-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VEhzRnabdEpxg2QnEvqc69gRmfPU7K8Uq/xb++c6X1yDhjbCE9HvNfMSswqSMGG7 qWGl4I+45Ww3IWgEaG4P2w== 0000835910-01-500023.txt : 20010816 0000835910-01-500023.hdr.sgml : 20010816 ACCESSION NUMBER: 0000835910-01-500023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010701 FILED AS OF DATE: 20010815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN POWER CONVERSION CORPORATION CENTRAL INDEX KEY: 0000835910 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL INDUSTRIAL APPARATUS [3620] IRS NUMBER: 042722013 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12432 FILM NUMBER: 1716290 BUSINESS ADDRESS: STREET 1: 132 FAIRGROUNDS RD CITY: WEST KINGSTON STATE: RI ZIP: 02892 BUSINESS PHONE: 4017895735 MAIL ADDRESS: STREET 1: 132 FAIRGROUNDS ROAD CITY: WEST KINGSTON STATE: RI ZIP: 02892 10-Q 1 tenq201z.txt 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 1, 2001 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 required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] Registrant's Common Stock outstanding, $.01 par value, at August 9, 2001 - 195,355,000 shares 1 FORM 10-Q July 1, 2001 AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES INDEX Page No. Part I - Financial Information: Item 1. Consolidated Condensed Financial Statements: Consolidated Condensed Balance Sheets - July 1, 2001 (Unaudited) and December 31, 2000 3 - 4 Consolidated Condensed Statements of Income - Three Months and Six Months Ended July 1, 2001 and July 2, 2000 (Unaudited) 5 Consolidated Condensed Statements of Cash Flows - Three Months and Six Months Ended July 1, 2001 and July 2, 2000 (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 9 - 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 Part II - Other Information: Item 4. Submission of Matters to a Vote of Security Holders 14 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 Exhibit Index 17 2 FORM 10-Q July 1, 2001 PART I - CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ITEM 1 - FINANCIAL STATEMENTS AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands) ASSETS
July 1, December 31, 2001 2000 (Unaudited) Current assets: Cash and cash equivalents $291,748 $283,025 Short term investments 13,853 25,000 Accounts receivable, less allowance for doubtful accounts of $21,784 in 2001 and $20,085 in 2000 299,555 298,041 Inventories: Raw materials 192,890 120,685 Work-in-process and finished goods 170,698 168,347 Total inventories 363,588 289,032 Prepaid expenses and other current assets 23,429 23,488 Deferred income taxes 42,036 42,024 Total current assets 1,034,209 960,610 Property, plant, and equipment: Land, buildings and improvements 73,206 72,136 Machinery and equipment 193,961 178,558 Office equipment, furniture, and fixtures 74,410 68,765 Purchased software 28,662 25,633 370,239 345,092 Less accumulated depreciation and amortization 150,763 133,335 Net property, plant, and equipment 219,476 211,757 Goodwill and other intangibles, net 118,195 122,716 Other assets 20,944 22,022 Total assets $1,392,824 $1,317,105
See accompanying notes to consolidated condensed financial statements. 3 FORM 10-Q July 1, 2001 AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED) (In thousands, except per share data) LIABILITIES AND SHAREHOLDERS' EQUITY
July 1, December 31, 2001 2000 (Unaudited) Current liabilities: Accounts payable $107,761 $105,031 Accrued expenses 34,223 37,946 Accrued compensation 21,227 21,708 Accrued sales and marketing programs 23,736 15,210 Deferred revenue 14,028 11,847 Income taxes payable 13,651 14,377 Total current liabilities 214,626 206,119 Deferred income taxes 13,903 13,805 Total liabilities 228,529 219,924 Shareholders' equity: Common stock, $.01 par value; authorized 450,000 shares; issued 195,584 shares in 2001 and 195,071 shares in 2000 1,956 1,951 Additional paid-in capital 120,878 115,381 Retained earnings 1,048,169 986,176 Treasury stock, 250 shares, at cost (1,551) (1,551) Accumulated other comprehensive loss (5,157) (4,776) Total shareholders' equity 1,164,295 1,097,181 Total liabilities and shareholders' equity $1,392,824 $1,317,105
