10-Q 1 b39215ate10-q.txt AAVID THERMAL TECHNOLOGIES INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended MARCH 31, 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 May 15, 2001 was 940 shares of Class A, 1,000 shares of Class B and 40 shares of Class H, all of which are owned by Heat Holdings Corp. On February 2, 2000, a wholly-owned subsidiary of Heat Holdings Corp. was merged with and into the Registrant with the Registrant becoming a wholly-owned subsidiary of Heat Holdings Corp. and each share of Registrant's then outstanding common stock was converted into $25.50 in cash. The Registrant's Common Stock is no longer publicly traded; however, the Registrant's Senior Notes are publicly traded. 2 AAVID THERMAL TECHNOLOGIES, INC. INDEX TO FORM 10-Q
PAGE Part I. Financial Information Item 1. Financial Statements a.) Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000 ............................................ 3 b.) Consolidated Statements of Operations for the quarter ended March 31, 2001, the period from January 1, 2000 to February 1, 2000 and the period from February 2, 2000 through April 1, 2000 ....................... 4 c.) Consolidated Statements of Cash Flows for the quarter ended March 31, 2001, the period from January 1, 2000 to February 1, 2000 and the period from February 2, 2000 through April 1, 2000 ........................................ 5 d.) Notes to Consolidated Financial Statements ................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................. 19 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 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AAVID THERMAL TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, 2001 DECEMBER 31, (UNAUDITED) 2000 ASSETS Cash and cash equivalents $ 14,473 $ 23,849 Accounts receivable-trade, net 43,784 49,094 Inventories 23,471 25,203 Prepaid and other current assets 5,263 4,625 ---------- ---------- Total current assets 86,991 102,771 Property, plant and equipment, net 50,114 57,013 Goodwill, net 156,636 162,430 Developed technology and assembled workforce, net 46,291 49,015 Other assets, net 10,484 15,059 ---------- ---------- Total assets $ 350,516 $ 386,288 ========== ========== LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY Current portion of debt obligations $ 10,744 $ 10,768 Accounts payable - trade 16,915 18,582 Income taxes payable 6,158 6,250 Restructuring charges 3,745 1,274 Deferred revenue 9,859 9,390 Deferred income taxes 1,741 1,741 Accrued expenses and other current liabilities 22,479 29,998 ---------- ---------- Total current liabilities 71,641 78,003 Revolving line of credit 7,700 7,700 Term loan 39,000 41,000 12 3/4% senior subordinated notes 144,451 144,290 Other long term debt obligations 173 244 Deferred income taxes 9,922 9,977 ---------- ---------- Total liabilities 272,887 281,214 ---------- ---------- Commitments and Contingencies Minority interests in consolidated subsidiaries 1,744 4,915 Stockholders' equity: Class A Common Stock, $.0001 par value; authorized 1,000 shares; 940 shares issued and outstanding -- -- Class B Common Stock, $.0001 par value; authorized 1,000 shares; 1,000 shares issued and outstanding -- -- Class H Common Stock, $.0001 par value; authorized 1,000 shares; 40 shares issued and outstanding -- -- Warrants to purchase 60 shares of Class A common stock and 60 shares of Class H common stock 4,560 4,560 Additional paid-in capital 147,187 147,187 Cumulative translation adjustment (3,321) (1,608) Retained deficit (72,541) (49,980) ----------- ----------- Total stockholders' equity 75,885 100,159 ---------- ---------- Total liabilities, minority interests and stockholders' equity $ 350,516 $ 386,288 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 3 4 AAVID THERMAL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)
PERIOD FROM PERIOD FROM QUARTER FEBRUARY 2, JANUARY 1, ENDED TO TO MARCH 31, APRIL 1, FEBRUARY 1, 2001 2000 2000 ---------- ----------- ------------- (COMPANY) (COMPANY) (PREDECESSOR) Net sales $ 61,611 $ 54,560 $ 23,442 Cost of goods sold 38,144 40,051 15,516 --------- ---------- --------- Gross profit 23,467 14,509 7,926 Selling, general and administrative expenses 17,964 13,229 5,032 Amortization of intangible assets 8,560 5,172 182 Acquired in-process research and development --- 15,000 -- Research and development 2,884 1,723 752 Restructuring charge 12,457 --- --- --------- ---------- --------- Income (loss) from operations (18,398) (20,615) 1,960 Interest expense, net (6,278) (3,989) (816) Other income (expense), net (145) (86) 22 ---------- ----------- --------- Income (loss) before income taxes and minority interest (24,821) (24,690) 1,166 Income tax expense (911) (1,294) (547) --------- ---------- --------- Income (loss) before minority interest (25,732) (25,984) 619 Minority interest in (income) loss of consolidated with subsidiaries 3,171 (10) 6 --------- ---------- --------- Net income (loss) $ (22,561) $ (25,994) $ 625 ========== ========== =========
