ANNUAL REPORT ON FORM 10-K
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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 1-12432
AMERICAN POWER CONVERSION CORPORATION
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 04-2722013
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
132 FAIRGROUNDS ROAD, WEST KINGSTON, RHODE ISLAND 02892
401-789-5735
(Address and telephone number of Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
Common Stock, $.01 par value Registered
Pacific Exchange, Inc.
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 shorter period that the
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
YES [ X ] NO [ ]
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 the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant on March 12, 2001 was approximately $2,022,055,000 based on
the price of the last reported sale as reported by The Nasdaq Stock Marketr
on March 12, 2001. The number of shares outstanding of the Registrant's
Common Stock on March 12, 2001 was 194,904,000.
Documents Incorporated by Reference
Portions of the Registrant's definitive Proxy Statement in connection with
the 2001 Annual Meeting of the Shareholders are incorporated by reference
in Part III hereof.
1
Part I
Item 1. Description of Business
American Power Conversion Corporation
American Power Conversion Corporation, APC, designs, develops, manufactures, and
markets power protection and management solutions for computer, communications,
and electronic applications worldwide. Our solutions include:
Uninterruptible power supply products, commonly known as UPSs;
DC-power solutions;
Electrical surge protection devices, also known as surge suppressors;
Power conditioning products;
Precision cooling equipment; and
Associated software, services, and accessories.
These solutions are used with sensitive electronic devices which rely on
electric utility power including, but not limited to, home electronics, PCs,
high-performance computer workstations, servers, networking equipment,
communications equipment, Internetworking equipment, data centers, mainframe
computers, and facilities.
Our UPS products regulate the flow of utility power to ensure safe and clean
power to the protected equipment and provide seamless back-up power in the event
of the loss of utility power. The back-up power lasts for a period of time
sufficient to enable the user to continue computer operations, conduct an
orderly shutdown of the protected equipment, preserve data, work through short
power outages or, in some cases, continue operating for several hours or longer.
Our DC-power solutions are highly configurable designs that continuously monitor
and isolate end-user equipment from utility voltage fluctuations, frequency
variations, and electrical noise. In the event of a power failure, the DC
products seamlessly provide back-up power for critical communications networks,
allowing users emergency access to these networks for a period of many hours.
Our surge protection devices and power conditioning products provide protection
from electrical power surges and noise in the flow of utility power. APC's
precision cooling equipment regulates temperature and humidity. Our software
and accessory solutions enhance monitoring, management, and performance of our
UPS products, and our service offerings assist the end-user with installation,
configuration, and maintenance of our products.
Segments
APC operates primarily within one industry consisting of three reportable
operating segments by which we manage our business and from which various
offerings are commonly combined to develop a total solution for the customer.
These efforts primarily incorporate the design, manufacture, and marketing of
power protection equipment and related software and accessories for computer,
communications, and related equipment. Our three segments are: Small Systems,
Large Systems and Other. Each of these segments address global markets.
The Small Systems segment develops power solutions for servers and networking
equipment commonly used in local area and wide area networks and for personal
computers and sensitive electronics. Major product offerings include the Smart-
UPSr, Matrix-UPSr, Symmetrar Power Arrayr and Back-UPSr family of UPSs. Also
included are the SurgeArrestr surge suppressors as well as cabling and
connectivity solutions. Additional accessories and software products are
offered to enhance the management of these networks. Products include
PowerChuter software, MasterSwitchT power distribution units, and NetShelterr
server enclosures. Products are sold to home and commercial users primarily
through an indirect selling model consisting of computer distributors and
dealers, value added resellers, mass merchandisers, catalog merchandisers, E-
commerce vendors, and strategic partnerships.
2
The Large Systems segment produces large system solutions that provide power and
availability solutions for data centers, facilities, and communications
equipment. Product offerings include Silconr UPSs, NetworkAIRT precision
cooling equipment, and DC-power solutions. Products are sold to commercial
users primarily through an indirect selling model consisting of value added
resellers and strategic partnerships.
The Other segment provides Web-based informational, product, and selling
services as well as replacement batteries for the Company's UPS products and
notebook computers.
Information on reportable operating segment net sales, profit from operations,
and depreciation for each of the last three years is located in note 10 of Notes
to Consolidated Financial Statements in Item 8 of this Report.
APC was incorporated under the laws of the Commonwealth of Massachusetts on
March 11, 1981. Executive offices are located at 132 Fairgrounds Road, West
Kingston, RI 02892, our telephone number is (401) 789-5735 and our Web site is
www.apc.com.
Market Overview
The growth of the power protection industry has been fueled by the rapid
proliferation of microprocessor-based equipment and related systems in the
corporate marketplace and in the small office/home office environment. PCs and
servers have become an integral part of the overall business strategy of many
organizations as well as in many technical, scientific, and manufacturing
settings. Businesses continue to store, manipulate, and transfer data via local
area and wide area networks as well as via corporate intranets and the Internet.
Additionally, there has been a rise in the installation of large data centers
and Web hosting facilities to support the rapidly growing Internet-based market.
APC's products protect both the hardware and data stored in, and traveling
through, these networks from power disturbances. The products also provide
battery back-up to enhance productivity through the continued availability of
networks, sensitive electronics, and even facilities during power outages.
We believe that the increased awareness of the costs and lost productivity
associated with poor power quality has increased demand for power protection
products. Complete failures, surges, or sags in the electrical power supplied
by a utility can cause computers and electronic systems to malfunction,
resulting in costly downtime, damaged or lost data files, and damaged hardware.
A UPS protects against these power disturbances by providing continuous power
automatically and virtually instantaneously after the electric power supply is
interrupted. UPSs also provide line filtering and protection against surges or
sags while the electric utility is operating. In international regions, power
quality often results in varied levels of distortions and, as a result, these
areas provide us with additional opportunities for our products.
In 2000, we focused on providing global, end-to-end, Nonstop NetworkingT
solutions for the PC, server, data center, communications, and enterprise
systems marketplace. Particular emphasis was placed on our Large Systems and
the rapidly growing market for large UPS systems with Fortune 1000 companies,
Internet service providers, Web hosting, and co-locators who use large amounts
of information technology, or IT, equipment to support their businesses. APC's
operations worldwide were impacted by the growth of networking-based
applications, the continued rapid expansion of Internet-based applications, the
growth of the PC market, and the continued poor and unreliable quality of power
worldwide.
Our goals are to 1) target the sales of UPSs with new IT equipment; 2) have the
products and presence to succeed in new geographies; and 3) continue to position
APC as the UPS and power availability provider of choice. We continue to target
promotional efforts at both consumer and commercial markets, which we believe
represent growth opportunities, and continue to target industries that are
dependent on electronic systems, such as the communications industry, as
potential market growth opportunities.
Products
APC's strategy is to design and manufacture products that incorporate high-
performance and quality at competitive prices. Our products are designed to fit
seamlessly into the computer, networking, and communications environments of
businesses, homes, and small offices/home offices. These products are
engineered and extensively tested for compatibility with leading information
technology hardware and software.
3
UPS
We currently manufacture a broad range of standard domestic and international
UPS products. Our UPSs are designed for multiple applications with the
principal differences among the products being the amount of power which can be
supplied during an outage, the length of time for which battery power can be
supplied, the level of intelligent network interfacing capability, and the
number of brownout and over-voltage correction features. UPSs range from 200
volt-amps, suitable for a PC, to 500 kilo volt-amps, or kVA, suitable for data
centers, mainframe computers or facilities. List prices to end-users range from
approximately $80 to approximately $200,000.
Surge Suppressors
We also offer a line of surge protection products to protect against power
spikes and surges. The principal difference among the surge suppressor models
is the level of protection available and feature sets of the products. List
prices to end-users range from approximately $13 to approximately $3,500.
DC Power
Our DC-Power solutions include rectifiers; highly configurable DC power plant
design, installation, and service; and power distribution equipment for a
variety of communications networks, including cable, wireless, fiber optic, and
public switched telephone network applications. The products serve as both the
primary power supply and back-up power for communications equipment. List
prices to end-users range from approximately $500 to over $100,000.
Power Management Software
APC also offers a family of power management software solutions. The primary
software offering is available under the PowerChute plus name and provides
unattended system shutdown capabilities, UPS power management, and diagnostic
features. PowerChute plus is available free of charge for many major operating
systems with the purchase of select UPS units. List prices to end-users for
other PowerChute products start at approximately $69. The Company also offers
software packages for advanced monitoring, configuring, and managing of power
resources. Select versions are available free of charge, while list prices to
end-users for these software packages range from approximately $169 to
approximately $10,000.
Power Management Accessories
We also offer a range of power management hardware accessories. These solutions
include add-on hardware to manage and monitor attached UPS and networking
equipment; cables and connectivity equipment; a free-standing rack enclosure
product, NetShelter; and a variety of rack accessories to better utilize
precious space in a computer room. List prices to end-users for accessory
products range from approximately $70 to approximately $1,650.
Precision Cooling
Additionally, APC offers a line of precision cooling products that regulate
temperature and humidity. Products include floor and ceiling-mounted precision
cooling systems as well as management systems used in a variety of applications
including data centers, colocation facilities, and communication stations. List
prices range from approximately $3,000 to approximately $45,000.
Service Programs
Warranties
APC provides service programs to our customers for in-warranty UPS products and
out-of-warranty UPS products, as well as for product installation and start-up.
There are two-year and one-year limited warranties covering UPS, DC-power and
NetworkAir products. Customers can extend the basic warranty period of select
products, at an additional charge, for a period of one or three additional
years. In-warranty service programs allow customers to return their original
unit for repair and, if found defective, we will replace the original unit with
a factory reconditioned unit or, if requested, repair the original unit and
return it to the customer. The extended warranty can be purchased anytime
during the standard warranty period. For a fixed fee, which varies by model, we
will replace an out-of-warranty UPS unit with a factory reconditioned unit. We
also offer a standard one-year limited warranty which covers certain Silcon
product parts. This warranty can be extended in annual increments for a period
not to exceed ten years. Additionally, customers can purchase on-site service,
preventative maintenance, and power availability consulting. On-site service is
offered through APC's service department and third party vendors. We also offer
Trade-UPS programs for customers to upgrade old APC or competitive units to new
APC units.
4
Equipment Protection Policy
APC offers an Equipment Protection Policy in the US, Canada, and European
Community. Depending on the model and country, the policy provides up to
$25,000, 50,000 pounds sterling, or 100,000 euros for repair or replacement of
customers' hardware should a surge or lightning strike pass through a Company
unit. Other restrictions also apply. Customers can also register the
ProtectNetr line of data line surge suppressors for a "Double-Up" Supplemental
Equipment Protection Policy, under which the total recoverable limit under the
Equipment Protection Policy is doubled (U.S. and Canada only). Most surge
suppressor products come with a lifetime product warranty.
Our products have experienced satisfactory field operating results, and warranty
costs incurred to date have not had a significant impact the consolidated
results of operations.
Distribution Channels
APC markets its products to businesses, small offices/home offices, and home
users around the world through a variety of distribution channels. These
channels include:
Computer distributors and dealers;
Value added resellers;
Mass merchandisers;
Catalog merchandisers;
E-commerce vendors; and
Strategic partnerships.
We also sell directly to some large value added resellers, which typically
integrate our products into specialized computer systems and then market turnkey
systems to selected vertical markets. Additionally, certain select products are
sold directly to manufacturers for incorporation into products manufactured or
packaged by them.
Two customers, Ingram Micro and Tech Data Product Management, accounted for
approximately 15% and 11%, respectively, of net sales in 2000. No single
customer comprised 10% or more of APC's net sales in 1999. One customer, Ingram
Micro, accounted for approximately 11% of our net sales in 1998. The majority
of our sales to Ingram Micro and Tech Data Product Management are included in
the Small Systems segment.
Sales and Marketing
APC's sales and marketing organizations are primarily responsible for four
activities: sales, marketing, customer service, and technical support. Our
sales force is responsible for relationships with distributors, dealers,
strategic partners, and end-users as well as developing new distribution
channels, particularly in geographic and product application areas into which we
are expanding. We have charged our sales force with providing customers
comprehensive product and service solutions to meet their power availability and
management needs.
Our marketing activities include market research, product planning, trade shows,
sales and pricing strategies, and product sales literature. We utilize direct
marketing efforts domestically and internationally, including direct mailings
and print, online/Internet, radio, and television advertising, as well as
exhibiting at computer trade shows. Customer service is responsible for all
technical marketing inquiries and customer support. APC has developed a number
of programs and techniques to support the distribution channels. These include,
but are not limited to, toll-free phone assistance, online product and technical
information, formal product demonstrations, and reseller trainings.
5
Supply Chain Management - Manufacturing, Quality, Raw Materials, and
Distribution
Manufacturing
APC's manufacturing operations are located in the United States, Philippines,
Ireland, China, India, Denmark, Switzerland, and England. We believe that our
long-term success depends on, among other things, the ability to control our
costs. We utilize lean "cell" based manufacturing processes, automated
manufacturing techniques, and extensive quality control in order to minimize
costs and maximize product reliability. In addition, the design of products and
the commonality of parts allow for efficient circuit board component insertion,
wave soldering, and in-process testing. Quality control procedures are
performed at the component, sub-assembly, and finished product levels. We are
committed to an ongoing effort to enhance the overall productivity of our
manufacturing facilities.
Quality
APC has been ISO 14001 and ISO 9001 certified by the International Organization
for Standardization. Our systems have been audited to the stringent ISO 14001
and ISO 9001 levels at our manufacturing facilities in Rhode Island, Ireland,
Denmark, China, India, and the Philippines. The International Organization for
Standardization has also certified our manufacturing efforts in England and our
Massachusetts Research and Development Center to the ISO 9001 level.
Raw Materials
We generally purchase devices and components from more than one source where
alternative sources are available; however, we do use sole source suppliers for
certain components. We believe that alternative components for these sole
source items could be incorporated into our products, if necessary. While we
have been able to obtain adequate supplies of components from sole source
suppliers, the future unavailability of components from these suppliers could
disrupt production and delivery of products until an alternative source is
identified.