See accompanying notes to consolidated condensed financial statements. 4 FORM 10-Q July 1, 2001 AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (In thousands, except earnings per share)
Six months ended Three months ended July 1, July 2, July 1, July 2, 2001 2000 2001 2000 (Unaudited) Net sales $724,232 $679,232 $364,544 $368,036 Cost of goods sold 456,186 376,859 221,487 207,618 Gross profit 268,046 302,373 143,057 160,418 Operating expenses: Marketing, selling, general and administrative 163,443 148,048 84,198 75,575 Special charges - 30,400 - 30,400 Research and development 26,483 20,928 13,351 11,623 Total operating expenses 189,926 199,376 97,549 117,598 Operating income 78,120 102,997 45,508 42,820 Other income, net 8,584 12,804 3,162 6,634 Earnings before income taxes 86,704 115,801 48,670 49,454 Income taxes 24,711 33,582 13,871 14,341 Net income $61,993 $82,219 $34,799 $35,113 Basic earnings per share $ .32 $ .42 $ .18 $ .18 Basic weighted average shares outstanding 195,043 193,769 195,176 194,089 Diluted earnings per share $ .31 $ .41 $ .18 $ .17 Diluted weighted average shares outstanding 196,983 200,336 197,482 201,040
See accompanying notes to consolidated condensed financial statements. 5 FORM 10-Q July 1, 2001 AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands)
Six months ended Three months ended July 1, July 2, July 1, July 2, 2001 2000 2001 2000 (Unaudited) Cash flows from operating activities: Net income $61,993 $82,219 $34,799 $35,113 Adjustments to reconcile net income to net cash provided by (used in operating activities: Depreciation and amortization of property, plant, and equipment 19,342 14,844 9,466 7,710 Deferred income taxes 86 5,348 (546) 1,313 Special charges - 30,400 - 30,400 Other non-cash items, net 6,837 2,714 3,530 1,868 Changes in operating assets and liabilities excluding effects of acquisitions: Accounts receivable (4,298) (21,023) 17,608 (29,936) Inventories (74,556) (31,435) (32,736) (14,809) Prepaid expenses and other current assets 59 (4,693) 3,314 (2,664) Other assets (172) (47,772) 83 (47,186) Accounts payable 2,730 18,821 8,657 5,986 Accrued expenses 6,503 (10,532) 1,051 (1,963) Income taxes payable (726) (10,608) (1,659) (3,546) Net cash provided by (used in) operating activities 17,798 28,283 43,567 (17,714) Cash flows from investing activities: Purchases of held-to-maturity debt securities (13,853) (75,000) (4,853) - Maturities of held-to-maturity debt securities 25,000 - - - Capital expenditures, net of capital grants (28,468) (39,727) (18,067) (28,409) Proceeds from sale of property, plant, and equipment 2,744 - - - Acquisitions - (78,922) - (78,922) Net cash used in investing activities (14,577) (193,649) (22,920) (107,331) Cash flows from financing activities: Proceeds from issuances of common stock 5,502 16,706 4,187 9,403 Net cash provided by financing activities 5,502 16,706 4,187 9,403 Net change in cash and cash equivalents 8,723 (148,660) 24,834 (115,642) Cash and cash equivalents at beginning of period 283,025 456,325 266,914 423,307 Cash and cash equivalents at end of period $291,748 $307,665 $291,748 $307,665 Supplemental cash flow disclosures Cash paid during the period for income taxes (net of refunds) $23,985 $38,288 $15,476 $16,433
See accompanying notes to consolidated condensed financial statements. 6 FORM 10-Q July 1, 2001 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 American Power Conversion Corporation's, APC's, Annual Report on Form 10-K for the year ended December 31, 2000. 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.
