilities ....................... 154,346 46,522 24,594 (5,307) 220,155
---------- ---------- ---------- ---------- ----------
Commitments and contingencies
Minority interests ...................... 579 79 1,464 (701) 1,421
Stockholders' equity:
Preferred stock, par value .............. -- -- -- -- --
Common stock, par value ................. -- -- 6 (6) --
Warrants ................................ 3,764 -- -- -- 3,764
Additional paid-in capital .............. 188,007 207,605 4,021 (211,626) 188,007
Cumulative translation adjustment ....... (3,056) 2,009 (3,988) 1,979 (3,056)
Retained earnings (deficit) ............. (237,253) (217,411) 34,640 182,771 (237,253)
---------- ---------- ---------- ---------- ----------
Total stockholders' (deficit) equity .... (48,538) (7,797) 34,679 (26,882) (48,538)
---------- ---------- ---------- ---------- ----------
Total liabilities, minority interests and
stockholders' (deficit) equity ....... $ 106,387 $ 38,804 $ 60,737 $ (32,890) $ 173,038
========== ========== ========== ========== ==========
13
CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2001
-------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
ASSETS
Cash and cash equivalents .......... $ 849 $ 5,953 $ 9,257 $ -- $ 16,059
Accounts receivable-trade, net ..... -- 13,539 19,023 368 32,930
Notes receivable ................... -- 480 -- -- 480
Inventories ........................ -- 4,196 8,322 42 12,560
Due (to) from affiliate, net ....... 95,115 (48,374) (13,091) (33,650) --
Refundable taxes ................... (180) -- 118 180 118
Deferred income taxes .............. 11,687 (3,065) 333 (8,955) --
Prepaid and other current assets ... 151 6,254 3,090 (11) 9,484
---------- ---------- ---------- ---------- ----------
Total current assets ............... 107,622 (21,017) 27,052 (42,026) 71,631
Property, plant and equipment, net . 33 22,861 16,391 (16) 39,269
Investment in subsidiaries ......... (26,551) -- -- 26,551 --
Deferred taxes ..................... 974 -- 410 (1,384) --
Other assets, net .................. 23,802 46,376 15,192 (22,992) 62,378
---------- ---------- ---------- ---------- ----------
Total assets ....................... $ 105,880 $ 48,220 $ 59,045 $ (39,867) $ 173,278
========== ========== ========== ========== ==========
LIABILITIES, MINORITY INTERESTS
AND STOCKHOLDERS' (DEFICIT)
EQUITY
Accounts payable-trade ............. $ 834 $ 5,388 $ 8,283 $ -- $ 14,505
Current portion of debt obligations 174,845 444 93 -- 175,382
Income taxes payable ............... (10,240) 13,122 2,501 (703) 4,680
Deferred revenue ................... -- 4,871 3,557 -- 8,428
Accrued expenses and other
current liabilities ............. 7,668 10,157 7,468 32 25,325
---------- ---------- ---------- ---------- ----------
Total current liabilities .......... 173,107 33,982 21,902 (671) 228,320
---------- ---------- ---------- ---------- ----------
Debt obligations, net of
current portion ................. -- 221 229 -- 450
Deferred income taxes .............. (10,849) 15,463 22 (4,636) --
---------- ---------- ---------- ---------- ----------
Total liabilities .................. 162,258 49,666 22,153 (5,307) 228,770
---------- ---------- ---------- ---------- ----------
Commitments and contingencies
Minority interests ................. 578 85 1,502 (701) 1,464
Stockholders' equity:
Common stock, par value ............ -- -- -- -- --
Warrants ........................... 3,764 -- -- -- 3,764
Additional paid-in capital ......... 176,007 207,604 4,021 (211,625) 176,007
Cumulative translation adjustment .. (2,678) 1,954 (3,231) 1,277 (2,678)
Retained earnings (deficit) ........ (234,049) (211,089) 34,600 176,489 (234,049)
---------- ---------- ---------- ---------- ----------
Total stockholders' equity (deficit) (56,956) (1,531) 35,390 (33,859) (56,956)
---------- ---------- ---------- ---------- ----------
Total liabilities, minority
interests and stockholders'
(deficit) equity ................ $ 105,880 $ 48,220 $ 59,045 $ (39,867) $ 173,278
========== ========== ========== ========== ==========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 30, 2002 (UNAUDITED)
-----------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
Net sales ............................. $ -- $ 24,097 $ 32,600 $ (9,436) $ 47,261
Cost of goods sold .................... -- 10,898 20,126 (5,279) 25,745
---------- ---------- ---------- ---------- ----------
Gross profit .......................... -- 13,199 12,474 (4,157) 21,516
Selling, general and administrative
expenses ........................... 553 8,958 7,003 (1,521) 14,993
Research and development .............. -- 3,171 2,889 (2,680) 3,380
---------- ---------- ---------- ---------- ----------
Income (loss) from operations ......... (553) 1,070 2,582 44 3,143
Interest income (expense), net ........ 412 (5,663) 31 4 (5,216)
Other income (expense), net ........... 6 (6) (6) 28 22
