ANNUAL REPORT ON FORM 10-K
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 1-12432
AMERICAN POWER CONVERSION CORPORATION
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 04-2722013
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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 17, 2000 was approximately $5,503,456,000 based
on the price of the last reported sale as reported by The NASDAQ Stock
Marketr on February 17, 2000. The number of shares outstanding of the
Registrant's Common Stock on February 17, 2000 was 193,442,000.
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 11, 2000 are
incorporated by reference in Part III hereof.
1
<PAGE>
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 ("UPSs"), 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 back-up power in the
event of the loss of utility power. The back-up power lasts for a period of
time sufficient to enable the user to continue computer operations, conduct an
orderly shutdown of the protected equipment, preserve data, work through short
power outages or, in some cases, continue operating for several hours or 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, configuration, 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.
Market Overview
The growth of the power protection industry has been fueled by the rapid
proliferation of microprocessor-based equipment and related systems in the
corporate marketplace and in the small office/home office ("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. Additionally, there has been a rise in the
installation of large datacenters and Web hosting facilities to support the
rapidly growing Internet-based market. Businesses are also becoming aware of
the need to protect devices such as switches, hubs, routers, bridges, and other
"smart" devices that manage and interconnect networks. It is necessary to
protect both the hardware and data stored in and traveling through these
networks as well as to provide battery back-up to enhance productivity through
the high availability of networks, sensitive electronics, and even facilities.
The Company believes that the increased awareness of the costs and lost
productivity associated with poor power quality has increased demand for power
protection products. Complete failures, surges, or sags in the electrical power
supplied by a utility can cause computers and related electronic systems to
malfunction, resulting in costly downtime, damaged or lost data files, and
damaged hardware. A UPS protects against these power disturbances by providing
continuous power automatically and virtually instantaneously after the electric
power supply is interrupted, as well as line filtering and protection against
surges or sags while the electric utility is operating. A UPS can draw on the
energy stored in its internal battery to provide continuous, clean, computer
power. In international regions, power quality often results in varied levels
of distortions and, as a result, these areas provide the Company with additional
opportunities for its products.
2
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In 1999, the Company focused on providing global, end-to-end, Nonstop
NetworkingT solutions for the PC, server, datacenter, and enterprise market
place. Particular emphasis was placed on the expanding role of the Company in
the rapidly growing market for three-phase UPS equipment with customers such as
Internet service providers, Web hosting, and co-locators who use large amounts
of information technology ("IT") equipment to support their subscribers. The
Company's operations worldwide were impacted by the continued expansion of
networking-based applications, the continued rapid expansion of Internet-based
applications, the growth of the PC market, and the continued poor and unreliable
quality of power worldwide.
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 500 kVA (suitable for mainframe
computers or facilities). List prices to end-users range from approximately
$100 to approximately $200,000. The Company also offers a line of surge
protection products to protect against power spikes and surges. The principal
difference among the surge suppressor models is the level of protection
available and feature sets. List prices to end-users range from approximately
$25 to approximately $135.
The Company also develops a family of software power management solutions. The
primary software offering is sold under the PowerChuter plus name and provides
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 to end-users range from $169 to $499.
The Company also offers a range of power management hardware accessories. These
solutions include add-on hardware to manage and monitor attached UPS and
networking equipment. Additionally, the Company offers a free-standing rack
enclosure product, NetShelterr, and a variety of rack accessories to better
utilize precious space in a computer room. List prices to end-users for
accessory products range from $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.
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<PAGE>
The Company offers a standard one-year limited warranty which covers certain
SilconT 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. 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,
depending on the model, provides up to $25,000 for repair or replacement of
customers' hardware should a surge or lightning strike pass through a Company
unit. The policy applies to all units manufactured after January 1, 1992.
Other restrictions also apply. The Company's customers can also register the
ProtectNetr line of data line surge suppressors for a "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 computer 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.
No single customer comprised 10% or more of the Company's net sales in 1999.
One customer accounted for approximately 11% and 10%, respectively, of the
Company's net sales in 1998 and 1997.
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 force is responsible for relationships with distributors,
dealers, strategic partners, and end-users as well as developing new
distribution channels, particularly in geographic and product application areas
into which the Company is expanding. The Company has charged its sales force
with providing its customers with comprehensive product and service solutions to
their power management needs.
The Company's marketing activities include market research, product planning,
trade shows, sales and pricing strategies, and product sales literature. The
Company also utilizes direct marketing efforts domestically and internationally,
including direct mailings and print, online/Internet, radio, and television
advertising, as well as exhibiting at computer trade shows. Customer service is
responsible for all technical marketing inquiries and customer support. The
Company has developed a number of programs and techniques to support the
Company's distribution channels. These include, but are not limited to, toll-
free phone assistance, online product and technical information, formal product
demonstrations, and reseller trainings.
Supply Chain Management - Manufacturing, Quality, and Distribution
The Company's manufacturing operations are located in the United States,
Philippines, Ireland, China, India, 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 lean "cell" based manufacturing
processes, automated manufacturing techniques, and extensive quality control in
order to minimize costs and maximize product reliability. In addition, the
design of products and the commonality of parts allow for efficient circuit
board component insertion, wave soldering, and in-process testing.
4
<PAGE>
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.
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 and Castlebar, Ireland,
China, and at three 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.
The Company continues to invest in a worldwide distribution network that
delivers its products and services to the Company's customers. The Company owns
or leases distribution centers in numerous countries across the globe. All
distribution centers are connected to the Company's customer service operations
via the Company's Enterprise Resource Planning system, which enables orders
received from any point in the network to be fulfilled from any distribution
center throughout the world. During 1999 and 1998, the Company deployed several
enhanced fulfillment capabilities in support of its overall E-commerce
initiatives. These capabilities include the use of Electronic Data Interchange
transactions between the Company and its distributors for receipt of orders,
acknowledgement of orders, and confirmation of shipments. Additionally, the
Company has implemented a suite of Web tools that allows consumers and resellers
to view product information, gain access to pricing information, and place their
orders via the Web.
Product Development
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 1999, the Company increased its offerings of products and services for
the enterprise market, specifically, geographically expanding the availability
of the Silcon three-phase UPS products, introducing new Symmetrar models, and
introducing APC's Global Services organization, which offers a comprehensive
suite of professional and maintenance services. Hardware introductions
primarily focused on enhancements to the Company's SurgeArrestr, Smart-UPSr, and
Back-UPSr lines. New software solutions announced during the year included new
versions of the Company's PowerChute plus software to expand support of leading
operating systems, including support for Microsoft Windows 2000 Beta 3 and
expanded support for Linux, as well as integration with leading management
platforms.
During 1998, the Company expanded its product offerings in the enterprise market
with the acquisition of Silcon, a leading manufacturer of three-phase UPSs up to
500 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 ArrayT, the first scalable and fault-tolerant power protection
system for multiple servers, computer rooms, call centers, and back-office
applications. The Company also innovated its desktop line of UPSs during 1998,
revamping its Back-UPS line and adding new features, including Universal Serial
Bus support, to select products in the Back-UPS Pror line.
5
<PAGE>
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.
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.
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 Invensys Secure Power, a unit of Invensys PLC consisting of
PowerWare (formerly Exide Electronics) and Best Power; 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, access to distribution
channels, customer service, product design, and price.
International Operations
The Company has experienced rapid growth internationally and plans to continue
to expand its international efforts. 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 manufacturing
operations outside of the United States are located in the Philippines, Ireland,
China, India, Denmark, and Switzerland. 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 across the globe. The Company also owns or
leases distribution centers in numerous countries worldwide, and utilizes third
party warehouses in Europe, the Far East, Canada, South Africa, and Uruguay for
distribution into its international markets.
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, 1999, the Company had approximately 5,290 full-time employees
worldwide, approximately 1,633 of whom are located in the United States and
Canada. The Company also engages other personnel on a part-time basis.
