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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission file number 0-27309
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
incorporation or organization) Identification No.)
EAGLE SQUARE, SUITE 509, CONCORD, NEW HAMPSHIRE 03301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 224-1117
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 shorted period that the
registrant was required to file such report, and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [X]
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 March 15, 2002 was 940 shares of class A, 1000 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 Subordinated Notes are
publicly traded.
Documents incorporated by reference: none
1
PART I
ITEM 1. BUSINESS
COMPANY INTRODUCTION
We are a leading global provider of thermal management solutions for
electronic products and the leading developer and marketer of computational
fluid dynamic ("CFD") software. We design, manufacture and distribute on a
worldwide basis thermal management products that dissipate unwanted heat, which
can degrade system performance and reliability, from microprocessors and
industrial electronics products. Our products, which include heat sinks, heat
pipes, interface materials and attachment accessories, fans, heat spreaders and
liquid cooling and phase change devices that we configure to meet
customer-specific needs, serve the critical function of conducting, convecting
and radiating away unwanted heat. CFD software is used in complex
computer-generated modeling of fluid flows, heat and mass transfer and chemical
reactions. Our CFD software is used in a variety of industries, including the
automotive, aerospace, chemical processing, power generation, material
processing, electronics and HVAC industries.
Our thermal management products are used in a wide variety and growing
number of computer and networking and industrial electronics applications,
including computer systems (desktops, laptops, disk drives, printers and
peripheral cards), network devices (servers, routers, set top boxes and local
area networks), telecommunications equipment (wireless base stations, satellite
stations and PBXs), instrumentation (semiconductor test equipment, medical
equipment and power supplies), transportation and motor drives (braking and
traction systems) and consumer electronics (stereo systems and video games). Our
CFD software is used for a wide variety of computer-based analyses, including
the design of electronic components and systems, automotive design, combustion
systems modeling and process plant troubleshooting. We have longstanding
relationships with a highly diversified base of more than 3,500 national and
international customers, including original equipment manufacturers (commonly
referred to as OEMs), electronics distributors and contract manufacturers. Our
customers include 3M, Arrow, Agilent Technologies, Bobardier, Boeing, Cisco
Systems, Compaq Computer, Dell, Dow Chemical, Ericsson, Flextronics, Ford,
Fujitsu, Gateway, General Electric, General Motors, Hewlett-Packard, IBM, Intel,
Lockheed Martin, Lucent, Motorola, NASA, Nortel, Rockwell Automation, Rolls
Royce, Sanmina-SCI, Siemens, Solectron and Sun Microsystems.
On February 2, 2000 we were acquired in a merger with Heat Holdings Corp., a
corporation newly formed by Willis Stein & Partners II, L.P. the "Purchaser").
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. In connection with the merger, we consolidated our business into two
operating segments: Aavid Thermalloy LLC, which designs, manufacturers and
distributes thermal management products that dissipate unwanted heat from
microprocessors and industrial electronics products, and includes Applied
Thermal Technologies, Inc.'s thermal design, validation and consulting services;
and Fluent, which develops and markets CFD software.
INDUSTRY OVERVIEW
THERMAL MANAGEMENT
In today's electronic environment, microprocessors and their associated
power supplies, hard drives, advanced video chips and other peripheral devices
draw large amounts of power and, consequently, must dissipate a significant
amount of heat. The same heat generation occurs in semiconductors and integrated
circuits in motor controls, telecommunications switches and other electronics.
Because these electronic components can only operate efficiently in narrow
temperature bands, heat is an absolute constraint in electronic system design.
The excessive heat generated within a component not only degrades semiconductor
and system performance and reliability, but can also cause semiconductor and
system failure.
2
Increasingly, neither externally generated off-the-shelf thermal management
products nor internally designed and produced parts have been able to
effectively address the expanding complexity of thermal management problems
resulting from the increasing amount of heat required to be dissipated by
electronic products. The complexity of thermal management problems has been
intensified by reductions in system size, shorter time-to-market, shorter
product life cycles and more demanding operating environments. These factors
have led to the development and growth of the thermal management industry.
Electronics manufacturers seek to respond to end user demands and increasing
competition by offering new products with improved performance (functionality
and speed) and greater reliability in smaller forms and at lower prices. This
greater functionality, speed and the miniaturization of component housing has
resulted in an increase in unwanted heat generated by electronics products. The
demand for thermal management products is driven by the need to dissipate the
increasing amount of heat generated by electronic products.
We believe that future growth of the thermal management products market will
be driven by the following factors:
- Inherent unit growth in end-user products, such as desktop computers,
laptops and telecommunications equipment. In particular, the volume of
microprocessors and support chip units is increasing on an absolute and
on a per product basis.
- The wider use of electronic controls in numerous areas due to the
general increase in automation.
- The increasing use of microprocessors in industrial electronics
applications, fueling the need for thermal management products to manage
the different operating temperature characteristics of these devices.
- The increased need for reliable power supplies. The quality of power can
be adversely affected by thermal overload arising from ineffective
thermal management. This is becoming increasingly important within the
industrial, computer and telecommunications sectors where "irregular"
power surges can damage equipment and cause productivity loss.
- The complexity of thermal management problems, which has been
intensified by the increasing amount of heat to be dissipated,
reductions in system size, shorter time-to-market product cycles and
more demanding temperature operating environments.
COMPUTATIONAL FLUID DYNAMICS SOFTWARE
CFD software is used in a wide range of industries for complex
computer-based analysis of engineering designs involving fluid flows, heat and
mass transfer, chemical reaction and other fluid flow phenomena. CFD software
tools allow the analysis and evaluation of design modifications without the
physical prototyping of each design modification, thereby reducing engineering
cost, improving product performance and decreasing time-to-market for new
products. Specific uses of CFD-based flow analysis include the design of
electronic components and systems, automotive design, combustion systems
modeling and process plant troubleshooting.
Over the past decade, increases in computing power have made CFD-based
computer analysis of complex fluid flows feasible on computers that are readily
available to research and development and engineering departments. Development
of CFD software technology is expanding that market beyond its traditional user
base of Ph.D-level engineers in corporate research and development centers to
the larger base of design engineers working in product development. Finally, CFD
software tools are part of the growing trend toward improved engineering
efficiency through computer-aided analysis and design by integrating CFD
software with geometric modeling and design.
3
The CFD software market, which has been growing rapidly over the past
decade, continued to grow in 2001, although at a reduced rate. Based upon
publicly available information from a number of our key competitors and internal
management estimates, we believe that in 2001 the size of the developed market
for CFD software applications was approximately $170 million. We further expect
to benefit from the anticipated continued growth of this market. Based on a
market study we conducted in connection with our acquisition of Fluent, we
estimate that the size of the potential market for CFD software products is
currently approximately $500 million. We also believe that, through Fluent, we
have approximately 35% of the developed market for CFD software applications.
We expect that future growth of the CFD software market will be driven by
the following factors:
- The ability of customers using CFD software to reduce their product
development costs, minimize time-to-market for their new products and
improve product performance.
- The ability to analyze fluid flows is becoming increasingly important
across a wide range of industries.
- The development of more powerful and affordable computers that are
capable of running CFD software.
- The growing trend among customers to improve the engineering efficiency
of product development and improvement through computer-aided analysis
and design.
- Expansion of the traditional user base for CFD software beyond
Ph.D.-level engineers in corporate research and development centers to
the larger base of design engineers.
COMPETITIVE STRENGTHS
We believe that the following competitive strengths have enabled us to
become a worldwide leader in both the thermal management market and the CFD
software market.
TOTAL INTEGRATED SOLUTIONS PROVIDER
The increasing complexity of heat dissipation problems and the growing trend
among manufacturers to outsource development of thermal management solutions has
stimulated demand for total integrated solutions. We provide total integrated
solutions by analyzing customers' thermal management problems at the device-,
board- and system-level, designing, simulating and prototyping thermal
management solutions and manufacturing, distributing and supporting these
solutions worldwide.
VALUE-ADDED PARTNERING WITH OUR CUSTOMERS
We work closely with our customers to develop customized thermal management
solutions. We believe that our close relationships with customers and their
design and development teams, as well as our worldwide manufacturing
capabilities, allow us to anticipate customers' needs and, through our
engineering expertise and experience, provide quality product solutions more
quickly than our competitors.
WORLDWIDE LOW COST MANUFACTURER
We have manufacturing operations in the United States, Canada, Mexico,
Europe and Asia, including China. As an increasing number of electronics systems
are being manufactured outside the United States, our low cost foreign
manufacturing operations enable us to supply products directly to our customers
at their geographically dispersed manufacturing locations.
4
LEADERSHIP IN CFD SOFTWARE
We believe that we are the technology leader in CFD software. As a result of
our technological leadership, we develop software that enables our customers to
generate the increasingly complex computer models they demand for more
cost-efficient product design. This factor, as well as the relative ease-of-use
and predictive accuracy of our CFD software, are of primary importance to our
customers.
RECURRING REVENUES FROM SOFTWARE BUSINESS
Our CFD software business is characterized by high customer retention and
recurring revenues. In recent years, approximately 80% of our annual software
license revenue was renewed in the following year. This is driven by the
significant value added by our CFD software to the design process and the high
cost of switching to a competitor's software.
EXPERIENCED MANAGEMENT TEAM
Our senior management team has extensive operating and marketing experience
in the thermal management and CFD software markets. This management team has
grown our business, both organically and through strategic acquisitions, and has
been responsible for improving operating efficiencies. Bharatan R. Patel, our
chief executive officer who founded our CFD software business, has 28 years of
experience in the area of fluid flows and thermal management and H. Ferit
Boysan, president of our CFD software business, has 21 years of experience in
the area of fluid flows and CFD software.