Equity in income (loss) of subsidiaries (4,586) -- -- 4,586 --
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and
minority interests .................. (4,721) (4,599) 2,607 4,662 (2,051)
Income tax benefit (expense) .......... 1,517 (1,728) (985) -- (1,196)
---------- ---------- ---------- ---------- ----------
Income (loss) before minority interests (3,204) (6,327) 1,622 4,662 (3,247)
Minority interests in (income) loss of
consolidated subsidiaries ........... -- 5 38 -- 43
---------- ---------- ---------- ---------- ----------
Net income (loss) ..................... $ (3,204) $ (6,322) $ 1,660 $ 4,662 $ (3,204)
========== ========== ========== ========== ==========
14
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 (UNAUDITED)
-----------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
Net sales ............................. $ -- $ 38,307 $ 34,403 $ (11,099) $ 61,611
Cost of goods sold .................... 1,000 25,260 19,576 (7,692) 38,144
---------- ---------- ---------- ---------- ----------
Gross profit .......................... (1,000) 13,047 14,827 (3,407) 23,467
Selling, general and administrative
expenses ............................ 799 20,344 6,462 (1,081) 26,524
Restructuring charges ................. -- 12,457 -- -- 12,457
Research and development .............. -- 2,268 3,001 (2,385) 2,884
---------- ---------- ---------- ---------- ----------
Income (loss) from operations ......... (1,799) (22,022) 5,364 59 (18,398)
Interest income (expense), net ........ (453) (5,756) (56) (13) (6,278)
Other income (expense), net ........... 7 (73) (108) 29 (145)
Equity in income (loss) of subsidiaries (21,316) -- -- 21,316 --
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and
minority interests .................. (23,561) (27,851) 5,200 21,391 (24,821)
Income tax benefit (expense) ......... 1,000 84 (1,995) -- (911)
---------- ---------- ---------- ---------- ----------
Income (loss) before minority interests (22,561) (27,767) 3,205 21,391 (25,732)
Minority interests in (income) loss of
consolidated subsidiaries ........... -- 3,269 (98) -- 3,171
---------- ---------- ---------- ---------- ----------
Net income (loss) ..................... $ (22,561) $ (24,498) $ 3,107 $ 21,391 $ (22,561)
========== ========== ========== ========== ==========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 30, 2002 (UNAUDITED)
------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
Net cash (used in) provided by
operating activities ................... $ (10,302) $ 11 $ 1,999 $ -- $ (8,292)
Cash flows used in investing activities:
Purchases of property, plant and equipment -- (391) (931) -- (1,322)
Proceeds from sale of property, plant and
equipment .............................. -- 6 -- -- 6
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities .... -- (385) (931) -- (1,316)
Cash flows provided by (used in) financing
activities:
Issuance of preferred stock .............. 12,000 -- -- -- 12,000
Advances under line of credit ............ -- -- 233 -- 233
Principal payments on debt obligations ... (1,985) (161) (8) -- (2,154)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities ............................. 10,015 (161) 225 -- 10,079
Foreign exchange effect on cash and
cash equivalents ....................... -- 56 (264) -- (208)
---------- ---------- ---------- ---------- ----------
Net (decrease) increase in cash and
cash equivalents ....................... (287) (479) 1,029 -- 263
Cash and cash equivalents, beginning
of period .............................. 849 5,953 9,257 -- 16,059
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents, end of period . $ 562 $ 5,474 $ 10,286 $ -- $ 16,322
========== ========== ========== ---------- ==========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2001 (UNAUDITED)
------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities ............................. $ (7,166) $ 90 $ 3,116 $ (1) $ (3,961)
Cash flows used in investing activities:
Purchases of property, plant and equipment -- (964) (1,648) -- (2,612)
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities .... -- (964) (1,648) -- (2,612)
Cash flows provided by (used in) financing
activities:
Principal payments on debt obligations ... (2,000) (1) (79) -- (2,080)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities ............................. (2,000) (1) (79) -- (2,080)
Foreign exchange effect on cash and
cash equivalents ....................... -- -- (723) -- (723)
---------- ---------- ---------- ---------- ----------
Net increase in cash and cash equivalents (9,166) (875) 666 (1) (9,376)
Cash and cash equivalents, beginning
of period .............................. 9,443 4,190 10,215 1 23,849
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents, end of period . $ 277 $ 3,315 $ 10,881 $ -- $ 14,473
========== ========== ========== ---------- ==========
15
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, 2001.