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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 17, 2000, the executive officers of
the Company were as follows:
<TABLE>
<CAPTION>
Name Age Positions
<S> <C> <C>
Rodger B. Dowdell, Jr. 50 Chairman of the Board of Directors, President, and Chief Executive Officer
Neil E. Rasmussen 45 Vice President, Chief Technical Officer, and Director
Edward W. Machala 45 Vice President, Operations and Treasurer
Donald M. Muir 43 Vice President, Finance and Administration, and Chief Financial Officer
Emanuel E. Landsman 63 Vice President, Clerk, and Director
David P. Vieau 49 Vice President, Worldwide Business Development
Aaron L. Davis 33 Vice President, Small Systems Group
</TABLE>
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 became Chief Technical Officer of the Company in 1997 and has
been Vice President and a Director of the Company since its inception. From
1979 to 1981, Mr. Rasmussen worked in the Energy Systems Engineering Group at
Massachusetts Institute of Technology's ("M.I.T.") Lincoln Laboratory.
Edward W. Machala joined the Company in January 1989 as Vice President,
Operations. From January 1985 to January 1989, Mr. Machala was Director of
Manufacturing and Engineering Technology for GTECH, a manufacturer of electronic
lottery and gaming terminals, where he was responsible for manufacturing and
engineering functions.
Donald M. Muir joined the Company in July 1995 as Chief Financial Officer. From
July 1993 to July 1995, Mr. Muir was the Treasurer of Stratus Computer, Inc.
where he was responsible for managing investor relations, treasury services,
corporate taxation, and risk management. Prior to his appointment as Treasurer
at Stratus Computer, Inc., Mr. Muir held the position of Director of Finance and
Administration from January 1991 to July 1993 and Controller, Worldwide Sales
and Service from December 1988 to January 1991.
Emanuel E. Landsman has been Vice President, Clerk, and a Director of the
Company since its inception. From 1966 to 1981, Dr. Landsman worked at M.I.T.'s
Lincoln Laboratory, where he was in the Space Communications Group from 1966 to
1977 and the Energy Systems Engineering Group from 1977 to 1981.
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 to the newly created role of Vice President, Small
Systems Group in May 1999 after serving as Vice President, Marketing and
Communications since June 1997 and Vice President of Marketing Communications
since January 1995. Mr. Davis joined the Company as Director of Marketing
Communications in May 1989.
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Item 2. Properties
The Company's principal properties are located in the United States, Ireland,
Philippines, China, India, Denmark, and Switzerland. 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.
<TABLE>
<CAPTION>
Sales,
Location of Marketing &
Principal Properties Administration Manufacturing R&D Warehouse Total
In square feet
<S> <C> <C> <C> <C> <C>
Owned
United States
Rhode Island 163,330 98,930 4,980 267,240
Massachusetts 65,000 65,000
Europe
Ireland 58,900 192,300 118,800 370,000
Denmark 27,660 71,925 11,065 110,650
Far East
Philippines 175,330 40,000 215,330
Leased
United States
Rhode Island 29,000 58,000 19,040 441,130 547,170
Missouri 13,155 2,700 10,460 1,350 27,665
Europe
Switzerland 14,120 19,380 540 8,610 42,650
Far East
China 38,945 18,685 57,630
India 39,090 6,205 45,295
</TABLE>
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.
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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 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $27.125 $14.032 $15.188 $11.750
Second Quarter 21.125 13.250 17.188 13.563
Third Quarter 22.500 17.188 19.750 13.438
Fourth Quarter 28.750 16.188 24.781 14.875
</TABLE>
On February 17, 2000, the closing sale price for the Company's Common Stock was
$33.938 per share. As of February 17, 2000, there were approximately 2,231
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. Earnings per share and share data reflect a stock split
effected in 1999.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net sales $1,337,265 $1,125,835 $873,388 $706,877 $515,262
Cost of goods sold 722,735 621,073 476,060 407,902 284,500
Gross profit 614,530 504,762 397,328 298,975 230,762
Operating expenses 335,305 300,293 225,890 165,185 127,057
Operating income 279,225 204,469 171,438 133,790 103,705
Other income, net 13,292 11,687 6,354 5,189 860
Earnings before income
taxes and minority interest 292,517 216,156 177,792 138,979 104,565
Income taxes 86,293 68,231 56,004 46,558 35,029
Earnings before
minority interest 206,224 147,925 121,788 92,421 69,536
Minority interest, net - 349 - - -
Net income $206,224 $147,576 $121,788 $92,421 $69,536
Basic earnings per share $1.07 $.77 $.64 $.49 $.37
Basic weighted average
shares outstanding 192,201 191,006 189,986 187,744 185,878
Diluted earnings per share $1.05 $.76 $.63 $.49 $.37
Diluted weighted average
shares outstanding 196,088 193,576 192,242 188,694 187,734
Total assets $1,106,938 $871,983 $641,290 $504,002 $346,588
Short-term debt $102 $12,540 - - -
Long-term debt - - - - -
</TABLE>
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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, and net income, expressed as a percentage of net sales, for
the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net sales 100.0 100.0 100.0
Cost of goods sold 54.0 55.2 54.5
Gross profit 46.0 44.8 45.5
Marketing, selling, general &
administrative expenses 22.5 23.1 23.3
Research & development 2.6 2.9 2.6
Acquired research & development - .6 -
Operating income 20.9 18.2 19.6
Other income, net 1.0 1.0 .7
Earnings before income taxes &
minority interest 21.9 19.2 20.3
Net income 15.4 13.1 13.9
</TABLE>
Revenues
Net sales in fiscal year 1999 increased by 18.8% to $1,337.3 million from
$1,125.8 million in fiscal year 1998, which reflected a 28.9% increase from
$873.4 million in fiscal year 1997. The increases from 1997 to 1999 were
attributable to strong demand for the Company's products across all solution
applications, combined with sales attributable to Silcon A/S ("Silcon") (see
"Acquisition" below). In addition, sales of new products and increased efforts
by the Company's sales force have contributed to increased sales volumes. Net
sales attributable to new products totaled approximately 7%, 11%, and 8%, of
1999, 1998 and 1997 net sales, respectively.
Foreign sales to unaffiliated customers, primarily in Europe, the Far East,
Canada, and South America, in fiscal year 1999 were $632.7 million or 47.3% of
net sales compared to $486.6 million or 43.2% of net sales in fiscal year 1998
and $378.3 million or 43.3% of net sales in fiscal year 1997. See also note 8
to the consolidated financial statements.
Cost of Goods Sold
Cost of goods sold was $722.7 million or 54.0% of net sales in fiscal year 1999
compared to $621.1 million or 55.2% of net sales in fiscal year 1998. Gross
margins for fiscal year 1999 were 46.0% of sales, approximately 120 basis points
higher than in fiscal year 1998. The improvement was driven primarily by
manufacturing cost reductions, particularly material cost reductions, the
ongoing transition of production from the U.S. and Ireland to the Philippines,
improved capacity utilization associated with the closure of the Company's
manufacturing facility in Fort Meyers, Florida, and volume related margin
improvements in Silcon and Symmetra products.
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 accounted for a larger percentage of
revenue in 1998 compared to previous years.
Total inventory reserves at December 31, 1999 were $17.1 million compared to
$13.3 million at December 31, 1998. 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.
10
<PAGE>
Operating Expenses
Marketing, selling, general, and administrative (SG&A) expenses were $300.7
million or 22.5% of net sales in 1999 compared to $260.2 million or 23.1% of net
sales in 1998 and $203.5 million or 23.3% of net sales in 1997. The increases
in total spending in 1999 and 1998 were due primarily to costs associated with
increased advertising and promotional costs, as well as costs associated with
increased staffing and operating expenses of the Company's marketing, selling,
and administrative functions. However, the decreases as a percentage of sales
from 1997 to 1999 were attributable to certain fixed SG&A expenses spread over a
higher revenue base, as well as the Company's focused efforts to manage
spending.
