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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 AND
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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 Jusrisdiction of (I.R.S. Employer Identification
Incorporation or Organization) No.)
132 FAIRGROUNDS ROAD, WEST KINGSTON, RHODE ISLAND 02892
401-789-5735
(Address and telephone number of Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
Common Stock, $.01 par value Registered
Pacific Stock Exchange
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 February 24, 1998 was approximately $2,279,628,000 based
on the price of the last reported sale as reported by the NASDAQ Stock
Market on February 24, 1998. The number of shares outstanding of the
Registrant's Common Stock on February 24, 1998 was 95,285,100.
Documents Incorporated by Reference
Portions of the Registrant's definitive Proxy Statement in connection with
the Annual Meeting of the Shareholders to be held on May 1, 1998 are
incorporated by reference in Part III hereof.
- Exhibit Index on Sequentially Numbered Page 41 -
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Part I
Item 1. Description of Business
The Company
American Power Conversion Corporation and its subsidiaries (the "Company")
designs, develops, manufactures, and markets a line of uninterruptible power
supply products ("UPS"), electrical surge protection devices, power conditioning
products, and associated software and accessories for use with personal
computers ("PCs"), engineering work stations, networking equipment and servers,
communications and internetworking equipment, and a variety of other sensitive
electronic devices which rely on electric utility power. The variation or
interruption of power to sensitive parts of a computer system may damage or
destroy important hardware, data, or the computer's set of operating
instructions. The Company's UPS products provide protection from disturbances
in the smooth flow of power while utility power is available and provide
automatic, virtually instantaneous backup power in the event of a loss of
utility power. The backup power lasts for a sufficient period of time (from
five minutes to several hours) to enable the user to continue computer
operations or conduct an orderly shutdown of the protected equipment and
preserve data. 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 markets its products to business and home users around the world
through a variety of distribution channels, including computer distributors and
dealers, mass merchandisers, catalog merchandisers, and private label accounts.
The Company believes that the proprietary design of its products, its strict
quality control systems, and its automated production equipment enable it to
provide customers with high-performance, cost-effective products and are
primarily responsible for its high rate of growth and its leadership in the
markets it serves.
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.
Market Overview
The UPS industry's growth is the result of the rapid proliferation of
microprocessor-based equipment and related systems in the corporate marketplace
as well as in small business and home environments. PCs have become an integral
part of the overall business strategy of many organizations as well as in many
technical and manufacturing settings. Businesses continue to change their
computer configurations from mainframe and remote terminals to linked PCs in
local area networks ("LANs"). PCs and servers have become increasingly
important and it has become necessary to ensure that data stored in and
operating instructions for them are protected from fluctuations in utility
power. Businesses are also becoming aware of the need to protect devices such
as hubs, routers, bridges, and other "smart" devices that manage and
interconnect networks. In addition to the demand that traditional server-based
networks create for UPSs, the growth opportunities from the proliferation of
wide-area networks (such as the Internet) will further stimulate UPS demand.
The Company believes that the increasing awareness of the costs 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, surge-free, computer power. Power
quality in many international regions often results in varied levels of
distortions and, as a result, these areas provide the Company with significant
opportunities for its products.
In 1997 the Company continued to focus on providing "best of breed" solutions
for the PC and server market, while adding innovative products for the
datacenter market to its offerings. Major global trends affecting the Company's
business in 1997 included the continued proliferation of servers, including
those for Internet and intranet applications; the continued decline of server
prices; the growth of networking applications; the growth of PC sales; and the
continued poor quality of power. The Company's goal is to leverage these
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trends, to target the sales of UPS to new servers, to have the products and
presence to succeed in new geographies and to continue to position itself as the
UPS and power solution provider of choice. The Company also continues to target
promotional efforts at the Small Office, Home Office (SOHO) market which it has
identified as a growth opportunity 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. The
Company believes that the overall penetration by UPS products of the server
market is approximately 70-80% and penetration of the PC market remains less
than 10%.
Products
The Company's strategy has been to design and manufacture products which
incorporate high-performance and quality at competitive prices. In addition,
certain products are designed to be aesthetically pleasing and appropriate for
use in an office environment. The products are engineered and extensively
tested for compatibility with many common PC, server, and datacenter
applications.
Each of the Company's UPS products contains the following elements necessary to
perform its function:
Surge suppressors and noise filters for protection from surges in
utility power;
A rechargeable battery to provide backup power;
An inverter to convert battery power to usable AC current;
A battery charger;
An automatic high-speed switch to transfer to backup power on loss of
utility power; and
Sensors, control circuits, and indicators to properly sequence
operation and provide status information to the user.
Each of the Company's surge protection products contains the following elements
necessary to perform its function:
Surge suppressors and noise filters for protection from surges in
utility power; and
Sensors, control circuits, and indicators to provide status
information to the user.
The Company currently manufactures a broad range of standard domestic and
international UPS models designed for different applications. The principal
differences among the products are 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
16,000 volt-amps (suitable for a datacenter). The products can also support
work groups utilizing either a LAN or a multi-user system consisting of a host
computer and linked terminals. List prices to end-users for products ranging
from 200 volt-amps to 5,000 volt-amps range from $100 to $6,767. List prices to
end-users for products ranging from 8,000 volt-amps to 16,000 volt-amps range
from $7,919 to $17,278. In addition to its UPS products designed for the office
environment, the Company manufactures rack-mount UPS products designed for use
in back office and manufacturing operations. The Company also offers
SurgeArrestr, PowerManager and ProtectNetr products with the principal
difference among the models being the level of protection available and feature
sets. List prices to end-users range from $15 to $135.
The Company also develops a family of software products under the PowerChuter
plus name which provides its users with unattended shutdown capabilities, UPS
power management, and diagnostic features. PowerChute plus is available free of
charge with the purchase of select UPS units from the Company for many major
operating systems. List prices to end-users for other PowerChute products range
from $69 to $299. The Company also offers PowerNetT and PowerXtendT 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 $199 to $699.
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. NetShelterT is a high quality, free standing rack enclosure for
storing and protecting network, internetworking, and power protection equipment.
Other accessories offered by the Company include MasterswitchT to provide
remote web and SNMP management and control of networks; PowerViewT for display
of a UPS's operational status; Share-UPST and the SmartSlotT Interface Expander
for reliable shutdown of multiple servers connected to a single UPS; Measure-
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UPST to provide environmental and security monitoring; SmartSlot Expansion
Chassis, which connects multiple accessories to a single UPS; Call-UPST II,
which provides remote, out of band UPS management via modem; SmartSlot Relay I/O
module, which integrates UPS control into dry contact environments; Control-
UPS/400T, which monitors and manages an AS/400 system via UPS. List prices to
end-users for accessory products range from $75 to $2,059.
Service Programs
The Company provides service programs to its customers for in-warranty and out-
of-warranty UPS products. The Company's standard practice is to grant a two-
year limited warranty covering its UPS products. The Company offers its
customers the opportunity to extend the basic warranty period, at an additional
charge, an additional three 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.
Customers who purchase the three-year extension will enjoy warranty coverage for
a total of five full years from the original UPS purchase date. For a fixed fee
(varying by model), the Company will replace an out-of-warranty UPS unit with a
factory reconditioned unit. The Company also offers on-site service through
third party vendors and Trade-UPS programs for customers to upgrade old APC or
competitive units to new units. The Company also offers PowerAuditr, an on-site
power quality consulting service which analyzes the electrical infrastructure of
a building and determines its suitability for a given business or to correct
existing anomalies.
The Company has 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 ProtectNetr line of data line
surge suppressors for a unique "Double-Up" Supplemental Equipment Protection
Policy, under which the total recoverable limit under the Equipment Protection
policy is doubled, up to $50,000.
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 through a domestic and international network of
computer distributors, computer dealers, mass merchandisers, and catalog
merchandisers. 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. The Company also sells certain selected products directly to
manufacturers for incorporation into products manufactured or packaged by them.
In 1997, Ingram Micro Corporation, accounted for approximately 10% of the
Company's net sales. In 1996 and 1995, 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 existing
distributors and dealers and developing new distribution channels, particularly
in geographic areas into which the Company is expanding. The sales group
conducts ongoing training and support for dealers and distributors. The
Company's domestic 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 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, advertising, and product sales
literature. The Company also utilizes direct marketing efforts, including
direct mailings, print, radio, and television advertising, and exhibiting at
major computer trade shows, both domestically and internationally. 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 a technical
assistance "hot line," formal product demonstrations, and reseller trainings.
4
Manufacturing, Quality Control, and Supply
The Company's manufacturing operations are located in the United States,
Ireland, and the Philippines. 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 allows 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. To ensure the highest level of quality
and product reliability, the Company has implemented 100% product testing at
seven discrete levels in its manufacturing process. Product design and
efficient manufacturing techniques have enabled the Company to keep its direct
and indirect manufacturing labor costs (including incentive bonuses), as a
percentage of net sales, below that of similar manufacturing companies in the
electronics industry.
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 Rhode Island facilities as well as applied to its international
locations. The Company has also adopted a "focused factories" philosophy aimed
at reducing the number of products built in any given location to increase
efficiency and overall quality. The Company is implementing this philosophy in
its manufacturing efforts worldwide.
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 and Galway, Ireland.
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.
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. Employees devoted to the
improvement and development of software products are located in the West
Kingston, Rhode Island facility and in the Company's subsidiary, Systems
Enhancement Corporation, located in St. Louis, Missouri. 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 1997, the Company's new product offerings included the SymmetraT
PowerArrayT ("Symmetra"), its first entry into the above 5kVA market segment.
The product is a fault-tolerant and scalable power protection solution for
datacenter applications. 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 include
additions to the Company's SurgeArrestr 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 OEM partners and international
marketplaces.
During 1996, the Company's new product offerings included the Back-UPS Officer
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 include web management capability with PowerChuter plus
software, a network-manageable power distribution unit, and MasterswitchT, which
enables a network manager to control attached loads independent of each other.