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 was being amortized
over 20 years through December 31, 2001. The remainder, $70.0 million, is
attributable to Fluent, the CFD software business, and was being amortized over
4 years through December 31, 2001. During the fourth quarter of 2001, the
Company wrote off the goodwill attributable to Aavid Thermalloy after performing
a review for impairment under Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." The impairment charge recorded in the fourth quarter
of 2001 related to the goodwill attributable to Aavid Thermalloy was $94.2
million. The Company adopted SFAS 142, "Goodwill and Other Intangible Assets,"
on January 1, 2002. Under the provisions of SFAS 142, the remaining goodwill
attributable to Fluent is no longer amortized, but instead will be tested for
impairment at least annually. The Company completed its initial review for
impairment during the first quarter of 2002 and determined its intangible assets
were not impaired. Because goodwill and some intangible assets are no longer
being amortized, 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. Additionally, the Company was required
to reclassify the net balance of its assembled workforce intangible asset of
$3.7 million to goodwill upon adoption of the statement. In the first quarter of
2001, the Company recorded $6.4 million of amortization related to goodwill that
was not recorded in the first quarter 2002 under the provisions of SFAS No. 142.
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
16
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
quarters ended March 30, 2002 and March 31, 2001.
The Indenture limits the Company's ability to incur additional debt, to
pay dividends or make other distributions, to purchase or redeem our stock or
make other investments, to sell or dispose of assets, to create or incur liens,
and to merge or consolidate with any other person. The Indenture also contains
provisions requiring additional equity investments by Willis Stein & Partners in
the event the Company does not achieve certain leverage to EBITDA ratios, as
defined, in years 2000 and 2001. 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
2002. 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 March 30,
2002 the interest rates on the Term Facility and the Revolving Facility were
6.5%.
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).
17
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.
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 Subordinated 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 be prepaid with $6.0 million of
the proceeds of the equity contribution, and the four required principal
payments in 2002 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 and March
31, 2001 were cured.
As of December 31, 2001 and continuing through March 30, 2002, the Company
was not in compliance with certain financial covenants under the Amended and
Restated Credit Facility. The Company notified its lenders concerning the
noncompliance. The resulting event of default has not been waived by the
Company's lenders; accordingly, the lenders could have demanded full payment of
all amounts outstanding under the Amended and Restated Credit Facility. As a
result of the event of default, the Company classified $17.0 million outstanding
under the revolving credit facility, $36.2 million outstanding under the term
facility and $119.8 million of 12-3/4 % Senior Subordinated Notes as current
within the accompanying balance sheet. On January 29, 2002 the Company and its
Senior lenders entered into a forbearance agreement with an expiration date of
May 31, 2002. The forbearance agreement, among other things, required the
Company's owners to contribute $12.0 million of additional equity and allowed
the Company to pay its semi-annual interest payment due February 1, 2002 on its
12-3/4% Senior Subordinated Notes. The forbearance agreement also required the
Company to accelerate a principal payment of $2.0 million on the term loan that
was originally due on March 31, 2002. This payment of $2.0 million was made at
the time of the signing of the forbearance agreement.
On January 30, 2002, as part of the equity contribution required under the
forbearance agreement discussed above, Heat Holdings contributed to Aavid
Thermal Technologies, Inc. an aggregate of $12.0 million in cash in exchange
for: (a) a warrant to purchase 174,389 Series B Preferred Units of Aavid
Thermalloy, LLC held beneficially and of record by Aavid Thermal Technologies,
Inc. and (b) 67.71 shares of Aavid Thermal Technologies, Inc. Series A Preferred
Stock, par value $.0001 per share and 67.71 shares of Aavid Thermal
Technologies, Inc. Series B Preferred Stock, par value $.0001 per share. The
portion of the equity contribution related to the warrant has been recorded in
additional paid in capital in the accompanying balance sheet as of March 30,
2002.
