<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 March 28, 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 May 6, 1999 -
95,957,000 shares
1
<PAGE>
FORM 10-Q
March 28, 1999
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information:
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets -
March 28, 1999 (Unaudited) and December 31, 1998 3 - 4
Consolidated Condensed Statements of Income -
Three Months Ended
March 28, 1999 and March 29, 1998 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows -
Three Months Ended
March 28, 1999 and March 29, 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 8 - 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
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
March 28, 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>
March 28, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $225,986 $219,908
Accounts receivable,
less allowance for doubtful accounts of
$17,544 in 1999 and $15,471 in 1998 197,423 180,356
Inventories:
Raw materials 105,167 87,975
Work-in-process and finished goods 138,355 140,707
Total inventories 243,522 228,682
Prepaid expenses and other current assets 18,336 17,801
Deferred income taxes 25,776 28,498
Total current assets 711,043 675,245
Property, plant, and equipment:
Land, buildings and improvements 52,384 51,735
Machinery and equipment 125,663 125,274
Office equipment, furniture, and fixtures 47,745 44,955
Purchased software 12,001 11,505
237,793 233,469
Less accumulated depreciation and amortization 90,149 85,205
Net property, plant, and equipment 147,644 148,264
Goodwill and other intangibles 51,490 45,837
Other assets 2,308 2,637
Total assets $912,485 $871,983
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
FORM 10-Q
March 28, 1999
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
March 28, December 31,
1999 1999
(Unaudited)
<S> <C> <C>
Current liabilities:
Short term debt $ 8,805 $12,540
Accounts payable 75,449 75,190
Accrued expenses 37,257 28,560
Accrued compensation 23,722 22,130
Accrued sales and marketing programs 16,488 17,824
Accrued retirement contributions 3,893 2,469
Income taxes payable 23,844 22,753
Total current liabilities 189,458 181,466
Deferred tax liability 5,703 7,500
Total liabilities 195,161 188,966
Minority interest - 1,725
Shareholders' equity:
Common stock, $.01 par value;
authorized 200,000 shares; issued 96,040
shares in 1999 and 95,973 shares in 1998 960 960
Additional paid-in capital 68,247 67,080
Retained earnings 649,092 614,301
Treasury stock, 125 shares, at cost (1,551) (1,551)
Accumulated other comprehensive income 576 502
Total shareholders' equity 717,324 681,292
Total liabilities and shareholders' equity $912,485 $871,983
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
FORM 10-Q
March 28, 1999
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands except earnings per share)
<CAPTION>
Three months ended
March 28, March 29,
1999 1998
(Unaudited)
<S> <C> <C>
Net sales $277,185 $218,867
Cost of goods sold 155,030 120,855
Gross profit 122,155 98,012
Operating expenses:
Marketing, selling, general and administrative 66,324 55,367
Research and development 8,952 7,724
Total operating expenses 75,276 63,091
Operating income 46,879 34,921
Other income, net 2,471 3,534
Earnings before income taxes 49,350 38,455
Income taxes 14,559 11,729
Net income $34,791 $26,726
Basic earnings per share $ .36 $ .28
Basic weighted average shares outstanding 95,880 95,304
Diluted earnings per share $ .36 $ .28
Diluted weighted average shares outstanding 97,788 96,568
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
FORM 10-Q
March 28, 1999
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Three months ended
March 28, March 29,
1999 1998
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income $34,791 $26,726
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,805 6,396
Provision for doubtful accounts 2,314 1,248
Deferred income taxes 925 (4,891)
Changes in operating assets and liabilities:
Accounts receivable (19,381) (20,403)
Inventories (14,840) (26,723)
Prepaid expenses and other current assets (535) (2,066)
Other assets 329 31
Accounts payable 259 29,673
Accrued expenses 10,377 160
Income taxes payable 1,091 16,571
Net cash provided by operating activities 21,135 26,722
Cash flows from investing activities
Capital expenditures, net of capital grants (4,324) (9,716)
Acquisition of minority interest (8,165) -
Net cash used in investing activities (12,489) (9,716)
Cash flows from financing activities
Repayment of short term debt (3,735) -
Proceeds from issuances of common stock 1,167 746
Net cash (used in) provided by financing activities (2,568) 746
Net change in cash and cash equivalents 6,078 17,752
Cash and cash equivalents at beginning of period 219,908 270,134
Cash and cash equivalents at end of period $225,986 $287,886
Supplemental cash flow disclosures
Cash paid for income taxes (net of refunds) $11,323 $ -
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
FORM 10-Q
March 28, 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 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.
