<PAGE>
QUARTERLY REPORT ON FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
_________________________
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 27, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________to_____________
Commission File Number: 1-12432
AMERICAN POWER CONVERSION CORPORATION
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 04-2722013
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
132 FAIRGROUNDS ROAD, WEST KINGSTON, RHODE ISLAND 02892
401-789-5735
(Address and telephone number of principal executive offices)
Indicate by check mark whether the Registrant (1) has filed all reports 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 [ ]
Registrant's Common Stock outstanding, $.01 par value, at November 6, 1998 -
95,715,000 shares
1
<PAGE>
FORM 10-Q
September 27, 1998
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information:
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets -
September 27, 1998 (Unaudited) and December 31, 1997 3 - 4
Consolidated Condensed Statements of Income -
Three Months and Nine Months Ended
September 27, 1998 and September 28, 1997 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows -
Three Months and Nine Months Ended
September 27, 1998 and September 28, 1997 (Unaudited) 6
Notes to Consolidated Condensed Financial Statements
(Unaudited) 7 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 13
Part II - Other Information:
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
<PAGE>
FORM 10-Q
September 27, 1998
PART I - CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
ASSETS
<CAPTION>
September 27, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $208,857 $270,134
Accounts receivable,
less allowance for doubtful accounts of
$16,630 in 1998 and $12,230 in 1997 198,841 131,115
Inventories:
Raw materials 116,398 61,430
Work-in-process and finished goods 106,524 42,741
Total inventories 222,922 104,171
Prepaid expenses and other current assets 20,042 13,305
Deferred income taxes 26,200 21,571
Total current assets 676,862 540,296
Property, plant, and equipment:
Land, buildings and improvements 50,804 31,143
Machinery and equipment 119,837 80,091
Office equipment, furniture, and fixtures 42,318 31,431
Purchased software 11,082 9,584
224,041 152,249
Less accumulated depreciation and amortization 81,821 52,631
Net property, plant, and equipment 142,220 99,618
Goodwill and other intangibles 38,821 -
Other assets 3,650 1,376
Total assets $861,553 $641,290
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
FORM 10-Q
September 27, 1998
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
September 27, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Current liabilities:
Short term debt $15,045 $ -
Accounts payable 106,046 37,068
Accrued expenses 26,961 16,334
Accrued compensation 18,610 16,476
Accrued sales and marketing programs 16,173 15,965
Accrued retirement contributions 8,417 7,446
Income taxes payable 31,280 20,241
Total current liabilities 222,532 113,530
Deferred tax liability 7,992 6,006
Total liabilities 230,524 119,536
Minority interest 3,253 -
Shareholders' equity:
Common stock, $.01 par value;
authorized 200,000 shares; issued 95,773
shares in 1998 and 95,383 shares in 1997 958 954
Additional paid-in capital 61,717 55,626
Retained earnings 566,841 466,725
Treasury stock, 125 shares, at cost (1,551) (1,551)
Currency translation adjustment (189) -
Total shareholders' equity 627,776 521,754
Total liabilities and shareholders' equity $861,553 $641,290
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
FORM 10-Q
September 27, 1998
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands except earnings per share)
<CAPTION>
Nine months ended Three months ended
September September September September
27, 28, 27, 28,
1998 1997 1998 1997
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $806,898 $621,653 $327,370 $246,044
Cost of goods sold 446,385 340,482 183,087 132,471
Gross profit 360,513 281,171 144,283 113,573
Operating expenses:
Marketing, selling, general and administrative 189,750 144,987 70,841 55,705
Research and development 24,658 15,782 7,962 6,186
Acquired research and development 7,554 - 167 -
Total operating expenses 221,962 160,769 78,970 61,891
Operating income 138,551 120,402 65,313 51,682
Other income, net 9,128 2,750 2,149 2,002
Earnings before income taxes 147,679 123,152 67,462 53,684
Income taxes 47,340 38,793 20,621 16,911
Earnings before minority interest 100,339 84,359 46,841 36,773
Minority interest, net 223 - 223 -
