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, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 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, $0.01 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 11, 2002 was approximately $2,450,835,000 based on
the price of the last reported sale as reported by The Nasdaq Stock Marketr
on March 11, 2002. The number of shares outstanding of the Registrant's
Common Stock on March 11, 2002 was 195,852,000.
Documents Incorporated by Reference
Portions of the Registrant's definitive Proxy Statement in connection with
the 2002 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 products include:
- uninterruptible power supply products, commonly known as UPSs;
- DC-power systems;
- electrical surge protection devices, also known as surge suppressors;
- power conditioning products;
- precision cooling equipment; and
- associated software, services, and accessories.
These products 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 systems 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
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 devices and accessories 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 products that provide power and availability
for data centers, facilities, and communications equipment for both commercial
and industrial applications. Product offerings include Silconr UPSs,
NetworkAIRT precision cooling equipment, and DC-power systems. Products are
sold to commercial users primarily through an indirect selling model consisting
of value added resellers and strategic partnerships.
The Other segment provides replacement batteries for APC's UPS products and
notebook computers as well as Web-based informational, product, and selling
services.
Information on reportable operating segment net sales, profit from operations,
and depreciation for each of the last three years is located in Note 11 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 proliferation
of microprocessor-based equipment and related systems in the corporate
marketplace and in the small office/home office environment. Despite recent
softness in IT markets and lower general IT spending and growth in core
technology applications, 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, while the installation
of large data centers particularly has experienced the same recent spending
decline as PCs and servers, the past few years have been marked with a general
rise in these installations to support Internet-based market and corporate IT
needs.
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 available. The products also enhance
productivity through the continued availability of networks, sensitive
electronics, and even facilities during power outages. 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 2001, we continued to expand and enhance the overall product and service
offering throughout our business. Internal product development resulted in the
introduction of a number of new UPS and accessory products as well as new power
and network management products. Through acquisition we added battery
management technology and broadband power solutions to enhance our Large Systems
offerings. Our business continued to be impacted by the difficult macro-
economic environment and slow down in our core end markets, including PCs,
servers, data centers and communications.
In the first quarter of 2002, APC introduced PowerStruXureT, a patent-pending,
systematic approach to building data center physical infrastructure. This
entirely new approach to data center support simplifies the design, building and
management of data center infrastructure with an innovative, fully engineered
and tested system. The three initial core solutions that comprise PowerStruXure
are a modular, scalable, N+1 redundant UPS; zoned, intelligent power
distribution; and a next generation rack enclosure. The product is initially
available in North America and is expected to be available in most countries
worldwide during 2002.
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, small offices/home offices and outdoor installations. These
products are engineered and extensively tested for compatibility with leading
information and communications 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 1.6 megawatt, or MW, suitable for data centers,
mainframe computers, industrial applications or facilities. List prices to end-
users range from approximately $50 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 systems include rectifiers; highly configurable DC power plant
design, installation consulting, 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 can
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 name and provides unattended
system shutdown capabilities, UPS power management, and diagnostic features.
PowerChute 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. APC 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 $1,700.
Precision Cooling
Additionally, APC offers a line of precision cooling products that regulate
temperature and humidity. Products include portable, floor and ceiling-mounted
precision cooling systems as well as management systems used in a variety of
applications including server rooms, data centers, and communication stations.
List prices range from approximately $900 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 on-site services, installation
consulting services, remote monitoring services, power audit services, and
network integration services. Depending on the product, there are standard 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
4
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. Most surge suppressor products come with a lifetime product
warranty. APC's Charge-UPS programs provide end-users the ability to refurbish
certain APC Back-UPS and Smart-UPS units. For UPS units six years of age or
less, the program provides a new two year warranty on an entire UPS system;
premium replacement battery; CD of the latest PowerChute software, and prepaid
return freight for the spent battery. Additional options include software
upgrades and the option to have APC perform the battery replacement and a system
check. The program is currently available in North America and we plan to offer
it in other regions.
Equipment Protection Policy
APC offers an Equipment Protection Policy in the U.S., Canada, and European
Community. Depending on the model and country, the policy provides up to
$150,000, 50,000 pounds sterling, or 100,000 euros for repair or replacement of
customers' hardware should a surge or lightning strike pass through an APC 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 may be doubled (U.S. and Canada only).
Our products have experienced satisfactory field operating results, and warranty
and Equipment Protection Policy 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 computer distributor customers, Ingram Micro and Tech Data Product
Management, accounted for approximately 15.5% and 13.3%, respectively, of net
sales in 2001, and 14.9% and 11.4%, respectively, of net sales in 2000. No
single customer comprised 10% or more of APC's net sales in 1999. 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 products and services to meet their power availability and
management needs.
5
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
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.
Supply Chain Management - Manufacturing, Quality, Raw Materials, and
Distribution
Manufacturing
APC's manufacturing operations are located in the United States, Brazil, China,
India, Ireland, the Philippines, and Switzerland. In 2001, we reduced our
overall capacity and continued moving production to lower cost areas. This
resulted in the closing of manufacturing facilities in England, Denmark and
Maryland. As of December 31, 2001, employee terminations related to the closure
of these facilities were substantially completed. For more information about
our manufacturing downsizing actions, refer to Note 3 to Notes to Consolidated
Financial Statements in Item 8 of this Report. 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 mounting or
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, China,
India, Ireland, and the Philippines. The International Organization for
Standardization has also certified our Research and Development Centers in
Massachusetts, Denmark, and England 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 and certain finished products. 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
Texas, Denmark, England, and Taiwan. 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.
6
New introductions in 2001 enhanced our UPS line-up with new models in our Back-
UPS, Smart-UPS and Symmetra families. We revamped our PowerChute software
family introducing three new versions tailored for home, business and enterprise
customers. New management and accessory products were also introduced,
including new NetShelter server enclosures plus monitoring and management tools.
Via acquisition, we added new battery management technology for our three-phase
UPS systems as well as outside plant, networking power solutions to our
broadband power line-up.
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, refer to 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.
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.
R&D expenditures were $54.6 million or 3.8% of net sales in 2001, $46.9 million
or 3.2% of net sales in 2000, and $34.6 million or 2.6% of net sales in 1999.
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 any 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. Many of our competitors offer
competitive products in both the Small and Large systems space, while some focus
on only one segment. Our principal competitors in the Small Systems space
include:
- Liebert Corporation, a unit of Emerson Electric Co.;
- Invensys Secure Power, a unit of Invensys plc, consisting of PowerWare
and Best Power;
- MGE UPS Systems, a privately-held French company;
- Trippe Manufacturing Company, a privately-held U.S. company;
- Phoenixtec Power Company Ltd., a publicly-held Taiwanese company; and
- Belkin Components, a privately-held U.S. company.
7
Principal competitors in the Large Systems segment include:
- Liebert Corporation;
- Invensys Secure Power;
- MGE UPS Systems; and
- Chloride Power, a subsidiary of Chloride Group PLC.
We also compete with a number of other U.S. and non-U.S. based companies that
offer power protection, DC-power, and other products similar to ours in both
segments. 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 Brazil, China, India, Ireland, the Philippines, and Switzerland.
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.
Financial Information About Foreign and Domestic Operations
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.
Employees
As of December 31, 2001, APC had approximately 6,212 full-time employees
worldwide, approximately 1,834 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 11, 2002, APC's executive officers were:
Name Age Positions
Rodger B. Dowdell, Jr. 52 Chairman of the Board of Directors,
President, and Chief Executive Officer
Neil E. Rasmussen 47 Senior Vice President,
Chief Technical Officer, and Director
Edward W. Machala 47 Senior Vice President, Operations,
and Chief Operations Officer
Donald M. Muir 45 Senior Vice President, Finance & Administration,
Treasurer and Chief Financial Officer
Emanuel E. Landsman 65 Vice President and Director
Aaron L. Davis 35 Vice President, Marketing and Communications
Peter A. Rumsey 33 Vice President, Global Sales
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.
8
Neil E. Rasmussen became Senior Vice President in June 2001 and previously was
Vice President since our inception. In 1997, he was appointed Chief Technical
Officer of APC and has been 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 was named Senior Vice President, Operations, and Chief
Operations Officer in June 2001. Mr. 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 became Senior Vice President, Finance & Administration and
Treasurer in June 2001. Mr. 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 and a Director of APC since our
inception and served as Clerk from our inception until June 2001. 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 named Vice President, Marketing and Communications in June
2001. Mr. Davis served as Vice President, Small Systems Group from May 1999 to
June 2001, 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.
Peter A. Rumsey was named Vice President, Global Sales at APC in June 2001. Mr.
Rumsey served as APC's Vice President, Enterprise Solutions Group from May 1999
to June 2001. Mr. Rumsey joined APC in 1990 as an OEM Account Manager and has
served in a variety of sales management roles including Technical Sales Manager,
Director of Strategic Partners, Country Manager for Japan, Managing Director of
Asia Pacific, and General Manager of Asia Pacific. From 1991 to 1993 Mr. Rumsey
served in the U.S. Air Force.