In thousands Six months ended Three months ended July 1, July 2, July 1, July 2, 2001 2000 2001 2000 Basic weighted average shares outstanding 195,043 193,769 195,176 194,089 Net effect of dilutive potential common shares outstanding based on the treasury stock method using the average market price 1,940 6,567 2,306 6,951 Diluted weighted average shares outstanding 196,983 200,336 197,482 201,040 Antidilutive potential common shares excluded from the computation above 6,797 - 6,720 -
7 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. 5. Comprehensive Income The components of comprehensive income, net of tax, are as follows:
In thousands Six months ended Three months ended July 1, July 2, July 1, July 2, 2001 2000 2001 2000 Net income $61,993 $82,219 $34,799 $35,113 Other comprehensive income (loss), net of tax: Change in foreign currency translation adjustment (381) (768) (522) 22 Other comprehensive income (loss) (381) (768) (522) 22 Comprehensive income $61,612 $81,451 $34,277 $35,135
6. Short Term Investments At July 1, 2001, short term investments consisted of investment grade corporate bonds with original maturities greater than three months and less than or equal to one year at the date of acquisition. 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 APC has the positive intent and ability to hold such securities to maturity. 7. Operating Segment Information Basis for presentation APC operates primarily within one industry consisting of three reportable operating segments by which it manages its business and from which various offerings are commonly combined to develop a total solution for the customer. These efforts primarily incorporate the design, manufacture, and marketing of power protection equipment and related software and accessories for computer, communications, and related equipment. APC's three segments are: Small Systems, Large Systems, and Other. Each of these segments address global markets. The Small Systems segment develops power solutions for servers and networking equipment commonly used in local area and wide area networks and for personal computers and sensitive electronics; the Large Systems segment produces large system power and availability solutions for data centers, facilities, and communications equipment; and the Other segment provides Web-based informational, product, and selling services as well as replacement batteries for APC's UPS products and notebook computers. APC measures the profitability of its segments based on direct contribution margin. Direct contribution margin includes R&D, marketing, and administrative expenses directly attributable to the segments and excludes certain expenses which are managed outside the reportable segments. 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 tracked or reported by the operating segments, although depreciation expense is allocated to and reported by the operating segments. 8 Summary operating segment information is as follows:
In thousands Six months ended Three months ended July 1, July 2, July 1, July 2, 2001 2000 2001 2000 Segment net sales Small Systems $585,259 $603,244 $298,975 $321,355 Large Systems 119,446 71,914 54,669 44,390 Other 16,797 - 9,284 - Total segment net sales 721,502 675,158 362,928 365,745 Shipping and handling revenues 2,730 4,074 1,616 2,291 Total net sales $724,232 $679,232 $364,544 $368,036 Segment profits Small Systems $243,924 $273,972 $132,471 $145,151 Large Systems (10,459) 10,815 (7,204) 5,123 Other 10,367 - 5,794 - Total segment profits 243,832 284,787 131,061 150,274 Shipping and handling net costs 11,835 7,997 5,550 3,983 Indirect operating expenses 153,877 143,393 80,003 73,071 Special charges - 30,400 - 30,400 Other income, net 8,584 12,804 3,162 6,634 Earnings before income taxes $86,704 $115,801 $48,670 $49,454
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenues Net sales were $364.5 million for the second quarter of 2001, a decrease of 0.9% compared to $368.0 million for the same period in 2000. Net sales for the first half of 2001 were $724.2 million compared to $679.2 million in 2000, an increase of 6.6%. Second quarter 2001 net sales included approximately $9.7 million attributable to Airflow Company which was acquired in the fourth quarter 2000. APC's Small Systems business, which provides power protection, uninterruptible power supply (UPS) and management products for the PC, server, and local area networking markets, represented approximately 82% and 81% of net sales in the second quarter and first half of 2001, respectively. Second quarter 2001 net sales for this segment was down 7% versus the same period last year, while first half 2001 net sales for this segment was down 3% versus the same period last year. The Large Systems segment, consisting primarily of UPS, DC-power systems, and precision cooling products for data centers, facilities, and communication applications, represented approximately 15% and 17% of net sales in the second quarter and first half of 2001, respectively. Second quarter 2001 net sales for this segment grew 23% versus the same period last year, while first half 2001 net sales for this segment grew 66% versus the same period last year. On a geographic basis, the Americas (North and Latin America) represented 61.6% of second quarter 2001 net sales and were