Distribution
APC continues to invest in a worldwide distribution network that delivers our
products and services to our customers. We own or lease distribution centers in
numerous countries across the globe. All distribution centers are connected to
our customer service operations via APC's Enterprise Resource Planning system,
which enables orders received from any point in the network to be fulfilled from
any distribution center throughout the world. APC employs several enhanced
fulfillment capabilities in support of our overall E-commerce initiatives,
including the use of Electronic Data Interchange transactions between APC and
our distributors for receipt of orders, acknowledgement of orders, and
confirmation of shipments. Additionally, we utilize a suite of Web tools that
allows consumers and resellers to view product information, gain access to
pricing information, and place their orders via the Web.
Product Development
APC's research and development, or R&D, staff includes engineers and support
persons who develop new products and provide engineering support for existing
products. Our R&D efforts are also aimed at reducing cost and total cycle time
and improving product and component quality. Most of these employees are
located in two Massachusetts facilities with additional resources located in
Denmark and England. Employees devoted to the improvement and development of
software products are located in the West Kingston, Rhode Island facility and in
St. Louis, Missouri, at APC's subsidiary, Systems Enhancement Corporation. We
believe that the technical expertise of our R&D staff is very important to our
growth as technological change is rapid in our markets.
Through acquisitions in 2000, APC added DC-power solutions for communications
applications, cabling, and connectivity products for desktop and networking
environments, and precision cooling equipment for data center and communications
gear. (For more information about these acquisitions, see the Acquisition
section included in Management's Discussion and Analysis of Financial Condition
and Results of Operations in Item 7 of this Report.) New UPS solutions
introduced during the year from existing product lines included new Back-UPS
Officer models, new Smart-UPS models, new Symmetra Rack-mount Power Arrays, and
new high end Silcon models in North America. We introduced solutions for mobile
PC users, including TravelPowerT laptop power adapters and notebook replacement
battery cartridges. Additional power management, monitoring and services were
also introduced during the year.
6
During 1999, APC increased its offerings of products and services for the
enterprise market, specifically, geographically expanding the availability of
the Silcon UPS products, introducing new Symmetra models, and introducing APC's
Global Services organization, which offers a comprehensive suite of professional
and maintenance services. Hardware introductions primarily focused on
enhancements to the SurgeArrest, Smart-UPS, and Back-UPS lines. New software
solutions announced during the year included new versions of the PowerChute plus
software to expand support of leading operating systems, including support for
Microsoft Windows 2000 Beta 3 and expanded support for Linux, as well as
integration with leading management platforms.
During 1998, APC expanded its product offerings in the enterprise market with
the acquisition of Silcon, a leading manufacturer of 3-phase UPSs up to 500 kVA.
Implementation of APC's enterprise power protection strategy began in 1997 with
the introduction of the Symmetra Power Array, the first scalable and fault-
tolerant power protection system for multiple servers, computer rooms, call
centers, and back-office applications. We also innovated our desktop line of
UPSs during 1998, revamping the Back-UPS line and adding new features, including
Universal Serial Bus support, to select products in the Back-UPS Pror line.
Additional areas of development included new products for the Internetworking
market, additional network management support via new PowerChute and PowerNetr
solutions, and customized hardware and software products for strategic partners.
R&D expenditures were $46.9 million or 3.2% of net sales in 2000, $34.6 million
or 2.6% of net sales in 1999, and $32.6 million or 2.9% of net sales in 1998.
Intellectual Property
We protect certain proprietary rights in our products as well as certain
proprietary technology developments by seeking patent protection. We believe
that the loss of such rights concerning these developments would not have a
material adverse effect on our business. We also license from others certain
worldwide patent rights relating to UPS technology. With respect to protection
of those areas of our technology for which patent protection has not been
sought, we rely on the complexity of our technology, trade secrecy law, and
employee confidentiality agreements.
APC has numerous trademarks registered in the United States and in many foreign
countries. We also have trademark applications pending domestically and
internationally. The trademark "APC" is of principal importance to us. In
addition, a number of other trademarks owned by us have significant importance.
Competition
We believe that we are one of less than ten global companies providing a full
range of UPS products and services worldwide. Our principal competitors include
Invensys Secure Power, a unit of Invensys plc, consisting of PowerWare (formerly
Exide Electronics) and Best Power; Liebert Corporation, a division of Emerson
Network Power and Emerson Electric Co.; MGE UPS Systems, a privately-held French
company; Chloride Power, a subsidiary of Chloride Group PLC; and Phoenixtec
Power Company Ltd., a publicly-held Taiwanese company. We also compete with a
number of other U.S. and non-U.S. based companies which offer power protection,
DC-power, and other products similar to ours. Some competitors have greater
financial and other resources than APC. We compete in the sale of our products
on the basis of several factors, including product performance and quality,
marketing, access to distribution channels, customer service, product design,
and price.
International Operations
APC has experienced rapid growth internationally and plans to continue to expand
its international efforts. With a full line of internationally positioned
products already available, we continue to staff personnel to serve geographical
markets of interest. Our manufacturing operations outside of the United States
are located in the Philippines, Ireland, China, India, Denmark, Switzerland, and
England. A significant portion of products in our Small Systems and Large
Systems reportable operating segments are built internationally, particularly in
the Philippines. We believe that the production of these products could be
redeployed to other regions if necessitated.
Our primary sales offices outside of the United States are located in Europe and
the Far East. These offices, together with offices in other locations
worldwide, provide sales and technical support to our customers across the
globe. APC also owns or leases distribution centers in numerous countries
worldwide, and utilizes third party warehouses in Europe, the Far East, Canada,
South Africa, and Uruguay for distribution into our international markets.
7
Financial Information About Foreign and Domestic Operations
The information required under this section is included in note 10 of Notes to
Consolidated Financial Statements in Item 8 of this Report and is incorporated
herein by reference.
Employees
As of December 31, 2000, APC had approximately 7,350 full-time employees
worldwide, approximately 2,233 of whom are located in the United States and
Canada. APC also engages other personnel on a part-time basis.
APC's Executive Officers
APC's Executive officers are elected annually and hold office until the next
Annual Meeting of the Board of Directors and until their successors are duly
elected and qualified. As of March 12, 2001, APC's executive officers were:
Name Age Positions
Rodger B. Dowdell, Jr. 51 Chairman of the Board of Directors, President, and Chief Executive Officer
Neil E. Rasmussen 46 Vice President, Chief Technical Officer, and Director
Edward W. Machala 46 Vice President, Operations and Treasurer
Donald M. Muir 44 Vice President, Finance and Administration and Chief Financial Officer
Emanuel E. Landsman 64 Vice President, Clerk, and Director
Aaron L. Davis 34 Vice President, Small Systems Group
Rodger B. Dowdell, Jr. has been President and a Director of APC since August
1985 and Chairman of APC's Board of Directors since June 1988. From January to
August 1985, Mr. Dowdell worked for APC as a consultant, developing a marketing
and production strategy for UPS products. From 1978 to December of 1984 he was
President of Independent Energy, Inc., a manufacturer of electronic temperature
controls.
Neil E. Rasmussen became Chief Technical Officer of APC in 1997 and has been
Vice President and a Director of APC since our inception. From 1979 to 1981,
Mr. Rasmussen worked in the Energy Systems Engineering Group at Massachusetts
Institute of Technology's Lincoln Laboratory.
Edward W. Machala joined APC in January 1989 as Vice President, Operations.
From January 1985 to January 1989, Mr. Machala was Director of Manufacturing and
Engineering Technology for GTECH, a manufacturer of electronic lottery and
gaming terminals, where he was responsible for manufacturing and engineering
functions.
Donald M. Muir joined APC in July 1995 as Chief Financial Officer. From July
1993 to July 1995, Mr. Muir was the Treasurer of Stratus Computer, Inc. where he
was responsible for managing investor relations, treasury services, corporate
taxation, and risk management. Prior to his appointment as Treasurer at Stratus
Computer, Inc., Mr. Muir held the position of Director of Finance and
Administration from January 1991 to July 1993 and Controller, Worldwide Sales
and Service from December 1988 to January 1991.
Emanuel E. Landsman has been Vice President, Clerk, and a Director of APC since
our inception. From 1966 to 1981, Dr. Landsman worked at Massachusetts
Institute of Technology's Lincoln Laboratory, where he was in the Space
Communications Group from 1966 to 1977 and the Energy Systems Engineering Group
from 1977 to 1981.
Aaron L. Davis was appointed to the newly created role of Vice President, Small
Systems Group in May 1999 after serving as Vice President, Marketing and
Communications from June 1997 to May 1999, and Vice President of Marketing
Communications from January 1995 to June 1997. Mr. Davis joined APC as Director
of Marketing Communications in May 1989. Mr. Dowdell is the uncle of Mr. Davis.
8
Item 2. Properties
APC's principal properties are located in the United States, Ireland,
Philippines, China, India, Denmark, Switzerland, and England. In addition, we
own or lease sales offices and other space at various locations throughout the
United States and outside the United States. APC also owns or leases such
machinery and equipment as are necessary in our operations. In general, our
properties are in good condition, are considered to be adequate for the uses to
which they are being put, and are substantially in regular use.
Location of Sales,
Principal Marketing &
Properties Administration Manufacturing R&D Warehouse Total Segment
In square feet
Owned
United States
Rhode Island 167,850 98,930 4,980 271,760 Shared
Maryland 12,170 80,980 26,280 119,430 Large Systems
Massachusetts 23,000 23,000 Shared
Europe
Ireland 58,900 192,300 118,800 370,000 Shared
Denmark 27,660 71,925 11,065 110,650 Large Systems
England 7,990 40,890 5,000 15,050 68,930 Large Systems
Far East
Philippines 26,250 199,240 42,195 267,685 Shared
Leased
United States
Rhode Island 41,210 188,830 9,540 304,940 544,520 Shared
Maryland 15,900 25,000 64,900 105,800 Small Systems
Massachusetts 52,300 52,300 Shared
Texas 8,500 33,500 3,000 45,000 Large Systems
Missouri 13,155 2,700 10,460 1,350 27,665 Shared
Europe
England 17,200 55,630 7,290 6,680 86,800 Large Systems
Switzerland 14,120 19,380 540 8,610 42,650 Large Systems
Far East
China 26,820 38,945 22,990 88,755 Shared
India 12,130 38,055 7,240 57,425 Small Systems
Item 3. Legal Proceedings
The information required under this section is included in note 11 of Notes to
Consolidated Financial Statements in Item 8 of this Report and is incorporated
herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
9
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
APC's Common Stock is traded over-the-counter on The Nasdaq Stock Market under
the symbol APCC and on the Pacific Exchange, Inc. under the symbol ACC. The
following table sets forth the range of high and low bid quotations on the
Nasdaq Stock Market per share of Common Stock for the years 2000 and 1999.
These quotations reflect inter-dealer prices, without retail mark up, mark down,
or commission and may not necessarily represent actual transactions.
2000 1999
High Low High Low
First Quarter $44.880 $23.250 $27.125 $14.032
Second Quarter 45.000 28.063 21.125 13.250
Third Quarter 48.844 18.500 22.500 17.188
Fourth Quarter 22.750 9.500 28.750 16.188
On March 12, 2001, the closing sale price for APC's Common Stock was $12.313 per
share. As of March 12, 2001, there were approximately 2,190 holders of record
of APC's Common Stock. No cash dividends have been paid and it is anticipated
that none will be declared in the foreseeable future. We currently intend to
retain any earnings to finance the growth and development of our business. Any
future dividends will be at the discretion of the Board of Directors and will
depend upon, among other things, the financial condition, capital requirements,
earnings, and liquidity of APC.
Item 6. Selected Financial Data
All amounts are in dollars except for outstanding shares. Dollars are in
thousands except for basic and diluted earnings per share. Shares are in
thousands. APC did not declare any cash dividends for the five year period
presented. Earnings per share and share data reflect a stock split effected in
1999.
The results of operations of companies acquired in 2000 and 1998 are included
from their respective dates of acquisition. For more information about these
acquisitions, see the Acquisition section included in Management's Discussion
and Analysis of Financial Condition and Results of Operations in Item 7 of this
Report.
In consideration of guidance issued by the Financial Accounting Standards
Board's Emerging Issues Task Force in Issue No. 00-10, "Accounting for Shipping
and Handling Fees and Costs," we have retroactively changed our classification
of freight charges billed to customers and related freight expenses from
operating expenses to net sales and cost of goods sold, respectively. These
changes increased net sales by $10.0 million, $7.7 million, $5.2 million, $2.9
million, and $2.2 million in 2000, 1999, 1998, 1997 and 1996, respectively;
increased cost of goods sold by $30.8 million, $24.7 million, $24.3 million,
$15.4 million, and $9.6 million in 2000, 1999, 1998, 1997 and 1996 respectively;
and decreased marketing, selling, general, and administrative expenses by $20.8
million, $17.0 million, $19.1 million, $12.5 million, and $7.4 million in 2000,
1999, 1998, 1997 and 1996, respectively.
10
Item 6. Selected Financial Data (cont.)
2000 1999 1998 1997 1996
Net sales $1,483,563 $1,344,931 $1,130,991 $876,292 $709,078
Cost of goods sold 867,680 747,389 645,378 491,460 417,473
Gross profit 615,883 597,542 485,613 384,832 291,605
Operating expenses 406,410 318,317 281,144 213,394 157,815
Operating income 209,473 279,225 204,469 171,438 133,790
Other income, net 23,838 13,292 11,687 6,354 5,189
Earnings before
income taxes and
minority interest 233,311 292,517 216,156 177,792 138,979
Income taxes 67,660 86,293 68,231 56,004 46,558
Earnings before
minority interest 165,651 206,224 147,925 121,788 92,421
Minority interest, net - - 349 - -
Net income $165,651 $206,224 $147,576 $121,788 $92,421
Basic earnings
per share $.85 $1.07 $.77 $.64 $.49
Basic weighted average
shares outstanding 194,235 192,201 191,006 189,986 187,744
Diluted earnings
per share $.83 $1.05 $.76 $.63 $.49
Diluted weighted average
shares outstanding 200,156 196,088 193,576 192,242 188,694
Total assets $1,317,105 $1,106,938 $871,983 $641,290 $504,002
Short-term debt - - $12,540 - -
Long-term debt - - - - -
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of operations
The following table sets forth our net sales, cost of goods sold, gross profit,
marketing, selling, general, and administrative expenses, R&D expenses,
operating income, other income, earnings before income taxes and minority
interest, and net income, expressed as a percentage of net sales, for the years
ended December 31, 2000, 1999 and 1998.