9
Item 2. Properties
APC's principal properties are located in the United States, Brazil, China,
Denmark, England, India, Ireland, the Philippines, and Switzerland. 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 66,400 208,100 103,900 378,400 Shared
Denmark 27,660 71,925 11,065 110,650 Large Systems
Far East
Philippines 21,410 178,840 64,280 264,530 Shared
Leased
United States
Rhode Island 47,210 182,830 9,540 304,940 544,520 Shared
Maryland 15,900 25,000 23,900 64,800 Small Systems
Missouri 31,670 3,500 26,960 62,130 Shared
Massachusetts 52,300 52,300 Shared
Texas 2,640 21,130 2,640 26,410 Large Systems
Europe
England 17,200 55,630 7,290 6,680 86,800 Large Systems
Switzerland 14,510 20,690 540 8,610 44,350 Large Systems
Far East
India 16,165 75,895 7,240 99,300 Small Systems
China 27,315 38,945 29,990 96,250 Shared
South America
Brazil 34,750 82,925 46,620 164,295 Small Systems
10
Item 3. Legal Proceedings
APC is involved in various claims and legal actions arising in the
ordinary course of business. We do not believe that the ultimate disposition of
these matters will have a material adverse effect on the APC's consolidated
financial position or results of operations or liquidity.
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 2001 and 2000.
These quotations reflect inter-dealer prices, without retail mark up, mark down,
or commission and may not necessarily represent actual transactions.
2001 2000
High Low High Low
First Quarter $18.50 $10.25 $44.88 $23.25
Second Quarter 19.39 11.06 45.00 28.06
Third Quarter 15.30 10.26 48.84 18.50
Fourth Quarter 15.80 11.21 22.75 9.50
On March 11, 2002, the closing sale price for APC's Common Stock was $14.70 per
share. As of March 11, 2002, there were approximately 2,078 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 two for one 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, refer to the Acquisition section included in Management's
Discussion and Analysis of Financial Condition and Results of Operations in Item
7 of this Report.
11
Item 6. Selected Financial Data (cont.)
2001 2000 1999 1998 1997
Net sales $1,433,312 $1,483,563 $1,344,931 $1,130,991 $876,292
Cost of goods sold 920,895 867,680 747,389 645,378 491,460
Gross profit 512,417 615,883 597,542 485,613 384,832
Operating expenses 367,564 406,410 318,317 281,144 213,394
Operating income 144,853 209,473 279,225 204,469 171,438
Other income, net 13,700 23,838 13,292 11,687 6,354
Earnings before
income taxes and
minority interest 158,553 233,311 292,517 216,156 177,792
Income taxes 45,188 67,660 86,293 68,231 56,004
Earnings before
minority interest 113,365 165,651 206,224 147,925 121,788
Minority
interest, net - - - 349 -
Net income $113,365 $165,651 $206,224 $147,576 $121,788
Basic earnings
per share $0.58 $0.85 $1.07 $0.77 $0.64
Basic weighted
average shares
outstanding 195,171 194,235 192,201 191,006 189,986
Diluted earnings
per share $0.58 $0.83 $1.05 $0.76 $0.63
Diluted weighted
average shares
outstanding 196,793 200,156 196,088 193,576 192,242
Total assets $1,420,772 $1,317,105 $1,106,938 $871,983 $641,290
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 net income,
expressed as a percentage of net sales, for the years ended December 31, 2001,
2000 and 1999.
2001 2000 1999
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 64.2 58.5 55.6
Gross profit 35.8 41.5 44.4
Marketing, selling,
general and
administrative
expenses 21.8 21.0 21.1
Special charges - 3.2 -
Research and
development 3.8 3.2 2.6
Operating income 10.2 14.1 20.7
Other income, net .9 1.6 1.0
Earnings before
income taxes 11.1 15.7 21.7
Net income 7.9 11.2 15.3
12
Revenues
Net sales in fiscal year 2001 decreased by 3.4% to $1,433.3 million from
$1,483.6 million in fiscal year 2000 which was 10.3% higher than $1,344.9
million in fiscal year 1999. Net sales in 2001 and 2000 included sales
attributable to 2000 acquisitions; also refer to Acquisitions below. Our
fiscal year 2001 net revenue continued to be impacted by softness in IT and
communications market segments with general IT spending and growth in core
technology applications, such as PCs, down year over year. Our Small Systems
business, which provides power protection, uninterruptible power supply (UPS),
and management products for the PC, server, and local area networking markets,
was negatively impacted in fiscal years 2001 and 2000 by industry softness in
the IT markets, weakening global economies, and maturing markets. The rate of
growth in the Large Systems segment, consisting primarily of UPS, DC-power
systems, and precision cooling products for data centers, facilities, and
communication applications, was negatively impacted in fiscal year 2001 by the
significant reduction in corporate investment for these types of applications,
particularly in the second half of 2001. This negative impact was partially
offset by the inclusion of incremental revenue activity for fiscal year 2001
attributable to the 2000 acquisitions of Advance Power and NetworkAir, formerly
Airflow Company, which were acquired in the second and fourth quarters of 2000,
respectively. The Large Systems segment experienced healthy growth in fiscal
year 2000, driven by the build-out of data centers and share gains in the 3-
phase UPS market as well as the 2000 acquisition of DC-power and precision
cooling products. APC experienced strong demand for its products across all
solution applications in 1999.
Despite decreased net sales in 2001, sales of products introduced in 2001 have
contributed to overall net sales and represented approximately 18%, 12%, and 7%
of net sales in 2001, 2000 and 1999, respectively.
Foreign sales to unaffiliated customers, primarily in Europe, the Far East,
Canada, and South America, in fiscal year 2001 were $676.3 million or 47.2% of
net sales compared to $696.2 million or 46.9% of net sales in fiscal year 2000
and $636.2 million or 47.3% of net sales in fiscal year 1999. Also refer to
Note 11 to Notes to Consolidated Financial Statements in Item 8 of this Report.
Cost of Goods Sold
Cost of goods sold was $920.9 million or 64.2% of net sales in fiscal year 2001
compared to $867.7 million or 58.5% of net sales in fiscal year 2000 and $747.4
million or 55.6% of net sales in fiscal year 1999. Gross margins for fiscal
year 2001 were 35.8% of net sales, approximately 570 basis points lower than in
fiscal year 2000; for fiscal year 2000, gross margins were 41.5% of net sales,
approximately 290 basis points lower than in fiscal year 1999. The gross margin
erosions were associated with product mix shifts to lower margin products,
principally the continued growth of our lower gross margin Large System segment,
the effect of pro-active consumer product price cuts in 2001 and 2000, and
manufacturing inefficiencies from continued global capacity expansion prior to
our capacity rationalization efforts during the second half of 2001.
Additionally, 2001 gross margins included the effects of third quarter charges
for excess inventory of $12.4 million and restructuring costs of $4.1 million,
principally associated with the Large Systems segment. These charges were the
result of events or assessments that occurred during the third quarter of 2001.
The charge for excess inventory related to specifically identified finished
goods and raw materials inventories. There were no additional inventory
charges, other than APC's standard provisioning, during the fourth quarter of
2001. Approximately $6.0 million of inventories included in the third quarter
charge were physically disposed during the fourth quarter. Disposition of the
remaining inventories has continued into early 2002; we anticipate that all
excess inventory will be physically disposed by no later than the end of the
first half of 2002. The restructuring costs were associated with manufacturing
downsizing actions in Denmark and the U.K. and included the effects of employee
terminations, facilities closures, and the related impairment of tangible and
intangible assets. These actions were announced and substantially completed in
the third quarter of 2001. We anticipate the final settlements of our
restructuring actions to be completed by no later than the end of the first half
of 2002. We expect to generate significant employment cost savings as a result
of our restructuring actions. Due to the timing of the facilities closures and
contractual or regulatory obligations to certain workers, the financial benefits
of these actions did not commence until the fourth quarter of 2001 and will
continue to phase in gradually during the first half of 2002. Also refer to
Note 3 to Notes to Consolidated Financial Statements in Item 8 of this Report.
13
Total inventory reserves at December 31, 2001 were $32.9 million compared to
$20.5 million at December 31, 2000. This increase was due primarily to the
aforementioned charge for excess inventory as well as routine provisioning
throughout the year. APC's reserve estimate methodology involves quantifying
the total inventory position having potential loss exposure. Loss exposure
generally results from several business factors, including product or component
discontinuance, unplanned changes in demand, product design changes, and factory
transitions. Quantifying such loss exposure is the result of combining the cost
of inventories specifically identified as having little or no opportunity for
sale or use (thus available for physical disposition) plus the cost of
inventories having a high risk of no future sale or use based upon an analysis
of on-hand quantities compared to historical and anticipated future sale or use.
