** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

** **

**(MarkOne)**

**ý****              ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 26, 2004**

 

**or**

 

**o****              ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from ________________ to ________________**

 

**CommissionFile Number: 1-12432**

 

**AMERICANPOWER CONVERSION CORPORATION**

(Exact name ofregistrant as specified in its charter)

 
| **MASSACHUSETTS**                                               | ** ** | **04-2722013**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. employer  identification no.) |

 

**132FAIRGROUNDS ROAD, WEST KINGSTON, RHODE ISLAND 02892**

**401-789-5735**

(Address andtelephone number of principal executive offices)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

| YES ý | NO o |
|------------|------|

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

| YES ý | NO o |
|------------|------|

 

Registrant’sCommon Stock outstanding, $0.01 par value, at October 28, 2004 – 191,266,000shares

 

 

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FORM 10-Q

September 26, 2004

 

**AMERICANPOWER CONVERSION CORPORATION**

 

**INDEX**

 
| **Part  I - Financial Information:** |                                                                                                                                          |
|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|                                 |                                                                                                                                          |   |
| Item 1.                              | Consolidated Condensed  Financial Statements:                                                                                                 |   |
|                                 | Consolidated  Condensed Balance Sheets -  September 26, 2004 and December 31, 2003 (Unaudited)                                                |   |
|                                 |                                                                                                                                          |   |
|                                 | Consolidated  Condensed Statements of Income -  Three Months and Nine Months Ended  September 26, 2004 and September 28, 2003 (Unaudited)     |   |
|                                 |                                                                                                                                          |   |
|                                 | Consolidated  Condensed Statements of Cash Flows -  Three Months and Nine Months Ended  September 26, 2004 and September 28, 2003 (Unaudited) |   |
|                                 |                                                                                                                                          |   |
|                                 | Notes to  Consolidated Condensed Financial Statements  (Unaudited)                                                                            |   |
|                                 |                                                                                                                                          |   |
| Item 2.                              | Management’s  Discussion and Analysis of Financial  Condition and Results of Operations                                                  |   |
|                                 |                                                                                                                                          |   |
| Item 3.                              | Quantitative and  Qualitative Disclosures About Market Risk                                                                                   |   |
|                                 |                                                                                                                                          |   |
| Item 4.                              | Controls and  Procedures                                                                                                                      |   |
|                                 |                                                                                                                                          |   |
| **Part II - Other  Information:**    |                                                                                                                                          |
|                                 |                                                                                                                                          |   |
| Item 1.                              | Legal Proceedings                                                                                                                             |   |
|                                 |                                                                                                                                          |   |
| Item  2.                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                  |   |
|                                 |                                                                                                                                          |   |
| Item 6.                              | Exhibits                                                                                                                                      |   |
|                                 |                                                                                                                                          |   |
| **Signatures**                       |                                                                                                                                          |
|                                 |                                                                                                                                          |   |
| **Exhibit Index**                    | ** **                                                                                                                                    |

 

2

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**PART I - CONSOLIDATED CONDENSED FINANCIALSTATEMENTS**

 

**ITEM 1.  FINANCIALSTATEMENTS**

 

**AMERICANPOWER CONVERSION CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

***Inthousands except per share amount***

***(Unaudited)***

 