5
During 1995, the Company introduced 155 new products, including a major
transition of its flagship product line, the Smart-UPSr, from its five year old
design to a new third generation product feature set, including automatic
voltage regulation and adjustment, a user-replaceable battery system, and an
internal accessory option slot. The Company also introduced its Back-UPS Pror
product, which was the first UPS product to be "plug & play" compatible with
Windows 95, and the Smart-UPS v/s products, a line of UPS products for
departmental server applications. Software product introductions included the
Company's first advanced UPS/Power Management software package tailored
specifically for the IBM AS/400 environment.
The Company's design center includes a UPS test facility with a custom-made AC
power fault simulator. This test facility is used to evaluate and extensively
test new designs and to provide comparative data on competitive products.
During the years ended December 31, 1997, 1996, and 1995, expenditures for the
Company's R&D were $22.4 million, $14.8 million, and $13.2 million,
respectively. The Company expects its R&D expenditures to remain at
substantially the same level as a percentage of sales for the foreseeable
future.
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
several 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 five global companies providing a full
range of UPS products and services worldwide in the 0 to 20 kVA UPS market. The
Company's principal competitors in the United States include Exide Electronics
Group, Inc., a business unit of BTR PLC, Best Power, a business unit of General
Signal Corporation, Trippe Manufacturing Company, and Liebert Corporation, a
division of Emerson Electric Co. The Company also competes with a number of
other US and non-US based companies which offer UPS products similar to the
Company's products. Some of these competitors have greater financial and other
resources than the Company. Furthermore, other well-established companies which
manufacture and market UPS products for the mainframe and large minicomputer
markets, and do not presently compete directly with the Company, could develop
products competitive with those of 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
the geographical markets of interest. The Company presently utilizes third
party warehouses in Australia, Canada, Japan, the Netherlands, Singapore, South
Africa, and Uruguay for distribution into its international markets. The
Company's primary manufacturing operations outside of the United States are
located in Ireland and the Philippines. American Power Conversion Europe,
S.A.R.L., the Company's subsidiary located in France, provides sales and
marketing support to customers in Europe, the Middle East, the former Soviet
Union, and Africa and its revenues are in the form of commissions from the
Galway operations. The Company also has an office in Japan which provides sales
and technical support to its customers in Japan. The Company's consolidated
financial statements include the accounts of all of its wholly-owned
subsidiaries.
6
In July 1997, the Company established a second Ireland manufacturing location in
Castlebar. The Company purchased and improved a 70,000 square foot facility at
which the Company began manufacturing certain Matrix-UPST products during the
fourth quarter of 1997. The Company executed an agreement with the Industrial
Development Authority of Ireland ("IDA") under which the Company will receive
grant monies equal to 60% of the costs incurred for machinery, equipment and
building improvements for the Castlebar facility. The maximum amount attainable
under the agreement is approximately $1.3 million. The grant monies would be
repayable, in whole or in part, should (a) the Company fail to meet certain
employment goals established under the agreement which are to be achieved over a
five year implementation period and/or (b) the Company discontinues operations
in Ireland prior to the termination of the agreement. The agreement terminates
five years from the date of the last claim made by the Company for grant monies.
No capital grant claims were submitted during 1997. Under a separate agreement
with the IDA, the Company will also receive up to $12,500 per new employee hired
at the Castlebar facility for the direct reimbursement of training costs. No
training grant claims were submitted during 1997.
In 1994, the Company established its Ireland operations in Galway, through its
subsidiary, American Power Conversion Corporation (A.P.C.) B.V. The facility is
providing manufacturing and technical support to service the Company's
international customers. The Company executed an agreement with the IDA under
which the Company will receive grant monies equal to 40% of the costs incurred
for machinery, equipment and building improvements for the Galway facility. The
maximum amount attainable under the agreement is approximately $13.1 million.
The grant monies would be repayable, in whole or in part, should (a) the Company
fail to meet certain employment goals established under the agreement which are
to be achieved over a five year implementation period and/or (b) the Company
discontinues operations in Ireland prior to the termination of the agreement.
The agreement terminates eight years from the date of the last claim made by the
Company for grant monies. The total cumulative amount of capital grant claims
submitted through December 31, 1997 was approximately $9.5 million. The total
cumulative amount of capital grants received through December 31, 1997 amounted
to approximately $8.6 million. Under a separate agreement with the IDA, the
Company receives up to $3,000 per new employee hired for the direct
reimbursement of training costs. The total cumulative amount of training grant
claims submitted through December 31, 1997 was approximately $1.8 million. The
total cumulative amount of training grants received through December 31, 1997
amounted to approximately $1.3 million.
During 1996, the Company established a manufacturing operation in the
Philippines which is operating within a designated economic zone which provides
certain economic incentives, primarily in the form of tax exemptions. The
Company purchased and improved a 70,000 square foot facility for approximately
$1.5 million which was financed from operating cash. In January 1997, the
Company purchased a second 67,000 square foot location in the Philippines for
approximately $3.0 million. The Company began manufacturing selected products
at this facility during the third quarter of 1997. The Philippines facilities
currently manufacture certain Back-UPSr and Smart-UPSr products sold in the
Company's domestic and international markets.
The Company continues to investigate potential sites for manufacturing expansion
in international locations. The Company currently plans to establish locations
in China during the first half of 1998 and India during the second half of 1998.
Financial Information About Foreign and Domestic Operations and Export Sales
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, 1997, the Company had approximately 3,110 full-time employees
worldwide, approximately 1,729 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 24, 1998, the executive officers of
the Company were as follows:
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Name Age Positions
Rodger B. Dowdell, Jr. 48 Chairman of the Board of Directors, President, and
Chief Executive Officer
Neil E. Rasmussen 43 Vice President of Engineering and Director
Edward W. Machala 44 Vice President of Operations and Treasurer
Donald M. Muir 41 Chief Financial Officer
Emanuel E. Landsman 61 Vice President, Clerk and Director
David P. Vieau 47 Vice President of Worldwide Business Development
Aaron L. Davis 31 Vice President of Marketing and Communications
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 of
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 of 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 of 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.
Item 2. Properties
The Company's U.S manufacturing and distribution center, and corporate offices,
are located at 132 Fairgrounds Road in West Kingston, Rhode Island. In early
1998, the Company completed an 86,000 square foot addition to its West Kingston
facility. Of the approximate 252,000 square feet of space currently in West
Kingston, Rhode Island, 136,000 square feet is being used for sales, marketing,
and administration, 86,000 square feet for manufacturing, and 30,000 square feet
for storage of raw materials and finished goods.
The Company also leases three facilities in Rhode Island located in West
Warwick, East Providence, and Cranston, as well as two facilities in Fort Myers,
Florida. The following information pertains to each location:
8
Location Use Square Feet
West Warwick Warehouse 342,000
Cranston Warehouse 75,200
East Providence Warehouse and 115,800
Manufacturing
Fort Myers Warehouse and 66,000
Manufacturing
Fort Myers Warehouse 85,000
The Company's Ireland manufacturing facility is located in Ballybrit Industrial
Estate, Galway, Ireland. The facility consists of approximately 280,000 square
feet, of which 130,000 square feet are being used for manufacturing, 20,000
square feet for sales and administration, and 130,000 square feet for storage of
raw materials and finished goods. In July 1997, the Company established a
second manufacturing location in Castlebar, Ireland. The Company purchased and
improved a 70,000 square foot facility at which the Company began manufacturing
certain Matrix-UPST products during the fourth quarter of 1997.
In June 1996, the Company purchased and improved a 70,000 square foot
manufacturing and warehouse facility in the Philippines for approximately $1.5
million. In January 1997, the Company purchased a second 67,000 square foot
location in the Philippines for approximately $3.0 million. The purchase price
was financed from available operating cash. The Company began manufacturing
selected products at this facility during the third quarter of 1997. The
Philippines facilities currently manufacture certain Back-UPSr and Smart-UPSr
products sold in the Company's domestic and international markets.
The Company owns and operates a 41,000 square foot building in Billerica,
Massachusetts and a 28,000 square foot building in North Billerica,
Massachusetts to accommodate its R&D operations.
Systems Enhancement Corporation, a subsidiary of the Company engaged in the
development of power management software solutions, is located in 15,000 square
feet of leased space in St. Louis, of which approximately 11,000 square feet is
being used for manufacturing and approximately 4,000 for sales, marketing, and
administration.
American Power Conversion Europe, S.A.R.L. is located in a suburb of Paris in
leased office space consisting of approximately 3,500 square feet. The Company
also leases office space in several foreign countries for local sales personnel.
The Company continues to investigate potential sites for manufacturing expansion
in international regions. The Company currently plans to establish locations in
China during the first half of 1998 and India during the second half of 1998.
Item 3. Legal Proceedings
On or about June 16, 1997, Trippe Manufacturing Company ("Trippe") filed suit
against the Company and Systems Enhancement in the United States District Court
for the Northern District of Illinois, alleging a variety of contract,
antitrust, and unfair competition claims relating to the Company's February 14,
1997 acquisition of Systems Enhancement. Trippe sought unspecified damages,
costs, fees, and injunctive relief. On or about September 11, 1997, Trippe
withdrew its lawsuit without prejudice. By stipulation of the parties, the
court dismissed all claims in the lawsuit with prejudice on or about October 22,
1997.
In August 1995, five purported class action complaints, Simon, et al. v.
American Power Conversion Corp., et al., Mason v. American Power Conversion
Corp., et al., Lewis, et al. v. American Power Conversion Corp., et al., Lohner,
et al. v. American Power Conversion Corp., et al., and Friends of Chabad
Lubavitch, Inc. v. American Power Conversion Corp., et al., were filed in the
United States District Court for the District of Rhode Island. On November 21,
1995, the plaintiffs in each of these five purported federal class actions
together filed a Corrected Consolidated Amended Complaint. The plaintiffs in
this federal class action claimed to be suing on behalf of a class of persons
who purchased the Company's Common Stock during the period from April 24, 1995
through July 27, 1995. Certain current or former officers and directors of the
Company were also named as defendants in the federal class action. The
complaint in the federal class action alleged, among other things, that the
9
defendants violated the federal securities laws through the issuance of material
misrepresentations and omissions. The Company believes that the allegations in
the federal class action are without merit and has defended the lawsuit
vigorously.