APC maintains an on-going business process for the physical disposition of
inventories previously identified. Inventory write-offs occur at the time of
physical disposition. Inventories, once reserved, are not written back up as
such reserve adjustments are considered to be a permanent decrease to the cost
basis of the excess or obsolete inventory.
Segment Results (Also refer to Note 11 of Notes to Consolidated Financial
Statements in Item 8 of this Report for important information regarding APC's
reportable segments)
While we experienced increased unit volumes during fiscal 2001, net sales for
products in the Small Systems segment, which provides power protection, UPS, and
management products for the PC, server, and local area networking markets,
decreased in fiscal year 2001 by 7.1% from the prior year, while Small Systems
net sales increased in fiscal year 2000 by 2.3% over the prior year. The
overall decrease in 2001 and the decline in the rate of growth during 2000 were
impacted by industry softness in the IT markets, weakening global economies, and
maturing markets. Profits for the Small Systems segment declined in 2001 from
comparable levels in 2000 as a result of pro-active price reductions in 2001
combined with a mix shift within the segment toward lower margin products.
Profits for this segment remained relatively stable during 2000 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, consisting primarily of
UPS, DC-power systems, and precision cooling products for data centers,
facilities, and communication applications, increased 9.3% and 92.0% over the
prior years in 2001 and 2000, respectively. The rate of growth during fiscal
year 2001 was negatively impacted by the significant reduction in corporate
investment for these types of applications, particularly in the second half of
2001. The Large Systems segment experienced healthy growth in fiscal year 2000
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 2000 acquisition of DC-power and
precision cooling products. Profits for this segment have declined due to cost
inefficiencies resulting from continued global capacity expansion, coupled with
declining sales volumes, particularly in the second half of 2001. Additionally,
profits were negatively impacted by continued investment in product and business
development initiatives for this business segment in fiscal year 2001, as well
as the restructuring costs discussed above associated with manufacturing
downsizing actions in Denmark and the U.K. which included the effects of
employee terminations, facilities closures, and the related impairment of
tangible and intangible assets.
Operating Expenses
Marketing, selling, general, and administrative (SG&A) expenses were $312.9
million or 21.8% of net sales in fiscal year 2001 compared to $311.6 million or
21.0% of net sales in fiscal year 2000 and $283.7 million or 21.1% of net sales
in fiscal year 1999. Total spending in 2001 approximated levels in 2000 due to
focused efforts to control expenses while improving the productivity and
efficiency of our global resources. 2001 spending rose due to increased
investment in sales personnel and distribution costs as well as increased
investment in IT support. These increases were substantially offset by reduced
spending on administrative support. The increase in total spending in 2000 was
due primarily to continued investments in building our sales capabilities,
including a global relational sales organization.
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. 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
14
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 consolidated 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 6.6% of gross accounts receivable at December
31, 2001 compared to 6.3% at December 31, 2000. Accounts receivable balances
outstanding over 60 days represented 18.2% of total receivables at December 31,
2001 compared to 13.4% at December 31, 2000. This increase reflects in part 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 the product mix shift towards Large Systems business, which typically
carries longer sales cycles and collection cycles. In addition, we have
experienced slower payment cycles as a result of what we believe is tighter
fiscal management by our customers during the recent macro economic downturn.
We continue to experience strong collection performance. 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 $54.6 million or 3.8% of net sales in fiscal year 2001,
$46.9 million or 3.2% of net sales in fiscal year 2000, and $34.6 million or
2.6% of net sales in fiscal year 1999. The increases in total R&D spending
primarily reflects increased numbers of software and hardware engineers and
other costs associated with new product development and engineering support,
combined with incremental costs attributable to Advance Power and NetworkAir,
formerly Airflow Company, which were acquired in the second and fourth quarters
of 2000, respectively.
Other Income, Net and Income Taxes
Other income is comprised principally of interest income combined with a $1.3
million gain in fiscal year 2001 on the sale of a building in Billerica,
Massachusetts. Although interest income increased substantially from 1999 to
2000 due to higher average cash balances available for investment during 2000,
interest income decreased substantially from 2000 to 2001 due to lower short
term interest rates during 2001.
Our effective income tax rates were approximately 28.5%, 29.0%, and 29.5%, in
2001, 2000 and 1999, respectively. The decrease from 1999 to 2001 is due to the
tax savings from an increasing portion of taxable earnings being generated from
APC's operations in jurisdictions currently having lower income tax rates 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, 2001 was $884.4 million compared to $744.8
million at December 31, 2000. APC has been able to increase its working capital
position as the result of continued positive operating results and despite
internally financing the capital investment required to expand its operations.
Our cash, cash equivalents, and short-term investments position increased to
$393.1 million at December 31, 2001 from $308.0 million at December 31, 2000.
Worldwide inventories were $350.6 million at December 31, 2001, up from $289.0
million at December 31, 2000. Like many other vendors participating in the
communications and Internet infrastructure build-out, APC has been impacted by
the rapid decline in forecasted demands during 2001 and late 2000. APC has also
experienced shipment cancellations and rescheduled sales orders from customers
in the telecommunications and service provider industry, while our global
capacity expansion and rebalancing in our Large Systems business drove the need
for additional safety stock. Additionally, APC's third quarter 2001 results
include the effects of a charge for excess inventory that totaled $12.4 million
relating to specifically identified finished goods and materials inventories.
The inventories subject to the write-off are categorized as follows: $1.5
million of residual, unusable quantities located at facilities impacted by
recent downsizing actions; $2.5 million of unusable or unsaleable quantities
related to declining and
15
changing demand requirements; and $8.4 million of custom finished goods impacted
by canceled sales orders, primarily from customers in the telecom and Internet
infrastructure industries. There were no additional inventory charges, other
than APC's standard provisioning, during the fourth quarter of 2001.
Approximately $6.0 million of inventories included in the third quarter charge
were physically disposed during the fourth quarter. Disposition of the
remaining inventories has continued into early 2002 and we anticipate that all
excess inventory will be physically disposed by no later than the end of the
first half of 2002. Inventory levels as a percentage of quarterly sales were
101% in the fourth quarter of 2001, unchanged from 101% in the third quarter of
2001 and up from 71% in the fourth quarter of 2000.
At December 31, 2001, we had $65.0 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 $7.0 million under
unsecured line of credit agreements with a second and third bank at similar
interest rates. No borrowings were outstanding under these facilities at
December 31, 2001. APC had no significant financial commitments, other than
those required in the normal course of business, at December 31, 2001.
APC has several non-cancelable operating leases, primarily for warehousing and
office space, expiring at various dates through 2010. These leases contain
renewal options for periods ranging from one to nine years and require APC to
pay its proportionate share of utilities, taxes, and insurance. Future
minimum lease payments under these non-cancelable leases are: 2002 - $7.2
million; 2003 - $5.4 million; 2004 - $4.3 million; 2005 - $3.1 million; 2006 -
$1.7 million; and $5.8 million thereafter.
During 2001 and 2000, our capital expenditures, net of capital grants, amounted
to approximately $47.9 million and $73.7 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 Brazil and India, as
well as to fund IT-related capital equipment and software purchases to support
business process improvement initiatives. Capital spending included Large
Systems segment global capacity expansion into lower cost locations closer to
local end-user customers and markets. Substantially all of APC's net capital
expenditures were financed from available operating cash. We had no material
capital commitments at December 31, 2001.
APC has agreements with the Industrial Development Authority of Ireland,
otherwise known 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. Also refer
to Note 15 to the Consolidated Financial Statements in Item 8 of this Report.
During the first quarter of 2002, we announced global headcount reductions of
approximately 17%. These actions impact personnel worldwide throughout a broad
range of functions within the organization. The majority of these terminations
are the result of our recent decision to consolidate APC's Philippines-based
manufacturing operations resulting in the closing of APC's manufacturing
facility in the province of Laguna. These actions have been and are being
implemented during the first half of 2002. We anticipate annualized employment
cost savings of approximately $10 million.
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.
16
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, 2001 and 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 systems 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, 2001 and 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, 2001 and 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.
Select assets of ARRIS Group Inc.
In the fourth quarter of 2001, we acquired select inventory and related
technology associated with outside plant, networking power product lines from
ARRIS Group Inc. for $10.3 million paid in cash. The product lines were
acquired from ARRIS' EnergyLinkT family of power supplies, enclosures and
equipment for network broadband power, including the TSPT (Total System
Power) line. The products lines are designed for outdoor use, commonly
installed on utility poles or adjacent to fiber nodes, and provide back-up power
for broadband cable applications. Our cash outlays associated with this
purchase were financed from operating cash.
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 2001, 2000 and 1999.
At December 31, 2001, APC's unhedged foreign currency accounts receivable, by
currency, were as follows:
In thousands Foreign U.S.
Currency Dollars
European Euros 54,878 $48,468
Japanese Yen 2,799,746 21,264
Swiss Francs 25,591 15,234
British Pounds 8,983 13,051
APC also had non-trade receivables denominated in Irish Pounds of approximately
U.S.$1.5 million, liabilities denominated in various European currencies of
approximately U.S.$41.8 million, and liabilities denominated in Japanese Yen of
approximately U.S.$7.1 million.
