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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, 1998
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
Incorporation or Organization) Identification No.)
132 FAIRGROUNDS ROAD, WEST KINGSTON, RHODE ISLAND 02892
401-789-5735
(Address and telephone number of Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.01 par value Pacific Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant on February 18, 1999 was approximately
$2,993,065,000 based on the price of the last reported sale as
reported by the NASDAQ Stock Market on February 18, 1999. The number of
shares outstanding of the Registrant's Common Stock on February 18, 1999
was 95,881,000.
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 7, 1999 are
incorporated by reference in Part III hereof.
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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 power protection and management
solutions for computer and electronic applications worldwide. The Company's
solutions include uninterruptible power supply products ("UPS"), electrical
surge protection devices, power conditioning products, and associated software,
services, and accessories. These solutions are for use with sensitive
electronic devices which rely on electric utility power including, but not
limited to, home electronics, personal computers ("PCs"), high performance
workstations, servers, networking equipment, telecommunications equipment,
internetworking equipment, datacenters, mainframe computers, and facilities.
The Company's UPS products regulate the flow of utility power to ensure safe and
clean power to the protected equipment and provide seamless backup power in the
event of the loss of utility power. The backup power lasts for a period of time
sufficient to enable the user to continue computer operations, conduct an
orderly shutdown of the protected equipment, preserve data, work through short
power outages or, in some cases, continue operating for several hours or even
days. The Company's surge protection devices and power conditioning products
provide protection from electrical power surges and noise in the flow of utility
power. The Company's software and accessory solutions enhance monitoring,
management, and performance of APC's UPS products. The Company's service
offerings assist the end-user with installation and maintenance of the Company's
UPS products.
The Company markets its products to business and home users around the world
through a variety of distribution channels, including computer distributors and
dealers, value added resellers, mass merchandisers, catalog merchandisers, E-
commerce vendors, and strategic partnerships.
The Company was incorporated under the laws of the Commonwealth of Massachusetts
on March 11, 1981. The Company's executive offices are located at 132
Fairgrounds Road, West Kingston, RI 02892 and its telephone number is (401) 789-
5735.
Acquisition of Silcon A/S
Early in the second quarter of 1998, the Company entered into a definitive
agreement with the principal management shareholders of Silcon A/S ("Silcon") to
acquire stock of Silcon, a Denmark-based manufacturer of three-phase UPSs up to
480 kilo volt-amps ("kVA"), and the Company commenced a tender offer for Silcon
shares. In June 1998, the initial tender offer and purchase of stock from
principal management shareholders was completed enabling the Company to operate
Silcon as a majority-owned subsidiary. During the second half of 1998, the
Company increased its ownership percentage to 89%. The Company's 1998 cash
outlays associated with the acquisition aggregating $64 million were financed
from operating cash. In January 1999, the Company attained ownership of more
than 90% of the share capital of Silcon through open market purchases financed
from operating cash and commenced a mandatory redemption of the remaining Silcon
shares. Through this mandatory share redemption process, the Company
anticipates that it will complete its acquisition of the remaining outstanding
shares of Silcon during the second half of 1999. In connection with the
mandatory redemption, the Copenhagen Stock Exchange has approved the de-listing
of Silcon's shares effective March 1, 1999. See also the "Acquisition" section
included in Management's Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 of this Report.
Market Overview
The growth of the UPS industry has been fueled by the rapid proliferation of
microprocessor-based equipment and related systems in the corporate marketplace
and in the small office / home office ("SOHO") environment. PCs and servers
have become an integral part of the overall business strategy of many
organizations as well as in many technical, scientific, and manufacturing
settings. Businesses continue to implement and run their operations via local
area and wide area networks ("LANs" and "WANs") as well as via corporate
intranets and the Internet. Businesses are also becoming aware of the need to
protect devices such as switches, hubs, routers, bridges, and other "smart"
devices that manage and interconnect networks. It is necessary to protect both
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the hardware and data stored in and traveling through these networks as well as
to provide battery back-up to enhance productivity through the high availability
of networks, sensitive electronics and even facilities.
The Company believes that the increased awareness of the costs and lost
productivity associated with poor power quality has increased demand for power
protection products. Complete failures, surges, or sags in the electrical power
supplied by a utility can cause computers and related electronic systems to
malfunction, resulting in costly downtime, damaged or lost data files, and
damaged hardware. A UPS protects against these power disturbances by providing
continuous power automatically and virtually instantaneously after the electric
power supply is interrupted, as well as line filtering and protection against
surges or sags while the electric utility is operating. A UPS can draw on the
energy stored in its internal battery to provide continuous, clean, computer
power. In international regions power quality often results in varied levels of
distortions and, as a result, these areas provide the Company with additional
opportunities for its products.
In 1998, the Company focused on providing global, end-to-end, Nonstop Networking
solutions for the PC, server, datacenter and enterprise markets. The
acquisition of Silcon expanded the scope of the Company's product reach enabling
it to address incremental segments of the UPS market, i.e., the larger than 16
kVA or enterprise segment that it was not previously addressing. Major global
trends affecting the Company's business in 1998 included the continued global
proliferation of servers and information technology ("IT") equipment, including
those for Internet and intranet applications; the growth of PC sales; and the
continued poor and unreliable quality of power worldwide.
The Company's goal is to leverage these trends, to target the sales of UPSs with
new IT equipment, to have the products and presence to succeed in new
geographies, and to continue to position itself as the UPS and power protection
solution provider of choice. The Company also continues to target promotional
efforts at the corporate, home, and SOHO PC markets, which it has identified as
growth opportunities for the future, and continues to target industries that are
becoming more dependent on electronic systems, such as the telecommunications
industry, as potential market growth opportunities.
Products
The Company's strategy is to design and manufacture products which incorporate
high-performance and quality at competitive prices. The Company's products are
designed to fit seamlessly into the computer and networking environments of
businesses, homes, and SOHOs. These products are engineered and extensively
tested for compatibility with leading PC, server, datacenter, and enterprise
hardware and software.
The Company currently manufactures a broad range of standard domestic and
international power protection solutions. The Company's UPS models are designed
for different applications with the principal differences among the products
being the amount of power which can be supplied during an outage, the length of
time for which battery power can be supplied (the "run time"), the level of
intelligent network interfacing capability, and the number of brownout and
overvoltage correction features. The Company's present line of UPS products
ranges from 200 volt-amps (suitable for a PC) to 480 kVA (suitable for mainframe
computers or facilities). List prices to end-users range from approximately
$100 to approximately $200,000. The Company also offers SurgeArrestr,
PowerManager and ProtectNetr products to protect against power spikes and
surges. The principal difference among the surge suppressor models is the level
of protection available and feature sets. List prices to end-users range from
approximately $25 to approximately $135.
The Company also develops a family of software products under the PowerChuter
plus name which provides its users with unattended shutdown capabilities, UPS
power management, and diagnostic features. PowerChute plus is available free of
charge for many major operating systems with the purchase of select UPS units
from the Company. List prices to end-users for other PowerChute products start
at $69. The Company also offers software packages for advanced monitoring,
configuring, and managing of power resources. Select versions are available
free of charge from the Company. List prices range from $169 to $499.
In addition, the Company offers a range of complimentary accessory products
designed to enhance the functionality of the Company's UPS and surge protection
products. NetShelterr is a high quality, free standing enclosure for storing
3
and protecting network, internetworking, and power protection equipment. Other
accessories offered by the Company include MasterSwitchT which provides remote
Web/SNMP management and control of power to attached network devices; PowerViewT
for display of a UPS's operational status; Share-UPSr for reliable shutdown of
multiple servers connected to a single UPS; SmartSlotT adapters designed to
fully integrate with APC Smart-UPSr, Matrix UPSr, and SymmetraT Power ArrayT
systems for advanced UPS and environmental management; and customized cables for
enhanced management and monitoring of APC UPSs. List prices to end-users for
accessory products range from $75 to $1,999.
Service Programs
The Company provides service programs to its customers for in-warranty UPS
products and out-of-warranty UPS products, as well as for product installation
and start-up. The Company offers two-year and one-year limited warranties
covering its UPS products. The Company also offers its customers the
opportunity to extend the basic warranty period, at an additional charge, for a
period of one or three additional years. In-warranty service programs allow
customers to return their original unit for repair and, if found defective, the
Company will replace the original unit with a factory reconditioned unit or, if
requested, repair the original unit and return it to the customer. The extended
warranty can be purchased anytime during the standard warranty period. For a
fixed fee (varying by model), the Company will replace an out-of-warranty UPS
unit with a factory reconditioned unit. The Company offers a standard one-year
warranty which covers certain Silcon product parts. This warranty can be
extended in annual increments for a period not to exceed ten years.
Additionally, the Company offers on-site service and preventative maintenance
visits for Silcon systems. The Company offers on-site service through APC's
service department and third party vendors as well as Trade-UPS programs for
customers to upgrade old APC or competitive units to new APC units. The Company
offers PowerAuditr, an on-site power quality consulting service which analyzes
the electrical infrastructure of a building to determine its suitability for a
given business and to identify corrections to existing anomalies.
The Company offers an Equipment Protection Policy (U.S. and Canada only) which
provides up to $25,000 for repair or replacement of customers' hardware should a
surge or lightning strike pass through a Company unit. The policy applies to
all units manufactured after January 1, 1992. Other restrictions also apply.
The Company's customers can also register the ProtectNet line of data line surge
suppressors for a "Double-Up" Supplemental Equipment Protection Policy, under
which the total recoverable limit under the Equipment Protection policy is
doubled, up to $50,000. Most of the Company's surge suppressor products come
with a lifetime product warranty.
The Company's products have experienced satisfactory field operating results,
and warranty costs incurred to date have not had a significant impact on the
Company's consolidated results of operations.
Distribution Channels
The Company markets its products to businesses, home users, and SOHOs around the
world through a variety of distribution channels, including computer
distributors and dealers, value added resellers, mass merchandisers, catalog
merchandisers, E-commerce vendors and strategic partnerships. The Company also
sells directly to some large value added resellers, which typically integrate
the Company's products into specialized microcomputer systems and then market
turnkey systems to selected vertical markets. Additionally, the Company sells
certain select products directly to manufacturers for incorporation into
products manufactured or packaged by them.
In 1998 and 1997, one customer accounted for approximately 11% and 10%,
respectively, of the Company's net sales. In 1996, no single customer comprised
10% or more of the Company's net sales.
Sales and Marketing
The Company's sales and marketing organizations are primarily responsible for
four activities: sales, marketing, customer service, and technical support.
The Company's sales staff is responsible for relationships with distributors,
dealers, strategic partners and end users as well as developing new distribution
channels, particularly in geographic and product application areas into which
the Company is expanding. The Company' sales force focuses on the customer
through customer units dedicated to specific customer groups. The Company has
charged its sales force with providing its customers with comprehensive product
and service solutions to their power management needs.
4
The Company's marketing activities include market research, product planning,
trade shows, sales and pricing strategies, and product sales literature. The
Company also utilizes direct marketing efforts domestically and internationally,
including direct mailings and print, online/Internet, radio, and television
advertising, as well as exhibiting at computer trade shows. Customer service is
responsible for all technical marketing inquiries and customer support. The
Company has developed a number of programs and techniques to support the
Company's distribution channels. These include, but are not limited to, toll-
free phone assistance, online product and technical information, formal product
demonstrations, and reseller trainings.
Manufacturing, Quality Control, and Supply
The Company's manufacturing operations are located in the United States,
Ireland, the Philippines, China, Denmark, and Switzerland. The Company believes
that its long-term success depends on, among other things, its ability to
control its costs. The Company utilizes state-of-the-art automated
manufacturing techniques and extensive quality control in order to minimize
costs and maximize product reliability. In addition, the design of products and
the commonality of parts allow for efficient circuit board component insertion,
wave soldering, and in-process testing. Quality control procedures are
performed at the component, sub-assembly, and finished product levels.
The Company is committed to an ongoing effort to enhance the overall
productivity of its manufacturing facilities. The Company uses lean, "cell"
based manufacturing processes. Such processes have been implemented in the
Company's U.S. facilities as well as a majority of its international locations.
National Quality Assurance has granted the Company its ISO 9000 quality seal.
The Company's systems have been audited to the stringent ISO 9002 level at its
manufacturing facilities in the United States, Galway, Ireland, and at two of
its facilities in the Philippines. Additionally, its Denmark manufacturing
operation is certified at the ISO 9001 level.
The Company generally purchases devices and components from more than one source
where alternative sources are available; however, it does use sole source
suppliers for certain components. The Company believes that alternative
components for these sole source items could be incorporated into the Company's
products, if necessary. While the Company has been able to obtain adequate
supplies of its components from sole source suppliers, the future unavailability
of components from these suppliers could disrupt production and delivery of
products until an alternative source is identified. See also the Company's Year
2000 Readiness Disclosure Statement included in Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7 of this
Report.