Net income $100,116 $84,359 $46,618 $36,773
Basic earnings per share $ 1.05 $ .89 $ .49 $ .39
Basic weighted average shares outstanding 95,412 94,915 95,537 95,154
Diluted earnings per share $ 1.04 $ .88 $ .48 $ .38
Diluted weighted average shares outstanding 96,647 96,125 96,861 96,495
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
FORM 10-Q
September 27, 1998
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Nine months ended Three months ended
September September September September
27, 28, 27, 28,
1998 1997 1998 1997
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income $100,116 $84,359 $46,618 $36,773
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 18,134 13,335 6,391 4,918
Provision for doubtful accounts 6,295 3,455 3,697 1,327
Deferred income taxes (4,479) (4,327) (1,247) 2,884
Acquired research and development 7,554 - 167 -
Changes in operating assets and liabilities
excluding effects of acquisitions:
Accounts receivable (54,508) (33,810) (19,179) (23,085)
Inventories (99,567) 11,958 (23,145) 40,749
Prepaid expenses and other current assets (6,392) (1,025) (2,273) 837
Other assets (1,549) 507 (1,234) (18)
Accounts payable 54,406 (7,678) 4,476 (3,784)
Accrued expenses 8,609 9,834 8,987 9,616
Income taxes payable 10,885 2,847 8,482 6,197
Other, net (38) - (38) -
Net cash provided by operating activities 39,466 79,455 31,702 76,414
Cash flows from investing activities
Capital expenditures, net of capital grants (43,321) (26,570) (19,147) (8,057)
Acquisitions (53,714) 101 (1,185) -
Net cash used in investing activities (97,035) (26,469) (20,332) (8,057)
Cash flows from financing activities
Repayment of short term debt (9,803) - (9,803) -
Proceeds from issuances of common stock 6,095 5,681 3,980 739
Net cash provided by (used in) financing activities (3,708) 5,681 (5,823) 739
Net change in cash and cash equivalents (61,277) 58,667 5,547 69,096
Cash and cash equivalents at beginning of period 270,134 153,234 203,310 142,805
Cash and cash equivalents at end of period $208,857 $211,901 $208,857 $211,901
Supplemental cash flow disclosures
Cash paid for income taxes (net of refunds) $36,301 $34,260 $12,139 $ 8,716
Details of acquisitions:
Fair value of assets $105,517 $ - $ 973 $ -
Liabilities and minority interest (49,843) - 212 -
Cash paid 55,674 - 1,185 -
Cash acquired (1,960) (101) - -
Acquisitions $53,714 $(101) $1,185 $ -
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
FORM 10-Q
September 27, 1998
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Management Representation
In the opinion of management, the accompanying unaudited interim financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position and the results of
operations for the interim periods. The results of operations for the interim
periods are not necessarily indicative of results to be expected for the full
year.
2. Principles of Consolidation
The consolidated financial statements include the accounts of American Power
Conversion Corporation and all of its wholly- and majority-owned subsidiaries.
All intercompany accounts and transactions are eliminated in consolidation.
Early in the second quarter of 1998, the Company entered into a definitive
agreement with the principal management shareholders of Silcon A/S to acquire
stock of Silcon, a Denmark-based manufacturer of three-phase UPSs up to 480 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. 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.
3. Per Share Data
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed by dividing net income by the weighted average number of
common shares and dilutive potential common shares outstanding during the
period. Under the treasury stock method, the unexercised options are assumed to
be exercised at the beginning of the period or at issuance, if later. The
assumed proceeds are then used to purchase common shares at the average market
price during the period. Dilutive potential common shares outstanding at
September 27, 1998 and September 28, 1997 were approximately 1.3 million and 1.3
million, respectively.
Potential common shares for which inclusion would have the effect of increasing
diluted earnings per share (i.e., antidilutive) are excluded from the
computation. Antidilutive potential common shares outstanding at September 27,
1998 and September 28, 1997 were approximately 2.2 million and 18 thousand,
respectively.
4. Shareholders' Equity
Changes in paid-in capital for the periods presented represent the issuances of
common stock resulting from the exercise of employee stock options.