<TABLE>
<CAPTION>
In thousands Three months ended
March 28, March 29,
1999 1998
<S> <C> <C>
Basic weighted average shares outstanding 95,880 95,304
Net effect of dilutive potential common shares
outstanding based on the treasury stock
method using the average market price 1,908 1,264
Diluted weighted average shares outstanding 97,788 96,568
</TABLE>
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 March 28, 1999
and March 29, 1998 were approximately 163,000 and 157,000, 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:
In thousands Three months ended
March 28, March 29,
1999 1998
Net income $34,791 $26,726
Other comprehensive income, net of tax:
Change in foreign currency translation adjustment 74 -
Other comprehensive income 74 -
Comprehensive income $34,865 $26,726
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:
In thousands Three months ended
March 28, March 29,
1999 1998
Net sales $277,185 $218,867
Segment direct contribution margin $109,657 $84,747
Indirect operating expenses 62,778 49,826
Other income, net 2,471 3,534
Earnings before incomes taxes $49,350 $38,455
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Revenues
Net sales were $277.2 million for the first quarter of 1999, an increase of
26.6% compared to $218.9 million for the same period in 1998. The increase was
attributable to continued strong demand for the Company's uninterruptible power
supply (UPS) and surge protection products, combined with $20.4 million in first
8
<PAGE>
quarter 1999 sales attributable to Silcon A/S ("Silcon") (see "Acquisition"
below). First quarter net sales growth was strong worldwide with the Americas
(North and Latin America) growing 14%, EMEA (Europe, Middle East and Africa)
growing 46%, and the Asia Pacific region growing 57%. International net sales
(excluding Canada) comprised 42% and 35% of total net sales in the first
quarters of 1999 and 1998, respectively.
Cost of Goods Sold
Cost of goods sold was $155.0 million or 55.9% of net sales in the first quarter
of 1999 compared to $120.9 million or 55.2% in the first quarter of 1998. First
quarter 1999 gross margin was 44.1% of sales, approximately 70 basis points
lower than the comparable period in 1998. Substantially all of the gross margin
decrease was related to product mix as the Company's high-power UPS business now
accounts for a larger percentage of revenue. Total inventory reserves at March
28, 1999 were $14.4 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 research and development (R&D) expenses.
SG&A expenses were $66.3 million or 23.9 % of net sales for the first quarter of
1999 compared to $55.4 million or 25.3 % of net sales for the first quarter of
1998. The increase in total spending over last year was due primarily to costs
associated with increased staffing and operating expenses of selling,
administrative, and marketing functions, as well as increased advertising and
promotional costs. However, the decrease as a percentage of sales from first
quarter 1998 to first quarter 1999 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 March 28,
1999 was 8.2% of accounts receivable, compared to 7.9% at December 31, 1998.
The Company continues to experience strong collection performance. Accounts
receivable balances outstanding over 60 days represented 6.6% of total
receivables at March 28, 1999, down from 8.6% at December 31, 1998. 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.
R&D expenses were $9.0 million or 3.2% of net sales and $7.7 million or 3.5% of
net sales for the first quarters of 1999 and 1998, respectively. The increase
in total R&D spending primarily reflects increased numbers of software and
hardware engineers and costs associated with new product development and
engineering support.