On February 13, 1996, a derivative complaint captioned Klein, et al. v. Machala,
et al. was filed in the Massachusetts Superior Court for Suffolk County. This
state derivative action, which was brought by the plaintiffs on behalf of the
Company against certain of its current or former officers and directors,
alleged, among other things, certain breaches of fiduciary duty. The Company
believes that the allegations in the state derivative action are without merit
and has defended the lawsuit vigorously.
On February 26, 1998, the Company announced that it had reached agreements-in-
principle to settle both the federal class action and the state derivative
action. The parties to the federal class action and state derivative action
have executed settlement agreements which are now awaiting approval by the
United States District Court for the District of Rhode Island and the
Massachusetts Superior Court for Suffolk County, respectively. The entire
settlement amount is being borne by the liability insurance carrier which
insures the Company, its directors and its officers.
The tentative settlements in each case are subject to certain conditions
including court approval. There can be no assurance that the settlements will
be finally approved and that the Company will not have to continue its defense
of the lawsuits. Should the proposed settlements not be finally approved for
any reason, the Company intends to defend the lawsuits vigorously. No provision
for any liability that may result from these actions has been recognized in the
consolidated financial statements included in Item 8.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock is traded over-the-counter on the NASDAQ Stock Market
under the symbol APCC and the Pacific Stock Exchange under the symbol ACC. The
following table sets forth the range of high and low bid quotations per share of
Common Stock for the years 1997 and 1996.
1997 1996
High Low High Low
First Quarter $31 1/2 $18 7/8 $11 5/8 $7 7/8
Second Quarter 24 1/2 15 1/4 13 5/8 9 5/8
Third Quarter 28 5/8 18 1/4 15 63/64 8 1/2
Fourth Quarter 34 3/8 22 1/8 28 1/8 14 1/8
On February 24 1998, the closing sale price for the Company's Common Stock was
$28 15/16 per share. As of February 24 1998, there were approximately 2,379
holders of record of the Company's Common Stock. No cash dividends have been
paid and it is anticipated that none will be declared in the foreseeable future.
The Company currently intends to retain any earnings to finance the growth and
development of the Company's 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 the
Company.
10
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. The Company did not declare any cash dividends for the five year
period presented. Earnings per share and share data reflect a stock split
effected in 1993.
1997 1996 1995 1994 1993
Net Sales $873,388 $706,877 $515,262 $378,295 $250,298
Cost of Goods Sold 476,060 407,902 284,500 189,954 122,009
Gross Profit 397,328 298,975 230,762 188,341 128,289
Costs and Expenses 225,890 165,185 127,057 82,692 53,392
Operating Income 171,438 133,790 103,705 105,649 74,897
Other Income, Net 6,354 5,189 860 3,701 977
Earnings Before
Income Taxes 177,792 138,979 104,565 109,350 75,874
Income Taxes 56,004 46,558 35,029 38,075 27,316
Net Income $121,788 $92,421 $69,536 $71,275 $48,558
Basic Earnings Per Share $1.28 $.98 $.75 $.78 $.54
Basic Weighted Average
Shares Outstanding 94,993 93,872 92,939 91,824 89,103
Diluted Earnings Per Share $1.27 $.98 $.74 $.77 $.53
Diluted Weighted Average
Shares Outstanding 96,121 94,347 93,867 92,913 91,588
Total Assets $641,290 $504,002 $346,588 $265,163 $158,971
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 the Company's net sales, cost of goods sold,
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, 1997, 1996 and 1995.
1997 1996 1995
Net sales 100.0 100.0 100.0
Cost of goods sold 54.5 57.7 55.2
Gross profit 45.5 42.3 44.8
Marketing, selling, general and
administrative expenses 23.3 21.3 22.1
Research and development 2.6 2.1 2.6
Operating income 19.6 18.9 20.1
Other income, net .7 .8 .2
Earnings before income taxes 20.3 19.7 20.3
Net income 13.9 13.1 13.5
11
Revenues
Net sales in fiscal year 1997 increased by 23.6% to $873.4 million from $706.9
million in fiscal year 1996, which reflected a 37.2% increase from $515.3
million in fiscal year 1995. The increases from 1995 to 1997 are attributable
to a continued strong increase in worldwide demand for the Company's products
across fast-growing core markets, including computer networking, internetworking
equipment and point-of-sale devices, combined with what the Company believes is
the increasing awareness by computer users of the consequences of data loss and
hardware damage which can be caused by power problems, particularly in
international markets. In addition, sales of new products and increased efforts
by, and the addition of members to, the Company's sales staff have contributed
to increased sales volumes. Net sales attributable to new products totaled
approximately 8%, 7%, and 13% of 1997, 1996 and 1995 net sales, respectively.
Export and foreign sales to unaffiliated customers, primarily in Europe, the Far
East, Canada, and South America, in fiscal year 1997 were $378.3 million or
43.3% of net sales compared to $305.1 million or 43.2% of net sales in fiscal
year 1996 and $204.5 million or 39.7% of net sales in fiscal year 1995. See
also note 8 to the consolidated financial statements.
Cost of Goods Sold
Cost of goods sold was $476.1 million or 54.5% of net sales in fiscal year 1997
compared to $407.9 million or 57.7% of net sales in fiscal year 1996. Gross
margins improved by approximately 320 basis points during 1997 over fiscal year
1996, primarily attributable to several factors, including but not limited to:
continued improvement in margins on lower cost Back-UPSr products manufactured
in the Philippines, the favorable margin impact of a higher-end product mix
resulting from strong growth in Smart-UPSr sales into the server segment of the
power protection market, and volume production efficiencies, partially offset by
certain price reductions implemented during the fourth quarter.
Cost of goods sold was $407.9 million or 57.7% of net sales in fiscal year 1996
compared to $284.5 million or 55.2% of net sales in fiscal year 1995. Gross
margins decreased by approximately 250 basis points during 1996 compared to
fiscal year 1995, primarily attributable to several factors, including but not
limited to: increased reserves for potential excess inventories in light of the
product transition which occurred largely during 1995 within the Smart-UPS
product family; a shift during 1996 in product sales mix from the high-end
Smart-UPS products to the lower margin Smart-UPS v/s products partially offset
by a favorable margin impact of increasing sales of third generation Smart-UPS
products; reduced average selling prices resulting from sales discounting; and
increased indirect manufacturing costs associated with additional indirect
manufacturing personnel and other costs incurred to support manufacturing
infrastructure expansion and a transition toward more specific product focused
factories.
Total inventory reserves at December 31, 1997 were $19.3 million compared to
$16.1 million at December 31, 1996. The Company's reserve estimate methodology
involves quantifying the total inventory position having potential loss
exposure, reduced by an amount reasonably forecasted to be sold, and adjusting
its interim reserve provisioning to cover the net loss exposure. Second
generation Smart-UPS represented approximately 5% of total inventories at
December 31, 1997 unchanged from 5% at December 31, 1996.
Operating Expenses
Marketing, selling, general, and administrative (SG&A) expenses were $203.5
million or 23.3% of net sales in 1997 compared to $150.4 million or 21.3% of net
sales in 1996 and $113.9 million or 22.1% of net sales in 1995. The increases
in total spending in 1997 and 1996 were due primarily to increased advertising
and promotional costs, as well as costs associated with increased staffing of
sales, marketing, and other related positions both domestically and
internationally. The decrease in SG&A expenses as a percentage of sales during
1996 from 1995 was attributable to certain fixed SG&A expenses spread over a
higher revenue base in 1996.
The allowance for bad debts was 8.5% of accounts receivable at December 31, 1997
compared to 9.0% at December 31, 1996. The Company continues to experience very
strong collection performance from its accounts receivable with outstanding
balances over 60 days outstanding representing 6.6% and 9.1% of total
receivables at December 31, 1997 and 1996, respectively. Write-offs of
uncollectible accounts represent less than 1% of net sales. A majority of
international customer balances are covered by receivables insurance. The
12
increase in bad debt reserves was primarily attributable to increased
international sales, particularly in regions not covered by the Company's
receivables insurance (i.e., the former Soviet Union).
R&D expenditures for 1997, 1996 and 1995 were $22.4 million, $14.8 million, and
$13.2 million, respectively. The increased R&D spending primarily reflects
increased numbers of software and hardware engineers and costs associated with
new product development and engineering support, including additional
engineering resources gained in the 1997 acquisition of Systems Enhancement
Corporation. Although the aggregate dollars of R&D expenses increased from 1995
to 1996 as a result of continued product and process development, the decrease
from 1995 to 1996 as a percentage of sales was attributable to certain fixed R&D
expenses spread over a higher revenue base in 1996. The Company expects its R&D
expenditures to remain at substantially the same level as a percentage of sales
for the foreseeable future.
Other Income, Net
Other income is comprised principally of interest income, which increased
substantially from 1995 to 1997 due to higher average cash balances available
for investment during 1996 and 1997.
The Company's effective income tax rates were 31.5%, 33.5%, and 33.5% in 1997,
1996 and 1995, respectively. The decrease from 1996 to 1997 is due to the
expected tax savings from an increasing portion of taxable earnings being
generated from the Company's operations in Ireland, a jurisdiction which
currently has a lower income tax rate for manufacturing companies than the
present U.S. statutory income tax rate.
Effects of Inflation
Management believes that inflation has not had a material effect on the
Company's operations.
Liquidity and Financial Resources
Working capital at December 31, 1997 was $426.8 million compared to $317.8
million at December 31, 1996. The Company has been able to increase its working
capital position as the result of continued strong operating results and despite
internally financing the capital investment required to expand its operations,
particularly in Ireland and the Philippines (see below). The Company's cash
position increased 76.3% to $270.1 million at December 31, 1997 from $153.2
million at December 31, 1996, due primarily to the Company's strong operating
results.
Inventories decreased substantially during 1997 due to operational improvements
relating to component and finished goods planning, combined with work-in-process
reductions associated with the Company's conversion to lean cellular
manufacturing. Inventory turnover was 4.1 turns for 1997, 2.9 turns for 1996,
and 2.4 turns for 1995. Accordingly, inventory levels declined as a percentage
of sales from 104% in the fourth quarter of 1995 to 62% in the fourth quarter of
1996 and 41% in the fourth quarter of 1997.