The accompanying notes are an integral part of these consolidated financial statements. 4 5 AAVID THERMAL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
PERIOD FROM FEBRUARY 2, PERIOD FROM FOR THE TO JANUARY 1, TO QUARTER ENDED APRIL 1, FEBRUARY 1, MARCH 31, 2001 2000 2000 -------------- ------------- ------------- (COMPANY) (COMPANY) (PREDECESSOR) Cash flows (used in) provided by operating activities: Net income (loss) $ (22,561) $ (25,994) $ 625 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 11,876 7,307 1,155 Acquired in-process research and development -- 15,000 -- Charge from inventory write-up to fair value -- 3,963 569 Deferred income taxes (59) (529) (22) Accretion of discount on 12 3/4% senior subordinated notes to interest expense 147 98 -- Minority interest in (loss) income (3,171) 10 (6) Restructuring charges 12,457 -- -- Changes in assets and liabilities: Accounts receivable - trade 5,060 641 (578) Inventories 1,582 (470) (499) Prepaid and other current assets (681) (804) (53) Other long term assets 596 1,428 137 Accounts payable - trade (1,567) (5,246) 2,346 Income taxes payable (67) 870 337 Deferred revenue 469 916 109 Accrued expenses and other current liabilities (8,042) 1,154 (473) ------------ --------- ---------- Total adjustments 18,600 24,338 3,022 ----------- --------- ---------- Net cash (used in) provided by operating activities (3,961) (1,656) 3,647 Cash flows used in investing activities: Purchase of property, plant & equipment (2,612) (1,802) (308) ------------ ---------- ----------- Net cash used in investing activities (2,612) (1,802) (308) Cash flows provided by (used in) financing activities: Issuance of common stock, net of expenses -- -- 349 Advances under line of credit -- 7,700 -- Repayments of line of credit -- (8,182) -- Advances under other debt obligations -- 53,856 -- Principal payments under debt obligations (2,080) (80,000) (25) Payment of merger and financing expenses -- (15,793) -- Repurchase of common stock, options and warrants -- (261,268) -- Net proceeds from 12 3/4% senior subordinated notes and warrants -- 148,312 -- Proceeds from investors -- 152,000 -- ---------- --------- --------- Net cash provided by (used in) financing activities (2,080) (3,375) 324 Foreign exchange rate effect on cash and cash equivalents (723) (37) (89) Net increase (decrease) in cash and cash equivalents (9,376) (6,870) 3,574 Cash and cash equivalents, beginning of period 23,849 21,847 18,273 ----------- --------- ---------- Cash and cash equivalents, end of period $ 14,473 $ 14,977 $ 21,847 =========== ========= ========== Supplemental disclosure of cash flow information: Interest paid $ 10,859 $ 430 $ 834 =========== ========= ========== Income taxes paid $ 843 $ 892 $ 117 =========== ========= ==========
The accompanying notes are an integral part of these consolidated financial statements. 5 6 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 (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 period February 2, 2000 to April 1, 2001 and for the quarter ended 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 $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) 6 7 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 31, 2001, the interest rates on the Term Facility and the Revolving Facility were 7.34%. The Amended and Restated Credit Facility may be prepaid at any time in whole or in part without penalty, and must be prepaid to the extent of certain equity or asset sales. The Amended and Restated Credit Facility limits the Company's ability to incur additional debt, to sell or dispose of assets, to create or incur liens, to make additional acquisitions, to pay dividends, to purchase or redeem its stock and to merge or consolidate with any other party. In addition, the Amended and Restated Credit Facility requires that the Company meet