Product Development
The Company's research and development ("R&D") staff includes engineers and
support persons who develop new products and provide engineering support for
existing products. The Company's R&D efforts are also aimed at reducing cost
and total cycle time and improving product and component quality. Most of these
employees are located in two Massachusetts facilities with additional resources
located in Denmark. Employees devoted to the improvement and development of
software products are located in the West Kingston, Rhode Island facility and in
St. Louis, Missouri, at the Company's subsidiary, Systems Enhancement
Corporation. The Company believes that the technical expertise of its R&D staff
is very important to its growth as technological change is rapid in the UPS
field.
During 1998, the Company expanded its product offerings in the enterprise market
with the acquisition of Silcon, a leading manufacturer of three-phase UPSs up to
480 kVA. (For more information about this acquisition, see the "Acquisition"
section included in Management's Discussion and Analysis of Financial Condition
and Results of Operations in Item 7 of this Report.) Implementation of APC's
enterprise power protection strategy began in 1997 with the introduction of the
Symmetra Power Array, the first scalable and fault-tolerant power protection
system for multiple servers, computer rooms, call centers, and back-office
applications. The Company also innovated its desktop line of UPSs during 1998,
revamping its Back-UPSr line and adding new features, including Universal Serial
Bus support, to select products in the Back-UPS Pror line. Additional areas of
development included new products for the internetworking market; additional
network management support via new PowerChute and PowerNetr solutions; and
customized hardware and software products for strategic partners.
5
During 1997, the Company's new product offerings included the Symmetra Power
Array, its first entry into the above 5kVA market segment. Shipments of
Symmetra began in the third quarter of 1997. The Company also added additional
products which strengthen the Company's position as an overall network solution
provider. These introductions included additions to the Company's SurgeArrest
line of surge protectors; additional and enhanced solutions for addressing
manageability across a growing number of operating systems and management
platforms; new rack-mount networking solutions and special product development
for our strategic partners and international marketplaces.
During 1996, the Company's new product offerings included the Back-UPS 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 included web management capability with PowerChute plus
software, a network-manageable power distribution unit, and MasterSwitch, which
enables a network manager to control attached loads independent of each other.
Intellectual Property
The Company protects certain proprietary rights in its products as well as
certain proprietary technology developments by seeking patent protection. The
Company believes that the loss of such rights concerning these developments
would not have a material adverse effect on the Company's business. With
respect to protection of those areas of its technology for which patent
protection has not been sought, the Company relies on the complexity of its
technology, trade secrecy law, and employee confidentiality agreements.
The Company has numerous trademarks registered in the United States and in many
foreign countries. The Company also has trademark applications pending
domestically and internationally. The Company believes that its trademarks are
valuable intangible assets, but also believes that the loss of any one trademark
would not have a material adverse effect on its operations.
Competition
The Company believes that it is one of less than ten global companies providing
a full range of UPS products and services worldwide. The Company's principal
competitors include Exide Electronics Group, Inc., a business unit of BTR PLC,
Best Power, a business unit of SPX Corp., Liebert Corporation, a division of
Emerson Electric Co., MGE UPS Systems, a privately held French company, Chloride
Power, a subsidiary of Chloride Group PLC, and Phoenixtec Power Company Ltd., a
publicly held Taiwanese company. The Company also competes with a number of
other U.S. and non-U.S. based companies which offer power protection products
similar to the Company's products. Some of these competitors have greater
financial and other resources than the Company. The Company competes in the
sale of its products on the basis of several factors, including product
performance and quality, marketing and access to distribution channels, customer
service, product design, and price.
International Operations
The Company plans to continue to expand its international marketing efforts and
manufacturing operations. With a full line of internationally-positioned
products already available, the Company continues to staff personnel to serve
geographical markets of interest. The Company's primary manufacturing
operations outside of the United States are located in Ireland, the Philippines,
China, Denmark, and Switzerland. For more information about the Company's
recent Denmark-based acquisition, see the "Acquisition" section included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 of this Report. The Company's primary sales offices
outside of the United States are located in Europe and the Far East. These
offices, together with offices in other locations worldwide, provide sales and
technical support to customers around the globe. The Company utilizes third
party warehouses in Europe, the Far East, Canada, South Africa, and Uruguay for
distribution into its international markets.
During the fourth quarter of 1998, the Company began establishing a
manufacturing operation in India. The Company will be leasing a 42,000 square
foot facility in Bangalore and expects to begin manufacturing selected products
at this facility during the second quarter of 1999.
6
During the first quarter of 1998, the Company established a manufacturing
operation in China. The Company is leasing a 50,000 square foot facility in
Suzhou and began manufacturing selected products at this facility during the
third quarter of 1998.
The Company's manufacturing facilities in the Philippines are operating within a
designated economic zone which provides certain incentives, primarily in the
form of tax exemptions. In August 1998, the Company purchased a third
manufacturing facility in the Philippines for approximately $750,000, financed
from operating cash. The Philippines facilities manufacture certain Back-UPS
and Smart-UPS products sold in the Company's domestic and international markets.
The Company's Galway and Castlebar, Ireland operations are providing
manufacturing and technical support to service the Company's international
customers. The Company has agreements with the Industrial Development Authority
of Ireland ("IDA") under which the Company receives grant monies for costs
incurred for machinery, equipment, and building improvements for its Galway and
Castlebar facilities equal to 40% and 60%, respectively, of such costs up to a
maximum of $13.1 million and $1.3 million, respectively. Such grant monies are
subject to the Company meeting certain employment goals and maintaining
operations in Ireland until termination of the respective agreements. Under
separate agreements with the IDA, the Company receives direct reimbursement of
training costs at its Galway and Castlebar facilities for up to $3,000 and
$12,500, respectively, per new employee hired. See also note 12 to the
consolidated financial statements.
The Company continues to evaluate international manufacturing expansion
including additional locations in the Far East and South America.
Financial Information About Foreign and Domestic Operations
The information required under this section is included in note 8 of Notes to
Consolidated Financial Statements in Item 8 of this Report and is incorporated
herein by reference.
Employees
As of December 31, 1998, the Company had approximately 5,443 full-time employees
worldwide, approximately 2,173 of whom are located in the United States and
Canada. The Company also engages other personnel on a part-time basis. The
Company considers its relations with employees to be good.
Executive Officers of the Company
Executive officers of the Company are elected annually and hold office until the
next Annual Meeting of the Board of Directors and until their successors are
duly elected and qualified. As of February 18, 1999, the executive officers of
the Company were as follows:
Name Age Positions
Rodger B. Dowdell, Jr. 49 Chairman of the Board of Directors,
President, and Chief Executive
Officer
Neil E. Rasmussen 44 Vice President, Chief Technical
Officer, and Director
Edward W. Machala 44 Vice President, Operations and
Treasurer
Donald M. Muir 42 Vice President, Finance and
Administration, and Chief Financial
Officer
Emanuel E. Landsman 62 Vice President, Clerk, and Director
David P. Vieau 48 Vice President, Worldwide Business
Development
Aaron L. Davis 32 Vice President, 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.
7
Edward W. Machala joined the Company in January 1989 as Vice President,
Operations. From January 1985 to January 1989, Mr. Machala was Director of
Manufacturing and Engineering Technology for GTECH, a manufacturer of electronic
lottery and gaming terminals, where he was responsible for manufacturing and
engineering functions.
Donald M. Muir joined the Company in July 1995 as Chief Financial Officer. From
July 1993 to July 1995, Mr. Muir was the Treasurer of Stratus Computer, Inc.
where he was responsible for managing investor relations, treasury services,
corporate taxation and risk management. Prior to his appointment as Treasurer
at Stratus Computer, Inc., Mr. Muir held the position of Director of Finance and
Administration from January 1991 to July 1993 and Controller, Worldwide Sales
and Service from December 1988 to January 1991.
Emanuel E. Landsman has been Vice President, Clerk, and a Director of the
Company since its inception. From 1966 to 1981, Dr. Landsman worked at
Massachusetts Institute of Technology's Lincoln Laboratory, where he was in the
Space Communications Group from 1966 to 1977 and the Energy System Engineering
Group from 1977 to 1981.
David P. Vieau assumed the position of Vice President, Worldwide Business
Development in October 1995 after completing a short sabbatical. Mr. Vieau
served as Vice President of Marketing from October 1991 to June 1995. From July
1988 to August 1991, he was President of Poly-Flex Circuits, Inc., a division
of Cookson America.
Aaron L. Davis was appointed Vice President, Marketing and Communications in
June 1997, after serving as Vice President of Marketing Communications since
January 1995. Mr. Davis joined the Company as Director of Marketing
Communications in May 1989.
Item 2. Properties
The Company's principal properties are located in the United States, Ireland,
Denmark, Switzerland, the Philippines, and China. In addition, the Company owns
or leases sales offices and other space at various locations throughout the
United States and outside the United States. The Company also owns or leases
such machinery and equipment as are necessary in its operations. In general,
its properties are in good condition, are considered to be adequate for the uses
to which they are being put, and are substantially in regular use. The Company
continues to evaluate international manufacturing expansion, including
additional locations in the Far East and South America.
In square feet Sales,
Location of Marketing &
Principal Properties Administration Manufacturing R&D Warehouse Total
Owned
United States
Rhode Island 136,000 86,000 30,000 252,000
Massachusetts 69,000 69,000
Europe
Ireland 20,000 200,000 130,000 350,000
Denmark 27,660 71,925 11,065 110,650
Far East
Philippines 110,370 38,031 148,401
Leased
United States
Rhode Island 115,800 417,200 533,000
Florida 66,000 85,000 151,000
Missouri 12,500 2,700 11,460 1,350 28,010
Europe
Switzerland 14,120 19,380 540 8,610 42,650
Far East
China 50,000 50,000
8
Item 3. Legal Proceedings
The information required under this section is included in note 9 of Notes to
Consolidated Financial Statements in Item 8 of this Report and is incorporated
herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
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 Exchange, Inc. 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 1998 and 1997.
1998 1997
High Low High Low
First Quarter $30 3/8 $23 1/2 $31 1/2 $18 7/8
Second Quarter 34 3/8 27 1/8 24 1/2 15 1/4
Third Quarter 39 1/2 26 7/8 28 5/8 18 1/4
Fourth Quarter 49 9/16 29 3/4 34 3/8 22 1/8
On February 18, 1999, the closing sale price for the Company's Common Stock was
$37 7/8 per share. As of February 18, 1999, there were approximately 2,025
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.
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.
1998 1997 1996 1995 1994
Net sales $1,125,835 $873,388 $706,877 $515,262 $378,295
Cost of goods sold 621,073 476,060 407,902 284,500 189,954
Gross profit 504,762 397,328 298,975 230,762 188,341
Costs and expenses 300,293 225,890 165,185 127,057 82,692
Operating income 204,469 171,438 133,790 103,705 105,649
Other income, net 11,687 6,354 5,189 860 3,701
Earnings before income taxes and
minority interest 216,156 177,792 138,979 104,565 109,350
Income taxes 68,231 56,004 46,558 35,029 38,075
Earnings before minority
interest 147,925 121,788 92,421 69,536 71,275
Minority interest, net 349 - - - -
Net income $147,576 $121,788 $92,421 $69,536 $71,275
Basic earnings per share $1.55 $1.28 $.98 $.75 $.78
Basic weighted average
shares outstanding 95,503 94,993 93,872 92,939 91,824
Diluted earnings per share $1.52 $1.27 $.98 $.74 $.77
Diluted weighted average
shares outstanding 96,788 96,121 94,347 93,867 92,913
Total assets $871,983 $641,290 $504,002 $346,588 $265,163
Short-term debt $12,540 - - - -
Long-term debt - - - - -
9
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,
gross profit, marketing, selling, general and administrative expenses, R&D
expenses, operating income, other income, earnings before income taxes and
minority interest, earnings before minority interest, and net income, expressed
as a percentage of net sales, for the years ended December 31, 1998, 1997, and
1996.
1998 1997 1996
Net sales 100.0 100.0 100.0
Cost of goods sold 55.2 54.5 57.7
Gross profit 44.8 45.5 42.3
Marketing, selling, general
& administrative expenses 23.1 23.3 21.3
Research & development 2.9 2.6 2.1
Acquired research & development .6 - -
Operating income 18.2 19.6 18.9
Other income, net 1.0 .7 .8
Earnings before income taxes
& minority interest 19.2 20.3 19.7
Earnings before minority interest 13.1 13.9 13.1
Net income 13.1 13.9 13.1
Revenues
Net sales in fiscal year 1998 increased by 28.9% to $1,125.8 million from $873.4
million in fiscal year 1997, which reflected a 23.6% increase from $706.9
million in fiscal year 1996. The increases from 1996 to 1998 are attributable
to continued strong demand for the Company's uninterruptible power supply
products ("UPS") and surge protection products, combined with $49.8 million in
1998 net sales attributable to Silcon (see "Acquisition" below). 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 11%, 8%, and 7%, of
1998, 1997 and 1996 net sales, respectively.
