Item 1. Description of Business
The Company
American Power Conversion Corporation and its subsidiaries (the “Company”) designs, develops, manufactures, and markets power protection and management solutions for computer and electronic applications worldwide. The Company’s solutions include uninterruptible power supply products (“UPS”), electrical surge protection devices, power conditioning products, and associated software, services, and accessories. These solutions are for use with sensitive electronic devices which rely on electric utility power including, but not limited to, home electronics, personal computers (“PCs”), high performance workstations, servers, networking equipment, telecommunications equipment, internetworking equipment, datacenters, mainframe computers, and facilities.
Acquisition of Silcon A/S
Market Overview
Products
Service Programs
Distribution Channels
Sales and Marketing
Manufacturing, Quality Control, and Supply
Product Development
Intellectual Property
Competition
International Operations
Financial Infromation About Foreign and Domestic Operations
Employees
Executive Officers of the Company
The Company's UPS products regulate the flow of utility power to ensure safe and clean power to the protected equipment and provide seamless backup power in the event of the loss of utility power. The backup 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 even days. The Company's surge protection devices and power conditioning products provide protection from electrical power surges and noise in the flow of utility power. The Company’s software and accessory solutions enhance monitoring, management, and performance of APC’s UPS products. The Company’s service offerings assist the end-user with installation and maintenance of the Company’s UPS products.
The Company markets its products to business and home users around the world through a variety of distribution channels, including computer distributors and dealers, value added resellers, mass merchandisers, catalog merchandisers, E-commerce vendors, and strategic partnerships.
The Company was incorporated under the laws of the Commonwealth of Massachusetts on March 11, 1981. The Company's executive offices are located at 132 Fairgrounds Road, West Kingston, RI 02892 and its telephone number is (401) 789-5735.
Acquisition of Silcon A/S
Early in the second quarter of 1998, the Company entered into a definitive agreement with the principal management shareholders of Silcon A/S (“Silcon”) to acquire stock of Silcon, a Denmark-based manufacturer of three-phase UPSs up to 480 kilo volt-amps (“kVA”), and the Company commenced a tender offer for Silcon shares. In June 1998, the initial tender offer and purchase of stock from principal management shareholders was completed enabling the Company to operate Silcon as a majority-owned subsidiary. During the second half of 1998, the Company increased its ownership percentage to 89%. The Company’s 1998 cash outlays associated with the acquisition aggregating $64 million were financed from operating cash. In January 1999, the Company attained ownership of more than 90% of the share capital of Silcon through open market purchases financed from operating cash and commenced a mandatory redemption of the remaining Silcon shares. Through this mandatory share redemption process, the Company anticipates that it will complete its acquisition of the remaining outstanding shares of Silcon during the second half of 1999. In connection with the mandatory redemption, the Copenhagen Stock Exchange has approved the de-listing of Silcon’s shares effective March 1, 1999. See also the “Acquisition” section included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Report.
Market Overview
The growth of the UPS industry has been fueled by the rapid proliferation of microprocessor-based equipment and related systems in the corporate marketplace and in the small office / home office (“SOHO”) environment. PCs and servers have become an integral part of the overall business strategy of many organizations as well as in many technical, scientific, and manufacturing settings. Businesses continue to implement and run their operations via local area and wide area networks (“LANs” and “WANs”) as well as via corporate intranets and the Internet. Businesses are also becoming aware of the need to protect devices such as switches, hubs, routers, bridges, and other “smart” devices that manage and interconnect networks. It is necessary to protect both the hardware and data stored in and traveling through these networks as well as to provide battery back-up to enhance productivity through the high availability of networks, sensitive electronics and even facilities.
The Company believes 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 related 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, as well as line filtering and protection against surges or sags while the electric utility is operating. A UPS can draw on the energy stored in its internal battery to provide continuous, clean, computer power. In international regions power quality often results in varied levels of distortions and, as a result, these areas provide the Company with additional opportunities for its products.