certain financial ratios, and provides the lenders with the right to require the payment of all amounts outstanding under the facility, and to terminate all commitments thereunder, if there is a change in control of Aavid. The Amended and Restated Credit Facility is guaranteed by each of Heat Holdings Corp. and Heat Holdings II Corp., and all of the Company's domestic subsidiaries and secured by the Company's assets (including the assets and stock of its domestic subsidiaries and a portion of the stock of its foreign subsidiaries). As of March 31, 2001, $7,700 was outstanding under the revolving credit facility and $49,000 was outstanding under the term facility, of which $10,000 was classified as current within the accompanying balance sheet. The Company incurred approximately $7,085 in underwriting, legal and other professional fees in connection with the issuance of the Notes and the establishment of the Amended and Restated Credit Facility. These costs, in addition to the $1,624 of unamortized costs associated with the original Credit Facility, have been capitalized as deferred financing fees and are being amortized over the respective terms of the related debt. This amortization is recorded in interest expense in the accompanying statement of operations from February 2, 2000 to April 1, 2000 and for the quarter ended March 31, 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 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 $8,000 in cash and $26,191 in principal amount of senior 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 to levels which the Company expects to meet through December 31, 2001 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 and March 31, 2001 was cured. (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 March 31, 2001, December 31, 2000 and for the quarter ended March 31, 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 March 31, 2001 and December 31, 2000, and the results of operations and cash flows for the quarter ended March 31, 2001 and the period from January 1, 2000 to February 1, 2000 and the period from February 2, 2000 to April 1, 2000. The financial information as of and for the period ended March 31, 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. 7 8 (3) ACCOUNTS RECEIVABLE The components of accounts receivable at March 31, 2001 and December 31, 2000 are as follows:
MARCH 31, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) Accounts receivable $ 47,092 $ 52,187 Allowance for doubtful accounts (3,308) (3,093) ---------- --------- Net accounts receivable $ 43,784 $ 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 March 31, 2001 and December 31, 2000 are as follows:
MARCH 31, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) Raw materials $ 11,593 $ 12,675 Work-in-process 5,159 6,168 Finished goods 6,719 6,360 --------- --------- $ 23,471 $ 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 FEBRUARY 2, JANUARY 1, QUARTER ENDED 2000 TO 2000 MARCH 31, APRIL 1, TO FEBRUARY 1, 2001 2000 2000 (COMPANY) (COMPANY) (PREDECESSOR) ------------- ----------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Net income (loss) $(22,561) $ (25,994) $ 625 Foreign currency translation adjustment, net of taxes (1,713) (38) (53) --------- ---------- ------ Comprehensive income (loss) $(24,274) $ (26,032) $ 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 8 9 their present value. The revenue projection used to value the in-process research and development was based on historical results, estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by the Company and its competitors. The resulting net cash flows from such projects are based on management's estimates of cost of sales, operating expenses, and income taxes from such projects. The nature of the efforts to develop the acquired in-process technologies into commercially viable products and services principally related to the completion of certain planning, designing, coding, prototyping, and testing activities that were necessary to establish that the developmental software technologies met their design specifications including functional, technical, and economic performance requirements. At the merger date, the technologies under development were between 40% and 80% complete, based upon project man-month and cost data. Anticipated completion dates ranged from 6 to 18 months, at which times the Company expects to begin selling the developed