The allowance for bad debts was 8.3% of gross accounts receivable at December
31, 1999 compared to 7.9% at December 31, 1998. The Company continues to
experience strong collection performance. Accounts receivable balances
outstanding over 60 days represented 9.0% of total receivables at December 31,
1999, up slightly from 8.6% at December 31, 1998. This increase reflects a
growing portion of the Company's business originating in areas where longer
payment terms are customary, including a growing contribution from international
markets as well as large system enterprise sales primarily associated with
Silcon products. Write-offs of uncollectible accounts represent less than 1% of
net sales. A majority of international customer balances are covered by
receivables insurance.
R&D expenditures were $34.6 million or 2.6% of net sales in 1999, $32.6 million
or 2.9% of net sales in 1998, and $22.4 million or 2.6% of net sales in 1997.
The increased R&D spending primarily reflects increased numbers of software and
hardware engineers and costs associated with new product development and
engineering support. The slight decrease as a percentage of sales from 1998 to
1999 was attributable to certain fixed R&D expenses spread over a higher revenue
base. In addition, during 1998 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 1997 to 1999 due to higher average cash balances available
for investment during 1998 and 1999.
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 approximately 29.5%, 30.5%, and 31.5%, in 1999, 1998 and 1997,
respectively. The decrease from 1997 to 1999 is due to the tax savings from an
increasing portion of taxable earnings being generated from the Company's
operations in jurisdictions currently having a lower income tax rate than the
present U.S. statutory income tax rate.
Effects of Inflation
Management believes that inflation has not had a material effect on the
Company's operations.
Liquidity and Financial Resources
Working capital at December 31, 1999 was $706.0 million compared to $493.8
million at December 31, 1998. The Company has been able to increase its working
capital position as the result of continued strong operating results and despite
internally financing the capital investment required to expand its operations.
The Company's cash and cash equivalents position increased to $456.3 million at
December 31, 1999 from $219.9 million at December 31, 1998.
Worldwide inventories were $176.5 million at December 31, 1999, down from $228.7
million at December 31, 1998 due primarily to a decrease in raw material levels.
This decrease was associated principally with improved materials management and
increased utilization of just-in-time planning.
11
<PAGE>
Inventory levels as a percentage of quarterly sales were 45% in the fourth
quarter of 1999, down from 56% in the third quarter of 1999 and 72% in the
fourth quarter of 1998.
At December 31, 1999, 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 and $7 million under unsecured line of credit agreements with a second
and third bank, respectively, at similar interest rates. No borrowings were
outstanding under these facilities at December 31, 1999. 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 this indebtedness during the second half of 1998
and $12.4 million during 1999. The Company had no significant financial
commitments, other than those required in the normal course of business, at
December 31, 1999.
During 1999 and 1998, the Company's capital expenditures, net of capital grants,
amounted to approximately $36.0 million and $55.7 million, respectively,
consisting primarily of manufacturing and office equipment, buildings and
improvements, and purchased software applications. The nature and level of
capital spending was made to improve manufacturing capabilities, principally in
the U.S. and the Far East, and to support the increased marketing, selling, and
administrative efforts necessitated by the Company's growth. 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, 1999.
As part of the Company's ongoing efforts to capitalize on its global
manufacturing presence, the Company closed its Fort Myers, Florida manufacturing
facility during the third quarter of 1999. This closure is not expected to have
a material adverse effect on the Company's business, operating results, or
financial condition.
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.
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.
Stock Repurchase Program
In September 1999, the Company announced that the Board of Directors had
authorized the repurchase of up to ten million shares of the Company's
outstanding common stock. Such purchases of stock may be made through September
10, 2001, from time to time on the open market as market conditions warrant.
The objective of the repurchase program is to offset potential dilution of
earnings per share, which may result from the Company's employee stock ownership
programs. No shares were repurchased during 1999.
Shareholder Rights Plan
In September 1999, the Company's Board of Directors adopted a Shareholder Rights
Agreement (the "Plan"). Under the terms of the Plan, which expires in September
2009, the Company declared a dividend of one Common Stock Purchase Right (the
"Rights"), for each outstanding share of common stock held at the close of
business on September 13, 1999. The Rights will become exercisable, if not
earlier redeemed or exchanged, only after a person or group has acquired, or
announced a tender offer which would result in a person or group acquiring, 15%
or more of the Company's common stock. In the event a Right becomes
exercisable, the Plan allows the Company's shareholders to purchase, at an
exercise price of $110 per Right, subject to adjustment, common stock of the
Company having a market value of $220. The Company will generally be entitled
to redeem the Rights at $.01 per Right at any time until a person or group has
acquired a 15% stock position. Until exercise, a Right holder, as such, has no
rights as a shareholder of the Company.
12
<PAGE>
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 to acquire stock
of Silcon, a Denmark-based manufacturer of three-phase UPSs up to 500 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%. 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, the Company completed its acquisition of the remaining outstanding
shares of Silcon in October 1999. In connection with the mandatory redemption,
the Copenhagen Stock Exchange approved the de-listing of Silcon's shares
effective March 1, 1999. The Company's cash outlays associated with the step-
acquisition of $64.4 million during 1998 and $8.4 million during 1999 were
financed from operating cash.
The purchase price was allocated to the net tangible and identifiable intangible
assets acquired and to acquired in-process R&D ("acquired R&D"). Acquired R&D
includes the value of products in the development stage that are not considered
to have reached technological feasibility and that have no alternative future
uses. In accordance with applicable accounting rules, acquired R&D is required
to be expensed. Accordingly, $7.6 million of the acquisition cost was expensed
in 1998. The remaining purchase price exceeded the fair value of the tangible
net assets acquired by approximately $53 million, consisting of identifiable
intangible assets and goodwill, which is being amortized on a straight-line
basis over 15 years. The acquisition has been accounted for as a purchase and,
accordingly, Silcon's results of operations are included in the Company's
consolidated financial statements from the date of acquisition.
Foreign Currency Activity
The Company invoices its customers in various currencies. Realized and
unrealized transaction gains or losses are included in the results of operations
and are measured based upon the effect of changes in exchange rates on the
actual or expected amount of functional currency cash flows. Transaction gains
and losses were not material to the results of operations in 1999, 1998 and
1997.
At December 31, 1999, the Company's unhedged foreign currency accounts
receivable, by currency, were as follows:
<TABLE>
<CAPTION>
In thousands Foreign Currency US Dollars
<S> <C> <C>
German Marks 36,585 $18,766
European Euros 17,145 17,213
Japanese Yen 1,345,259 13,159
British Pounds 5,967 9,646
French Francs 48,779 7,470
Swiss Francs 7,961 4,981
</TABLE>
The Company also had non-trade receivables of 3.3 million Irish Pounds
(approximately US$4.2 million) and short term debt and liabilities denominated
in various European currencies of US$45.4 million, as well as Yen denominated
liabilities of approximately US$7.5 million.
The Company continually reviews its foreign exchange exposure and considers
various risk management techniques, including the netting of foreign currency
receipts and disbursements, rate protection agreements with customers/vendors
and derivatives arrangements, including foreign exchange contracts. The Company
presently does not utilize rate protection agreements or derivative
arrangements.
13
<PAGE>
Recently Issued Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. This Statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000, as provided for in SFAS No. 137.
The adoption of this Statement is not expected to have a material impact on 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 were 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. All planned tests in business
systems and operations have been completed and no problems were reported. Key
vendors surveyed reported no problems that would affect their ability to support
the Company. To date, the Company has experienced no material adverse effect
from the date rollover to January 1, 2000. The Company considers its operations
to be year 2000 functional and ready to support its customers, however the
Company continues to monitor its systems and there can be no assurance that
there will be no year 2000 issues in the future.