7
<PAGE>
5. Comprehensive Income
The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
Nine months ended Three months ended
September September September September
27, 28, 27, 28,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $100,116 $84,359 $46,618 $36,773
Other comprehensive income, net of tax:
Foreign currency translation adjustment (189) - (189) -
Other comprehensive income (189) - (189) -
Comprehensive income $99,927 $84,359 $46,429 $36,773
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Revenues
Net sales were $327.4 million for the third quarter of 1998, an increase of
33.1% compared to $246.0 million for the same period in 1997. Net sales for the
first nine months of 1998 were $806.9 million compared to $621.7 million in
1997, an increase of 29.8%. The increase was attributable to continued strong
demand for the Company's uninterruptible power supply (UPS) and surge protection
products. Third quarter and nine month year-to-date net sales growth was strong
worldwide with the Americas (North and Latin America) growing 32.1% and 30.0%,
respectively, EMEA (Europe, Middle East and Africa) growing 43.5% and 39.8%,
respectively, and the Asia Pacific region growing 16.8% and 9.6%, respectively,
despite the economic downturn in that region. International net sales
(excluding Canada) comprised 37% of total net sales in each of the third quarter
and first nine month periods of 1998 and 1997, respectively.
Cost of Goods Sold
Cost of goods sold was $183.1 million or 55.9% of net sales in the third quarter
of 1998 compared to $132.5 million or 53.8% in the third quarter of 1997. Cost
of goods sold was $446.4 million or 55.3% of net sales in the first nine months
of 1998 compared to $340.5 million or 54.8% in the same period of 1997. Gross
margins declined by approximately 210 basis points and 50 basis points during
the third quarter and first nine months of 1998, respectively, over the
comparable periods in 1997. Substantially all of the gross margin erosion was
product mix related as the Company's high end UPS business now accounts for a
larger percentage of revenue, combined with seasonally strong desktop unit
volume growth of Back-UPSr products that were price reduced in the fourth
quarter of 1997. Total inventory reserves at September 27, 1998 were $23.5
million compared to $19.3 million at December 31, 1997. The Company's reserve
estimate methodology involves quantifying the total inventory position having
potential loss exposure, reduced by an amount reasonably forecasted to be sold,
and adjusting its interim reserve provisioning to cover the net loss exposure.
Operating Expenses
Operating expenses include marketing, selling, general and administrative
(SG&A), and research and development (R&D) expenses.
8
<PAGE>
SG&A expenses were $70.8 million or 21.6 % of net sales for the third quarter of
1998 compared to $55.7 million or 22.6% of net sales for the third quarter of
1997. SG&A expenses were $189.8 million or 23.5% of net sales for the first
nine months of 1998 compared to $145.0 million or 23.3% of net sales for the
first nine months of 1997. The aggregate dollars of SG&A expenses have increased
over last year due primarily to costs associated with increased staffing of
sales and administrative positions both domestically and internationally.
However, the slight decrease as a percentage of sales from third quarter 1997 to
third quarter 1998 is 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 doubtful accounts at September 27, 1998 was 7.7% of
accounts receivable, compared to 8.5% at December 31, 1997. The Company
continues to experience strong collection performance.
Excluding 1998 charges of $7.6 million for acquired R&D (see "Acquisition"
below), R&D expenses were $8.0 million or 2.4% of net sales and $6.2 million or
2.5% of net sales for the third quarters of 1998 and 1997, respectively, and R&D
expenses were $24.7 million or 3.1% of net sales and $15.8 million or 2.5% of
net sales for the first nine month periods of 1998 and 1997, respectively. The
increased R&D spending primarily reflects increased numbers of software and
hardware engineers and costs associated with new product development and
engineering support. Although the aggregate dollars of R&D expenses have
increased as a result of continued product and process development, the slight
decrease as a percentage of sales from third quarter 1997 to third quarter 1998
is attributable to certain fixed R&D expenses spread over a higher revenue base.
Other Income, Net and Income Taxes
Other income is comprised principally of interest income, which increased
substantially from 1997 to 1998 due to higher average cash balances available
for investment during 1998.