Other Income, Net and Income Taxes
Other income during the first quarter of 1999 was comprised principally of
interest income, which decreased from the comparable period in 1998 due to lower
average cash balances available for investment during 1999, due largely to cash
used 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 ended March 28, 1999 and March 29, 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
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 March 28, 1999 was $521.6 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 $226.0 million at March 28, 1999 from
$219.9 million at December 31, 1998.
9
<PAGE>
Worldwide inventories were $243.5 million at March 28, 1999 compared to $228.7
million at December 31, 1998. Inventory levels as a percentage of quarterly
sales were 88% in the first quarter of 1999 up from 72% in the fourth quarter of
1998. The first quarter 1999 inventory build was primarily related to
anticipation of increased demand patterns during the second half of the year
which result from typical seasonal factors.
At March 28, 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 March 28, 1999.
In connection with the 1998 acquisition of a majority interest in 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 $3.7 million during the
first quarter of 1999. The Company had no significant financial commitments,
other than those required in the normal course of business, at March 28, 1999.
Capital investment for the first quarter of 1999 consisted 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. 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 March 28, 1999.
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 March 28, 1999
for the Galway facility were approximately $12.3 million and $8.8 million,
respectively. The total cumulative amount of capital grant claims submitted
through March 28, 1999 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 March 28, 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 March 28,
1999 for the Castlebar facility was approximately $1.0 million; no training
grant claims had been received for the Castlebar facility.
During the fourth quarter of 1998, the Company established a manufacturing
operation in India. The Company is leasing a 42,000 square foot facility in
Bangalore and expects to begin manufacturing selected products at this facility
during the second quarter of 1999. Capital expenditures for the India expansion
are being financed from operating cash.
During the first quarter of 1998, the Company established a manufacturing
operation in China. The Company is leasing a 50,000 square foot facility in
Suzhou and began manufacturing selected products at this facility during the
third quarter of 1998. Capital expenditures for the China expansion were
financed from operating cash.
The Company's manufacturing operation in the Philippines is operating within a
designated economic zone which provides certain economic incentives, primarily
in the form of tax exemptions. In August 1998, the Company purchased a third
manufacturing facility in the Philippines for approximately $750,000, financed
from operating cash.
10
<PAGE>
The Company continues to evaluate international manufacturing expansion,
including additional locations in the Far East and South America.
Management believes that current internal cash flows together with available
cash, available credit facilities or, if needed, the proceeds from the sale of
additional equity, will be sufficient to support anticipated capital spending
and other working capital requirements for the foreseeable future.
Acquisition of Silcon A/S
Early in the second quarter of 1998, the Company entered into a definitive
agreement with the principal management shareholders of Silcon 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 anticipates that it will complete its acquisition of the
remaining outstanding shares of Silcon during the second half of 1999. In
connection with the mandatory redemption, the Copenhagen Stock Exchange approved
the de-listing of Silcon's shares effective March 1, 1999. The Company's cash
outlays associated with the acquisition of $64.4 million during 1998 and $8.2
million during the first quarter of 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 $54 million, consisting of identifiable
intangible assets and goodwill, which is being amortized on a straight-line
basis over 15 years. The acquisition has been accounted for as a purchase and,
accordingly, Silcon's results of operations are included in the Company's
consolidated financial statements from the date of acquisition.
Foreign Currency Activity
The Company invoices its customers in Denmark, France, Germany, Great Britain,
Switzerland, and Japan in their respective local currencies. Realized and
unrealized transaction gains or losses are included in the results of operations
and are measured based upon the effect of changes in exchange rates on the
actual or expected amount of functional currency cash flows. Transaction gains
and losses were not material to the results of operations in the first quarters
of 1999 and 1998.
At March 28, 1999 the Company's unhedged foreign currency accounts receivable,
by currency, were as follows:
In thousands Foreign Currency US Dollars
German Marks 19,596 $10,887
British Pounds 5,393 8,812
French Francs 40,579 6,729
Swiss Francs 7,458 5,108
Danish Kroner 3,322 486
Japanese Yen 1,693,536 14,352
The Company also had non-trade receivables of 4.2 million Irish Pounds
(approximately US$5.8 million), as well as Irish Pound denominated liabilities
of 3.3 million (approximately US$4.7 million). The Company also had short term
debt and liabilities denominated in various European currencies of US$38.5
million, as well as Yen denominated liabilities of approximately US$.9 million.