RESULTS OF OPERATIONS
For The Quarter Ended March 30, 2002 Compared With The Quarter Ended March
31, 2001
FOR THE THREE MONTHS ENDED
MARCH 30, MARCH 31,
SALES (DOLLARS IN MILLIONS) 2002 2001 CHANGE
---------- ---------- ----------
Computer, network and
industrial electronic
thermal solutions 22.0 37.6 (41.5)%
Direct-bonded copper
substrates (Curamik) 4.2 5.7 (26.1)%
Consulting and design
services (Applied) 0.3 0.5 (35.4)%
---------- ---------- ----------
Total Aavid Thermalloy 26.5 43.8 (39.5)%
Total Fluent 20.8 17.8 16.5%
---------- ---------- ----------
Total Company $ 47.3 $ 61.6 (23.3)%
========== ========== ==========
Sales in the first quarter of 2002 were $47.3 million, a decrease of $14.3
million, or 23.3% from the comparable period of 2001. The overall decrease in
sales stems from Aavid Thermalloy and is primarily the result of the significant
decline experienced by the semi-conductor and electronics industries during 2001
and which has extended into the first quarter of 2002.
18
Fluent software sales of $20.8 million in the first quarter of 2002 were
$3.0 million, or 16.5%, higher, than the first quarter of 2001. 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 $26.5 million in the first quarter of 2002,
a decrease of $17.3 million, or 39.5%, over the comparable period of 2001. As
discussed above, this was the result of a significant decline in the overall
industry in which Aavid Thermalloy's customers operate in. However, Aavid
Thermalloy has experienced an improvement in its book-to-bill ratio which became
positive at the beginning of the first quarter of 2002. Based on the current
booking activity, management expects to see moderate sequential revenue growth
in the second quarter of 2002 from the first quarter 2002 levels.
International sales (which include North American exports) increased to
60.8% of sales for the first quarter of 2002 compared with 51% in the first
quarter of 2001.
No customer generated greater than 10% of the Company's revenues in the
first quarter of 2002 or 2001.
The Company's gross profit for the first quarter of 2002 was $21.5 million
compared with $23.5 million in the comparable period from 2001. Gross margin as
a percentage of sales increased from 38.1% in the first quarter of 2001 to 45.5%
for the comparable period of 2002. Gross margin has improved through significant
improvements in manufacturing efficiency and utilization as a result of the
consolidation of manufacturing facilities (including the shut-down of the
Loudwater, U.K. facility and the Dallas and Terrell, Texas facilities) that
occurred during 2001. In addition, Fluent's higher gross margin business has
become a larger percentage of the Company's consolidated gross margin.
In the first quarter of 2002 the Company's operating income of $3.1
million compares with an operating loss of $18.4 million in the first quarter of
2001. The magnitude of the operating loss in the first quarter of 2001 was
primarily impacted by a one-time restructuring charge of $12.5 million that was
recorded in connection with the cessation of manufacturing activities at the
Dallas facility and the reduction of the New Hampshire workforce. Aavid
Thermalloy's selling, general and administrative expenses, excluding
amortization of intangibles, declined $2.8 million, from $8.0 million in the
first quarter of 2001 to $5.2 million in the first quarter of 2002 due to cost
savings resulting from facility consolidations and workforce reductions in 2001.
Fluent's operating expenses, exclusive of intangible asset amortization,
declined by $0.3 million in the first quarter of 2002 compared to the first
quarter of 2001. Amortization of intangible assets in the first quarter of 2002
was $0.9 million, a decrease of $7.6 million, or 89.3%, over the $8.6 million of
amortization recorded in the comparable quarter of 2001. This decrease in
amortization expense is a result of the cessation of goodwill amortization
beginning in the first quarter of 2002 due to the adoption of SFAS 142.
Net interest charges for the Company were $5.2 million in the first
quarter of 2002 which compares with $6.3 million for the comparable period of
2001. The decrease in interest expense is due to the lower debt levels in the
first quarter of 2002 compared to the first quarter of 2001 resulting from the
retirement of $26.2 million of Senior Subordinated Notes that occurred in the
second quarter of 2001, combined with lower interest rates on the senior credit
facility in 2002 compared to 2001.
The Company incurred a tax provision in the first quarter of 2002 despite
having significant operating losses in the United States because of significant
foreign tax provisions on foreign earnings. The Company's tax provision in 2002
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 first quarter of 2002 was $3.2 million,
versus a net loss for the comparable period of 2001 of $22.6 million. As
discussed above, the first quarter of 2001 includes a $12.5 million
restructuring charge related to the closure of the Dallas manufacturing facility
and $6.4 million of goodwill amortization which is no longer recorded due to the
adoption of SFAS 142.