products. Development costs to complete the R&D were estimated at approximately $4,000. Fluent's primary in-process R&D projects involved developing: (i) Fluent version 6.0; (ii) Gambit version 2.0; (iii) materials processing functionality; and, (iv) advanced infrastructure technology. Fluent 6.0 represents the Company's next-generation computational fluid dynamics (CFD) software engine. Gambit 2.0 includes new pre-processor CFD technologies. The development of materials processing technologies is designed to address CFD needs in new markets. The advanced infrastructure technology establishes a new platform upon which future products will be more efficiently and rapidly developed. Aggregate revenues for the developmental Fluent products were estimated to peak within three years of acquisition and then decline steadily as other new products and technologies are expected to enter the market. Operating expenses were estimated based on historical results and management's analysis of Fluent's cost structure. Projected operating expenses as a percentage of revenues were expected to be stable for the foreseeable future. The rates utilized to discount the net cash flows to their present value were based on estimated cost of capital calculations. A discount rate of 18 percent was considered appropriate for the in-process R&D, and a discount rate of 15 percent was appropriate for the existing products and technologies. These discount rates were commensurate with the Fluent's long history and market leadership position. The discount rate utilized for the in-process technology was higher than Aavid's cost of capital due to the inherent uncertainties surrounding the successful development of the purchased in-process technology, the useful life of such technology, the profitability levels of such technology and the uncertainty of technological advances that are unknown at this time. With respect to the acquired in-process technology, the calculations of value were adjusted to reflect the development efforts of Fluent prior to the close of the merger. In doing so, consideration was given to each major project's stage of completion, the complexity of the work completed to date, the difficulty of completing the remaining development, costs already incurred, and the projected cost to complete the projects. The Company believes that the foregoing assumptions used in the forecasts were reasonable at the time of the merger. No assurance can be given, however, that the underlying assumptions used to estimate sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. For these reasons, actual results may vary from projected results. The most significant and uncertain assumptions relating to the in-process projects relate to the projected timing of completion of, and revenues attributable to, each project. If these projects are not successfully developed, the sales and profitability of the Fluent division may be adversely affected in future periods. Additionally, the value of other acquired intangible assets may become impaired. (7) NON-RECURRING CHARGES AND RESTRUCTURING RESERVES 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 31, 2001: 9 10
CHARGES AGAINST RESERVES FOR THE RESTRUCTURING RESTRUCTURING QUARTER ENDED RESERVES BALANCE RESERVES BALANCE AT MARCH 31, AT MARCH 31, DECEMBER 31, 2000 2001 2001 ------------------- ---------------- ---------------- Lease terminations and leasehold improvements reserve $ 735 $ (75) $ 660 Employee separation 493 (158) 335 ------- ---------- ------- Total $ 1,228 $ (233) $ 995 ======= ========== =======
Approximately $716 of restructuring charges were recorded in connection with the Merger. The restructuring plans included initiatives to integrate the operations of the Company and reduce overhead. The primary components of these plans related to (a) the closure of operations in California and the United Kingdom and (b) the termination of certain contractual obligations. During the year ended December 31, 2000, 89 individuals were terminated under the restructuring plan. The following amounts have been charged against the merger restructuring reserves during the quarter ended March 31, 2001:
CHARGES AGAINST RESTRUCTURING RESERVES FOR THE RESERVES RESTRUCTURING QUARTER ENDED BALANCE RESERVES BALANCE AT MARCH 31, AT MARCH 31, DECEMBER 31, 2000 2001 2001 ------------------- ---------------- ------------ Lease terminations and leasehold improvements reserve $ 12 $ (12) $ -- Employee separation 34 (34) -- ------ -------- ------ Total $ 46 $ (46) $ -- ====== ======== ======
