ITEM 1. BUSINESS
OVERVIEW
Aavid Thermal Technologies, Inc. ("Aavid" or the "Company") operates in
two distinct business areas: thermal management solutions ("Aavid Engineering,
Inc.") and computational fluid dynamics software ("Fluent, Inc."). Thermal
Management Solutions involve the provision of thermal management solutions for
problems associated with the dissipation of unwanted heat in electronic and
electrical components and systems. Computational Fluid Dynamics Software
involves developing sophisticated software for computer modeling and analysis of
products and processes that would otherwise require time consuming and expensive
physical models and the facilities to test them.
Although these are separate business areas, synergies between the two
businesses are significant. The "common denominator" between them is technical
expertise in the physics of heat transfer which led to the creation in the first
quarter of 1997 of a third business unit, a thermal solutions design center. The
Company intends to leverage the heat transfer technology inherent in its
software business with new and expanded expertise in electronic device and
system packaging to grow its thermal management solutions business.
With 76% of revenues in 1996, the thermal solutions component of the
business has over 2,500 customers, including OEMs, distributors and contract
manufacturers serving major industry segments, including the computer,
semiconductor, telecommunications, transportation, automotive, and power
conversion industries. Increases in silicon and system integration, higher
processing speeds and frequencies, smaller form factors, more sophisticated
power requirements and other advances in chip technology are creating increasing
heat dissipation problems in electronic and electrical components and systems.
The Company addresses heat dissipation problems by providing customers with
advanced technological capabilities, sophisticated thermal management software,
and worldwide manufacturing capability. The Company's thermal management
products, which operate by conducting, convecting and radiating away unwanted
heat, include aluminum and copper heat sinks, heat sink/fan combinations, heat
exchangers, heat pipes, liquid cooled cold plates, attachment accessories,
compliant interface materials and conductive adhesives. Substantial engineering
is involved in designing these products to maximize heat dissipation and
minimize customers' assembly costs. The Company believes it has the broadest
range of products in the thermal management industry. The company's customers
include Allen-Bradley, AT&T, Chrysler, General Electric, Hewlett-Packard, IBM,
Intel, Motorola, COMPAQ and Packard Bell. The application of the Company's
products by these customers is quite diverse, ranging from cooling the most
sophisticated microprocessors used in personal computers and telecommunications
to cooling AC drive systems in diesel-electric locomotives.
With 24% of 1996 revenues, the computational fluid dynamics software
component of the business has over 1,800 customers serving major industry
segments including, aerospace, automotive, electronics, chemical process,
materials process, HVAC and power generation. The Company develops software and
provides problem-solving support services through its wholly owned subsidiary,
Fluent, Inc. ("Fluent"). Its software enables computer generated analysis of air
and other fluid flows, heat and mass transfer, chemical reaction and related
phenomena. By providing detailed information and the ability to model and
simulate, Fluent's
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software can significantly reduce its customers' engineering costs and
time-to-market, while improving the final product or process design. Fluent
expanded its computational fluid dynamics software business in May 1996, by
acquiring Fluid Dynamics, Inc. ("FDI"), a leading computational fluid dynamics
company focused on complimentary markets, including electronics. The FDI
acquisition increases the Company's ability to provide sophisticated software
solutions for thermal problems in the electronics industry. In January 1997,
Fluent acquired the remaining 50% of Polyflow, S.A., a small Belgian software
company focusing on the flow of polymers in the plastics industry.
The Company's thermal solutions design center, Applied Thermal
Technologies, Inc., is led by Dr. Vivek Mansingh, an expert in the field of
thermal engineering and electronic packaging design. The Company intends to use
the design center to significantly increase the Company's technological
capabilities in the thermal solutions market, allowing for front-end design and
test and validation of thermal management products, drawing upon the expertise
of both the thermal products and computational fluid dynamics businesses. Just
as importantly, the design center is intended to tie together all of the
Company's technical strengths in the thermal solutions business to solicit
customer funded research and development, and to provide cutting edge design and
consulting. The Company believes that the design center will enhance the
visibility of the Company as a technology leader, resulting in earlier and
closer ties to existing and new customers.
Overall, Aavid's strategy is to increase its technological
capabilities, expand its international presence in order to strengthen its
position as a leading provider of thermal management solutions, and to expand
its Fluent software business, both in support of its thermal management
business, and separately as a growing general purpose computational fluid
dynamics software company.