11
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The Company continually reviews its foreign exchange exposure and considers
various risk management techniques, including the netting of foreign currency
receipts and disbursements, rate protection agreements with customers/vendors
and derivatives arrangements, including foreign exchange contracts. The Company
presently does not utilize rate protection agreements or derivative
arrangements.
Recently Issued Accounting Standard
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The adoption of this Statement is not expected
to have a material impact on the Company's consolidated financial position or
results of operations.
Year 2000 Readiness Disclosure Statement
Many computer systems were not designed to handle any dates beyond the year 1999
and, therefore, many companies will be required to modify their computer
hardware and software prior to the year 2000 in order to remain fully
operational. During 1998, the Company commenced a year 2000 readiness program
to assess the impact of the year 2000 issue on the Company's operations and
address necessary remediation. A year 2000 program director reporting directly
to senior management has been assigned to this project.
Assessment of the Company's Products for Year 2000 Compliance
All of the Company's hardware products and accessories are year 2000 compliant,
meaning that they have been tested to verify that where date fields are
processed, dates are calculated and displayed accurately, and that scheduled
events such as shutdowns, self-tests, and run-time calibrations, and also the
handling of unscheduled events, such as power failures, are unaffected by the
millenium and century change; provided that all other third party products
(e.g., software, firmware, operating systems, and hardware) properly exchange
date data with the Company product and provided also that the Company products
are used in accordance with the product documentation. In addition, the
Company's year 2000 compliant products recognize the year 2000 as a leap year.
The Company has also tested its software products and determined that these
products are substantially year 2000 compliant, and the Company intends to
resolve any remaining year 2000 issues before the beginning of the fourth
quarter of 1999. Periodically updated information about the Company's software
products is available at the Company's Year 2000 Readiness Disclosure Web site
(www.APCC.com). Information on this site is provided to the Company's customers
for the sole purpose of assisting in planning for transition to the year 2000.
Such information is the most currently available concerning the behavior of the
Company's products in the next century and is provided "as is" without warranty
of any kind. In addition, to the extent the Company's hardware and software
products are combined with the hardware and software products of other
companies, there can be no assurance that users of the Company's products will
not experience year 2000 problems as a result of the combination of the
Company's hardware and software products with non-compliant products of other
companies. The Company currently does not anticipate material expenditures to
remedy any year 2000 issues with its products and services.
Assessment of the Company's Information Technology ("IT") and Non-IT Systems for
Year 2000 Compliance
The Company is currently in the process of evaluating its IT systems for
compliance. The Company's Oracle manufacturing and financial information
systems were implemented during 1998. The Company is evaluating the year 2000
compliance of these systems in accordance with Oracle's recommendations. At
December 31, 1998, the Company had completed its initial installation and
testing of software patches available from Oracle. The Company is currently
continuing to install and test additional software patches as they become
available from Oracle. The Company does not consider the cost of the new
hardware and software for the Oracle implementations to be related to year 2000
readiness as these system replacements were already planned to satisfy the
demands of expansion of its worldwide operations and were not accelerated due to
year 2000 issues. The Company is also currently in the process of evaluating
its non-IT systems for compliance. Additionally, the Company utilizes other
12
<PAGE>
third party software and equipment to distribute its products as well as to
operate other aspects of its business. The Company is reviewing such software
and equipment. The Company's review process is expected to be completed before
the beginning of the fourth quarter of 1999. There can be no assurance that
such software and equipment is year 2000 compliant, that non-compliant software
and equipment will be made compliant on a timely basis, or that any such non-
compliant software and equipment would not have a material adverse effect on the
Company's systems and operations.
