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 July 2, 2000
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 August 11, 2000 -
194,544,000 shares
1
<PAGE>
FORM 10-Q
July 2, 2000
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information:
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets -
July 2, 2000 (Unaudited) and December 31, 1999 3 - 4
Consolidated Condensed Statements of Income -
Three Months and Six Months Ended
July 2, 2000 and June 27, 1999 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows -
Three Months and Six Months Ended
July 2, 2000 and June 27, 1999 (Unaudited) 6
Notes to Consolidated Condensed Financial Statements
(Unaudited) 7 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Part II - Other Information:
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index 17
2
<PAGE>
FORM 10-Q
July 2, 2000
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>
July 2, December 31,
2000 1999
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $307,665 $456,325
Short term investments 75,000 -
Accounts receivable,
less allowance for doubtful accounts of
$17,717 in 2000 and $19,543 in 1999 250,776 216,810
Inventories:
Raw materials 98,825 60,708
Work-in-process and finished goods 125,164 115,769
Total inventories 223,989 176,477
Prepaid expenses and other current assets 21,011 18,283
Deferred income taxes 28,845 31,962
Total current assets 907,286 899,857
Property, plant, and equipment:
Land, buildings and improvements 65,380 58,220
Machinery and equipment 152,975 130,031
Office equipment, furniture, and fixtures 62,341 55,284
Purchased software 21,020 17,114
301,716 260,649
Less accumulated depreciation and amortization 116,582 103,422
Net property, plant, and equipment 185,134 157,227
Goodwill and other intangibles 112,281 48,239
Other assets 22,021 1,615
Total assets $1,226,722 $1,106,938
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
FORM 10-Q
July 2, 2000
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
July 2, December 31,
2000 1999
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $110,304 $ 78,641
Accrued expenses 39,775 41,966
Accrued compensation 21,718 25,743
Accrued sales and marketing programs 17,227 16,853
Income taxes payable 20,191 30,616
Total current liabilities 209,215 193,819
Deferred tax liability 13,260 11,029
Total liabilities 222,475 204,848
Shareholders' equity:
Common stock, $.01 par value;
authorized 450,000 shares; issued 194,625
shares in 2000 and 193,339 shares in 1999 1,946 1,933
Additional paid-in capital 103,682 82,989
Retained earnings 902,744 820,525
Treasury stock, 250 shares, at cost (1,551) (1,551)
Accumulated other comprehensive income (loss) (2,574) (1,806)
Total shareholders' equity 1,004,247 902,090
Total liabilities and shareholders' equity $1,226,722 $1,106,938
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
FORM 10-Q
July 2, 2000
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except earnings per share)
<CAPTION>
Six months ended Three months ended
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $675,158 $592,647 $365,745 $315,462
Cost of goods sold 364,788 331,939 201,344 176,909
Gross profit 310,370 260,708 164,401 138,553
Operating expenses:
Marketing, selling, general and
administrative 156,045 137,426 79,558 71,102
Special charges 30,400 - 30,400 -
Research and development 20,928 17,775 11,623 8,823
Total operating expenses 207,373 155,201 121,581 79,925
Operating income 102,997 105,507 42,820 58,628
Other income, net 12,804 4,571 6,634 2,100
Earnings before income taxes 115,801 110,078 49,454 60,728
Income taxes 33,582 32,473 14,341 17,914
Net income $82,219 $77,605 $35,113 $42,814
Basic earnings per share $ .42 $ .40 $ .18 $ .22
Basic weighted average shares 193,769 191,861 194,089 191,962
outstanding
Diluted earnings per share $ .41 $ .40 $ .17 $ .22
Diluted weighted average shares 200,336 195,850 201,040 195,177
outstanding
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
FORM 10-Q
July 2, 2000
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Six months ended Three months ended
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
(Unaudited)
Cash flows from operating activities
Net income $82,219 $77,605 $35,113 $42,814
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation 14,844 10,374 7,710 5,430
Deferred income taxes 5,348 (4,275) 1,313 (5,200)
Special charges 30,400 - 30,400 -
Other non-cash items, net 2,714 3,434 1,868 259
Changes in operating assets and
liabilities excluding effects of
acquisitions:
Accounts receivable (21,023) (18,429) (29,936) 952
Inventories (31,435) (3,214) (14,809) 11,626
Prepaid expenses and other
current assets (4,693) (5,662) (2,664) (5,127)
Other assets (47,772) 397 (47,186) 68
Accounts payable 18,821 7,406 5,986 7,147
Accrued expenses (10,532) 12,707 (1,963) 2,330
Income taxes payable (10,608) 1,866 (3,546) 775
Net cash provided by (used in)