Foreign sales to unaffiliated customers, primarily in Europe, the Far East,
Canada, and South America, in fiscal year 1998 were $486.6 million or 43.2% of
net sales compared to $378.3 million or 43.3% of net sales in fiscal year 1997
and $305.1 million or 43.2% of net sales in fiscal year 1996. See also note 8
to the consolidated financial statements.
Cost of Goods Sold
Cost of goods sold was $621.1 million or 55.2% of net sales in fiscal year 1998
compared to $476.1 million or 54.5% of net sales in fiscal year 1997. Gross
margins declined by approximately 70 basis points during 1998 from fiscal year
1997. Substantially all of the gross margin erosion was product mix related as
the Company's high-power UPS business now accounts for a larger percentage of
revenue.
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-UPS products manufactured in
the Philippines, the favorable margin impact of a higher-end product mix
resulting from strong growth in Smart-UPS 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.
10
Total inventory reserves at December 31, 1998 were $13.3 million compared to
$19.3 million at December 31, 1997. 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.
Operating Expenses
Marketing, selling, general, and administrative (SG&A) expenses were $260.2
million or 23.1% of net sales in 1998 compared to $203.5 million or 23.3% of net
sales in 1997 and $150.4 million or 21.3% of net sales in 1996. The increases
in total spending in 1998 and 1997 were due primarily to costs associated with
increased staffing and operating expenses of selling, administrative, and
marketing functions, as well as increased advertising and promotional costs.
The allowance for bad debts was 7.9% of accounts receivable at December 31, 1998
compared to 8.5% at December 31, 1997. The Company continues to experience
strong collection performance from its accounts receivable with outstanding
balances over 60 days outstanding representing 8.6% and 6.6% of total
receivables at December 31, 1998 and 1997, respectively. Write-offs of
uncollectible accounts represent less than 1% of net sales. A majority of
international customer balances are covered by receivables insurance.
R&D expenditures for 1998, 1997 and 1996 were $32.6 million, $22.4 million, and
$14.8 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. In addition, during 1998 the
Company recorded non-recurring charges of $7.6 million for acquired in-process
R&D in connection with its acquisition of Silcon (see "Acquisition" below). The
Company expects its recurring R&D expenditures to remain at substantially the
same level as a percentage of sales for the foreseeable future.
Other Income, Net and Income Taxes
Other income is comprised principally of interest income, which increased
substantially from 1996 to 1998 due to higher average cash balances available
for investment during 1997 and 1998.
Excluding 1998 non-tax deductible charges of $7.6 million for acquired in-
process R&D (see "Acquisition" below), the Company's effective income tax rates
were 30.5%, 31.5%, and 33.5% in 1998, 1997 and 1996, respectively. The decrease
from 1996 to 1998 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, 1998 was $493.8 million compared to $426.8
million at December 31, 1997. The Company's cash position decreased to $219.9
million at December 31, 1998 from $270.1 million at December 31, 1997, primarily
due to the cash purchase of approximately 89% of the share capital of Silcon
(see "Acquisition" below).
Worldwide inventories were $228.7 million at December 31, 1998 compared to
$104.2 million at December 31, 1997. Inventories increased during 1998 due to
increased demand and increased sourcing from the Philippines where longer
transit times result in higher finished goods inventories, combined with $19
million of inventory purchased in the Silcon acquisition.
At December 31, 1998, 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, 1998. In connection with the acquisition of Silcon (see
"Acquisition" below), the Company acquired $24.8 million in bank indebtedness
with interest rates ranging from 4% to 8%. The Company repaid $12.3 million of
11
this indebtedness during the second half of 1998. The Company had no
significant financial commitments, other than those required in the normal
course of business, at December 31, 1998.
During 1998 and 1997, the Company's capital expenditures, net of capital grants,
amounted to approximately $55.7 million and $37.2 million, respectively,
consisting primarily of manufacturing and office equipment, buildings and
improvements, and purchased software applications. The nature and level of
capital spending was made to improve manufacturing capabilities, establish
additional manufacturing capabilities in China, 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. Substantially all of the Company's net
capital expenditures were financed from available operating cash. The Company
had no material capital commitments at December 31, 1998. Capital expenditures
in 1999 are planned to grow in line with expected 1999 revenue growth, primarily
to support planned capacity expansions.
The Company has agreements with the Industrial Development Authority of Ireland
("IDA") under which the Company receives grant monies for costs incurred for
machinery, equipment, and building improvements for its Galway and Castlebar
facilities equal to 40% and 60%, respectively, of such costs up to a maximum of
$13.1 million and $1.3 million, respectively. Such grant monies are subject to
the Company meeting certain employment goals and maintaining operations in
Ireland until termination of the respective agreements. Under separate
agreements with the IDA, the Company receives direct reimbursement of training
costs at its Galway and Castlebar facilities for up to $3,000 and $12,500,
respectively, per new employee hired. See also note 12 to the consolidated
financial statements.
During the fourth quarter of 1998, the Company began establishing a
manufacturing operation in India. The Company will be leasing a 42,000 square
foot facility in Bangalore and expects to begin manufacturing selected products
at this facility during the second quarter of 1999.
During the first quarter of 1998, the Company established a manufacturing
operation in China. The Company is leasing a 50,000 square foot facility in
Suzhou and began manufacturing selected products at this facility during the
third quarter of 1998. Capital expenditures for the China expansion were
financed from operating cash.
The Company's manufacturing operation in the Philippines is operating within a
designated economic zone which provides certain economic incentives, primarily
in the form of tax exemptions. In August 1998, the Company purchased a third
manufacturing facility in the Philippines for approximately $750,000, financed
from operating cash. The Philippines facilities currently manufacture certain
Back-UPS and Smart-UPS products sold in the Company's domestic and international
markets.
The Company continues to evaluate international manufacturing expansion,
including additional locations in the Far East and South America.
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.
Acquisition of Silcon A/S
Early in the second quarter of 1998, the Company entered into a definitive
agreement with the principal management shareholders of Silcon A/S ("Silcon") to
acquire stock of Silcon, a Denmark-based manufacturer of three-phase UPSs up to
480 kilo volt-amps ("kVA"), and the Company commenced a tender offer for Silcon
shares. In June 1998, the initial tender offer and purchase of stock from
principal management shareholders was completed enabling the Company to operate
Silcon as a majority-owned subsidiary. During the second half of 1998, the
Company increased its ownership percentage to 89%. The Company's 1998 cash
outlays associated with the acquisition aggregating $64 million were financed
from operating cash. In January 1999, the Company attained ownership of more
than 90% of the share capital of Silcon through open market purchases financed
from operating cash and commenced a mandatory redemption of the remaining Silcon
shares. Through this mandatory share redemption process, the Company
12
anticipates that it will complete its acquisition of the remaining outstanding
shares of Silcon during the second half of 1999. In connection with the
mandatory redemption, the Copenhagen Stock Exchange has approved the de-listing
of Silcon's shares effective March 1, 1999.
The purchase price was allocated to the net tangible and identifiable intangible
assets acquired and to acquired in-process R&D ("acquired R&D"). Acquired R&D
includes the value of products in the development stage that are not considered
to have reached technological feasibility and that have no alternative future
uses. The acquired R&D effort related to several technologies for products that
Silcon was developing for which the Company intends to complete development. At
the valuation date, none of these products had demonstrated their technological
or commercial feasibility. Significant risk exists since the Company is unable
to predict with certainty the obstacles it may encounter in the form of time and
cost necessary to produce technologically feasible products. Should these
proposed products fail to become viable, the in-process technology has no
alternative use and it is unlikely that the Company would be able to realize any
value from the sale of the technology to another party. The Company used
professional consultants to assess and allocate values to the acquired R&D,
which were determined by estimating the contribution of the acquired R&D
technology to developing commercially viable products, estimating the resulting
net cash flows from the expected sales of such products, and discounting the net
cash flows to their present value using a risk-adjusted discount rate. The
Company believes that the assumptions used in the forecasts were reasonable at
the time of the acquisition. No assurance can be given, however, that the
underlying assumptions used to estimate expected product sales, development
costs, or profitability will transpire as estimated. For these reasons, actual
results may vary from the projected results.
In accordance with applicable accounting rules, acquired R&D is required to be
expensed. Accordingly, $7.6 million of the acquisition cost was expensed in
1998. The remaining purchase price exceeded the fair value of the tangible net
assets acquired by approximately $47 million, consisting of identifiable
intangible assets and goodwill, which is being amortized on a straight-line
basis over 15 years. The acquisition has been accounted for as a purchase and,
accordingly, Silcon's results of operations are included in the Company's
consolidated financial statements from the date of acquisition.
Foreign Currency Activity
The Company invoices its customers in Denmark, France, Germany, Great Britain,
Switzerland, 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 1998, 1997 and
1996.
At December 31, 1998, the Company's unhedged foreign currency accounts
receivable, by currency, were as follows:
In thousands Foreign Currency US Dollars
German Marks 21,442 $12,762
British Pounds 6,063 10,062
French Francs 48,679 8,662
Swiss Francs 7,821 5,666
Danish Kroner 23,000 3,594
Japanese Yen 1,086,192 9,528
The Company also had non-trade receivables of 3.9 million Irish Pounds
(approximately US$5.8 million), as well as Irish Pound denominated liabilities
of 3.9 million (approximately US$5.8 million). The Company also had short term
debt and liabilities denominated in various European currencies of US$42.8
million, as well as Yen denominated liabilities of approximately US$1.6 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
13
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 ("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The adoption of this Statement is not expected
to have a material impact on the Company's consolidated financial position or
results of operations.
The AICPA Accounting Standards Executive Committee recently issued Statement of
Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use. This SOP requires that certain costs related to
the development or purchase of internal-use software be capitalized and
amortized over the estimated useful life of the software, and is effective for
fiscal years beginning after December 15, 1998. The SOP also requires that
costs related to the preliminary project stage and post
implementation/operations stage in an internal-use computer software development
project be expensed as incurred. The adoption of this SOP is not expected to
have a material impact on the Company's consolidated financial position or
results of operations.
The AICPA Accounting Standards Executive Committee recently issued SOP 98-5,
Reporting on the Costs of Start-Up Activities. This SOP requires that costs
incurred during start-up activities, including organization costs, be expensed
as incurred, and is effective for fiscal years beginning after December 15,
1998. The adoption of this SOP is expected to have no impact on the Company's
consolidated financial position or results of operations.
Year 2000 Readiness Disclosure Statement
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 fully
operational. During 1998, the Company commenced a year 2000 readiness program
to assess the impact of the year 2000 issue on the Company's operations and
address necessary remediation. A year 2000 program director reporting directly
to senior management has been assigned to this project.
Assessment of the Company's Products for Year 2000 Compliance
All of the Company's hardware products and accessories are year 2000 compliant,
meaning that they have been tested to verify that where date fields are
processed, dates are calculated and displayed accurately, and that scheduled
events such as shutdowns, self-tests, and run-time calibrations, and also the
handling of unscheduled events, such as power failures, are unaffected by the
millenium and century change; provided that all other third party products
(e.g., software, firmware, operating systems, and hardware) properly exchange
date data with the Company product and provided also that the Company products
are used in accordance with the product documentation. In addition, the
Company's year 2000 compliant products recognize the year 2000 as a leap year.
The Company has also tested its software products and determined that these
products are substantially year 2000 compliant, and the Company intends to
resolve any remaining year 2000 issues before the beginning of the fourth
quarter of 1999. Periodically updated information about the Company's software
products is available at the Company's Year 2000 Readiness Disclosure Web site
(www.APCC.com). Information on this site is provided to the Company's customers
for the sole purpose of assisting in planning for transition to the year 2000.
Such information is the most currently available concerning the behavior of the
Company's products in the next century and is provided "as is" without warranty
of any kind. In addition, to the extent the Company's hardware and software
products are combined with the hardware and software products of other
companies, there can be no assurance that users of the Company's products will
not experience year 2000 problems as a result of the combination of the
Company's hardware and software products with non-compliant products of other
companies. The Company currently does not anticipate material expenditures to
remedy any year 2000 issues with its products and services.