Assessment of the Company's Products for Year 2000 Compliance
All of the Company's hardware products and accessories are believed to be 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
there are no known defects related to scheduled events such as shutdowns, self-
tests, and run-time calibrations and also the handling of unscheduled events,
such as power failures, which are directly attributable to the millennium 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's products and provided also that the Company's products are used in
accordance with the product documentation. The Company has also performed
extensive testing of all software products that it is currently offering for
licensing and has determined that these products are substantially year 2000
compliant. Periodically updated information about the Company's software
products is available at the Company's Year 2000 Readiness Disclosure Web site
(www.APCC.com; the information on this Web site is not incorporated by reference
into this document). Information on this site is provided to the Company's
customers for the sole purpose of assisting in assessing their transition to the
year 2000. Such information is the most currently available concerning the
behavior of the Company's products in the new century and is provided "as is"
without warranty of any kind. The Company's year 2000 compliant products
recognize the year 2000 as a leap year. 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 respect to its products and services.
Assessment of the Company's Information Technology ("IT") and Non-IT Systems for
Year 2000 Compliance
The Company's Oracle manufacturing and financial information systems were
implemented during 1998. The Company has evaluated the year 2000 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. During the second quarter of 1999, final
installation and testing of additional software patches completed efforts to
bring these systems into compliance. The Company did 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 has conducted an evaluation of its non-IT
systems for compliance, including those related to its manufacturing facilities,
distribution centers, and production and engineering equipment. 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 has
also conducted a review of such software and equipment. The Company's
evaluation and review of its non-IT systems and third party software and
equipment were completed at the end of the third quarter of 1999.
14
<PAGE>
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 included 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 were either in compliance or expected to be in compliance prior to
January 1, 2000. The Company identified its material third party relationships
and communicated with its significant vendors, service providers, and certain
strategic partners. All such efforts, including written questionnaires, on-site
visitations, and education were completed at the end of the third quarter of
1999. Many enterprises, including the Company's present and potential
customers, may have devoted 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 year.
Development of Contingency Plans
As the Company's year 2000 readiness program neared completion, the Company
identified worst case scenarios involving the interruption of critical vendors
as a result of infrastructure failures or third party vendor failures. The
Company completed its contingency plans at the end of the third quarter of 1999.
Such plans included but were not limited to maintaining appropriate inventory
levels, as well as requiring critical vendors to maintain certain inventory
levels.
It is the Company's policy to expense as incurred all costs associated with year
2000 readiness. The Company developed a separate budget for operating and
capital expenditures relating to year 2000 issues. No IT projects were deferred
due to year 2000 efforts. Based on the results of its year 2000 readiness
program 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.
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
"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.
15
<PAGE>
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 continue expanding its level of global operations during
2000. 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
All planned tests in business systems and operations have been completed and no
problems were reported. Key vendors surveyed reported no problems that would
affect their ability to support the Company. To date, the Company has
experienced no material adverse effect from the date rollover to January 1,
2000. The Company considers its operations to be year 2000 functional and ready
to support its customers, however the Company continues to monitor its systems
and there can be no assurance that there will be no year 2000 issues in the
future. Although the Company has taken measures to address the impact, if any,
of year 2000 issues, it cannot predict the ultimate 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.
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.
16
<PAGE>
Foreign Operations; Risk of Currency Fluctuations
The Company manufactures and markets its products worldwide through several
foreign subsidiaries, distributors, and resellers. 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 47.3%, 43.2%, and 43.3% of the
Company's net sales in 1999, 1998 and 1997, respectively. The Company
anticipates that international sales will continue to account for a significant
portion of revenue. The Company invoices its customers in various 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, patents, and copyrights to protect its proprietary
rights. Although the Company owns certain patents, and has applied, and in the
future may apply, for patents, 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 which
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
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 acquisition of Silcon, see the "Acquisition" section above.
17
<PAGE>
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 2000. In addition, should the Company's
intercompany transfer pricing with respect to its Ireland or Philippines
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
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
In thousands
ASSETS
<CAPTION>
1999 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $456,325 $219,908
Accounts receivable, less allowance for doubtful accounts
of $19,543 in 1999 and $15,471 in 1998 (Note 2) 216,810 180,356
Inventories (Note 3) 176,477 228,682
Prepaid expenses and other current assets 18,283 17,801
Deferred income taxes (Note 5) 31,962 28,498
Total current assets 899,857 675,245
Property, plant, and equipment:
Land, buildings, and improvements 58,220 51,735
Machinery and equipment 130,031 125,274
Office equipment, furniture, and fixtures 55,284 44,955
Purchased software 17,114 11,505
260,649 233,469
Less accumulated depreciation and amortization 103,422 85,205
Net property, plant, and equipment 157,227 148,264
Goodwill and other intangibles 48,239 45,837
Other assets 1,615 2,637
Total assets $1,106,938 $871,983
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
In thousands
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
1999 1998
<S> <C> <C>
Current liabilities:
Short term debt (Note 4) $102 $12,540
Accounts payable 78,641 75,190
Accrued expenses 41,864 31,029
Accrued compensation 25,743 22,130
Accrued sales and marketing programs 16,853 17,824
Income taxes payable 30,616 22,753
Total current liabilities 193,819 181,466
Deferred tax liability (Note 5) 11,029 7,500
Total liabilities 204,848 188,966
Minority interest - 1,725
Shareholders' equity (Notes 6 and 7):
Common stock, $.01 par value; authorized 450,000
shares in 1999 and 200,000 in 1998;
issued 193,339 in 1999 and 191,946 in 1998 1,933 1,919
Additional paid-in capital 82,989 66,121
Retained earnings 820,525 614,301
Treasury stock, 250 shares, at cost (1,551) (1,551)
Accumulated other comprehensive income (1,806) 502
Total shareholders' equity 902,090 681,292
COMMITMENTS AND CONTINGENCIES
(Notes 9, 11 and 12)
OTHER INFORMATION (Notes 4 and 10)
Total liabilities and shareholders' equity $1,106,938 $871,983
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998 and 1997
In thousands except per share amounts
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net sales (Note 8) $1,337,265 $1,125,835 $873,388
Cost of goods sold 722,735 621,073 476,060
Gross profit 614,530 504,762 397,328
Costs and expenses:
Marketing, selling, general, and
administrative 300,713 260,176 203,469
Research and development 34,592 32,563 22,421
Acquired research and development - 7,554 -
Total operating expenses 335,305 300,293 225,890
Operating income 279,225 204,469 171,438
Other income, net 13,292 11,687 6,354