operating activities 28,283 82,209 (17,714) 61,074
Cash flows from investing activities
Purchases of held-to-maturity debt
securities (75,000) - - -
Capital expenditures, net of capital
grants (39,727) (13,904) (28,409) (9,580)
Acquisitions (78,922) (8,310) (78,922) (145)
Net cash used in investing activities (193,649) (22,214) (107,331) (9,725)
Cash flows from financing activities
Proceeds from issuances of common stock 16,706 3,448 9,403 2,281
Repayment of short term debt - (11,532) - (7,797)
Net cash provided by (used in) financing
activities 16,706 (8,084) 9,403 (5,516)
Net change in cash and cash equivalents (148,660) 51,911 (115,642) 45,833
Cash and cash equivalents at beginning
of period 456,325 219,908 423,307 225,986
Cash and cash equivalents at end of
period $307,665 $271,819 $307,665 $271,819
Supplemental cash flow disclosures
Cash paid during the period for income
taxes (net of refunds) $38,288 $32,265 $16,433 $20,942
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
FORM 10-Q
July 2, 2000
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Management Representation
The accompanying unaudited consolidated condensed financial statements should be
read in conjunction with the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999. In
the opinion of management, the accompanying unaudited consolidated condensed
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the consolidated financial
position and the consolidated results of operations and cash flows 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
significant intercompany accounts and transactions are eliminated in
consolidation.
3. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed by dividing net income by the weighted average number of
common shares and dilutive potential common shares outstanding during the
period. Under the treasury stock method, the unexercised options are assumed to
be exercised at the beginning of the period or at issuance, if later. The
assumed proceeds are then used to purchase common shares at the average market
price during the period. Potential common shares for which inclusion would have
the effect of increasing diluted earnings per share (i.e., antidilutive) are
excluded from the computation.
<TABLE>
<CAPTION>
In thousands Six months ended Three months ended
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding 193,769 191,861 194,089 191,962
Net effect of dilutive potential common
shares outstanding based on the treasury stock
method using the average market price 6,567 3,989 6,951 3,215
Diluted weighted average shares outstanding 200,336 195,850 201,040 195,177
Antidilutive potential common shares
excluded from the computation above - 310 - 315
</TABLE>
7
<PAGE>
4. Shareholders' Equity
Changes in common stock and paid-in capital for the periods presented represent
the issuances of common stock resulting from the exercise of employee stock
options and the second quarter 2000 acquisition of ABL Electronics Corporation
(see "Acquisitions" in Management's Discussion and Analysis below).
5. Comprehensive Income
The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
In thousands Six months ended Three months ended
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net income $82,219 $77,605 $35,113 $42,814
Other comprehensive income (loss),
net of tax:
Change in foreign currency translation
adjustment (768) (1,702) 22 (1,776)
Other comprehensive income (loss) (768) (1,702) 22 (1,776)
Comprehensive income $81,451 $75,903 $35,135 $41,038
</TABLE>
6. Short Term Investments
At July 2, 2000, short term investments consisted of U.S. Government debt
securities with original maturities greater than three months and less than or
equal to one year. Such securities were classified as held-to-maturity and
carried at amortized cost. Management determines the appropriate classification
of debt securities at the time of purchase and re-evaluates such designation as
of each balance sheet date. Debt securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold such securities to
maturity.
7. Acquisitions
Advance Power
Early in the second quarter of 2000, the Company acquired Advance International
Group subsidiary, Advance Power, a U.K.-based manufacturer of DC-based power
solutions used in telecommunications and Internet applications, for $75 million
in cash plus expenses. The Company's cash outlays associated with the
acquisition were financed from operating cash. At the end of the second quarter
of 2000, the excess of the purchase price over the estimated fair value of the
tangible net assets acquired has been included in goodwill and is being
amortized on a straight-line basis over 15 years. The acquisition has been
accounted for as a purchase and, accordingly, Advance Power's results of
operations are included in the Company's consolidated financial statements from
the date of acquisition.