The Company was incorporated in Delaware in October 1993. Aavid
Engineering, Inc. ("Aavid Engineering"), the Company's predecessor, which was
acquired by the Company in October 1993, was incorporated in New Hampshire in
February 1964. References to "Aavid" and the "Company" include Aavid Thermal
Technologies, Inc. and its subsidiaries, including Aavid Engineering, Fluent,
and FDI. Aavid Engineering does business under the name "Aavid Thermal
Technologies". The Company's principal executive offices are located at One
Eagle Square, Suite 509, Concord, New Hampshire 03301, and its telephone number
is (603) 224-1117.
THERMAL PRODUCTS INDUSTRY BACKGROUND
Designers of electronic systems 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 form factors and at
lower prices. To meet these requirements, systems designers have principally
relied upon system integration, a strategy which seeks to implement new overall
system designs with fewer, smaller and lighter components, circuit boards and
structural components. Successful system integration for electronics is enabled
in large part
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by increasing levels of silicon circuit integration. The resulting small systems
containing tightly packed electronics and power supplies are often characterized
by restricted air flow and limited space to accommodate thermal management
products. As a result, these systems are inherently more susceptible to thermal
degradation than systems with larger enclosures, substantial airflow and more
loosely spaced printed circuit boards. Excessive heat degrades system
performance and reliability and can cause system failure. These negative effects
are exacerbated by the increasingly wide range of environmental conditions,
including temperature extremes, in which electronic systems are expected to
operate. The use of thermal management products helps maintain system and device
performance and reliability and helps avoid premature component and system
failure.
The trend toward increased silicon integration creates significant
challenges for thermal management. The amount of unwanted heat generated by an
integrated or power semiconductor device is a function of circuit density,
processing speed (system clock speed and frequency), amperage, supply voltage
and chip technology. For example, advanced logic devices now integrate millions
of transistors per device in increasingly small areas. With each transistor
generating unwanted heat, the result is more heat in a smaller area, i.e.,
higher thermal densities. Increases in system clock speeds of microprocessors
enabled by shorter gate lengths and other technology advances in devices, such
as the Pentium II, M2, K6, Ssparc Chip Set, MIPS Chip Set, and Power PC, result
in operating frequencies today of in excess of 200 MHz, compared to the typical
20 MHz clock speed of a 386 microprocessor.
There are a wide variety of markets which require thermal management
products, including the computer, semiconductor and semiconductor packaging,
telecommunications, transportation, medical and power conversion markets.
Thermal management applications within these markets can be generally divided
into two categories: Digital electronics applications with thermal products
attached to high power microprocessors and other digital semiconductor devices;
and power electronics applications, which represent the largest portion of the
overall market, with thermal management products for integrated circuits
controlling, regulating, converting, and routing voltage and current in power
electronic systems.
While digital electronics applications are generally viewed as high
growth markets, the Company believes that thermal management products content in
power electronics is growing faster than related end product growth as these
markets react to major end user demands for improved performance and
reliability, smaller form factors and lower prices with new product designs
which are increasingly complex to package and keep cool. In addition, the
increasing use of logic Ics; e.g., microcontrollers, programmable logic devices
in power electronics applications has created the need for thermal management
products to manage the different operating temperature characteristics of logic
and power devices.
COMPUTATIONAL FLUID DYNAMICS INDUSTRY BACKGROUND
Computational fluid dynamics (CFD) software tools for computer analysis
of engineering designs is a rapidly growing technology used by companies in a
wide range of industries. Supporting design modifications without physical
prototyping, computer-based analysis reduces engineering cost, improves product
performance, and reduces time-to-market for new devices.
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CFD software is used for computer-based analysis of designs involving fluid
flow, heat transfer, mass transfer, chemical reaction, and related phenomena,
with specific uses ranging from the design of electronic components and systems
to automotive component design, and from combustion system design to process
plant troubleshooting.
Over the past decade, the use of CFD software has expended
significantly, driven (i) by the increasing pressure on companies to reduce
design cost and speed their time to market, (ii) by the development of software
that can be used by non-experts, and (iii) by the increased power of computers.
Only recent increases in computing power have made computer analysis of complex
designs feasible on computers that are readily available to engineering. Ongoing
software development by Fluent and others support CFD software use by
non-experts, which I turn has expanded the CFD market beyond its traditional
user base of Ph.D. level engineers in corporate R&D centers. Finally, CFD
software tools are part of the growing trend toward improved engineering
efficiency through computer-aided analysis and design.