During the first half of 2001 the Company plans to cease manufacturing activities at its Dallas, Texas facility and reduce its New Hampshire workforce. In connection with this action, the Company recorded a one-time restructuring charge within the statement of operations for the first quarter of 2001. This one-time charge totals $12,457 and includes estimated amounts related to employee severance, write-off of fixed assets and write-off of most of a prepaid lease intangible asset that was originally recorded as part of the Thermalloy acquisition. During the quarter ended March 31, 2001, 81 individuals were terminated under the restructuring plan. The following amounts have been recorded during the first quarter of 2001 related to this restructuring:
CHARGES AGAINST RESTRUCTURING RESERVES FOR THE RESERVES RESTRUCTURING QUARTER ENDED BALANCE RESERVES ESTABLISHED MARCH 31, AT MARCH 31, AT MARCH 31, 2001 2001 2001 -------------------- ---------------- ------------- Employee separation $ 3,138 $ (388) $ 2,750 Fixed asset reserve 5,500 $ --- 5,500 Prepaid rent write-off 3,819 (3,819) --- -------- --------- -------- Total $ 12,457 $ (4,207) $ 8,250 ======== ========= ========
(8) 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. (9) 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. 10 11 The accounting policies of the segments are the same as those described in the summary of significant accounting policies as disclosed in the Company's Form 10-K for the year ended December 31, 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 quarter ending March 31, 2001 and the periods from January 1, 2000 to February 1, 2000 and February 2, 2000 to April 1, 2000:
SEGMENT REVENUES INCOME (LOSS) FROM BEFORE TAXES ASSETS (NET OF EXTERNAL AND MINORITY INTERCOMPANY CUSTOMERS INTERESTS BALANCES) March 31, 2001 (COMPANY) Thermal Products $ 43,808 $ (19,532) $ 230,367 CFD Software 17,803 (3,031) 93,888 Corporate Office -- (2,258) 26,261 -------- ----------- ---------- Total.......................................... $ 61,611 $ (24,821) $ 350,516 ======== =========== ========== February 2, 2000 to April 1, 2000 (COMPANY) Thermal Products $ 45,082 $ 1,989 $ 266,491 CFD Software 9,478 1,534 117,935 Corporate Office -- (28,213) 20,725 -------- ----------- ---------- Total.......................................... $ 54,560 $ (24,690) $ 405,151 ======== =========== ========== 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 12 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 PERIOD JANUARY 1, 2000 FOR THE QUARTER ENDED FOR THE PERIOD FEBRUARY 2, TO FEBRUARY 1, MARCH 31, 2001 2000 TO APRIL 1, 2000 2000 ----------------------------- --------------------------- --------------- (COMPANY) (COMPANY) (PREDECESSOR) LONG-LIVED LONG-LIVED ASSETS ASSETS AS OF PERIOD AS OF PERIOD REVENUES END REVENUES END REVENUES ----------- ------------ ---------- ------------ ---------- United States $ 38,306 $ 246,401 $ 35,083 $ 266,358 $ 14,967 Taiwan 2,680 1,567 8,389 7,177 3,539 China 3,099 3,692 7,913 4,255 2,298 United Kingdom 6,217 1,568 3,211 1,711 1,608 Other International 22,408 10,362 10,371 10,387 4,120 Intercompany eliminations (11,099) (65) (10,407) 8,062 (3,090) ----------- ----------- ---------- --------- --------- Total $ 61,611 $ 263,525 $ 54,560 $ 297,950 $ 23,442 =========== =========== ========== ========= =========
12 13 (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 $150,000 principal amount of the Company's 12 3/4% Senior Subordinated Notes, due 2007. The guarantors include the combined domestic operations of Aavid Thermalloy, LLC and Fluent, Inc. and the Company's subsidiary Applied Thermal Technologies, Inc. The non-guarantors include the combined foreign operations of Aavid Thermalloy, LLC and Fluent, Inc. The consolidating condensed financial statements of the Company depict Aavid Thermal Technologies, Inc., the Parent, carrying its investment in subsidiaries under the equity method and the guarantor and non-guarantor subsidiaries are presented on a combined basis. Management believes that there are no significant restrictions on the Parent's and guarantors' ability to obtain funds from their subsidiaries by dividend or loan. The principal elimination entries eliminate investment in subsidiaries and intercompany balances and transactions.