2000 1999 1998
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 58.5 55.6 57.1
Gross profit 41.5 44.4 42.9
Marketing, selling, general
& administrative expenses 21.0 21.1 21.3
Special charges 3.2 - -
Research & development 3.2 2.6 2.9
Acquired research & development - - .6
Operating income 14.1 20.7 18.1
Other income, net 1.6 1.0 1.0
Earnings before income
taxes & minority interest 15.7 21.7 19.1
Net income 11.2 15.3 13.0
11
Change in Accounting Principle
In consideration of guidance issued by the Financial Accounting Standards
Board's Emerging Issues Task Force in Issue No. 00-10, "Accounting for Shipping
and Handling Fees and Costs," we have retroactively changed our classification
of freight charges billed to customers and related freight expenses from
operating expenses to net sales and cost of goods sold, respectively. These
changes increased net sales by $10.0 million, $7.7 million, and $5.2 million in
2000, 1999 and 1998, respectively; increased cost of goods sold by $30.8
million, $24.7 million, and $24.3 million in 2000, 1999 and 1998, respectively;
and decreased marketing, selling, general, and administrative expenses by $20.8
million, $17.0 million, and $19.1 million in 2000, 1999 and 1998, respectively.
This accounting change had no impact on reported net income for any of the
periods presented.
Revenues
Net sales in fiscal year 2000 increased by 10.3% to $1,483.6 million from
$1,344.9 million in fiscal year 1999, which had increased 18.9%, from $1,131.0
million in fiscal year 1998. The increases from 1998 to 2000 included sales
attributable to 2000 and 1998 acquisitions (see Acquisitions below). In
addition, sales of new products and increased efforts by APC's sales force have
contributed to increased sales volumes; net sales attributable to new products
totaled approximately 12%, 7%, and 11%, of 2000, 1999 and 1998, respectively.
Sales for products in the Small Systems segment addressing networking
applications and desktop PCs were negatively impacted by industry softness in
the IT markets, weakening global economies, and maturing markets. The Large
Systems segment experienced healthy growth driven by the build-out of data
centers and share gains in the 3-phase UPS market as well as the acquisition of
DC-Power and precision cooling products for data centers and communications
equipment. The Company experienced strong demand for its products across all
solution applications in 1999.
Foreign sales to unaffiliated customers, primarily in Europe, the Far East,
Canada, and South America, in fiscal year 2000 were $696.2 million or 46.9% of
net sales compared to $636.2 million or 47.3% of net sales in fiscal year 1999
and $488.0 million or 43.1% of net sales in fiscal year 1998. See also note 10
to the consolidated financial statements.
Cost of Goods Sold
Cost of goods sold was $867.7 million or 58.5% of net sales in fiscal year 2000
compared to $747.4 million or 55.6% of net sales in fiscal year 1999. Gross
margins for fiscal year 2000 were 41.5% of sales, approximately 290 basis points
lower than in fiscal year 1999. The gross margin erosion was associated with
product mix shifts to lower margin products, the effect of pro-active consumer
product price cuts in 2000, and manufacturing inefficiencies from continued
global capacity expansion. Our product mix during 2000 reflected volumes
shifting to the high-end enterprise business, which has a lower gross margin
structure than our traditional core business.
Cost of goods sold was $747.4 million or 55.6% of net sales in fiscal year 1999
compared to $645.4 million or 57.1% of net sales in fiscal year 1998. Gross
margins for fiscal year 1999 were 44.4% of sales, approximately 150 basis points
higher than in fiscal year 1998. The improvement was driven primarily by
manufacturing cost reductions, particularly material cost reductions, the
ongoing transition of production from the U.S. and Ireland to the Philippines,
improved capacity utilization associated with the closure of our manufacturing
facility in Fort Meyers, Florida, and volume related margin improvements in
Silcon and Symmetra products.
Total inventory reserves at December 31, 2000 were $20.5 million compared to
$17.1 million at December 31, 1999. APC's reserve estimate methodology involves
quantifying the total inventory position having potential loss exposure, reduced
by an amount reasonably forecasted to be sold, and adjusting its interim reserve
provisioning to cover the net loss exposure.
12
Segment Results (Refer to note 10 of Notes to the Consolidated Financial
Statements in Item 8 of this Report for important information regarding the
Company's reportable segments)
Net sales for products in the Small Systems segment, which primarily address
local and wide are networking applications as well as desktop PCs, increased
2.3% and 14.9% over the prior years in 2000 and 1999, respectively. The rate of
growth from 1999 through 2000 was negatively impacted by industry softness in
the IT markets, weakening global economies, and maturing markets. Profits for
this segment have remained relatively stable as a percentage of net sales in
spite of declining sales growth and pro-active price reductions during 2000,
principally due to transitioning the manufacture of certain products to lower
cost facilities.
Net sales for products in the Large Systems segment, which primarily provides
large power and availability solutions for data centers, facilities, and
communications equipment, increased 92.0% and 101.3% over the prior years in
2000 and 1999, respectively. The Large Systems segment experienced healthy
growth driven by the build-out of data centers and share gains in the 3-phase
UPS market with our Silcon products as well as the acquisition of DC-Power and
precision cooling products for data centers and communications equipment.
Profits for this segment have declined due to cost inefficiencies resulting from
continued global capacity expansion, as well as the continued investment in
product and business development initiatives for this business segment.
Operating Expenses
Marketing, selling, general, and administrative (SG&A) expenses were $311.6
million or 21.0% of net sales in 2000 compared to $283.7 million or 21.1% of net
sales in 1999 and $241.0 million or 21.3% of net sales in 1998. The increase in
total spending in 2000 was due primarily to continued investments in building a
global relational sales organization. The increase in 1999 was due primarily to
costs associated with increased advertising and promotional costs, as well as
costs associated with increased staffing and operating expenses of our
marketing, selling, and administrative functions.
During the third and second quarters of 2000, we agreed to license worldwide
patent rights relating to uninterruptible power supply technology for lump-sum
cash payments of $17.0 million and $48.0 million, respectively, as more fully
described in note 11 of Notes to Consolidated Financial Statements in Item 8 of
this Report. These license fees were paid from operating cash during the third
and second quarters of 2000. APC evaluated the portion of the license fees that
represented payment for prior use of the subject technology and the portion that
represented payment for future use. Considering each of our markets and the
historical and projected revenue realized in markets utilizing the licensed
technology, we estimated the present value of royalty payments, basing this
calculation on an appropriate royalty rate and the technology's contribution to
the overall value of affected products. Separate present values were calculated
for both historic and projected product sales; the historic values were expensed
and the projected values were capitalized. Accordingly, write-offs of the fully
paid-up portions of the patent licenses were recognized in our statements of
income for the third and second quarters of 2000 as special charges to pre-tax
earnings of $17.5 million and $30.4 million, respectively, including direct
expenses of $1.5 million and $1.9 million, respectively. The remaining balances
of $1.0 million and $19.5 million have been classified on the consolidated
balance sheet as long term assets and are being amortized on a straight-line
basis over three years and nine years, respectively, the estimated remaining
economic lives of the patent licenses.
The allowance for bad debts was 6.3% of gross accounts receivable at December
31, 2000 compared to 8.3% at December 31, 1999. We continue to experience
strong collection performance. Accounts receivable balances outstanding over 60
days represented 13.4% of total receivables at December 31, 2000 compared to
9.0% at December 31, 1999. The increase reflects a growing portion of our
business originating in areas where longer payment terms are customary,
including a growing contribution from international markets as well as large
system enterprise sales primarily associated with Silcon products. Write-offs
of uncollectable accounts represent less than 1% of net sales. A majority of
international customer balances are covered by receivables insurance.
R&D expenditures were $46.9 million or 3.2% of net sales in 2000, $34.6 million
or 2.6% of net sales in 1999, and $32.6 million or 2.9% of net sales in 1998.
The increased R&D spending primarily reflects increased numbers of software and
hardware engineers and costs associated with new product development and
engineering support. The slight decrease as a percentage of sales from 1998 to
1999 was attributable to certain fixed R&D expenses spread over a higher revenue
base. In addition, during 1998 we recorded non-recurring charges of $7.6
million for acquired in-process R&D in connection with its acquisition of Silcon
(see Acquisitions below).
13
Other Income, Net and Income Taxes
Other income is comprised principally of interest income, which increased
substantially from 1998 to 2000 due to higher average cash balances available
for investment during 1999 and 2000.
Excluding 1998 non-tax deductible charges of $7.6 million for acquired in-
process R&D (see Acquisition section below), our effective income tax rates were
approximately 29.0%, 29.5%, and 30.5%, in 2000, 1999 and 1998, respectively.
The decrease from 1998 to 2000 is due to the tax savings from an increasing
portion of taxable earnings being generated from APC's operations in
jurisdictions currently having a lower income tax rate than the present U.S.
statutory income tax rate.
Effects of Inflation
Management believes that inflation has not had a material effect on APC's
operations.
Liquidity and Financial Resources
Working capital at December 31, 2000 was $754.5 million compared to $706.0
million at December 31, 1999. APC has been able to increase its working capital
position as the result of continued strong operating results and despite
internally financing the capital investment required to expand its operations
and fund the licensing of technology discussed below. Our cash, cash
equivalents, and short-term investments position decreased to $308.0 million at
December 31, 2000 from $456.3 million at December 31, 1999, due primarily to
outlays from operating cash in 2000 related to acquisitions (see Acquisitions
section below) and the licensing of worldwide patent rights relating to
uninterruptible power supply technology (see note 11 of Notes to Consolidated
Financial Statements in Item 8 of this Report).
Worldwide inventories were $289.0 million at December 31, 2000, up from $176.5
million at December 31, 1999, due primarily to increases in on-hand raw
materials, to support current and anticipated demand growth for enterprise
products, and lower than expected demand in the fourth quarter of 2000, combined
with $21.3 million in inventory attributable to acquisitions during 2000 (see
Acquisitions section below). Inventory levels as a percentage of quarterly
sales were 71% in the fourth quarter of 2000, up from 65% in the third quarter
of 2000 and 45% in the fourth quarter of 1999.
At December 31, 2000, we had $50.0 million available for future borrowings under
an unsecured line of credit agreement at a floating interest rate equal to the
bank's cost of funds rate plus .625% and an additional $15.0 million and $7.0
million under unsecured line of credit agreements with a second and third bank,
respectively, at similar interest rates. No borrowings were outstanding under
these facilities at December 31, 2000. APC had no significant financial
commitments, other than those required in the normal course of business, at
December 31, 2000.
During 2000 and 1999, our capital expenditures, net of capital grants, amounted
to approximately $73.7 million and $36.0 million, respectively, consisting
primarily of manufacturing and office equipment, buildings and improvements, and
purchased software applications. The nature and level of capital spending was
made to improve manufacturing capabilities, principally in the U.S. and the Far
East; to upgrade and expand our IT infrastructure; and to support the increased
marketing, selling, and administrative efforts necessitated by our growth.
Substantially all of APC's net capital expenditures were financed from available
operating cash. We had no material capital commitments at December 31, 2000.
APC has agreements with the Industrial Development Authority of Ireland,
otherwise knows as the IDA. Under these agreements, we receive grant monies for
costs incurred for machinery, equipment, and building improvements for our
Galway and Castlebar facilities. These grants are equal to 40% and 60%,
respectively, of such costs up to a maximum of $13.1 million for Galway and $1.3
million for Castlebar. Such grant monies are subject to APC meeting certain
employment goals and maintaining operations in Ireland until termination of the
respective agreements. Under separate agreements with the IDA, we receive
direct reimbursement of training costs at our Galway and Castlebar facilities
for up to $3,000 and $12,500, respectively, per new employee hired. See also
note 14 to the consolidated financial statements.
We believe that current internal cash flows together with available cash,
available credit facilities or, if needed, the proceeds from the sale of
additional equity, will be sufficient to support anticipated capital spending
and other working capital requirements for the foreseeable future.
14
Acquisitions
Airflow
In the fourth quarter of 2000, we acquired privately-held Airflow Company, a
Maryland-based manufacturer of precision cooling equipment primarily used in
data center, Internet, and telecommunications applications. For Airflow Company
we paid $22.5 million in cash plus expenses, of which $4.0 million will be paid
at scheduled dates over three years in the event no indemnity claims arise. Our
cash outlays associated with the acquisition were financed from operating cash.
At December 31, 2000, the excess of the purchase price over the estimated fair
value of the tangible net assets acquired has been included in goodwill and is
being amortized on a straight-line basis over 15 years. The acquisition has
been accounted for as a purchase and, accordingly, Airflow's results of
operations are included in our consolidated financial statements from the date
of acquisition.
Advance Power
Early in the second quarter of 2000, we acquired privately-held Advance Power
Ltd., a U.K.-based manufacturer of DC-power solutions used in communications and
Internet applications, for $75.0 million in cash plus expenses. Our cash
outlays associated with the acquisition were financed from operating cash. At
December 31, 2000, the excess of the purchase price over the estimated fair
value of the tangible net assets and identifiable intangible assets acquired has
been included in goodwill and is being amortized on a straight-line basis over
15 years. The acquisition has been accounted for as a purchase and,
accordingly, Advance Power's results of operations are included in our
consolidated financial statements from the date of acquisition.
ABL Electronics Corporation
Early in the second quarter of 2000, we acquired privately-held ABL Electronics
Corporation, a North American provider of computer and network cables, switches,
and other connectivity products, for $8.0 million paid in a combination of cash
and stock, plus expenses. Our cash outlays associated with the
acquisition were financed from operating cash. At December 31, 2000, the excess
of the purchase price over the estimated fair value of the tangible net assets
acquired has been included in goodwill and is being amortized on a straight-line
basis over 15 years. The acquisition has been accounted for as a purchase and,
accordingly, ABL's results of operations are included in our consolidated
financial statements from the date of acquisition.