Assessment of the Company's Information Technology ("IT") and Non-IT Systems for
Year 2000 Compliance
The Company is currently in the process of evaluating its IT systems for
compliance. The Company's Oracle manufacturing and financial information
systems were implemented during 1998. The Company is evaluating the year 2000
14
compliance of these systems in accordance with Oracle's recommendations. At
December 31, 1998, the Company had completed its initial installation and
testing of software patches available from Oracle. The Company is currently
continuing to install and test additional software patches as they become
available from Oracle. The Company does not consider the cost of the new
hardware and software for the Oracle implementations to be related to year 2000
readiness as these system replacements were already planned to satisfy the
demands of expansion of its worldwide operations and were not accelerated due to
year 2000 issues. The Company is also currently in the process of evaluating
its non-IT systems for compliance. Additionally, the Company utilizes other
third party software and equipment to distribute its products as well as to
operate other aspects of its business. The Company is reviewing such software
and equipment. The Company's review process is expected to be completed before
the beginning of the fourth quarter of 1999. There can be no assurance that
such software and equipment is year 2000 compliant, that non-compliant software
and equipment will be made compliant on a timely basis, or that any such non-
compliant software and equipment would not have a material adverse effect on the
Company's systems and operations.
Evaluation of Third Parties with which the Company has a Material Relationship,
including Key Suppliers, Service Providers, and Strategic Partners
The Company's year 2000 readiness program includes identifying these third
parties and determining, based on receipt of written verification, review of
publicly available financial statement disclosures, and other means, that such
third parties are either in compliance or expect to be in compliance prior to
January 1, 2000. The Company is currently in the process of communicating with
its significant vendors, service providers, and certain strategic partners.
Many enterprises, including the Company's present and potential customers, may
be devoting a substantial portion of their information systems spending to
resolving year 2000 issues, which may result in their spending being diverted
from applications such as the Company's products, over the next two years.
Development of Contingency Plans
The Company is currently not in a position to determine what would be its most
reasonably likely worst case year 2000 scenario or any plan for handling such
scenario. To date, the Company has not completed a formal contingency plan for
non-compliance, however to the extent that further evaluation of its products,
its IT and non-IT systems, or information obtained from the third parties with
which it has a material relationship suggests that there is a significant risk,
contingency plans will be implemented. Such contingency plans may include the
development of alternative sources for the product or service provided by any
non-compliant vendor.
It is the Company's policy to expense as incurred all costs associated with year
2000 readiness. The Company has developed a separate budget for operating and
capital expenditures relating year 2000 issues. No IT projects have been
deferred due to year 2000 efforts. Although the Company is not yet able to
estimate its total incremental cost for year 2000 issues, based on its
preliminary review to date, the Company does not believe that the costs of year
2000 issues will have a material adverse effect on the Company's business,
operating results, or financial condition. Although the Company is taking
measures to address the impact, if any, of year 2000 issues, it cannot predict
the outcome or success of its year 2000 readiness program, or whether the
failure of third party systems or equipment to operate properly in the year 2000
will have a material adverse effect upon the Company's business, operating
results, or financial condition, or require the Company to incur unanticipated
material expenses to remedy any year 2000 issue.
The foregoing discussion regarding the Company's year 2000 readiness program's
implementation, effectiveness, and cost, contains forward-looking statements
which are based on management's expectations, determined utilizing certain
assumptions of future events, including third party compliance and other
factors. However, there can be no guarantee that these expectations will be
realized, and actual results could differ materially from management's
expectations. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area and other similar uncertainties, and the remediation success of the
Company's suppliers, service providers, and strategic partners.
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
15
"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 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 1999.
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 less than ten global companies providing
a full range of UPS products and services worldwide. 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
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, or
financial condition.
Year 2000 Issues
Although the Company is taking measures to address the impact, if any, of year
2000 issues, it cannot predict the outcome or success of its year 2000 readiness
program, or whether the failure of third party systems or equipment to operate
properly in the year 2000 will have a material adverse effect upon the Company's
business, operating results, or financial condition, or require the Company to
incur unanticipated material expenses to remedy any year 2000 issue. See also
the Company's Year 2000 Readiness Disclosure Statement above.
16
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, or
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 43.2%, 43.3%, and 43.2% of the
Company's net sales in 1998, 1997, and 1996, respectively. The Company
anticipates that international sales will continue to account for a significant
portion of revenue. The Company invoices its customers in Denmark, France,
Germany, Great Britain, Switzerland, 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
upon 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 or determined, 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.
Integration of Acquired Businesses
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
17
adversely affect the Company's business, operating results, or 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. For information on the
Company's recent acquisition of Silcon, see the "Acquisition" section above.
The Company's determination of acquired R&D in connection with this acquisition
is subject to review and revaluation by the Securities and Exchange Commission.
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 1999. 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.
Uncertainty Regarding the Litigation Process
The Company has been, is, and/or may in the future become, involved in material
litigation involving the Company, its products or its operations. The
litigation process is uncertain and includes the risk of an unexpected,
unfavorable result and there can be no assurance that the Company will not be
materially adversely impacted by any such litigation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company, in the normal course of business, is exposed to market risks
relating to fluctuations in foreign currency exchange rates. The information
required under this section related to such risks is included in the Foreign
Currency Activity section of Management's Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 of this Report and is incorporated
herein by reference.
18
ITEM 8. Financial Statements and Supplementary Data
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
In thousands
ASSETS
1998 1997
Current assets:
Cash and cash equivalents $219,908 $270,134
Accounts receivable, less allowance for doubtful accounts
of $15,471 in 1998 and $12,230 in 1997 (Note 2) 180,356 131,115
Inventories (Note 3) 228,682 104,171
Prepaid expenses and other current assets 17,801 13,305
Deferred income taxes (Note 5) 28,498 21,571
Total current assets 675,245 540,296
Property, plant, and equipment:
Land, buildings, and improvements 51,735 31,143
Machinery and equipment 125,274 80,091
Office equipment, furniture, and fixtures 44,955 31,431
Purchased software 11,505 9,584
233,469 152,249
Less accumulated depreciation and amortization 85,205 52,631
Net property, plant, and equipment 148,264 99,618
Goodwill and other intangibles 45,837 -
Other assets 2,637 1,376
Total assets $871,983 $641,290
See accompanying notes to consolidated financial statements.
19
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
In thousands
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1997
Current liabilities:
Short term debt (Note 4) $12,540 $ -
Accounts payable 75,190 37,068
Accrued expenses 28,560 16,334
Accrued compensation 22,130 16,476
Accrued sales and marketing programs 17,824 15,965
Accrued retirement contributions 2,469 7,446
Income taxes payable 22,753 20,241
Total current liabilities 181,466 113,530
Deferred tax liability (Note 5) 7,500 6,006
Total liabilities 188,966 119,536
Minority interest 1,725 -
Shareholders' equity (Notes 6 and 7):
Common stock, $.01 par value;
authorized 200,000 shares in 1998 and 1997;
issued 95,973 in 1998 and 95,383 in 1997 960 954
Additional paid-in capital 67,080 55,626
Retained earnings 614,301 466,725
Treasury stock, 125 shares, at cost (1,551) (1,551)
Accumulated other comprehensive income 502 -
Total shareholders' equity 681,292 521,754
COMMITMENTS AND CONTINGENCIES
(Notes 9, 11 and 12)
OTHER INFORMATION (Notes 4 and 10)
Total liabilities and shareholders' equity $871,983 $641,290
See accompanying notes to consolidated financial statements.
20
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and 1996
In thousands except per share amounts
1998 1997 1996
Net sales (Note 8) $1,125,835 $873,388 $706,877
Cost of goods sold 621,073 476,060 407,902
Gross profit 504,762 397,328 298,975
Costs and expenses:
Marketing, selling, general, and administrative 260,176 203,469 150,401
expenses
Research and development 32,563 22,421 14,784
Acquired research and development 7,554 - -
Total operating expenses 300,293 225,890 165,185
Operating income 204,469 171,438 133,790
Other income, net 11,687 6,354 5,189
Earnings before income taxes and minority interest 216,156 177,792 138,979
Income taxes (Note 5) 68,231 56,004 46,558
Earnings before minority interest 147,925 121,788 92,421
Minority interest, net 349 - -
Net income $147,576 $121,788 $92,421
Basic earnings per share (Note 1) $1.55 $1.28 $.98
Basic weighted average shares outstanding 95,503 94,993 93,872
Diluted earnings per share (Note 1) $1.52 $1.27 $.98
Diluted weighted average shares outstanding 96,788 96,121 94,347
See accompanying notes to consolidated financial statements.
21
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
In thousands
Accumulated
$.01 Par, Additional Treasury Stock, Other
Common Stock Paid-in Retained at Cost Comprehensive
Shares Amount Capital Earnings Shares Amount Income Total
Balances at
December 31, 1995 93,271 $933 $37,123 $251,710 - $- $- $289,766
Net income 92,421 92,421
Comprehensive income 92,421
Exercises of stock options 576 6 2,900 2,906
Tax effect of exercises
of stock options 1,430 1,430
Shares issued to Employee
Stock Ownership Plan 570 5 6,921 6,926
Purchases of common stock (125) (1,551) (1,551)
Balances at
December 31, 1996
as previously reported 94,417 944 48,374 344,131 (125) (1,551) - 391,898
Adjustment for immaterial
pooling-of-interests 480 5 806 811
Balances at
December 31, 1996
as adjusted 94,897 949 48,374 344,937 (125) (1,551) - 392,709
Net income 121,788 121,788
Comprehensive income 121,788
Exercises of stock options 348 4 3,228 3,232
Tax effect of exercises
of stock options 765 765
Shares issued to Employee
Stock Ownership Plan 138 1 3,259 3,260
Balances at
December 31, 1997 95,383 954 55,626 466,725 (125) (1,551) - 521,754
Net income 147,576 147,576
Foreign currency
translation adjustment 502 502
Comprehensive income 148,078
Exercises of stock options 553 6 8,475 8,481
Tax effect of exercises
of stock options 2,082 2,082
Shares issued to Employee
Stock Purchase Plan 37 897 897
Balances at
December 31, 1998 95,973 $960 $67,080 $614,301 (125) $(1,551) $502 $681,292
See accompanying notes to consolidated financial statements.
22
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
In thousands
1998 1997 1996
Cash flows from operating activities
Net income $147,576 $121,788 $92,421
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 22,951 17,716 13,511
Provision for doubtful accounts 6,593 4,834 4,291
Deferred income taxes (5,967) (1,061) (8,080)
Acquired research and development 7,554 - -
Changes in operating assets and liabilities
excluding effects of acquisitions:
Accounts receivable (36,321) (26,821) (41,636)
Inventories (105,327) 26,631 17,098
Prepaid expenses and other current assets (4,151) (2,372) (2,332)
Other assets (536) 644 (186)
Accounts payable 23,550 (4,999) 15,180
Accrued expenses 6,395 2,721 6,785
Accrued compensation 5,654 4,256 5,745
Accrued sales and marketing programs 1,859 (395) 9,580
Accrued retirement contributions (4,977) 1,143 1,612
Income taxes payable 3,138 3,425 16,929
Other, net (409) - -
Net cash provided by operating activities 67,582 147,510 130,918
Cash flows from investing activities
Capital expenditures, net of capital grants (55,654) (37,208) (25,005)
Acquisitions (62,424) 101 -
Sale of assets 3,200 - -
Net cash used in investing activities (114,878) (37,107) (25,005)
Cash flows from financing activities
Repayment of short term debt (12,308) - -
Proceeds from issuances of common stock 9,378 6,497 9,832
Purchases of common stock - - (1,551)
Net cash provided by (used in) financing activities (2,930) 6,497 8,281
Net change in cash and cash equivalents (50,226) 116,900 114,194
Cash and cash equivalents at beginning of year 270,134 153,234 39,040
Cash and cash equivalents at end of year $219,908 $270,134 $153,234
Supplemental cash flow disclosures
Cash paid during the year for:
Income taxes (net of tax refunds) $65,109 $48,563 $37,219
Details of acquisitions:
Fair value of assets $113,177 $ - $ -
Liabilities and minority interest (48,793) - -
Cash paid 64,384 - -
Cash acquired (1,960) (101) -
Acquisitions $62,424 $ (101) $ -
NON-CASH TRANSACTIONS: In 1998, 1997 and 1996, the tax effect of the exercise of
stock options resulted in increases to additional paid-in capital and reductions
to income taxes payable of $2,082, $765, and $1,430, respectively.
See accompanying notes to consolidated financial statements.