17
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.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. The U.S. Securities and Exchange Commission has defined critical
accounting policies as those that are both most important to the portrayal of
our financial condition and results and which require our most difficult,
complex or subjective judgments or estimates. Based on this definition, we have
identified the policies below as critical to our business operations and the
understanding of our results of operations. The impact and any associated risks
related to these policies on our business operations is discussed throughout
Management's Discussion and Analysis of Financial Condition and Results of
Operations where such policies affect our reported and expected financial
results. For all financial statement periods presented, there have been no
material modifications to the application of these critical accounting policies.
For a detailed discussion on the application of these and other accounting
policies, also refer to Note 1 in Notes to Consolidated Financial Statements in
Item 8 of this Report.
On an on-going basis, we evaluate the judgments and estimates underlying all of
our accounting policies, including those related to revenue recognition,
product returns, bad debts, inventories, impairment of long-lived assets,
deferred tax valuation allowances, restructuring reserves and contingencies, and
litigation. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Materially different results in the amount and timing of our actual results for
any period could occur if we made different judgments or utilized different
estimates. Actual results may differ from those estimates.
Our critical accounting policies are as follows:
Revenue Recognition
We follow very specific and detailed guidelines in measuring revenue; however,
certain judgments affect the application of our revenue policy. Revenue results
are difficult to predict, and any shortfall in revenue or delay in recognizing
revenue could cause our operating results to vary significantly from quarter to
quarter. In general, revenue is recognized when title has passed at the time of
delivery of product for all of our operating segments as stipulated by the
delivery terms for the sales transactions. In addition, prior to revenue
recognition, we require persuasive evidence of the arrangement, that the price
is fixed or determinable, and that collectibility is reasonably assured.
Installation is not applicable for Small Systems and Other segment products
based on the nature of the products sold. Generally, revenue associated with
Large Systems sales is also recognized at the time of delivery pursuant to the
delivery terms, as we do not perform installation. Delivery terms vary, but
often include origin-based terms (e.g., FOB Shipping Point and Ex-works) and
destination-based terms (e.g., DDU/DDP (delivered duty unpaid/delivered duty
paid)).
Certain Large Systems product lines and, at times, one product line included in
the Small Systems segment require electrical hardwire installation or duct
installation which is performed by the customer or their contracted licensed
contractor/electrician. Since we do not perform the installation, revenue
recognition at the time of delivery is proper as customer acceptance of the unit
is not required. Also, payment by the customer is not contingent upon
installation of the product.
18
We offer additional services to customers depending on the type of product the
customer has purchased, including on-site services, installation consulting
services, remote monitoring services, power audit services, and network
integration services. Revenue is recognized at the time services are provided
or is deferred and recognized over the service period (where applicable). The
fair value of these services are based upon the rates that we charge customers
in separately negotiated transactions and such services are not essential to the
functionality of the delivered product.
For all sales, except those completed over the Internet, we use a binding
purchase order as evidence of an arrangement. For sales over the Internet, we
use a credit card authorization as evidence of an arrangement. Sales through
certain customers are evidenced by a master agreement governing the relationship
together with binding purchase orders on a transaction by transaction basis.
Our arrangements do not generally include acceptance clauses. However, if an
arrangement includes a customer specified acceptance provision, acceptance
generally occurs at our factory prior to delivery. As we introduce new products
in 2002, particularly PowerStruXure, we anticipate that installation and
customer acceptance provisions will become more common, and therefore
increasingly significant for determining delivery and performance and
consequently our entitlement to recognize revenue.
Estimating Valuation Allowances and Accrued Liabilities - Allowances for Sales
Returns, Doubtful Accounts, and Inventory Obsolescence, and Assessment of the
Probability of the Outcome of our Current Litigation
Significant management judgments that affect the application of our revenue
policy also include estimates of potential future product returns related to
current period product revenue. We analyze historical returns, current economic
trends, and channel inventories when evaluating the adequacy of the sales
returns and other allowances. Significant management judgments and estimates
must be made and used in connection with establishing the sales returns and
other allowances in any accounting period. Material differences may result in
the amount and timing of our revenue for any period if management made different
judgments or utilized different estimates.
We provide limited rights of return to distributors and retailers for our Small
Systems product lines. We provide appropriate reserves for returns at the time
that related revenue is recognized based on historical patterns of returns and
contractual provisions in accordance with the provisions of SFAS 48 and SAB 101.
Returns of Large Systems products generally do not occur. Historically, returns
have represented 3% of gross sales and have not differed significantly from
prior estimates.
Similarly, we must make estimates of the uncollectability of our accounts
receivables. Management specifically analyzes accounts receivable balances in
view of customer credit-worthiness, customer concentrations, historical bad
debts, current economic trends, and changes in our customer payment terms when
evaluating the adequacy of the allowance for doubtful accounts. A majority of
international customer balances are covered by receivables insurance. Our
accounts receivable balance was $263.6 million, net of an allowance for doubtful
accounts of $18.7 million as of December 31, 2001.
Our inventory reserve estimate methodology involves quantifying the total
inventory position having potential loss exposure. Loss exposure generally
results from several business factors, including product or component
discontinuance, unplanned changes in demand, product design changes, and factory
transitions. Quantifying such loss exposure is the result of combining the cost
of inventories specifically identified as having little or no opportunity for
sale or use (thus available for physical disposition) plus the cost of
inventories having a high risk of no future sale or use based upon an analysis
of on-hand quantities compared to historical and anticipated future sale or use.
We maintain an on-going business process for the physical disposition of
inventories previously identified. Inventory write-offs occur at the time of
physical disposition. Inventories, once reserved, are not written back up as
such reserve adjustments are considered to be a permanent decrease to the cost
basis of the excess or obsolete inventory. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required.
We are, and may in the future become, involved in litigation involving our
business, products or operations. For pending claims for which there is an
estimatable range of loss greater than zero, we record the best estimate of
liability within the range. If no point within the range is considered the best
estimate, we record the minimum estimated liability. Because of uncertainties
related to the identifiable range of loss on any pending claims, we may
19
be unable to make a reasonable estimate of the liability that could result from
an unfavorable outcome. As additional information becomes available, we assess
the potential liability related to our pending claims and revise our estimates.
Such revisions in our estimates of the potential liability could materially
impact our results of operation and financial position. The litigation process
is uncertain and includes the risk of an unexpected, unfavorable result. We may
be materially adversely impacted by any such litigation.
Valuation of Long-lived Tangible and Intangible Assets including Goodwill
We assess the impairment of long-lived tangible and intangible assets including
goodwill on an ongoing basis and whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Should our assessment
suggest impairment, we would determine recoverability based on an estimate of
future undiscounted cash flows resulting from our use of the asset and its
eventual disposition. Factors we consider that could trigger an impairment
review include the following:
- significant underperformance relative to expected historical or projected
- future operating results;
- significant changes in the manner of our use of the acquired assets or the
strategy for our overall business;
- significant negative industry or economic trends; and
- significant technological changes, which would render equipment and
manufacturing process, obsolete.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we
are required to estimate our income taxes in each of the jurisdictions in which
we operate. This process involves estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items, such as deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our consolidated balance sheet. We must then assess the likelihood that
our deferred tax assets will be recovered from future taxable income.
Expectations about future taxable income incorporate numerous assumptions about
actions, elections and strategies to minimize income taxes in future years. Our
ability to take such actions, make preferred elections and implement tax-
planning strategies may be adversely impacted by enacted changes in tax laws
and/or tax rates, as well as successful challenges by tax authorities resulting
from differing interpretations of tax laws and regulations.
To the extent we believe that recovery of deferred tax assets is not likely, we
must establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the consolidated statements of income. Significant
management judgment is required in determining our provision for income taxes,
our deferred tax assets and liabilities and any valuation allowance recorded
against our net deferred tax assets. We have recorded a valuation allowance of
$1.7 million as of December 31, 2001, due to uncertainties related to our
ability to utilize some of our deferred tax assets, primarily consisting of net
operating losses generated in 2001 for the start up of Brazilian operations,
before they expire. The valuation allowance is based on our estimates of taxable
income by jurisdiction in which we operate and the period over which our
deferred tax assets will be recoverable. In the event that actual results
differ from these estimates or we adjust these estimates in future periods we
may need to establish an additional valuation allowance which could materially
impact our financial position and results of operations. The net deferred tax
asset as of December 31, 2001 was $38.9 million, net of a valuation allowance of
$1.7 million.
Recently Issued Accounting Standards
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. We adopted this
Statement on January 1, 2002. The adoption of this Statement is not expected to
have a material impact on our consolidated financial position or results of
operations.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement is effective for fiscal years beginning
after June 15, 2002; we will adopt this Statement on January 1, 2003. The
adoption of this Statement is not expected to have a material impact on our
consolidated financial position or results of operations.