Silcon A/S
Early in the second quarter of 1998, APC entered into a definitive agreement
with the principal management shareholders of Silcon to acquire stock of Silcon,
a Denmark-based manufacturer of 3-phase UPSs up to 500 kVA. In 1998, we
acquired 89% of the outstanding shares of Silcon, and in January through March
1999, we attained ownership of the remaining Silcon shares. Our cash outlays
associated with the step-acquisition of $64.4 million during 1998 and $8.4
million during 1999 were financed from operating cash.
The purchase price was allocated to the net tangible and identifiable intangible
assets acquired and to acquired in-process R&D, or acquired R&D. Acquired R&D
includes the value of products in the development stage that are not considered
to have reached technological feasibility and that have no alternative future
uses. In accordance with applicable accounting rules, acquired R&D is required
to be expensed. Accordingly, $7.6 million of the acquisition cost was expensed
in 1998. The remaining purchase price exceeded the fair value of the tangible
net assets acquired by approximately $53.0 million, consisting of identifiable
intangible assets and goodwill, which is being amortized on a straight-line
basis over 15 years. The acquisition has been accounted for as a purchase and,
accordingly, Silcon's results of operations are included in our consolidated
financial statements from the dates of acquisition.
Foreign Currency Activity
We invoice our customers in various currencies. Realized and unrealized
transaction gains or losses are included in the results of operations and are
measured based upon the effect of changes in exchange rates on the actual or
expected amount of functional currency cash flows. Transaction gains and losses
were not material to the results of operations in 2000, 1999 and 1998.
15
At December 31, 2000, APC's unhedged foreign currency accounts receivable, by
currency, were as follows:
In thousands Foreign Currency US Dollars
European Euros 38,597 $35,937
British Pounds 14,989 22,438
Japanese Yen 1,942,010 16,992
German Marks 22,396 10,665
Swiss Francs 16,867 10,285
French Francs 54,873 7,783
APC also had non-trade receivables denominated in Irish Pounds of approximately
US$3.4 million, liabilities denominated in various European currencies of
approximately US$68.6 million, and liabilities denominated in Japanese Yen of
approximately US$8.7 million.
We continually review our foreign exchange exposure and consider various risk
management techniques, including the netting of foreign currency receipts and
disbursements, rate protection agreements with customers/vendors and derivatives
arrangements, including foreign exchange contracts. We presently do not utilize
rate protection agreements or derivative arrangements.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. This Statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000, as provided for in SFAS No. 137.
The adoption of this Statement is not expected to have a material impact on our
consolidated financial position or results of operations.
Factors That May Affect Future Results
This document contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this document.
Our quarterly results are likely to be volatile.
Our quarterly operating results may fluctuate as a result of a number of
factors, including:
The growth rates in the UPS industry and related industries, including
but not limited to the PC, server, networking, telecommunications and
enterprise hardware industries;
Timing of orders from, and shipments to, customers;
Timing of new product introductions and the market acceptance of those
products;
Increased competition;
Changes in manufacturing costs;
Changes in the mix of product sales;
Inventory risks due to shifts in market demand;
Component constraints and shortages;
Risks of nonpayment of accounts receivable;
Expansion of manufacturing capacity;
Factors associated with international operations; and
Changes in world economic conditions.
16
To remain competitive and expand our growth, we need to manage our growth
expansion effectively.
We have experienced, and are currently experiencing, growth in our business
which has placed, and could continue to place, a significant strain on our
resources. In order to support the growth of our business, we plan to continue
expanding our level of global operations during 2001. If our management is
unable to manage growth effectively, our operating results could be adversely
affected.
We currently compete with several firms providing power protection and related
products and services and expect competition to increase in the future, which
could affect our revenue and profitability.
We believe that we are one of less than ten global companies providing a full
range of UPS products and services worldwide. The UPS, power protection and
related industries, however, are highly competitive on both a worldwide basis
and a regional geographic basis. We compete, and will continue to compete, with
several U.S. and foreign firms, both on a worldwide basis and in various
geographical regions, and within individual product and application niches. We
expect competition to increase in the future from existing competitors and a
number of companies that may enter our existing or future markets. Increased
competition could adversely affect our revenue and profitability through price
reductions and loss of market share. The principal competitive factors in our
products include:
Product performance and quality;
Marketing and access to distribution channels;
Customer services; and
Product design and price.
Some of our current and potential competitors have substantially greater
financial, technical, sales and marketing resources than we have. We may not be
able to continue to compete successfully with our existing competitors or with
new competitors.
Failure to alter our products to meet the demands of technological innovation
could seriously harm our business.
The market for our products is characterized by rapidly changing technology,
evolving industry standards and frequent new product introductions. Current
competitors or new market entrants may develop new products with features that
could adversely affect the competitive position of our products. We may not be
successful in selecting, developing, manufacturing and marketing new products or
enhancing our existing products or in responding effectively to technological
changes, new standards or product announcements by competitors. The timely
availability of new products and enhancements, and their acceptance by customers
are important to our future success. Delays in such availability or a lack of
market acceptance could have an adverse effect on our business.
Defects in our products could seriously harm our business.
Our products may have defects despite testing internally or by current or
potential customers. These defects could result in loss or delay in market
acceptance, which could have a material adverse effect upon our business,
operating results, or financial condition.
Loss of any of our key personnel could seriously harm our business.
Our success depends to a significant degree upon the continuing contributions of
key management, sales, marketing, research and development and manufacturing
personnel, many of whom we would have difficulty replacing. We believe that our
future success will depend in large part upon our ability to attract and retain
highly-skilled hardware and software engineers, and management, sales, and
marketing personnel. Competition for such personnel is intense, and we may not
be successful in attracting and retaining such personnel. Failure to attract
and retain key personnel could have a material adverse effect on our business,
operating results, or financial condition.
17
Because we depend on foreign operations and revenues, we are exposed to currency
fluctuations, import barriers and other risks related to conducting foreign
operations.
We manufacture and market our products worldwide through several foreign
subsidiaries, distributors, and resellers. Our worldwide operations are subject
to the risks normally associated with foreign operations including, but not
limited to:
The disruption of markets;
Changes in export or import laws;
Restrictions on currency exchanges;
Potentially negative tax consequences;
Longer payment terms;
Political instability; and
The modification or introduction or government policies with potentially
adverse effects.
International sales, which are both direct and indirect sales to customers
outside the United States, accounted for approximately 46.9%, 47.3%, and 43.1%
of our net sales in 2000, 1999 and 1998, respectively. We anticipate that
international sales will continue to account for a significant portion of
revenue. We invoice our customers in various currencies. To date, we do not
use any rate protection agreements or derivative agreements to hedge any foreign
exchange exposure. Accordingly, we may be exposed to exchange losses based upon
currency exchange rate fluctuations, which losses could have a materially
adverse effect on our operating results.
A significant portion of products in our Small Systems and Large Systems
reportable operating segments are manufactured in foreign locations. The Small
Systems have particular exposure to the Philippines, a country which has
experienced political and financial instability. Disruption of manufacturing
efforts in these international facilities could negatively impact our ability to
fulfill customer orders and potentially result in the loss of business.
Because our business relies upon a variety of computer systems to operate
effectively, the failure or disruption of these systems could have a material
adverse effect on our business.
APC is a highly automated company whose efficient and effective operation relies
on a variety of information systems, including e-mail, enterprise resource
planning, electronic data interchange, customer resource management and e-
commerce systems. Disruption in the operation of these systems, or difficulties
in maintaining or upgrading these systems, could have an adverse effect on our
business. In January 2001, we upgraded our enterprise resource planning system.
Difficulties that we have encountered, or may encounter, in connection with our
implementation and use of this upgraded enterprise resource planning system
could adversely affect our order management and fulfillment, financial reporting
and supply chain management processes, and any such difficulties could have a
material adverse effect on our business.
Our reliance on sole source suppliers may result in product delays or price
increases.
We currently obtain some components of our products from single sources. In the
future, our suppliers may not be able to meet our demand for components in a
timely and cost-effective manner. We generally purchase these single or limited
source components using purchase orders and have no guaranteed supply
arrangements with the suppliers. In addition, the availability of many of these
components is dependent in part on our ability to provide the suppliers with
accurate forecasts of our future requirements. However, our operating results
and customer relationships could be adversely affected by either an increase in
prices for, or an interruption or reduction in supply of, any key components.
We have a limited ability to protect our intellectual property rights and others
could infringe on or misappropriate our propriety rights and information.
Our success will depend, to a large extent, on our ability to protect our
proprietary technology. We rely on a combination of contractual rights, trade
secrets, patents, and copyrights to protect our proprietary rights. Although we
own certain patents, and we have applied, and in the future we may apply, for
patents, our intellectual property protection may not be sufficient to prevent
competitors from developing similar technology. Moreover, in the absence of
patent protection, our business may be adversely affected by competitors which
independently develop functionally equivalent technology.
Our products may infringe on the intellectual property rights of others.
We attempt to ensure that our products and processes do not infringe upon third
party patents and other proprietary rights, but third parties may allege such
infringement in the future. If third parties allege or determine infringement,
we may not prevail in such a challenge. Furthermore, if infringement is
determined, we may not be able to obtain the necessary licenses on acceptable
terms, if at all.
18
If we are unable to identify and successfully integrate acquisitions, our
ability to expand and our financial results could suffer.
We have limited experience in integrating acquired companies or technologies
into our operations. We may from time to time pursue the acquisition of other
companies, assets, products or technologies. We may not be able to integrate
successfully products, technologies, distribution channels, key personnel and
businesses of acquired companies into our business or product offerings. In
addition, the integration of acquired companies may adversely affect our
business, operating results, or financial condition. Further, these acquired
companies, assets, products or technologies may not contribute significantly to
our sales or earnings, and the sales and earnings from acquired businesses may
be adversely affected by the integration process or other factors. If we are
not successful in the integration of such acquired businesses, our financial
results could be adversely impacted. In addition, we may not be able to
identify and consummate suitable acquisition transactions in the future.
Our stock price could be volatile, which could cause you to lose part or all of
your investment.
The market price of our common stock has been, and may continue to be, extremely
volatile. The trading price of our common stock could be subject to wide
fluctuations in response to:
Quarter-to-quarter variations in operating results;
Changes in earnings estimates by analysts;
Announcements of technological innovations or new products developed by us
or our competitors; and
Challenges associated with integration of businesses and other events or
factors.
In addition, the stock market has from time to time experienced extreme price
and volume fluctuations which have particularly affected the market price for
many high technology companies and which often have been unrelated to the
operating performance of these companies. These broad market fluctuations may
adversely affect the market price of our common stock.
Our tax rate depends on earnings derived from certain foreign manufacturing
operations.
Our tax rate is heavily dependent upon the proportion of earnings that we derive
from our Ireland and Philippines manufacturing operations and our ability to
reinvest those earnings permanently outside the United States. If the earnings
of these operations as a percentage of our total earnings were to decline
significantly from anticipated levels, or should our ability to reinvest these
earnings be reduced, our effective tax rate would exceed the currently estimated
rate for 2001. In addition, should our intercompany transfer pricing with
respect to our Ireland or Philippines manufacturing operations require
significant adjustment due to audits or regulatory changes, our overall
effective tax rate could increase.
We have been and may become involved in litigation, which could materially harm
our business.
We have been and may in the future become, involved in litigation involving our
business, products or operations. The litigation process is uncertain and
includes the risk of an unexpected, unfavorable result. We may be materially
adversely impacted by any such litigation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
APC, in the normal course of business, is exposed to market risks relating to
fluctuations in foreign currency exchange rates. The information required under
this section related to such risks is included in the Foreign Currency Activity
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 of this Report and is incorporated herein by
reference.
19
Item 8. Financial Statements and Supplementary Data
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
In thousands
ASSETS
2000 1999
Current assets:
Cash and cash equivalents $283,025 $456,325
Short term investments 25,000 -
Accounts receivable, less allowance
for doubtful accounts of
$20,085 in 2000 and $19,543 in 1999 (Note 4) 298,041 216,810
Inventories (Note 5) 289,032 176,477
Prepaid expenses and other current assets 23,488 18,283
Deferred income taxes (Note 7) 42,024 31,962
Total current assets 960,610 899,857
Property, plant, and equipment:
Land, buildings, and improvements 72,136 58,220
Machinery and equipment 178,558 130,031
Office equipment, furniture, and fixtures 68,765 55,284
Purchased software 25,633 17,114
345,092 260,649
Less accumulated depreciation and amortization 133,335 103,422
Net property, plant, and equipment 211,757 157,227
Goodwill and other intangibles, net (Note (2) 122,716 48,239
Other assets (Note 3) 22,022 1,615
Total assets $1,317,105 $1,106,938
See accompanying notes to consolidated financial statements.
20
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
In thousands
LIABILITIES AND SHAREHOLDERS' EQUITY
2000 1999
Current liabilities:
Accounts payable $105,031 $78,641
Accrued expenses 37,946 33,227
Accrued compensation 21,708 25,743
Accrued sales and marketing programs 15,210 16,853
Deferred revenue 11,847 8,739
Income taxes payable 14,377 30,616
Total current liabilities 206,119 193,819
Deferred tax liability (Note 7) 13,805 11,029
Total liabilities 219,924 204,848
Shareholders' equity (Notes 8 and 9):
Common stock, $.01 par value;
authorized 450,000 shares in 2000;
issued 195,071 in 2000 and 193,339 in 1999 1,951 1,933
Additional paid-in capital 115,381 82,989
Retained earnings 986,176 820,525
Treasury stock, 250 shares, at cost (1,551) (1,551)
Accumulated other comprehensive income (loss) (4,776) (1,806)
Total shareholders' equity 1,097,181 902,090
COMMITMENTS AND CONTINGENCIES
(Notes 11, 13 and 14)
Total liabilities and shareholders' equity $1,317,105 $1,106,938
See accompanying notes to consolidated financial statements.