Earnings before income taxes and
minority interest 292,517 216,156 177,792
Income taxes (Note 5) 86,293 68,231 56,004
Earnings before minority interest 206,224 147,925 121,788
Minority interest, net - 349 -
Net income $206,224 $147,576 $121,788
Basic earnings per share (Note 1) $1.07 $.77 $.64
Basic weighted average shares outstanding 192,201 191,006 189,986
Diluted earnings per share (Note 1) $1.05 $.76 $.63
Diluted weighted average shares outstanding 196,088 193,576 192,242
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
In thousands
<CAPTION>
Accumulated
$.01 Par, Additional Treasury Stock, Other
Common Stock Paid-in Retained at Cost Comprehensive
Shares Amount Capital Earnings Shares Amount Income Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
2-for-1 stock split
effective
May 28, 1999 94,897 949 (949) (125) -
Balances at
December 31,
1996 as
adjusted 189,794 1,898 47,425 344,937 (250) (1,551) - 392,709
Net income 121,788 121,788
Comprehensive
income 121,788
Exercises of
stock options 696 7 3,225 3,232
Tax effect of
exercises of
stock options 765 765
Shares issued to
Employee Stock
Ownership Plan 276 3 3,257 3,260
Balances at
December 31,
1997 190,766 1,908 54,672 466,725 (250) (1,551) - 521,754
Net income 147,576 147,576
Foreign currency
translation
adjustment 502 502
Comprehensive
income 148,078
Exercises of
stock options 1,106 11 8,470 8,481
Tax effect of
exercises of
stock options 2,082 2,082
Shares issued to
Employee Stock
Purchase Plan 74 897 897
Balances at
December 31,
1998 191,946 1,919 66,121 614,301 (250) (1,551) 502 681,292
Net income 206,224 206,224
Foreign currency
translation
adjustment (2,308) (2,308)
Comprehensive
income 203,916
Exercises of
stock options 1,285 13 12,762 12,775
Tax effect of
exercises of
stock options 2,565 2,565
Shares issued to
Employee Stock
Purchase Plan 108 1 1,541 1,542
Balances at
December 31,
1999 193,339 $1,933 $82,989 $820,525 (250) $(1,551) $(1,806) $902,090
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
In thousands
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities
Net income $206,224 $147,576 $121,788
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 30,590 22,951 17,716
Gain on sale of property, plant and equipment (277) - -
Provision for doubtful accounts 6,015 6,593 4,834
Deferred income taxes 65 (5,967) (1,061)
Acquired research and development - 7,554 -
Changes in operating assets and liabilities
excluding effects of acquisitions:
Accounts receivable (42,469) (36,321) (26,821)
Inventories 52,205 (105,327) 26,631
Prepaid expenses and other current assets (482) (4,151) (2,372)
Other assets 1,022 (536) 644
Accounts payable 3,451 23,550 (4,999)
Accrued expenses 10,835 1,418 3,864
Accrued compensation 3,613 5,654 4,256
Accrued sales and marketing programs (971) 1,859 (395)
Income taxes payable 10,428 3,138 3,425
Other, net (2,382) (409) -
Net cash provided by operating activities 277,867 67,582 147,510
Cash flows from investing activities
Capital expenditures, net of capital grants (36,003) (55,654) (37,208)
Proceeds from sale of property, plant
and equipment 1,100 3,200 -
Acquisitions (8,426) (62,424) 101
Net cash used in investing activities (43,329) (114,878) (37,107)
Cash flows from financing activities
Repayment of short term debt (12,438) (12,308) -
Proceeds from issuances of common stock 14,317 9,378 6,497
Net cash provided by (used in) financing
activities 1,879 (2,930) 6,497
Net change in cash and cash equivalents 236,417 (50,226) 116,900
Cash and cash equivalents at beginning of year 219,908 270,134 153,234
Cash and cash equivalents at end of year $456,325 $219,908 $270,134
Supplemental cash flow disclosures
Cash paid during the year for:
Income taxes (net of tax refunds) $70,204 $65,109 $48,563
Interest $922 $609 $-
Details of acquisitions:
Fair value of assets $8,426 $113,177 $-
Liabilities and minority interest - (48,793) -
Cash paid 8,426 64,384 -
Cash acquired - (1,960) (101)
Acquisitions $8,426 $62,424 $(101)
</TABLE>
NON-CASH TRANSACTIONS: In 1999, 1998 and 1997, the tax effect of the exercise of
stock options resulted in increases to additional paid-in capital and reductions
to income taxes payable of $2,565, $2,082, and $765, respectively.
See accompanying notes to consolidated financial statements.
23
<PAGE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999, 1998 and 1997
1. Summary of Significant Accounting Policies
Nature of Business
American Power Conversion Corporation and its subsidiaries (the "Company")
designs, develops, manufactures, and markets power protection and management
solutions for computer and electronic applications worldwide. The Company's
solutions include uninterruptible power supply products ("UPSs"), 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-owned subsidiaries. All
intercompany accounts and transactions are eliminated in consolidation.
Revenue Recognition
Revenue from sales of the Company's products, including UPS products, electrical
surge protection devices, power conditioning products, and associated
accessories, is recognized at the time the goods are shipped or when title
passes, with appropriate provisions for sales returns and allowances and
uncollectible accounts. Revenues from the sale of service-related contracts are
deferred and recognized ratably over an established term, typically one to five
years.
Cash and Cash Equivalents
Cash and cash equivalents consist of funds on deposit, money market savings
accounts, and short-term commercial paper with original maturities of three
months or less.
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, 1999.
24
<PAGE>
Research and Development
Expenditures for research and development ("R&D") are expensed in the period
incurred.
Warranties
The Company offers limited two-year and one-year warranties. The provision for
potential liabilities resulting from warranty claims is provided at the time of
sale. The Company also offers its customers the opportunity to extend the basic
warranty period up to an additional three years under a separately priced
program. Recognition of the revenue associated with the extended warranty
program commences on the date the extended warranty becomes effective and is
recognized on a straight-line basis over the extended warranty period. In
addition, the Company has an Equipment Protection Policy which, depending on the
model, provides up to $25,000 for repair or replacement of a customer's hardware
should a surge or lightning strike pass through a Company unit. The policy
applies to all units manufactured after January 1, 1992. Other restrictions
also apply. The Company's ProtectNet line of data line surge suppressors
feature a "Double-Up" Supplemental Equipment Protection Policy, under which the
total recoverable limit under the Equipment Protection Policy is doubled, 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 $275 million
at December 31, 1999. The Company plans to reinvest all such earnings for
future expansion. If such earnings were distributed, taxes would increase by
approximately $67 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. Potential common shares for which inclusion would have
the effect of increasing diluted earnings per share (i.e., antidilutive) are
excluded from the computation.
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
<S> <C> <C> <C>
Basic weighted average shares outstanding 192,201 191,006 189,986
Net effect of dilutive potential common
shares outstanding based on the treasury
stock method using the average market price 3,887 2,570 2,256
Diluted weighted average shares outstanding 196,088 193,576 192,242
Antidilutive potential common shares
excluded from the computation above 872 496 166
</TABLE>
25
<PAGE>
Stock-Based Compensation
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its stock-based compensation plans. No compensation cost has been
recognized for these plans in the accompanying consolidated financial
statements.
Advertising Costs
Advertising costs are expensed as incurred and reported in 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 $94.4 million in 1999, $67.4 million in 1998, and $59.9
million in 1997. 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:
<TABLE>
<CAPTION>
In thousands 1999 1998
<S> <C> <C>
Raw materials $60,708 $87,975
Work in process 7,396 9,328
Finished goods 108,373 131,379
$176,477 $228,682
</TABLE>
4. Revolving Credit Agreements and Short Term Debt
At December 31, 1999, 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
and $7 million under unsecured line of credit agreements with a second and third
bank, respectively, at similar interest rates. No borrowings were outstanding
under these facilities at December 31, 1999. 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 and $12.4 million of this
indebtedness during 1999.