20
In July 2001, the Financial Accounting Standards Board finalized Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. Statement 141 requires the use of the
purchase method of accounting for business combinations initiated after June 30,
2001. Statement 141 also specifies the criteria that intangible assets acquired
in a purchase method business combination must meet in order to be recognized
and reported apart from goodwill. We adopted certain provisions of Statement
141 on July 1, 2001. Statement 142 requires that companies no longer amortize
goodwill, but instead test goodwill impairment at least annually (or more
frequently if impairment indicators arise). Statement 142 is required to be
applied in fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of when those assets
were initially recognized. Statement 142 requires us to complete a transitional
goodwill impairment test six months from the date of adoption. We are also
required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of Statement 142. We adopted Statement 142
on January 1, 2002. As of December 31, 2001 we had goodwill of $64.5 million
less accumulated amortization of $8.1 million with amortization expense of
approximately $3.3 million in 2001. We expect a reduction of approximately $3.3
million in goodwill amortization included in operating expenses in 2002 as the
result of the adoption of Statement 142. We are currently evaluating the impact
of the adoption of Statement 142 and the required transitional goodwill
impairment test.
In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products." This issue addresses the income statement classification of slotting
fees, cooperative advertising arrangements and buydowns. The consensus requires
certain customer promotional payments currently classified as marketing expenses
to be re-classified as a reduction of revenue. We adopted EITF 00-25 on January
1, 2002. Our adoption of EITF 00-25 will result in a reclassification for the
2001, 2000 and 1999 consolidated income statements to reduce net sales and also
reduce marketing, selling, general and administrative expenses by approximately
$25.2 million, $11.3 million, and $12.5 million, respectively. The adoption of
EITF 00-25 will have no impact on profit from operations, net income or earnings
per share.
In April 2001, the EITF revised the transition requirements of its May 2000
consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives. " This
issue involves the accounting for and reporting of sales subject to rebates and
revenue sharing arrangements as well as coupons and discounts, including the
income statement classification of rebates and other discounts. We adopted EITF
00-14 on January 1, 2002. Our adoption of EITF 00-14 will result in a
reclassification for the 2001, 2000 and 1999 consolidated income statements to
reduce net sales and also reduce marketing, selling, general and administrative
expenses by approximately $5.4 million, $1.9 million, and $0.7 million,
respectively. The adoption of EITF 00-14 will have no impact on profit from
operations, net income or earnings per share.
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 annual and 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;
- our ability to execute our planned job reductions and realize anticipated
cost savings;
- changes in manufacturing costs;
- changes in the mix of product sales;
21
- 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;
- acts of terrorism, war and political instability; and
- volatility in world economic conditions.
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 may 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.
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:
22
- customer and vendor financial instability;
- volatility in world economic conditions;
- the disruption of markets;
- changes in export or import laws;
- restrictions on currency exchanges;
- potentially negative tax consequences;
- longer payment terms;
- acts of war, terrorism and 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 47.2%, 46.9%, and 47.3%
of our net sales in 2001, 2000 and 1999, respectively. We anticipate that
international sales will continue to account for a significant portion of our
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,
particularly developing countries such as Brazil, China, India, and the
Philippines, which subject APC to a number of economic and other risks. The
Small Systems have particular exposure to the Philippines, a country which is
experiencing political and financial instability. Disruption of manufacturing
efforts in these international facilities could materially adversely 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 certain components of our products and certain finished
products from sole sources. In the future, our suppliers may not be able to
meet our demand for components and products in a timely and cost-effective
manner. Our inability to secure and qualify alternative sources of supply in a
timely manner may disrupt our ability to fulfill customer orders. We generally
purchase these sole source components and products using purchase orders and
have no guaranteed supply arrangements with the suppliers. In addition, the
availability of many of these components and products 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 materially adversely affected by either an increase in prices for, or an
interruption or reduction in supply of, any key components and products.
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.
23
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 from time to time third parties
have alleged, and in the future may allege, such infringement. 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.
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
- acts of war, terrorism and political instability 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 2002. 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 are, and may become, involved in litigation, which could materially harm our
business.
We are, 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.
24
Item 8. Financial Statements and Supplementary Data
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
In thousands
ASSETS
2001 2000
Current assets:
Cash and cash equivalents $288,210 $283,025
Short term investments 104,868 25,000
Accounts receivable,
less allowance for doubtful
accounts of $18,712 in 2001
and $20,085 in 2000 (Note 5) 263,595 298,041
Inventories (Note 6) 350,636 289,032
Prepaid expenses and
other current assets 15,935 23,488
Deferred income taxes (Note 8) 44,255 32,346
Total current assets 1,067,499 950,932
Property, plant, and equipment:
Land, buildings, and improvements 71,166 72,136
Machinery and equipment 200,000 178,558
Office equipment, furniture,
and fixtures 72,510 68,765
Purchased software 30,463 25,633
374,139 345,092
Less accumulated depreciation
and amortization 164,154 133,335
Net property, plant,
and equipment 209,985 211,757
Goodwill and other
intangibles, net (Note 3) 110,854 122,716
Deferred income taxes (Note 8) 10,924 9,678
Other assets (Note 4) 21,510 22,022
Total assets $1,420,772 $1,317,105
See accompanying notes to consolidated financial statements.
25
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
In thousands
LIABILITIES AND SHAREHOLDERS' EQUITY
2001 2000
Current liabilities:
Accounts payable $75,569 $105,031
Accrued expenses 28,276 37,946
Accrued compensation 21,640 21,708
Accrued sales and
marketing programs 23,011 15,210
Deferred revenue 14,451 11,847
Income taxes payable 20,131 14,377
Total current liabilities 183,078 206,119
Deferred tax liability (Note 8) 16,306 13,805
Total liabilities 199,384 219,924
Shareholders' equity
(Notes 9 and 10):
Common stock, $0.01 par value;
authorized 450,000 shares
in 2001 and 2000; issued 196,025
in 2001 and 195,071 in 2000 1,960 1,951
Additional paid-in capital 126,365 115,381
Retained earnings 1,099,541 986,176
Treasury stock, 250 shares, at cost (1,551) (1,551)
Accumulated other comprehensive loss (4,927) (4,776)
Total shareholders' equity 1,221,388 1,097,181
COMMITMENTS AND CONTINGENCIES
(Notes 12, 14 and 15)
Total liabilities and
shareholders' equity $1,420,772 $1,317,105
See accompanying notes to consolidated financial statements.
26
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2001, 2000 and 1999
In thousands except per share amounts
2001 2000 1999
Net sales (Note 11) $1,433,312 $1,483,563 $1,344,931
Cost of goods sold 920,895 867,680 747,389
Gross profit 512,417 615,883 597,542
Costs and expenses:
Marketing, selling,
general, & administrative 312,918 311,612 283,725
Special charges (Note 4) - 47,900 -
Research & development 54,646 46,898 34,592
Total operating expenses 367,564 406,410 318,317
Operating income 144,853 209,473 279,225
Other income, net 13,700 23,838 13,292
Earnings before
income taxes 158,553 233,311 292,517
Income taxes (Note 8) 45,188 67,660 86,293
Net income $113,365 $165,651 $206,224
Basic earnings per share $0.58 $0.85 $1.07
Basic weighted average
shares outstanding 195,171 194,235 192,201
Diluted earnings per share $0.58 $0.83 $1.05
Diluted weighted average
shares outstanding 196,793 200,156 196,088
See accompanying notes to consolidated financial statements.
27
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2001, 2000 and 1999
In thousands
Accumulated
$0.01 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, 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 benefit from
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 benefit from
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
Net income 113,365 113,365
Foreign currency
translation
adjustment (51) (51)
Net unrealized
loss on
investments (100) (100)
Comprehensive
income 113,214
Exercises of
stock options 754 7 7,633 7,640
Tax benefit from
exercises of
stock options 1,131 1,131
Shares issued to
Employee Stock
Purchase Plan 200 2 2,220 2,222
Balances at
December 31, 2001 196,025 $1,960 $126,365 $1,099,541 (250) $(1,551) $(4,927) $1,221,388
See accompanying notes to consolidated financial statements.