21
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2000, 1999 and 1998
In thousands except per share amounts
2000 1999 1998
Net sales (Note 10) $1,483,563 $1,344,931 $1,130,991
Cost of goods sold 867,680 747,389 645,378
Gross profit 615,883 597,542 485,613
Costs and expenses:
Marketing, selling, general, and
administrative 311,612 283,725 241,027
Special charges (Note 3) 47,900 - -
Research and development 46,898 34,592 32,563
Acquired research and development - - 7,554
Total operating expenses 406,410 318,317 281,144
Operating income 209,473 279,225 204,469
Other income, net 23,838 13,292 11,687
Earnings before income
taxes and minority interest 233,311 292,517 216,156
Income taxes (Note 7) 67,660 86,293 68,231
Earnings before minority interest 165,651 206,224 147,925
Minority interest, net - - 349
Net income $165,651 $206,224 $147,576
Basic earnings per share (Note 1) $.85 $1.07 $.77
Basic weighted average
shares outstanding 194,235 192,201 191,006
Diluted earnings per share (Note 1) $.83 $1.05 $.76
Diluted weighted average
shares outstanding 200,156 196,088 193,576
See accompanying notes to consolidated financial statements.
22
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2000, 1999 and 1998
In thousands
Accumulated
$.01 Par, Additional Treasury Stock, Other
Common Stock Paid-in Retained at Cost Comprehensive
Shares Amount Capital Earnings Shares Amount Income Total
Balances at
December 31, 1997 190,766 $1,908 $54,672 $466,725 (250) $(1,551) $- $521,754
Net income 147,576 147,576
Foreign currency
translation
adjustment 502 502
Comprehensive
income 148,078
Exercises of
stock options 1,106 11 8,470 8,481
Tax effect of
exercises of
stock options 2,082 2,082
Shares issued to
Employee Stock
Purchase Plan 74 897 897
Balances at
December 31, 1998 191,946 1,919 66,121 614,301 (250) (1,551) 502 681,292
Net income 206,224 206,224
Foreign currency
translation
adjustment (2,308) (2,308)
Comprehensive
income 203,916
Exercises of
stock options 1,285 13 12,762 12,775
Tax effect of
exercises of
stock options 2,565 2,565
Shares issued to
Employee Stock
Purchase Plan 108 1 1,541 1,542
Balances at
December 31, 1999 193,339 1,933 82,989 820,525 (250) (1,551) (1,806) 902,090
Net income 165,651 165,651
Foreign currency
translation
adjustment (2,970) (2,970)
Comprehensive
income 162,681
Exercises of
stock options 1,488 15 18,652 18,667
Tax effect of
exercises of
stock options 7,981 7,981
Shares issued to
Employee Stock
Purchase Plan 131 1 1,761 1,762
Shares issued to
acquire ABL
Electronics 113 2 3,998 4,000
Balances at
December 31, 2000 195,071 $1,951 $115,381 $986,176 (250) $(1,551) $(4,776) $1,097,181
See accompanying notes to consolidated financial statements.
23
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2000, 1999 and 1998
In thousands
2000 1999 1998
Cash flows from
operating activities
Net income $165,651 $206,224 $147,576
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amortization 40,943 30,590 22,951
Gain on sale of property,
plant and equipment - (277) -
Provision for doubtful accounts 2,028 6,015 6,593
Deferred income taxes (7,212) 65 (5,967)
Acquired research and development - - 7,554
Other, net (2,970) (2,382) (409)
Changes in operating assets
and liabilities, excluding
effects of acquisitions:
Accounts receivable (59,638) (42,469) (36,321)
Inventories (91,253) 52,205 (105,327)
Prepaid expenses and
other current assets (4,559) (482) (4,151)
Other assets (21,362) 1,022 (536)
Accounts payable 8,898 3,451 23,550
Accrued expenses (1,757) 8,926 (457)
Accrued compensation (4,610) 3,613 5,654
Accrued sales and
marketing programs (1,902) (971) 1,859
Deferred revenue 3,108 1,909 1,875
Income taxes payable (8,336) 10,428 3,138
Net cash provided by
operating activities 17,029 277,867 67,582
Cash flows from
investing activities
Purchases of held-to-maturity
securities (75,000) - -
Maturities of held-to-maturity
securities 50,000 - -
Capital expenditures,
net of capital grants (73,716) (36,003) (55,654)
Proceeds from sale of
property, plant and equipment - 1,100 3,200
Acquisitions (100,315) (8,426) (62,424)
Net cash used in
investing activities (199,031) (43,329) (114,878)
Cash flows from
financing activities
Repayment of short term debt (11,727) (12,438) (12,308)
Proceeds from issuances
of common stock 20,429 14,317 9,378
Net cash provided by
(used in) financing
activities 8,702 1,879 (2,930)
Net change in cash
and cash equivalents (173,300) 236,417 (50,226)
Cash and cash equivalents
at beginning of year 456,325 219,908 270,134
Cash and cash equivalents
at end of year $283,025 $456,325 $219,908
Supplemental cash flow disclosures
Cash paid during the year for:
Income taxes (net of tax refunds) $80,240 $70,204 $65,109
Details of acquisitions:
Fair value of assets $138,242 $8,426 $113,177
Liabilities and minority interest (36,614) - (48,793)
Cash paid 101,628 8,426 64,384
Cash acquired (1,313) - (1,960)
Acquisitions $100,315 $8,426 $62,424
NON-CASH TRANSACTIONS: In 2000, 1999 and 1998, the tax effect of the exercise
of stock options resulted in increases to additional paid-in capital and
reductions to income taxes payable of $7,981, $2,565, and $2,082. In 2000,
113,273 shares were issued related to the acquisition of ABL Electronics
Corporation resulting in an increase to additional paid-capital of $3,998.
See accompanying notes to consolidated financial statements.
24
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2000, 1999 and 1998
1. Summary of Significant Accounting Policies
Nature of Business
American Power Conversion Corporation and its subsidiaries (the "Company")
designs, develops, manufactures, and markets power protection and management
solutions for computer and electronic applications worldwide. The Company's
solutions include uninterruptible power supply products ("UPSs"), DC-power
solutions, electrical surge protection devices, power conditioning products,
precision cooling equipment and associated software, services, and accessories.
These solutions are for use with sensitive electronic devices which rely on
electric utility power including, but not limited to, home electronics, personal
computers ("PCs"), high-performance workstations, servers, networking equipment,
communications equipment, Internetworking equipment, data centers, mainframe
computers, and facilities. The Company's principal markets are in North
America, Europe, and the Far East.
Principles of Consolidation
The consolidated financial statements include the accounts of American Power
Conversion Corporation and all of its wholly-owned subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Change in Accounting Principle
In consideration of guidance issued by the Financial Accounting Standards
Board's Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and
Handling Fees and Costs," the Company has retroactively changed its
classification of freight charges billed to customers and related freight
expenses from operating expenses to net sales and cost of goods sold,
respectively. These changes increased net sales by $10.0 million, $7.7 million,
and $5.2 million in 2000, 1999 and 1998, respectively, increased cost of goods
sold by $30.8 million, $24.7 million, and $24.3 million in 2000, 1999 and 1998,
respectively; and decreased SG&A expenses by $20.8 million, $17.0 million, and
$19.1 million, in 2000, 1999 and 1998, respectively. This accounting change had
no impact on reported net income for any of the periods presented.
Revenue Recognition
Revenue from sales of the Company's products, including UPS products, DC-power
solutions, electrical surge protection devices, power conditioning products,
precision cooling equipment, and associated accessories, is recognized when
persuasive evidence of an arrangement exists, delivery has occurred, the price
to the buyer is fixed or determinable, and collectibility is reasonably assured.
Provisions for sales returns and allowances and uncollectible accounts are made
at the time of sale. Revenues from the sale of service-related contracts are
deferred and recognized ratably over an established term, typically one to five
years.
Cash and Cash Equivalents
Cash and cash equivalents consist of funds on deposit, money market savings
accounts, and short-term commercial paper with original maturities of three
months or less.
Short Term Investments
At December 31, 2000, short term investments consisted of U.S. Government debt
securities with original maturities greater than three months and less than or
equal to one year. Such securities were classified as held-to-maturity and
carried at amortized cost. The cost of such securities approximates fair market
value. Management determines the appropriate classification of debt securities
at the time of purchase and re-evaluates such designation as of each balance
sheet date. Debt securities are classified as held-to-maturity when the Company
has the positive intent and ability to hold such securities to maturity.
25
Inventories
Inventories are stated at the lower of cost or market; cost being determined
using the first-in, first-out (FIFO) method.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is provided by
using the straight-line method over estimated useful lives as follows:
Land improvements 15 years
Buildings and improvements 40 years
Machinery and equipment 5 - 10 years
Office equipment, furniture
and fixtures 3 - 10 years
Purchased software 3 years
Goodwill and Other Intangibles
Goodwill represents the excess of cost over the fair value of the net tangible
assets and identifiable intangible assets of businesses acquired and is being
amortized on a straight-line basis over 15 years. Periodically, the Company
evaluates the carrying value of goodwill to assure that changes in facts and
circumstances do not suggest that recoverability has been impaired. This
analysis relies on a number of factors, including operating results, business
plans, budgets, economic projections, and changes in management's strategic
direction or market emphasis. In management's opinion, no impairment exists at
December 31, 2000. Goodwill and other intangibles are presented net of
accumulated amortization of $12.2 million and $4.8 million at December 31, 2000
and 1999, respectively.
Research and Development
Expenditures for research and development ("R&D") are expensed in the period
incurred.
Warranties
The Company offers limited two-year and one-year warranties. The provision for
potential liabilities resulting from warranty claims is provided at the time of
sale. The Company also offers its customers the opportunity to extend the basic
warranty period up to an additional three years under a separately priced
program. Recognition of the revenue associated with the extended warranty
program commences on the date the extended warranty becomes effective and is
recognized on a straight-line basis over the extended warranty period. In
addition, the Company has an Equipment Protection Policy which, depending on the
model, provides up to $25,000, 50,000 pounds sterling, or 100,000 euros for
repair or replacement of a customer's hardware should a surge or lightning
strike pass through a Company unit. The policy applies to all units
manufactured after January 1, 1992. Other restrictions also apply. The
Company's ProtectNet line of data line surge suppressors feature a "Double-Up"
Supplemental Equipment Protection Policy, under which the total recoverable
limit under the Equipment Protection Policy is doubled (U.S. and Canada
only). The Company has experienced satisfactory field operating results, and
warranty costs incurred to date have not had a significant impact on the
Company's results of operations.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Deferred income taxes have not been provided for the undistributed earnings of
the Company's foreign subsidiaries which aggregated approximately $361.0 million
at December 31, 2000. The Company plans to reinvest all such earnings for
future expansion. If such earnings were distributed, taxes would increase by
approximately $86.0 million. Additionally, the Company has tax holidays in
China, India, and the Philippines, which reduce or eliminate the income taxes
paid in those countries. Based on the currently enacted regular corporate
income tax rates in these countries, the benefit to the Company of these tax
holidays was approximately $6.8 million, or $.03 per diluted share, for the year
ended December 31, 2000; $4.5 million, or $.02 per diluted share, for the year
ended December 31, 1999; $2.4 million, or $.01 per diluted share, for the year
ended December 31, 1998.
26
Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed by dividing net income by the weighted average number of
common shares and dilutive potential common shares outstanding during the
period. Under the treasury stock method, the unexercised options are assumed to
be exercised at the beginning of the period or at issuance, if later. The
assumed proceeds are then used to purchase common shares at the average market
price during the period. Potential common shares for which inclusion would have
the effect of increasing diluted earnings per share (i.e., antidilutive) are
excluded from the computation.
In thousands 2000 1999 1998
Basic weighted average
shares outstanding 194,235 192,201 191,006
Net effect of dilutive
potential common shares
outstanding based on the
treasury stock method using
the average market price 5,921 3,887 2,570
Diluted weighted average
shares outstanding 200,156 196,088 193,576
Antidilutive potential
common shares excluded
from the computation above 280 872 496
Stock-Based Compensation
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its stock-based compensation plans. No compensation cost has been
recognized for these plans in the accompanying consolidated financial
statements.
Advertising Costs
Advertising costs are expensed as incurred and reported in marketing, selling,
general, and administrative expenses in the accompanying consolidated statements
of income. Such costs of advertising, advertising production, trade shows, and
other activities are designed to enhance demand for the Company's products.
Advertising costs were $85.5 million in 2000, $94.4 million in 1999, and $67.4
million in 1998. There are no capitalized advertising costs in the accompanying
consolidated balance sheets.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
2. Acquisitions
Airflow
In the fourth quarter of 2000, the Company acquired privately-held Airflow
Company, a Maryland-based manufacturer of precision cooling equipment primarily
used in data center, Internet, and telecommunications applications, for $22.5
million in cash plus expenses, of which $4.0 million will be paid at scheduled
dates over three years in the event no indemnity claims arise. The Company's
cash outlays associated with the acquisition were financed from operating cash.
At December 31, 2000, the excess of the purchase price over the estimated fair
value of the tangible net assets acquired has been included in goodwill and is
being amortized on a straight-line basis over 15 years. The acquisition has
been accounted for as a purchase and, accordingly, Airflow's results of
operations are included in the Company's consolidated financial statements from
the date of acquisition.
27
Advance Power
Early in the second quarter of 2000, the Company acquired privately-held Advance
Power Ltd., a U.K.-based manufacturer of DC-based power solutions used in
communications and Internet applications, for $75.0 million in cash plus
expenses. The Company's cash outlays associated with the acquisition were
financed from operating cash. At December 31, 2000, the excess of the purchase
price over the estimated fair value of the tangible net assets and identifiable
intangible assets acquired has been included in goodwill and is being amortized
on a straight-line basis over 15 years. The acquisition has been accounted for
as a purchase and, accordingly, Advance Power's results of operations are
included in the Company's consolidated financial statements from the date of
acquisition.