BUSINESS STRATEGY
Our business strategy is to continue to be a market leader in both the
thermal management and CFD software markets. We intend to continue this business
strategy and strengthen our competitive position through the following
initiatives:
CAPITALIZE ON THERMAL MANAGEMENT INDUSTRY GROWTH
We believe that our existing thermal management markets will continue to
experience growth in the long term. Growth will be driven by the need to
dissipate the increasing amount of heat being generated by electronic products,
as well as unit growth in these products. We believe our competitive strengths
position us to capitalize on these growth trends.
TAKE ADVANTAGE OF OUTSOURCING TREND
The increasing complexity of heat dissipation problems is driving a trend
among manufacturers to outsource the development of thermal management solutions
to companies with high levels of expertise in solving these problems. We intend
to capitalize on this trend by leveraging our technical expertise in designing
thermal management products and through continuing to partner with our customers
in creating customized solutions.
EXPAND OUR ADDRESSED THERMAL MANAGEMENT MARKET
We believe we have significant opportunities to expand the portion of the
outsourced thermal management market that we address. Our strategy is to expand
into the part of the outsourced thermal management market that we do not
currently serve by entering into new geographic markets and introducing new
products that complement our existing product offerings.
5
ACCELERATE GROWTH IN COMPUTATIONAL FLUID DYNAMICS SOFTWARE MARKET
Growth in the CFD software market will be driven by customers' needs to
reduce product development costs, minimize the time-to-market for their new
products and improve product performance, as well as by increasing applications
for CFD software. We intend to grow our CFD software business through internal
product development and possibly strategic acquisitions to leverage our core
technological competence in the development of computerized design and
simulation software. Our goal is to further expand this market beyond its
traditional user base of Ph.D.-level engineers in corporate research and
development centers to the larger base of design engineers by providing them
relatively easy-to-use industry-specific software.
PROVIDE TOTAL THERMAL MANAGEMENT SOLUTIONS ON A GLOBAL BASIS
We intend to continue capitalizing on our state-of-the-art worldwide
manufacturing capabilities and to further leverage our expertise and technology
to offer our customers a complete global solution to their thermal management
problems. The increasing number of electronics systems manufactured outside of
the United States has forced many electronics manufacturers to seek a highly
integrated, worldwide provider of thermal solutions. We plan to continue to
expand our quick-ramp, high-volume manufacturing and our design, sales and
distribution activities globally as our customers continue to expand their
operations overseas.
LEVERAGE OUR TECHNOLOGICAL LEADERSHIP
Our approximately 199 Ph.D.s and 290 engineers focus on new technology
initiatives as well as developing new and enhancing existing products, processes
and materials to address the evolving needs of our customers. We seek to enhance
our internal research and development activities through collaborations with our
customers and third parties in order to gain access to, or to pursue the
development of, new technologies for thermal management applications and CFD
software.
MARKETS AND CUSTOMERS
We sell our thermal management products and services to a highly-diversified
base of customers across a wide range of industries and applications. We
currently sell our thermal management products and services to over 2,500
customers. The following chart shows our largest customers for thermal
management products and services by market sector:
MARKET CUSTOMERS
------ ---------
COMPUTERS AND NETWORKING:
Computers............................ Intel Gateway
Dell Hewlett-Packard
EMC IBM
Contract Manufacturing............... Celestica Sanmina - SCI
Jabil Circuit Solectron
Flextronics Benchmark
Networking........................... Cisco Systems Sun Microsystems
INDUSTRIAL ELECTRONICS:
Communications....................... Ciena Hughes Network
Lucent Motorola
Technologies
Nortel Nokia
Ericsson Marconi
Electronics Distributors............. Arrow Future Electronics
Avnet Sager
Other................................ Agilent American
Technologies Biophysics
Bombardier General Electric
Liebert Corp. Rockwell
Automation
Siemens Schneider Toshiba
SMA B&O
Philips Chloride
Tyco
6
No customer represented more than 10% of our thermal management net sales
during 2001, 2000 or 1999.
We currently have more than 2,000 licensees of our CFD software. License
revenue is diversified by market sector and geographical market. The following
chart shows our largest customers for CFD software applications by market
sector:
MARKET CUSTOMERS
------ ---------
Aerospace.............................. Boeing Lockheed Martin
British Aerospace NASA
Komatsu
Automotive............................. Cummins Engine Mitsubishi Motor
Corporation
Ford Renault
General Motors
Chemical Process....................... Bayer 3M
Dow Chemical Shell KSLA
DuPont
Electronics............................ Fujitsu IBM
Hewlett-Packard Motorola
HVAC/Appliance......................... Carrier Welbilt
Hoover Whirlpool
Osram/Sylvania
Power Generation....................... Asea Brown Boveri Mitsubishi Heavy
Industries
General Electric Rolls Royce
Power Systems Westinghouse
THERMAL MANAGEMENT PRODUCTS AND SERVICES
We provide total integrated solutions to our thermal management customers.
We have the thermal design know-how to first analyze customers' thermal
management problems at the device-, board- and system-level, to then design,
simulate and prototype thermal management solutions and to finally manufacture,
distribute and support these solutions around the world.
Our design and applications engineers work concurrently with our customers'
design teams to develop optimal thermal solutions, which are increasingly being
outsourced by our customers. Working as an extension of the product design team,
Applied Thermal Technologies' engineers give customers easy access to our system
design expertise in thermal management on a time-and-materials consulting basis.
Additionally, Applied Thermal Technologies provides for a smooth transition from
system design and validation to complete outsourced product solutions provided
by Aavid Thermalloy.
We design, manufacture and sell both standard and customized thermal
management products. We seek to become a strategic supplier to our customers and
to differentiate ourselves from our competitors by offering a higher level of
service. We currently offer heat sinks, interface materials and attachment
accessories, fans, heat spreaders and liquid cooling and phase change devices
that we configure to meet customer-specific needs. The prices for our thermal
management products (including attachment devices and interface materials),
depend primarily on cost, the technology used to make the part and its value in
the customer's application. Because of the continued shrinking time-to-market
for most new products and the corresponding contraction of design cycles, we
also offer simulation and modeling software to assist our customers in handling
the complexity of the design of a thermal solution.
7
The following is a brief description of our thermal management products and
services:
PRODUCT OR SERVICE DESCRIPTION APPLICATION
------------------ ----------- -----------
Heat Sinks, Fan Heat Sinks and Heat Spreaders These products are typically made from - Removes potentially damaging
aluminum extrusions, stampings, castings heat from microprocessors and
or multi-technology assemblies. These integrated circuits in electronics
products have high surface area to volume applications
ratios and may rely on a fan mounted
directly on the heat sink to increase the
movement of air.
Interface Materials and Attachment Attachment devices are the spring clips, - Increases the effectiveness of
Accessories tapes, adhesives, tabs and similar devices heat sinks
which are used to attach the heat
sink to the semiconductor or - Promotes a highly efficient
integrated circuit device and/or thermal transfer between the
to the customer's printed circuit microprocessor or integrated circuit
board or system chassis. and heat sink
Interface materials include - Reduces the cost of the
greases, silicon pads and other customer's installation and repair
materials which have desirable - Transfers heat from the
thermal and electrical component being cooled to the heat
properties. We purchase most of sink
these materials on a private
label basis from a number of
suppliers.
Liquid Cooling and Phase Change Devices These devices include cold plates, heat - Moves highly concentrated heat
pipes and other liquid cooling designs from microprocessors and integrated
that dissipate heat by conducting or circuits to a location where a
convecting the heat into a liquid, which traditional heat sink can dissipate
then transfers the heat away from the heat
source to the ultimate heat sink.
Applied Thermal Technologies' Design Centers Applied Thermal Technologies' facilities - Analyzes customers' thermal
are staffed by technicians with thermal problems at the device-, board-and
engineering and flow analysis expertise system-level
and utilize a variety of sophisticated
design, test and validation hardware and
software.
- Designs, simulates and
prototypes thermal management
solutions efficiently
COMPUTATIONAL FLUID DYNAMICS SOFTWARE PRODUCTS
We are the leading provider of general purpose CFD software used to predict
fluid flow, heat and mass transfer, chemical reaction and related phenomena. We
provide CFD-based flow analysis software and consulting services that are used
by engineers in corporations worldwide for the design and analysis of products
and processes. Our software and services help engineers reduce engineering and
product development costs, improve product performance and reduce time-to-market
for new products.
We currently license our software products to more than 2,000 licensees
worldwide. In North America, we typically license our software products under
one year, renewable agreements. In Europe and the Far East, a significant
portion of our CFD software sales are derived from licenses of this software for
one-time fees; in such situations, we also typically receive annual maintenance
and support fees.
We have also introduced CFD-based industry-specific products, such as
Icepak, for use by designers and engineers in the electronics cooling industry,
Airpak, for use by designers and engineers in the HVAC industry and Mixsim, for
use by designers and engineers in the chemical mixing industry. We believe that
our relatively easy-to-use, industry-specific products are expanding the CFD
total market beyond its traditional user base of Ph.D.-level engineers in
corporate research and development centers to the larger base of design
engineers.
We also market engineering consulting services. With over 15 years of CFD
and engineering consulting experience, our worldwide team of CFD professionals
supports clients with senior engineering consultants, experienced CFD analysts,
leading CFD software developers and mesh generation experts. Support services
include expertise in the physics of heat, fluid flow and related phenomena, in
CFD modeling and analysis, and in selection of engineering design solutions. In
addition to providing CFD software expertise and access to high-performance
computing systems, our CFD software consulting group works under contract to
develop software with specific features required by individual clients.