Excluding 1998 non-tax deductible charges of $7.6 million for acquired R&D (see
"Acquisition" below), the Company's effective income tax rates were
approximately 30.5% and 31.5% for the quarters ended September 27, 1998 and
September 28, 1997, respectively. The decrease from last year is due to the
expected tax savings from an increasing portion of taxable earnings being
generated from the Company's operations in Ireland, a jurisdiction which
currently has a lower income tax rate for manufacturing companies than the
present U.S. statutory income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 27, 1998 was $454.3 million compared to $426.8
million at December 31, 1997. The Company's cash position decreased to $208.9
million at September 27, 1998 from $270.1 million at December 31, 1997,
primarily due to the cash purchase of approximately 77% of the share capital of
Silcon A/S (see "Acquisition" below).
Worldwide inventories were $222.9 million at September 27, 1998 compared to
$104.2 million at December 31, 1997. Inventories increased during the first
nine months of 1998 due to anticipation of increased demand patterns during the
second half of the year which result from typical seasonal factors, combined
with $19 million of inventory purchased in the Silcon acquisition. During the
third quarter of 1998, inventories grew 11.6% over second quarter 1998 levels,
compared to a 25.6% growth rate for third quarter 1998 net sales over second
quarter 1998. Inventory levels were 68% as a percentage of quarterly sales in
the third quarter of 1998, down from 77% in the second quarter of 1998.
At September 27, 1998, the Company had $50 million available for future
borrowings under an unsecured line of credit agreement at a floating interest
rate equal to the bank's cost of funds rate plus .625% and an additional $15
million under an unsecured line of credit agreement with a second bank at a
similar interest rate. No borrowings were outstanding under these facilities at
September 27, 1998. In connection with the acquisition of Silcon (see
"Acquisition" below), the Company acquired $24.8 million in bank indebtedness
with interest rates ranging from 4% to 8%. The Company repaid $9.8 million of
this indebtedness during the third quarter of 1998. The Company had no
9
<PAGE>
significant financial commitments, other than those required in the normal
course of business, at September 27, 1998.
Capital investment for the first nine months of 1998 consisted primarily of
manufacturing and office equipment, and buildings and improvements. The nature
and level of capital spending was made to improve manufacturing capabilities and
to support the increased marketing, selling, and administrative efforts
necessitated by the Company's growth. Net capital expenditures were financed
from available operating cash. The Company had no material capital commitments,
other than those required in the normal course of business, at September 27,
1998.
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 September 27,
1998 for the Galway facility were approximately $12.6 million and $8.9 million,
respectively. The total cumulative amount of capital grant claims submitted
through September 27, 1998 for the Castlebar facility was $1.2 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 September 27, 1998 for the
Galway facility were approximately $1.8 million and $1.3 million, respectively.
The total cumulative amount of training grant claims submitted through September
27, 1998 for the Castlebar facility was approximately $0.9 million; no training
grant claims had been received for the Castlebar facility.
During the first quarter of 1998, the Company began establishing a manufacturing
operation in China. The Company is leasing a 50,000 square foot facility in
Suzhou and began manufacturing selected products at this facility during the
third quarter of 1998. Capital expenditures for the China expansion will be
financed from operating cash. In August 1998, the Company purchased a third
manufacturing facility in the Philippines for approximately $750,000, financed
from operating cash. The Company continues to evaluate international
manufacturing expansion including additional locations in the Far East and South
America.
Management believes that current internal cash flows, together with available
cash, available credit facilities or, if needed, the proceeds from the sale of
additional equity, will be sufficient to support anticipated capital spending
and other working capital requirements for the foreseeable future.
Acquisition
Early in the second quarter of 1998, the Company entered into a definitive
agreement with the principal management shareholders of Silcon A/S to acquire
stock of Silcon, a Denmark-based manufacturer of three-phase UPSs up to 480 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 third quarter of 1998, the Company increased its
ownership percentage to 77%. The Company's cash outlays of $56 million were
financed from operating cash.
The purchase price was allocated to the net assets acquired and to acquired in-
process research and development (acquired R&D). Acquired R&D includes the
value of products in the development stage and not considered to have reached
technological feasibility. In accordance with applicable accounting rules,
acquired R&D is required to be expensed. Accordingly, $7.4 million of the
acquisition cost was expensed in the second quarter of 1998. An additional $.2
million was expensed in the third quarter of 1998 consistent with the Company's
increased ownership percentage. The remaining purchase price exceeded the fair
value of the tangible net assets acquired by approximately $39 million, which is
being amortized on a straight-line basis over periods ranging from 10-20 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.
