-----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, FqqpDJuChyhKmzn9vy8QyXrKuycF+OwdKN2LhcRgrHYrCWikKCbB3D7Pmw5weUCR 6+QM1fMrOfoipAFF6SiZBw== 0000835910-99-000022.txt : 19990513 0000835910-99-000022.hdr.sgml : 19990513 ACCESSION NUMBER: 0000835910-99-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990328 FILED AS OF DATE: 19990512 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: SEC FILE NUMBER: 001-12432 FILM NUMBER: 99618924 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 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 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 FORM 10-Q March 28, 1999 PART I - CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ITEM 1 - FINANCIAL STATEMENTS AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands) ASSETS
March 28, December 31, 1999 1998 (Unaudited) 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
See accompanying notes to consolidated condensed financial statements. 3 FORM 10-Q March 28, 1999 AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED) (In thousands) LIABILITIES AND SHAREHOLDERS' EQUITY
March 28, December 31, 1999 1999 (Unaudited) 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
See accompanying notes to consolidated condensed financial statements. 4 FORM 10-Q March 28, 1999 AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (In thousands except earnings per share)
Three months ended March 28, March 29, 1999 1998 (Unaudited) 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
See accompanying notes to consolidated condensed financial statements. 5 FORM 10-Q March 28, 1999 AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands)
Three months ended March 28, March 29, 1999 1998 (Unaudited) 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 $ -
See accompanying notes to consolidated condensed financial statements. 6 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.
In thousands Three months ended March 28, March 29, 1999 1998 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
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 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 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 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 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 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 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 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 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 EX-27 2
5 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. 1 U.S. DOLLARS 3-MOS DEC-31-1998 MAR-28-1999 1.00 225,986,000 0 214,967,000 17,544,000 243,522,000 711,043,000 237,793,000 90,149,000 912,485,000 189,458,000 0 0 0 960,000 716,364,000 912,485,000 277,185,000 277,185,000 155,030,000 230,306,000 2,471,000 0 0 49,350,000 14,559,000 34,791,000 0 0 0 34,791,000 .36 .36
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