23
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
1. Summary of Significant Accounting Policies
Nature of Business
American Power Conversion Corporation and its subsidiaries (the "Company")
designs, develops, manufactures, and markets power protection and management
solutions for computer and electronic applications worldwide. The Company's
solutions include uninterruptible power supply products ("UPS"), electrical
surge protection devices, power conditioning products, associated software,
services, and accessories. These solutions are for use with sensitive
electronic devices which rely on electric utility power including, but not
limited to, home electronics, personal computers ("PCs"), high performance
workstations, servers, networking equipment, telecommunications equipment,
internetworking equipment, datacenters, mainframe computers, and facilities.
The Company's principal markets are in North America, Europe, and the Far East.
Principles of Consolidation
The consolidated financial statements include the accounts of American Power
Conversion Corporation and all of its wholly- and majority-owned subsidiaries.
All intercompany accounts and transactions are eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consists of funds on deposit, money market savings
accounts, and short-term commercial paper with original maturities of three
months or less.
Inventories
Inventories are stated at the lower of cost or market; cost being determined
using the first-in, first-out (FIFO) method.
Property, Plant, and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided by
using the straight-line method over estimated useful lives as follows:
Land improvements 15 years
Buildings and improvements 40 years
Machinery and equipment 5 - 10 years
Office equipment, furniture and fixtures 3 - 10 years
Purchased software 3 years
Goodwill and Other Intangibles
Goodwill and other intangibles represents the excess of cost over the fair value
of the net tangible assets of businesses acquired and is being amortized on a
straight-line basis over 15 years. Periodically, the Company evaluates the
recovery of goodwill to assure that changes in facts and circumstances do not
suggest that recoverability has been impaired. This analysis relies on a number
of factors, including operating results, business plans, budgets, economic
projections, and changes in management's strategic direction or market emphasis.
In management's opinion, no impairment exists at December 31, 1998.
24
Research and Development
Expenditures for R&D are expensed in the year incurred.
Warranties
The Company offers limited two-year and one-year warranties. The provision for
potential liabilities resulting from warranty claims is provided at the time of
sale. The provision is computed based upon historical data and current
estimates. The Company also offers its customers the opportunity to extend the
basic warranty period up to an additional three years under a separately priced
program. Recognition of the revenue associated with the extended warranty
program commences on the date the extended warranty becomes effective and is
recognized on a straight-line basis over the extended warranty period. In
addition, the Company has an Equipment Protection Policy which 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 ProtectNet line of data line surge suppressors feature a "Double-Up"
Supplemental Equipment Protection Policy, under which the total recoverable
limit under the Equipment Protection Policy is doubled, up to $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 $180 million
at December 31, 1998. The Company plans to reinvest all such earnings for
future expansion. If such earnings were distributed, taxes would be increased
by approximately $48 million.
Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed by dividing net income by the weighted average number of
common shares and dilutive potential common shares outstanding during the
period. Under the treasury stock method, the unexercised options are assumed to
be exercised at the beginning of the period or at issuance, if later. The
assumed proceeds are then used to purchase common shares at the average market
price during the period.
1998 1997 1996
Basic weighted average shares outstanding 95,503 94,993 93,872
Net effect of dilutive potential common shares
outstanding based on the treasury stock
method using the average market price 1,285 1,128 475
Diluted weighted average shares outstanding 96,788 96,121 94,347
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,
1998, 1997, and 1996 were approximately 248,000, 83,000, and 68,000,
respectively.
25
Stock-Based Compensation
The Company applies APB Opinion 25 and related Interpretations in accounting for
its stock option plans. No compensation cost has been recognized for these
plans in the accompanying consolidated financial statements.
Advertising Costs
Advertising costs are expensed as incurred and reported in selling, general, and
administrative expenses in the accompanying consolidated statements of income.
Such costs of advertising, advertising production, trade shows, and other
activities are designed to enhance demand for the Company's products.
Advertising costs were $67.4 million in 1998, $59.9 million in 1997, and $36.3
million in 1996. There are no capitalized advertising costs in the accompanying
consolidated balance sheets.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
2. 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 1998 1997
Raw materials $ 87,975 $ 61,430
Work in process 9,328 3,731
Finished goods 131,379 39,010
$228,682 $104,171
4. Revolving Credit Agreements and Short Term Debt
At December 31, 1998, 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, 1998. In connection with the acquisition of Silcon, the Company
acquired $24.8 million in bank indebtedness with interest rates ranging from 4%
to 8%. The Company repaid $12.3 million of this indebtedness during the second
half of 1998.
26
5. Income Taxes
Total federal, state and foreign income tax expense (benefit) from continuing
operations for the years ended December 31, 1998, 1997, and 1996 consists of the
following:
In thousands Current Deferred Total
1998:
Federal $58,294 ($4,188) $54,106
State 4,707 (785) 3,922
Foreign 11,197 (994) 10,203
$74,198 ($5,967) $68,231
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
Income tax expense attributable to continuing operations amounted to $68.2
million in 1998, $56.0 million in 1997, and $46.6 million in 1996, (effective
rates of 31.6%, 31.5%, and 33.5%, respectively). The actual expense for 1998,
1997, and 1996 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 1998 1997 1996
Computed "expected" tax expense $75,655 $62,227 $48,643
State income taxes, net of federal income tax benefit 2,549 4,445 3,900
Foreign earnings taxed at rates lower than U.S.
statutory rate (principally Ireland) (12,676) (10,727) (4,520)
Foreign sales corporation (2,729) (1,603) (1,475)
Acquired R&D 3,094 - -
Other 2,338 1,662 10
$68,231 $56,004 $46,558
The domestic and foreign components of earnings before income taxes were $162.0
million and $54.2 million, respectively, for 1998, $121.0 million and $56.8
million, respectively, for 1997, and $94.8 million and $44.2 million,
respectively, for 1996. Total income tax expense for the years ended December
31, 1998, 1997 and 1996 was allocated as follows:
In thousands 1998 1997 1996
Income from continuing operations $68,231 $56,004 $46,558
Shareholders' equity, for compensation expense
for tax purposes in excess of amounts recognized
for financial statement purposes (2,082) (765) (1,430)
$66,149 $55,239 $45,128
At December 31, 1998 and 1997, 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:
27
In thousands 1998 1997
Deferred tax liabilities
Excess of tax over financial statement depreciation $ 5,605 $ 5,736
Other 1,895 270
Total deferred tax liabilities 7,500 6,006
Deferred tax assets
Allowance for doubtful accounts 4,441 3,702
Additional costs inventoried for tax purposes 1,050 22
Intercompany inventory profits 4,521 2,983
Allowances for sales and marketing programs 6,517 6,005
Inventory obsolescence reserve 3,865 4,569
Accrual for compensation and compensated absences 1,672 1,039
Reserve for warranty costs 1,024 761
Deferred revenue 2,356 1,913
Other 3,052 577
Total gross deferred tax assets 28,498 21,571
Less valuation allowance - -
Net deferred tax assets 28,498 21,571
Net deferred income taxes $20,998 $15,565
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
1997, 1996 and 1995 was approximately $111.6 million, $98.3 million, and $82.8
million, respectively.
6. Stock Plans
Stock Option Plans
At December 31, 1998, the Company had four stock option plans, which are
described below. 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 1998 1997 1996
Net income As reported $147,576 $121,788 $ 92,421
Pro forma 132,296 116,370 91,228
Basic earnings per share As reported $1.55 $1.28 $.98
Pro forma 1.39 1.23 .97
Diluted earnings per share As reported $1.52 $1.27 $.98
Pro forma 1.37 1.22 .97
28
The pro forma effect on net income for 1998, 1997 and 1996 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 1998, 1997
and 1996 was $17.67, $11.19, and $5.13, 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
1998, 1997 and 1996:
1998 1997 1996
Expected volatility 57% 57% 56%
Dividend yield - - -
Risk-free interest rate 5.5% 6.3% 6.6%
Expected life 5 years 5 years 5 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.
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 February 12, 1998 for 10,000 shares at an exercise
price of $27.00, 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 2008.
29
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,
1998, 1997 and 1996, and changes during the years ending on those dates is
presented below:
Shares in thousands 1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 3,009 $15.62 1,609 $10.04 1,947 $ 8.59
Granted 2,399 33.02 1,939 18.78 461 9.68
Exercised (472) 13.23 (348) 9.29 (576) 5.05
Terminated (156) 22.33 (191) 12.03 (223) 9.17
Outstanding
at end of year 4,780 24.45 3,009 15.62 1,609 10.04
Exercisable
at end of year 677 397 556
Shares reserved
at end of year 6,768 7,240 2,837
The following table summarizes information about stock options outstanding at
December 31, 1998:
Shares in thousands Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
$9.13 to $12.00 747 6.9 $ 9.63 295 $10.08
$13.63 to $17.50 811 8.2 16.52 220 16.59
$19.50 to $21.75 660 8.4 19.97 136 20.07
$22.63 to $26.88 154 8.0 23.59 11 23.77
$27.00 to $30.25 115 9.1 28.33 - -
$31.75 to $35.41 2,153 9.3 32.49 15 31.75
$44.81 140 9.9 44.81 - -
4,780 8.6 24.45 677 14.90
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 1.0 million shares are available
for purchase under the Plan. During 1998, under the Plan, 21,316 shares were
issued at $26.88 per share and 15,313 shares were issued at $21.14 per share.
There were no shares issued under the Plan during 1997.
30
7. Retirement Benefits
Employee Stock Ownership Plans
At December 31, 1998, the Company had noncontributory Employee Stock Ownership
Plans (the "ESOP") covering substantially all employees in North America and
Ireland. Contributions to the ESOP are based on a percentage of eligible
compensation and are determined by the Company's Board of Directors at its
discretion, subject to the limitations established by U.S. and Ireland tax laws.
The ESOP holds 4.7 million shares of common stock at December 31, 1998.
Substantially all contributed shares have been allocated to participant
accounts. No shares were contributed to the ESOP in 1998. The value of
contributed shares to the ESOP in 1997 and 1996 amounted to approximately $3.3
million and $6.9 million, respectively.
Employee Savings Plan
On May 1, 1997, the Company established an employee savings plan (the "Savings
Plan") that qualifies as a deferred salary arrangement under Section 401(k) of
the Internal Revenue Code of 1986, as amended, covering substantially all North
American employees. The Savings Plan allows eligible employees to contribute up
to 15% of their compensation on a pre-tax basis subject to certain limitations.
The Company matches, with Company common stock, 100% of the first 3% of employee
contributions. Such matching Company contributions vest according to an
employee's years of service. The Company's matching contributions in 1998 and
1997 amounted to approximately $1.6 million and $0.4 million, respectively.
The retirement expense for 1998, 1997, and 1996 amounted to approximately $2.9
million, $5.2 million, and $8.5 million, respectively.
8. Operating Segment and Geographic Information
At December 31, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information." Prior-period amounts have been restated in accordance
with the requirements of SFAS 131. Segment accounting policies are the same as
policies described in note 1.
Basis for presentation
The Company's operating businesses design, manufacture, and market power
protection equipment and related software and accessories for computer and
computer-related equipment. The Company manages its businesses based on the
nature of products provided. These businesses share similar economic
characteristics and have been aggregated into one reportable operating segment.
Markets and competition are global. Products are sold to businesses, home
users, and SOHOs utilizing an indirect selling model which encompasses computer
distributors and dealers, value added resellers, mass merchandisers, catalog
merchandisers, E-commerce vendors, and strategic partnerships. The Company also
sells directly to some large value added resellers, which typically integrate
the Company's products into specialized microcomputer systems and then market
turnkey systems to selected vertical markets. Additionally, the Company sells
certain select products directly to manufacturers for incorporation into
products manufactured or packaged by them.
The Company evaluates the performance of its businesses based on direct
contribution margin. Direct contribution margin includes R&D, marketing, and
administrative expenses directly attributable to the segment and excludes
certain expenses which are managed outside the reportable segment. Costs
excluded from segment profit are indirect operating expenses, primarily
consisting of selling and corporate expenses, and income taxes. Expenditures
for additions to long-lived assets are not reported to management by the
operating businesses.
31
Summary operating segment information is as follows:
In thousands 1998 1997 1996
Net sales $1,125,835 $873,388 $706,877
Segment direct contribution margin $448,200 $345,156 $268,139
Indirect operating expenses 243,731 173,718 134,349
Other income, net 11,687 6,354 5,189
Earnings before incomes taxes and
minority interest $216,156 $177,792 $138,979
Segment depreciation $16,996 $15,421 $11,755
Summary geographic information is as follows:
In thousands 1998 1997 1996
Net sales
United States $ 639,229 $495,108 $401,823
North and Latin America
excluding United States 60,897 55,138 42,052
Europe, Middle East, and Africa 305,108 222,011 179,002
Far East 120,601 101,131 84,000
$1,125,835 $873,388 $706,877
Note: Sales are attributed to geographic regions based on location of customer
Long-lived assets
United States $79,724 $72,167 $62,035
Europe 87,711 17,350 15,443
Far East 29,303 11,477 2,409
$196,738 $100,994 $79,887
The Company closely monitors the credit worthiness of its customers, adjusting
credit policies and limits as deemed necessary. One customer accounted for
approximately 11% and 10%, respectively, of the Company's net sales in 1998 and
1997. No single customer comprised 10% or more of the Company's net sales in
1996.