10
<PAGE>
Foreign Currency Activity
Financial statements for the Company's international subsidiaries for which the
U.S. dollar is the functional currency are remeasured into U.S. dollars using
current rates of exchange for monetary assets and liabilities and historical
rates of exchange for nonmonetary assets. Gains and losses from remeasurement
are included in other income, net.
The Company invoices its customers in Japan, Great Britain, Germany, and France,
in their respective local currencies. At September 27, 1998 the Company's
unhedged foreign currency accounts receivable, by currency, were as follows:
(In thousands) Foreign Currency U.S. Dollars
Japanese Yen 1,619,000 11,320
British Pounds 4,201 7,132
German Marks 19,723 11,810
French Francs 36,146 6,443
Total gross accounts receivable at September 27, 1998 was approximately $215.5
million. The Company had non-trade receivables of 4.1 million Irish Pounds
(approximately US$6.2 million), as well as Irish Pound denominated liabilities
of 4.4 million (approximately US$6.5 million). The Company also had liabilities
denominated in various European currencies of US$14.7 million, as well as Yen
denominated liabilities of approximately US$1.9 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 derivatives
arrangements.
Recently Issued Accounting Standards
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes standards for reporting
information about operating segments in annual and interim financial statements
issued to shareholders. This Statement also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company will adopt this Statement at December 31, 1998 and is currently
studying its provisions.
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The adoption of this Statement is not expected to have a
material impact on the Company's financial position or results of operations.
The AICPA Accounting Standards Executive Committee recently issued Statement of
Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use. This SOP requires that certain costs related to
the development or purchase of internal-use software be capitalized and
amortized over the estimated useful life of the software, and is effective for
fiscal years beginning after December 15, 1998. The SOP also requires that
costs related to the preliminary project stage and post
implementation/operations stage in an internal-use computer software development
project be expensed as incurred. The adoption of this SOP is not expected to
have a material impact on the Company's financial position or results of
operations.
The AICPA Accounting Standards Executive Committee recently issued Statement of
Position ("SOP") 98-5, Reporting on the Costs of Start-Up Activities. This SOP
requires that costs incurred during start-up activities, including organization
costs, be expensed as incurred, and is effective for fiscal years beginning
11
<PAGE>
after December 15, 1998. The adoption of this SOP is expected to have no impact
on the Company's financial position or results of operations.
Year 2000 Readiness Disclosure Statement
Many computer systems were not designed to handle any dates beyond the year 1999
and, therefore, many companies will be required to modify their computer
hardware and software prior to the year 2000 in order to remain fully
operational. During 1998, the Company commenced a year 2000 readiness program
to assess the impact of the year 2000 issue on the Company's operations and
address necessary remediation. A year 2000 program director reporting directly
to senior management has been assigned to this project, which includes:
Assessment of the Company's products for year 2000 compliance. All of the
Company's hardware products and accessories are year 2000 compliant, meaning
that they have been tested to verify that where date fields are processed, dates
are calculated and displayed accurately, and that scheduled events such as
shutdowns, self-tests, and run-time calibrations, and also the handling of
unscheduled events, such as power failures, are unaffected by the millenium and
century change; provided that all other third party products (e.g., software,
firmware, operating systems, and hardware) properly exchange date data with the
Company product and provided also that the Company products are used in
accordance with the product documentation. In addition, the Company's year 2000
compliant products recognize the year 2000 as a leap year. The Company has also
tested its software products and determined that these products are
substantially year 2000 compliant, and the Company intends to resolve any
remaining year 2000 issues before the arrival of year 2000. Periodically
updated information about the Company's software products is available at the
Company's Year 2000 Readiness Disclosure Web site (www.APCC.com). Information
on this site is provided to the Company's customers for the sole purpose of
assisting in planning for transition to the year 2000. Such information is the
most currently available concerning the behavior of the Company's products in
the next century and is provided "as is" without warranty of any kind. In
addition, to the extent the Company's hardware and software products are
combined with the hardware and software products of other companies, there can
be no assurance that users of the Company's products will not experience year
2000 problems as a result of the combination of the Company's hardware and
software products with non-compliant products of other companies. The Company
currently does not anticipate material expenditures to remedy any year 2000
issues with its products and services.