At December 31, 1997, the Company had $50 million available for future
borrowings under an unsecured line of credit agreement at a floating interest
rate equal to the bank's cost of funds rate plus .625% and an additional $15
million under an unsecured line of credit agreement with a second bank at a
similar interest rate. No borrowings were outstanding under these facilities at
December 31, 1997. Additionally, the Company has no significant financial
commitments outstanding other than those required in the normal course of
business.
During 1997 and 1996, the Company's capital expenditures, net of capital grants,
amounted to approximately $37.2 million and $25.0 million, respectively,
consisting primarily of manufacturing equipment, building improvements, office
equipment, and purchased software applications. The nature and level of capital
spending was made to improve manufacturing capabilities, establish additional
manufacturing capabilities in the Philippines and Ireland, to support the
increased selling, marketing, and administrative efforts necessitated by the
Company's significant growth and to improve the Company's enterprise-wide
software applications. Net capital expenditures were financed from available
operating cash. The Company had no material capital commitments at December 31,
1997. Capital expenditures in 1998 are estimated to be $15 to $20 million above
the level of capital spending incurred in 1997, primarily to support planned
capacity expansions.
13
In July 1997, the Company established a second Ireland manufacturing location in
Castlebar. The Company purchased and improved a 70,000 square foot facility at
which the Company began manufacturing certain Matrix-UPST products during the
fourth quarter of 1997. The Company executed an agreement with the IDA under
which the Company will receive grant monies equal to 60% of the costs incurred
for machinery, equipment and building improvements for the Castlebar facility.
The maximum amount attainable under the agreement is approximately $1.3 million.
The grant monies would be repayable, in whole or in part, should (a) the Company
fail to meet certain employment goals established under the agreement which are
to be achieved over a five year implementation period and/or (b) the Company
discontinues operations in Ireland prior to the termination of the agreement.
The agreement terminates five years from the date of the last claim made by the
Company for grant monies. No capital grant claims were submitted during 1997.
Under a separate agreement with the IDA, the Company will also receive up to
$12,500 per new employee hired at the Castlebar facility for the direct
reimbursement of training costs. No training grant claims were submitted during
1997.
In 1994, the Company established its Ireland operations in Galway, through its
subsidiary, American Power Conversion Corporation (A.P.C.) B.V. The facility is
providing manufacturing and technical support to service the Company's
international customers. The Company executed an agreement with the IDA under
which the Company will receive grant monies equal to 40% of the costs incurred
for machinery, equipment and building improvements for the Galway facility. The
maximum amount attainable under the agreement is approximately $13.1 million.
The grant monies would be repayable, in whole or in part, should (a) the Company
fail to meet certain employment goals established under the agreement which are
to be achieved over a five year implementation period and/or (b) the Company
discontinues operations in Ireland prior to the termination of the agreement.
The agreement terminates eight years from the date of the last claim made by the
Company for grant monies. The total cumulative amount of capital grant claims
submitted through December 31, 1997 was approximately $9.5 million. The total
cumulative amount of capital grants received through December 31, 1997 amounted
to approximately $8.6 million. Under a separate agreement with the IDA, the
Company receives up to $3,000 per new employee hired for the direct
reimbursement of training costs. The total cumulative amount of training grant
claims submitted through December 31, 1997 was approximately $1.8 million. The
total cumulative amount of training grants received through December 31, 1997
amounted to approximately $1.3 million.
During 1996, the Company established a manufacturing operation in the
Philippines which is operating within a designated economic zone which provides
certain economic incentives, primarily in the form of tax exemptions. The
Company purchased and improved a 70,000 square foot facility for approximately
$1.5 million which was financed from operating cash. In January 1997, the
Company purchased a second 67,000 square foot location in the Philippines for
approximately $3.0 million. The Company began manufacturing selected products
at this facility during the third quarter of 1997. The Philippines facilities
currently manufacture certain Back-UPSr and Smart-UPSr products sold in the
Company's domestic and international markets.
The Company continues to investigate potential sites for manufacturing expansion
in international locations. The Company currently plans to establish locations
in China during the first half of 1998 and India during the second half of 1998.
Management believes 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.
Acquisitions
On February 14, 1997, the Company completed its acquisition of Systems
Enhancement Corporation ("Systems Enhancement"), a privately-held manufacturer
of power management software and accessories, by means of a merger of a wholly-
owned subsidiary of the Company with and into Systems Enhancement. As a result
of the merger, Systems Enhancement became a wholly-owned subsidiary of the
Company. The Company issued 480,144 shares of its Common Stock, $.01 par value,
in exchange for all of the issued and outstanding shares of Systems Enhancement.
The Company has accounted for the acquisition as a pooling-of-interests.
14
Foreign Currency Activity
The Company invoices its customers in Germany, Great Britain, France, and Japan
in their respective local 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 1997, 1996 and 1995.
At December 31, 1997, the Company's unhedged foreign currency accounts
receivable, by currency, were as follows:
In thousands Foreign Currency US Dollars
German Marks 13,495 $7,539
British Pounds 3,576 5,950
French Francs 30,775 5,146
Japanese Yen 735,528 5,702
Total gross accounts receivable at December 31, 1997 was $143.3 million. The
Company also had non-trade receivables of 0.9 million Irish Pounds
(approximately US$1.3 million), as well as Irish Pound denominated liabilities
of 7.0 million (approximately US$10.0 million). The Company also had
liabilities denominated in various European currencies of US$1.3 million, as
well as Yen denominated liabilities of approximately US$2.4 million.
The Company continually reviews its foreign exchange exposure and considers
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. The Company
presently does not utilize rate protection agreements or derivative
arrangements.
Recently Issued Accounting Standard
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information, which establishes standards for reporting information about
operating segments in annual and interim financial statements issued to
shareholders. This Statement also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
will adopt this Statement at December 31, 1998 and is currently studying its
provisions.
Year 2000 Issue
Many computer systems were not designed to handle any dates beyond the year
1999, and therefore, many companies will be required to modify their computer
hardware and software prior to the year 2000 in order to remain functional. All
of the Company's hardware products and accessories are year 2000 compliant,
i.e., critical dates are calculated and displayed accurately, and scheduled
events such as shutdowns, self-tests, and run-time calibrations, are unaffected
by the century change. Additionally, the Company has tested its software
products and determined that these products are substantially year 2000
compliant, and the Company intends to address any remaining issues before the
arrival of year 2000. However, there can be no assurance that other companies'
hardware and software products will be converted on a timely basis or that any
such failure to convert by another company would not have an adverse effect on
the Company's products. The Company currently does not anticipate material
expenditures to remedy any year 2000 issues with its products and services.
Many enterprises, including the Company's present and potential customers, will
be devoting a substantial portion of their information systems spending to
resolving the year 2000 issue, which may result in spending being diverted from
applications such as the Company's products, over the next two years.
Additionally, the Company utilizes third party computer and telecommunications
software and equipment to distribute its products as well as to operate other
aspects of its business, and there can be no assurances that such software and
equipment is year 2000 compliant. The Company is reviewing such software and
equipment. Although the Company is not yet able to estimate its incremental
cost for year 2000 issues, based on its preliminary review to date, the Company
does not believe year 2000 issues will have a material adverse effect on the
Company's business, operating results, and financial condition. Although the
Company is taking measures to address the impact, if any, of year 2000 issues,
15
failure of any critical software or equipment to operate properly in the year
2000 may have a material adverse effect upon the Company's business, operating
results, and financial condition, or require the Company to incur unanticipated
material expenses to remedy any year 2000 issue.
Risk Factors That May Affect Future Results
This document may include forward-looking statements. Any statements contained
herein that do not describe historical facts are forward-looking statements.
The Company makes such forward-looking statements under the provisions of the
"safe harbor" section of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements contained herein are based on current
expectations, but are subject to a number of risks and uncertainties. The
factors that could cause actual results to differ materially from such forward-
looking statements include: the general economic conditions and growth rates in
the power protection industry and related industries; pricing pressures; changes
in product mix; changes in the seasonality of demand patterns; inventory risks
due to shifts in market demand; component constraints and shortages; expansion
of manufacturing capacity; risks of nonpayment of accounts receivable; risks
associated with the year 2000 issue; and the risk factors set forth below.
Fluctuations in Revenue and Operating Results
The Company's quarterly operating results may fluctuate as a result of a number
of factors, including the growth rates in the UPS industry and related
industries; timing of orders from, and shipments to, customers; the timing of
new product introductions and the market acceptance of those products; increased
competition; changes in manufacturing costs; changes in the mix of product
sales; inventory risks due to shifts in market demand; component constraints and
shortages; risks of nonpayment of accounts receivable; expansion of
manufacturing capacity; factors associated with international operations; and
changes in world economic conditions.
Management of Growth
The Company has experienced, and is currently experiencing, a period of rapid
growth which has placed, and could continue to place, a significant strain on
the resources of the Company. In order to support the growth of its business,
the Company plans to significantly expand its level of operations during 1998.
If the Company's management is unable to manage growth effectively, the
Company's operating results could be adversely affected.
Competition
The Company believes that it is one of five global companies providing a full
range of UPS products and services worldwide in the 0 to 20 kVA UPS market. The
UPS industry, however, is highly competitive on both a worldwide basis and a
regional geographic basis. The Company competes, and will continue to compete,
with several U.S. and foreign firms with respect to UPS products, both on a
worldwide basis and in various geographical regions, and within individual UPS
product and application niches. The Company expects competition to increase in
the future from existing competitors and a number of companies which may enter
the Company's existing or future markets. Increased competition could adversely
affect the Company's revenue and profitability through price reductions and loss
of market share. The principal competitive factors in the UPS industry are
product performance and quality, marketing and access to distribution channels,
customer services, product design and price. Some of the Company's current and
potential competitors have substantially greater financial, technical, sales and
marketing resources than the Company. There can be no assurance that the
Company will be able to continue to compete successfully with its existing
competitors or will be able to compete successfully with new competitors.