9. Litigation
On or about November 6, 1998, General Signal Power Systems, Inc. ("GSPS") filed
suit against the Company in Waukesha County Circuit Court in Wisconsin. GSPS
alleges interference with a contractual relationship with respect to a
distribution agreement between the Best Power division of GSPS and Silcon Power
Electronics A/S, a wholly-owned subsidiary of Silcon A/S. GSPS seeks
unspecified damages, costs, fees, and injunctive relief. On or about November
17, 1998, the Company removed the case from the Waukesha County Circuit Court to
the United States District Court for the Eastern District of Wisconsin. The
Company believes the GSPS lawsuit to be without merit and intends to vigorously
defend against it. The Company also believes the ultimate disposition of this
matter will not have a material adverse effect on the Company's consolidated
financial position or results of operations or liquidity. No provision for any
liability that may result from this action has been recognized in the Company's
consolidated financial statements.
32
On or about January 27, 1999, the Company was served with a lawsuit filed by an
individual in the United States District Court for the Central District of
California alleging patent infringement. The plaintiff, Anthony F. Coppola,
claims sole ownership of the patent referenced in the lawsuit. Coppola seeks
unspecified damages, costs, fees, and injunctive relief. The Company intends to
vigorously defend against the suit and believes the ultimate disposition of this
matter will not have a material adverse effect on the Company's consolidated
financial position or results of operations or liquidity. No provision for any
liability that may result from this action has been recognized in the Company's
consolidated financial statements.
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, short-term
debt, 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 1998, 1997 and 1996 was $2.5
million, $2.3 million, and $2.5 million, respectively.
Future minimum lease payments under these leases are: 1999 - $2.9 million;
2000 - $2.1 million; 2001 - $2.0 million; 2002 - $1.7 million; 2003 - $1.4
million; and 2004 - $1.3 million.
12. Contingencies
The Company has agreements with the Industrial Development Authority of Ireland
("IDA") under which the Company receives grant monies for costs incurred for
machinery, equipment, and building improvements for its Galway and Castlebar
facilities equal to 40% and 60%, respectively, of such costs up to a maximum of
$13.1 million and $1.3 million, respectively. Such grant monies are subject to
the Company meeting certain employment goals and maintaining operations in
Ireland until termination of the respective agreements. The total cumulative
amounts of capital grant claims submitted and received through December 31, 1998
for the Galway facility were approximately $12.8 million and $9.4 million,
respectively. The total cumulative amount of capital grant claims submitted
through December 31, 1998 for the Castlebar facility was $1.3 million; no
capital grant claims had been received for the Castlebar facility. Under
separate agreements with the IDA, the Company receives direct reimbursement of
training costs at its Galway and Castlebar facilities for up to $3,000 and
$12,500, respectively, per new employee hired. The total cumulative amounts of
training grant claims submitted and received through December 31, 1998 for the
Galway facility were approximately $1.3 million and $1.3 million, respectively.
The total cumulative amount of training grant claims submitted through December
31, 1998 for the Castlebar facility was approximately $1.0 million; no training
grant claims had been received for the Castlebar facility.
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.
33
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
1998:
Net Sales $218,867 $260,661 $327,370 $318,937
Gross Profit $98,012 $118,218 $144,283 $144,249
Net Income $26,726 $26,772 $46,618 $47,460
Basic Earnings Per Share $.28 $.28 $.49 $.50
Basic Weighted Average Shares Outstanding 95,304 95,394 95,537 95,775
Diluted Earnings Per Share $.28 $.28 $.48 $.49
Diluted Weighted Average Shares Outstanding 96,568 96,740 96,861 97,712
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
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
34
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 7, 1999. 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 7, 1999 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 7, 1999 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 7, 1999 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, 1998 and 1997
Consolidated Statements of Income for each of the three years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity for each of the
three years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules
Schedule Description Page
Number 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 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.
35
3. Exhibit Listing
Exhibit
Number Description
3.01 Articles of Organization of the Registrant, as amended
3.02 By-Laws of the Registrant, as amended and restated
10.01 1987 Stock Option Plan of the Registrant (X)
10.02 Form of Incentive Stock Option Agreement under the Registrant's 1987
Stock Option Plan (X)
10.03 Form of the Non-Qualified Stock Option Agreement under the Registrant's
1987 Stock Option Plan (X)
10.04 The Registrant's Employee Stock Ownership Plan Trust Agreement dated
December 30, 1987 (X)
10.05 The Registrant's Employee Stock Ownership Plan dated December 30, 1987,
as amended and restated (X)
10.06 Employment Agreement dated June 16, 1986 between the Company and Rodger
B. Dowdell, Jr. (X)
10.7 Unsecured line of credit agreement dated June 29, 1991 between the
Registrant and Rhode Island Hospital Trust National Bank
10.8 Unsecured line of credit agreement dated December 30, 1991 between the
Registrant and Fleet National Bank
10.9 Amendment dated December 30, 1992 to Unsecured line of credit agreement
between the Registrant and Fleet National Bank
10.10 Grant agreement dated February 16, 1994 between the Registrant and
Industrial Development Authority of Ireland
10.11 Contract for Sale dated January 31, 1994 between the Registrant and
Digital Equipment International
10.12 Management Agreement dated January 31, 1994 between the Registrant and
Digital Equipment International
10.13 Licence Agreement dated January 31, 1994 between the Registrant
(Grantor) and Digital Equipment International (Licencee)
10.14 Grant of Options Agreement dated January 31, 1994 between the
Registrant and Digital Equipment International
10.15 Memorandum Agreement dated January 31, 1994 between the Registrant and
Digital Equipment International
10.16 1993 Non-Employee Director Stock Option Plan (X)
10.17 Letter Agreement dated June 22, 1995 to amend loan agreement dated
December 30, 1991 by and between Registrant and Fleet National Bank
10.18 Letter Agreement dated October 11, 1995 to amend loan agreement dated
December 30, 1991 by and between Registrant and Fleet National Bank
10.19 Purchase and Sale Contract dated April 12, 1995 between the Registrant
and Trustees of Normac-Billerica Associates III u/d/t dated
October 11, 1979
10.20 American Power Conversion Corporation B.V. Profit Sharing Scheme dated
September 25, 1996 (X)
10.21 1997 Non-Employee Director Stock Option Plan of the Registrant (X)
10.22 1997 Stock Option Plan of the Registrant (X)
10.23 1997 Employee Stock Purchase Plan of the Registrant (X)
21 Subsidiaries of Registrant
23 Consent of KPMG LLP
27 Financial Data Schedule
(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, 1998.
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, 1998 and 1997, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1998. 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, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
KPMG LLP
Providence, Rhode Island
February 4, 1999
37
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American Power Conversion Corporation:
Under date of February 4, 1999, we reported on the consolidated balance sheets
of American Power Conversion Corporation and subsidiaries as of December 31,
1998 and 1997 and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998, as contained in the annual report on Form 10-K
for the year 1998. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedule listed in Item 14(a)(2). This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Providence, Rhode Island
February 4, 1999
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: March 22, 1999
By: /s/ Donald M. Muir
Donald M. Muir, Chief Financial Officer
(principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on the date indicated.
Date: March 22, 1999
By: /s/ Rodger B. Dowdell, Jr.
Rodger B. Dowdell, Jr.,
Chairman, President,
Chief Executive Officer and Director
(principal executive officer)
Date: March 22, 1999
/s/ Neil E. Rasmussen
Neil E. Rasmussen,
Vice President and Director
Date: March 22, 1999
/s/ Emanuel E. Landsman
Emanuel E. Landsman,
Vice President, Clerk and Director
Date: March 22, 1999
/s/ Ervin F. Lyon
Ervin F. Lyon,
Director
Date: March 22, 1999
/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, 1998, 1997 and 1996
Valuation accounts deducted from assets to which they apply:
In thousands Allowance for Doubtful Accounts Receivable
Balance at Charged to Costs Write Offs/ Balance at
Beginning of Year and Expenses Allowances Taken End of Year
1998 $12,230 $6,593 $(3,352) $15,471
1997 10,789 4,834 (3,393) 12,230
1996 6,920 4,291 (422) 10,789
40
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Page
Number Description No.
3.01**** Articles of Organization of the Registrant, as amended (3.01)
3.02 By-Laws of the Registrant, as amended and restated 43-50
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)
21 Subsidiaries of Registrant 51
23 Consent of KPMG LLP 52
27 Financial Data Schedule 53
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 3.02
AMERICAN POWER CONVERSION CORPORATION
*****************************
AMENDED AND RESTATED
BY-LAWS
*****************************
ARTICLE I
Stockholders
1. Annual Meeting. The annual meeting of stockholders shall be held on
the 4th Tuesday in April in each year (or if that be a legal holiday in the
place where the meeting is to be held, on the next succeeding full business day)
at 10:00 A.M. unless a different hour is fixed by the Directors or the President
and stated in the notice of the meeting. The purposes for which the annual
meeting is to be held, in addition to those prescribed by law, by the Articles
of Organization or by these By-laws, may be specified by the Directors or the
President. In the event an annual meeting has not been held on the date fixed
in these By-laws, a special meeting in lieu of the annual meeting may be held
with all the force and effect of an annual meeting.
2. Special Meetings. Special meetings of stockholders may be called by
the President or by the Directors. Upon written application of one or more
stockholders who hold at least 40% of the capital stock entitled to vote at a
meeting, a special meeting shall be called by the Clerk, or in case of the
death, absence, incapacity or refusal of the Clerk, by any other officer.
3. Place of Meetings. All meetings of stockholders shall be held at the
principal office of the corporation unless a different place (within or without
Massachusetts, but within the United States) is fixed by the Directors or the
President and stated in the notice of the meeting.
4. Notice of Meetings. A written notice of the place, date and hour of
all meetings of stockholders stating the purpose of the meeting shall be given
by the Clerk or an Assistant Clerk or by the person calling the meeting at least
seven days before the meeting or such longer period as is required by law to
each stockholder entitled to vote thereat and to each stockholder who under the
law, under the Articles of Organization or under these By-laws, is entitled to
such notice, by leaving such notice with him or at his residence or usual place
of business, or by mailing it, postage prepaid, and addressed to such
stockholder at his address as it appears in the records of the corporation.
Whenever notice of a meeting is required to be given a stockholder under any
provision of the Massachusetts Business Corporation Law or of the Articles of
Organization or these By-laws, a written waiver thereof, executed before or
after the meeting by such stockholder or his attorney thereunto authorized and
filed with the records of the meeting, shall be deemed equivalent to such
notice.
5. Notice of Stockholder Business. The following provisions of this
Section 5 shall apply to the conduct of business at any meeting of the
stockholders. (As used in this Section 5, the term annual meeting shall include
a special meeting in lieu of annual meeting.)
(a) At any meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) pursuant to the
corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) by any stockholder of the corporation who is a stockholder of
record at the time of giving of the notice provided for in paragraph (b) of this
Section 5, who shall be entitled to vote at such meeting and who complies with
the notice procedures set forth in paragraph (b) of this Section 5.
(b) For business to be properly brought before any meeting of the
stockholders by a stockholder pursuant to clause (iii) of paragraph (a) of this
By-law, the stockholder must have given timely notice thereof in writing to the
Clerk of the corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation (i) in the case of any annual meeting, not less than ninety (90)
days nor more than one hundred and twenty (120) days prior to the date specified
in Section 1 above for such annual meeting, regardless of any postponements,
deferrals or adjournments of that meeting to a later date; provided, however,
that if a special meeting in lieu of annual meeting of stockholders is to be
43
held on a date prior to the date specified in Section 1 above, and if less than
seventy (70) days' notice or prior public disclosure of the date of such special
meeting in lieu of annual meeting is given or made, notice by the stockholder to
be timely must be so delivered or received not later than the close of business
on the tenth day following the earlier of the date on which notice of the date
of such special meeting in lieu of annual meeting was mailed or the day on which
public disclosure was made of the date of such special meeting in lieu of annual
meeting; and (ii) in the case of a special meeting (other than a special meeting
in lieu of an annual meeting), not later than the tenth day following the
earlier of the day on which notice of the date of the scheduled meeting was
mailed or the day on which public disclosure was made of the date of the
scheduled meeting. A stockholder's notice to the Clerk shall set forth as to
each matter the stockholder proposes to bring before the meeting, (i) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (ii) the name and address,
as they appear on the corporation's books, of the stockholder proposing such
business, the name and address of the beneficial owner, if any, on whose behalf
the proposal is made, and the name and address of any other stockholders or
beneficial owners known by such stockholder to be supporting such proposal,
(iii) the class and number of shares of the corporation which are owned
beneficially and of record by the stockholder proposing such business, by the
beneficial owner, if any, on whose behalf the proposal is made, and by any other
stockholders or beneficial owners known by such stockholder to be supporting
such proposal, and (iv) any material interest in such proposed business of the
stockholder proposing such business, any material interest in such proposed
business of the beneficial owner, if any, on whose behalf the proposal is made,
and any material interest in such proposed business of any other stockholders or
beneficial owners known by such stockholder to be supporting such proposal, to
the extent known by such stockholder.