CONDENSED CONSOLIDATING BALANCE SHEET AS OF MARCH 31, 2001 (UNAUDITED) -------------------------------------------------------------------------- U.S. GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- -------------- ------------- ------------ ------------ ASSETS Cash and cash equivalents .............................. $ 277 $ 3,314 $ 10,882 $ -- $ 14,473 Accounts receivable-trade, net ......................... -- 21,650 21,766 368 43,784 Inventories ............................................ (1,000) 12,528 12,089 (146) 23,471 Due (to) from affiliate, net ........................... 73,430 (9,868) (5,815) (57,747) -- Refundable taxes ....................................... (180) -- 80 100 -- Deferred income taxes .................................. 10,761 (2,194) 333 (8,900) -- Prepaid and other current assets ....................... 442 1,767 3,065 (11) 5,263 --------- --------- -------- --------- --------- Total current assets ................................... 83,730 27,197 42,400 (66,336) 86,991 Property, plant and equipment, net ..................... 178 34,132 15,820 (16) 50,114 Investment in subsidiaries ............................. 154,545 -- -- (154,545) -- Other assets, net ...................................... 24,990 146,818 9,723 31,880 213,411 --------- --------- -------- --------- --------- Total assets ........................................... $ 263,443 $ 208,147 $ 67,943 $(189,017) $ 350,516 ========= ========= ======== ========= ========= LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY Current portion of debt obligations .................... $ 10,000 $ 367 $ 377 $ -- $ 10,744 Accounts payable-trade ................................. 490 6,629 9,796 -- 16,915 Income taxes payable ................................... (16,266) 17,654 5,473 (703) 6,158 Deferred revenue ....................................... -- 5,862 3,997 -- 9,859 Deferred income taxes .................................. 1,741 -- -- -- 1,741 Accrued expenses and other current liabilities ......... 4,531 13,950 7,709 34 26,224 --------- --------- -------- --------- --------- Total current liabilities .............................. 496 44,462 27,352 (669) 71,641 --------- --------- -------- --------- --------- Debt obligations, net of current portion ............... 191,151 195 (22) -- 191,324 Deferred income taxes .................................. (4,753) 19,346 (34) (4,637) 9,922 --------- --------- -------- --------- --------- Total liabilities ...................................... 186,894 64,003 27,296 (5,306) 272,887 --------- --------- -------- --------- --------- Commitments and contingencies Minority interests ..................................... 664 91 1,383 (394) 1,744 Stockholders' equity: Common Stock ........................................... -- -- -- -- -- Warrants ............................................... 4,560 -- -- -- 4,560 Additional paid-in capital ............................. 147,187 207,605 4,021 (211,626) 147,187 Cumulative translation adjustment ...................... (3,321) 1,861 (3,878) 2,017 (3,321) Retained earnings (deficit) ............................ (72,541) (65,413) 39,121 26,292 (72,541) --------- --------- -------- --------- --------- Total stockholders' equity ............................. 75,885 144,053 39,264 (183,317) 75,885 --------- --------- -------- --------- --------- Total liabilities, minority interests and stockholders' equity ................................ $ 263,443 $ 208,147 $ 67,943 $(189,017) $ 350,516 ========= ========= ======== ========= =========
13 14
CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2000 ------------------------------------------------------------------------ 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 ========= ========= ======== ========= =========
14 15
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 (UNAUDITED) (COMPANY) -------------------------------------------------------------------------- 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) ======== ======== ======== ======== ========
15 16
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE PERIOD FROM FEBRUARY 2, TO APRIL 1, 2000 (UNAUDITED) (COMPANY) -------------------------------------------------------------------------- U.S. GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------------- ------------- ------------ ------------ Net sales ........................................ $ -- $ 34,992 $ 29,953 $(10,385) $ 54,560 Cost of goods sold ............................... -- 28,392 19,706 (8,047) 40,051 -------- -------- -------- -------- -------- Gross profit ..................................... -- 6,600 10,247 (2,338) 14,509 Selling, general and administrative expenses ..... 669 13,951 5,491 (1,710) 18,401 Acquired research and development ................ -- 15,000 -- -- 15,000 Research and development ......................... -- 1,367 1,744 (1,388) 1,723 -------- -------- -------- -------- -------- Income (loss) from operations .................... (669) (23,718) 3,012 760 (20,615) Interest income (expense), net ................... (3,909) (94) (9) 23 (3,989) Other income (expense), net ...................... 407 64 (120) (437) (86) Equity in income of subsidiaries ................. (23,696) -- -- 23,696 -- -------- -------- -------- -------- -------- Income (loss) before income taxes and minority interests ..................................... (27,867) (23,748) 2,883 24,042 (24,690) Income tax benefit (expense) ..................... 1,873 (152) (891) (2,124) (1,294) -------- -------- -------- -------- -------- Income (loss) before minority interests .......... (25,994) (23,900) 1,992 21,918 (25,984) Minority interests in income of consolidated subsidiaries .................................. -- -- (10) -- (10) -------- -------- -------- -------- -------- Net income (loss) ................................ $(25,994) $(23,900) $ 1,982 $ 21,918 $(25,994) ======== ======== ======== ======== ========