8
We provide a complete suite of CFD software products, with each product
designed for a specific task or for optimal performance on a specific class of
problems. The following is a brief description of our CFD software products:
PRODUCT DESCRIPTION FEATURES
- ------- ----------- --------
Fluent Fluent is general purpose CFD software - Provides a choice of solver
used across a wide range of industries and options for optimum convergence and
is ideally suited for incompressible and accuracy for a wide range of flow
mildly compressible (transonic) and highly regimes
compressible (supersonic and hypersonic) - Structured and solution-adaptive
flows. Fluent contains physical models for unstructured mesh capability
a wide range of applications including - Enables easier problem setup
turbulent flows, heat transfer, reacting
flows, chemical mixing, combustion and
multi-phase flows.
Fidap Fidap is general purpose CFD software for - Offers complete mesh flexibility
the simulation of incompressible or - Provides a wide range of physical
compressible flows, including prediction models, with particular strength
of liquid-free surfaces, non-Newtonion for application in the materials
rheology and advanced radiation modeling. processing, biomedical,
semiconductor, food paper and
chemical industries
Icepak Icepak is a fully-interactive, - Used for component-, board- and
object-based CFD software tool cabinet- level design
specifically designed to analyze air flow - Reduces design costs
and thermal management in electronics - Reduces the time-to-market of
design. high-performance electronic systems
Airpak Airpak, like Icepak, is a - Used to determine the layout of
fully-interactive, object-based CFD ventilation systems in rooms and
software tool. Airpak is specifically buildings in order to provide maximum
designed to analyze air flow, comfort and air quality.
contamination and thermal comfort in room - Assesses the risk of airborn
and building designs. contamination
- Improves the energy performance of
heating and cooling designs.
GAMBIT GAMBIT supports a single user interface - Reduces the time to create a CFD
for geometry creation and meshing. model
Different CFD problems require different - Allows users to import geometries
mesh types, and GAMBIT brings together all created under other CAD/CAE
of Fluent's options in one environment. packages into the Fluent suite of
software products.
- Enables users to automatically
create unstructured tetrahedral
meshes for extremely complex
geometries
- Provides a concise and powerful
set of solid modeling-based geometry
tools with both geometry and
"clean-up" functions
SALES AND SUPPORT
We sell our thermal management products and CFD software primarily through a
global network of direct sales personnel, manufacturers' representatives, agents
and a network of independent distributors. We provide support services to our
customers, particularly in the CFD software area where we believe that
high-quality support service is critical to the success of the CFD software
business. Aavid Thermalloy (including Applied Thermal Technologies) and Fluent
both have their own sales, support and marketing personnel, all of whom
cross-sell each other's products and services where appropriate. We currently
employ approximately 240 sales, support and marketing personnel.
TECHNOLOGY
We believe that technology leadership is essential to our growth strategy
and have focused our approximately 199 Ph.D.s and 290 engineers on the
development of technology in two areas:
9
THERMAL MANAGEMENT TECHNOLOGY
We believe that we are a technology leader in thermal management due to our
extensive design expertise, technical manufacturing capabilities and process
technology. We intend to develop new technologies and to enhance existing
technologies in order to meet our customers' needs for higher performance
products on a timely basis.
We have developed proprietary software tools (analytical models) which
enable fast approximation answers for a large class of thermal management
problems which, in turn, permits quicker design and prototyping of thermal
solutions. We have extensive prototyping capabilities and state-of-the-art
thermal laboratory facilities, including a wind tunnel which allows us to test
and validate the design of thermal solutions.
As part of Aavid Thermalloy, Applied Thermal Technologies leverages Aavid
Thermalloy's capabilities and Icepak's technology to assist customers in
analyzing their thermal problems at the device-, board- and system-levels and to
efficiently design, simulate and prototype thermal management solutions. By
entering into the customer relationship at the onset of the product design
cycle, Applied Thermal Technologies greatly enhances our knowledge of future
industry trends, including technology development and acceptance. Additionally,
Applied Thermal Technologies provides a smooth transition from design and
validation to outsourced manufacturing with Aavid Thermalloy.
COMPUTATIONAL FLUID DYNAMIC SOFTWARE TECHNOLOGY
We believe that we are the technology leader in CFD software. Fluent's CFD
software includes:
- automatic unstructured mesh generation, which allows the automatic
creation of meshes,
- numerical algorithms for the accurate solution of fluid flow equations
on structured and unstructured meshes,
- solution adaptive mesh which allows for interactive mesh refinement to
provide improved solution accuracy,
- state-of-the-art physical models for important fluid flow phenomena such
as turbulence, turbulence-chemistry interactions, free surface flows and
multiphase flows,
- algorithms for efficient execution on multi-processor computers and
distributed computer networks,
- interactive client/server architecture with a flexible and customizable
user interface, and
- post-processing and data analysis tools.
PRODUCT DEVELOPMENT
Our thermal management product development activities are focused on
lowering production costs, improving thermal characteristics and ease of
attachment of conventional heat sinks, and developing new thermal management
products and technologies to address the emerging and anticipated thermal
management problems of our customers. We are developing new products, both
internally as well as through collaborative efforts with third parties. These
development efforts are directed toward: heat sink characterization and
optimization; fan designs; air flow management; boundary layer optimization and
focused flow; re-circulating passive and active cooling systems including heat
pipes; thermoelectric coolers, which use electricity to create a temperature
difference across an interface between the electronic device and a heat sink;
liquid and sub-ambient cooling systems; tab and surface mount heat sink
attachment methods; vacuum die casting; engineered materials and net shape part
manufacturing technology; direct chip mounting to extruded heat sinks; and
highly thermally conductive adhesive and interface systems.
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Our CFD product development activities are focused on enhancing the
capabilities of its solvers, implementing new physical models to increase the
range of applications and developing front-end user interfaces that are easy to
use for engineers in specific industries. We are also focusing on various
application and industry-specific CFD software projects which we believe will
enable us to penetrate the design engineering market.
SUPPLIERS
We purchase raw aluminum, aluminum extrusion, aluminum coil and various
components from a limited number of outside sources. We purchase substantially
all of our aluminum coil stock from a single supplier. We believe that
purchasing aluminum extrusion and coil stock from a limited number of suppliers
is necessary to obtain lower prices and to consistently achieve the tolerances
and design and delivery flexibility that we require.
For raw aluminum extrusion and coil stock, we typically make purchasing
commitments to key suppliers of up to 24 months. In return, these suppliers
commit to maintaining local inventory and to reserving run-time on their
critical machines. The cost of aluminum extrusion is generally negotiated
annually, with the price adjusted monthly, based upon the changes in the price
of aluminum ingot, which has historically been highly cyclical.
COMPETITION
Our thermal management products business competes with a number of major
providers of thermal management products located in the United States, Asia and
Europe. Two of our most significant competitors are Hon Hai Precision Components
Manufacturing (d/b/a Foxconn) and Wakefield Engineering, Inc. Foxconn is a
Taiwan-based company that sells thermal management products as part of its
broader electronic components products portfolio. Wakefield is a subsidiary of
publicly traded Alpha Technologies Group, Inc. and mainly focuses on thermal
management products for industrial electronics applications.
In addition, there are a large number of smaller heat sink companies, as
well as hundreds of machine shops, that fabricate heat sinks, usually under
subcontract with an OEM customer. Further, some aluminum die casters offer cast
heat sinks, and a number of aluminum extruders sell heat sink products and
fabrication capability, including aluminum extruders serving the automotive
industry and the power conversion market.
Fluent currently competes with a number of privately held companies,
primarily on the basis of product performance. To the extent that Fluent expands
into additional application and industry-specific markets, it will encounter
additional competition from software companies already serving such specific
markets. In addition, certain CFD software is available in the public domain.
BACKLOG AND LICENSE RENEWAL
Our hardware products typically are produced and shipped within two months
of the receipt of orders and, accordingly, we operate with little backlog. As a
result, net sales in any quarter generally are dependent on orders booked and
shipped in that quarter. All orders are subject to cancellation or rescheduling
by customers. Because of our quick turn of orders to shipments, the timing of
orders, delivery intervals, customer and product mix and the possibility of
customer changes in delivery schedules, we do not believe our backlog at a
particular date is a reliable indicator of actual sales for any succeeding
period.
Our software products are typically sold under annual license agreements. In
recent years, approximately 80% of our annual software license revenue was
renewed in the following year.
EMPLOYEES
As of December 31, 2001 we had a total of 2,218 employees including
approximately 500 contract employees in China. Except for the employees in our
manufacturing facility in Mexico, none of our employees are represented by labor
unions or collective bargaining units. We believe that our relationship with our
employees is good.
11
RISK FACTORS
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements regarding our expected
future financial position, results of operations, cash flows, financing plans,
business strategy, competitive position, plans and objectives and words such as
"anticipate," "believe," "estimate," "expect," "intend," "plan" and other
similar expressions are forward-looking statements. Such forward looking
statements are inherently uncertain, and holders of our securities must
recognize that actual results could differ materially from those projected or
contemplated in the forward-looking statements as a result of a variety of
factors, including the factors set forth below. Holders of our securities should
not place undue reliance on these forward-looking statements.
The forward-looking statements speak only as of the date on which they are
made, and we undertake no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which the statement is made or
to reflect the occurrence of unanticipated events. In addition, we cannot assess
the effect of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
RISKS RELATING TO OUR BUSINESS
WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR INTERNAL GROWTH.
Having recently gone through a reduction of our workforce and capacity due
to economic events in 2001, we intend to increase our thermal products and
software businesses overseas, expand the products and services we offer, and
possibly make selective acquisitions as the economy improves. This growth and
expansion may place a significant strain on our production, technical, financial
and other management resources. To manage growth effectively, we must maintain a
high level of manufacturing quality, efficiency, delivery and performance and
must continue to enhance our operational, financial and management systems, and
attract, train, motivate and manage our employees. We may not be able to
effectively manage this expansion, and any failure to do so could have a
material adverse effect on our business and financial condition.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
Our quarterly and annual operating results are affected by a wide variety of
factors, many of which are outside our control, that have in the past and could
in the future materially and adversely affect our net sales, gross margins and
profitability. These factors include:
- the volume and timing of orders received;
- competitive pricing pressures;
- the availability and cost of raw materials;
- changes in the mix of products and services sold;
- potential cancellation or rescheduling of orders;
- general economic conditions;
- changes in the level of customer inventories of our products;
- the timing of new product and manufacturing process technology
introductions by us or our competitors;
- the availability of manufacturing capacity; and
- market acceptance of new or enhanced products introduced by us.