FINANCIAL CONDITION
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
19
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 three months of 2002, the Company used $8.3 million of
cash for operations, versus using $4.0 million of cash for operations in the
first quarter of 2001. Of the $8.3 million of cash used for operations, $8.8
million related to interest payments made during the period. During the period,
the Company was provided with $10.1 million of cash in connection with financing
activities and used $1.3 million for capital expenditures.
As of December 31, 2001 and continuing through March 30, 2002, the Company
was not in compliance with certain financial covenants under the Amended and
Restated Credit Facility. The Company notified its lenders concerning the
noncompliance. The resulting event of default has not been waived by the
Company's lenders; accordingly, the lenders could have demanded full payment of
all amounts outstanding under the Amended and Restated Credit Facility. As a
result of the event of default, the Company classified $17.0 million outstanding
under the revolving credit facility, $36.2 million outstanding under the term
facility and $119.8 million of 12-3/4 % Senior Subordinated Notes as current
within the accompanying balance sheet. On January 29, 2002 the Company and its
Senior lenders entered into a forbearance agreement with an expiration date of
May 31, 2002. The forbearance agreement, among other things, required the
Company's owners to contribute $12.0 million of additional equity and allowed
the Company to pay its semi-annual interest payment due February 1, 2002 on its
12-3/4% Senior Subordinated Notes. The forbearance agreement also required the
Company to accelerate a principal payment of $2.0 million on the term loan that
was originally due on March 31, 2002. This payment of $2.0 million was made at
the time of the signing of the forbearance agreement. The Company intends to
either amend its current Senior Credit Facility with its existing lenders;
secure a new Senior Credit Facility with new lenders; or enter negotiations for
an additional forbearance period to accomplish the foregoing by May 31, 2002.
There can be no assurance that the Company will be successful in negotiating
favorable terms with its existing lenders or securing a new financing
arrangement.
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 $1.1 million at March 30, 2002.
At March 30, 2002 inventory turns were 7.3, which compare with 7.4 at
December 31, 2001.
At March 30, 2002 accounts receivable days sales outstanding ("DSO") were
67, which compare with 63 days at December 31, 2001.
CRITICAL ACCOUNTING POLICIES
We prepare the consolidated financial statements of Aavid Thermal
Technologies, Inc. in conformity with accounting principles generally accepted
in the United States of America. As such, we are required to make certain
estimates, judgements and assumptions that we believe are reasonable based on
the information available. These estimates and assumptions affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the periods presented. The
significant accounting policies which we believe are the most critical to aid in
fully understanding and evaluating our financial reporting results include the
following:
REVENUE RECOGNITION AND SALES RETURNS AND ALLOWANCES
Thermal Products
Revenue is recognized when products are shipped. We offer certain
distributors limited rights of return and stock rotation rights. Due to these
return rights, we continuously monitor and track product returns and we record a
provision for the estimated future amount of such future returns, based on
historical experience and any notification we receive of pending returns. While
such returns have historically been within our expectations and provisions
established, we cannot guarantee that we will continue to experience the same
return rates that we have in the past. Any significant decrease in product
demand experienced by our distributor customers and the resulting credit returns
could have a material adverse impact on our operating results for the period or
periods in which such returns materialize.
Software
20
Our software subsidiary, Fluent, Inc. licenses its software products under
both annual and perpetual license arrangements. Software license revenue is
recognized upon the execution of the license arrangements and shipment of the
product, provided that no significant vendor post-contract support obligations
remain outstanding, and collection of the resulting receivable is deemed
probable. Fluent recognizes revenue from post-contract support, which consists
of telephone support and the right to software upgrades, ratably over the period
of the post-contract arrangement.
Fluent recognizes software revenue in accordance with Statement of
Position (SOP) 97-2, "Software Revenue Recognition" and SOP 98-9, "Modification
of SOP 97-2; Software Revenue Recognition, With Respect to Certain
Transactions." These statements provide specific industry guidance and stipulate
that revenue recognized from software arrangements is to be allocated to each
element of the arrangement based on the relative fair values of the elements,
such as software products, upgrades, enhancements, post-contract customer
support, installation or training. SOP 98-9 modified SOP 97-2 to require the use
of the "residual method" in situations where vendor specific objective evidence
(VSOE) exists for all undelivered elements but does not exist for one or more of
the delivered elements. Under the residual method, the undiscounted VSOE of fair
value of the undelivered elements is deferred and the difference (residual)
between the total fee and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements. Revenue related to the
software element is recognized upon signing of the contract and delivery of the
product. Post-contract support is recognized ratably over the life of the
contract.