ABL Electronics Corporation
Early in the second quarter of 2000, the Company acquired privately-held ABL
Electronics Corporation ("ABL"), a North American provider of computer and
network cables, switches, and other connectivity products, for $8 million paid
in a combination of cash and stock, plus expenses. The Company's cash outlays
associated with the acquisition were financed from operating cash. At the end
of the second quarter of 2000, the excess of the purchase price over the
estimated fair value of the tangible net assets acquired has been included in
goodwill and is being amortized on a straight-line basis over 15 years. The
acquisition has been accounted for as a purchase and, accordingly, ABL's results
of operations are included in the Company's consolidated financial statements
from the date of acquisition.
8
<PAGE>
8. Special Charges
During the second quarter of 2000, the Company agreed to license worldwide
patent rights relating to uninterruptible power supply technology for a lump-sum
cash payment of $48.0 million, as more fully described under Part II, Item 1 -
Legal Proceedings. The license fee was paid from operating cash during the
second quarter of 2000. The Company evaluated the portion of the license fee
that represented payment for prior use of the subject technology and the portion
that represented payment for future use. Considering each of the Company's
markets and the historical and projected revenue realized in markets utilizing
the licensed technology, the Company estimated the present value of royalty
payments, basing this calculation on an appropriate royalty rate and the
technology's contribution to the overall value of affected products. Separate
present values were calculated for both historic and projected product sales;
the historic value was expensed and the projected value was capitalized.
Accordingly, a write-off of the fully paid-up portion of the patent licenses was
recognized in the Company's statement of income for the second quarter of 2000
as a special charge to pre-tax earnings of $30.4 million, including direct
expenses of $1.9 million. The remaining balance of $19.5 million has been
classified on the consolidated balance sheet as a long term asset and is being
amortized on a straight-line basis over 9 years, the estimated remaining
economic life of the patent license.
9. 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 Six months ended Three months ended
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net sales $675,158 $592,647 $365,745 $315,462
Segment direct contribution margin $284,334 $240,042 $150,274 $130,385
Indirect operating expenses 150,937 134,535 77,054 71,757
Special charges 30,400 - 30,400 -
Other income, net 12,804 4,571 6,634 2,100
Earnings before income taxes $115,801 $110,078 $49,454 $60,728
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Revenues
Net sales were $365.7 million for the second quarter of 2000, an increase of
15.9% compared to $315.5 million for the same period in 1999. Net sales for the
first half of 2000 were $675.2 million compared to $592.6 million in 1999, an
increase of 13.9%. The growth in net sales in the second quarter and first half
of 2000 from the comparable periods in 1999 was attributable to growth in the
Company's high-end and enterprise businesses, including $12.9 million in second
quarter 2000 sales attributable to Advance Power and ABL Electronics (see
"Acquisitions" below). Second quarter and first half 2000 net sales growth was
led by increases in Asia and the Americas. Net sales in the Asia Pacific region
grew 41% and 42%, respectively, while net sales in the Americas (North and Latin
America) grew 21% and 16%, respectively. Net sales in EMEA (Europe, Middle East
and Africa) decreased 5% and 2%, respectively, reflecting continued IT industry
softness as well as the impact of currency movements. On a constant currency
basis, EMEA net sales for the second quarter of 2000 grew two percent versus the
second quarter of 1999 while EMEA net sales for the first half of 2000 grew four
percent versus the first half of 1999.
Cost of Goods Sold
Cost of goods sold was $201.3 million or 55.1% of net sales in the second
quarter of 2000 compared to $176.9 million or 56.1% of net sales in the second
quarter of 1999. Cost of goods sold was $364.8 million or 54.0% of net sales in
the first half of 2000 compared to $331.9 million or 56.0% in the first half of
1999. Second quarter 2000 gross margin was 44.9% of net sales, approximately
100 basis points higher than the comparable period in 1999. First half 2000
gross margin was 46.0% of net sales, approximately 200 basis points higher than
the comparable period in 1999. The improvements were driven primarily by
manufacturing cost reductions, particularly material cost reductions, and the
ongoing transition of production from the U.S. and Ireland to the Philippines,
partially offset by the full quarter impact of price reductions on selected
Back-UPSr products made late in the first quarter of 2000. Total inventory
reserves at July 2, 2000 were $19.8 million compared to $17.1 million at
December 31, 1999. 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), special charges, and R&D expenses.