Technological Change; New Product Delays; Risks of Product Defects
The market for the Company's 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 the Company's
products. There can be no assurance that the Company will be successful in
selecting, developing, manufacturing and marketing new products or enhancing its
existing products or that the Company will be able to respond 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 the future success of the Company. Delays in such
availability or a lack of market acceptance could have an adverse effect on the
Company. Although the Company has not experienced material adverse effects
resulting from product defects, there can be no assurance that, despite testing
16
internally or by current or potential customers, defects will not be found in
products, resulting in loss or delay in market acceptance, which could have a
material adverse effect upon the Company's business, operating results and
financial condition.
Dependence on Key Employees
The Company's success depends to a significant degree upon the continuing
contributions of its key management, sales, marketing, R&D and manufacturing
personnel, many of whom would be difficult to replace. The Company does not
have employment contracts with most of its key personnel. The Company believes
that its future success will depend in large part upon its ability to attract
and retain highly-skilled hardware and software engineers, and management, sales
and marketing personnel. Competition for such personnel is intense, and there
can be no assurance that the Company will be successful in attracting and
retaining such personnel. Failure to attract and retain key personnel could
have a material adverse effect on the Company's business, operating results and
financial condition.
Foreign Operations; Risk of Currency Fluctuations
The Company manufactures and markets its products worldwide through several
foreign subsidiaries and independent agents. The Company's worldwide operations
are subject to the risks normally associated with foreign operations including,
but not limited to, the disruption of markets, changes in export or import laws,
restrictions on currency exchanges, potentially negative tax consequences and
the modification or introduction of other governmental policies with potentially
adverse effects.
International sales (sales to customers outside the United States, both direct
and indirect) accounted for approximately 43.3%, 43.2%, and 39.7% of the
Company's net sales in 1997, 1996 and 1995, respectively. The Company
anticipates that international sales will continue to account for a significant
portion of revenue. The Company invoices its customers in Germany, Great
Britain, France, and Japan in their respective local currencies. To date, the
Company does not utilize any rate protection agreements or derivative agreements
to hedge any foreign exchange exposure. Accordingly, the Company may be exposed
to exchange losses based upon currency exchange rate fluctuations, which losses
could have a materially adverse effect on the Company's operating results.
Dependence on Sole Source Suppliers
Some components of the Company's products are currently obtained from single
sources. There can be no assurance that in the future the Company's suppliers
will be able to meet the Company's demand for components in a timely and cost-
effective manner. The Company generally purchases these single or limited
source components pursuant to purchase orders and has no guaranteed supply
arrangements with the suppliers. In addition, the availability of many of these
components to the Company is dependent in part on the ability of the Company to
provide the suppliers with accurate forecasts of future requirements. The
Company has generally been able to obtain adequate supplies of parts and
components in a timely manner from existing sources. The Company's operating
results and customer relationships could be adversely affected by either an
increase in prices for, or an interruption or reduction in supply of, any key
components.
Uncertainties Regarding Patents and Protection of Proprietary Technology
The Company's success will depend, to a large extent, on its ability to protect
its proprietary technology. The Company relies on a combination of contractual
rights, trade secrets and copyrights to protect its proprietary rights.
Although the Company may apply for patents in the future, there can be no
assurance that the Company's intellectual property protection will be sufficient
to prevent competitors from developing similar technology. Moreover, in the
absence of patent protection, the Company's business may be adversely affected
by competitors that independently develop functionally equivalent technology.
The Company attempts to ensure that its products and processes do not infringe
patents and other proprietary rights, but there can be no assurance that such
infringement may not be alleged by third parties in the future. If infringement
is alleged, there can be no assurance that the necessary licenses would be
available on acceptable terms, if at all, or that the Company would prevail in
any such challenge.
17
Integration of Acquired Businesses
The Company consummated its acquisition of Systems Enhancement in February 1997.
Systems Enhancement currently operates as a wholly-owned subsidiary of the
Company. The Company has limited experience in integrating acquired companies
or technologies into its operations. The Company may from time to time pursue
the acquisition of other companies, assets, products or technologies. There can
be no assurance that products, technologies, distribution channels, key
personnel and businesses of acquired companies will be successfully integrated
into the Company's business or product offerings, or that such integration will
not adversely affect the Company's business, operating results, and financial
condition. There can be no assurance that any acquired companies, assets,
products or technologies will contribute significantly to the Company's sales or
earnings, or that the sales and earnings from acquired businesses will not be
adversely affected by the integration process or other factors. If the Company
is not successful in the integration of such acquired businesses, there could be
an adverse impact on the financial results of the Company. There can be no
assurance that the Company will continue to be able to identify and consummate
suitable acquisition transactions in the future.
Possible Volatility of Stock Price
The market price of the Company's Common Stock has been, and may continue to be,
extremely volatile. The trading price of the Company's 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 by the Company or its competitors,
challenges associated with integration of businesses and other events or
factors. In addition, the stock market has from time to time experienced
extreme price and volume fluctuations which have particularly affected the
market price for many high technology companies and which often have been
unrelated to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock.
Tax Rate
The Company's tax rate is heavily dependent upon the proportion of earnings that
are derived from its Ireland and Philippines manufacturing operations and its
ability to reinvest those earnings permanently outside the United States. If
the earnings of these operations as a percentage of the Company's total earnings
were to decline significantly from anticipated levels, or should its ability to
reinvest these earnings be reduced, the Company's effective tax rate would
exceed the currently estimated rate for 1998. In addition, should the Company's
intercompany transfer pricing with respect to its Ireland or Philippine
manufacturing operations require significant adjustment due to audits or
regulatory changes, the Company's overall effective tax rate could increase.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
18
ITEM 8. Financial Statements and Supplementary Data
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
In thousands
ASSETS
1997 1996
Current assets:
Cash and cash equivalents $270,134 $153,234
Accounts receivable, less allowance for doubtful
accounts of $12,230 in 1997 and $10,789 in 1996 (Note 2) 131,115 108,544
Inventories (Note 3) 104,171 130,443
Prepaid expenses and other current assets 13,305 11,610
Deferred income taxes (Note 5) 21,571 20,284
Total current assets 540,296 424,115
Property, plant, and equipment:
Land, buildings, and improvements 31,143 18,710
Machinery and equipment 80,091 64,986
Office equipment, furniture, and fixtures 31,431 23,299
Purchased software 9,584 7,357
152,249 114,352
Less accumulated depreciation and amortization 52,631 35,655
Net property, plant, and equipment 99,618 78,697
Other assets 1,376 1,190
Total assets $641,290 $504,002
See accompanying notes to consolidated financial statements.
19
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
In thousands
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
Current liabilities:
Accounts payable $37,068 $41,587
Accrued expenses 16,334 12,576
Accrued compensation 16,476 12,217
Accrued sales and marketing programs 15,965 16,360
Accrued retirement contributions 7,446 6,290
Income taxes payable 20,241 17,294
Total current liabilities 113,530 106,324
Deferred tax liability (Note 5) 6,006 5,780
Total liabilities 119,536 112,104
Shareholders' equity (Notes 6 and 7):
Common stock, $.01 par value;
authorized 200,000 shares in 1997 and 1996;
issued 95,383 in 1997 and 94,417 in 1996 954 944
Additional paid-in capital 55,626 48,374
Retained earnings 466,725 344,131
Treasury stock, 125 shares, at cost (1,551) (1,551)
Total shareholders' equity 521,754 391,898
COMMITMENTS AND CONTINGENCIES
(Notes 9, 11 and 12)
OTHER INFORMATION (Notes 4 and 10)
Total liabilities and shareholders' equity $641,290 $504,002
See accompanying notes to consolidated financial statements.
20
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
In thousands except per share amounts
1997 1996 1995
Net sales (Note 8) $873,388 $706,877 $515,262
Cost of goods sold 476,060 407,902 284,500
Gross profit 397,328 298,975 230,762
Costs and expenses:
Selling, general, and administrative expenses 203,469 150,401 113,864
Research and development 22,421 14,784 13,193
225,890 165,185 127,057
Operating income 171,438 133,790 103,705
Other income, net 6,354 5,189 860
Earnings before income taxes 177,792 138,979 104,565
Income taxes (Note 5) 56,004 46,558 35,029
Net income $121,788 $92,421 $69,536
Basic earnings per share (Note 1) $1.28 $.98 $.75
Basic weighted average shares outstanding 94,993 93,872 92,939
Diluted earnings per share (Note 1) $1.27 $.98 $.74
Diluted weighted average shares outstanding 96,121 94,347 93,867
See accompanying notes to consolidated financial statements.
21
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
In thousands
$.01 Par, Additional Unrealized Treasury
Common Paid-in Holding Retained Stock,
Stock Capital Losses Earnings at Cost Total
Balances at
December 31, 1994 $925 $29,326 ($497) $182,174 $- $211,928
Exercises of stock options 5 1,999 2,004
Tax effect of exercises of
stock options 300 300
Shares issued to Employee
Stock Ownership Plan 3 5,498 5,501
Changes in unrealized
holding losses 497 497
Net income 69,536 69,536
Balances at
December 31, 1995 933 37,123 - 251,710 - 289,766
Exercises of stock options 6 2,900 2,906
Tax effect of exercises of
stock options 1,430 1,430
Shares issued to Employee
Stock Ownership Plan 5 6,921 6,926
Purchases of common stock (1,551) (1,551)
Net income 92,421 92,421
Balances at
December 31, 1996
as previously reported 944 48,374 - 344,131 (1,551) 391,898
Adjustment for immaterial
pooling-of-interests 5 806 811
Balances at
December 31, 1996
as adjusted 949 48,374 - 344,937 (1,551) 392,709
Exercises of stock options 4 3,228 3,232
Tax effect of exercises of
stock options 765 765
Shares issued to Employee
Stock Ownership Plan 1 3,259 3,260
Net income 121,788 121,788
Balances at
December 31, 1997 $954 $55,626 $- $466,725 ($1,551) $521,754
See accompanying notes to consolidated financial statements.