ACCOUNTS RECEIVABLE
We perform ongoing credit evaluations of our customers and adjust credit limits
based on payment history and the customer's current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based on our historical experience and any specific
customer collection issues we have identified. While such credit losses have
historically been within our expectations and the provisions established, we
cannot guarantee that we will continue to experience the same credit loss rates
we have in the past. In the event that economic or other conditions cause a
change in liquidity or financial condition in multiple customers, there could be
a material adverse effect on our collection of receivables and future results of
operations.
INVENTORIES
We value our inventory, which consists of materials, labor and overhead,
at the lower of the actual cost to purchase and/or manufacture the inventory or
the current estimated market value of the inventory. We regularly review
inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated forecast of product demand and
production demand for the next twelve months. As demonstrated in 2001, demand
for our products can fluctuate significantly. A significant increase in demand
for our products could result in a short-term increase in the cost of inventory
purchases and production costs while a significant decrease in demand could
result in an increase in the amount of excess inventory quantities on hand. In
addition, our industry is characterized by rapid technological change, frequent
new product development and rapid product obsolescence that could result in an
increase in the amount of obsolete inventory quantities on hand. Additionally,
our estimates of future product demand may prove to be inaccurate, in which case
we may have understated or overstated the provision required for excess or
obsolete inventory. In the future, if our inventory is determined to be
overvalued, we would be required to recognize such costs in our cost of goods
sold at the time of determination. Likewise, if our inventory is determined to
be undervalued, we may have over-reported our cost of sales in previous periods
and would be required to recognize such additional operating income at the time
of sale. Therefore, although we make every effort to ensure the accuracy of our
forecasts of future product demand, any significant unanticipated changes in
demand or technological developments could have a significant impact on the
value of our inventory and reported operating results.
VALUATION OF LONG-LIVED ASSETS AND INTANGIBLE ASSETS AND GOODWILL
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" and the accounting and reporting provisions
of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" for the disposal of a segment of
a business (as previously defined in that Opinion). The Company adopted SFAS No.
144 on January 1, 2002. The application of SFAS No. 144 did not have a material
effect on the Company's financial position or results of operations.
21
During 2001 and prior periods, we assessed the impairment of identifiable
intangibles, long-lived assets and related goodwill whenever events or changes
in circumstances indicate that the carrying value may not be recoverable as
required under SFAS 121. Factors we considered important which could trigger an
impairment review included the following:
- significant underperformance relative to expected historical or
projected future operating results;
- significant changes in the manner of our use of the acquired assets
or the strategy for our overall business;
- significant negative industry or economic trends.
Under SFAS 121, when we determine that the carrying value of intangibles,
long-lived assets and related goodwill may not be recoverable based on the
existence of one or more of the above indicators of impairment, we measure any
impairment based on a projected discounted cashflow method using a discount rate
determined by our management to be commensurate with the risk inherent in our
business model. During 2001, global macroeconomic conditions weakened and the
demand for industrial and consumer electronics contracted significantly and as a
result we determined that our ability to achieve our long term financial
forecast had been negatively impacted. We determined that a triggering event, as
defined by SFAS 121, had occurred related to the intangible assets initially
acquired in connection with the Merger. Based on cash flow projections related
to the acquired assets, we concluded that all of the acquired intangible assets
related to Aavid Thermalloy and certain intangible assets related to Fluent had
been impaired. During the fourth quarter of 2001, upon completion of our
analysis of the impairment, we wrote down the assets, along with any allocated
goodwill, to fair value based on the related discounted cash flow. In order to
measure the impairment loss related to goodwill, the difference between the
carrying value and the fair value of goodwill was calculated using a business
enterprise methodology. This method of goodwill measurement entails calculating
the total enterprise value of each of Aavid's business units. Goodwill and
intangible assets were then estimated by subtracting the allocated tangible
assets (normal levels of working capital and fixed assets) from the total
enterprise value.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various other legal proceedings that are
incidental to the conduct of the Company's business, none of which the Company
believes could reasonably be expected to have a materially adverse effect on the
Company's financial condition.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
22
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNATURES
DATE: May 14, 2002 AAVID THERMAL TECHNOLOGIES, INC.
By: /s/ Brian A. Byrne
----------------------------------
Vice President and Chief Financial
Officer
(Principal Financial Officer)
23