The Company believes that continued growth of CFD design tools depends
on software developments that integrate CFD with geometry modeling and design
software (CAD software) and which increase accessibility to design engineers
who are non-expert in CFD.
THERMAL MANAGEMENT PRODUCTS AND SERVICES
The following is a brief description of the Company's services and
various types of thermal management products, which can be configured in
thousands of different designs, and are currently offered by Aavid:
- - Heat Sinks, Heat Exchangers and Fan Heat Sinks. These products typically
consist of fabricated aluminum extrusions, stampings, castings or
multi-technology assemblies designed to conduct heat away from
semiconductor and integrated circuit devices. These products have high
surface area to volume ratios and are machined, pressed, shaped and/or
assembled to fit a specific application. Fan heat sinks rely on a fan
mounted directly on the heat sink to increase the movement of air. A
substantial majority of the Company's net sales currently consist of heat
sinks, either alone or with related attachment devices or interface
materials.
- - Attachment Devices. Attachment devices are the spring clips, tapes,
adhesives, tabs and similar devices which are used to attach the heat sink
to the semiconductor or integrated circuit devices and/or to the customer's
printed circuit board or system chassis. Aavid's attachment devices are
designed to promote a highly efficient thermal transfer between the
component and the thermal management products, as well as to reduce the
cost of the customer's installation and to provide for ease of repair.
- - Interface Materials. Interface materials are found at the interface of
adjacent surfaces and play an important role in transferring heat from the
component being cooled to the heat sink. Interface materials include
greases, silicone pads, phase change materials, tapes and adhesives which
have desirable thermal properties. The Company purchases these materials on
a private label basis from a number of suppliers.
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- - Liquid Cooling. These devices include cold plates and other liquid cooling
designs that dissipate heat by conducting or convecting the heat into a
liquid which then transfers the away from the source to the ultimate heat
sink.
- - Application Engineering Support Services. Aavid supports its customers with
an experienced applications and thermal engineering staff which analyzes
customer thermal problems, recommends design changes in the customer's
product and designs a thermal solution. Aavid currently utilizes finite
element and analytical proprietary software models to analyze customer
thermal management problems and design issues relating to the Company's
thermal management products. These analytical models provide very fast
approximations of solutions to a wide range of thermal engineering problems
encountered by Aavid's applications engineering staff on a daily basis.
COMPUTATIONAL FLUID DYNAMICS SOFTWARE PRODUCTS AND SERVICES
Fluent is a leading provider of computational fluid dynamics (CFD)
software used to predict fluid flow, heat and mass transfer, chemical reaction,
and related phenomena. Fluent provides CFD software and consulting services that
are used by engineers in corporations worldwide for design and analysis of
products and processes. Our software and services help these engineers reduce
engineering cost, improve product performance, and reduce time-to-market. Fluent
provides a complete suite of CFD software products, with each product designed
for specific tasks or for optimal performance on a specific class of problems.
The following is a brief description of the Company's software products and
services:
- - Engineering Consulting Services. Fluent's consulting staff conducts
computer-aided analysis, on a fee-for-service basis. Customers of the
consulting services department include companies that use CFD software
internally, but need additional expertise or computer resources that are
available through Fluent. Other customers are companies that are not
equipped with personnel or computers to support CFD software in-house. In
addition to providing CFD software expertise and high-performance computing
systems, the Fluent consulting group works under contract to develop
software with specific features required by individual clients. Fluent's
staff provides consulting services in the United States, United Kingdom,
Germany, France, India and Japan.
- - GeoMesh and TGrid are used for model building and dramatically reduce the
time to create a CFD model. GeoMesh allows users to import geometries
created under other CAD/CAE packages into the Fluent suite of software
products. GeoMesh features an intuitive graphical interface, special tools
for the creation, control and refinement of meshes (mathematical
representations dividing the flow region into smaller finite elements and
volume), and advanced diagnostic capabilities. TGrid enables users to
automatically create unstructured tetrahedral meshes for extremely complex
geometries.
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- - Fluent and Fluent/UNS are general purposes CFD software used across a wide
range of industries and are ideally suited for incompressible and mildly
compressible flows. Fluent contains physical models for a wide range of
applications including turbulent flows, heat transfer, reacting flows,
chemical mixing, combustion and multi-phase flows. Fluent/UNS provides many
of Fluent's physical models on unstructured meshes, enabling easier problem
setup and greater accuracy using solution-adaption of the mesh.