down 1.0% year over year. Europe, the Middle East, and Africa (EMEA) represented 24.9% of net sales and grew 5.6% compared to the same period last year. Asia comprised 13.6% of the quarter's net sales and was down 11.0% year over year. On a constant currency basis, EMEA net sales for the second quarter of 2001 grew 9.8% versus the second quarter of 2000, while Asia net sales for the second quarter of 2001 fell 4.5% versus the same period last year. 9 On a geographic basis, the Americas represented 61.9% of first half 2001 net sales and were up 11.3% year over year. EMEA represented 22.9% of net sales and were down 1.7% compared to the same period last year. Asia comprised 15.2% of the first half's net sales and grew 2.0% year over year. On a constant currency basis, EMEA net sales for the first half of 2001 grew 2.6% versus the first half of 2000, while Asia net sales for the first half of 2001 grew 8.7% versus the same period last year. Cost of Goods Sold Cost of goods sold was $221.5 million or 60.8% of net sales in the second quarter of 2001 compared to $207.6 million or 56.4% of net sales in the second quarter of 2000. Cost of goods sold was $456.2 million or 63.0% of net sales in the first half of 2001 compared to $376.9 million or 55.5% in the first half of 2000. Second quarter 2001 gross margin was 39.2% of net sales, approximately 440 basis points lower than the comparable period in 2000. First half 2001 gross margin was 37.0% of net sales, approximately 750 basis points lower than the comparable period in 2000. The year over year gross margin erosion resulted from several factors, including the rapid growth of our lower gross margin Large Systems segment and the impact of foreign currency exchange rate erosion on international sales and margins, particularly in Asia in the first quarter of 2001 and in EMEA in the second quarter of 2001. Additional factors were the cumulative impact of pricing actions occurring subsequent to the first quarter of 2000, combined with the impact of Small Systems material cost savings recognized in the form of favorable purchase price variances taken during last year's first quarter. The year over year gross margin erosion for the Large Systems segment resulted from cost inefficiencies resulting from continued global capacity expansion. Total inventory reserves at July 1, 2001 were $23.7 million compared to $20.5 million at December 31, 2000. APC'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 research and development (R&D) expenses. SG&A expenses were $84.2 million or 23.1% of net sales for the second quarter of 2001 compared to $75.6 million or 20.5% of net sales for the second quarter of 2000. SG&A expenses were $163.4 million or 22.6% of net sales for the first half of 2001 compared to $148.0 million or 21.8% of net sales for the first half of 2000. The increase in total spending over last year was due primarily to costs associated with increased operating expenses of selling and administrative functions, as well as increased promotional and sales incentives costs. The allowance for doubtful accounts at July 1, 2001 was 6.8% of accounts receivable, compared to 6.3% at December 31, 2000. APC continues to experience strong collection performance. Accounts receivable balances outstanding over 60 days represented 21.3% of total receivables at July 1, 2001, up from 13.4% at December 31, 2000. This increase reflects in part a growing portion of APC's business originating in areas where longer payment terms are customary, including a growing contribution from international markets, as well as the product mix shift towards Large Systems business, which typically carries longer sales cycles and collection cycles. In addition, slower payment cycles reflected recent macro economic trends. 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. R&D expenses were $13.4 million or 3.7% of net sales and $11.6 million or 3.2% of net sales for the second quarters of 2001 and 2000, respectively, and $26.5 million or 3.7% of net sales and $20.9 million or 3.1% of net sales for the first half periods of 2001 and 2000, respectively. The increase in total R&D spending primarily reflects increased numbers of software and hardware engineers and other costs associated with new product development and engineering support. Other Income, Net and Income Taxes Other income is comprised principally of interest income combined with a $1.3 million gain in the first quarter of 2001 on the sale of a building in Billerica, Massachusetts. Interest income was lower during the second quarter and first half of 2001 due to lower short term interest rates and lower average cash balances available for investment in 2001 compared to the same periods last year. 10 Our effective income tax rates were approximately 28.5% and 29.0% for the quarters and first half periods ended July 1, 2001 and June 2, 2000, 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 APC'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 1, 2001 was $819.6 million compared to $754.5 million at December 31, 2000. APC has been able to increase its working capital position as the result of continued strong operating results and despite internally financing the working and long term capital investments required to expand its operations. Our cash, cash