ABL Electronics Corporation
Early in the second quarter of 2000, the Company acquired privately-held ABL
Electronics Corporation ("ABL"), a North American provider of computer and
network cables, switches, and other connectivity products, for $8.0 million paid
in a combination of cash and stock, plus expenses. The Company's
cash outlays associated with the acquisition were financed from operating cash.
At December 31, 2000, the excess of the purchase price over the estimated fair
value of the tangible net assets acquired has been included in goodwill and is
being amortized on a straight-line basis over 15 years. The acquisition has
been accounted for as a purchase and, accordingly, ABL's results of operations
are included in the Company's consolidated financial statements from the date of
acquisition.
Silcon A/S
Early in the second quarter of 1998, APC entered into a definitive agreement
with the principal management shareholders of Silcon to acquire stock of Silcon,
a Denmark-based manufacturer of 3-phase UPSs up to 500 kVA. In 1998, we
acquired 89% of the outstanding shares of Silcon, and in January through March
1999, we attained ownership of the remaining Silcon shares. Our cash outlays
associated with the step-acquisition of $64.4 million during 1998 and $8.4
million during 1999 were financed from operating cash.
The purchase price was allocated to the net tangible and identifiable intangible
assets acquired and to acquired in-process R&D ("acquired R&D"). Acquired R&D
includes the value of products in the development stage that are not considered
to have reached technological feasibility and that have no alternative future
uses. In accordance with applicable accounting rules, acquired R&D is required
to be expensed. Accordingly, $7.6 million of the acquisition cost was expensed
in 1998. The remaining purchase price exceeded the fair value of the tangible
net assets acquired by approximately $53 million, consisting of identifiable
intangible assets and goodwill, which is being amortized on a straight-line
basis over 15 years. The acquisition has been accounted for as a purchase and,
accordingly, Silcon's results of operations are included in the Company's
consolidated financial statements from the date of acquisition.
Pro forma results from operations have not been provided as the acquisitions are
not considered material individually and in the aggregate.
3. Special Charges
During the third and second quarters of 2000, the Company agreed to license
worldwide patent rights relating to uninterruptible power supply technology for
lump-sum cash payments of $17.0 million and $48.0 million, respectively. These
license fees were paid from operating cash during the third and second quarters
of 2000, respectively. The Company evaluated the portion of the license fees
that represented payment for prior use of the subject technology and the portion
that represented payment for future use. Considering each of the Company's
markets and the historical and projected revenue realized in markets utilizing
the licensed technology, the Company estimated the present value of royalty
payments, basing this calculation on an appropriate royalty rate and the
technology's contribution to the overall value of affected products. Separate
present values were calculated for both historic and projected product sales;
the historic values were expensed and the projected values were capitalized.
Accordingly, write-offs of the fully paid-up portions of the patent licenses
were recognized in the Company's statements of income for the third and second
quarters of 2000 as special charges to pre-tax earnings of $17.5 million and
$30.4 million, respectively, including direct expenses of $1.5 million and $1.9
million, respectively. The remaining balances of $1.0 million and $19.5 million
have been classified on the consolidated balance sheet as long term assets and
are being amortized on a straight-line basis over three years and nine years,
respectively, the estimated remaining economic lives of the patent licenses.
28
4. Accounts Receivable
Accounts receivable are generally not concentrated in any geographic region or
industry. Collateral is usually not required except for certain international
transactions for which the Company requires letters of credit to secure payment.
The Company estimates an allowance for doubtful accounts based on the credit
worthiness of its customers as well as general economic conditions.
Consequently, an adverse change in those factors could affect the Company's
estimate of its bad debts.
5. Inventories
Inventories consist of the following:
In thousands 2000 1999
Raw materials $120,685 $60,708
Work in process 15,755 7,396
Finished goods 152,592 108,373
$289,032 $176,477
6. Revolving Credit Agreements and Short Term Debt
At December 31, 2000 and 1999, the Company had available for future borrowings
$50.0 million under an unsecured line of credit agreement at a floating interest
rate equal to the bank's cost of funds rate plus .625%, and an additional $15.0
million and $7.0 million under unsecured line of credit agreements with a second
and third bank, respectively, at similar interest rates. No borrowings were
outstanding under these facilities at December 31, 2000 and 1999.
7. Income Taxes
Total federal, state, and foreign income tax expense (benefit) from continuing
operations for the years ended December 31, 2000, 1999 and 1998 consists of the
following:
In thousands Current Deferred Total
2000:
Federal $53,319 $(3,850) $49,469
State 8,073 (794) 7,279
Foreign 12,559 (1,647) 10,912
$73,951 $(6,292) $67,660
1999:
Federal $61,756 $(244) $61,512
State 8,024 (239) 7,785
Foreign 16,448 548 16,996
$86,228 $65 $86,293
1998:
Federal $58,294 $(4,188) $54,106
State 4,707 (785) 3,922
Foreign 11,197 (994) 10,203
$74,198 $(5,967) $68,231
29
Income tax expense attributable to continuing operations amounted to $67.7
million in 2000, $86.3 million in 1999, and $68.2 million in 1998, (effective
rates of 29.0%, 29.5%, and 31.6%, respectively). The actual expense for 2000,
1999 and 1998 differs from the "expected" tax expense (computed by applying the
statutory U.S. federal corporate tax rate of 35% to earnings before income
taxes) as follows:
In thousands 2000 1999 1998
Computed "expected"
tax expense $81,659 $102,381 $75,655
State income taxes,
net of federal income
tax benefit 4,731 5,060 2,549
Foreign earnings taxed
at rates lower than U.S.
statutory rate (principally
Ireland and Philippines) (16,616) (18,754) (12,676)
Foreign sales corporation (1,754) (1,294) (2,729)
Acquired R&D - - 3,094
Other (360) (1,100) 2,338
$67,660 $86,293 $68,231
The domestic and foreign components of earnings before income taxes were $145.3
million and $88.0 million, respectively, for 2000; $188.5 million and $104.0
million, respectively, for 1999; and $162.0 million and $54.2 million,
respectively, for 1998. Total income tax expense for the years ended December
31, 2000, 1999 and 1998 was allocated as follows:
In thousands 2000 1999 1998
Income from continuing operations $67,660 $86,293 $68,231
Shareholders' equity,
for compensation expense for
tax purposes in excess of
amounts recognized for
financial statement purposes (7,981) (2,565) (2,082)
$59,679 $83,728 $66,149
At December 31, 2000 and 1999, deferred income tax assets and liabilities result
from temporary differences in the recognition of income and expense for tax and
financial reporting purposes. The sources and tax effects of these temporary
differences are presented below:
In thousands 2000 1999
Deferred tax assets
Allowance for doubtful accounts $5,060 $5,150
Additional costs inventoried
for tax purposes 1,629 920
Intercompany inventory profits 4,520 4,521
Allowances for sales
and marketing programs 5,837 5,644
Inventory obsolescence reserve 4,302 4,272
Accrual for compensation
and compensated absences 2,912 5,629
Reserve for warranty costs 2,449 1,274
Deferred revenue 3,918 2,955
Intangible assets 9,585 -
Other 1,812 1,597
Total gross deferred tax assets 42,024 31,962
Less valuation allowance - -
Net deferred tax assets 42,024 31,962
Deferred tax liabilities
Excess of tax over financial
statement depreciation 11,441 9,282
Other 2,364 1,747
Total deferred tax liabilities 13,805 11,029
Net deferred income taxes $28,219 $20,933
30
In assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Due to the fact that the Company has sufficient
taxable income in the federal carryback period and anticipates sufficient future
taxable income during the periods over which the deferred tax assets are
deductible, the ultimate realization of deferred tax assets for federal and
state tax purposes appears more likely than not.
8. Stock Plans
Stock-based Compensation Plans
At December 31, 2000, the Company had four stock option plans and a stock
purchase plan, which are described below. SFAS No. 123, Accounting for Stock-
Based Compensation, requires companies to either (a) record compensation costs
related to its stock-based compensation plans, or (b) disclose pro forma net
income and earnings per share data as if the company had recorded such costs.
The Company has elected to continue to apply APB Opinion No. 25 and related
Interpretations in accounting for these plans and to comply with the SFAS No.
123 disclosure requirements. Accordingly, no compensation cost has been
recognized for its stock-based compensation plans in the accompanying
consolidated financial statements. Had compensation costs for such plans been
determined in accordance with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
In thousands except per share amounts 2000 1999 1998
Net income As reported $165,651 $206,224 $147,576
Pro forma 133,115 181,123 132,296
Basic earnings
per share As reported $.85 $1.07 $.77
Pro forma .69 .94 .69
Diluted earnings
per share As reported $.83 $1.05 $.76
Pro forma .65 .92 .69
The pro forma effect on net income for 2000, 1999 and 1998 is not representative
of the pro forma effect on net income in future years because it does not take
into consideration pro forma compensation expense related to stock option grants
made prior to 1995. The weighted average fair value of stock options granted
during 2000, 1999 and 1998 was $11.43, $9.35, and $8.84, respectively. The
Company estimates the fair value of each option as of the date of grant using
the Black-Scholes pricing model with the following weighted average assumptions
used for grants in 2000, 1999 and 1998:
2000 1999 1998
Expected volatility 70% 59% 57%
Dividend yield - - -
Risk-free interest rate 5.9% 5.3% 5.5%
Expected life 6 years 5 years 5 years
31
Stock Option Plans
On April 21, 1997, the Company's shareholders approved the 1997 Stock Option
Plan and on June 19, 1987 approved the 1987 Stock Option Plan (collectively the
"Plans"). The 1997 and 1987 Stock Option Plans authorized the grant of options
for up to 12.0 million shares and 21.6 million shares, respectively, of common
stock. On May 7, 1999, the Company's shareholders authorized an additional 12.0
million shares under the 1997 Stock Option Plan. Options granted under the
Plans are either (a) options intended to constitute incentive stock options
("ISOs") under the Internal Revenue Code of 1986 (the "Code") or (b) non-
qualified options. Incentive stock options may be granted under the Plans to
employees or officers of the Company. Non-qualified options may be granted to
consultants, directors (whether or not they are employees), employees or
officers of the Company.
ISOs granted under the Plans may not be granted at a price less than the fair
market value of the common stock on the date of grant (or 110% of fair market
value in the case of employees or officers holding 10% or more of the voting
stock of the Company). The aggregate fair market value of shares, for which
ISOs granted to any employee are exercisable for the first time by such employee
during any calendar year (under all stock option plans of the Company and any
related corporation), may not exceed $100,000. Non-qualified options granted
under the Plan may not be granted at a price less than the lesser of (a) the
book value per share of common stock as of the end of the fiscal year of the
Company immediately preceding the date of such grant, or (b) 50% of the fair
market value of the common stock on the date of grant.
Options granted under the Plans before December 1, 1995 vested 25% at the end of
the first year and 12.5% at the end of each six month period thereafter.
Options granted after December 1, 1995 and before February 14, 1997 vest 20% at
the end of the second year and 20% at the end of each year thereafter. Options
granted after February 14, 1997 vest 25% at the end of the first year and 12.5%
at the end of each six month period thereafter.
On April 21, 1997, the Company's shareholders approved the 1997 Non-employee
Director Stock Option Plan and on May 20, 1993 approved the 1993 Non-employee
Director Stock Option Plan (collectively the "Director Plans"). The 1997 and
1993 Director Plans authorized the grant of options for up to 400,000 shares and
80,000 shares of common stock, respectively. In 2000, two directors were
entitled to participate in the Director Plans with each receiving a grant of
options as of February 12, 2000 for 20,000 shares at an exercise price of
$29.84, February 12, 1999 for 20,000 shares at an exercise price of $19.94,
February 12, 1998 for 20,000 shares at an exercise price of $13.50, April 21,
1997 for 20,000 shares at an exercise price of $10.88 per share, and February
25, 1993 for 40,000 shares at an exercise price of $6.00 per share (i.e., the
market price on the dates of grant).
Options granted under the 1997 Director Plan vest 25% at the end of the second
year and 9.375% at the end of each six month period thereafter. Options granted
under the 1993 Director Plan vested 25% at the end of the first year and 25%
annually thereafter.
Options granted under all stock option plans before January 1, 1993 expired not
more than five years from the date of grant, if unexercised. Options granted
under all stock option plans after January 1, 1993 expire not more than ten
years from the date of grant (five years in the case of ISOs granted to ten
percent shareholders). The outstanding options at December 31, 2000 expire at
various dates through 2009. Options granted terminate within a specified period
of time following termination of an optionee's employment or position as a
director or consultant with the Company.
32
A summary of the status of the Company's stock option plans as of December 31,
2000, 1999 and 1998, and changes during the years ending on those dates is
presented below:
2000 1999 1998
Shares in Weighted Weighted Weighted
thousands Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 12,082 $14.00 9,560 $12.23 6,018 $7.81
Granted 9,448 16.41 5,097 16.26 4,798 16.51
Exercised (1,488) 12.63 (1,285) 10.12 (944) 6.62
Terminated (1,040) 15.50 (1,290) 13.50 (312) 11.17
Outstanding
at end of year 19,002 15.26 12,082 14.00 9,560 12.23
Exercisable
at end of year 4,531 13.01 2,696 11.40 1,354 7.45
Shares reserved
at end of year 23,514 25,115 13,536
The following table summarizes information about stock options outstanding at
December 31, 2000:
Shares in thousands Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
$4.56 - $6.82 781 4.8 $4.93 522 $5.03
$8.30 - $11.69 1,841 6.1 9.37 1,249 9.15
$12.70 - $17.71 12,143 8.8 13.95 2,441 15.41
$19.30 - $24.80 3,957 9.1 22.98 319 22.84
$29.00 - $31.13 280 8.4 30.72 - -
19,002 8.4 15.26 4,531 13.01
Stock Purchase Plan
On April 21, 1997, the Company's shareholders approved an Employee Stock
Purchase Plan (the "Plan") to provide substantially all employees an opportunity
to purchase shares of its common stock through payroll deductions, in an
aggregate amount up to 10% of eligible compensation. Semiannually, participant
account balances are used to purchase shares of stock at the lesser of 85% of
the fair market value of shares on the grant date or the exercise date. The
aggregate number of shares purchased by an employee may not exceed 6,000 shares
annually (subject to limitations imposed by the Internal Revenue Code). The
employee stock purchase plan expires on February 11, 2007. A total of 2.0
million shares are available for purchase under the Plan. During 2000, under
the Plan, 41,671 shares were issued at $18.75 per share and 89,173 shares were
issued at $11.00 per share. During 1999, under the Plan, 54,706 shares were
issued at $14.03 per share and 53,608 shares were issued at $14.45 per share.