- - Rampant is CFD software used in applications in the aerospace and
turbo-machining industries for high speed and compressible flows in the
design of wing aerodynamics, engines, compressors, and turbines. Rampant
contains physical models that address turbulent flows, heat transfer,
compressible mixing, rotating flows and flows with strong shocks. Utilizing
unstructured meshes, Rampant enables fast model creation and local mesh
adaption for capturing shocks and other flow details.
- - Fidap is general-purpose CFD software for the simulation of incompressible
or compressible flows, with particular strength for applications in the
materials processing, biomedical, semiconductor, food, paper, and chemical
industries. Fidap offers complete mesh flexibility and a wide range of
physical models, including prediction of liquid-free surfaces,
non-Newtonion rheology, and advanced radiation modeling.
- - Polyflow is CFD software for the analysis of polymer processing, including
extrusion die design, blow molding, thermoforming, plastic film casting,
float glass production, thin sheet forming, fiber drawing, wire coating,
and related materials processing flows. Polyflow is used by Fortune 500
resin producers and by major plastics and rubber producers. Polyflow has
the unique capability for "inverse" die design, allowing designers to
compute the die shape required for a desired extrudate shape.
- - Nekton is CFD software for simulation of thin film coating flows and
related problems in materials processing. Nekton addresses applications in
the paper, photographics, imaging and printing industries such as
roll-coating, slot coating, and air-knife coating processes.
- - Icepak is application-specific CFD software designed to analyze air flow
and thermal management in electronic devices such as computer cabinets,
monitors, and telecommunications equipment. Icepak is used by manufacturers
of electronic equipment, component-level, board-level, or cabinet-level
system design.
- - Mixsim is an application-specific model building software for computer
analysis of agitated mixing vessels used in the chemical and process
industries. Based on inputs from the designer, Mixsim automates the CFD
model generation and simulation process. This eliminates the need for
process plant engineers to learn the more complex usage of general purpose
CFD software.
Fluent has licensed its software products to more than 1,800 customers
worldwide. In North America, Fluent typically licenses its software products
pursuant to a one year, renewable agreement for annual fees greater than $20,000
per year (subject to discounts for multiple licenses). In Europe and the Far
East, a significant portion of Fluent's sales are derived from
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licenses of its software products for one-time fees greater than $50,000; in
such situation, Fluent also typically receives annual maintenance and support
fees of approximately 15%.
Fluent licenses its GeoMesh and Nekton software products from
independent third parties. The Company believes that GeoMesh and Nekton are
important components of the Fluent suite of software products. There can be no
assurance that the GeoMesh and Nekton licenses will be renewed or that such
licenses, if renewed, will be on comparable terms. In addition, there can be no
assurance that GeoMesh will not be licensed to competitors of Fluent. If these
licenses were not renewed on favorable terms, or if GeoMesh or Nekton were
licensed to competitors of Fluent, and Fluent was unable to develop or license a
suitable substitute software package, such event could materially adversely
affect Fluent's business, results of operations and financial condition. See "
- -- Intellectual Property."
Fluent provides customers with technical support to assist them in
using its CFD software successfully. The Company believes that high-quality
technical support service is critical to the success of the CFD software
business. Fluent provides support services locally in all markets where Fluent
does business, through Fluent's own staff or through independent distributors.
These services are undertaken from the United States, United Kingdom, Germany,
France, India and Japan.
MARKETS AND CUSTOMERS
The Company has established a highly diversified base of customers for
its thermal management products, services and software, representing a wide
range of industries and applications. In 1996, Aavid sold its thermal products
to over 2,500 customers. Fluent has licensed its software to over 1,800
customers. The Company seeks to sell multiple products to its customers in order
to enable Aavid to become a more strategic supplier. The Company's single
largest customer in 1994, 1995 and 1996 accounted for approximately 6%, 7%, and
5%, respectively, of the Company's net sales. The Company's ten largest
customers in 1994, 1995, and 1996 accounted for approximately 33%, 37%, and 27%,
respectively, of the Company's net sales.
The following chart shows certain customers of Aavid:
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Customers Market
-------------------------------------------------------------------
Cyrix Computers
Compaq Computer
IBM
Packard Bell
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ABB Daimler-Benz Industrial Controls
Allen Bradley
G.E.