equivalents, and short term investments position was $305.6 million at July 1, 2001, up from $275.9M at April 1, 2001 and down from $308.0 million at December 31, 2000. Worldwide inventories were $363.6 million at July 1, 2001 compared to $289.0 million at December 31, 2000. Like many other vendors participating in the communications and Internet infrastructure build-out, APC has been impacted by the rapid decline in forecasted demands during the fourth quarter of 2000 and the first half of 2001. Additionally, despite our growth rate in the Large Systems space, APC experienced first half shipment cancellations and rescheduled sales orders from customers in the telecommunications and service provider industry, while our global capacity expansion and rebalancing in our Large Systems business drove the need for additional safety stock. Inventory levels as a percentage of quarterly sales were 99.7% in the second quarter of 2001 and 92.0% in the first quarter of 2001. At July 1, 2001, we had $65.0 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 0.625% and an additional $7.0 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 July 1, 2001. APC had no significant financial commitments, other than those required in the normal course of business, at July 1, 2001. During the first half of 2001, our capital expenditures, net of capital grants, 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 Asia and the U.S., and to support the increased selling and administrative efforts necessitated by APC's growth. First half 2001 capital spending included Large Systems segment global capacity expansion into lower cost locations closer to local end-user customers and markets, as well as development of infrastructure to support emerging growth in the Large Systems space. Substantially all of APC's net capital expenditures were financed from available operating cash. We had no material capital commitments, other than those required in the normal course of business, at July 1, 2001. APC has agreements with the Industrial Development Authority of Ireland under which APC 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 APC meeting certain employment goals and maintaining operations in Ireland until termination of the respective agreements. We believe 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. Foreign Currency Activity We invoice our 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. 11 At July 1, 2001, APC's unhedged foreign currency accounts receivable, by currency, were as follows:
Foreign In thousands Currency US Dollars European Euros 34,687 $29,848 British Pounds 13,784 19,535 Japanese Yen 1,983,627 15,950 Swiss Francs 22,676 12,853 German Marks 11,434 5,031 French Francs 29,428 3,860
APC also had non-trade receivables denominated in Irish Pounds of approximately US$3.2 million, liabilities denominated in various European currencies of approximately US$48.1 million, and liabilities denominated in Japanese Yen of approximately US$7.0 million. We continually review our foreign exchange exposure and consider various risk management techniques, including the netting of foreign currency receipts and disbursements, rate protection agreements with customers/vendors and derivative arrangements, including foreign exchange contracts. We presently do not utilize rate protection agreements or derivative arrangements. Recently Issued Accounting Standards In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for (a) all business combinations initiated after June 30, 2001 and (b) all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies the criteria that intangible assets acquired in a purchase method business combination must meet in order to be recognized and reported apart from goodwill. Pursuant to the requirements of Statement 142, goodwill and intangible assets with indefinite useful lives will no longer be amortized, but instead will be tested for impairment at least annually. Statement 142 also requires that intangible assets with definite useful lives be (a) amortized over their respective estimated useful lives to their estimated residual values and (b) reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. APC is required to adopt the provisions of Statement 141 immediately and Statement 142 effective January 1, 2002. Prior to the adoption of Statement 142, APC's goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized. Also, prior to the adoption of Statement 142, goodwill and intangible assets acquired in purchase business combinations completed by APC after June 30, 2001 and determined to have indefinite useful lives will not be amortized but will be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. APC is currently studying the provisions of Statements 141 and 142. At July 1, 2001, APC has unamortized goodwill and other intangible assets of approximately $118.2 million which will be subject to the transition provisions of Statements 141 and 142. APC's amortization expense related to goodwill and other intangible assets was $2.3 million in each of the first and second quarters of 2001 and $7.4 million in fiscal year 2000. In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." This issue addresses the recognition and measurement of costs incurred by a vendor in connection with a retailer's purchase or promotion of the vendor's products, including the income statement classification of such costs not directly addressed in Issue 00-14 (see below). This Issue is effective January 1, 2002. APC is currently studying the provisions of this Issue and is also in the process of quantifying the impact of implementing this new guidance. 