28
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2000 and 1999
In thousands
2001 2000 1999
Cash flows from
operating activities
Net income $113,365 $165,651 $206,224
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amortization
of property, plant, and
equipment 44,377 32,357 27,074
Gain on sale of property,
plant, and equipment (1,728) - (277)
Amortization of goodwill
and other intangibles 11,559 8,586 3,516
Provision for doubtful
accounts 4,775 2,028 6,015
Provision for inventory 18,015 4,632 6,724
Deferred income taxes (10,654) (7,212) 65
Restructuring charges 5,089 - -
Special charges - 47,900 -
Other, net (151) (2,970) (2,382)
Changes in operating assets
and liabilities, excluding
effects of acquisitions:
Accounts receivable 29,671 (59,638) (42,469)
Inventories (79,619) (95,885) 45,481
Prepaid expenses and
other current assets 7,553 (4,559) (482)
Other assets (3,018) (69,262) 1,022
Accounts payable (29,462) 8,898 3,451
Accrued expenses (9,670) (1,757) 8,926
Accrued compensation (68) (4,610) 3,613
Accrued sales and
marketing programs 7,801 (1,902) (971)
Deferred revenue 2,604 3,108 1,909
Income taxes payable 6,885 (8,336) 10,428
Net cash provided by
operating activities 117,324 17,029 277,867
Cash flows from
investing activities
Purchases of held-to-maturity
-securities (79,776) (75,000) -
Maturities of held-to-maturity
-securities 25,000 50,000 -
Purchases of available-for-sale
-securities (25,092) - -
Capital expenditures,
net of capital grants (47,859) (73,716) (36,003)
Proceeds from sale of
property, plant, and
equipment 5,726 - 1,100
Acquisitions - (100,315) (8,426)
Net cash used in
investing activities (122,001) (199,031) (43,329)
Cash flows from
financing activities
Repayment of short term debt - (11,727) (12,438)
Proceeds from issuances
of common stock 9,862 20,429 14,317
Net cash provided
by financing
activities 9,862 8,702 1,879
Net change in cash
and cash equivalents 5,185 (173,300) 236,417
Cash and cash equivalents
at beginning of year 283,025 456,325 219,908
Cash and cash equivalents
at end of year $288,210 $283,025 $456,325
Supplemental cash
flow disclosures
Cash paid during
the year for:
Income taxes
(net of tax refunds) $45,982 $80,240 $70,204
Details of acquisitions:
Fair value of assets $- $138,242 $8,426
Liabilities and
minority interest - (36,614) -
Cash paid - 101,628 8,426
Cash acquired - (1,313) -
Acquisitions $- $100,315 $8,426
NON-CASH TRANSACTIONS: In 2001, 2000 and 1999, the tax effect of the exercise
of stock options resulted in increases to additional paid-in capital and
reductions to income taxes payable of $1,131, $7,981, and $2,565. 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. In
2001, the Company recorded a restructuring charge that included a non-cash
component of $5,089 (note 3).
See accompanying notes to consolidated financial statements.
29
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
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, communications and electronic applications worldwide.
The Company's products include uninterruptible power supply products ("UPSs"),
DC-power systems, electrical surge protection devices, power conditioning
products, precision cooling equipment, and associated software, services, and
accessories. These products are used 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 majority-owned subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Revenue Recognition
Revenue from sales of the Company's products, including UPS products, DC-power
systems, electrical surge protection devices, power conditioning products,
precision cooling equipment, and associated accessories, is recognized when
title has passed at the time of delivery of product as stipulated by the
delivery terms for the sales transactions. In addition, prior to revenue
recognition, the Company requires persuasive evidence of the arrangement, that
the price is fixed or determinable, and that collectibility is reasonably
assured. Provisions for sales returns and allowances, warranties, and
uncollectible accounts are made at the time of sale based on historical patterns
of returns and contractual provisions in accordance with the provisions of
Statement 48 and SAB 101. The Company's arrangements do not generally include
acceptance clauses. However, if an arrangement includes a customer specified
acceptance provision, acceptance generally occurs at the Company's factory prior
to delivery. 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, 2001, short term investments consisted of investment grade
corporate and municipal bonds, and 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. Held-to-maturity
securities aggregated $79.8 million and $25.0 million at December 31, 2001 and
2000, respectively, and are carried at amortized cost. The cost of such
held-to-maturity securities approximates fair market value and the unrealized
holding gains or losses were not material. Available-for-sale securities
aggregated $25.1 million at December 31, 2001. There were no available-for-sale
securities at December 31, 2000. Available-for-sale securities are recorded at
fair value with net unrealized gains and losses reported, net of tax, in other
comprehensive income. At December 31, 2001, the gross unrealized holding losses
on available-for-sale securities were $0.1 million. 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.
30
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
using the straight-line method over the estimated useful lives indicated below.
Leasehold improvements are amortized over the shorter of the lease term or
estimated useful life of the asset.
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
Grant Monies
Grant monies are provided to certain of the Company's subsidiaries located in
Ireland to reimburse qualifying capital expenditures and for hiring and
maintaining certain employment levels within Ireland. Grant monies received for
costs incurred for property, plant and equipment are recorded as a reduction to
the basis of the corresponding depreciable assets. Grant monies received for
employee levels are recorded as a reduction of payroll expense in the period in
which the employee levels required by the grant are reached. Grant monies are
received subject to "clawback" provisions that would obligate the Company to
repay the grant monies received should its employment levels fall below
established levels. At the end of each fiscal quarter, the Company evaluates
current conditions relating to the status of on-going operations and related
employment levels in Ireland to assess the possibility that grant monies will
need to be repaid and, if deemed necessary, to accrue a repayment liability.
Since the inception of its grant agreements in 1994, the Company has not
assessed the need to accrue a repayment liability and, based upon a current
evaluation of its significant investment in Ireland and on-going operational
requirements, the Company believes the possibility that the clawback provisions
will become effective is remote.
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. Should this
evaluation suggest impairment, the Company would determine recoverability based
on an estimate of future undiscounted cash flows resulting from its use of the
asset and its eventual disposition, as discussed below. 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, 2001.
Goodwill and other intangibles are presented net of accumulated amortization of
$23.8 million and $12.2 million at December 31, 2001 and 2000, respectively.
The Company adopted Statement 142, Goodwill and Other Intangible Assets on
January 1, 2002. As of December 31, 2001, the Company had goodwill of $64.5
million less accumulated amortization of $8.1 million with amortization expense
of approximately $3.3 million in 2001. The Company expects a reduction of
approximately $3.3 million in goodwill amortization included in operating
expenses in 2002 as the result of the adoption of Statement 142.
Long-lived Assets
The Company accounts for long-lived assets, including goodwill and other
intangibles, in accordance with the provisions of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This Statement requires that long-lived assets, such as property, plant
and equipment, and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
31
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 based on historical patterns of returns and contractual provisions in
accordance with the provisions of Statement 48 and SAB 101. Customers can
extend the basic warranty period of select products, at an additional charge,
for a period of one or three additional years. 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 offers an Equipment
Protection Policy in the U.S., Canada, and Europe. Depending on the
model and country, the policy provides up to $150,000, 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 may be doubled
(U.S. and Canada only). Most surge suppressor products come with a lifetime
product warranty. The Company has experienced satisfactory field operating
results, and warranty and Equipment Protection Policy 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 $361.1 million
at December 31, 2001. The Company plans to reinvest all such earnings for
future expansion. If such earnings were distributed, taxes would increase by
approximately $90.2 million. Additionally, the Company has tax holidays in
China, India, and the Philippines, which reduce or eliminate the income taxes
paid in those countries. These holidays begin to expire in 2003. Based on the
currently enacted regular corporate income tax rates in these countries, the
benefit to the Company of these tax holidays was approximately $8.0 million, or
$0.04 per diluted share, for the year ended December 31, 2001; $6.8 million, or
$0.03 per diluted share, for the year ended December 31, 2000; and $4.5 million,
or $0.02 per diluted share, for the year ended December 31, 1999.
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 2001 2000 1999
Basic weighted average 195,171 194,235 192,201
shares outstanding
Net effect of dilutive
potential common shares
outstanding based on
the treasury stock
method using the average
market price 1,622 5,921 3,887
Diluted weighted average
shares outstanding 196,793 200,156 196,088
Antidilutive potential
common shares excluded
from the computation above 9,566 280 872
32
Stock-Based Compensation
As permitted by Statement 123, the Company applies APB Opinion No. 25 and
related Interpretations in accounting for its employee stock-based compensation
plans. The Company accounts for its non-employee stock-based compensation
awards in which goods or services are the consideration received for the equity
instruments issued based on the fair value of the consideration received or the
fair value of the equity instruments issued, whichever is more reliably
measurable. Compensation cost recognized for non-employees under these plans in
the accompanying consolidated financial statements is not material.
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 $65.9 million in 2001, $85.5 million in 2000, and $94.4
million in 1999. There are no capitalized advertising costs in the accompanying
consolidated balance sheets.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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, 2001 and 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.
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, 2001 and 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, 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, 2001 and 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.
Pro forma results from operations have not been provided as the acquisitions are
not considered material individually and in the aggregate.