Reliance Electric
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AT&T Communications
Lucent
Motorola
Northern Telcom
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Chrysler Automotive
Gentex
Motorola
Eaton
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The following chart shows certain customers of Fluent:
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Customers Market
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British Aerospace Aerospace
Komatsu
Lockheed Martin
Astronautics
NASA
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Cummins Engine Automotive
General Motors
Mitsubishi
Renault
----------------------------------------------------------
Bayer Chemical Process
Dow Chemicals
3M
Shell KSLA
----------------------------------------------------------
Fujitsu Electronics
Hewlett-Packard
IBM
Motorola
----------------------------------------------------------
Carrier HVAC/Appliance
G.E. Lighting
Whirlpool
----------------------------------------------------------
Asea Brown Boveri Power Generation
General Electric Power
Systems
Mitsubishi Heavy Industries
Westinghouse
----------------------------------------------------------
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SALES AND SUPPORT
Aavid Engineering sells its thermal management products primarily
through direct sales personnel, manufacturers' representatives, agents and a
network of independent distributors. Aavid Engineering sells through independent
distributors to service smaller volume customers and customers who prefer to
source their product purchases through distributors. Aavid Engineering grants
several distributors a limited right to return products. During 1994, 1995, and
1996, sales to independent distributors accounted for 13%, 14%, and 15% of net
sales, respectively. The largest single distributor accounted for less than 3%
of net sales in each of those periods. These independent distributors generally
are subject to minimum purchase requirements, and can discontinue marketing
Aavid Engineering's products at any time upon proper notice. Accordingly, Aavid
Engineering must compete for the focus and sales efforts of its distributors.
There can be no assurance that Aavid Engineering's distributors will continue to
distribute Aavid Engineering's products or do so successfully. Although the
Company believes that other channels of distribution would be available if the
Company were to lose the services of one or more of its independent
distributors, there can be no assurance that such loss would not have an adverse
effect on its results of operations. Aavid Engineering has organized its sales
and support effort by geographic region. Each region is headed by a manager and
is composed of sales representatives, independent sales representatives,
distributors, applications engineers and customer service representatives. At
December 31, 1996, the thermal products division employed more than 75 sales,
support, and marketing personnel.
Fluent sells its products through its own sales representatives in the
USA, UK, France, Germany and Japan, and through independent distributors in
Korea, Australia and most European countries. Fluent's revenue generating teams
are organized by geography and industry, with business units focused on specific
engineering markets.
TECHNOLOGY
Thermal Management High Volume Technology. The Company believes that it
is a technology leader in thermal management due to its production capabilities
to manufacture complex heat sinks; extensive design expertise; CFD software;
process technology; and development activities relating to advanced materials.
Aavid believes that Fluent is a leader in CFD software technology for thermal
management due to its Icepak software tools, comprehensive set of algorithms,
state of the art mesh generation methodology and interactive post processing
that allows extensive visualization and analysis of results. As evidenced by its
creation of a design center in Silicon Valley, the Company intends to develop
new technologies and to enhance existing technologies in order to meet its
customers' needs for higher performance and lower cost products on a timely
basis.
CFD Software Technology. Fluent's computational fluid dynamics software
include (i) automatic unstructured tetrahedral mesh generation which allows the
automatic creation of
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tetrahedral meshes given a triangular surface mesh, (ii) numerical algorithms
for the solution of fluid flow equations on structured and unstructured meshes,
(iii) solution adaptive mesh which allows for interactive mesh refinement to
provide improved solution accuracy, (iv) state-of-the-art physical models for
important fluid flow phenomena such as turbulence, turbulence-chemistry
interactions, free surface flows and multiphase flows, (v) algorithms for
efficient execution on multi-processor computers and distributed computer
networks, (vi) interactive client/server architecture with a flexible and
customizable user interface and (vii) postprocessing and data analysis tools.
Applied Thermal Design Technology. Aavid Engineering's and Applied
Thermal Technologies' design engineering technology enables it to assist
customers in analyzing their thermal problems at the device, and systems levels
and efficiently design, simulate and prototype thermal management solutions. In
addition to numerical and finite element software tools licensed from others,
the Company has 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. The Company has extensive prototyping capabilities and
state-of-the-art thermal laboratory facilities including a wind tunnel, which
allows it to test and validate the design of thermal solutions.
The markets for the Company's products are characterized by rapidly
changing technology, frequent new product introductions and enhancements, and
rapid product obsolescence. The Company's future success will be highly
dependent upon its ability to continually develop new and enhance existing
products, materials, manufacturing processes and services in order to keep pace
with the technological advancements of its customers and their corresponding
increasingly complex thermal management needs. There can be no assurance that
the Company will 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 that its products will receive commercial
acceptance. In addition, there can be no assurance that products or technologies
developed by others, including the Company's customers, will not render the
Company's products or technologies noncompetitive or obsolete.