26
<PAGE>
5. Income Taxes
Total federal, state, and foreign income tax expense (benefit) from continuing
operations for the years ended December 31, 1999, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
In thousands Current Deferred Total
<S> <C> <C> <C>
1999:
Federal $61,756 $(244) $61,512
State 8,024 (239) 7,785
Foreign 16,448 548 16,996
$86,228 $65 $86,293
1998:
Federal $58,294 $(4,188) $54,106
State 4,707 (785) 3,922
Foreign 11,197 (994) 10,203
$74,198 $(5,967) $68,231
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
</TABLE>
Income tax expense attributable to continuing operations amounted to $86.3
million in 1999, $68.2 million in 1998, and $56.0 million in 1997, (effective
rates of 29.5%, 31.6%, and 31.5%, respectively). The actual expense for 1999,
1998 and 1997 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:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
<S> <C> <C> <C>
Computed "expected" tax expense $102,381 $75,655 $62,227
State income taxes, net of federal
income tax benefit 5,060 2,549 4,445
Foreign earnings taxed at rates lower
than U.S. statutory rate
(principally Ireland and Philippines) (18,754) (12,676) (10,727)
Foreign sales corporation (1,294) (2,729) (1,603)
Acquired R&D - 3,094 -
Other (1,100) 2,338 1,662
$86,293 $68,231 $56,004
</TABLE>
The domestic and foreign components of earnings before income taxes were $188.5
million and $104.0 million, respectively, for 1999; $162.0 million and $54.2
million, respectively, for 1998; and $121.0 million and $56.8 million,
respectively, for 1997. Total income tax expense for the years ended December
31, 1999, 1998 and 1997 was allocated as follows:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
<S> <C> <C> <C>
Income from continuing operations $86,293 $68,231 $56,004
Shareholders' equity, for
compensation expense for tax
purposes in excess of amounts
recognized for financial
statement purposes (2,565) (2,082) (765)
$83,728 $66,149 $55,239
</TABLE>
27
<PAGE>
At December 31, 1999 and 1998, 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:
<TABLE>
<CAPTION>
In thousands 1999 1998
<S> <C> <C>
Deferred tax assets
Allowance for doubtful accounts $5,150 $4,441
Additional costs inventoried for tax purposes 920 1,050
Intercompany inventory profits 4,521 4,521
Allowances for sales and marketing programs 5,644 6,517
Inventory obsolescence reserve 4,272 3,865
Accrual for compensation and compensated absences 5,629 1,672
Reserve for warranty costs 1,274 1,024
Deferred revenue 2,955 2,356
Other 1,597 3,052
Total gross deferred tax assets 31,962 28,498
Less valuation allowance - -
Net deferred tax assets 31,962 28,498
Deferred tax liabilities
Excess of tax over financial statement depreciation 9,282 5,605
Other 1,747 1,895
Total deferred tax liabilities 11,029 7,500
Net deferred income taxes $20,933 $20,998
</TABLE>
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.
6. Stock Plans
Stock Split
The Company effected a two-for-one stock split in the form of a 100% stock
dividend payable on May 28, 1999 to shareholders of record on May 7, 1999. All
share and per share amounts in the accompanying consolidated financial
statements have been restated to give effect to this stock split.
Stock-based Compensation Plans
At December 31, 1999, the Company had four stock option plans and a stock
purchase plan, which are described below. SFAS No. 123, Accounting for Stock-
Based Compensation, requires companies to either (a) record compensation costs
related to its stock-based compensation plans, or (b) disclose pro forma net
income and earnings per share data as if the company had recorded such costs.
The Company has elected to continue to apply APB Opinion No. 25 and related
Interpretations in accounting for these plans and to comply with the SFAS No.
123 disclosure requirements. Accordingly, no compensation cost has been
recognized for its stock-based compensation plans in the accompanying
consolidated financial statements. Had compensation costs for such plans been
determined in accordance with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
28
<PAGE>
<TABLE>
<CAPTION>
In thousands except per share amounts 1999 1998 1997
<S> <C> <C> <C> <C>
Net income As reported $206,224 $147,576 $121,788
Pro forma 181,123 132,296 116,370
Basic earnings per share As reported $1.07 $.77 $.64
Pro forma .94 .69 .61
Diluted earnings per share As reported $1.05 $.76 $.63
Pro forma .92 .69 .61
</TABLE>
The pro forma effect on net income for 1999, 1998 and 1997 is not representative
of the pro forma effect on net income in future years because it does not take
into consideration pro forma compensation expense related to stock option grants
made prior to 1995. The weighted average fair value of stock options granted
during 1999, 1998 and 1997 was $9.35, $8.84, and $5.60, 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:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Expected volatility 59% 57% 57%
Dividend yield - - -
Risk-free interest rate 5.3% 5.5% 6.3%
Expected life 5 years 5 years 5 years
</TABLE>
Stock Option Plans
On April 21, 1997, the Company's shareholders approved the 1997 Stock Option
Plan and on June 19, 1987 approved the 1987 Stock Option Plan (collectively the
"Plans"). The 1997 and 1987 Stock Option Plans authorized the grant of options
for up to 12.0 million shares and 21.6 million shares, respectively, of common
stock. On May 7, 1999, the Company's shareholders authorized an additional 12.0
million shares under the 1997 Stock Option Plan. Options granted under the
Plans are either (a) options intended to constitute incentive stock options
("ISOs") under the Internal Revenue Code of 1986 (the "Code") or (b) non-
qualified options. Incentive stock options may be granted under the Plans to
employees or officers of the Company. Non-qualified options may be granted to
consultants, directors (whether or not they are employees), employees or
officers of the Company.
ISOs granted under the Plans may not be granted at a price less than the fair
market value of the common stock on the date of grant (or 110% of fair market
value in the case of employees or officers holding 10% or more of the voting
stock of the Company). The aggregate fair market value of shares, for which
ISOs granted to any employee are exercisable for the first time by such employee
during any calendar year (under all stock option plans of the Company and any
related corporation), may not exceed $100,000. Non-qualified options granted
under the Plan may not be granted at a price less than the lesser of (a) the
book value per share of common stock as of the end of the fiscal year of the
Company immediately preceding the date of such grant, or (b) 50% of the fair
market value of the common stock on the date of grant.
Options granted under the Plans before December 1, 1995 vested 25% at the end of
the first year and 12.5% at the end of each six month period thereafter.
Options granted after December 1, 1995 and before February 14, 1997 vest 20% at
the end of the second year and 20% at the end of each year thereafter. Options
granted after February 14, 1997 vest 25% at the end of the first year and 12.5%
at the end of each six month period thereafter.
On April 21, 1997, the Company's shareholders approved the 1997 Non-employee
Director Stock Option Plan and on May 20, 1993 approved the 1993 Non-employee
Director Stock Option Plan (collectively the "Director Plans"). 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 400,000 shares and 80,000 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, 1999 for 20,000 shares at an
exercise price of $19.94, February 12, 1998 for 20,000 shares at an exercise
price of $13.50, April 21, 1997 for 20,000 shares at an exercise price of $10.88
per share, and February 25, 1993 for 40,000 shares at an exercise price of $6.00
per share (i.e., the market price on the dates of grant).
29
<PAGE>
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 2009.
Options granted terminate within a specified period of time following
termination of an optionee's employment or position as a director or consultant
with the Company.
A summary of the status of the Company's stock option plans as of December 31,
1999, 1998 and 1997, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
Shares in thousands 1999 1998 1997
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 9,560 $12.23 6,018 $7.81 3,218 $5.02
Granted 5,097 16.26 4,798 16.51 3,878 9.39
Exercised (1,285) 10.12 (944) 6.62 (696) 4.65
Terminated (1,290) 13.50 (312) 11.17 (382) 6.02
Outstanding
at end of year 12,082 14.00 9,560 12.23 6,018 7.81
Exercisable
at end of year 2,696 11.40 1,354 7.45 794 5.54
Shares reserved
at end of year 25,115 13,536 14,480
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C>
$4.56 to $4.84 778 6.0 $4.65 329 $4.72
$5.13 to $6.81 259 4.7 5.74 223 5.57
$8.31 to $9.81 2,058 7.2 9.00 913 8.94
$10.73 to $11.69 317 6.9 11.39 77 10.96
$13.00 to $14.31 3,646 9.1 14.30 18 13.87
$15.13 to $17.70 3,622 8.3 16.22 1,078 16.13
$19.94 to $20.06 436 9.4 20.05 - -
$22.41 to $24.75 966 9.6 24.11 58 22.41
12,082 8.2 14.00 2,696 11.40
</TABLE>
30
<PAGE>
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 6,000 shares annually (subject to
limitations imposed by the Internal Revenue Code). The employee stock purchase
plan expires on February 11, 2007. A total of 2.0 million shares are available
for purchase under the Plan. During 1999, under the Plan, 54,706 shares were
issued at $14.03 per share and 53,608 shares were issued at $14.45 per share.