In 1998, the Company focused on providing global, end-to-end, Nonstop Networking solutions for the PC, server, datacenter and enterprise markets. The acquisition of Silcon expanded the scope of the Company’s product reach, enabling it to address incremental segments of the UPS market, i.e., the larger than 16 kVA or enterprise segment that it was not previously addressing. Major global trends affecting the Company’s business in 1998 included the continued global proliferation of servers and information technology (“IT”) equipment, including those for Internet and intranet applications; the growth of PC sales; and the continued poor and unreliable quality of power worldwide.
The Company’s goal is to leverage these trends, to target the sales of UPSs with new IT equipment, to have the products and presence to succeed in new geographies, and to continue to position itself as the UPS and power protection solution provider of choice. The Company also continues to target promotional efforts at the corporate, home, and SOHO PC markets, which it has identified as growth opportunities for the future, and continues to target industries that are becoming more dependent on electronic systems, such as the telecommunications industry, as potential market growth opportunities.
Products
The Company's strategy is to design and manufacture products which incorporate high-performance and quality at competitive prices. The Company’s products are designed to fit seamlessly into the computer and networking environments of businesses, homes, and SOHOs. These products are engineered and extensively tested for compatibility with leading PC, server, datacenter, and enterprise hardware and software.
The Company currently manufactures a broad range of standard domestic and international power protection solutions. The Company’s UPS models are designed for different 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 “run time”), the level of intelligent network interfacing capability, and the number of brownout and overvoltage correction features. The Company's present line of UPS products ranges from 200 volt-amps (suitable for a PC) to 480 kVA (suitable for mainframe computers or facilities). List prices to end-users range from approximately $100 to approximately $200,000. The Company also offers SurgeArrest®, PowerManager™, and ProtectNet® 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. List prices to end-users range from approximately $25 to approximately $135.
The Company also develops a family of software products under the PowerChute® plus name which provides its users with unattended shutdown capabilities, UPS power management, and diagnostic features. PowerChute plus is available free of charge for many major operating systems with the purchase of select UPS units from the Company. List prices to end-users for other PowerChute products start at $69. The Company also offers software packages for advanced monitoring, configuring, and managing of power resources. Select versions are available free of charge from the Company. List prices range from $169 to $499.
In addition, the Company offers a range of complimentary accessory products designed to enhance the functionality of the Company’s UPS and surge protection products. NetShelter® is a high-quality, free-standing enclosure for storing and protecting network, internetworking, and power protection equipment. Other accessories offered by the Company include MasterSwitch™ which provides remote Web/SNMP management and control of power to attached network devices; PowerView™ for display of a UPS’s operational status; Share-UPS® for reliable shutdown of multiple servers connected to a single UPS; SmartSlot™ adapters designed to fully integrate with APC Smart-UPS®, Matrix UPS®, and Symmetra™ Power Array™ systems for advanced UPS and environmental management; and customized cables for enhanced management and monitoring of APC UPSs. List prices to end-users for accessory products range from $75 to $1,999.
Service Programs
The Company provides service programs to its customers for in-warranty UPS products and out-of-warranty UPS products, as well as for product installation and start-up. The Company offers two-year and one-year limited warranties covering its UPS products. The Company also offers its customers the opportunity to extend the basic warranty period, 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, the Company will replace the original unit with a factory reconditioned unit or, if requested, repair the original unit and return it to the customer. The extended warranty can be purchased anytime during the standard warranty period. For a fixed fee (varying by model), the Company will replace an out-of-warranty UPS unit with a factory reconditioned unit. The Company offers a standard one year warranty which covers certain Silcon product parts. This warranty can be extended in annual increments for a period not to exceed ten years. Additionally, the Company offers on-site service and preventative maintenance visits for Silcon systems. The Company offers on-site service through APC’s service department and third party vendors as well as Trade-UPS programs for customers to upgrade old APC or competitive units to new APC units. The Company offers PowerAudit®, an on-site power quality consulting service which analyzes the electrical infrastructure of a building to determine its suitability for a given business and to identify corrections to existing anomalies.