FOREIGN OPERATIONS
The Company believes that it will need to acquire additional
manufacturing facilities overseas to adequately service its customers, many of
which have moved manufacturing operations and expanded their business overseas.
This trend may have an adverse impact on the Company's sales of domestically
manufactured products. As a result, a key element of the Company's business
strategy is to expand internationally, particularly in the market for digital
electronics applications.
There can be no assurance that the Company's expansion of its foreign
operations will be successful. Foreign operations are subject to a number of
risks, including work stoppages, transportation delays and interruptions,
political instability, foreign currency fluctuations, economic disruptions,
expropriation, nationalization, misappropriation of intellectual property, and
imposition of tariffs and import and export controls, changes in governmental
policies (including U.S. policy
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toward these countries) and other factors which could have an adverse effect on
the Company's business. In addition, the Company 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 material
adverse effect on the Company's results of operations and could have an adverse
effect on the Company's relationships with its customers. Furthermore, the
occurrence of certain of these factors in countries in which Aavid owns or
operates manufacturing facilities could results in the impairment or loss of the
Company's investment in such countries.
SUPPLIERS
The Company purchases raw aluminum extrusion, aluminum coil and various
components from a limited number of outside sources. During 1996, the Company
purchased substantially all of its aluminum coil stock from United Aluminum
Corporation. The Company believes 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 the Company requires. For raw aluminum extrusion and coil
stock, the Company typically makes purchasing commitments of up to 24 months to
key suppliers. In return, these suppliers commit to maintaining local inventory
and 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. These purchasing commitments could have a material adverse
effect on the Company's operating results if the Company's need for raw
materials is less than its purchasing commitments as a result of a decrease in
the demand for the Company's products. The Company's results of operations in
1995 and the second half of 1994 were adversely impacted by increases in the
price of aluminum. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
If the available supply of aluminum declines, or if one or more of the
current suppliers is unable for any reason to meet the Company's requirements,
is acquired by a competitor or determines to compete with Aavid, the Company
could experience cost increases, deterioration of service from its suppliers, or
interruptions, delays or a reduction in raw material supply that may cause the
Company to fail to meet delivery schedules to customers. Although the Company
believes 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 the Company. Also, because most suppliers of aluminum
extrusion cannot currently meet the product tolerances and design limits
required by the Company, any unanticipated interruption of supply of aluminum
extrusion would have a material adverse effect until the Company could obtain
another supplier who could meet the product tolerances and design limits
required by the Company or the Company itself began to produce aluminum
extrusion or source an alternative materials technology. Although the Company
acquired an aluminum extrusion facility in September 1996, it only provides
extrusions to the Company's Laconia, New Hampshire manufacturing facility,
representing only a portion of that facility's requirements.
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RESEARCH AND PRODUCT DEVELOPMENT
Aavid's research and product development efforts 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 customers. The Company is developing new products both
internally as well as through joint ventures and other collaborative efforts
with third parties. These development efforts are directed toward: heat sink
characterization and optimization; air flow management; boundary layer
optimization and focused flow; recirculating 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.
Fluent's research and development activities are focused on enhancing
the capabilities of its solvers and developing front-end user interfaces that
are easy to use for engineers in specific industries. Fluent is also focusing on
various application-specific CFD software projects which Fluent believes will
enable it to penetrate the design engineering market.
COMPETITION
The markets for thermal management products and CFD software are highly
competitive. Certain of the companies with which the Company competes, including
divisions or subsidiaries of large companies and its customers, have
substantially greater technical, financial, research and development and
marketing resources than the Company. The ability of the Company to compete
successfully depends upon a number of factors, including prices, customer
acceptance of the Company's products, cost effective high-volume manufacturing,
proximity to customers, lead times, ease of installation of its products, new
product and manufacturing process technology introductions by the Company and
its competitors, access to new technologies and general market and economic
conditions. There can be no assurance that the Company will be able to compete
successfully in the future against existing or potential competitors or that the
Company's operating results will not be adversely affected by increased price
competition. In addition, there can be no assurance that the Company's customers
will not manufacture thermal management products internally rather than purchase
them from the Company.
The Company experiences competition from three relatively large
providers of thermal management products: Wakefield Engineering, Inc., a wholly
owned subsidiary of Alpha Technologies Group, Inc.; Thermalloy, a division of
Bowthorpe plc, a United Kingdom based conglomerate that also owns heat sink
manufacturers in Europe and Hong Kong; and International Electronics Research
Corp., a subsidiary of Dynamics Corporation of America. 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.