22
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
In thousands
1997 1996 1995
Cash flows from operating activities
Net income $121,788 $92,421 $69,536
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 17,716 13,511 10,102
Provision for doubtful accounts 4,834 4,291 4,627
Deferred income taxes (1,061) (8,080) (3,696)
Changes in operating assets and liabilities:
Increase in accounts receivable (26,821) (41,636) (15,287)
Decrease (increase) in inventories 26,631 17,098 (55,126)
Increase in prepaid expenses and other
current assets (2,372) (2,332) (358)
Decrease (increase) in other assets 644 (186) (161)
Increase (decrease) in accounts payable (4,999) 15,180 (7,151)
Increase in accrued expenses 2,721 6,785 2,857
Increase in accrued compensation 4,256 5,745 257
Increase (decrease) in accrued sales and
marketing programs (395) 9,580 2,841
Increase in accrued retirement contributions 1,143 1,612 1,070
Increase in income taxes payable 3,425 16,929 3,897
Net cash provided by operating activities 147,510 130,918 13,408
Cash flows from investing activities
Capital expenditures, net of capital grants (37,208) (25,005) (23,994)
Cash acquired in acquisition 101 - -
Proceeds from sale of equipment - - 143
Purchases of short-term investments - - (803)
Sales and maturities of short-term investments,
net of gain and losses - - 13,708
Net cash used in investing activities (37,107) (25,005) (10,946)
Cash flows from financing activities
Proceeds from issuances of common stock 6,497 9,832 7,505
Purchases of common stock - (1,551) -
Net cash provided by financing activities 6,497 8,281 7,505
Net increase in cash and cash equivalents 116,900 114,194 9,967
Cash and cash equivalents at beginning of year 153,234 39,040 29,073
Cash and cash equivalents at end of year $270,134 $153,234 $39,040
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $- $- $317
Income taxes (net of tax refunds) $48,563 $37,219 $34,828
NON-CASH TRANSACTIONS: In 1997, 1996 and 1995, the tax effect of the exercise of
stock options resulted in increases to additional paid-in capital and reductions
to income taxes payable of $765, $1,430, and $300, respectively. During 1995
unrealized holding gains on short-term investments resulted in increases to
shareholders' equity and to short-term investments of $497.
See accompanying notes to consolidated financial statements.
23
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
1. Summary of Significant Accounting Policies
Nature of Business
American Power Conversion Corporation and its subsidiaries (the "Company")
designs, develops, manufactures, and markets a line of uninterruptible power
supply ("UPS") products, electrical surge protection devices, power conditioning
products, and associated software and accessories for use with personal
computers, engineering work stations, networking equipment and servers,
communications and internetworking equipment, and a variety of other sensitive
electronic devices which rely on electric utility power. The Company's
principal markets are in North America, Europe, and the Asia Pacific region.
Principles of Consolidation
The consolidated financial statements include the accounts of American Power
Conversion Corporation and all of its majority-owned subsidiaries. All
intercompany accounts and transactions are eliminated in consolidation.
On February 14, 1997, the Company completed its acquisition of Systems
Enhancement Corporation ("Systems Enhancement"), a privately-held manufacturer
of power management software and accessories. The Company has accounted for the
acquisition as a pooling-of-interests and, accordingly, Systems Enhancement's
results of operations and cash flows are included in the Company's financial
statements from January 1, 1997. The acquisition was immaterial to the
Company's consolidated results of operations and financial condition and,
therefore, comparative prior period results have not been restated.
Inventories
Inventories are stated at the lower of cost or market; cost being determined
using the first-in, first-out (FIFO) method.
Property, Plant, and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided by
using the straight-line method over estimated useful lives as follows:
Land improvements 15 years
Buildings and improvements 40 years
Machinery and equipment 5 - 10 years
Office equipment, furniture and fixtures 3 - 10 years
Purchased software 3 years
Research and Development
Expenditures for R&D are expensed in the year incurred.
Warranties
The Company presently offers a limited two-year warranty. The provision for
potential liabilities resulting from warranty claims is provided at the time of
sale. The provision is computed based upon historical data and current
estimates. The Company also offers its customers the opportunity to extend the
basic warranty period an additional three years under a separately priced
program. Recognition of the revenue associated with the extended warranty
program commences on the date the extended warranty becomes effective and is
recognized on a straight-line basis over the extended warranty period. In
addition, the Company has an Equipment Protection Policy which provides up to
$25,000 for repair or replacement of a 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 ProtectNetr line of data line surge suppressors feature a unique
"Double-Up" Supplemental Equipment Protection Policy, under which the total
recoverable limit under the Equipment Protection Policy is doubled, up to
24
$50,000 (U.S. and Canada only). The Company has experienced satisfactory field
operating results, and warranty costs incurred to date have not had a
significant impact on the Company's results of operations.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Deferred income taxes have not been provided for the undistributed earnings of
the Company's foreign subsidiaries which aggregated approximately $125 million
at December 31, 1997. The Company plans to reinvest all such earnings for
future expansion. If such earnings were distributed, taxes would be increased
by approximately $29 million.
Cash and Cash Equivalents
Cash and cash equivalents consists of funds on deposit and money market savings
accounts.
Short-term Investments
Short-term investments (consisting primarily of government and government agency
debt securities with fixed rates of interest) are carried at fair value and have
original maturities greater than three months. The cost of short-term
investments sold is determined using the specific identification method. The
Company had no short-term investments at December 31, 1997 and 1996.
Earnings per Share
The Company has adopted SFAS No. 128, Earnings per Share, which establishes
standards for computing and presenting earnings per share, simplifying previous
standards and making them comparable to international earnings per share
standards.
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. Dilutive potential common shares outstanding at
December 31, 1997, 1996 and 1995 were approximately 1.1 million, 0.5 million,
and 0.9 million, respectively.
Potential common shares for which inclusion would have the effect of increasing
diluted earnings per share (i.e., antidilutive) are excluded from the
computation. Antidilutive potential common shares outstanding at December 31,
1997, 1996 and 1995 were approximately 83,000, 68,000, and 89,000, respectively.
Stock-Based Compensation
The Company applies APB Opinion 25 and related Interpretations in accounting for
its four stock option plans. No compensation cost has been recognized for these
plans in the accompanying consolidated financial statements.
Advertising Costs
Advertising costs are reported in selling, general, and administrative expenses
in the accompanying consolidated statements of income and include costs of
advertising, advertising production, trade shows, and other activities designed
to enhance demand for the Company's products. Advertising costs were $59.9
million in 1997, $36.3 million in 1996, and $23.1 million in 1995. There are no
capitalized advertising costs in the accompanying consolidated balance sheets.
25
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
2. 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.
3. Inventories
Inventories consist of the following:
In thousands 1997 1996
Raw materials $ 61,430 $ 68,657
Work in process 3,731 13,344
Finished goods 39,010 48,442
$104,171 $130,443
4. Revolving Credit Agreements
At December 31, 1997, the Company had available for future borrowings $50
million under an unsecured line of credit agreement at a floating interest rate
equal to the bank's cost of funds rate plus .625% and an additional $15 million
under an unsecured line of credit agreement with a second bank at a similar
interest rate. No borrowings were outstanding under these facilities at
December 31, 1997.
5. Income Taxes
Total federal, state and foreign income tax expense (benefit) from continuing
operations for the years ended December 31, 1997, 1996 and 1995 consists of the
following:
In thousands Current Deferred Total
1997:
Federal $41,090 ($1,028) $40,062
State 7,031 (193) 6,838
Foreign 8,944 160 9,104
$57,065 ($1,061) $56,004
1996:
Federal $38,279 ($6,759) $31,520
State 7,100 (1,100) 6,000
Foreign 9,259 (221) 9,038
$54,638 ($8,080) $46,558
1995:
Federal $33,122 ($2,993) $30,129
State 4,300 (500) 3,800
Foreign 1,303 (203) 1,100
$38,725 ($3,696) $35,029
26
Income tax expense attributable to continuing operations amounted to $56.0
million in 1997, $46.6 million in 1996, and $35.0 million in 1995, (effective
rates of 31.5%, 33.5%, and 33.5%, respectively). The actual expense for 1997,
1996 and 1995 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 1997 1996 1995
Computed "expected" tax expense $62,227 $48,643 $36,598
State income taxes, net of federal income tax benefit 4,445 3,900 2,470
Foreign earnings taxed at rates lower than U.S.
statutory rate (principally Ireland) (10,727) (4,520) (2,880)
Foreign sales corporation (1,603) (1,475) (1,332)
Research and development credit - - (38)
Other 1,662 10 211
$56,004 $46,558 $35,029
The domestic and foreign components of earnings before income taxes were $121.0
million and $56.8 million, respectively, for 1997, $94.8 million and $44.2
million, respectively, for 1996, and $70.5 million and $34.0 million,
respectively, for 1995. Total income tax expense for the years ended December
31, 1997, 1996 and 1995 was allocated as follows:
In thousands 1997 1996 1995
Income from continuing operations $56,004 $46,558 $35,029
Shareholders' equity, for compensation expense
for tax purposes in excess of amounts recognized
for financial statement purposes (765) (1,430) (300)
$55,239 $45,128 $34,729
At December 31, 1997 and 1996, 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 1997 1996
Deferred tax liabilities
Excess of tax over financial statement depreciation $5,736 $5,706
Other 270 74
Total deferred tax liabilities 6,006 5,780
Deferred tax assets
Allowance for doubtful accounts 3,702 2,806
Additional costs inventoried for tax purposes 22 1,014
Intercompany inventory profits 2,983 2,793
Allowances for sales and marketing programs 6,005 5,343
Inventory obsolescence reserve 4,569 4,875
Accrual for compensation and compensated absences 1,039 1,063
Reserve for warranty costs 761 508
Deferred revenue 1,913 1,138
Deferred gain on intercompany sale of equipment 479 744
Other 98 -
Total gross deferred tax assets 21,571 20,284
less valuation allowance - -
Net deferred tax assets 21,571 20,284
Net deferred income taxes $15,565 $14,504
27
In assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Due to the fact that the Company has sufficient
taxable income in the federal carryback period and anticipates sufficient future
taxable income over the periods which the deferred tax assets are deductible,
the ultimate realization of deferred tax assets for federal and state tax
purposes appears more likely than not. The U.S. federal taxable income for
1996, 1995 and 1994 was approximately $98.3 million, $82.8 million, and $85.1
million, respectively.