33
3. Restructuring
In the second half of 2001, the Company recorded $8.6 million of restructuring
costs of which $4.1 million and $4.5 million were classified in cost of goods
sold and operating expenses, respectively. These costs were associated with
manufacturing downsizing actions primarily in Denmark and the U.K. and included
the effects of approximately 450 employee terminations principally in the
manufacturing area, facilities closures, and the related impairment of tangible
and intangible assets. A summary of the restructuring costs is outlined as
follows:
(In thousands) Restructuring Total Non-cash Reversals Cash Restructuring
Liabilities at Charges Charges Payments Liabilities
Beginning at End
of Period of Period
Q3 Activities:
Employee
terminations $ - $3,281 $ - $ - $(2,892) $ 389
Facilities
closures - 2,003 (1,118) - - 885
Impairment of
intangible
assets - 3,728 (3,728) - - -
Subtotals - 9,012 (4,846) - (2,892) 1,274
Q4 Activities:
Employee
terminations 389 236 - - (173) 452
Facilities
closures 885 138 (138) (885) - -
Impairment of
intangible
assets - 105 (105) - - -
Subtotals 1,274 479 (243) (885) (173) 452
Totals $ - $9,491 $(5,089) $(885) $(3,065) $452
The reversal occurring in Q4 relating to facilities closures represents the
reversal of a cancelled lease liability recognized during the third quarter in
connection with the closure of a leased facility in the United Kingdom. During
Q4, the Company reversed its decision to vacate the leased facility.
4. 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 consolidated 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.
34
5. 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.
6. Inventories
Inventories consist of the following:
In thousands 2001 2000
Raw materials $158,140 $120,685
Work in process 9,238 15,755
Finished goods 183,258 152,592
$350,636 $289,032
7. Revolving Credit Agreements and Short Term Debt
At December 31, 2001 and 2000, the Company had available for future borrowings
$65.0 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 $7.0
million under unsecured line of credit agreements with a second and third bank
at similar interest rates. No borrowings were outstanding under these
facilities during fiscal years 2001 and 2000, or at December 31, 2001 and 2000.
8. Income Taxes
Total federal, state, and foreign income tax expense (benefit) from continuing
operations for the years ended December 31, 2001, 2000, and 1999 consists of the
following:
In thousands Current Deferred Total
2001:
Federal $33,887 $(7,584) $26,303
State 7,653 (1,425) 6,228
Foreign 14,302 (1,645) 12,657
$55,842 $(10,654) $45,188
2000:
Federal $53,319 $(3,850) $49,469
State 8,073 (794) 7,279
Foreign 12,559 (1,647) 10,912
$73,951 $(6,291) $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
35
Income tax expense attributable to continuing operations amounted to $45.2
million in 2001, $67.7 million in 2000, and $86.3 million in 1999, (effective
rates of 28.5%, 29.0%, and 29.5%, respectively). The actual expense for 2001,
2000 and 1999 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 2001 2000 1999
Computed "expected"
tax expense $56,394 $81,659 $102,381
State income taxes,
net of federal income
tax benefit 4,064 4,731 5,060
Foreign earnings taxed
at rates lower than
U.S. statutory rate
(principally Ireland
and the Philippines) (11,430) (16,616) (18,754)
Foreign sales corporation (1,352) (1,754) (1,294)
Other (2,488) (360) (1,100)
$45,188 $67,660 $86,293
The domestic and foreign components of earnings before income taxes were $79.6
million and $79.0 million, respectively, for 2001; $145.3 million and $88.0
million, respectively, for 2000; and $188.5 million and $104.0 million,
respectively, for 1999. Total income tax expense for the years ended December
31, 2001, 2000 and 1999 was allocated as follows:
In thousands 2001 2000 1999
Income from continuing
operations $45,188 $67,660 $86,293
Shareholders' equity,
for compensation expense
for tax purposes in excess
of amounts recognized for
financial statement purposes (1,131) (7,981) (2,565)
$44,057 $59,679 $83,728
At December 31, 2001 and 2000, 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 2001 2000
Deferred tax assets
Allowance for doubtful accounts $4,521 $5,060
Additional costs inventoried
for tax purposes 6,681 1,629
Intercompany inventory profits 6,140 4,520
Allowances for sales and
marketing programs 9,019 5,837
Inventory obsolescence reserve 4,956 4,302
Accrual for compensation and
compensated absences 3,877 2,912
Reserve for warranty costs 2,262 2,449
Deferred revenue 4,345 3,918
Intangible assets 12,006 9,585
Other 3,031 1,812
Total gross deferred tax assets 56,838 42,024
Less valuation allowance (1,659) -
Net deferred tax assets 55,179 42,024
Deferred tax liabilities
Excess of tax over financial
statement depreciation 12,215 11,441
Other 4,091 2,364
Total deferred tax liabilities 16,306 13,805
Net deferred income taxes $38,873 $28,219
36
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. At December 31, 2001, the Company provided a
valuation allowance on certain of its deferred tax assets because of uncertainty
regarding their realizability due to certain net operating losses generated in
2001 for the start up of Brazilian operations.
9. Stock Plans
Stock-based Compensation Plans
At December 31, 2001, the Company had four stock option plans and an employee
stock purchase plan, which are described below. As permitted by Statement 123,
the Company applies APB Opinion No. 25 and related Interpretations in accounting
for its employee stock-based compensation plans. The Company accounts for its
non-employee stock-based compensation awards in which goods or services are the
consideration received for the equity instruments issued based on the fair value
of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. Compensation cost recognized for
non-employees under these plans in the accompanying consolidated financial
statements is not material. Had employee 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 2001 2000 1999
per share amounts
Net income As reported $113,365 $165,651 $206,224
Pro forma 65,628 133,115 181,123
Basic earnings As reported $0.58 $0.85 $1.07
per share Pro forma .34 .69 .94
Diluted earnings As reported $0.58 $0.83 $1.05
per share Pro forma .33 .65 .92
The pro forma effect on net income for 2001, 2000 and 1999 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 2001, 2000 and 1999 was $10.32, $11.43, and $9.35, 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 2001, 2000 and 1999:
2001 2000 1999
Expected volatility 83% 70% 59%
Dividend yield - - -
Risk-free interest rate 4.7% 5.9% 5.3%
Expected life 6 years 6 years 5 years
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.
37
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 2001, two directors were
entitled to participate in the Director Plans with each receiving a grant of
options as of February 12, 2001 for 20,000 shares at an exercise price of
$13.25; 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 (i.e., the
market price on the dates of grant). In addition, two new non-employee
directors elected at the June 2001 Annual Meeting of Shareholders were each
granted on August 9, 2001 under the 1997 Stock Option Plan options to purchase
13,643 shares at an exercise price of $13.57.
Options granted under the 1997 Director Plan, and the options granted on August
9, 2001 under the 1997 Stock Option 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.
A summary of the status of the Company's stock option plans as of December 31,
2001, 2000 and 1999, and changes during the years ending on those dates is
presented below:
2001 2000 1999
Shares in thousands Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 19,002 $15.26 12,082 $14.00 9,560 $12.23
Granted 574 14.36 9,448 16.41 5,097 16.26
Exercised (754) 10.05 (1,488) 12.63 (1,285) 10.12
Terminated (1,173) 17.20 (1,040) 15.50 (1,290) 13.50
Outstanding
at end of year 17,649 15.31 19,002 15.26 12,082 14.00
Exercisable
at end of year 8,454 14.55 4,531 13.01 2,696 11.40
Shares reserved
at end of year 22,760 23,514 25,115
The following table summarizes information about stock options outstanding at
December 31, 2001:
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 - $6.82 592 3.8 $ 4.97 498 $ 5.01
$8.30 - $11.69 1,528 5.3 9.44 1,430 9.29
$12.43 - $17.71 11,760 7.7 13.97 5,218 14.67
$19.30 - $24.80 3,522 8.1 22.99 1,229 22.94
$29.00 - $31.13 247 8.2 30.69 79 30.85
17,649 7.4 15.31 8,454 14.55
38
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 2001, under
the Plan, 102,079 shares were issued at $11.17 per share and 98,851 shares were
issued at $10.94 per share. 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.
10. Retirement Benefits
Employee Stock Ownership Plans
At December 31, 2001, 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 7.7 million shares, 8.3 million shares, and 8.8 million shares of
common stock at December 31, 2001, December 31, 2000, and December 31, 1999,
respectively. No shares were contributed to the ESOP in 2001, 2000 or 1999.
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. Employees may diversify
employer matching contributions to other investment options available under the
Savings Plan.
The Company also sponsors pension plans in several foreign locations.
The Company's pension contributions in 2001, 2000 and 1999 amounted to
approximately $9.2 million, $4.9 million, and $4.3 million, respectively.
39
11. 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-
UPS, Matrix-UPS, Symmetra Power Array and Back-UPS family of UPSs. Also
included are the SurgeArrest 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
PowerChute software, MasterSwitch power distribution units and NetShelter 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 systems. 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.
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.