During 1998, under the Plan, 42,632 shares were issued at $13.44 per share and
30,626 shares were issued at $10.57 per share. There were no shares issued
under the Plan during 1997.
7. Retirement Benefits
Employee Stock Ownership Plans
At December 31, 1999, the Company had noncontributory Employee Stock Ownership
Plans (the "ESOP") covering substantially all employees in North America and
Ireland. Contributions to the ESOP are based on a percentage of eligible
compensation and are determined by the Company's Board of Directors at its
discretion, subject to the limitations established by U.S. and Ireland tax laws.
The ESOP held 8.8 million shares and 9.4 million shares of common stock at
December 31, 1999 and December 31, 1998, respectively. Substantially all
contributed shares have been allocated to participant accounts. No shares were
contributed to the ESOP in 1999 or 1998. The value of contributed shares to the
ESOP in 1997 amounted to approximately $3.3 million.
Employee Savings Plan
On May 1, 1997, the Company established an employee savings plan (the "Savings
Plan") that qualifies as a deferred salary arrangement under Section 401(k) of
the Internal Revenue Code of 1986, as amended, covering substantially all North
American employees. The Savings Plan allows eligible employees to contribute up
to 15% of their compensation on a pre-tax basis subject to certain limitations.
The Company matches, with Company common stock, 100% of the first 3% of employee
contributions plus 50% of the next 3% of employee contributions. Employees are
fully vested in their employer matching contributions. The Company's matching
contributions in 1999, 1998 and 1997 amounted to approximately $4.3 million,
$1.6 million, and $0.4 million, respectively.
8. Operating Segment and Geographic Information
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 small offices/home offices 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
computer 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
<PAGE>
Summary operating segment information is as follows:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
<S> <C> <C> <C>
Net sales $1,337,265 $1,125,835 $873,388
Segment direct contribution margin $571,696 $448,200 $345,156
Indirect operating expenses 292,471 243,731 173,718
Other income, net 13,292 11,687 6,354
Earnings before income taxes and
minority interest $292,517 $216,156 $177,792
Segment depreciation $20,202 $16,996 $15,421
</TABLE>
Summary geographic information is as follows:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
<S> <C> <C> <C>
Net sales
United States $704,585 $639,229 $495,108
North and Latin America
excluding United States 70,372 60,897 55,138
Europe, Middle East, and Africa 382,213 305,108 222,011
Far East 180,095 120,601 101,131
$1,337,265 $1,125,835 $873,388
Note: Sales are attributed to geographic regions based on location of
customer. No individual foreign country is material in relation to
total net sales.
Long-lived assets
United States $79,219 $79,724 $72,167
Europe 84,866 87,711 17,350
Philippines 31,558 25,923 11,073
Other Far East 11,438 3,380 404
$207,081 $196,738 $100,994
</TABLE>
The Company closely monitors the credit worthiness of its customers, adjusting
credit policies and limits as deemed necessary. No single customer comprised
10% or more of the Company's net sales in 1999. One customer accounted for
approximately 11% and 10%, respectively, of the Company's net sales in 1998 and
1997.
9. Litigation
On or about August 20, 1999, General Signal Power Systems, Inc (a/k/a Best
Power) ("Best") filed suit against the Company in the United States District
Court for the Western District of Wisconsin alleging patent infringement and
false advertising. Best 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.
32
<PAGE>
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. On or about April 14,
1999, the Company removed the case from the United States District Court for the
Central District of California to the United States District Court for the
District of Massachusetts. 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 amounts of cash, cash equivalents, accounts receivable, short-term
debt, accounts payable, and accrued liabilities approximate their fair values
because of the short duration of these instruments.
11. Commitments
The Company has several non-cancelable 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 five years and
require the Company to pay its proportionate share of utilities, taxes, and
insurance. Rent expense under these leases for 1999, 1998 and 1997 was $4.3
million, $2.5 million, and $2.3 million, respectively.
Future minimum lease payments under these leases are: 2000 - $4.2 million; 2001
- - $3.2 million; 2002 - $2.4 million; 2003 - $1.8 million; and 2004 - $1.4
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, 1999
for the Galway facility were approximately $11.0 million and $8.1 million,
respectively. The total cumulative amount of capital grant claims submitted
through December 31, 1999 for the Castlebar facility was $0.4 million; no
capital grant claims had been received for the Castlebar facility. Under
separate agreements with the IDA, the Company receives direct reimbursement of
training costs at its Galway and Castlebar facilities for up to $3,000 and
$12,500, respectively, per new employee hired. The total cumulative amounts of
training grant claims submitted and received through December 31, 1999 for the
Galway facility were approximately $1.1 million and $1.1 million, respectively.
The total cumulative amount of training grant claims submitted through December
31, 1999 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
<PAGE>
13. Quarterly Financial Data (Unaudited)
The following is a summary of quarterly results of operations in thousands
except per share amounts:
<TABLE>
<CAPTION>
Q1 Q2 Q3 Q4
<S> <C> <C> <C> <C>
1999:
Net sales $277,185 $315,462 $355,920 $388,698
Gross profit $122,155 $138,553 $166,937 $186,885
Net income $34,791 $42,814 $62,127 $66,492
Basic earnings per share $.18 $.22 $.32 $.34
Basic weighted average
shares outstanding 191,760 191,962 192,272 192,807
Diluted earnings per share $.18 $.22 $.32 $.34
Diluted weighted average
shares outstanding 195,576 195,177 196,621 197,625
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 $.14 $.14 $.24 $.25
Basic weighted average
shares outstanding 190,608 190,788 191,074 191,550
Diluted earnings per share $.14 $.14 $.24 $.24
Diluted weighted average
shares outstanding 193,136 193,480 193,722 195,424
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
34
<PAGE>
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 11, 2000. 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 11, 2000 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 11, 2000 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 11, 2000 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, 1999 and 1998
Consolidated Statements of Income for each of the three years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity for each of the
three years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules
Schedule Description Page No.
Number
II Valuation and Qualifying 40
Accounts and Reserves
Schedules other than those listed above have been omitted since they are either
not required or the information required is included in the consolidated
financial statements or the notes thereto.
KPMG LLP's reports with respect to the above listed consolidated financial
statements and consolidated financial statement schedule are included herein on
pages 37 and 38.
35
<PAGE>
3. Exhibit Listing
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
3.01 Articles of Organization of the Registrant, as amended
3.02 By-Laws of the Registrant, as amended and restated
4.01 Shareholder Rights Agreement, dated as of September 2, 1999, between the Company and
BankBoston, N.A.
10.01 1987 Stock Option Plan of the Registrant (X)
10.02 Form of Incentive Stock Option Agreement under the Registrant's 1987 Stock Option
Plan (X)
10.03 Form of the Non-Qualified Stock Option Agreement under the Registrant's 1987 Stock
Option Plan (X)
10.04 The Registrant's Employee Stock Ownership Plan Trust Agreement dated December 30,
1987 (X)
10.05 The Registrant's Employee Stock Ownership Plan dated December 30, 1987, as amended
and restated (X)
10.06 Employment Agreement dated June 16, 1986 between the Company and Rodger B. Dowdell,
Jr. (X)
10.07 Unsecured line of credit agreement dated June 29, 1991 between the Registrant and
Rhode Island Hospital Trust National Bank
10.08 Unsecured line of credit agreement dated December 30, 1991 between the Registrant
and Fleet National Bank
10.09 Amendment dated December 30, 1992 to Unsecured line of credit agreement between the
Registrant and Fleet National Bank
10.10 Grant agreement dated February 16, 1994 between the Registrant and Industrial
Development Authority of Ireland
10.11 Contract for Sale dated January 31, 1994 between the Registrant and Digital
Equipment International
10.12 Management Agreement dated January 31, 1994 between the Registrant and Digital
Equipment International
10.13 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
</TABLE>
(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, 1999.