The Company offers an Equipment Protection Policy (U.S. and Canada only) which provides up to $25,000 for repair or replacement of customers' hardware should a surge or lightning strike pass through a Company unit. The policy applies to all units manufactured after January 1, 1992. Other restrictions also apply. The Company’s customers can also register the ProtectNet line of data line surge suppressors for a “Double-Up” Supplemental Equipment Protection Policy, under which the total recoverable limit under the Equipment Protection policy is doubled, up to $50,000. Most of the Company’s surge suppressor products come with a lifetime product warranty.
The Company’s products have experienced satisfactory field operating results, and warranty costs incurred to date have not had a significant impact on the Company's consolidated results of operations.
Distribution Channels
The Company markets its products to businesses, home users, and SOHOs around the world through a variety of distribution channels, including computer distributors and dealers, value added resellers, mass merchandisers, catalog merchandisers, E-commerce vendors and strategic partnerships. The Company also sells directly to some large value added resellers, which typically integrate the Company’s products into specialized microcomputer systems and then market turnkey systems to selected vertical markets. Additionally, the Company sells certain select products directly to manufacturers for incorporation into products manufactured or packaged by them.
In 1998 and 1997, one customer accounted for approximately 11% and 10%, respectively, of the Company’s net sales. In 1996, no single customer comprised 10% or more of the Company’s net sales.
Sales and Marketing
The Company’s sales and marketing organizations are primarily responsible for four activities: sales, marketing, customer service, and technical support. The Company’s sales staff 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 the Company is expanding. The Company’s sales force focuses on the customer through customer units dedicated to specific customer groups. The Company has charged its sales force with providing its customers with comprehensive product and service solutions to their power management needs.
The Company’s marketing activities include market research, product planning, trade shows, sales and pricing strategies, and product sales literature. The Company also utilizes direct marketing efforts domestically and internationally, including direct mailings and print, online/Internet, radio, and television advertising, as well as exhibiting at computer trade shows. Customer service is responsible for all technical marketing inquiries and customer support. The Company has developed a number of programs and techniques to support the Company’s distribution channels. These include, but are not limited to, toll-free phone assistance, online product and technical information, formal product demonstrations, and reseller trainings.
Manufacturing, Quality Control, and Supply
The Company’s manufacturing operations are located in the United States, Ireland, the Philippines, China, Denmark, and Switzerland. The Company believes that its long-term success depends on, among other things, its ability to control its costs. The Company utilizes state-of-the-art automated manufacturing techniques and extensive quality control in order to minimize costs and maximize product reliability. In addition, the design of products and the commonality of parts allow for efficient circuit board component insertion, wave soldering, and in-process testing. Quality control procedures are performed at the component, sub-assembly, and finished product levels.
The Company is committed to an ongoing effort to enhance the overall productivity of its manufacturing facilities. The Company uses lean, “cell” based manufacturing processes. Such processes have been implemented in the Company’s U.S. facilities as well as a majority of its international locations.
National Quality Assurance has granted the Company its ISO 9000 quality seal. The Company’s systems have been audited to the stringent ISO 9002 level at its manufacturing facilities in the United States, Galway, Ireland, and at two of its facilities in the Philippines. Additionally, its Denmark manufacturing operation is certified at the ISO 9001 level.
The Company generally purchases devices and components from more than one source where alternative sources are available; however, it does use sole source suppliers for certain components. The Company believes that alternative components for these sole source items could be incorporated into the Company’s products, if necessary. While the Company has been able to obtain adequate supplies of its 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. See also the Company’s Year 2000 Readiness Disclosure Statement included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Report.
Product Development
The Company's research and development (“R&D”) staff includes engineers and support persons who develop new products and provide engineering support for existing products. The Company’s R&D efforts are also aimed at reducing cost and total cycle time and improving product and component quality. Most of these employees are located in two Massachusetts facilities with additional resources located in Denmark. 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 the Company’s subsidiary, Systems Enhancement Corporation. The Company believes that the technical expertise of its R&D staff is very important to its growth as technological change is rapid in the UPS field.