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 ======= ======= ======= ======= =======
16 17
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE QUARTER ENDED MARCH 31, 2001 (UNAUDITED) (COMPANY) ------------------------------------------------------------------------- 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: Notes receivable ..................................... -- -- -- -- -- Proceeds from sale of property, plant and equipment .. -- 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 ======= ======= ======= ------- =======
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE PERIOD FROM FEBRUARY 2, 2000 TO APRIL 1, 2000 (UNAUDITED) (COMPANY) --------------------------------------------------------------------------- U.S. GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------------- ------------- ------------ ------------ Net cash provided by (used in) operating activities .. $ 3,291 $ (9,634) $ 3,622 $ 1,065 $ (1,656) Cash flows used in investing activities: Purchases of property, plant and equipment ........... -- (1,286) (333) (183) (1,802) -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities .. -- (1,286) (333) (183) (1,802) Cash flows provided by (used in) financing activities: Advances under other debt obligations ................ 53,856 -- -- -- 53,856 Principal payments on other debt obligations ......... (80,000) -- -- -- (80,000) Advances under line of credit ........................ 7,700 -- 506 (506) 7,700 Repayments of line of credit ......................... (8,182) 93 357 (450) (8,182) Payment of merger and financing expense .............. (15,793) -- -- -- (15,793) Repurchase of common stock, options and warrants ..... (261,268) -- -- -- (261,268) Net proceeds from 12 3/4% senior subordinated notes .. 148,312 -- -- -- 148,312 Proceeds from investors .............................. 152,000 -- -- -- 152,000 -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities .. (3,375) 93 863 (956) (3,375) Foreign exchange effect on cash and cash equivalents . -- -- (158) 121 (37) -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents . (84) (10,827) 3,994 47 (6,870) Cash and cash equivalents, beginning of period ....... 134 14,483 7,278 (48) 21,847 -------- -------- -------- -------- -------- Cash and cash equivalents, end of period ............. $ 50 $ 3,656 $ 11,272 $ (1) $ 14,977 ======== ======== ======== ======== ========
17 18
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 ======= ======= ======= ======= =======
18 19 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 19 20 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 March 31, 2001 and the period February 2, 2000 to April 1, 2000. The Indenture limits the Company's ability to incur additional debt, to pay dividends or make other distributions, to purchase or redeem our stock or make other investments, to sell or dispose of assets, to create or incur liens, and to merge or consolidate with any other person. The Indenture also contains provisions requiring additional equity investments by Willis Stein & Partners in the event the Company does not achieve certain leverage to EBITDA ratios, as defined, in years 2000 and 2001. 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 he required ratio 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 March 31, 2001 the interest rates on the Term Facility and the Revolving Facility were 7.34%. 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). As of March 31, 2001, $7,700,000 was outstanding under the revolving credit facility and $49,000,000 was outstanding under the term facility, of which $10,000,000 was classified as current within the accompanying balance sheet. The Company incurred approximately $7,085,000 in underwriting, legal and other professional fees in connection with the issuance of the Notes and the obtainment of the Amended and Restated Credit Facility. These costs, in addition to the $1,624,000 of 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 20 21 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 to levels which the Company expects to meet through December 31, 2001 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 was cured. 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 Ended March 31, 2001 Compared With The Quarter Ended April 1, 2000 The results of operations for the quarter ended April 1, 2000 are the result of the combination of the results for the period from January 1, 2000 through February 1, 2000 (the Predecessor) and the period from February 2, 2000 through April 1, 2000. As a result of purchase accounting adjustments for the Merger, which was consummated February 2, 2000, 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 quarters ended March 31, 2001 and April 1, 2000 may not necessarily be meaningful.