12
Additionally, our growth and results of operations have in the past been,
are currently being and would in the future be, adversely affected by downturns
in the semiconductor or electronics industries. Our ability to reduce costs
quickly in response to revenue shortfalls is limited, and this limitation will
be exacerbated to the extent we continue to add additional manufacturing
capacity. The need for continued investment in research and development could
also limit our ability to reduce expenses accordingly. As a result of these
factors, we expect our operating results to continue to fluctuate. Results of
operations in any one quarter should not be considered indicative of results to
be expected for any future period, and fluctuations in operating results may
also cause fluctuations in the market price of the senior subordinated notes. We
cannot provide assurance that the overall thermal management market, the
segments of the market served by us or we will continue to grow in the future.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
OUR BUSINESS IS DEPENDENT ON THE SEMICONDUCTOR MARKET.
A significant portion of our net sales has been, and is expected to continue
to be, dependent upon sales of thermal management products for industrial
electronics applications, consisting primarily of integrated circuits and for
computer and networking applications, consisting primarily of microprocessors
and related chip sets. Our sales for industrial electronics applications
accounted for approximately 52%, 51% and 34% of our net sales in 2001, 2000 and
1999, respectively. Our sales for computer and networking applications accounted
for approximately 15%, 29% and 41% of our net sales in 2001, 2000 and 1999,
respectively. The thermal management market for computer and networking
applications is characterized by rapid technological change, short product life
cycles, greater pricing pressure and increasing foreign and domestic competition
as compared to the thermal management market for industrial electronics
applications.
Future growth will, to a significant extent, depend upon increased demand
for semiconductor devices and products that require thermal solutions. The
semiconductor industry (both computer and networking and industrial) has
historically been cyclical and subject to significant economic downturns
characterized by diminished product demand and eroding average selling prices. A
decrease in demand for semiconductor products would reduce demand for our
products and have an adverse impact on our results of operations. Further,
semiconductor manufacturers and their customers, in developing and designing new
products, typically seek to eliminate or minimize thermal problems, and such
efforts could have the effect of reducing or eliminating demand for certain of
our products. Additionally, we believe that many of our OEM customers compete in
intensely competitive markets characterized by declining prices and low margins.
These OEMs apply continued pricing pressure on their component suppliers,
including us. We cannot provide assurance that we will not be adversely affected
by cyclical conditions in the semiconductor and electronics industries.
The semiconductor industry continues to be in an economic slump and demand
for industrial and consumer electronics contracted significantly during 2001.
This situation adversely affected our results of operation for 2001, and will
likely adversely affect our results of operation into at least the second half
of 2002.
CHANGES IN THE AVAILABILITY OR PRICE OF ALUMINUM CAN SIGNIFICANTLY AFFECT
OUR BUSINESS AND RESULTS OF OPERATIONS.
Aluminum is the principal raw material used in our products and represents a
significant portion of our cost of goods sold. We purchase raw aluminum,
aluminum extrusion, aluminum coil and various components from a limited number
of outside sources. During the years ended December 31, 2001, 2000 and 1999, we
purchased a significant portion of our aluminum coil stock from a single
supplier. We believe that purchasing aluminum extrusion and coil stock from a
limited number of suppliers is necessary in order to obtain lower prices and to
achieve, consistently, the tolerances and design and delivery flexibility that
we require. If the available supply of aluminum declines, or if one or more of
our current suppliers is unable for any reason to meet our requirements, is
acquired by a competitor or determines to compete with us, we could experience
cost increases, a deterioration of service from our suppliers, or interruptions,
delays or a reduction in raw material supply that may cause us to fail to meet
delivery schedules to customers. Although we believe that viable alternate
suppliers exist for the aluminum coil stock and components, any unanticipated
interruption of supply would have a short-term material adverse effect on us.
13
In addition, our ability to pass price increases for aluminum or other raw
materials along to our customers may be limited by competitive pressures,
customer resistance and price adjustment limitations in our product purchase
contracts with our customers. Even if we are able to pass along all or a portion
of raw material price increases, there is typically a lag of three to twelve
months between the actual cost increase of raw material and the corresponding
increase in the prices of our products. We cannot provide assurance that in the
future we will be able to recover increased aluminum or other raw material costs
through higher prices to our customers. Market prices for raw aluminum, which
have historically been cyclical and highly volatile, have a significant effect
on our gross margin. An increase in the market price for aluminum could have a
material adverse effect upon our results of operations and business. See "Our
operating results may fluctuate significantly."
WE SUPPLY PRODUCTS AND SERVICES TO INDUSTRIES THAT EXPERIENCE RAPID
TECHNOLOGICAL CHANGE, WHICH MAY MAKE OUR PRODUCTS OBSOLETE.
The markets for our products are characterized by rapidly changing
technology, frequent new product introductions and enhancements and rapid
product obsolescence. Our future success will be highly dependent upon our
ability to continually enhance or develop new thermal and software products,
materials, manufacturing processes and services in order to keep pace with the
technological advancements of our customers and their corresponding increasingly
complex thermal management and computational fluid dynamics software needs. We
may not be able to identify new product trends or opportunities, develop and
bring to market new products or respond effectively to new technological changes
or product announcements by others, develop or obtain access to advanced
materials, or achieve commercial acceptance of our products. In addition, other
companies, including our customers, may develop products or technologies which
render our products or technologies noncompetitive or obsolete.
WE FACE INTENSE COMPETITION, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO
MAINTAIN OR INCREASE SALES OF OUR PRODUCTS.
The markets for thermal management products and computational fluid dynamics
software are highly competitive. Certain of our competitors, which include
divisions or subsidiaries of large companies, may have greater technical,
financial, research and development and marketing resources than we do. Further,
we expect that as the trend toward outsourcing continues, a number of new
competitors may emerge, some of which may have greater technical, financial,
research and development and marketing resources than we do. Our ability to
compete successfully depends upon a number of factors, including price, customer
acceptance of our products, cost effective high-volume manufacturing, proximity
to customers, lead times, ease of installation of our products, new product and
manufacturing process technology introductions by us and our competitors, access
to new technologies and general market and economic conditions. We cannot
provide assurance that we will be able to compete successfully in the future
against existing or potential competitors, or that our operating results will
not be adversely affected by increased price competition. In addition, our
customers for thermal management and software products may manufacture or
develop such products internally or actively support new entrants into our
market rather than purchase thermal products from us. Further, many of our
customers like to maintain dual sources for thermal management products.
OUR BUSINESS EXPERIENCES SEASONAL VARIATIONS.
Our CFD software business has experienced and is expected to continue to
experience significant seasonality due to, among other things, the second and
third quarter slowdown in software revenues primarily due to the purchasing and
budgeting patterns of Fluent's software customers. In addition, our thermal
management business has experienced slight seasonal variations due to the
slowdown during the third quarter's summer months which historically has
occurred in the electronics industry. Typically, our revenues are lowest during
the second and third quarters of the fiscal year, which ends in December.
WE DEPEND ON KEY PERSONNEL AND SKILLED EMPLOYEES WHO MAY NOT REMAIN WITH US
IN THE FUTURE.
Our success depends to a large extent upon the continued services of our
senior management and technical personnel. Our business also depends upon our
ability to retain skilled and semi-skilled employees. There is intense
competition for qualified management and skilled and semi-skilled employees and
our failure to recruit, train and retain such employees could adversely affect
our business.
14
OUR INTERNATIONAL OPERATIONS EXPOSE US TO ADDITIONAL RISKS.
We currently have multiple international manufacturing locations to better
service our customers, many of whom have moved their manufacturing operations
and expanded their business overseas. International operations are subject to a
number of risks, including:
- greater difficulties in controlling and administering business;
- less familiarity with business customs and practices;
- increased reliance on key local personnel;
- the imposition of tariffs and import and export controls;
- changes in governmental policies (including U.S. policy toward
these countries);
- difficulties caused by language barriers;
- increased difficulty in collecting receivables;
- availability of, and time required for, the transportation of products
to and from foreign countries;
- political instability;
- foreign currency fluctuations; and
- expropriation and nationalization.
The occurrence of any of these or other factors may have a material adverse
effect on our results of operations and could have an adverse effect on our
relationships with our customers. Furthermore, the occurrence of certain of
these factors in countries in which we operate could result in the impairment or
loss of our investment in such countries. The trend by our customers to move
manufacturing operations and expand their business overseas may have an adverse
impact on our sales of domestically manufactured products.
A part of our net sales is currently derived from products manufactured at
our manufacturing facility in Guang Dong Province in The People's Republic of
China. We commenced manufacturing at this facility in early 1998 and currently
maintain 120,000 square feet of manufacturing space. We only have limited
experience in managing operations in China and, although we have focused
significant management resources on this operation, we cannot provide assurance
that this business will be successful. An inability to successfully manage this
business or an interruption in the operations at this facility could have a
material adverse effect on our overall financial performance until we are able
to obtain substitute production capability with similar low operating costs. We
have additional manufacturing facilities in North America, Southern Asia and
Europe.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY.