(c) Notwithstanding anything in these By-laws to the contrary, no
business shall be conducted at a meeting except in accordance with the
procedures set forth in these By-laws. The person presiding at the meeting
shall, if the facts warrant, determine that business was not properly brought
before the meeting and in accordance with the procedures prescribed by these By-
laws, and if he should so determine, he shall so declare at the meeting and any
such business not properly brought before the meeting shall not be transacted.
Notwithstanding the foregoing provision of this By-law, a stockholder shall also
comply with all applicable requirements of the Securities Exchange Act of 1934,
as amended (or any successor provision), and the rules and regulations
thereunder with respect to the matters set forth in this By-law.
(d) This provision shall not prevent the consideration and approval
or disapproval at the meeting of reports of officers, Directors and committees
of the Board of Directors, but, in connection with such reports, no new business
shall be acted upon at such meeting unless properly brought before the meeting
as herein provided.
6. Quorum. The holders of a majority in interest of all stock issued,
outstanding and entitled to vote at a meeting shall constitute a quorum, but a
lesser number may adjourn any meeting from time to time without further notice;
except that, if two or more classes of stock are outstanding and entitled to
vote as separate classes, then in the case of each such class, a quorum shall
consist of the holders of a majority in interest of the stock of that class
issued, outstanding and entitled to vote.
7. Voting and Proxies. Each stockholder shall have one vote for each
share of stock entitled to vote owned by him and a proportionate vote for a
fractional share, unless otherwise provided by the Articles of Organization in
the case that the corporation has two or more classes or series of stock.
Capital stock shall not be voted if any installment of the subscription therefor
has been duly demanded in accordance with the law of the Commonwealth of
Massachusetts and is overdue and unpaid. Stockholders may vote either in person
or by written proxy. Proxies shall be filed with the clerk of the meeting, or
of any adjournment thereof, before being voted. No proxy dated more than six
months before the date named therein shall be valid and no proxy shall be valid
after the final adjournment of such meeting. Notwithstanding the provisions of
the preceding sentence, a proxy coupled with an interest sufficient in law to
support an irrevocable power, including, without limitation, an interest in
shares or in the corporation generally, may be made irrevocable if it so
provides, need not specify the meeting to which it relates, and shall be valid
and enforceable until the interest terminates, or for such shorter period as may
be specified in the proxy. Except as otherwise limited therein, proxies shall
entitle the persons named therein to vote at any adjournment of such meeting but
shall not be valid after final adjournment of such meeting. A proxy with
respect to stock held in the name of two or more persons shall be valid if
executed by any one of them unless at or prior to exercise of the proxy the
corporation receives a specific written notice to the contrary from any one of
them. A proxy purporting to be executed by or on behalf of a stockholder shall
be deemed valid unless challenged at or prior to its exercise and the burden of
proving invalidity shall rest on the challenger.
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8. Action at Meeting. When a quorum is present, the holders of a
majority of the stock present or represented and voting on a matter (or if there
are two or more classes of stock entitled to vote as separate classes, then in
the case of each such class, the holders of a majority of the stock of that
class present or represented and voting on a matter), except where a larger vote
is required by law, the Articles of Organization or these By-laws, shall decide
any matter to be voted on by the stockholders. Any election of directors or
officers by the stockholders shall be determined by a plurality of the votes
cast by stockholders entitled to vote at the election. Any such elections shall
be by ballot if so requested by any stockholder entitled to vote thereon. The
corporation shall not directly or indirectly vote any share of its own stock.
9. Action without Meeting. Any action required or permitted to be taken
at any meeting of the stockholders may be taken without a meeting if all
stockholders entitled to vote on the matter consent to the action in writing and
the written consents are filed with the records of the meetings of stockholders.
Such consent shall be treated for all purposes as a vote at a meeting.
ARTICLE II
Directors
1. Powers. The business of the corporation shall be managed by a Board
of Directors who may exercise all the powers of the corporation except as
otherwise provided by law, by the Articles of Organization or by these By-laws.
In the event of vacancy in the Board of Directors, the remaining Directors,
except as otherwise provided by law, may exercise the powers of the full Board
until the vacancy is filled.
2. Election. A Board of Directors shall be elected by the stockholders
at the annual meeting. The number of directors shall be fixed by the
stockholders (except as that number may be enlarged by the Board of Directors
acting pursuant to Section 4 of this Article), but shall be not less than three,
except that whenever there shall be only two stockholders the number of
directors shall be not less than two and whenever there shall be only one
stockholder or prior to the issuance of any stock, there shall be at least one
director, and shall be not more than nine.
3. Vacancies. Any vacancy in the Board of Directors, however occurring,
including a vacancy resulting from the enlargement of the Board, may be filled
by the stockholders or, in the absence of stockholder action, by the Directors.
4. Enlargement of the Board. The Board of Directors may be enlarged by
the stockholders at any meeting or by vote of a majority of the Directors
then in office.
5. Tenure. Except as otherwise provided by law, by the Articles of
Organization or by these By-laws, Directors shall hold office until the next
annual meeting of stockholders and until their successors are chosen and
qualified. Any Director may resign by delivering his written resignation to the
corporation at its principal office or to the President, Clerk or Secretary.
Such resignation shall be effective upon receipt unless it is specified to be
effective at some other time or upon the happening of some other event.
6. Removal. A Director may be removed from office (a) with or without
cause by the vote of the holders of at least two-thirds of the shares entitled
to vote in the election of Directors, provided that the Directors of a class
elected by a particular class of stockholders may be removed only by the vote of
the holders of at least two-thirds of the shares of the particular class of
stockholders entitled to vote for the election of such Directors; or (b) for
cause by vote of at least two-thirds of the Directors then in office. A
Director may be removed for cause only after a reasonable notice and opportunity
to be heard before the body proposing to remove him.
7. Meetings. Regular meetings of the Directors may be held without call
or notice at such places and at such times as the Directors may from time to
time determine, provided that any Director who is absent when such determination
is made shall be given notice of the determination. A regular meeting of the
Directors may be held without a call or notice at the same place as the annual
meeting of stockholders.
Special meetings of the Directors may be held at any time and place
designated in a call by the President or two or more Directors.
8. Telephone Conference Meetings. Members of the Board of Directors may
participate in a meeting of the board by means of a conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other at the same time and participation by such means
shall constitute presence in person at a meeting.
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9. Notice of Meetings. Notice of all special meetings of the Directors
shall be given to each Director by the Secretary, or Assistant Secretary, or if
there be no Secretary or Assistant Secretary, by the Clerk, or Assistant Clerk,
or in case of the death, absence, incapacity or refusal of such persons, by the
officer or one of the Directors calling the meeting. Notice shall be given to
each Director in person or by telephone or by telegram sent to his business or
home address at least twenty-four hours in advance of the meeting, or by written
notice mailed to his business or home address at least forty-eight hours in
advance of the meeting. Notice of a meeting need not be given to any Director
if a written waiver of notice, executed by him before or after the meeting, is
filed with the records of the meeting, or to any Director who attends the
meeting without protesting prior thereto or at its commencement the lack of
notice to him. A notice or waiver of notice of a Directors' meeting need not
specify the purposes of the meeting.
10. Quorum. At any meeting of the Directors, a majority of the Directors
then in office shall constitute a quorum. Less than a quorum may adjourn any
meeting from time to time without further notice.
11. Action at Meeting. At any meeting of the Directors at which a quorum
is present, a majority of the Directors present may take any action on behalf of
the Board except to the extent that a larger number is required by law or the
Articles of Organization or these By-laws.
12. Action by Consent. Any action required or permitted to be taken at
any meeting of the Directors may be taken without a meeting, if all the
Directors consent to the action in writing and the written consents are filed
with the records of the meetings of Directors. Such consents shall be treated
for all purposes as a vote at a meeting.
13. Committees. The Directors may, by vote of a majority of the Directors
then in office, elect from their number an executive or other committees and may
by like vote delegate thereto some or all of their powers except those which by
law, the Articles of Organization or these By-laws they are prohibited from
delegating to such committee. Except as the Directors may otherwise determine,
any such committee may make rules for the conduct of its business, but unless
otherwise provided by the Directors or in such rules, its business shall be
conducted as nearly as may be in the same manner as is provided by these By-laws
for the Directors.
ARTICLE III
Officers
1. Enumeration. The officers of the corporation shall consist of a
President, a Treasurer, a Clerk, and such other officers, including a Chairman
of the Board of Directors, one or more Vice-Presidents, Assistant Treasurers,
Assistant Clerks, Secretary and Assistant Secretaries as the Directors may
determine.
2. Election. The President, Treasurer and Clerk shall be elected
annually by the Directors at their first meeting following the annual meeting of
stockholders. other officers may be chosen by the Directors at such meeting or
at any other meeting.
3. Qualification. The President may, but need not be, a Director. No
officer need be a stockholder. Any two or more offices may be held by the same
person, provided that the President and Clerk shall not be the same person. The
Clerk shall be a resident of Massachusetts unless the corporation has a resident
agent appointed for the purpose of service of process. Any officer may be
required by the Directors to give bond for the faithful performance of his
duties to the corporation in such amount and with such sureties as the Directors
may determine.
4. Tenure. Except as otherwise provided by law, by the Articles of
Organization or by these By-laws, the President, Treasurer and Clerk shall hold
office until the first meeting of the Directors following the next annual
meeting of stockholders and until their successors are chosen and qualified; and
all other officers shall hold office until the first meeting of the Directors
following the next annual meeting of stockholders and until their successors are
chosen and qualified, unless a shorter term is specified in the vote choosing or
appointing them. Any officer may resign by delivering his written resignation
to the corporation at its principal office or to the President, Clerk or
Secretary, and such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
5. Removal. The Directors may remove any officer with or without cause
by vote of a majority of the Directors then in office; provided, that an officer
may be removed for cause only after a reasonable notice and opportunity to be
heard before the Board of Directors.
6. President, Chairman of the Board, and Vice-President. The President
shall, unless otherwise provided by the Directors, be the chief executive
officer of the corporation and shall, subject to the direction of the Directors,
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have general supervision and control of its business. Unless otherwise provided
by the Directors he shall preside, when present, at all meetings of stockholders
and, unless a Chairman of the Board has been elected and is present, of the
Directors.
If a Chairman of the Board of he shall preside at all meetings of the
Board of Directors at which he is present. The Chairman shall have such other
powers as the Directors may from time to time designate.
Any Vice-President shall have such powers as the Directors may from
time to time designate.
7. Treasurer and Assistant Treasurer. The Treasurer shall, subject to
the direction of the Directors, have general charge of the financial affairs of
the corporation and shall cause accurate books of account to be kept. He shall
have custody of all funds, securities, and valuable documents of the
corporation, except as the Directors may otherwise provide.
Any Assistant Treasurer shall have such powers as the Directors may
from time to time designate.
8. Clerk and Assistant Clerks. The Clerk shall record all proceedings of
the stockholders in a book to be kept therefor. Unless a transfer agent is
appointed, the Clerk shall keep or cause to be kept in Massachusetts, at the
principal office of the corporation or at his office, the stock and transfer
records of the corporation, in which are contained the names of all stockholders
and the record address and the amount of stock held by each.
In case a Secretary is not elected, the Clerk shall record all
proceedings of the Directors in a book to be kept therefor.
In the absence of the Clerk from any meeting of the stockholders, an
Assistant Clerk, if one be elected, otherwise a Temporary Clerk designated by
the person presiding at the meeting, shall perform the duties of the Clerk. Any
Assistant Clerk shall have such additional powers as the Directors may from time
to time designate.
9. Secretary and Assistant Secretaries. If a Secretary is elected, he
shall keep a record of the meetings of the Directors and in his absence, an
Assistant Secretary, if one be elected, otherwise a Temporary Secretary
designated by the person presiding at the meeting, shall keep a record of the
meetings of the Directors.
