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 26, 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)
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 5, 1999 -
192,595,000 shares
1
<PAGE>
FORM 10-Q
September 26, 1999
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information:
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets -
September 26, 1999 (Unaudited) and December 31, 1998 3 - 4
Consolidated Condensed Statements of Income -
Three Months and Nine Months Ended
September 26, 1999 and September 27, 1998 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows -
Three Months and Nine Months Ended
September 26, 1999 and September 27, 1998 (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 9 - 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Part II - Other Information:
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index 17
2
<PAGE>
FORM 10-Q
September 26, 1999
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 26, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $330,920 $219,908
Accounts receivable,
less allowance for doubtful accounts of
$20,716 in 1999 and $15,471 in 1998 241,431 180,356
Inventories:
Raw materials 72,241 87,975
Work-in-process and finished goods 126,347 140,707
Total inventories 198,588 228,682
Prepaid expenses and other current assets 18,996 17,801
Deferred income taxes 28,296 28,498
Total current assets 818,231 675,245
Property, plant and equipment:
Land, buildings and improvements 56,714 51,735
Machinery and equipment 129,405 125,274
Office equipment, furniture, and fixtures 52,084 44,955
Purchased software 16,862 11,505
255,065 233,469
Less accumulated depreciation and amortization 101,811 85,205
Net property, plant, and equipment 153,254 148,264
Goodwill and other intangibles 49,008 45,837
Other assets 2,108 2,637
Total assets $1,022,601 $871,983
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
FORM 10-Q
September 26, 1999
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
September 26, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
Current liabilities:
Short term debt $ 160 $12,540
Accounts payable 83,831 75,190
Accrued expenses 41,244 28,560
Accrued compensation 26,208 22,130
Accrued sales and marketing programs 14,180 17,824
Accrued retirement contributions 3,584 2,469
Income taxes payable 21,553 22,753
Total current liabilities 190,760 181,466
Deferred tax liability 5,082 7,500
Total liabilities 195,842 188,966
Minority interest - 1,725
Shareholders' equity:
Common stock, $.01 par value;
authorized 200,000 shares; issued 192,680
shares in 1999 and 191,946 shares in 1998 1,927 960
Additional paid-in capital 73,040 67,080
Retained earnings 754,033 614,301
Treasury stock, 250 shares, at cost (1,551) (1,551)
Accumulated other comprehensive income (loss) (690) 502
Total shareholders' equity 826,759 681,292
Total liabilities and shareholders' equity $1,022,601 $871,983
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
FORM 10-Q
September 26, 1999
<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 26, September 27, September 26, September 27,
1999 1998 1999 1998
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $948,567 $806,898 $355,920 $327,370
Cost of goods sold 520,922 446,385 188,983 183,087
Gross profit 427,645 360,513 166,937 144,283
Operating expenses:
Marketing, selling, general and administrative 211,451 189,750 74,025 70,841
Research and development 25,951 24,658 8,176 7,962
Acquired research and development - 7,554 - 167
Total operating expenses 237,402 221,962 82,201 78,970
Operating income 190,243 138,551 84,736 65,313
Other income, net 7,959 9,128 3,388 2,149
Earnings before income taxes
and minority interest 198,202 147,679 88,124 67,462
Income taxes 58,470 47,340 25,997 20,621
Earnings before minority interest 139,732 100,339 62,127 46,841
Minority interest, net - 223 - 223
Net income $139,732 $100,116 $ 62,127 $ 46,618
Basic earnings per share $ .73 $ .52 $ .32 $ .24
Basic weighted average shares outstanding 191,998 190,824 192,272 191,074
Diluted earnings per share $ .71 $ .52 $ .32 $ .24
Diluted weighted average shares outstanding 195,926 193,294 196,621 193,722
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
FORM 10-Q