12 In April 2001, the EITF revised the transition requirements of its May 2000 consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives. " This issue involves the accounting for and reporting of sales subject to rebates and revenue sharing arrangements as well as coupons and discounts, including the income statement classification of rebates and other discounts. This issue is effective January 1, 2002. APC is currently studying the provisions of this Issue and is also in the process of quantifying the impact of implementing this new guidance. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. This Statement became effective for APC on January 1, 2001. The adoption of this Statement did not have any impact on APC's consolidated financial position or results of operations as we presently do not utilize any derivative instruments. Factors That May Affect Future Performance This document contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this document. The factors that could cause actual results to differ materially include the following: The extent to which APC is able to execute its planned job reductions; our ability to successfully integrate and operate acquired businesses; the timely development and acceptance of new products; ramp up, expansion and rationalization of global manufacturing capacity; our ability to effectively align operating expenses and production capacity with the current demand environment; impact on order management and fulfillment, financial reporting and supply chain management processes as a result of our implementation of Oracle 11i commenced in the first quarter 2001; general worldwide economic conditions, and, in particular, the possibility that the PC and related markets decline more dramatically than currently anticipated; 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; product mix changes and the potential negative impact on gross margins from such changes; changes in the seasonality of demand patterns; inventory risks due to shifts in market demand; component constraints, shortages and quality; risk of nonpayment of accounts receivable; the uncertainty of the litigation process including risk of an unexpected, unfavorable result of current or future litigation; risk of disruption to Asian manufacturing operations due to political instability; and the risks described from time to time in our filings with the Securities and Exchange Commission. APC cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. APC disclaims any obligation to publicly update or revise any such statements to reflect any change in APC's expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward- looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK APC, 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 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders was held on June 7, 2001 at which APC's shareholders approved the following: (i) by a vote of 164,732,071 shares in favor, 7,421,368 opposed, and 856,794 abstaining, the number of directors was fixed at five. (ii) the following persons (with vote results) were elected to serve another term as Directors of APC:
For Withheld Rodger B. Dowdell, Jr. 158,375,420 14,634,813 James D. Gerson 167,799,912 5,210,321 Emanuel E. Landsman 158,139,673 14,870,560 Ervin F. Lyon 167,809,169 5,201,064 Neil E. Rasmussen 157,592,670 15,417,563
In addition, by a vote of 34,503,031 shares in favor, 91,074,842 opposed, 4,635,659 abstaining, and 42,796,701 broker non-votes, a shareholder proposal regarding the composition of APC's Board of Directors, was not approved. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits Exhibit No. 3.01 Articles of Organization of APC, as amended, previously filed as an exhibit to APC's Quarterly Report on Form 10-Q for the fiscal quarter ended June 27, 1999 and incorporated herein by reference (File No. 1-12432) Exhibit No. 3.02 By-Laws of APC, as amended and restated, previously filed as an exhibit to APC's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and incorporated herein by reference (File No. 1-12432) (B) Reports on Form 8-K No reports on Form 8-K were filed by American Power Conversion Corporation during the quarter ended July 1, 2001. 14 FORM 10-Q July 1, 2001 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 15, 2001 /s/ Donald M. Muir Donald M. Muir Chief Financial Officer (Principal Accounting and Financial Officer) 15 FORM 10-Q July 1, 2001 AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES EXHIBIT INDEX
Exhibit Page Number Description No 3.01 Articles of Organization of APC, as amended, previously filed as an exhibit to APC's Quarterly Report on Form 10-Q for the fiscal quarter ended June 27, 1999 and incorporated herein by reference (File No. 1-12432) 3.02 By-Laws of APC, as amended and restated, previously filed as an exhibit to APC's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and incorporated herein by reference (File No. 1-12432)
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