Any Assistant Secretary shall have such additional powers as the
Directors may from time to time designate.
10. Other Powers and Duties. Each officer shall, subject to these By-
laws, have in addition to the duties and powers specifically set forth in these
By-laws, such duties and powers as are customarily incident to his office, and
such duties and powers as the Directors may from time to time designate.
ARTICLE IV
Capital Stock
1. Certificates of Stock. Subject to the provisions of Section 2 below,
each stockholder shall be entitled to a certificate of the capital stock of the
corporation in such form as may be prescribed from time to time by the
Directors. The certificate shall be signed by the President or a Vice-
President, and by the treasurer or an Assistant Treasurer; provided, however,
such signatures may be facsimiles if the certificate is signed by a transfer
agent, or by a registrar, other than a Director, officer or employee of the
corporation. In case any officer who has signed or whose facsimile signature
has been placed on such certificate shall have ceased to be such officer before
such certificate is issued, it may be issued by the corporation with the same
effect as if he were such officer at the time of its issue.
Every certificate issued for shares of stock at a time when such
shares are subject to any restriction on transfer pursuant to the Articles of
Organization, these By-laws or any agreement to which the corporation is a party
shall have the restriction noted conspicuously on the certificate and shall also
set forth on the face or back of the certificate either the full text of the
restriction or a statement of the existence of such restriction and a statement
that the corporation will furnish a copy thereof to the holder of such
certificate upon written request and without charge. Every stock certificate
issued by the corporation at a time when it is authorized to issue more than one
class or series of stock shall set forth upon the face or back of the
certificate either the full text of the preferences, voting powers,
qualifications and special and relative rights of the shares of each class and
series, if any, authorized to be issued, as set forth in the Articles of
Organization, or a statement of the existence of such preferences, powers,
qualifications, and rights, and a statement that the corporation will furnish a
copy thereof to the holder of such certificate upon written request and without
charge.
2. Stockholder Open Accounts. The corporation may maintain or caused to
be maintained stockholder open accounts in which may be recorded all
stockholders, ownership of stock and all changes therein. Certificates need not
47
be issued for shares so recorded in a stockholder open account unless requested
by the stockholder.
3. Transfers. Subject to the restrictions, if any, stated or noted on
the stock certificates, shares of stock may be transferred in the records of the
corporation by the surrender to the corporation or its transfer agent of the
certificate therefor, properly endorsed or accompanied by a written assignment
and power of attorney properly executed, with necessary transfer stamps affixed,
and with such proof of the authenticity of signature as the corporation or its
transfer agent may reasonably require. When such stock certificates are thus
properly surrendered to the corporation or its transfer agent, the corporation
or transfer agent shall cause the records of the corporation to reflect the
transfer of the shares of stock. Except as may be otherwise required by law, by
the Articles of Organization or by these By-laws, the corporation shall be
entitled to treat the record holder of stock as shown in its records as the
owner of such stock for all purposes, including the payment of dividends and the
right to vote with respect thereof, regardless of any transfer, pledge or other
disposition of such stock, until the shares have been transferred on the books
of the corporation in accordance with the requirements of these By-laws.
It shall be the duty of each stockholder to notify the corporation of
his post office address.
4. Record Date. The Directors may fix in advance a time which shall be
not more than sixty (60) days before the date of any meeting of stockholders or
the date for the payment of any dividend or the making of any distribution to
stockholders or the last day on which the consent or dissent of stockholders may
be effectively expressed for any purpose, as the record date for determining the
stockholders having the right to notice of and to vote at such meeting and any
adjournment thereof or the right to receive such dividend or distribution or the
right to give such consent or dissent. In such case only stockholders of record
on such record date shall have such right, notwithstanding any transfer of stock
on the books of the corporation after the record date. Without fixing such
record date the Directors may for any of such purposes close the transfer books
for all or any part of such period.
If no record date is fixed and the transfer books are not closed, the
record date for determining stockholders having the right to notice of or to
vote at a meeting of stockholders shall be at the close of business on the day
next preceding the day on which notice is given, and the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors acts with respect thereto.
5. Replacement of Certificates. In case of the alleged loss, mutilation
or destruction of a certificate of stock, a duplicate certificate may be issued
in place thereof, upon such terms and conditions as the Directors may prescribe.
6. Issue of Capital Stock. The whole or any part of the then authorized
but unissued shares of each class of stock may be issued at any time or from
time to time by the Board of Directors without action by the stockholders.
7. Reacquisition of Stock. Shares of stock previously issued which have
been reacquired by the corporation, may be restored to the status of authorized
but unissued shares by vote of the Board of Directors, without amendment of the
Articles of Organization.
ARTICLE V
Provisions Relative to Directors,
Officers, Stockholders and Employees
1. Certain Contracts and Transactions. In the absence of fraud or bad
faith, no contract or transaction by this corporation shall be void, voidable or
in any way affected by reason of the fact that the contract or transaction is
(a) with one or more of its officers, Directors, stockholders or employees, (b)
with a person who is in any way interested in this corporation or (c) with a
corporation, organization or other concern in which an officer, Director,
stockholder or employee of this corporation is an officer, director,
stockholder, employee or in any way interested. The provisions of this section
shall apply notwithstanding the fact that the presence of a Director or
stockholder, with whom a contract or transaction is made or entered into or who
is an officer, director, stockholder or employee of a corporation, organization
or other concern with which a contract or transaction is made or entered into or
who is in any way interested in such contract or transaction, was necessary to
constitute a quorum at the meeting of the Directors (or any authorized committee
thereof) or stockholders at which such contract or transaction was authorized
and/or that the vote of such Director or stockholder was necessary for the
adoption of such contract or transaction, provided that if said interest was
material, it shall have been known or disclosed to the Directors or stockholders
voting at said meeting on said contract or transaction. A general notice to any
48
person voting on said contract or transaction that an officer, Director,
stockholder or employee has a material interest in any corporation, organization
or other concern shall be sufficient disclosure as to such officer, Director,
stockholder or employee with respect to all contracts and transactions with such
corporation, organization or other concern. This section shall be subject to
amendment or repeal only by action of the stockholders.
2. Indemnification. Each Director and officer of the corporation, and
any person who, at the request of the corporation, serves as a director or
officer of another organization shall be indemnified by the corporation against
any cost, expense (including attorneys, fees), judgment, liability and/or amount
paid in settlement reasonably incurred by or imposed upon him in connection with
any action, suit or proceeding (including any proceeding before any
administrative or legislative body or agency), to which he may be made a party
or otherwise involved or with which he shall be threatened, by reason of his
being, or related to his status as, a Director or officer of the corporation or
of any other organization, which other organization he serves or has served as
director or officer at the request of the corporation (whether or not he
continues to be an officer or Director of the corporation or such other
organization at the time such action, suit or proceeding is brought or
threatened), unless such indemnification is prohibited by the Business
Corporation Law of the Commonwealth of Massachusetts. The foregoing right of
indemnification shall be in addition to any rights to which any such person may
otherwise be entitled and shall inure to the benefit of the executors or
administrators of each such person. The corporation may pay the expenses
incurred by any such person in defending a civil or criminal action, suit or
proceeding in advance of the final disposition of such action, suit, or
proceeding, upon receipt of an undertaking by such person to repay such payment
if it is determined that such person is not entitled to indemnification
hereunder. This section shall not affect any rights to indemnification to which
corporate personnel other than Directors and officers may be entitled by
contract or otherwise under law. This section shall be subject to amendment or
repeal only by action of the stockholders.
ARTICLE VI
Miscellaneous Provisions
1. Fiscal Year. Except as from time to time otherwise determined by the
Directors, the fiscal year of the corporation shall be the twelve (12) months
ending the last day of December. Following any change in the fiscal year
previously adopted, a certificate of such change, signed under the penalties of
perjury by the Clerk or an Assistant Clerk, shall be filed forthwith with the
state secretary.
2. Seal. The seal of this corporation shall, subject to alteration by
the Directors, bear its name, the word "Massachusetts", and the year of its
incorporation.
3. Execution of Instruments. All deeds, leases, transfers, contracts,
bonds, notes and other obligations authorized to be executed by an officer of
the corporation in its behalf shall be signed by the President or the Treasurer
except as the Directors may generally or in particular cases otherwise
determine.
4. Voting of Securities. Except as the Directors may otherwise
designate, the President or Treasurer may waive notice of, and appoint any
person or persons to act as proxy or attorney in fact for this corporation (with
or without power of substitution) at any meeting of stockholders or shareholders
of any other corporation or organization, the securities of which may be held by
the corporation.
5. Corporate Records. The original, or attested copies, of the Articles
of Organization, By-laws and records of all meetings of incorporators and
stockholders, and the stock and transfer records, which shall contain the names
of all stockholders and the record address and the amount of stock held by each,
shall be kept in Massachusetts at the principal office of the corporation or at
an office of its transfer agent or of the Clerk or of its resident agent. Said
copies and records need not all be kept in the same office. They shall be
available at all reasonable times to the inspection of any stockholder for any
proper purpose but not to secure a list of stockholders or other information for
the purpose of selling said list or information or copies thereof or of using
the same for a purpose other than in the interest of the applicant, as a
stockholder, relative to the affairs of the corporation.
6. Articles of Organization. All references in these By-laws to the
Articles of Organization shall be deemed to refer to the Articles of
Organization of the corporation, as amended and in effect from time to time.
7. Amendments. These By-laws, to the extent provided in these By-laws,
may be amended or repealed, in whole or in part, and new By-laws adopted either
(a) by the stockholders at any meeting of the stockholders by the affirmative
vote of the holders of at least two-thirds in interest of the capital stock
present and entitled to vote, provided that notice of the proposed amendment or
repeal or of the proposed making of new By-laws shall have been given in the
49
notice of such meeting, or (b) if so authorized by the Articles of Organization,
by the Board of Directors at any meeting of the Board by the affirmative vote of
at least two-thirds of the Directors then in office, but no amendment or repeal
of a By-law shall be voted by the Board of Directors and no new By-law shall be
made by the Board of Directors which alters the provisions of these By-laws with
respect to removal of Directors, or the election of committees by Directors and
the delegation of powers thereto, nor shall the Board of Directors make, amend
or repeal any provision of the By-laws which by law, the Articles of
Organization or the By-laws requires action by the stockholders. Not later than
the time of giving notice of the meeting of stockholders next following the
making, amending, or repealing by the Directors of any By-law, notice thereof
stating the substance of such change shall be given to all stockholders entitled
to vote on amending the By-laws. Any By-law or amendment of a By-law made the
Board of Directors may be amended or repealed by the stockholders by affirmative
vote as above provided in this Section 7.
ARTICLE VII
Massachusetts General Laws, Chapter 110D
Until such time as this Article VII shall be repealed or these By-laws
shall be amended to provide otherwise in accordance with Article VI, Section 7
of these By-laws, the provisions of Chapter 110D of the Massachusetts General
Laws shall not apply to "control share acquisitions" of the corporation within
the meaning of said Chapter 110D.
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Exhibit 21
AMERICAN POWER CONVERSION CORPORATION
Subsidiaries as of March 31, 1999
Place of
Subsidiary Incorporation
APC America, Inc. Delaware
APC Sales & Service Corp. Delaware
Systems Enhancement Corporation Missouri
APC Foreign Sales Corporation Barbados, W.I.
American Power Conversion Europe S.A.R.L. France
American Power Conversion Corporation (A.P.C.) B.V. The Netherlands
APC Distribution Limited Ireland
APC (EMEA) Limited Ireland
APC Holdings B.V. The Netherlands
APC Deutschland GmbH Germany
American Power Conversion UK Ltd. England
American Power Conversion Sweden AB Sweden
APC Benelux B.V. The Netherlands
American Power Conversion (Phils.), Inc. Philippines
American Power Conversion Land Holdings Inc. Philippines
(40%; 60% Filipino nationals)
APC (Suzhou) Uninterrupted Power Supply Co., Ltd. China
American Power Conversion Singapore Pte Ltd. Singapore
Silcon A/S Denmark
American Power Conversion Denmark A/S Denmark
Gutor Electronic AG Switzerland
Gotec Limited Ireland
Silcon (Quingdao) Power Electronics Co. Ltd. China
American Power Conversion Mexico, S.A. de C.V. Mexico
American Power Conversion Uruguay S.A. Uruguay
APC Japan, Inc. Japan
American Power Conversion (India) Private Limited India
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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 4, 1999, relating to the consolidated balance sheets of
American Power Conversion Corporation and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998, and the related schedule, which reports appear
in the 1998 annual report on Form 10-K of American Power Conversion Corporation.
KPMG LLP
Providence, Rhode Island
March 22, 1999
52