Our success depends in part on our proprietary technology. We attempt to
protect our proprietary technology through patents, copyrights, trademarks,
trade secrets and license agreements. We believe, however, that our success will
depend to a greater extent upon innovation, technological expertise and
distribution strength. We cannot provide assurance that we will be able to
protect our technology, or that our competitors will not be able to develop
similar technology independently. We cannot provide assurance that the claims
allowed on any patents held by us will be sufficiently broad to protect our
technology. In addition, no assurance can be given that any patents issued to us
will not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to us. In addition, effective
patent, copyright and trade secret protection may be unavailable or limited in
certain foreign countries in which we conduct business. Although we believe that
our products and technology do not infringe upon proprietary rights of others,
there can be no assurance that third parties will not assert infringement claims
in the future. Moreover, litigation may be necessary in the future to enforce
our patents, copyrights and other intellectual property rights, to protect our
trade secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our financial condition and results of
operations.
15
WE ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL AND OTHER REGULATIONS.
We are subject to a variety of United States and foreign environmental laws
and regulations, including those relating to the use, storage, treatment,
discharge and disposal of hazardous materials, substances and wastes used to
manufacture our products and remediation of soil and groundwater contamination.
Public attention has increasingly been focused on the environmental impact of
operations that use hazardous materials. Some of the environmental laws impose
strict, and in certain cases joint and several, liability for response costs at
contaminated properties on their owners or operators, or on persons who arranged
for the disposal of regulated materials at these properties. Our operations are
also governed by laws and regulations relating to workplace safety and worker
health, principally the Occupational Safety and Health Act and regulations
thereunder which, among other requirements, establish noise and dust standards.
We believe we are in material compliance with applicable environmental, health
and safety requirements. Our failure to comply with present or future laws or
regulations could result in substantial liability to us. We cannot predict the
nature, scope or effect of legislation or regulatory requirements that could be
imposed or how existing or future laws or regulations will be administered or
interpreted with respect to products or activities to which they have not
previously applied. Enactment of more stringent laws or regulations, as well as
more vigorous enforcement policies of regulatory agencies or discovery of
previously unknown conditions requiring remediation, could require substantial
expenditures by us and could adversely affect our results of operations.
RISKS RELATED TO OUR INDEBTEDNESS
OUR SUBSTANTIAL DEBT COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE SENIOR SUBORDINATED
NOTES.
We have a substantial amount of debt. The following chart shows certain
important credit statistics:
AS OF DECEMBER 31,
2001
----------------------
(DOLLARS IN THOUSANDS)
Total debt (including current portion) $ 175,832
Stockholders' deficit (56,956)
Debt to stockholders' equity N/A
Since September 29, 2001 the Company has not been in compliance with certain
financial covenants under the amended and restated credit facility. The Company
has notified its lenders concerning the noncompliance. The resulting event of
default has not been waived by the Company's lenders; accordingly, following the
forbearance period described below, the lenders could demand full payment of all
amounts outstanding under the amended and restated credit facility. As a result
of the event of default, the Company classified $17.0 million outstanding under
the revolving credit facility, $38.2 million outstanding under the term facility
and $119.7 million of 12 3/4 % Senior Subordinated Notes as current on its
December 31, 2001 balance sheet. On January 29th, 2002, the Company entered into
a forbearance agreement with its senior lenders pursuant to which Aavid's senior
lenders will forbear through May 31, 2002 with respect to certain covenant
noncompliance issues. The forbearance agreement, among other things, also
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. We are
seeking to either amend our current Senior Credit Facility with our existing
lenders or secure a new Senior Credit Facility with new lenders 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. As a result of the uncertainty with respect to the new financing,
the Company's auditors, for the year ended December 31, 2001, have rendered a
"going concern" opinion for the Company. See page 47.
16
Our substantial indebtedness and our need to restructure our existing credit
facility with our senior lenders or with new lenders could have important
consequences to holders of our senior subordinated notes. For example, it could:
- make it difficult for us to satisfy our obligations with respect to the
senior subordinated notes and our obligations under our amended and
restated credit facility;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, which will reduce amounts available
for working capital, capital expenditures, research and development and
other general corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- increase our vulnerability to general adverse economic and industry
conditions;
- place us at a competitive disadvantage compared to our competitors
with less debt; and
- limit our ability to borrow additional funds.
The terms of the indenture governing our senior subordinated notes do not
fully prohibit us or our subsidiaries from incurring substantial additional debt
in the future. Our amended and restated credit facility also permits additional
borrowing. All of the borrowings under the amended and restated credit facility
are senior to the senior subordinated notes. If new debt is added to our current
debt levels, the related risks that we now face could intensify.
In addition, a portion of our debt, including debt incurred under our
amended and restated credit facility, bears interest at variable rates. An
increase in the interest rates on our debt will reduce the funds available to
repay the senior subordinated notes and our other debt and for operations and
future business opportunities and will intensify the consequences of our
leveraged capital structure. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" for a description of our
amended and restated credit facility and the senior subordinated notes.
TO SERVICE OUR DEBT, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH, WHICH
DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our debt, including the
senior subordinated notes and the amended and restated credit facility, will
depend on our ability to generate cash in the future. This, to an extent, is
subject to general economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control.
We cannot provide assurance that our business will generate sufficient cash
flow or that future borrowings will be available to us in an amount sufficient
to enable us to pay our debt, including the senior subordinated notes, or to
fund our other liquidity needs. If our future cash flow from operations and
other capital resources are insufficient to pay our obligations as they mature
or to fund our liquidity needs, we may be forced to reduce or delay our business
activities and capital expenditures, sell assets, obtain additional equity
capital or restructure or refinance all or a portion of our debt, including the
senior subordinated notes, on or before maturity. We cannot assure noteholders
that we will be able to refinance any of our debt, including the senior
subordinated notes, on a timely basis or on satisfactory terms if at all.
In addition, the terms of our existing debt, including the senior
subordinated notes and the amended and restated credit facility, and other
future debt may limit our ability to pursue any of these alternatives.
17
OUR AMENDED AND RESTATED CREDIT FACILITY AND THE INDENTURE IMPOSE
OPERATIONAL AND FINANCIAL RESTRICTIONS ON US.
Our amended and restated credit facility and the indenture under which our
senior subordinated notes were issued include restrictive covenants that, among
other things, restrict our ability to:
- incur more debt;
- pay dividends and make distributions;
- issue stock of subsidiaries;
- make certain investments;
- repurchase stock;
- create liens;
- enter into transactions with affiliates;
- enter into sale-leaseback transactions;
- merge or consolidate; and
- transfer and sell assets.
Our amended and restated credit facility also requires us to maintain
financial ratios. All of these restrictive covenants may restrict our ability to
expand or to pursue our business strategies. Our ability to comply with these
and other provisions of our indenture and amended and restated credit facility
may be affected by changes in our business condition or results of operations,
adverse regulatory developments or other events beyond our control. As discussed
above, we are currently not in compliance with several of these ratios which has
resulted in a default under our debt. We could be prohibited from making
payments with respect to the senior subordinated notes until the default is
cured or all debt under the amended and restated credit facility or other senior
debt is paid in full. This default could allow our creditors to accelerate the
related debt, as well as any other debt to which a cross-acceleration or
cross-default provision applies. If our indebtedness were to be accelerated, we
cannot provide assurance that we would be able to repay it. In addition, a
default could give the lenders the right to terminate any commitments they had
made to provide us with further funds.
RISKS RELATED TO THE SENIOR SUBORDINATED NOTES
OUR CONTROLLING STOCKHOLDER, WILLIS STEIN, MAY HAVE INTERESTS THAT CONFLICT
WITH HOLDERS OF THE SENIOR SUBORDINATED NOTES.
We are a wholly owned subsidiary of Heat Holdings Corp., whose equity
securities are held by Willis Stein and some co-investors. Through its
controlling interest in Aavid and pursuant to the terms of the security holders'
agreement among the equity investors, Willis Stein has the ability to control
the operations and policies of Aavid. Circumstances may occur in which the
interests of Willis Stein, as the controlling equity holder, could be in
conflict with the interests of the holders of the senior subordinated notes. In
addition, the equity investors may have an interest in pursuing acquisitions,
divestitures or other transactions that, in their judgment, could enhance their
equity investment, even though such transactions might involve risks to the
holders of the senior subordinated notes.
THE SENIOR SUBORDINATED NOTES ARE CONTRACTUALLY SUBORDINATED IN RIGHT OF
PAYMENT TO OUR SENIOR DEBT.
The senior subordinated notes are senior subordinated obligations of Aavid
ranking junior to all of our existing and future senior debt, equal in right of
payment with all of our existing and future senior subordinated debt and senior
in right of payment to any of our subordinated debt. The senior subordinated
notes are contractually subordinated in right of payment to borrowings under our
amended and restated credit facility.
As of December 31, 2001, we had $55.2 million of senior debt outstanding,
all of which was secured debt. The indenture limits, and in some (but not all)
instances prohibits, the incurrence of additional debt.
18
In addition, all payments on the senior subordinated notes will be blocked
in the event of a payment default under the amended and restated credit facility
and may be blocked for up to 179 consecutive days in any given year in the event
of non-payment defaults on senior debt. In the event of a default on the senior
subordinated notes and any resulting acceleration of the senior subordinated
notes, the holders of senior debt then outstanding will be entitled to payment
in full in cash of all obligations in respect of such senior debt before any
payment or distribution may be made with respect to the senior subordinated
notes.
In a bankruptcy, liquidation or reorganization or similar proceeding
relating to us, holders of the senior subordinated notes will participate with
trade creditors and all other holders of subordinated debt in the assets
remaining after we have paid all of the senior debt. However, because the
indenture requires that amounts otherwise payable to holders of the senior
subordinated notes in a bankruptcy or similar proceeding be paid to holders of
senior debt instead, holders of the senior subordinated notes may receive
proportionately less than holders of trade payables in any such proceeding. In
any of these cases, we cannot provide assurance that sufficient assets will
remain to make any payments on the senior subordinated notes.