SG&A expenses were $79.6 million or 21.8% of net sales for the second quarter of
2000 compared to $71.1 million or 22.5% of net sales for the second quarter of
1999. SG&A expenses were $156.0 million or 23.1% of net sales for the first
half of 2000 compared to $137.4 million or 23.2% of net sales for the first half
of 1999. 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, while the slight decrease as a percentage of net sales was
attributable to certain fixed SG&A expenses spread over a higher revenue base.
The allowance for doubtful accounts at July 2, 2000 was 6.6% of accounts
receivable, compared to 8.3% at December 31, 1999. The Company continues to
experience strong collection performance. Accounts receivable balances
outstanding over 60 days represented 11.8% of total receivables at July 2, 2000,
up from 9.0% at December 31, 1999. This increase reflects a growing portion of
the Company's business originating in areas where longer payment terms are
customary, including a growing contribution from international markets as well
as large system enterprise sales primarily associated with Silcon products.
Write-offs of uncollectible accounts have historically represented less than 1%
of total net sales. A majority of international customer balances are covered
by receivables insurance.
During the second quarter of 2000, the Company agreed to license worldwide
patent rights relating to uninterruptible power supply technology for a lump-sum
10
<PAGE>
cash payment of $48.0 million, as more fully described under Part II, Item 1 -
Legal Proceedings. The license fee was paid from operating cash during the
second quarter of 2000. The Company evaluated the portion of the license fee
that represented payment for prior use of the subject technology and the portion
that represented payment for future use. Considering each of the Company's
markets and the historical and projected revenue realized in markets utilizing
the licensed technology, the Company estimated the present value of royalty
payments, basing this calculation on an appropriate royalty rate and the
technology's contribution to the overall value of affected products. Separate
present values were calculated for both historic and projected product sales;
the historic value was expensed and the projected value was capitalized.
Accordingly, a write-off of the fully paid-up portion of the patent licenses was
recognized in the Company's statement of income for the second quarter of 2000
as a special charge to pre-tax earnings of $30.4 million, including direct
expenses of $1.9 million. The remaining balance of $19.5 million has been
classified on the consolidated balance sheet as a long term asset and is being
amortized on a straight-line basis over 9 years, the estimated remaining
economic life of the patent license.
R&D expenses were $11.6 million or 3.2% of net sales and $8.8 million or 2.8% of
net sales for the second quarters of 2000 and 1999, respectively, and $20.9
million or 3.1% of net sales and $17.8 million or 3.0% of net sales for the
first six month periods of 2000 and 1999, 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 is comprised principally of interest income, which increased from
1999 to 2000 due to higher average cash balances available for investment during
2000.
The Company's effective income tax rates were approximately 29.0% and 29.5% for
the quarters and six month periods ended July 2, 2000 and June 27, 1999,
respectively. The decrease in the effective tax rate 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 July 2, 2000 was $698.1 million compared to $706.0 million at
December 31, 1999. The Company has been able to substantially maintain its
working capital position as the result of continued strong operating results and
despite internally financing the acquisitions and capital investment required to
expand its operations. The Company's cash and short term investments position
decreased to $382.7 million at July 2, 2000 from $456.3 million at December 31,
1999, due primarily to second quarter 2000 outlays from operating cash related
to acquisitions (see "Acquisitions" below) and the licensing of worldwide patent
rights relating to uninterruptible power supply technology (see "Part II, Item 1
- Legal Proceedings).
Worldwide inventories were $224.0 million at July 2, 2000 compared to $176.5
million at December 31, 1999. The first half 2000 inventory build was primarily
related to anticipation of increased demand patterns during the second half of
the year which result from typical seasonal factors, combined with $16.9 million
in inventory attributable to Advance Power and ABL Electronics (see
"Acquisitions" below). Inventory levels as a percentage of quarterly sales were
61% in the second quarter of 2000, up from 45% in the fourth quarter of 1999.
At July 2, 2000, 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%; an additional $15 million and $7
million were available under unsecured line of credit agreements with a second
and third bank at similar interest rates. No borrowings were outstanding under
these facilities at July 2, 2000. The Company had no significant financial
commitments, other than those required in the normal course of business, at July
2, 2000.