September 26, 1999
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Nine months ended Three months ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income $139,732 $100,116 $62,127 $46,618
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 19,237 18,134 7,117 6,391
Gain on sale of property, plant and equipment (277) - (277) -
Provision for doubtful accounts 5,125 6,295 1,661 3,697
Deferred income taxes (2,216) (4,479) 2,059 (1,247)
Acquired research and development - 7,554 - 167
Changes in operating assets and liabilities
excluding effects of acquisition:
Accounts receivable (66,200) (54,508) (47,771) (19,179)
Inventories 30,094 (99,567) 33,308 (23,145)
Prepaid expenses and other current assets (1,195) (6,392) 4,467 (2,273)
Other assets 529 (1,549) 132 (1,234)
Accounts payable 8,641 54,406 1,235 4,476
Accrued expenses 14,233 8,609 1,526 8,987
Income taxes payable (1,200) 10,885 (3,066) 8,482
Other, net (1,266) (38) 510 (38)
Net cash provided by operating activities 145,237 39,466 63,028 31,702
Cash flows from investing activities
Capital expenditures, net of capital grants (21,562) (43,321) (7,658) (19,147)
Proceeds from sale of property, plant and equipment 1,100 - 1,100 -
Acquisition (8,310) (53,714) - (1,185)
Net cash used in investing activities (28,772) (97,035) (6,558) (20,332)
Cash flows from financing activities
Repayment of short term debt (12,380) (9,803) (848) (9,803)
Proceeds from issuances of common stock 6,927 6,095 3,479 3,980
Net cash (used in) provided by financing activities (5,453) (3,708) 2,631 (5,823)
Net change in cash and cash equivalents 111,012 (61,277) 59,101 5,547
Cash and cash equivalents at beginning of period 219,908 270,134 271,819 203,310
Cash and cash equivalents at end of period $330,920 $208,857 $330,920 $208,857
Supplemental cash flow disclosures
Cash paid during the period for income taxes
(net of refunds) $58,664 $36,301 $26,399 $12,139
Details of acquisition:
Fair value of assets $ 8,310 $105,517 $ - $ 973
Liabilities and minority interest - (49,843) - 212
Cash paid 8,310 55,674 - 1,185
Cash acquired - (1,960) - -
Acquisition $ 8,310 $ 53,714 $ - $1,185
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
FORM 10-Q
September 26, 1999
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 financial statements of
American Power Conversion Corporation and its wholly-owned subsidiaries. All
intercompany accounts and transactions are eliminated in consolidation.
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 (i.e., stock options)
outstanding during the period. Under the treasury stock method, 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 Nine months ended Three months ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Basic weighted average
shares outstanding 191,998 190,824 192,272 191,074
Net effect of dilutive potential common
shares outstanding based on the
treasury stock method using the
average market price 3,928 2,470 4,349 2,648
Diluted weighted average
shares outstanding 195,926 193,294 196,621 193,722
Antidilutive potential common shares
excluded from the computation above 725 2,045 260 2,111
Shares data reflect a two-for-one stock split effected May 28, 1999.
</TABLE>
7
<PAGE>
4. Shareholders' Equity
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.
After giving effect to the May 1999 stock split, changes in paid-in capital for
the periods presented represent issuances of common stock resulting from the
exercise of employee stock options.
5. Comprehensive Income
The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
In thousands Nine months ended Three months ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $139,732 $100,116 $62,127 $46,618
Other comprehensive income (loss), net of tax:
Change in foreign currency
translation adjustment (1,192) (189) 510 (189)
Other comprehensive income (loss) (1,192) (189) 510 (189)
Comprehensive income $138,540 $ 99,927 $62,637 $46,429
</TABLE>
6. Operating Segment Information
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.
The Company evaluates the performance of its businesses based on direct
contribution margin. Direct contribution margin includes research and
development ("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.