During 1998, under the Plan, 42,632 shares were issued at $13.44 per share and
30,626 shares were issued at $10.57 per share.
9. Retirement Benefits
Employee Stock Ownership Plans
At December 31, 2000, the Company had noncontributory Employee Stock Ownership
Plans (the "ESOP") covering substantially all employees in North America and
Ireland. Contributions to the ESOP are based on a percentage of eligible
compensation and are determined by the Company's Board of Directors at its
discretion, subject to the limitations established by U.S. and Ireland tax laws.
The ESOP held 8.3 million shares and 8.8 million shares of common stock at
December 31, 2000 and December 31, 1999, respectively. No shares were
contributed to the ESOP in 2000, 1999 or 1998.
33
Employee Savings Plan
On May 1, 1997, the Company established an employee savings plan (the "Savings
Plan") that qualifies as a deferred salary arrangement under Section 401(k) of
the Internal Revenue Code of 1986, as amended, covering substantially all North
American employees. The Savings Plan allows eligible employees to contribute up
to 15% of their compensation on a pre-tax basis subject to certain limitations.
The Company matches, with Company common stock, 100% of the first 3% of employee
contributions plus 50% of the next 3% of employee contributions. Employees are
fully vested in their employer matching contributions.
The Company also sponsors pension plans in several foreign locations.
The Company's pension contributions in 2000, 1999 and 1998 amounted to
approximately $4.9 million, $4.3 million, and $1.6 million, respectively.
10. Operating Segment and Geographic Information
Segment accounting policies are the same as policies described in note 1.
Basis for presentation
The Company operates primarily within one industry consisting of three
reportable operating segments by which it manages its business and from which
various offerings are commonly combined to develop a total solution for the
customer. These efforts primarily incorporate the design, manufacture, and
marketing of power protection equipment and related software and accessories for
computer, communications, and related equipment. The Company's three segments
are: Small Systems, Large Systems, and Other. Each of these segments address
global markets.
The Small Systems segment develops power solutions for servers and networking
equipment commonly used in local area and wide area networks and for personal
computers and sensitive electronics. Major product offerings include the Smart-
UPSr, Matrix-UPSr, Symmetrar Power Arrayr and Back-UPSr family of UPSs. Also
included are the SurgeArrestr surge suppressors as well as cabling and
connectivity solutions. Additional accessories and software products are
offered to enhance the management of these networks. Products include
PowerChuter software, MasterSwitchT power distribution units and NetShelterr
server enclosures. Products are sold to home and commercial users primarily
through an indirect selling model consisting of computer distributors and
dealers, value added resellers, mass merchandisers, catalog merchandisers, E-
commerce vendors, and strategic partnerships.
The Large Systems segment produces large system solutions that provide power and
availability solutions for data centers, facilities and communications
equipment. Product offerings include Silcon UPSs, NetworkAIR precision cooling
equipment and DC-power solutions. Products are sold to commercial users
primarily through an indirect selling model consisting of value added resellers
and strategic partnerships.
The Other segment provides Web-based informational, product, and selling
services as well as replacement batteries for the Company's UPS products and
notebook computers.
In the fourth quarter of 2000, the Company revised its reportable segments from
prior periods to reflect management's increased focus on managing the business
by small systems, large systems, and other, as a result of acquisitions during
2000, changing trends in the market, economic conditions, and increased product
offerings. Prior periods have been reclassified to reflect the Company's 2000
presentation.
The Company measures the profitability of its segments based on direct
contribution margin. Direct contribution margin includes R&D, marketing, and
administrative expenses directly attributable to the segments and excludes
certain expenses which are managed outside the reportable segments. Costs
excluded from segment profit are indirect operating expenses, primarily
consisting of selling and corporate expenses, and income taxes. Expenditures
for additions to long-lived assets are not tracked or reported by the operating
segments, although depreciation expense is allocated to and reported by the
operating segments.
34
Summary operating segment information is as follows:
In thousands 2000 1999 1998
Segment net sales
Small Systems $1,265,264 $1,236,413 $1,075,741
Large Systems 193,623 100,852 50,094
Other 14,643 - -
Total segment net sales 1,473,530 1,337,265 1,125,835
Shipping and handling revenues 10,033 7,666 5,156
Total net sales $1,483,563 $1,344,931 $1,130,991
Summary operating segment information (cont.):
In thousands 2000 1999 1998
Segment profits
Small Systems $558,548 $554,385 $454,726
Large Systems 6,261 17,310 4,056
Other 7,792 - -
Total segment profits 572,601 571,695 458,782
Shipping and handling net costs 20,745 16,988 19,149
Indirect operating expenses 342,383 275,482 235,164
Other income, net 23,838 13,292 11,687
Earnings before income taxes
and minority interest $233,311 $292,517 $216,156
Segment depreciation
Small Systems $18,517 $17,072 $16,992
Large Systems 4,885 3,130 4
Other 77 - -
Total segment depreciation $23,479 $20,202 $16,996
Summary geographic information is as follows:
In thousands 2000 1999 1998
Net sales
United States $787,359 $708,777 $643,021
North and Latin America
excluding United States 65,330 70,372 60,897
Europe, Middle East,
and Africa 395,417 385,486 306,472
Far East 235,457 180,296 120,601
$1,483,563 $1,344,931 $1,130,991
Note: Sales are attributed to geographic regions based on location of
customer. No individual foreign country is material in relation to
total net sales.
Long-lived assets
United States $141,251 $79,219 $79,724
Europe 152,913 84,866 87,711
Philippines 47,798 31,558 25,923
Other Far East 14,533 11,438 3,380
$356,495 $207,081 $196,738
35
The Company closely monitors the credit worthiness of its customers, adjusting
credit policies and limits as deemed necessary. Two customers, Ingram Micro and
Tech Data Product Management, accounted for approximately 14% and 11%,
respectively, of the Company's net sales in 2000. No single customer comprised
10% or more of the Company's net sales in 1999. One customer, Ingram Micro,
accounted for approximately 11% of the Company's net sales in 1998. The
majority of the Company's sales to Ingram Micro and Tech Data Product Management
are included in the Small Systems reportable segment.
11. Litigation
On or about August 20, 1999, General Signal Power Systems, Inc, former parent
company of Best Power ("General Signal"), filed suit against the Company in the
United States District Court for the Western District of Wisconsin alleging
patent infringement and false advertising. General Signal sought unspecified
damages, costs, fees, and injunctive relief. During March and April 2000, the
court dismissed four of the five patent infringement claims. On or about May
12, 2000, General Signal voluntarily dismissed with prejudice the false
advertising claims. On May 17, 2000, the parties agreed to the voluntary
dismissal of the remaining claim in the lawsuit with prejudice. In connection
with the resolution of this dispute, the Company agreed to license from General
Signal worldwide patent rights relating to uninterruptible power supply
technology for a lump-sum cash payment of $48.0 million. The license fee was
paid from operating cash during the second quarter of 2000. See also note 3.
On or about January 27, 1999, the Company was served with a lawsuit filed by an
individual in the United States District Court for the Central District of
California alleging patent infringement. The plaintiff, Anthony F. Coppola,
claimed sole ownership of the patent referenced in the lawsuit. Coppola sought
unspecified damages, costs, fees, and injunctive relief. On or about April 14,
1999, the Company removed the case from the United States District Court for the
Central District of California to the United States District Court for the
District of Massachusetts. On September 8, 2000, the parties agreed to the
voluntary dismissal of the lawsuit with prejudice. In connection with the
resolution of this dispute, the Company agreed to license from Anthony Coppola
worldwide patent rights relating to uninterruptible power supply technology for
a lump-sum cash payment of $17.0 million. The license fee was paid from
operating cash during the third quarter of 2000. See also note 3.
The Company is also involved in various claims and legal actions arising in the
ordinary course of business, some of which claim substantial damages. In the
opinion of management, the ultimate disposition of these matters will not have a
material adverse effect on the Company's consolidated financial position or
results of operations or liquidity.
12. Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts receivable, short-term
debt, accounts payable, and accrued liabilities approximate their fair values
because of the short duration of these instruments.
13. Commitments
The Company has several non-cancelable operating leases, primarily for
warehousing and office space, expiring at various dates through 2007. These
leases contain renewal options for periods ranging from one to five years and
require the Company to pay its proportionate share of utilities, taxes, and
insurance. Rent expense under these leases for 2000, 1999 and 1998 was $6.7
million, $4.3 million, and $2.5 million, respectively.
Future minimum lease payments under these non-cancelable leases are: 2001 - $7.7
million; 2002 - $6.0 million; 2003 - $4.3 million; 2004 - $3.9 million, 2005 -
$2.6 million, and $5.0 million thereafter.
36
14. Contingencies
The Company has agreements with the Industrial Development Authority of Ireland
("IDA") under which the Company receives grant monies for costs incurred for
machinery, equipment, and building improvements for its Galway and Castlebar
facilities equal to 40% and 60%, respectively, of such costs up to a maximum of
$13.1 million for Galway and $1.3 million for Castlebar. Such grant monies are
subject to the Company meeting certain employment goals and maintaining
operations in Ireland until termination of the respective agreements. The total
cumulative amounts of capital grant claims submitted and received through
December 31, 2000 for the Galway facility were approximately $10.6 million and
$8.0 million, respectively. The total cumulative amount of capital grant claims
submitted through December 31, 2000 for the Castlebar facility was $.4 million;
no capital grant claims had been received for the Castlebar facility. Under
separate agreements with the IDA, the Company receives direct reimbursement of
training costs at its Galway and Castlebar facilities for up to $3,000 and
$12,500, respectively, per new employee hired. The total cumulative amounts of
training grant claims submitted and received through December 31, 2000 for the
Galway facility were approximately $1.1 million and $1.1 million, respectively.
The total cumulative amount of training grant claims submitted and received
through December 31, 2000 for the Castlebar facility were approximately $1.1
million and $.7 million; respectively.
In addition, the Company executed agreements in 1994 with an unrelated company
to acquire the 280,000 square foot manufacturing and distribution facility
presently occupied for one (1) Irish Pound (equivalent to approximately $1.50).
As additional consideration for the facility, the Company assumed a contingent
liability of approximately $5.2 million as part of the Company's agreement with
the IDA. The contingent liability is canceled upon successful completion of the
terms of the agreement.
15. Quarterly Financial Data (Unaudited)
In consideration of guidance issued by the Financial Accounting Standards
Board's Emerging Issues Task Force in Issue No. 00-10, "Accounting for Shipping
and Handling Fees and Costs," we have retroactively changed our classification
of freight charges billed to customers and related freight expenses from
operating expenses to net sales and cost of goods sold, respectively. These
changes increased net sales, increased cost of goods sold, and decreased
marketing, selling, general, and administrative (SG&A) expenses as follows, in
thousands:
Increase (decrease) Q1 Q2 Q3 Q4
2000
Net sales $1,783 $2,291 $2,057 $3,902
Cost of goods sold $5,797 $6,274 $5,916 $12,791
SG&A ($4,014) ($3,983) ($3,859) ($8,889)
1999
Net sales $1,975 $2,331 $1,443 $1,917
Cost of goods sold $6,163 $5,576 $6,056 $6,859
SG&A ($4,188) ($3,245) ($4,613) ($4,942)
The following is a summary of quarterly results of operations in thousands
except per share amounts:
Q1 Q2 Q3 Q4
2000
Net sales $311,196 $368,036 $397,034 $407,297
Gross profit $141,955 $160,418 $164,039 $149,471
Net income $47,106 $35,113 $45,009 $38,423
Basic earnings per share $.24 $.18 $.23 $.20
Basic weighted average
shares outstanding 193,450 194,089 194,600 194,761
Diluted earnings per share $.24 $.17 $.22 $.20
Diluted weighted average
shares outstanding 199,530 201,040 200,112 196,350
1999
Net sales $279,160 $317,793 $357,363 $390,615
Gross profit $117,967 $135,308 $162,324 $181,943
Net income $34,791 $42,814 $62,127 $66,492
Basic earnings per share $.18 $.22 $.32 $.34
Basic weighted average
shares outstanding 191,760 191,962 192,272 192,807
Diluted earnings per share $.18 $.22 $.32 $.34
Diluted weighted average
shares outstanding 195,576 195,177 196,621 197,625
37
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Part III
Item 10. Directors of the Registrant
Information with respect to Directors may be found under the caption
"Occupations of Directors" appearing in the Company's definitive Proxy Statement
for the 2001 Annual Meeting of Shareholders. Such information is incorporated
herein by reference.
Item 11. Executive Compensation
The information set forth under the caption "Executive Compensation" appearing
in the Company's definitive Proxy Statement for the 2001 Annual Meeting of
Shareholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption, "Management and Principal Holders
of Voting Securities" appearing in the Company's definitive Proxy Statement for
the 2001 Annual Meeting of Shareholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the captions, "Certain Relationships and Related
Transactions" appearing in the Company's definitive Proxy Statement for the 2001
Annual Meeting of Shareholders is incorporated herein by reference.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of Form 10-K
1. Consolidated Financial Statements
The consolidated financial statements of the Company have been included in Item
8 of this report.
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Income for each of the three years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Changes in Shareholders' Equity for each of the
three years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules
Schedule Number Description Page No.
II Valuation and Qualifying Accounts and Reserves 43
Schedules other than those listed above have been omitted since they are either
not required or the information required is included in the consolidated
financial statements or the notes thereto.
KPMG LLP's reports with respect to the above listed consolidated financial
statements and consolidated financial statement schedule are included herein on
pages 40 and 41.
38
3. Exhibit Listing
Exhibit
Number Description
3.01 Articles of Organization of the Registrant, as amended
3.02 By-Laws of the Registrant, as amended and restated
4.01 Shareholder Rights Agreement, dated as of September 2, 1999, between the Company and
BankBoston, N.A.