Evaluation of Third Parties with which the Company has a Material Relationship,
including Key Suppliers, Service Providers, and Strategic Partners
The Company's year 2000 readiness program includes identifying these third
parties and determining, based on receipt of written verification, review of
publicly available financial statement disclosures, and other means, that such
third parties are either in compliance or expect to be in compliance prior to
January 1, 2000. The Company is currently in the process of communicating with
its significant vendors, service providers, and certain strategic partners.
Many enterprises, including the Company's present and potential customers, may
be devoting a substantial portion of their information systems spending to
resolving year 2000 issues, which may result in their spending being diverted
from applications such as the Company's products, over the next two years.
Development of Contingency Plans
The Company is currently not in a position to determine what would be its most
reasonably likely worst case year 2000 scenario or any plan for handling such
scenario. To date, the Company has not completed a formal contingency plan for
non-compliance, however to the extent that further evaluation of its products,
its IT and non-IT systems, or information obtained from the third parties with
which it has a material relationship suggests that there is a significant risk,
contingency plans will be implemented. Such contingency plans may include the
development of alternative sources for the product or service provided by any
non-compliant vendor.
It is the Company's policy to expense as incurred all costs associated with year
2000 readiness. The Company has developed a separate budget for operating and
capital expenditures relating year 2000 issues. No IT projects have been
deferred due to year 2000 efforts. Although the Company is not yet able to
estimate its total incremental cost for year 2000 issues, based on its
preliminary review to date, the Company does not believe that the costs of year
2000 issues will have a material adverse effect on the Company's business,
operating results, or financial condition. Although the Company is taking
measures to address the impact, if any, of year 2000 issues, it cannot predict
the outcome or success of its year 2000 readiness program, or whether the
failure of third party systems or equipment to operate properly in the year 2000
will have a material adverse effect upon the Company's business, operating
results, or financial condition, or require the Company to incur unanticipated
material expenses to remedy any year 2000 issue.
The foregoing discussion regarding the Company's year 2000 readiness program's
implementation, effectiveness, and cost, contains forward-looking statements
which are based on management's expectations, determined utilizing certain
assumptions of future events, including third party compliance and other
factors. However, there can be no guarantee that these expectations will be
realized, and actual results could differ materially from management's
expectations. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area and other similar uncertainties, and the remediation success of the
Company's suppliers, service providers, and strategic partners.
Factors That May Affect Future 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 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, networking and enterprise hardware industries; competitive
factors and pricing pressures; changes in product mix; changes in the
13
<PAGE>
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 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
Reference is made to the disclosure in Part I, Item 3, entitled "Legal
Proceedings," of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998. There have been no subsequent developments in the
matters mentioned therein or in any claims or legal actions arising in the
ordinary course of business which, the Company believes, are materially adverse
to the Company, its consolidated financial position, results of operations or
liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
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 March 28, 1999.
FORM 10-Q
March 28, 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: May 12, 1999
/s/ Donald M. Muir
Donald M. Muir
Chief Financial Officer
(Principal Accounting And Financial Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AT MARCH 28, 1999 AND CONSOLIDATED
CONDENSED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 28, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-28-1999
<EXCHANGE-RATE> 1.00
<CASH> 225,986,000
<SECURITIES> 0
<RECEIVABLES> 214,967,000
<ALLOWANCES> 17,544,000
<INVENTORY> 243,522,000
<CURRENT-ASSETS> 711,043,000
<PP&E> 237,793,000
<DEPRECIATION> 90,149,000
<TOTAL-ASSETS> 912,485,000
<CURRENT-LIABILITIES> 189,458,000
<BONDS> 0
0
0
<COMMON> 960,000
<OTHER-SE> 716,364,000
<TOTAL-LIABILITY-AND-EQUITY> 912,485,000
<SALES> 277,185,000
<TOTAL-REVENUES> 277,185,000
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<TOTAL-COSTS> 230,306,000
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<INCOME-PRETAX> 49,350,000
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<INCOME-CONTINUING> 34,791,000
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<NET-INCOME> 34,791,000
<EPS-PRIMARY> .36
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