Summary operating segment information is as follows:
<TABLE>
<CAPTION>
In thousands Nine months ended Three months ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $948,567 $806,898 $355,920 $327,370
Segment direct contribution margin $396,094 $314,095 $156,052 $127,426
Indirect operating expenses 205,851 175,544 71,316 62,113
Other income, net 7,959 9,128 3,388 2,149
Earnings before income taxes and
minority interest $198,202 $147,679 $88,124 $67,462
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Revenues
Net sales were $355.9 million for the third quarter of 1999, an increase of 8.7%
compared to $327.4 million for the same period in 1998. Net sales for the first
nine months of 1999 were $948.6 million compared to $806.9 million in 1998, an
increase of 17.6%. The increases 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). Third quarter
and year-to-date 1999 net sales growth was led by increases in Asia and Europe.
For the quarter and year-to-date periods, the Asia Pacific region grew 42% and
48%, respectively, EMEA (Europe, Middle East and Africa) grew 16% and 35%,
respectively, while the Americas (North and Latin America) grew 1% and 7%,
respectively. International net sales (excluding Canada) comprised 39% and 37%
of total net sales in the third quarters of 1999 and 1998, respectively, and 41%
and 37% of total net sales in the first nine month periods of 1999 and 1998,
respectively.
Cost of Goods Sold
Cost of goods sold was $189.0 million or 53.1% of net sales in the third quarter
of 1999 compared to $183.1 million or 55.9% in the third quarter of 1998. Cost
of goods sold was $520.9 million or 54.9% of net sales in the first nine months
of 1999 compared to $446.4 million or 55.3% in the first nine months of 1998.
Third quarter 1999 gross margin was 46.9% of sales, approximately 280 basis
points higher than the comparable period in 1998. Gross margin for the first
nine month period of 1999 was 45.1% of sales, approximately 40 basis points
higher than the comparable period in 1998. The improvements were driven
primarily by 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. Total inventory reserves
at September 26, 1999 were $14.7 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.
Operating Expenses
Operating expenses include marketing, selling, general and administrative
(SG&A), and R&D expenses.
SG&A expenses were $74.0 million or 20.8% of net sales for the third quarter of
1999 compared to $70.8 million or 21.6% of net sales for the third quarter of
1998. SG&A expenses were $211.5 million or 22.3% of net sales for the first
nine months of 1999 compared to $189.8 million or 23.5% of net sales for the
first nine months of 1998. The increases in total spending over last year were
due primarily to increased advertising and promotional costs, as well as costs
associated with increased staffing and operating expenses of the Company's
marketing and administrative functions. However, the decreases as a percentage
of sales from 1998 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 doubtful accounts at September 26, 1999 was
7.9% of accounts receivable, unchanged from 7.9% at December 31, 1998. The
Company continues to experience strong collection performance. Accounts
receivable balances outstanding over 60 days represented 11.9% of total
receivables at September 26, 1999, up 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, combined with higher balances over 60 days of
certain U.S. distribution accounts.
Write-offs of uncollectible accounts have historically represented less than 1%
of total receivable balances. A majority of international customer balances are
covered by receivables insurance.
9
<PAGE>
R&D expenses were $8.2 million or 2.3% of net sales and $8.0 million or 2.4% of
net sales for the third quarters of 1999 and 1998, respectively, and $26.0
million or 2.7% of net sales and $24.7 million or 3.1% of net sales for the
first nine month periods of 1999 and 1998, respectively, excluding 1998 charges
of $7.6 million for acquired R&D (see "Acquisition" below). The increases in
total R&D spending during 1999 over the comparable periods in 1998 primarily
reflects increased numbers of software and hardware engineers and costs
associated with new product development and engineering support. The decreases
as a percentage of sales from 1998 to 1999 were 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 was
substantially higher during the third quarter of 1999 compared to the third
quarter of 1998 due to higher average cash balances available for investment
during the third quarter of 1999. However, interest income for the first nine
month period of 1999 was lower than the comparable period last year, as the
third quarter 1999 increase was more than offset by the impact of lower average
cash balances available for investment during the first half of 1999, due
largely to cash used late in the second half of 1998 in the acquisition of
Silcon (see "Acquisition" below).