4.02 Stock Purchase Agreement dated as of April 28, 2000, by and among ABL Acquisition
Corporation, Randall R. Amon, Daniel Bryan, William C. Litsinger III, Jack L.
Ottenheimer and Kevin W. Campion (4.02)
10.01 1987 Stock Option Plan of the Registrant (X)
10.02 Form of Incentive Stock Option Agreement under the Registrant's 1987 Stock Option Plan (X)
10.03 Form of the Non-Qualified Stock Option Agreement under the Registrant's 1987 Stock
Option Plan (X)
10.04 The Registrant's Employee Stock Ownership Plan Trust Agreement dated December 30, 1987 (X)
10.05 The Registrant's Employee Stock Ownership Plan dated December 30, 1987, as amended and
restated (X)
10.06 Employment Agreement dated June 16, 1986 between the Company and Rodger B. Dowdell,
Jr. (X)
10.07 Unsecured line of credit agreement dated June 29, 1991 between the Registrant and
Rhode Island Hospital Trust National Bank
10.08 Unsecured line of credit agreement dated December 30, 1991 between the Registrant and
Fleet National Bank
10.09 Amendment dated December 30, 1992 to Unsecured line of credit agreement between the
Registrant and Fleet National Bank
10.10 Grant agreement dated February 16, 1994 between the Registrant and Industrial
Development Authority of Ireland
10.11 Contract for Sale dated January 31, 1994 between the Registrant and Digital Equipment
International
10.12 Management Agreement dated January 31, 1994 between the Registrant and Digital
Equipment International
10.13 License Agreement dated January 31, 1994 between the Registrant (Grantor) and Digital
Equipment International (Licensee)
10.14 Grant of Options Agreement dated January 31, 1994 between the Registrant and Digital
Equipment International
10.15 Memorandum Agreement dated January 31, 1994 between the Registrant and Digital
Equipment International
10.16 1993 Non-Employee Director Stock Option Plan (X)
10.17 Letter Agreement dated June 22, 1995 to amend loan agreement dated December 30, 1991
by and between Registrant and Fleet National Bank
10.18 Letter Agreement dated October 11, 1995 to amend loan agreement dated December 30,
1991 by and between Registrant and Fleet National Bank
10.19 Purchase and Sale Contract dated April 12, 1995 between the Registrant and Trustees of
Normac-Billerica Associates III u/d/t dated October 11, 1979
10.20 American Power Conversion Corporation B.V. Profit Sharing Scheme dated September 25,
1996 (X)
10.21 1997 Non-Employee Director Stock Option Plan of the Registrant (X)
10.22 1997 Stock Option Plan of the Registrant (X)
10.23 1997 Employee Stock Purchase Plan of the Registrant (X)
10.24 Form of Change-in-Control Severance Agreement dated as of July 5, 2000 entered into by
the Company with each of Rodger B. Dowdell, Jr. and Neil E. Rasmussen. (X) (10.24)
10.25 Form of Change-in-Control Severance Agreement dated as of July 5, 2000 entered into by
the Company with each of Donald M. Muir and Aaron L. Davis. (X) (10.25)
21 Subsidiaries of Registrant
23 Consent of KPMG LLP
(X) Indicates a management contract or any compensatory plan, contract or
arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Registrant during the quarter
ended December 31, 2000.
39
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American Power Conversion Corporation:
We have audited the accompanying consolidated balance sheets of American Power
Conversion Corporation and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Power
Conversion Corporation and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Providence, Rhode Island
March 15, 2001
40
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American Power Conversion Corporation:
Under date of March 15, 2001, we reported on the consolidated balance sheets of
American Power Conversion Corporation and subsidiaries as of December 31, 2000
and 1999, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2000, as contained in the annual report on Form 10-K
for the year 2000. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedule listed in Item 14(a)(2). This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Providence, Rhode Island
March 15, 2001
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN POWER CONVERSION CORPORATION
Date: March 26, 2001
By: /s/ Donald M. Muir
Donald M. Muir, Chief Financial Officer
(principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on the date indicated.
Date: March 26, 2001
By: /s/ Rodger B. Dowdell, Jr.
Rodger B. Dowdell, Jr.,
Chairman, President,
Chief Executive Officer and Director
(principal executive officer)
Date: March 26, 2001
/s/ Neil E. Rasmussen
Neil E. Rasmussen,
Vice President and Director
Date: March 26, 2001
/s/ Emanuel E. Landsman
Emanuel E. Landsman,
Vice President, Clerk and Director
Date: March 26, 2001
/s/ Ervin F. Lyon
Ervin F. Lyon,
Director
Date: March 26, 2001
/s/ James D. Gerson
James D. Gerson,
Director
42
Schedule II
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
For the years ended December 31, 2000, 1999 and 1998
Valuation accounts deducted from assets to which they apply:
In thousands Allowance for Doubtful Accounts Receivable
Balance at Charged to Costs Write Offs/ Balance at End
Beginning of Year and Expenses Allowances Taken of Year
2000 $19,543 $2,028 ($1,486) $20,085
1999 15,471 6,015 (1,943) 19,543
1998 12,230 6,593 (3,352) 15,471
43
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Page No.
Exhibit Number Description
3.01**** Articles of Organization of the Registrant, as amended (3.01)
3.02********** By-Laws of the Registrant, as amended and restated (3.02)
4.01*********** Shareholder Rights Agreement, dated as of September 2, 1999,
between the Company and BankBoston, N.A. (4.01)
4.02*********** Stock Purchase Agreement dated as of April 28, 2000, by and
among ABL Acquisition Corporation, Randall R. Amon, Daniel
Bryan, William C. Litsinger III, Jack L. Ottenheimer and Kevin
W. Campion (4.02)
10.01* 1987 Stock Option Plan of the Registrant (10.01) (X)
10.02* Form of Incentive Stock Option Agreement under the Registrant's
1987 Stock Option Plan (10.02) (X)
10.03* Form of the Non-Qualified Stock Option Agreement under the
Registrant's 1987 Stock Option Plan (10.03) (X)
10.04* The Registrant's Employee Stock Ownership Plan Trust Agreement
dated December 30, 1987 (10.04) (X)
10.05** The Registrant's Employee Stock Ownership Plan dated December
30, 1987, as amended and restated (10.05) (X)
10.06* Employment Agreement dated June 16, 1986 between the Company and
Rodger B. Dowdell, Jr. (10.07) (X)
10.07** Unsecured line of credit agreement dated June 29, 1991 between
the Registrant and Rhode Island Hospital Trust National Bank
(10.19)
10.08** Unsecured line of credit agreement dated December 30, 1991
between the Registrant and Fleet National Bank (10.20)
10.09*** Amendment dated December 30, 1992 to Unsecured line of credit
agreement between the Registrant and Fleet National Bank (10.13)
10.10*** Grant agreement dated February 16, 1994 between the Registrant
and Industrial Development Authority of Ireland (10.14)
10.11*** Contract for Sale dated January 31, 1994 between the Registrant
and Digital Equipment International (10.15)
10.12*** Management Agreement dated January 31, 1994 between the
Registrant and Digital Equipment International (10.17)
10.13*** License Agreement dated January 31, 1994 between the Registrant
(Grantor) and Digital Equipment International (Licensee) (10.18)
10.14*** Grant of Options Agreement dated January 31, 1994 between the
Registrant and Digital Equipment International (10.19)
10.15*** Memorandum Agreement dated January 31, 1994 between the
Registrant and Digital Equipment International (10.20)
10.16*** 1993 Non-Employee Director Stock Option Plan (10.22) (X)
10.17***** Letter Agreement dated June 22, 1995 to amend loan agreement
dated December 30, 1991 by and between Registrant and Fleet
National Bank (10.1)
10.18****** Letter Agreement dated October 11, 1995 to amend loan agreement
dated December 30, 1991 by and between Registrant and Fleet
National Bank (10.1)
10.19******* Purchase and Sale Contract dated April 12, 1995 between the
Registrant and Trustees of Normac-Billerica Associates III
u/d/t dated October 11, 1979 (10.19)
10.20******** American Power Conversion Corporation B.V. Profit Sharing Scheme
dated September 25, 1996 (10.20) (X)
10.21********* 1997 Non-Employee Director Stock Option Plan of the Registrant
(4.4) (X)
10.22********* 1997 Stock Option Plan of the Registrant (4.5) (X)
10.23********* 1997 Employee Stock Purchase Plan of the Registrant (4.6) (X)
10.24************ Form of Change-in-Control Severance Agreement dated as of July
5, 2000 entered into by the Company with each of Rodger B.
Dowdell, Jr. and Neil E. Rasmussen. (X) (10.24)
10.25************ Form of Change-in-Control Severance Agreement dated as of July
5, 2000 entered into by the Company with each of Donald M. Muir
and Aaron L. Davis. (X) (10.25)
21 Subsidiaries of Registrant 46
23 Consent of KPMG LLP 47
44
* Previously filed as exhibits to the Company's Registration Statement on Form
S-18 dated July, 1988 (File No. 33-22707-B).
** Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991 and incorporated herein by reference
(File No. 0-17126). The number given in parenthesis indicates the corresponding
exhibit in such Form 10-K.
*** Previously filed as an exhibit (Exhibit No. 22) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993 and incorporated
herein by reference (File No. 1-12432). The number given in parenthesis
indicates the corresponding exhibit in such Form 10-K.
**** Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 and incorporated herein by reference
(File No. 1-12432). The number given in parenthesis indicates the corresponding
exhibit in such Form 10-K.
***** Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1995 and incorporated herein by
reference (File No. 1-12432). The number given in parenthesis indicates the
corresponding exhibit in such Form 10-Q.
****** Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1995 and incorporated herein by
reference (File No. 1-12432). The number given in parenthesis indicates the
corresponding exhibit in such Form 10-Q.
******* Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995 and incorporated herein by
reference (File No. 1-12432). The number given in parenthesis indicates the
corresponding exhibit in such Form 10-K.
******** Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996 and incorporated herein by
reference (File No. 1-12432). The number given in parenthesis indicates the
corresponding exhibit in such Form 10-K.
********* Previously filed as exhibits to the Company's Registration Statement
on Form S-8 dated July 31, 1997 (File No. 333-32563). The number given in
parenthesis indicates the corresponding exhibit in such Form S-8.
********** Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 and incorporated herein by
reference (File No. 1-12432). The number given in parenthesis indicates the
corresponding exhibit in such Form 10-K.
*********** Previously filed as an exhibit to the Company's Current Report on
Form 8-K, dated as of September 3, 1999, which included as Exhibit A the Form of
Rights Certificate, and as Exhibit B the Summary of Rights to Purchase Common
Stock, and incorporated herein by reference (File No. 1-12432). The number
given in parenthesis indicates the corresponding exhibit in such Form 8-K.
************ Previously filed as an exhibit to the Company's Registration
Statement on Form S-3 and incorporated herein by reference (File No. 333-43348).
************ Previously filed as an exhibit to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30, 2000 and incorporated
herein by reference (File No. 1-12432).
(X) Indicates a management contract or any compensatory plan, contract or
arrangement.
45
Exhibit 21
AMERICAN POWER CONVERSION CORPORATION
Subsidiaries as of December 31, 2000
Place of
Subsidiary Incorporation
APC America, Inc. Delaware
APC Sales & Service Corp. Delaware
American Power Conversion Holdings Inc. Delaware
Systems Enhancement Corporation Missouri
A.B.L. Electronics Corporation Delaware
APC DC Network Solutions Inc. Ohio
APC NetworkAIR Holding Corp. Delaware
APC NetworkAIR Corp. Delaware
APC Foreign Sales Corporation Barbados, W.I.
American Power Conversion Europe S.A.R.L. France
American Power Conversion Corporation (A.P.C.) B.V. The Netherlands
APC Distribution Limited Ireland
APC (EMEA) Limited Ireland
APC Holdings B.V. The Netherlands
APC Deutschland GmbH Germany
American Power Conversion UK Ltd. England
American Power Conversion Sweden AB Sweden
APC Benelux B.V. The Netherlands
APC Australia Pty Limited Australia
American Power Conversion Portugal, Lda. Portugal
American Power Conversion Spain S.L. Spain
American Power Conversion Italia S.R.L. Italy
Advance Italia S.R.L. Italy
(60%, 40% APC DC Network Solutions UK Limited)
American Power Conversion France SARL France
Advance Power Elektronics KFT Hungary
American Power Conversion (Phils.), Inc. Philippines
American Power Conversion Land Holdings Inc. Philippines
(40%; 60% Filipino nationals)
APC (Suzhou) Uninterrupted Power Supply Co., Ltd. China
American Power Conversion Singapore Pte Ltd. Singapore
APC International Trade (Shanghai) Co. Ltd. China
American Power Conversion Denmark ApS Denmark
Gutor Electronic GmbH Switzerland
American Power Conversion Dublin Limited Ireland
Silcon (Quingdao) Power Electronics Co. Ltd. China
American Power Conversion Mexico, S.A. de C.V. Mexico
American Power Conversion Uruguay S.A. Uruguay
APC Japan, Inc. Japan
American Power Conversion (India) Private Limited India
American Power Conversion Brasil Ltd. Brazil
American Power Conversion Holdings (UK) Limited United Kingdom
APC DC Network Solutions UK Limited United Kingdom
46
Exhibit 23
ACCOUNTANTS' CONSENT
The Board of Directors
American Power Conversion Corporation:
We consent to incorporation by reference in the registration statement (No. 333-
42348) on Form S-3 and in the registration statements (Nos. 33-25873, 33-54416,
333-32563, 333-78595, 333-80541 and 333-80569) on Form S-8 of American Power
Conversion Corporation of our reports dated March 15, 2001 relating to the
consolidated balance sheets of American Power Conversion Corporation and
subsidiaries as of December 31, 2000 and 1999, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the years in the three-year period ended December 31, 2000, and the related
schedule, which reports appear in the 2000 annual report on Form 10-K of
American Power Conversion Corporation.
KPMG LLP
Providence, Rhode Island
March 30, 2001
47