Summary operating segment information is as follows:
In thousands 2001 2000 1999
Segment net sales
Small Systems $1,176,036 $1,265,264 $1,236,413
Large Systems 211,670 193,623 100,852
Other 39,554 14,643 -
Total segment
net sales 1,427,260 1,473,530 1,337,265
Shipping and
handling revenues 6,052 10,033 7,666
Total net sales $1,433,312 $1,483,563 $1,344,931
40
Summary operating segment information is as follows (cont.):
In thousands 2001 2000 1999
Segment profits
Small Systems $484,452 $558,548 $554,385
Large Systems (31,628) 6,261 17,310
Other 22,837 7,792 -
Total segment profits 475,661 572,601 571,695
Shipping and
handling net costs 20,777 20,745 16,988
Indirect operating
expenses 310,031 342,383 275,482
Other income, net 13,700 23,838 13,292
Earnings before
income taxes $158,553 $233,311 $292,517
Segment depreciation
Small Systems $22,692 $18,517 $17,072
Large Systems 8,212 4,885 3,130
Other 65 77 -
Total segment
depreciation 30,969 23,479 20,202
Corporate 13,408 8,878 6,872
Total depreciation $44,377 $32,357 $27,074
Summary geographic information is as follows:
In thousands 2001 2000 1999
Net sales
United States $757,058 $787,359 $708,777
North and Latin America
excluding United States 72,056 65,330 70,372
Europe, Middle East,
and Africa 372,762 395,417 385,486
Far East 231,436 235,457 180,296
$1,433,312 $1,483,563 $1,344,931
Sales are attributed to geographic regions based on location of customer.
No individual foreign country is material in relation to total net sales.
In thousands 2001 2000 1999
Capital expenditures
United States $15,382 $36,776 $19,329
Europe 7,602 13,427 8,851
Philippines 9,237 19,195 7,823
Other Far East 11,671 4,318 -
Latin America 3,967 - -
$47,859 $73,716 $36,003
Long-lived assets
United States $140,192 $150,929 $80,066
Europe 135,363 152,913 84,866
Philippines 51,740 47,798 31,558
Other Far East 21,209 14,533 11,438
Latin America 4,769 - -
$353,273 $366,173 $207,928
41
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 15.5% and 13.3%,
respectively, of the Company's net sales in 2001, and 14.9% and 11.4%,
respectively, of the Company's net sales in 2000. No single customer comprised
10% or more of the Company's net sales in 1999. The majority of the Company's
sales to Ingram Micro and Tech Data Product Management are included in the Small
Systems reportable segment.
12. Litigation
The Company is involved in various claims and legal actions arising in the
ordinary course of business. The Company does not believe that the ultimate
disposition of these matters will have a material adverse effect on its
consolidated financial position or results of operations or liquidity.
13. 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.
14. Commitments
The Company has several non-cancelable operating leases, primarily for
warehousing and office space, expiring at various dates through 2010. These
leases contain renewal options for periods ranging from one to nine years and
require the Company to pay its proportionate share of utilities, taxes, and
insurance. Rent expense under these leases for 2001, 2000 and 1999 was $7.7
million, $6.7 million, and $4.3 million, respectively.
Future minimum lease payments under these non-cancelable leases are: 2002 - $7.2
million; 2003 - $5.4 million; 2004 - $4.3 million; 2005 - $3.1 million; 2006 -
$1.7 million; and $5.8 million thereafter.
15. 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, 2001 for the Galway facility were approximately $9.6 million and
$9.0 million, respectively. The total cumulative amount of capital grant claims
submitted through December 31, 2001 for the Castlebar facility was $0.3 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, 2001 for the
Galway facility were approximately $1.0 million and $1.0 million, respectively.
The total cumulative amount of training grant claims submitted and received
through December 31, 2001 for the Castlebar facility were approximately $1.2
million and $0.7 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.
42
16. Quarterly Financial Data (Unaudited)
The following is a summary of quarterly results of operations in thousands
except per share amounts:
Q1 Q2 Q3 Q4
2001
Net sales $359,688 $364,544 $360,943 $348,137
Gross profit $124,989 $143,057 $116,918 $127,453
Net income $27,194 $34,799 $22,295 $29,077
Basic earnings
per share $0.14 $0.18 $0.11 $0.15
Basic weighted
average shares
outstanding 195,132 195,176 195,377 195,536
Diluted earnings
per share $0.14 $0.18 $0.11 $0.15
Diluted weighted
average shares
outstanding 196,700 197,482 196,522 196,966
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 $0.24 $0.18 $0.23 $0.20
Basic weighted
average shares
outstanding 193,450 194,089 194,600 194,761
Diluted earnings
per share $0.24 $0.17 $0.22 $0.20
Diluted weighted
average shares
outstanding 199,530 201,040 200,112 196,350
17. Subsequent Event
During the first quarter of 2002, the Company announced global headcount
reductions of approximately 17%. These actions impact personnel worldwide
throughout a broad range of functions within the organization. The majority of
these terminations are the result of the Company's recent decision to
consolidate its Philippines-based manufacturing operations resulting in the
closing of its manufacturing facility in the province of Laguna. These actions
have been and are being implemented during the first half of 2002.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
43
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 2002 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 2002 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 2002 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 2002
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, 2001 and 2000
Consolidated Statements of Income for each of the three years ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity for each
of the three years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for each of the three years
ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules
Schedule Page
Number Description Number
II Valuation and Qualifying 50
Accounts and Reserves
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 46 and 47.
44
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 and dated as of
February 7, 2001 entered into by the Company with Edward M. Machala. (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, 2001.
45
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, 2001 and 2000, 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,
2001. 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, 2001 and 2000, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Providence, Rhode Island
January 31, 2002, except as to Note 17,
which is as of March 28, 2002
46
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American Power Conversion Corporation:
Under date of January 31, 2002, except as to Note 17, which is as of March 28,
2002, we reported on the consolidated balance sheets of American Power
Conversion Corporation and subsidiaries as of December 31, 2001 and 2000, 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,
2001, which are contained in the annual report on Form 10-K for the year 2001.
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
January 31, 2002
47
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 25, 2002
By: /s/ Donald M. Muir
Donald M. Muir,
Senior Vice President, Finance and Administration,
Treasurer, and Chief Financial 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 25, 2002
By: /s/ Rodger B. Dowdell, Jr.
Rodger B. Dowdell, Jr.,
Chairman, President,
Chief Executive Officer and Director
(principal executive officer)
Date: March 25, 2002
By: /s/ Donald M. Muir
Donald M. Muir,
Senior Vice President, Finance and Administration,
Treasurer, and Chief Financial Officer
(principal financial and accounting officer)
Date: March 25, 2002
/s/ Neil E. Rasmussen
Neil E. Rasmussen,
Senior Vice President, Chief Technology Officer and Director
Date: March 25, 2002
/s/ Emanuel E. Landsman
Emanuel E. Landsman,
Vice President and Director
Date: March 25, 2002
/s/ Ervin F. Lyon
Ervin F. Lyon,
Director
48
SIGNATURES (Cont.)
Date: March 25, 2002
/s/ James D. Gerson
James D. Gerson,
Director
Date: March 25, 2002
/s/ John G. Kassakian
John G. Kassakian,
Director
Date: March 25, 2002
/s/ John F. Keane, Sr.
John F. Keane, Sr.
Director
49
Schedule II
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
For the years ended December 31, 2001, 2000 and 1999
Valuation accounts deducted from assets to which they apply:
In thousands Balance at Charged to Write Offs/ Balance
Beginning Costs and Allowances at End
of Year Expenses Taken of Year
Allowance for
Doubtful
Accounts
Receivable
2001 $20,085 $4,775 $(6,148) $18,712
2000 19,543 2,028 (1,486) 20,085
1999 15,471 6,015 (1,943) 19,543
Inventory
Reserve
2001 $20,481 $18,015 $(5,646) $32,850
2000 17,080 4,632 (1,231) 20,481
1999 13,278 6,724 (2,922) 17,080
Deferred Tax
Asset
Valuation
Allowance
2001 $- $1,659 $- $1,659
2000 - - - -
1999 - - - -
50
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Page
Number Description Number
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)
51
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX (CONT.)
Exhibit Page
Number Description Number
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 and dated as of February 7, 2001
entered into by the Company with Edward M. Machala. (X) (10.25)
21 Subsidiaries of Registrant 53
23 Consent of KPMG LLP 54
* 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.
52
Exhibit 21
AMERICAN POWER CONVERSION CORPORATION
Subsidiaries as of December 31, 2001
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 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
American Power Conversion France SARL France
Advance Power Elektronics KFT Hungary
APC Korea Corporation Korea
American Power Conversion Hong Kong Limited Hong Kong
(50%; 50% American Power Conversion
Corporation (A.P.C.) B.V.)
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
53
Exhibit 23
ACCOUNTANTS' CONSENT
The Board of Directors
American Power Conversion Corporation:
We consent to incorporation by reference 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
January 31, 2002, except as to Note 17, which is as of March 28, 2002, relating
to the consolidated balance sheets of American Power Conversion Corporation and
subsidiaries as of December 31, 2001 and 2000, 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, 2001, and the related
schedule, which reports appear in the 2001 annual report on Form 10-K of
American Power Conversion Corporation.
KPMG LLP
Providence, Rhode Island
April 1, 2002
54