6. Stock Plans
Stock Option Plans
At December 31, 1997, the Company had four stock option plans, which are
described below. Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation, requires companies to either (a) record
an expense related to its stock option plans based on the estimated fair value
of stock options as of the date of the grant or (b) disclose pro forma net
income and earnings per share data as if the company had recorded an expense,
beginning with options granted in 1995. The Company has elected to continue to
apply APB Opinion 25 and related Interpretations in accounting for these plans
and to comply with the SFAS No. 123 disclosure requirements. Accordingly, no
compensation cost has been recognized for its stock option plans in the
accompanying consolidated financial statements. Had compensation cost for such
plans been determined based on the fair value at the grant dates for awards
under these plans consistent with the method of SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
In thousands except per share amounts 1997 1996 1995
Net income As reported $121,788 $ 92,421 $ 69,536
Pro forma 116,370 91,228 68,908
Basic earnings per share As reported $1.28 $.98 $.75
Pro forma 1.23 .97 .75
Diluted earnings per share As reported $1.27 $.98 $.74
Pro forma 1.22 .97 .74
The pro forma effect on net income for 1997, 1996 and 1995 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 grants made prior
to 1995. The weighted average fair value of options granted during 1997, 1996
and 1995 was $11.19, $5.13, and $4.95, 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
1997, 1996 and 1995:
1997 1996 1995
Expected volatility 57% 56% 54%
Dividend yield - - -
Risk-free interest rate 6.3% 6.6% 5.7%
Expected life 5 years 5 years 4 years
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 6.0 million shares and 10.8 million shares, respectively, of common
stock. 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.
28
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"). Options granted
under these plans are non-qualified stock options and may be granted to each
person who was a member of the Company's Board of Directors on April 21, 1997
and February 25, 1993, respectively, and who was not an employee or officer of
the Company. The 1997 and 1993 Director Plans authorized the grant of options
for up to 200,000 shares and 40,000 shares of common stock, respectively. Two
directors were entitled to participate in the Director Plans with each receiving
a grant of options as of April 21, 1997 for 10,000 shares at an exercise price
of $21.75 per share and as of February 25, 1993 for 20,000 shares at an exercise
price of $12 per share (i.e., the market price on the dates of grant).
Options granted under the 1997 Director Plan vest 25% at the end of the second
year and 9.375% at the end of each six month period thereafter. Options granted
under the 1993 Director Plan vested 25% at the end of the first year and 25%
annually thereafter.
Options granted under all stock option plans before January 1, 1993 will expire
not more than five years from the date of grant. Options granted under all
stock option plans after January 1, 1993 will 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 expire at various dates through 2007.
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,
1997, 1996 and 1995, and changes during the years ending on those dates is
presented below:
Shares in thousands 1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 1,609 $10.04 1,947 $ 8.59 2,258 $10.70
Granted 1,939 18.78 461 9.68 1,114 10.75
Exercised (348) 9.29 (576) 5.05 (484) 4.14
Terminated (191) 12.03 (223) 9.17 (941) 18.57
Outstanding
at end of year 3,009 15.62 1,609 10.04 1,947 8.59
Exercisable
at end of year 397 556 919
Shares reserved
at end of year 7,200 2,837 3,412
29
The following table summarizes information about stock options outstanding at
December 31, 1997:
Shares in thousands Options Options
Outstanding Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
$6.94 to $10.25 977 8.1 $ 9.53 295 $ 9.79
$12.00 to $17.50 1,073 9.0 16.26 79 12.95
$19.63 to $26.00 893 9.3 20.33 23 21.26
$31.75 66 9.9 31.75 - -
$6.94 to $31.75 3,009 8.8 15.62 397 11.07
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, 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 3,000 shares annually (subject to
limitations imposed by the Internal Revenue Code). The employee stock purchase
plan expires on February 11, 2007. A total of 1,000,000 shares are available
for purchase under the Plan. There were no shares issued under the Plan during
1997.
7. Retirement Benefits
At December 31, 1997, the Company has 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 holds 4.8 million shares of common stock at December 31, 1997.
Substantially all contributed shares have been allocated to participant
accounts. The value of contributed shares to the ESOP in 1997, 1996 and 1995
amounted to approximately $3.3 million, $6.9 million, and $5.5 million,
respectively.
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. Such matching Company contributions vest according to an
employee's years of service. The Company's matching contributions in 1997
amounted to approximately $0.4 million.
The retirement expense for 1997, 1996 and 1995 amounted to approximately $5.2
million, $8.5 million, and $6.6 million, respectively.
8. Segment and Geographic Information
The Company operates primarily in one industry segment which includes the
manufacturing and selling of UPS products primarily to wholesalers in the
computer industry. The Company closely monitors the credit worthiness of its
customers, adjusting credit policies and limits as deemed necessary. Ingram
Micro Corporation accounted for approximately 10% of the Company's net sales in
1997. No single customer comprised 10% or more of the Company's net sales in
1996 and 1995.
30
The Company's primary manufacturing operations outside of the United States are
located in Ireland, as explained in Note 12, and in the Philippines. American
Power Conversion Europe, S.A.R.L., American Power Conversion Corporation's
subsidiary located in France, provides sales and technical support to customers
in Europe, the Middle East, the former Soviet Union and Africa and its revenues
are in the form of commissions from the Ireland operations. The Company also
has an office in Japan which provides sales and technical support to customers
in Japan. These foreign operations have been combined into one category.
Intercompany transactions have been eliminated. Information about the Company's
operations in different geographic locations for 1997, 1997 and 1995 follows:
In thousands 1997 1996 1995
Revenues from unaffiliated customers:
United States $495,108 $401,823 $310,751
Foreign 271,221 190,945 115,093
Export sales from United States 107,059 114,109 89,418
$873,388 $706,877 $515,262
Operating profit:
United States $97,176 $84,531 $69,848
Foreign 74,262 49,259 33,857
$171,438 $133,790 $103,705
Identifiable assets:
United States $519,989 $338,659 $241,891
Foreign 121,301 165,343 104,697
$641,290 $504,002 $346,588
Capital expenditures:
United States $22,263 $17,270 $21,554
Foreign 14,945 7,735 2,440
$37,208 $25,005 $23,994
Depreciation and amortization:
United States $13,429 $10,813 $8,401
Foreign 4,287 2,698 1,701
$17,716 $13,511 $10,102
During 1997, 1996 and 1995, respectively, 49%, 63%, and 38% of export sales from
the United States were to unaffiliated customers in the Asia Pacific region and
28%, 20%, and 17% were to unaffiliated customers in Canada, with the remainder
in South American, European, African, and Middle Eastern countries. During
1997, 1996 and 1995, approximately 64%, 76%, and 81% of foreign sales to
unaffiliated customers were to European, African, and Middle Eastern customers,
with the remainder in the former Soviet Union and the Asia Pacific region.
During 1997, 1996 and 1995, approximately 72%, 90%, and 90% of the Company's
foreign operating profits were located in Europe, with the remainder in the Asia
Pacific region. At December 31, 1997, 1996 and 1995, approximately 69%, 84%,
and 90% of the Company's identifiable assets were located in Europe, with the
remainder in the Asia Pacific region.
9. Litigation
On or about June 16, 1997, Trippe Manufacturing Company ("Trippe") filed suit
against the Company and Systems Enhancement in the United States District Court
for the Northern District of Illinois, alleging a variety of contract,
antitrust, and unfair competition claims relating to the Company's February 14,
1997 acquisition of Systems Enhancement. Trippe sought unspecified damages,
costs, fees, and injunctive relief. On or about September 11, 1997, Trippe
withdrew its lawsuit without prejudice. By stipulation of the parties, the
court dismissed all claims in the lawsuit with prejudice on or about October 22,
1997.
In August 1995, five purported class action complaints, Simon, et al. v.
American Power Conversion Corp., et al., Mason v. American Power Conversion
Corp., et al., Lewis, et al. v. American Power Conversion Corp., et al., Lohner,
et al. v. American Power Conversion Corp., et al., and Friends of Chabad
31
Lubavitch, Inc. v. American Power Conversion Corp., et al., were filed in the
United States District Court for the District of Rhode Island. On November 21,
1995, the plaintiffs in each of these five purported federal class actions
together filed a Corrected Consolidated Amended Complaint. The plaintiffs in
this federal class action claimed to be suing on behalf of a class of persons
who purchased the Company's Common Stock during the period from April 24, 1995
through July 27, 1995. Certain current or former officers and directors of the
Company were also named as defendants in the federal class action. The
complaint in the federal class action alleged, among other things, that the
defendants violated the federal securities laws through the issuance of material
misrepresentations and omissions. The Company believes that the allegations in
the federal class action are without merit and has defended the lawsuit
vigorously.
On February 13, 1996, a derivative complaint captioned Klein, et al. v. Machala,
et al. was filed in the Massachusetts Superior Court for Suffolk County. This
state derivative action, which was brought by the plaintiffs on behalf of the
Company against certain of its current or former officers and directors,
alleged, among other things, certain breaches of fiduciary duty. The Company
believes that the allegations in the state derivative action are without merit
and has defended the lawsuit vigorously.
On February 26, 1998, the Company announced that it had reached agreements-in-
principle to settle both the federal class action and the state derivative
action. The parties to the federal class action and state derivative action
have executed settlement agreements which are now awaiting approval by the
United States District Court for the District of Rhode Island and the
Massachusetts Superior Court for Suffolk County, respectively. The entire
settlement amount is being borne by the liability insurance carrier which
insures the Company, its directors and its officers.
The tentative settlements in each case are subject to certain conditions
including court approval. There can be no assurance that the settlements will
be finally approved and that the Company will not have to continue its defense
of the lawsuits. Should the proposed settlements not be finally approved for
any reason, the Company intends to defend the lawsuits vigorously. No provision
for any liability that may result from these actions has been recognized in the
consolidated financial statements included in Item 8.
The Company is also involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations or liquidity.
10. Fair Value of Financial Instruments
The carrying amount of cash, cash equivalents, accounts receivable, accounts
payable, and accrued liabilities approximates their fair value because of the
short duration of these instruments.
11. Commitments
The Company has several noncancelable operating leases, primarily for
warehousing and office space, expiring at various dates through 2004. These
leases contain renewal options for periods ranging from one to three years and
require the Company to pay its proportionate share of utilities, taxes, and
insurance. Rent expense under these leases for 1997, 1996 and 1995 was $2.3
million, $2.5 million, and $1.9 million, respectively.