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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. In the market for software
specifically designed to model thermal management problems in electronics, the
leading software companies include Flowmerics, Inc., located in the United
Kingdom. To the extent that Fluent expands into additional application-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.
INTELLECTUAL PROPERTY
The Company believes that the success of its business, particularly the
business of its Fluent subsidiary, will depend in part upon its intellectual
property, including patents, copyrights, trade secrets, know-how and continuing
technology innovation. The Company has a policy of seeking patents when
appropriate on inventions concerning new products and improvements as part of
its ongoing research, development and manufacturing activities. In addition,
Fluent copyrights all of its software products. The Company also has licenses to
use the patents of its Aavid Air joint venture and certain MII patents relating
to heat sinks and attachment devices, for which it pays royalties. The Company
also relies upon trade secret protection for its confidential and proprietary
information. There can be no assurance that any steps taken by the Company to
protect its intellectual property will be adequate to prevent misappropriation,
that any patents or copyrights issued to the Company will not be invalidated,
circumvented or challenged or that rights granted thereunder will provide a
competitive advantage. In addition, the laws of certain territories in which the
Company's products are, or may be, developed, manufactured or sold, including
Asia, Europe and Latin America, may not provide the Company's products and
intellectual property rights with the same degree of protection as the laws of
the United States. Furthermore, there can be no assurance that others will not
independently develop technologies that are similar or superior to the Company's
technology and obtain patents or copyrights thereon. In such event, the Company
may not be able to license such technology on reasonable terms, or at all.
Although the Company believes that its 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 the Company's patents, copyrights and other
intellectual property rights, to protect the Company's 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
materially adverse effect on the Company's financial condition and results of
operations. See "Item 3. Legal Proceedings."
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REGULATORY MATTERS
Heat sink manufacturing requires the use of chemicals. As a result, the
Company is subject to a variety of federal, state and local environmental laws
relating to the storage, discharge, handling, emission, generation, manufacture,
use and disposal of chemicals, solid and hazardous waste and other toxic and
hazardous materials used to manufacture the Company's products. The Company's
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. The Company believes that it has been operating its facilities in
substantial compliance in all material respects with existing laws and
regulations. However, the Company 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. Compliance
with more stringent laws or regulations, as well as more vigorous enforcement
policies of regulatory agencies, could require substantial expenditures by the
Company and could adversely affect its results of operations.
BACKLOG
The Company's thermal management products typically are produced and
shipped within two months of the receipt of orders and, accordingly, the Company
operates 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 the Company's
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, the Company does not believe its backlog at any particular date is a
reliable indicator of actual sales for any succeeding period.
EMPLOYEES
As of December 31, 1996, the Company had a total of 1,279 employees. Of
the total employees, 117 are in sales and marketing functions, 115 are in
administration, 77 are in research and development, and the remaining are in
technical support and manufacturing. None of the Company's employees are
represented by labor unions or collective bargaining units. The Company believes
that its relationship with its employees is good. The Company also believes that
its future success will depend in large part on its ability to continue to
attract and retain highly skilled employees and to train its existing employees
in more technologically advanced manufacturing processes.
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EXECUTIVE OFFICERS OF THE COMPANY
The executive officers at March 28, 1997 were as follows:
NAME AGE POSITION
- ---- --- --------
Ronald F. Borelli................ 60 President, Chief Executive Officer and Chairman of the
Board of Directors
D. Max Henderson................. 56 President and Chief Operating Officer of Aavid Engineering,
and Director of the Company
Bharatan R. Patel................ 48 President and Chief Executive Officer of Fluent
Mark Brown....................... 43 Vice President -- Finance and Chief Financial Officer
John W. Mitchell................. 48 Vice President and General Counsel
Henry M. Caira................... 59 Vice President -- Quality and Customer Assurance of Aavid
Engineering
George P. Dannecker.............. 47 Vice President -- Marketing and Sales of Aavid Engineering
Edward F. Goucher................ 53 Vice President -- Materials of Aavid Engineering
H. Ferit Boysan.................. 49 Managing Director -- Fluent European Operations
Linda Spencer-Green.............. 44 Chief Financial Officer of Fluent
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Ronald F. Borelli became Chairman of the Board, Chief Executive Officer
and President of the Company on October 15, 1996. He has been a director of the
Company since October 1993. Mr. Borelli was formerly the chief executive officer
and a director of Spectra, Inc., a hot melt ink jet company focusing on color
printers. Mr. Borelli joined
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Spectra in March 1989 as chief executive officer. From 1982 to March 1989 he was
a senior vice president of SCI Systems. Prior thereto he spent 20 years at
Honeywell.