SALES (DOLLARS IN MILLIONS) FOR THE THREE MONTHS ENDED MARCH 31, APRIL 1, 2001 2000 CHANGE --------- -------- ------- Computers and Network $ 9.6 $ 27.5 (65.1)% Industrial Electronics 33.7 35.5 (5.1)% Consulting and Design (Applied) 0.5 0.3 66.7 % ------ ------- ------- Total Aavid Thermalloy 43.8 63.3 (30.8)% Total Fluent 17.8 14.7 21.1 % ------ ------- ------- Total Company $ 61.6 $ 78.0 21.0 % ====== ======= =======
Sales in the first quarter of 2001 were $61.6 million, a decrease of $16.4 million, or 21.0% from the comparable period of 2000. This decrease stems from Aavid Thermalloy and is a direct result of the decline experienced by the Computer and Networking industry during the first quarter of 2001. This decrease was primarily due to a decline in the Semi-Conductor industry as a whole. The Company does expect to see revenue growth in the second half of the year. The company also expects an improvement in profitability as a result of cost reduction actions within Aavid Thermalloy such as personnel reductions and further consolidation of manufacturing operations which will be completed on or about June 30, 2001. Fluent software sales of $17.8 million in the first quarter of 2001 were $3.1 million, or 21.1%, higher, than the first quarter of 2000. 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 $43.8 million in the first quarter of 2001, a decrease of $19.5 million, or 30.8%, over 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) decreased to 51% of sales for the first quarter of 2001 compared with 59% in the first quarter of 2000. 21 22 No customer generated greater than 10% of the Company's revenues in the first quarter of 2001 or 2000. The Company's gross profit for the first quarter of 2001 was $23.5 million compared with $22.4 million in the comparable period from 2000. Gross margin as a percentage of sales increased from 28.8% in the first quarter of 2000 to 38.1% for the comparable period of 2001. For the first quarter 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 34.6%. Gross margin has improved through improvements in manufacturing efficiency and utilization as a result of the consolidation of manufacturing facilities that occurred during 2000 and continues into 2001 with the cessation of manufacturing activities in the Dallas facility. 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 2001 the Company's operating loss of $18.4 million compares with operating loss of $18.7 million in the first quarter of 2000. 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 planned cessation of manufacturing activities at the Dallas facility and the reduction of the New Hampshire workforce. Additionally, the results for 2001 contain a full quarter of amortization of intangibles that were established as part of the merger. The large operating loss that occurred in the first quarter 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 expects an improvement in profitability in the second half of the 2001 as a result of cost reduction actions within Aavid Thermalloy such as personnel reductions and further consolidation of manufacturing operations which will be completed on or about June 30, 2001. Net interest charges for the Company were $6.3 million in the first quarter of 2001 which compares with $4.8 million for the comparable period of 2000. The increase in interest charges resulted from the fact that the first quarter of 2001 contains a full quarter of interest charges on the debt that resulted from the merger. The first quarter of 2000 contained only a partial quarter of merger related interest charges due the merger occurring on February 2, 2000. The Company incurred a tax provision in the first 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 first quarter of 2001 was $22.6 million, versus a net loss for the comparable period of 2000 of $25.4 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. The net loss in the first quarter 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. 22 23 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 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 2001, the Company used $4.0 million of cash for operations, versus providing $2.0 million of cash from operations in the first quarter of 2000. During the period, the Company used $2.1 million of cash in connection with financing activities and $2.6 million for capital expenditures. Total indebtedness at March 31, 2001 was $202.1 million, which compares with $204.0 million at December 31, 2000. Total indebtedness as a percent of stockholders' equity at March 31, 2001 was 266.3%, compared with 203.7% at December 31, 2000. Long-term debt at March 31, 2001 was $191.3 million, a decrease of $1.9 million from December 31, 2000. The Company had $7.7 million outstanding under its line of credit as of March 31, 2001 and December 31, 2000, which is classified as long term debt on the accompanying balance sheet. As further discussed in Note (6) in the accompanying financial statements development costs to complete ongoing development projects at Fluent are estimated to be $1.2 million. There were no material purchase commitments as of March 31, 2001. At March 31, 2001 inventory turns were 5.7, which compare with 6.4 at December 31, 2000. At March 31, 2001 accounts receivable days sales outstanding ("DSO") were 64, which compare with 66 days at December 31, 2000. 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 10.1 Amendment No. 1 and Consent to Amended and Restated Credit Agreement 10.2 Omnibus Amendment (b) Reports on Form 8-K None. 23 24 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 15, 2001 AAVID THERMAL TECHNOLOGIES, INC. By: /s/ Brian A. Byrne -------------------------------------------- Vice President and Chief Financial Officer (Principal Financial Officer) 24