WE ARE A HOLDING COMPANY AND OUR ONLY SOURCE OF CASH TO PAY INTEREST ON AND
THE PRINCIPAL OF THE SENIOR SUBORDINATED NOTES IS DISTRIBUTIONS FROM OUR
SUBSIDIARIES.
We are a holding company with no business operations of our own. Our only
significant asset is and will be our equity interests in our subsidiaries. We
conduct all of our business operations through our subsidiaries. Accordingly,
our only source of cash to make payments of interest on and principal of the
senior subordinated notes is distributions with respect to our ownership
interest in our subsidiaries from the net earnings and cash flows generated by
such subsidiaries.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE
CHANGE OF CONTROL OFFER REQUIRED BY THE INDENTURE.
If we undergo a "change of control," as defined in the indenture under which
the senior subordinated notes were issued, we must offer to buy back the senior
subordinated notes for a price equal to 101% of the principal amount, plus
interest that has accrued but has not been paid as of the repurchase date. We
cannot assure note holders that we will have sufficient funds available to make
the required repurchases of the senior subordinated notes in that event, or that
we will have sufficient funds to pay our other debts. In addition, our amended
and restated credit facility prohibits us from repurchasing the senior
subordinated notes after a change of control until we have repaid in full our
debt under such credit facility. If we fail to repurchase the senior
subordinated notes upon a change of control, we will be in default under both
the senior subordinated notes and our amended and restated credit facility. Any
future debt that we incur may also contain restrictions on repurchases in the
event of a change of control or similar event.
THE SENIOR SUBORDINATED NOTES AND THE GUARANTEES COULD BE VOIDED OR
SUBORDINATED TO OUR OTHER DEBT IF THE ISSUANCE OF THE SENIOR SUBORDINATED
NOTES OR THE GUARANTEES CONSTITUTED A FRAUDULENT CONVEYANCE.
If a bankruptcy case or lawsuit is initiated by our unpaid creditors, the
debt represented by the senior subordinated notes and the guarantees of the
senior subordinated notes by certain of our subsidiaries may be reviewed under
the federal bankruptcy laws and comparable provisions of state fraudulent
transfer laws. Under these laws, the debt could be voided, or claims in respect
of the senior subordinated notes and the guarantees could be subordinated to all
other debts of Aavid or its subsidiaries if, among other things, the court found
that, at the time we incurred the debt represented by the senior subordinated
notes and the subsidiaries incurred the debt represented by the guarantee, we or
any subsidiary:
- received less than reasonably equivalent value or fair consideration
for the incurrence of such debt; and
- were insolvent or rendered insolvent by reason of such incurrence; or
- were engaged in a business or transaction for which the remaining assets
constituted unreasonably small capital; or
- intended to incur, or believed that we or a subsidiary executing a
guarantee thereof would incur, debts beyond the ability to pay such
debts as they matured; or
- intended to hinder, delay or defraud creditors.
19
The measure of insolvency for purposes of fraudulent transfer laws varies
depending on the law applied. Generally, however, a debtor would be considered
insolvent if:
- the sum of its debts, including contingent liabilities, were greater
than the fair saleable value of all of its assets; or
- the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
- it could not pay its debts as they become due.
EFFECT OF ORIGINAL ISSUE DISCOUNT ON HOLDERS OF THE SENIOR SUBORDINATED
NOTES.
The senior subordinated notes are considered to have been issued with
original issue discount. Holders of the senior subordinated notes are required
to include the accretion of the original issue discount in gross income for U.S.
federal income tax purposes in advance of receipt of the cash payments to which
such income is attributable. If a bankruptcy case is commenced by or against us
under the United States Bankruptcy Code, the claim of a holder of senior
subordinated notes with respect to the principal amount thereof may be limited
to an amount equal to the sum of (i) the purchase price and (ii) that portion of
the original issue discount which has been amortized as of the date of any such
bankruptcy filing.
ITEM 2. PROPERTIES
Aavid Thermalloy has a total of approximately 580,000 square feet of
manufacturing space with locations in Laconia, New Hampshire; Monterrey, Mexico;
the United Kingdom; Italy; Germany (Curamik facility); Malaysia; Singapore;
Taiwan; China; and Toronto, Canada. We employ a broad range of aluminum
fabrication and processing capabilities. Manufacturing operations consist of
cutting, stamping, machining, assembling and finishing, including anodizing
capabilities. We have a substantial in-house tool and die capability that
enables us to create our own extrusion and progressive stamping dies and other
production tooling. A key element of our business strategy has been to expand
internationally. Many of our customers have short product cycles that demand
facilities to support quick-ramp, high-volume, high-quality manufacturing at
their geographically dispersed manufacturing locations. We plan to continue to
build or acquire additional manufacturing facilities overseas to better service
our customers, many of whom have moved manufacturing operations and expanded
their business overseas. Fluent's total sales, marketing, development, and
support facilities consist of approximately 170,000 square feet.
There can be no assurance that our expansion of our foreign operations will
be successful. Foreign operations are subject to a number of risks including:
work stoppages; transportation delays and interruptions; expropriation;
nationalization; misappropriation of intellectual property; imposition of
tariffs, foreign currency fluctuations and import and export controls; changes
in governmental policies (including U.S. policy toward these countries); and
other factors which could have an adverse effect on our business. In addition,
we may be subject to risks associated with the availability of, and time
required for, the transportation of products to and from foreign countries. The
occurrence of any of these factors may delay or prevent the delivery of goods
ordered by customers, and such delay or inability to meet customers'
requirements would have a materially adverse effect our results of operations
and could have an adverse effect on the our relationships with our customers.
Furthermore, the occurrence of certain of these factors in countries where we
own or operate manufacturing facilities could result in the impairment or loss
of our investment in such countries.
In 2001, due to excess capacity resulting from a significant slowdown in the
primary industries serviced by our customers, we closed the Dallas and Terrell,
Texas facilities. In addition, on December 28, 2001 we sold our Franklin, NH
extrusion facility.
20
We currently operate in the following locations:
U.S. LOCATIONS PRINCIPAL ACTIVITY
- -------------- ------------------
Concord, NH............................. Corporate Offices, Aavid Thermalloy Corporate Offices
Chicago, IL............................. Fluent-Software Development, Sales and Marketing
Dallas, TX.............................. Curamik-Sales and Marketing
Laconia, NH............................. Aavid Thermalloy-Manufacturing
Lebanon, NH............................. Fluent-Software Development, Sales and Marketing
Santa Clara, CA......................... Applied Thermal Technologies-Research and Development and
Consulting
INTERNATIONAL LOCATIONS PRINCIPAL ACTIVITY
- ----------------------- ------------------
Toronto, Canada......................... Aavid Thermalloy-Manufacturing
Monterrey, Mexico....................... Aavid Thermalloy-Manufacturing
Eschenbach, Germany..................... Curamik-Manufacturing
Darmstadt, Germany...................... Fluent-Software Sales and Marketing
Swindon, U.K............................ Aavid Thermalloy-Manufacturing
Sheffield, U.K.......................... Fluent-Software Development, Sales and Marketing
Bologna, Italy.......................... Aavid Thermalloy-Manufacturing
Le Bretonneaux, France.................. Fluent-Software Sales and Marketing
Malacca, Malaysia....................... Aavid Thermalloy-Manufacturing
Guang Dong Prov., PRC................... Aavid Thermalloy-Manufacturing
Singapore............................... Aavid Thermalloy-Manufacturing
Taipei, Taiwan.......................... Aavid Thermalloy-Manufacturing
Pune, India............................. Fluent-Software Development, Sales and Marketing
Tokyo, Japan............................ Fluent-Software Development, Sales and Marketing
ITEM 3. LEGAL PROCEEDINGS
Following the public announcement of the merger with Heat Merger Corp.,
lawsuits were filed against us, Willis Stein, our directors, and one former
director in the Court of Chancery of the State of Delaware by certain of our
stockholders. The complaints alleged, among other things, that our directors
breached their fiduciary duties and sought to enjoin, preliminarily and
permanently, the merger and also sought compensatory damages. The stockholder
plaintiffs, on behalf of our public stockholders, also sought class action
certification for their lawsuits. On March 11, 2001 the Court granted the
plaintiffs motion to dismiss the class action without prejudice.
We are involved in various other legal proceedings that are incidental to
the conduct of our business, none of which we believe could reasonably be
expected to have a materially adverse effect on our financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET PRICES OF AAVID COMMON STOCK
Our Common Stock traded on the Nasdaq National Market under the symbol "AATT"
until February 2, 2000, the date we were acquired by Heat Holdings. As a result
of the merger, our Common Stock is no longer publicly traded.
We have never paid a cash dividend on our Common Stock, and we currently
intend to retain all earnings for use in our business and do not anticipate
paying cash dividends in the foreseeable future. Our current amended and
restated credit facility and senior subordinated notes indenture contain
restrictive covenants which, among other things, impose limitations on the
payment of dividends.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA(1)
The following tables set forth selected statement of operations and balance
sheet data derived from the consolidated financial statements of the Company and
the Predecessor for the periods indicated. The following tables should be read
in conjunction with "Management Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Financial Statements, and related
Notes thereto of the Company and the Predecessor included elsewhere herein.
The purchase method of accounting was used to record assets acquired and
liabilities assumed by the Company. Such accounting generally results in
increased amortization and depreciation reported in future periods. Accordingly,
the accompanying financial statements of the Predecessor and the Company are not
comparable in all material respects since those financial statements report
financial position, results of operations, and cash flows for these two separate
entities.