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D. Max Henderson joined Aavid Engineering in March 1995 as President
and Chief Operating Officer, responsible for overseeing all of Aavid
Engineering's operations, and at that time became a director of the Company. Mr.
Henderson served as president of Panduit Corp., a manufacturer of wiring and
communication products for electrical, electronic and telecommunications
markets, from 1984 to 1993, president-international of Panduit from 1993 to
March 1995 and in other capacities with Panduit from 1976 to 1993. Mr. Henderson
served as president of the switch division of Oak Industries from 1973 to 1976,
and in various capacities at Motorola, Inc. from 1963 to 1973, ending as
assistant general manager of Motorola Taiwan Electronics.
Bharatan R. Patel, Ph.D., has been the President and Chief Executive
Officer of Fluent since 1988, when Fluent was formed as a subsidiary of Creare
Inc. ("Creare"), an engineering consulting firm. Dr. Patel joined Creare in
1976, serving in various capacities including principal engineer and vice
president, and established the Fluent division upon its formation in 1983. Prior
to joining Creare, Dr. Patel worked as a senior engineer from 1971 to 1976 in
the Power Systems Group of Westinghouse Electric Corporation.
Mark Brown joined Aavid Engineering in January 1993 as Finance Manager
and became Vice President -- Finance and Chief Financial Officer of the Company
in November 1995. Mr. Brown has indicated his intention to leave the Company
prior to the end of 1997. From 1982 to 1985 and from 1987 until he joined the
Company, Mr. Brown served in various financial capacities for ABA Industries,
Inc., an aerospace parts company, most recently as controller. Mr. Brown was
corporate finance manager of Fotomat Corporation from 1985 to 1987. From 1980 to
1982, Mr. Brown was in the consulting division of Arthur Andersen LLP. Mr. Brown
is a certified public accountant.
John W. Mitchell joined the Company in December 1995 as Vice President
and General Counsel. From January 1985 until he joined the Company, Mr. Mitchell
was a partner in Sulloway & Hollis, a Concord, New Hampshire law firm, where he
served as Aavid Engineering's principal outside legal counsel since May 1985.
Henry M. Caira joined Aavid Engineering in July 1992 as Director,
Quality Assurance, served as acting Vice President -- Operations from August
1993 to August 1994 and has been Vice President-Quality and Customer Assurance
since August 1994. Prior to joining Aavid, Mr. Caira was senior manager, quality
control/assurance of Hadco Corporation, a manufacturer of printed circuit
boards. Mr. Caira is also department chairperson and a professor at the New
Hampshire Vocational and Technical College.
George P. Dannecker joined Aavid Engineering in January 1994 as Vice
President -- Marketing and Sales. Prior to joining Aavid Engineering, Mr.
Dannecker was employed by Concord Communications, Inc., a telecommunications
software company, where he was vice president-sales and service from March 1986
to January 1994.
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Edward F. Goucher joined Aavid Engineering in July 1995 as Vice
President -- Materials. From June 1994 until joining Aavid Engineering,
Mr. Goucher was senior vice president and general manager of Data Electronic
Devices, a contract manufacturing company. From 1979 to June 1994, Mr. Goucher
worked for Digital Equipment Corporation, holding various management positions
in manufacturing operations, corporate inventory, corporate manufacturing and
logistics, field service materials and plant materials.
H. Ferit Boysan, Ph.D., has been Managing Director of Fluent's European
operations since 1991. From 1986 to 1991 Dr. Boysan was the managing director of
Flow Simulations, Ltd., the European distributor of Fluent products until the
formation of Fluent Europe in 1991. Dr. Boysan was one of the original
developers of Fluent's CFD software.
Linda Spencer-Green joined Fluent in 1988 as its Chief Financial
Officer. Prior to joining Fluent, Ms. Spencer-Green was a management consultant
with Smith, Batchelder & Rugg, an accounting firm, from 1984 to 1986 and an
analyst in the Operating Plans and Analysis-Financial/Modeling Analyst Research
Services group of Federated Stores, Inc., from 1980 to 1983. Ms. Spencer-Green
is a certified public accountant.
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