36
<PAGE>
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, 1999 and 1998, 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,
1999. 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, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
Providence, Rhode Island
January 27, 2000
37
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American Power Conversion Corporation:
Under date of January 27, 2000, we reported on the consolidated balance sheets
of American Power Conversion Corporation and subsidiaries as of December 31,
1999 and 1998 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, 1999, as contained in the annual report on Form 10-K
for the year 1999. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedule listed in Item 14(a)(2). This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Providence, Rhode Island
January 27, 2000
38
<PAGE>
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 20, 2000
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 20, 2000
By: /s/ Rodger B. Dowdell, Jr.
Rodger B. Dowdell, Jr.,
Chairman, President,
Chief Executive Officer and Director
(principal executive officer)
Date: March 20, 2000
/s/ Neil E. Rasmussen
Neil E. Rasmussen,
Vice President and Director
Date: March 20, 2000
/s/ Emanuel E. Landsman
Emanuel E. Landsman,
Vice President, Clerk and Director
Date: March 20, 2000
/s/ Ervin F. Lyon
Ervin F. Lyon,
Director
Date: March 20, 2000
/s/ James D. Gerson
James D. Gerson,
Director
39
<PAGE>
Schedule II
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
For the years ended December 31, 1999, 1998 and 1997
<CAPTION>
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
<S> <C> <C> <C> <C>
1999 $15,471 $6,015 $(1,943) $19,543
1998 12,230 6,593 (3,352) 15,471
1997 10,789 4,834 (3,393) 12,230
</TABLE>
40
<PAGE>
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
<CAPTION>
Page
Exhibit Number Description No.
<S> <C> <C>
3.01**** Articles of Organization of the Registrant, as amended (3.01)
3.02********** By-Laws of the Registrant, as amended and restated (3.02)
4.01********** Shareholder Rights Agreement, dated as of September 2, 1999, between
the Company and BankBoston, N.A. (4.01)
10.01* 1987 Stock Option Plan of the Registrant (10.01) (X)
10.02* Form of Incentive Stock Option Agreement under the Registrant's 1987
Stock Option Plan (10.02) (X)
10.03* Form of the Non-Qualified Stock Option Agreement under the
Registrant's 1987 Stock Option Plan (10.03) (X)
10.04* The Registrant's Employee Stock Ownership Plan Trust Agreement dated
December 30, 1987 (10.04) (X)
10.05** The Registrant's Employee Stock Ownership Plan dated December 30,
1987, as amended and restated (10.05) (X)
10.06* Employment Agreement dated June 16, 1986 between the Company and
Rodger B. Dowdell, Jr. (10.07) (X)
10.07** Unsecured line of credit agreement dated June 29, 1991 between the
Registrant and Rhode Island Hospital Trust National Bank (10.19)
10.08** Unsecured line of credit agreement dated December 30, 1991 between
the Registrant and Fleet National Bank (10.20)
10.09*** Amendment dated December 30, 1992 to Unsecured line of credit
agreement between the Registrant and Fleet National Bank (10.13)
10.10*** Grant agreement dated February 16, 1994 between the Registrant and
Industrial Development Authority of Ireland (10.14)
10.11*** Contract for Sale dated January 31, 1994 between the Registrant and
Digital Equipment International (10.15)
10.12*** Management Agreement dated January 31, 1994 between the Registrant
and Digital Equipment International (10.17)
10.13*** 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 43
23 Consent of KPMG LLP 44
27 Financial Data Schedule
</TABLE>
41
<PAGE>
* Previously filed as exhibits to the Company's Registration Statement on Form
S-18 dated July, 1988 (File No. 33-22707-B).
** Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991 and incorporated herein by reference
(File No. 0-17126). The number given in parenthesis indicates the corresponding
exhibit in such Form 10-K.
*** Previously filed as an exhibit (Exhibit No. 22) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993 and incorporated
herein by reference (File No. 1-12432). The number given in parenthesis
indicates the corresponding exhibit in such Form 10-K.
**** Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 and incorporated herein by reference
(File No. 1-12432). The number given in parenthesis indicates the corresponding
exhibit in such Form 10-K.
***** Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1995 and incorporated herein by
reference (File No. 1-12432). The number given in parenthesis indicates the
corresponding exhibit in such Form 10-Q.
****** Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1995 and incorporated herein by
reference (File No. 1-12432). The number given in parenthesis indicates the
corresponding exhibit in such Form 10-Q.
******* Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995 and incorporated herein by
reference (File No. 1-12432). The number given in parenthesis indicates the
corresponding exhibit in such Form 10-K.
******** Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996 and incorporated herein by
reference (File No. 1-12432). The number given in parenthesis indicates the
corresponding exhibit in such Form 10-K.
********* Previously filed as exhibits to the Company's Registration Statement
on Form S-8 dated July 31, 1997 (File No. 333-32563). The number given in
parenthesis indicates the corresponding exhibit in such Form S-8.
********** Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 and incorporated herein by
reference (File No. 1-12432). The number given in parenthesis indicates the
corresponding exhibit in such Form 10-K.
*********** Previously filed as an exhibit to the Company's Current Report on
Form 8-K, dated as of September 3, 1999, which included as Exhibit A the Form of
Rights Certificate, and as Exhibit B the Summary of Rights to Purchase Common
Stock, and incorporated herein by reference (File No. 1-12432). The number
given in parenthesis indicates the corresponding exhibit in such Form 8-K.
(X) Indicates a management contract or any compensatory plan, contract or
arrangement.
42
<PAGE>
Exhibit 21
<TABLE>
AMERICAN POWER CONVERSION CORPORATION
Subsidiaries as of December 31, 1999
<CAPTION>
Subsidiary Place of Incorporation
<S> <C>
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
APC Australia Pty Limited Australia
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 ApS Denmark
American Power Conversion Denmark ApS Denmark
Gutor Electronic AG Switzerland
American Power Conversion Dublin Limited Ireland
Silcon (Quingdao) Power Electronics Co. Ltd. China
American Power Conversion Mexico, S.A. de C.V. Mexico
American Power Conversion Uruguay S.A. Uruguay
APC Japan, Inc. Japan
American Power Conversion (India) Private Limited India
American Power Conversion Brazil Ltd. Brazil
</TABLE>
43
<PAGE>
Exhibit 23
ACCOUNTANTS' CONSENT
The Board of Directors
American Power Conversion Corporation:
We consent to incorporation by reference in the registration statements (Nos.33-
25873, 33-54416, 333-32563, 333-78595, 333-80541, and 333-80569) on Form S-8 of
American Power Conversion Corporation of our reports dated January 27, 2000
relating to the consolidated balance sheets of American Power Conversion
Corporation and subsidiaries as of December 31, 1999 and 1998, 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, 1999,
and the related schedule, which reports appear in the 1999 annual report on Form
10-K of American Power Conversion Corporation.
KPMG LLP
Providence, Rhode Island
March 29, 2000
44
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT DECEMBER 31, 1999 AND CONSOLIDATED
CONDENSED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1.00
<CASH> 456,325
<SECURITIES> 0
<RECEIVABLES> 236,353
<ALLOWANCES> 19,543
<INVENTORY> 176,477
<CURRENT-ASSETS> 899,857
<PP&E> 260,649
<DEPRECIATION> 103,422
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0
0
<COMMON> 1,933
<OTHER-SE> 900,157
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<SALES> 1,337,265
<TOTAL-REVENUES> 1,337,265
<CGS> 722,735
<TOTAL-COSTS> 1,058,040
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<INCOME-TAX> 86,293
<INCOME-CONTINUING> 206,224
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<EPS-BASIC> 1.07
<EPS-DILUTED> 1.05
</TABLE>