Future minimum lease payments under these leases are: 1998 - $2.2 million; 1999
- - $1.4 million; 2000 - $1.3 million; 2001 - $1.1 million; 2002 - $0.4 million;
and $0.1 million thereafter.
12. Contingencies
In July 1997, the Company established a second Ireland manufacturing location in
Castlebar. The Company purchased and improved a 70,000 square foot facility at
which the Company began manufacturing certain Matrix-UPST products during the
fourth quarter of 1997. The Company executed an agreement with the IDA under
which the Company will receive grant monies equal to 60% of the costs incurred
for machinery, equipment and building improvements for the Castlebar facility.
The maximum amount attainable under the agreement is approximately $1.3 million.
The grant monies would be repayable, in whole or in part, should (a) the Company
32
fail to meet certain employment goals established under the agreement which are
to be achieved over a five year implementation period and/or (b) the Company
discontinues operations in Ireland prior to the termination of the agreement.
The agreement terminates five years from the date of the last claim made by the
Company for grant monies. No capital grant claims were submitted during 1997.
Under a separate agreement with the IDA, the Company will also receive up to
$12,500 per new employee hired at the Castlebar facility for the direct
reimbursement of training costs. No training grant claims were submitted during
1997.
In 1994, the Company established its Ireland operations in Galway, through its
subsidiary, American Power Conversion Corporation (A.P.C.) B.V. The facility is
providing manufacturing and technical support to better service the Company's
markets in Europe, the Middle East, Africa, and the former Soviet Union. The
Company executed an agreement with the IDA under which the Company will receive
grant monies equal to 40% of the costs incurred for machinery, equipment and
building improvements for the Galway facility. The maximum amount attainable
under the agreement is approximately $13.1 million. The grant monies would be
repayable, in whole or in part, should (a) the Company fail to meet certain
employment goals established under the agreement which are to be achieved over a
five year implementation period and/or (b) the Company discontinues operations
in Ireland prior to the termination of the agreement. The agreement terminates
eight years from the date of the last claim made by the Company for grant
monies. The total cumulative amount of capital grant claims submitted through
December 31, 1997 was approximately $9.5 million. The total cumulative amount
of capital grants received through December 31, 1997 amounted to approximately
$8.6 million. Under a separate agreement with the IDA, the Company receives up
to $3,000 per new employee hired for the direct reimbursement of training costs.
The total cumulative amount of training grant claims submitted through December
31, 1997 was approximately $1.8 million. The total cumulative amount of
training grants received through December 31, 1997 amounted to approximately
$1.3 million.
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.
13. Quarterly Financial Data (Unaudited)
The following is a summary of quarterly results of operations in thousands
except per share amounts:
Q1 Q2 Q3 Q4
1997:
Net Sales $171,989 $203,619 $246,044 $251,736
Gross Profit $76,188 $91,410 $113,573 $116,157
Net Income $20,975 $26,611 $36,773 $37,429
Basic Earnings Per Share $.22 $.28 $.39 $.39
Basic Weighted Average
Shares Outstanding 94,542 95,049 95,154 95,226
Diluted Earnings Per Share $.22 $.28 $.38 $.39
Diluted Weighted Average
Shares Outstanding 95,551 96,076 96,495 96,588
1996:
Net Sales $141,626 $161,437 $193,755 $210,059
Gross Profit $58,185 $67,338 $81,984 $91,468
Net Income $15,213 $19,105 $27,901 $30,202
Basic Earnings Per Share $.16 $.20 $.30 $.32
Basic Weighted Average
Shares Outstanding 93.419 93,835 94,039 94,233
Diluted Earnings Per Share $.16 $.20 $.30 $.32
Diluted Weighted Average
Shares Outstanding 93,750 94,244 94,401 95,109
33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Part III
Item 10. Directors of the Registrant
Information with respect to Directors may be found under the caption
"Occupations of Directors" appearing in the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on May 1, 1998. 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 Annual Meeting of
Shareholders to be held on May 1, 1998 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 Annual Meeting of Shareholders to be held on May 1, 1998 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
Annual Meeting of Shareholders to be held on May 1, 1998 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, 1997 and 1996
Consolidated Statements of Income for each of the three years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for each of the three years
ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules
Schedule Number Description Page No.
II Valuation and Qualifying Accounts and Reserves 40
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 Peat Marwick LLP's reports with respect to the above listed consolidated
financial statements and consolidated financial statement schedule are included
herein on pages 37 and 38.
34
3. Exhibit Listing
Exhibit Number Description
3.01**** Articles of Organization of the Registrant, as amended (3.01)
3.02** By-Laws of the Registrant, as amended (3.02)
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)
10.7** Unsecured line of credit agreement dated June 29, 1991 between the Registrant
and Rhode Island Hospital Trust National Bank (10.19)
10.8** Unsecured line of credit agreement dated December 30, 1991 between the
Registrant and Fleet National Bank (10.20)
10.9*** 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*** Licence Agreement dated January 31, 1994 between the Registrant (Grantor) and
Digital Equipment International (Licencee) (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)
11 Computation of Earnings per Share
21 Subsidiaries of Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule (for SEC EDGAR filing only)
35
* 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.
(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, 1997.
36
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, 1997 and 1996, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
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 generally accepted auditing
standards. 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, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Providence, Rhode Island
February 3, 1998
37
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American Power Conversion Corporation:
Under date of February 3, 1998, we reported on the consolidated balance sheets
of American Power Conversion Corporation and subsidiaries as of December 31,
1997 and 1996 and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997, as contained in the annual report on Form 10-K for the year
1997. 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 Peat Marwick LLP
Providence, Rhode Island
February 3, 1998
38
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: February 27, 1998
By: /s/ Donald M. Muir
Donald M. Muir, Chief Financial Officer
(principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on the date indicated.
Date: February 27, 1998
By: /s/ Rodger B. Dowdell, Jr.
Rodger B. Dowdell, Jr.,
Chairman, President,
Chief Executive Officer and Director
(principal executive officer)
Date: February 27, 1998
/s/ Neil E. Rasmussen
Neil E. Rasmussen,
Vice President and Director
Date: February 27, 1998
/s/ Emanuel E. Landsman
Emanuel E. Landsman,
Vice President, Clerk and Director
Date: February 27, 1998
/s/ Ervin F. Lyon
Ervin F. Lyon,
Director
Date: February 27, 1998
/s/ James D. Gerson
James D. Gerson,
Director
39
Schedule II
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
For the years ended December 31, 1997, 1996 and 1995
Valuation accounts deducted from assets to which they
apply:
Allowance for Doubtful Accounts Receivable
In thousands Balance at Charged to Write Offs/
Beginning of Costs and Allowances Balance at End
Year Expenses Taken of Year
1997 $10,789 $4,834 ($3,393) $12,230
1996 6,920 4,291 (422) 10,789
1995 2,979 4,627 (686) 6,920
40
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Number Description Page No.
3.01**** Articles of Organization of the Registrant, as amended (3.01)
3.02** By-Laws of the Registrant, as amended (3.02)
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)
10.7** Unsecured line of credit agreement dated June 29, 1991 between the
Registrant and Rhode Island Hospital Trust National Bank (10.19)
10.8** Unsecured line of credit agreement dated December 30, 1991 between
the Registrant and Fleet National Bank (10.20)
10.9*** 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*** Licence Agreement dated January 31, 1994 between the Registrant
(Grantor) and Digital Equipment International (Licencee) (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)
11 Computation of Earnings per Share 43
21 Subsidiaries of Registrant 44
23 Consent of KPMG Peat Marwick LLP 45
27 Financial Data Schedule (for SEC EDGAR filing only) 46
41
* 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.
(X) Indicates a management contract or any compensatory plan, contract or
arrangement.
42
Exhibit 11
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
Computation of Earnings per Share
For the years ended December 31, 1997, 1996 and 1995
In thousands except per share amounts 1997 1996 1995
Basic
Net earnings $121,788 $92,421 $69,536
Basic weighted average shares outstanding 94,993 93,872 92,939
Basic earnings per share $1.28 $.98 $.75
Diluted
Net earnings $121,788 $92,421 $69,536
Basic weighted average shares outstanding 94,993 93,872 92,939
Net effect of dilutive potential common shares
outstanding based on the treasury stock
method using the average market price 1,128 475 928
Diluted weighted average shares outstanding 96,121 94,347 93,867
Diluted earnings per share $1.27 $.98 $.74
43
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Place of
Subsidiary Incorporation Ownership
American Power Conversion Corporation (APC) B.V. The Netherlands 100% by Registrant
APC Distribution Ltd. Ireland 100% by Registrant
APC America, Inc. Delaware 100% by Registrant
American Power Conversion Europe, S.A.R.L. France 100% by Registrant
APC Foreign Sales Corporation Barbados, W.I. 100% by Registrant
APC Japan, Inc. Japan 100% by Registrant
American Power Conversion (Philippines), Inc. Philippines 100% by APC B.V.
American Power Conversion Landholdings Inc. Philippines 40% by APC (Phil),Inc.
60% by Filipino nationals
American Power Conversion Uruguay S. A. Uruguay 100% by Registrant
American Power Conversion Mexico, S.A. de C.V. Mexico 100% by Registrant
American Power Conversion (India) Private Limited India 100% by Registrant
APC Resources Inc. Delaware 100% by Registrant
Systems Enhancement Corporation Missouri 100% by Registrant
44
Exhibit 23
ACCOUNTANTS' CONSENT
The Board of Directors
American Power Conversion Corporation:
We consent to incorporation by reference in the registration statement (No. 333-
23007) on Form S-3 and in the registration statements (Nos. 33-25873, 33-54416,
and 333-32563) on Form S-8 of American Power Conversion Corporation of our
reports dated February 3, 1998, relating to the consolidated balance sheets of
American Power Conversion Corporation and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997, and the related schedule, which reports appear in the 1997
annual report on Form 10-K of American Power Conversion Corporation.
KPMG Peat Marwick LLP
Providence, Rhode Island
March 20, 1998
45