The Company's effective income tax rates were approximately 29.5% and 30.5% for
the quarters and nine month periods ended September 26, 1999 and September 27,
1998, 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 jurisdictions currently having a lower income tax
rate than the present U.S. statutory income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 26, 1999 was $627.5 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 position increased to $330.9 million at September 26, 1999
from $219.9 million at December 31, 1998.
Worldwide inventories were $198.6 million at September 26, 1999 compared to
$228.7 million at December 31, 1998. Inventory levels as a percentage of
quarterly sales were 56% in the third quarter of 1999, down from 74% in the
second quarter of 1999, 88% in the first quarter of 1999, and 72% in the fourth
quarter of 1998.
At September 26, 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 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 26, 1999. In connection with the 1998 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 the
first nine months of 1999. The Company had no significant financial
commitments, other than those required in the normal course of business, at
September 26, 1999.
Capital investment for the first nine months of 1999 consisted primarily of
manufacturing and office equipment, buildings and improvements, and purchased
software applications. The nature and level of capital spending were 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. 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 26,
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.
10
<PAGE>
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 26,
1999 for the Galway facility were approximately $11.4 million and $8.4 million,
respectively. The total cumulative amount of capital grant claims submitted
through September 26, 1999 for the Castlebar facility was $1.1 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 26, 1999 for the
Galway facility were approximately $1.2 million and $1.2 million, respectively.
The total cumulative amount of training grant claims submitted through September
26, 1999 for the Castlebar facility was approximately $1.0 million; no training
grant claims had been received for the Castlebar facility.
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
On September 10, 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.
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.
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 480 kilo volt-
amps ("kVA"), and the Company commenced a tender offer for Silcon shares. In
June 1998, the initial tender offer and purchase of stock from principal
management shareholders was completed enabling the Company to operate Silcon as
a majority-owned subsidiary. During the second half of 1998, the Company
increased its ownership percentage to 89%. 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 $8.3 million during the first
nine months of 1999 were financed from operating cash.
11
<PAGE>
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 certain local currencies. Realized and
unrealized transaction gains or losses are included in the results of operations
and are measured based upon the effect of changes in exchange rates on the
actual or expected amount of functional currency cash flows. Transaction gains
and losses were not material to the results of operations in the third quarters
and first nine month periods of 1999 and 1998.
At September 26, 1999 the Company's significant unhedged foreign currency
accounts receivable, by currency, were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
In thousands Foreign Currency US Dollars
Japanese Yen 1,371,830 $13,178
German Marks 23,168 12,386
European Euros 11,479 11,982
French Francs 75,056 11,952
British Pounds 5,073 8,289
Swiss Francs 9,310 6,062
</TABLE>
The Company also had non-trade receivables of 3.9 million Irish Pounds
(approximately US$5.2 million) and short term debt and liabilities denominated
in various European currencies of US$45.8 million, as well as Yen denominated
liabilities of approximately US$2.8 million.
The Company periodically reviews its foreign exchange exposure and considers
various risk management techniques, including the netting of foreign currency
receipts and disbursements, rate protection agreements with customers/vendors
and derivatives arrangements, including foreign exchange contracts. The Company
presently does not utilize rate protection agreements or derivative
arrangements.
Recently Issued Accounting Standard
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards ("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 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.
12
<PAGE>
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 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'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). 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. 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 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 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. 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 has identified its material third party
relationships and has 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 be devoting a substantial portion of their
information systems spending to resolving year 2000 issues, which may result in
their spending being diverted from applications such as the Company's products,
over the next year.
Development of Contingency Plans
As the Company's year 2000 readiness program nears completion, management
currently believes that its material IT and non-IT systems and equipment will be
compliant by the year 2000 and that the cost to address year 2000 issues will
not be material. Nevertheless, the Company has identified worst case scenarios
13
<PAGE>
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 include but are 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 has developed a separate budget for operating and
capital expenditures relating to year 2000 issues. No IT projects have been
deferred due to year 2000 efforts. Based on its efforts to date, the Company
does not believe that the costs of year 2000 issues will have a material adverse
effect on the Company's business, operating results, or financial condition.