Capital investment for the first half of 2000 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 July 2, 2000.
12
<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.
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.
Acquisitions
Advance Power
Early in the second quarter of 2000, the Company acquired Advance International
Group subsidiary, Advance Power, a U.K.-based manufacturer of DC-based power
solutions used in telecommunications and Internet applications, for $75 million
in cash plus expenses. The Company's cash outlays associated with the
acquisition were financed from operating cash. At the end of the second quarter
of 2000, the excess of the purchase price over the estimated fair value of the
tangible net assets acquired has been included in goodwill and is being
amortized on a straight-line basis over 15 years. The acquisition has been
accounted for as a purchase and, accordingly, Advance Power's results of
operations are included in the Company's consolidated financial statements from
the date of acquisition.
ABL Electronics Corporation
Early in the second quarter of 2000, the Company acquired privately-held ABL
Electronics Corporation ("ABL"), a North American provider of computer and
network cables, switches, and other connectivity products, for $8 million paid
in a combination of cash and stock, plus expenses. The Company's cash outlays
associated with the acquisition were financed from operating cash. At the end
of the second quarter of 2000, the excess of the purchase price over the
estimated fair value of the tangible net assets acquired has been included in
goodwill and is being amortized on a straight-line basis over 15 years. The
acquisition has been accounted for as a purchase and, accordingly, ABL's results
of operations are included in the Company's consolidated financial statements
from the date of acquisition.
Foreign Currency Activity
The Company invoices its customers in various currencies. Realized and
unrealized transaction gains or losses are included in the results of operations
and are measured based upon the effect of changes in exchange rates on the
actual or expected amount of functional currency cash flows. Transaction gains
and losses were not material to the results of operations in the second quarters
and first six month periods of 2000 and 1999.
At July 2, 2000, the Company's unhedged foreign currency accounts receivable, by
currency, were as follows:
<TABLE>
<CAPTION>
In thousands Foreign Currency US Dollars
<S> <C> <C>
European Euros 14,065 $13,256
Japanese Yen 1,240,100 11,750
British Pounds 7,571 11,436
Swiss Francs 17,546 10,634
German Marks 20,498 9,855
French Francs 38,120 5,477
</TABLE>
The Company also had non-trade receivables of 3.3 million Irish Pounds
(approximately US$4.0 million) and liabilities denominated in various European
currencies of US$46.6 million, as well as Yen denominated liabilities of
approximately US$5.3 million.
12
<PAGE>
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 Standards
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, which provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with the
Commission. This SAB is effective beginning in the fourth quarter of 2000, as
provided for in SAB No. 101B. Compliance with this SAB is not expected to have
a material impact on the Company's consolidated financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 138, 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.
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 ABL and Advance Power'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,
telecommunications, 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; the uncertainty of the litigation process
including risk of an unexpected, unfavorable result of current or future
litigation including, without limitation, the pending Anthony F. Coppola
litigation, as more fully described under Part II, Item 1 - Legal Proceedings;
financial impact during any period of the Company's purchase of the license to
certain patent rights under a worldwide patent license from General Signal Power
Systems; 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.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about August 20, 1999, General Signal Power Systems, Inc, former parent
company of Best Power ("General Signal"), filed suit against the Company in the
United States District Court for the Western District of Wisconsin alleging
patent infringement and false advertising. General Signal sought unspecified
damages, costs, fees, and injunctive relief. During March and April 2000, the
court dismissed four of the five patent infringement claims. On or about May
12, 2000, General Signal voluntarily dismissed with prejudice the false
advertising claims. On May 17, 2000, the parties agreed to the voluntary
dismissal of the remaining claim in the lawsuit with prejudice. In connection
with the resolution of this dispute, the Company agreed to license from General
Signal worldwide patent rights relating to uninterruptible power supply
technology for a lump-sum cash payment of $48 million. The license fee was paid
from operating cash during the second quarter of 2000.
On or about January 27, 1999, the Company was served with a lawsuit filed by an
individual in the United States District Court for the Central District of
California alleging patent infringement. The plaintiff, Anthony F. Coppola,
claims sole ownership of the patent referenced in the lawsuit. Coppola seeks
unspecified damages, costs, fees, and injunctive relief. On or about April 14,
1999, the Company removed the case from the United States District Court for the
Central District of California to the United States District Court for the
District of Massachusetts. The Company intends to vigorously defend against the
suit and believes the ultimate disposition of this matter will not have a
material adverse effect on the Company's consolidated financial position or
results of operations or liquidity. No provision for any liability that may
result from this action has been recognized in the Company's consolidated
financial statements.