22
THE PERIOD THE PERIOD
JANUARY 1, FEBRUARY 2,
2000 THROUGH THROUGH YEAR ENDED
YEARS ENDED DECEMBER 31, FEBRUARY DECEMBER DECEMBER 31,
1997(1) 1998(1) 1999(1)(2) 1, 2000(1) 31, 2000(1) 2001(1)
------------ ------------ ------------- ------------ ------------ ------------
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (THE COMPANY) (THE COMPANY)
STATEMENT OF OPERATIONS DATA:
(AMOUNTS IN THOUSANDS)
Net sales................................... $167,745 $209,078 $214,243 $23,442 $270,184 $ 208,840
Cost of goods sold.......................... 107,401 138,431 138,558 15,516 176,982 136,788
-------- -------- -------- ------- -------- ---------
Gross profit............................. 60,344 70,647 75,685 7,926 93,202 72,052
Selling, general and administrative expenses 36,709 43,783 51,970 5,214 95,748 96,423
Research and development.................... 6,939 6,756 7,528 752 9,935 12,886
Intangible asset impairment charge(3)....... -- -- -- -- -- 116,616
Restructuring and buyout of compensation
agreement charges (credit)(4)............. -- 5,740 (630) -- -- 17,017
Loss on sale of division(5)................. -- -- -- -- -- 4,931
Acquired in-process research and
development(6)............................ -- -- -- -- 15,000 --
-------- -------- -------- ------- -------- ---------
Income (loss) from operations............ 16,696 14,368 16,817 1,960 (27,481) (175,821)
Interest expense, net....................... (2,178) (1,342) (1,629) (816) (23,115) (23,563)
Other income (expense), net................. (1,201) (520) 218 22 379 (582)
-------- -------- -------- ------- -------- ----------
Income (loss) before income taxes,
minority interest, and extraordinary
item.................................... 13,317 12,506 15,406 1,166 (50,217) (199,966)
Benefit (provision) for income taxes........ (4,824) (4,385) (8,852) (547) (1,127) 9,553
-------- -------- -------- ------- -------- ---------
Income (loss) before minority interest
and extraordinary item................... 8,493 8,121 6,554 619 (51,344) (190,413)
Minority interest........................... -- -- 132 6 1,364 3,057
-------- -------- -------- ------- -------- ---------
Income (loss) before extraordinary item.. 8,493 8,121 6,686 625 (49,980) (187,356)
Gain on extinguishment of debt, net of
tax (7).................................... -- -- -- -- -- 3,287
-------- -------- -------- ------- -------- ---------
Net income (loss)(8)........................ $ 8,493 $ 8,121 $ 6,686 $ 625 $(49,980) $(184,069)
======== ======== ======== ======= ======== =========
OTHER FINANCIAL DATA:
Adjusted EBITDA(9).......................... $ 23,135 $ 23,728 $ 27,239 $ 3,706 $ 36,881 $ 8,905
Adjusted EBITDA margin(10).................. 13.8% 11.3% 12.7% 15.8% 13.7% 4.3%
Depreciation and amortization............... $ 7,640 $ 9,880 $ 10,072 $ 1,155 $ 43,998 $ 49,121
Capital expenditures........................ 15,992 10,407 12,364 308 11,242 8,126
Charge related to the write-up of inventory
to fair value............................. -- -- 2,857 569 3,963 --
Minority interest........................... -- -- (132) (6) (1,364) (3,057)
Write-off of acquired in-process research
and development........................... -- -- -- -- 15,000 --
Other one-time accruals..................... -- -- -- -- 999 --
BALANCE SHEET DATA AT YEAR END:
Working capital............................. $ 22,296 $ 30,635 $ 47,050 $ 24,768 $(156,689)
Total assets................................ 110,796 126,866 228,952 386,288 173,278
Total long term debt, including current
portion................................... 23,956 14,650 88,945 204,002 175,832
Stockholders' (deficit) equity.............. 50,415 71,351 79,568 100,159 (56,956)
23
NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA (amounts in thousands)
(1) This financial data reflects the consolidated financial position of the
Company as of December 31, 2001 and 2000 and the consolidated results of
operations of the Predecessor for the period from January 1, 2000 to
February 1, 2000 and the years ended December 31, 1999, 1998 and 1997
(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 on February 2, 2000. The accompanying financial data as of
and for the year ended December 31, 2001 and as of December 31, 2000 and
for the period from February 2, 2000 to December 31, 2000 reflect the
consolidated financial position and results of operations of the Company
subsequent to the date of the merger and include adjustments required under
the purchase method of accounting.
(2) Includes the results of operations of Thermalloy and Curamik from October
21, 1999 (the date of acquisition of Thermalloy).
(3) In the fourth quarter of 2001 and in accordance with SFAS 121, we recorded
an impairment charge related to goodwill and intangible assets acquired in
connection with the Merger.
(4) Represents the charges in 1998 related to (i) the estimated restructuring
costs incurred with our closure of our Manchester, New Hampshire facility,
(ii) the termination of the management agreement with Sterling Ventures
Limited and (iii) a bonus due a former President and Chief Executive
Officer, based on profits in excess of certain thresholds. The 1999 credit
of $630 relates to the reversal of excess restructuring reserves which were
no longer required upon the completion of the Manchester restructuring in
the fourth quarter of 1999. Restructuring charges of $17,017 in 2001 were
recorded in connection with the cessation of manufacturing activities at
the Dallas, Texas, Terrell, Texas and Loudwater, United Kingdom facilities,
reduction of the New Hampshire workforce and reduction of China workforce
including closure of the fan factory and write-off of associated fixed
assets.
(5) Represents loss realized on sale of Franklin, New Hampshire extrusion plant
that occurred in the fourth quarter of 2001.
(6) The $15,000 charge in 2000 represents the amount of the purchase price
allocated to technology acquired by Heat Holdings related to Fluent, Inc.,
which was not fully commercially developed and had no alternative future
use at the time of acquisition.
(7) Represents gain related to early retirement of debt, net of related tax
effect.
(8) On December 31, 2000 and 2001, the Company's common stock was not publicly
traded; therefore, earnings per share information is not presented.
(9) Represents net income before interest, income taxes, depreciation and
amortization and extraordinary items. Adjusted EBITDA for 2000 also
includes the following add-backs, as defined in the amended and restated
credit facility, to net income: non-cash charge to cost of sales related to
the write-up of inventory to fair value associated with purchase
accounting, minority interest, non-cash write-off of in-process technology,
one-time accruals related to increases in inventory and receivables
reserves related to the Thermalloy acquisition and severance associated
with a senior executive. Adjusted EBITDA in 2001 also includes add-backs
for restructuring charges, intangible asset impairment charge and loss on
sale of division, and excludes the gain on extinguishments of debt. Each of
these components of Adjusted EBITDA can significantly affect our results of
operations and liquidity and should be considered in evaluating our
financial performance. Adjusted EBITDA is included because we understand
that such information is considered to be an additional basis on which to
evaluate our ability to pay interest, repay debt and make capital
expenditures. Adjusted EBITDA is not intended to represent and should not
be considered more meaningful than, or as an alternative to, measures of
performance, profitability or liquidity determined in accordance with
generally accepted accounting principles.
(10) Represents Adjusted EBITDA as a percentage of net sales.
24
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations together with the financial statements and the notes to
such statements included elsewhere in this Annual Report on Form 10-K. This
discussion contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about us and our
industries. These forward-looking statements involve risks and uncertainties.
Our actual results could differ materially from those anticipated in these
forward-looking statements, as more fully described in "Item 1. Business - Risk
Factors". We undertake no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
OVERVIEW
We are a leading global provider of thermal management solutions for
electronic products and the leading developer and marketer of CFD software.
Historically, we were organized as three operating segments: Aavid Thermal
Products, Fluent and Applied Thermal Technologies; however, in connection with
the merger, we consolidated our business into two operating units: Aavid Thermal
Products (including Applied Thermal Technologies), which following the merger is
known as Aavid Thermalloy, and Fluent. Aavid Thermalloy designs, manufactures
and distributes thermal management products that dissipate unwanted heat from
microprocessors and industrial electronics products. Fluent develops and markets
CFD software that is used in complex computer-generated modeling of fluid flows,
heat and mass transfer and chemical reactions for a variety of industries
including, among others, the automotive, aerospace, chemical processing, power
generation, material processing, electronics and HVAC industries.
We and our predecessors have been engaged in the development and manufacture
of heat sinks and related thermal management products since 1964. In August
1995, we acquired all the outstanding capital stock of Fluent for $12.8 million.
In February 1996, we completed our initial public offering, whereby we sold an
aggregate of 2,645,000 shares of common stock at a price of $9.50 per share,
from which we received net proceeds of approximately $21.7 million. During 1996,
we further expanded our operations through the acquisitions of (1) Fluid
Dynamics International, Inc., a provider of computational fluid dynamics
software, (2) an aluminum extrusion manufacturing facility located in Franklin,
New Hampshire and (3) Beaver Industries, a manufacturer of heat sinks and
related thermal management products for electrical and electronics parts,
components, ensembles and systems in Toronto, Canada.
On October 21, 1999, the Company purchased all of the stock of the
Thermalloy Division of Bowthorpe plc ("Thermalloy") and 85.4% of the stock of
Curamik Electronics Gmbh ("Curamik") (the "Thermalloy acquisition") for a cash
purchase price of $84.6 million, including transaction costs of $2.8 million.
Thermalloy designs, manufactures and sells a wide variety of standard and
proprietary heat sinks and associated products, similar to those produced by
Aavid Thermal Products, our thermal management business, within the computer and
networking and industrial electronics (including telecommunications) industries.
Curamik is a German corporation that manufactures direct bonded copper ceramic
substrates that are used in the power semiconductor and other industrial
electronics industries. Aavid used $12.6 million of its cash on hand and $84.6
million of borrowings under its new credit facility to complete the Thermalloy
acquisition, repay $12.6 million of outstanding debt, and pay transaction costs.