During 1998, the Company expanded its product offerings in the enterprise market with the acquisition of Silcon, a leading manufacturer of three-phase UPSs up to 480 kVA. (For more information about this acquisition, see the “Acquisition” section included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Report.) Implementation of APC’s enterprise power protection strategy began in 1997 with the introduction of the Symmetra Power Array, the first scalable and fault-tolerant power protection system for multiple servers, computer rooms, call centers, and back-office applications. The Company also innovated its desktop line of UPSs during 1998, revamping its Back-UPS® line and adding new features, including Universal Serial Bus support, to select products in the Back-UPS Pro® line. Additional areas of development included new products for the internetworking market; additional network management support via new PowerChute and PowerNet® solutions; and customized hardware and software products for strategic partners.
During 1997, the Company’s new product offerings included the Symmetra Power Array, its first entry into the above 5kVA market segment. Shipments of Symmetra began in the third quarter of 1997. The Company also added additional products which strengthen the Company’s position as an overall network solution provider. These introductions included additions to the Company’s SurgeArrest line of surge protectors; additional and enhanced solutions for addressing manageability across a growing number of operating systems and management platforms; new rack-mount networking solutions and special product development for our strategic partners and international marketplaces.
During 1996, the Company’s new product offerings included the Back-UPS Office® which was introduced in the second quarter. This product was designed to be solution specific to the PC end-user, especially those using the Internet. Other new products included web management capability with PowerChute plus software, a network-manageable power distribution unit, and MasterSwitch, which enables a network manager to control attached loads independent of each other.
Intellectual Property
The Company protects certain proprietary rights in its products as well as certain proprietary technology developments by seeking patent protection. The Company believes that the loss of such rights concerning these developments would not have a material adverse effect on the Company’s business. With respect to protection of those areas of its technology for which patent protection has not been sought, the Company relies on the complexity of its technology, trade secrecy law, and employee confidentiality agreements.
The Company has numerous trademarks registered in the United States and in many foreign countries. The Company also has trademark applications pending domestically and internationally. The Company believes that its trademarks are valuable intangible assets, but also believes that the loss of any one trademark would not have a material adverse effect on its operations.
Competition
The Company believes that it is one of less than ten global companies providing a full range of UPS products and services worldwide. The Company’s principal competitors include Exide Electronics Group, Inc., a business unit of BTR PLC, Best Power, a business unit of SPX Corp., Liebert Corporation, a division of Emerson Electric Co., MGE UPS Systems, a privately held French company, Chloride Power, a subsidiary of Chloride Group PLC, and Phoenixtec Power Company Ltd., a publicly held Taiwanese company. The Company also competes with a number of other U.S. and non-U.S. based companies which offer power protection products similar to the Company’s products. Some of these competitors have greater financial and other resources than the Company. The Company competes in the sale of its products on the basis of several factors, including product performance and quality, marketing and access to distribution channels, customer service, product design, and price.
International Operations
The Company plans to continue to expand its international marketing efforts and manufacturing operations. With a full line of internationally-positioned products already available, the Company continues to staff personnel to serve geographical markets of interest. The Company’s primary manufacturing operations outside of the United States are located in Ireland, the Philippines, China, Denmark, and Switzerland. For more information about the Company’s recent Denmark-based acquisition, see the “Acquisition” section included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Report. The Company’s 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 customers around the globe. The Company utilizes third party warehouses in Europe, the Far East, Canada, South Africa, and Uruguay for distribution into its international markets.
During the fourth quarter of 1998, the Company began establishing a manufacturing operation in India. The Company will be leasing a 42,000 square foot facility in Bangalore and expects to begin manufacturing selected products at this facility during the second quarter of 1999.
During the first quarter of 1998, the Company established a manufacturing operation in China. The Company is leasing a 50,000 square foot facility in Suzhou and began manufacturing selected products at this facility during the third quarter of 1998.