The Company is also involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 28, 2000, the Company acquired all of the outstanding stock of ABL
Electronics Corporation from the stockholders thereof. In partial consideration
thereof, the Company agreed to issue to the stockholders of ABL Electronics an
aggregate of 113,273 shares of common stock of the Company valued at $35.313 per
share in a private placement transaction, of which, on April 28, 2000, the
Company issued 84,955 shares, and held back, without issuance, 28,318 shares of
common stock of the Company to cover any reimbursable claims arising under the
applicable stock purchase agreement.
Such selling stockholders represented to the Company that they were acquiring
the shares of the Company's common stock as principal for their own respective
accounts for investment and would refrain from transferring or otherwise
disposing of the shares in contravention of the Securities Act of 1933 or any
other applicable securities legislation. Based on the foregoing and the fact
that the Company had reason to believe that such stockholders were familiar with
and had access to information concerning the operations and financial condition
of the Company, the Company issued the common stock on reliance upon the
exemption from registration under Section 4(2) of the Securities Act of 1933 as
a transaction not involving a public offering. There were no underwriters
involved in such private placement transaction.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on May 11, 2000 at which the
shareholders of the Company approved the following:
(i) by a vote of 168,992,865 shares in favor, 1,951,643 opposed, 1,635,704
abstaining, and 8,770 broker non-votes, the number of directors was
fixed at five.
(ii) the following persons (with vote results) were elected to serve another
term as Directors of the Company:
For Withheld
Rodger B. Dowdell, Jr. 165,512,358 7,076,624
James D. Gerson 165,474,303 7,114,679
Emanuel E. Landsman 165,476,563 7,112,419
Ervin F. Lyon 163,910,667 8,678,315
Neil E. Rasmussen 165,503,072 7,085,910
In addition, by a vote of 39,328,134 shares in favor, 91,329,961 opposed,
14,404,482 abstaining, and 27,526,405 broker non-votes, a shareholder proposal
regarding the composition of the Company's Board of Directors, was not approved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit No. 3.1 Articles of Organization of the Company, as amended,
previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994 and incorporated
herein by reference (File No. 1-12432)
Exhibit No. 3.2 By-Laws of the Company, as amended and restated, previously
filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998 and incorporated herein by
reference (File No. 1-12432)
Exhibit No. 4 Stock Purchase Agreement dated as of April 28, 2000, by and among
ABL Acquisition Corporation, Randall R. Amon, Daniel Bryan, William C.
Litsinger III, Jack L. Ottenheimer and Kevin W. Campion, previously
filed as an exhibit to the Company's Registration Statement on Form S-
3 and incorporated herein by reference (File No. 333-42348)
Exhibit No. 27 Financial Data Schedule
(B) Reports on Form 8-K
No reports on Form 8-K were filed by American Power Conversion Corporation
during the quarter ended July 2, 2000.
15
<PAGE>
FORM 10-Q
July 2, 2000
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: August 16, 2000
/s/ Donald M. Muir
Donald M. Muir
Chief Financial Officer
(Principal Accounting and Financial Officer)
16
<PAGE>
FORM 10-Q
July 2, 2000
<TABLE>
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
<CAPTION>
Exhibit Number Description Page No
<S> <C> <C>
Exhibit Number 3.1 Articles of Organization of the Company, as amended, previously
filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 and incorporated
herein by reference (File No. 1-12432)
Exhibit Number 3.2 By-Laws of the Company, as amended and restated, previously
filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 and incorporated
herein by reference (File No. 1-12432)
Exhibit No. 4 Stock Purchase Agreement dated as of April 28, 2000, by and
among ABL Acquisition Corporation, Randall R. Amon, Daniel
Bryan, William C. Litsinger III, Jack L. Ottenheimer and Kevin
W. Campion, previously filed as an exhibit to the Company's
Registration Statement on Form S-3 and incorporated herein by
reference (File No. 333-42348)
Exhibit No. 27 Financial Data Schedule 18
</TABLE>