The acquisition of Thermalloy created significant opportunities to realize cost
savings through certain plant closings, the elimination of duplicative selling,
general and administrative functions and the reduction of unnecessary corporate
expenses. The increased goodwill amortization and other purchase accounting
adjustments resulting from our acquisition of Thermalloy decreased our net
income in the fourth quarter of 1999 and in 2000 as compared to the respective
prior year periods. Following the acquisition of Thermalloy, we changed the name
of Aavid Thermal Products to Aavid Thermalloy. See Note C. of notes to our
consolidated financial statements for pro forma information for the acquisition.
On February 2, 2000, we were acquired in a merger by Heat Holdings Corp., a
corporation newly formed by Willis Stein & Partners II, L.P. (the "Purchaser").
Pursuant to the merger, Aavid stockholders received $25.50 in cash for each
outstanding share of common stock, and outstanding stock options and warrants
were cashed out. The merger was accounted for using the purchase method.
25
RESULTS OF OPERATIONS
The following table is derived from our consolidated statements of
operations and sets forth the percentage relationship of certain items to net
sales for the periods indicated. The purchase method of accounting was used to
record assets acquired and liabilities assumed by the Company. Such accounting
generally results in increased amortization and depreciation reported in future
periods. Accordingly, the accompanying financial statements of the Predecessor
and the Company are not comparable in all material respects since those
financial statements report financial position, results of operations, and cash
flows for these two separate entities. The 2000 results include the combined
results of the Predecessor for the period January 1, 2000 through February 1,
2000 and the Company from February 2, 2000 through December 31, 2000.
YEAR ENDED DECEMBER 31,
------------------------------------
1999 2000 2001
----- ----- -----
Net sales........................................................................... 100.0% 100.0% 100.0%
Cost of goods sold.................................................................. 64.7 65.6 65.5
----- ----- -----
Gross profit...................................................................... 35.3 34.4 34.5
Selling, general and administrative expenses........................................ 24.3 34.4 46.2
Research and development............................................................ 3.5 3.6 6.2
Intangible asset impairment charge.................................................. -- -- 55.8
Restructuring and buyout of compensation arrangements............................... (0.3) -- 8.1
Loss on sale of division............................................................ -- -- 2.4
Acquired in-process research and development charge................................. -- 5.1 --
----- ----- -----
Income (loss) from operations..................................................... 7.8 (8.7) (84.2)
Interest expense, net............................................................... (0.7) (8.2) (11.3)
Other income (expense) and net...................................................... 0.1 0.1 (0.3)
----- ----- -----
Income (loss) before income taxes, minority interest and extraordinary item....... 7.2 (16.7) (95.8)
Benefit (provision) for income taxes................................................ (4.1) (0.6) 4.6
----- ----- -----
Income before minority interest and extraordinary item............................ 3.1 (17.3) (91.2)
Gain on extinguishment of debt...................................................... -- -- 1.6
Minority interest in loss of consolidated subsidiaries.............................. -- 0.5 1.5
----- ----- -----
Net income (loss)................................................................ 3.1% (16.8)% (88.1)%
===== ===== =====
2001 COMPARED WITH 2000
YEAR ENDED
NET SALES (DOLLARS IN MILLIONS) DECEMBER 31,
------------------------------- -----------------------
2000 2001 CHANGE
------- ------- --------
Computer and Networking.......................................................... $ 85.5 $ 32.2 (62.3)%
Industrial Electronics........................................................... 130.4 86.1 (40.0)%
Curamik GmbH..................................................................... 17.9 22.1 23.5%
Consulting and Design (Applied).................................................. 1.8 1.8 --%
------- ------- ------
Total Aavid Thermalloy......................................................... 235.6 142.2 (39.6)%
Total Fluent................................................................... 58.0 66.6 14.8%
------- ------- ------
Total Aavid Thermal Technologies .............................................. $ 293.6 $ 208.8 (28.9)%
======= ======= ======
Net sales for 2001 were $208.8 million, a decrease of 28.9% compared with
$293.6 million for 2000. 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. Sales to the Computer
and Network industry segment experienced a decline of $53.3 million from 2000
levels and Industrial Electronics experienced a $44.3 million decrease from
2000. This decrease was primarily due to a decline in the semi-conductor
industry as a whole, which adversely impacted 2001 performance and which will
likely adversely impact the first half of 2002 and may adversely impact the
second half of 2002. Aavid Thermalloy's German subsidiary, Curamik GmbH, a
supplier of direct-bonded copper substrate products, saw revenues increase $4.2
million over 2000. Fluent's sales increased $8.6 million and consulting services
were flat at $1.8 million. Foreign exchange rates in 2001 also had a negative
impact on revenues. Had foreign exchange rates over the course of 2001 remained
consistent with the exchange rates at the end of 2000, the Company's revenues
would have been approximately $4.2 million higher than reported.
26
Aavid Thermalloy's net sales were $142.2 million for 2001, a decrease of
$93.4 million, or 39.6% compared with $235.6 million for 2000. This decrease, as
discussed above, was primarily the result of the significant decline experienced
by the semi-conductor and electronics industries in 2001.
Fluent's net sales were $66.6 million for 2001, an increase of $8.6 million
or 14.8% over 2000 sales of $58.0 million. The increase was spread among all
product offerings due primarily to increased sales to new customers for
computational fluid dynamics software, as well as the success of
application-specific products.
International net sales (which include North American exports) increased to
57.5% of net sales for the year ended December 31, 2001 as compared with 42.2%
for the year ended December 31, 2000.
Our gross profit in 2001 was $72.1 million, a decrease of $29.0 million, or
28.7% lower than 2000 gross profit of $101.1 million. Our gross margin in 2001
was 34.5%, which compares with 34.4% in 2000. While the overall Company gross
margin remained consistent from year to year, Aavid Thermalloy saw a significant
decrease in gross profit in 2001 which was caused primarily by excess factory
capacity in the U.S. and abroad due to the significant slowdown in the
semi-conductor and electronic industries. This underutilization has been
addressed through the shut-down in 2001 of the Loudwater, U.K. facility and the
Dallas and Terrell, Texas facilities. However, due to Fluent's revenue and gross
profit becoming a larger percentage of the overall Company's revenue and gross
profit in 2001, the overall gross margin of the Company remained consistent in
spite of the slow down experienced by Aavid Thermalloy. Our gross margin in the
first quarter of 2000 was negatively impacted by certain purchase accounting and
acquisition related adjustments which decreased gross profit by $4.5 million in
acquisition related charges. Our gross margin in 2000 would have been 36.0%
without these charges.
Our selling, general and administrative expenses, excluding amortization of
intangibles, were $62.2 million, or 29.8% of sales for 2001, as compared with
$69.4 million, or 23.6% of net sales, for 2000. The net decrease in selling,
general and administrative expenses in dollars resulted primarily from S,G&A
expense reductions at Aavid Thermalloy, including personnel reductions in the
Concord, New Hampshire headquarters as well as personnel reductions associated
with the closure of the Dallas, Texas facility which was completed during the
second quarter of 2001. Aavid Thermalloy's (exclusive of Curamik) 2001 S,G&A
expenses were down $11.2 million from 2000 levels. Fluent's 2001 S,G&A increased
$2.2 million from 2000 levels as Fluent continued to enhance its sales and
support infrastructure to support its revenue growth. Curamik saw an increase of
$0.9 million over 2000 also associated with improving its sales and
administrative infrastructure to manage its revenue growth. Lastly, the
Company's corporate offices also experienced an $0.6 million increase primarily
related to increased legal costs associated with debt refinancings and foreign
corporate reorganizations. On a percentage of net sales basis, S,G&A in 2001 was
6.2% higher than in 2000. Much of this increase relates to Aavid Thermalloy as
their overall S,G&A rate as a percentage of sales increased in 2001 due to the
significant reduction in revenues from the previous year. The remaining increase
in percentage is primarily the result of Fluent becoming a much larger component
of the consolidated results of the Company. Fluent in general has a higher S,G&A
rate than Aavid Thermalloy.
$34.2 million of intangible asset amortization was recorded in 2001 compared
with $31.5 million recorded in 2000, primarily related to intangible assets
established as part of the acquisition of Aavid by Heat Holdings Corp. The
increase in 2001 is due to the fact that in 2001, the Company recorded a full 12
months of amortization. In 2000, the merger occurred on February 2nd and,
therefore, the Company only recorded approximately 11 months of amortization in
2000.
Our research and development expenses consist primarily of funding for
internal product development activities as well as product development
activities conducted by third parties on our behalf. Research and development
expenses also include the costs of obtaining patents on the technology developed
in research and development activities. Research and development expenses were
$12.9 million, or 6.2% of net sales which compares with $10.7 million, or 3.6%
of net sales in 2000. The increase in research and development expenses was
primarily due to increased expenditures at Fluent.
27
In connection with the Merger in February, 2000, the Company allocated $15.0
million of the purchase price to in-process research and development projects.
This allocation represented the estimated fair value based on risk-adjusted cash
flows related to the incomplete software research and development projects of
Fluent, Inc. At the date of the merger, the development of these projects had
not yet reached technological feasibility and the research and development in
progress had no alternative future uses. Accordingly, these costs were expensed
as of the merger date.
The Company allocated values to the in-process research and development
based on an in-depth assessment of the R&D projects. The value assigned to these
assets was limited to significant research projects for which technological
feasibility had not been established, including development, engineering and
testing activities associated with the introduction of the acquired in-process
technologies.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the acquired technology into commercially viable
products, estimating the resulting net cash flows from the projects, and
discounting the net cash flows to their present value. The revenue projection
used to value the in-process research and development was based on historical
results, estimates of relevant market sizes and growth factors, expected trends
in technology, and the nature and expected timing of new product introductions
by the Company and its competitors. The resulting net cash flows from such
projects are based on management's estimates of cost of sales, operating
expense