The Company’s manufacturing facilities in the Philippines are operating within a designated economic zone which provides certain incentives, primarily in the form of tax exemptions. In August 1998, the Company purchased a third manufacturing facility in the Philippines for approximately $750,000, financed from operating cash. The Philippines facilities manufacture certain Back-UPS and Smart-UPS products sold in the Company’s domestic and international markets.
The Company’s Galway and Castlebar, Ireland operations are providing manufacturing and technical support to service the Company's international customers. 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 and $1.3 million, respectively. Such grant monies are subject to the Company meeting certain employment goals and maintaining operations in Ireland until termination of the respective agreements. 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. See also note 12 to the consolidated financial statements.
The Company continues to evaluate international manufacturing expansion including additional locations in the Far East and South America.
Financial Information About Foreign and Domestic Operations
The information required under this section is included in note 8 of Notes to Consolidated Financial Statements in Item 8 of this Report and is incorporated herein by reference.
Employees
As of December 31, 1998, the Company had approximately 5,443 full-time employees worldwide, approximately 2,173 of whom are located in the United States and Canada. The Company also engages other personnel on a part-time basis. The Company considers its relations with employees to be good.
Executive Officers of the Company
Executive officers of the Company 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 February 18, 1999, the executive officers of the Company were as follows:
Rodger B. Dowdell, Jr
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Chairman of the Board of Directors, President, and Chief Executive Officer
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Neil E. Rasmussen
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Vice President, Chief Technical Officer, and Director
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Edward W. Machala
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Vice President, Finance and Administration, and Chief Financial Officer
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Donald M. Muir
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Vice President, Finance and Administration, and Chief Financial Officer
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Emanuel E. Landsman
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Vice President, Clerk, and Director
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David P. Vieau
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Vice President, Worldwide Business Dev.
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Aaron L. Davis
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Vice President, Marketing and Communications
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Rodger B. Dowdell, Jr. joined the Company in August 1985 and has been the President and a Director since that time. From January to August 1985, Mr. Dowdell worked for the Company as a consultant, developing a marketing and production strategy for UPS products. From 1978 to December of 1984 he was President of Independent Energy, Inc., a manufacturer of electronic temperature controls.
Neil E. Rasmussen has been Vice President and a Director of the Company since its inception. From 1979 to 1981, Mr. Rasmussen worked in the Energy System Engineering Group at Massachusetts Institute of Technology’s Lincoln Laboratory.
Edward W. Machala joined the Company in January 1989 as Vice President, Operations. From January 1985 to January 1989, Mr. Machala was Director of Manufacturing and Engineering Technology for GTECH, a manufacturer of electronic lottery and gaming terminals, where he was responsible for manufacturing and engineering functions.
Donald M. Muir joined the Company in July 1995 as Chief Financial Officer. From July 1993 to July 1995, Mr. Muir was the Treasurer of Stratus Computer, Inc. where he was responsible for managing investor relations, treasury services, corporate taxation and risk management. Prior to his appointment as Treasurer at Stratus Computer, Inc., Mr. Muir held the position of Director of Finance and Administration from January 1991 to July 1993 and Controller, Worldwide Sales and Service from December 1988 to January 1991.
Emanuel E. Landsman has been Vice President, Clerk, and a Director of the Company since its inception. From 1966 to 1981, Dr. Landsman worked at Massachusetts Institute of Technology’s Lincoln Laboratory, where he was in the Space Communications Group from 1966 to 1977 and the Energy System Engineering Group from 1977 to 1981.
David P. Vieau assumed the position of Vice President, Worldwide Business Development in October 1995 after completing a short sabbatical. Mr. Vieau served as Vice President of Marketing from October 1991 to June 1995. From July 1988 to August 1991, he was President of Poly-Flex Circuits, Inc., a division of Cookson America.
Aaron L. Davis was appointed Vice President, Marketing and Communications in June 1997, after serving as Vice President of Marketing Communications since January 1995. Mr. Davis joined the Company as Director of Marketing Communications in May 1989. |