Assessment of the Company's information technology ("IT") and non-IT systems for
year 2000 compliance. The Company is currently in the process of evaluating its
IT systems for compliance. The Company's Oracle manufacturing and financial
information systems were implemented during 1998. The Company is currently
evaluating the year 2000 compliance of these systems in accordance with Oracle's
recommendations. The Company has installed the most recent software patches
available from Oracle and expects its initial testing of these patches to be
complete by the end of 1998. The Company does not consider the cost of the new
hardware and software for the Oracle implementations to be related to year 2000
readiness as these system replacements were already planned to satisfy the
demands of expansion of its worldwide operations and were not accelerated due to
year 2000 issues. The Company is also currently in the process of evaluating
its non-IT systems for compliance. Additionally, the Company utilizes other
third party software and equipment to distribute its products as well as to
operate other aspects of its business. The Company is reviewing such software
and equipment. There can be no assurance that such software and equipment is
year 2000 compliant, that non-compliant software and equipment will be made
compliant on a timely basis, or that any such non-compliant software and
equipment would not have a material adverse effect on the Company's systems and
operations.
Evaluation of third parties with which the Company has a material relationship,
including key suppliers, service providers, and strategic partners. The
Company's year 2000 readiness program includes identifying these third parties
and determining, based on receipt of written verification, review of publicly
available financial statement disclosures, and other means, that such third
parties are either in compliance or expect to be in compliance prior to January
1, 2000. The Company is currently in the process of communicating with its
significant vendors, service providers, and certain strategic partners. Many
enterprises, including the Company's present and potential customers, may be
devoting a substantial portion of their information systems spending to
12
<PAGE>
resolving year 2000 issues, which may result in their spending being diverted
from applications such as the Company's products, over the next two years.
Development of contingency plans. The Company is currently not in a position to
determine what would be its most reasonably likely worst case year 2000 scenario
or any plan for handling such scenario. To date, the Company has not completed
a formal contingency plan for non-compliance, however to the extent that further
evaluation of its products, its IT and non-IT systems, or information obtained
from the third parties with which it has a material relationship suggests that
there is a significant risk, contingency plans will be implemented. Such
contingency plans may include the development of alternative sources for the
product or service provided by any non-compliant vendor.
It is the Company's policy to expense as incurred all costs associated with year
2000 readiness. To date, the Company has not identified a separate budget for
year 2000 issues. No IT projects have been deferred due to year 2000 efforts.
Although the Company is not yet able to estimate its total incremental cost for
year 2000 issues, based on its preliminary review to date, the Company does not
believe that the costs of year 2000 issues will have a material adverse effect
on the Company's business, operating results, or financial condition. Although
the Company is taking measures to address the impact, if any, of year 2000
issues, it cannot predict the outcome or success of its year 2000 readiness
program, or whether the failure of third party systems or equipment to operate
properly in the year 2000 will have a material adverse effect upon the Company's
business, operating results, or financial condition, or require the Company to
incur unanticipated material expenses to remedy any year 2000 issue.
The foregoing discussion regarding the Company's year 2000 readiness program's
implementation, effectiveness, and cost, contains forward-looking statements
which are based on management's expectations, determined utilizing certain
assumptions of future events including third party compliance and other
factors. However, there can be no guarantee that these expectations will be
realized, and actual results could differ materially from management's
expections. 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 Performance
Statements contained in this document that do not describe historical facts may
constitute 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 which could cause actual results to differ from those
projected. The factors that could cause actual results to differ materially
include the following: the ability of APC to operate Silcon as a less than
wholly-owned subsidiary; APC's ability to successfully integrate Silcon's
operations; the review and revaluation of acquired R&D by the Securities and
Exchange Commission (SEC); the timely development and acceptance of new products
such as the Symmetra Power Array; ramp up and expansion of manufacturing
capacity; general worldwide economic conditions; growth rates in the power
protection industry and related industries, including but not limited to the PC,
server, and networking industries; competitive factors and pricing pressures;
changes in product mix; changes in the seasonality of demand patterns; inventory
risks due to shifts in market demand; the effects of any other possible
acquisitions; component constraints and shortages; risk of nonpayment of
accounts receivable; all risks associated with the year 2000 issue including,
but not limited to, the impact on the Company's business due to internal systems
or systems of suppliers and other third parties adversely affected by year 2000
problems as previously discussed above; the uncertainty of the litigation
process including risk of an unexpected, unfavorable result of current or
threatened litigation; factors associated with international operations; and the
risks described from time to time in the Company's filings with the SEC.