Although the Company is taking measures to address the impact, if any, of year
2000 issues, it cannot predict the outcome or success of its year 2000 readiness
program, or whether the failure of third party systems or equipment to operate
properly in the year 2000 will have a material adverse effect upon the Company's
business, operating results, or financial condition, or require the Company to
incur unanticipated material expenses to remedy any year 2000 issue.
The foregoing discussion regarding the Company's year 2000 readiness program's
implementation, effectiveness, and cost, contains forward-looking statements
which are based on management's expectations, determined utilizing certain
assumptions of future events, including third party compliance and other
factors. However, there can be no guarantee that these expectations will be
realized, and actual results could differ materially from management's
expectations. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area and other similar uncertainties, and the remediation success of the
Company's suppliers, service providers, and strategic partners.
Factors That May Affect Future Performance
Statements contained in this document which are not historical facts may
constitute forward-looking statements as that term is defined under the
provisions of the "safe harbor" section of the Private Securities Litigation
Reform Act of 1995. All forward-looking statements are subject to 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: APC's ability to successfully integrate Silcon's operations; the
timely development and acceptance of new products; ramp up, expansion, and
rationalization of global manufacturing capacity; general worldwide economic
conditions; growth rates in the power protection industry and related
industries, including but not limited to the PC, server, networking, and
enterprise hardware 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; changes in customer order patterns and product demand
related to year 2000 purchasing issues; impact on the Company's business due to
internal systems or systems of suppliers and other third parties adversely
affected by year 2000 problems; the uncertainty of the litigation process
including risk of an unexpected, unfavorable result of current or future
litigation; and the risks described from time to time in the Company's filings
with the Securities and Exchange Commission.
ITEM 3. 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 2 of this Report and is incorporated
herein by reference.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit No. 4.01 - Shareholder Rights Agreement, dated as of September 2,
1999, between the Company and BankBoston, N.A., 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
Exhibit No. 27 - Financial Data Schedule
(B) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the Securities and Exchange
Commission dated September 3, 1999, which reported pursuant to Item 5, the
adoption of the Shareholder Rights Agreement by the Company's Board of
Directors.
15
<PAGE>
FORM 10-Q
September 26, 1999
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 10, 1999
/s/ Donald M. Muir
Donald M. Muir
Chief Financial Officer
(Principal Accounting And Financial Officer)
16
<PAGE>
FORM 10-Q
September 26, 1999
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit Number Description Page No.
Exhibit No. 4.01* Shareholder Rights Agreement, dated as of
September 2, 1999, between the Company and
BankBoston, N.A.
Exhibit No. 27 Financial Data Schedule 18
* Previously filed as an Exhibit (Exhibit 4.01) 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. 1-2432). The number given
in parenthesis indicates the corresponding exhibit in such Form 8-K.
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT SEPTEMBER 26, 1999 AND CONSOLIDATED
CONDENSED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 26, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-26-1999
<EXCHANGE-RATE> 1.00
<CASH> 330,920
<SECURITIES> 0
<RECEIVABLES> 262,147
<ALLOWANCES> 20,716
<INVENTORY> 198,588
<CURRENT-ASSETS> 818,231
<PP&E> 255,065
<DEPRECIATION> 101,811
<TOTAL-ASSETS> 1,022,601
<CURRENT-LIABILITIES> 190,760
<BONDS> 0
0
0
<COMMON> 1,927
<OTHER-SE> 824,832
<TOTAL-LIABILITY-AND-EQUITY> 1,022,601
<SALES> 948,567
<TOTAL-REVENUES> 948,567
<CGS> 520,922
<TOTAL-COSTS> 758,324
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 198,202
<INCOME-TAX> 58,470
<INCOME-CONTINUING> 139,732
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 139,732
<EPS-BASIC> .73
<EPS-DILUTED> .71
</TABLE>