13
<PAGE>
FORM 10-Q
September 27, 1998
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about November 6, 1998 General Signal Power Systems, Inc. ("GSPS") filed
suit against the Company in Waukesha County Circuit Court in Wisconsin. GSPS
alleges interference with a contractual relationship with respect to a
distribution agreement between the Best Power division of GSPS and Silcon A/S, a
majority-owned subsidiary of the Company. GSPS seeks unspecified damages,
costs, fees, and injunctive relief. The Company believes the lawsuit to be
without merit and intends to vigorously defend against it. The Company also
believes the ultimate disposition of this matter will not have a material
adverse effect on the Company's consolidated financial position or results of
operations and liquidity. No provision for any liability that may result from
this action has been recognized in the Company's consolidated condensed
financial statements included herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit No. 11 - Computation of Earnings per Share (Page 14)
Exhibit No. 27 - Financial Data Schedule (For SEC EDGAR Filing Only;
Intentionally Omitted)
(B) Reports on Form 8-K
No reports on Form 8-K were filed by American Power Conversion Corporation
during the quarter ended September 27, 1998.
14
<PAGE>
FORM 10-Q
September 27, 1998
SIGNATURES
Pursuant to the requirements 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: November 12, 1998
/s/ Donald M. Muir
Donald M. Muir
Chief Financial Officer
(Principal Accounting And Financial Officer)
15
<PAGE>
FORM 10-Q
September 27, 1998
EXHIBIT 11
<TABLE>
AMERICAN POWER CONVERSION CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(In thousands except for earnings per share)
<CAPTION>
Nine months ended Three months ended
September September September September
27, 28, 27, 28,
1998 1997 1998 1997
(Unaudited)
<S> <C> <C> <C> <C>
Basic
Net income $100,116 $84,359 $46,618 $36,773
Basic weighted average shares outstanding 95,412 94,915 95,537 95,154
Basic earnings per share $ 1.05 $ .89 $ .49 $ .39
Diluted
Net income $100,116 $84,359 $46,618 $36,773
Basic weighted average shares outstanding 95,412 94,915 95,537 95,154
Net effect of dilutive potential common shares
outstanding based on the treasury stock
method using the average market price 1,235 1,210 1,324 1,341
Diluted weighted average shares outstanding 96,647 96,125 96,861 96,495
Diluted earnings per share $ 1.04 $ .88 $ .48 $ .38
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT SEPTEMBER 27, 1998 AND CONSOLIDATED
CONDENSED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-27-1998
<EXCHANGE-RATE> 1.00
<CASH> 208,857,000
<SECURITIES> 0
<RECEIVABLES> 215,471,000
<ALLOWANCES> 16,630,000
<INVENTORY> 222,922,000
<CURRENT-ASSETS> 676,862,000
<PP&E> 224,041,000
<DEPRECIATION> 81,821,000
<TOTAL-ASSETS> 861,553,000
<CURRENT-LIABILITIES> 222,532,000
<BONDS> 0
0
0
<COMMON> 958,000
<OTHER-SE> 626,818,000
<TOTAL-LIABILITY-AND-EQUITY> 861,553,000
<SALES> 806,898,000
<TOTAL-REVENUES> 806,898,000
<CGS> 446,385,000
<TOTAL-COSTS> 668,347,000
<OTHER-EXPENSES> 9,128,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 147,679,000
<INCOME-TAX> 47,340,000
<INCOME-CONTINUING> 100,339,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100,116,000
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.04
</TABLE>