**ASSETS**

 
| ** **                                                                                         | ** ** | **September 26,  2004** | ** **    | **December 31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------|---------------|------------------------|------------|
| Current  assets:                                                                                   |       |                    |          |                   |       |
| Cash  and cash equivalents                                                                         | ** ** | **$**                   | **166,070**   |                   | $          | 252,114 |   |
| Short  term investments (Note 4)                                                                   | ** ** | **500,405**             |          | 496,209                |       |
| Accounts  receivable, less allowance for doubtful accounts  of $17,435 in 2004 and $18,987 in 2003 | ** ** | **308,245**             |          | 264,718                |       |
| Inventories:                                                                                       | ** ** | ** **              | ** **    | ** **             | ** ** |
| Raw  materials                                                                                     | ** ** | **220,009**             |          | 185,431                |       |
| Work-in-process  and finished goods                                                                | ** ** | **244,766**             |          | 216,791                |       |
| Total  inventories                                                                                 | ** ** | **464,775**             |          | 402,222                |       |
|                                                                                               |       |                    |          |                   |       |
| Prepaid  expenses and other current assets                                                         | ** ** | **37,752**              |          | 25,296                 |       |
| Deferred  income taxes                                                                             | ** ** | **59,612**              |          | 57,638                 |       |
|                                                                                               |       |                    |          |                   |       |
| Total  current assets                                                                              | ** ** | **1,536,859**           |          | 1,498,197              |       |
|                                                                                               |       |                    |          |                   |       |
| Property,  plant and equipment:                                                                    |       |                    |          |                   |       |
| Land,  buildings and improvements                                                                  | ** ** | **69,666**              |          | 71,206                 |       |
| Machinery  and equipment                                                                           | ** ** | **214,709**             |          | 207,506                |       |
| Office  equipment, furniture and fixtures                                                          | ** ** | **91,200**              |          | 85,474                 |       |
| Purchased  software                                                                                | ** ** | **40,495**              |          | 35,074                 |       |
| ** **                                                                                         |       | **416,070**             |          | 399,260                |       |
| Less  accumulated depreciation and amortization                                                    | ** ** | **258,072**             |          | 235,309                |       |
| Net  property, plant and equipment                                                                 | ** ** | **157,998**             |          | 163,951                |       |
|                                                                                               |       |                    |          |                   |       |
| Long  term investments (Note 4)                                                                    | ** ** | **10,477**              |          | 58,525                 |       |
| Goodwill  (Note 5)                                                                                 | ** ** | **7,179**               |          | 6,679                  |       |
| Other  intangibles, net (Note 5)                                                                   | ** ** | **42,575**              |          | 50,292                 |       |
| Deferred  income taxes                                                                             | ** ** | **29,311**              |          | 25,994                 |       |
| Other  assets                                                                                      | ** ** | **2,384**               |          | 2,328                  |       |
|                                                                                               |       |                    |          |                   |       |
| Total  assets                                                                                      | ** ** | **$**                   | **1,786,783** |                   | $          | 1,805,966 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

 

3

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**AMERICANPOWER CONVERSION CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDCONDENSED BALANCE SHEETS (CONTINUED)**

***Inthousands except per share amount***

***(Unaudited)***

 

**LIABILITIESAND SHAREHOLDERS’ EQUITY**

 
| ** **                                                                                                                            | ** ** | **September 26,  2004** | ** **    | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|---------------|------------------------|------------|
| Current  liabilities:                                                                                                                 |       |                    |          |                   |       |
| Accounts  payable                                                                                                                     | ** ** | **$**                   | **132,400**   |                   | $          | 102,800 |   |
| Accrued  compensation                                                                                                                 | ** ** | **42,072**              |          | 39,366                 |       |
| Accrued  sales and marketing programs                                                                                                 | ** ** | **41,620**              |          | 29,947                 |       |
| Accrued  warranty (Note 6)                                                                                                            | ** ** | **12,482**              |          | 11,709                 |       |
| Other  accrued expenses                                                                                                               | ** ** | **35,302**              |          | 34,146                 |       |
| Deferred  revenue                                                                                                                     | ** ** | **30,762**              |          | 24,330                 |       |
| Income  taxes payable                                                                                                                 | ** ** | **26,451**              |          | 38,428                 |       |
|                                                                                                                                  |       |                    |          |                   |       |
| Total  current liabilities                                                                                                            | ** ** | **321,089**             |          | 280,726                |       |
|                                                                                                                                  |       |                    |          |                   |       |
| Deferred  tax liability                                                                                                               | ** ** | **13,556**              |          | 14,357                 |       |
|                                                                                                                                  |       |                    |          |                   |       |
| Total  liabilities                                                                                                                    | ** ** | **334,645**             |          | 295,083                |       |
|                                                                                                                                  |       |                    |          |                   |       |
| Shareholders’  equity (Notes 7, 8, 9 and 10):                                                                                    |       |                    |          |                   |       |
| Common  stock, $0.01 par value; authorized 450,000 shares in 2004 and 2003;  issued 191,261 shares in 2004 and 199,982 shares in 2003 | ** ** | **1,913**               |          | 2,000                  |       |
| Additional  paid-in capital                                                                                                           | ** ** | **43,102**              |          | 182,566                |       |
| Retained  earnings                                                                                                                    | ** ** | **1,404,031**           |          | 1,326,733              |       |
| Treasury  stock, 250 shares, at cost, in 2003 (Note 8)                                                                                | ** ** | **—**              |          | (1,551                 | )          |
| Accumulated  other comprehensive income                                                                                               | ** ** | **3,092**               |          | 1,135                  |       |
|                                                                                                                                  |       |                    |          |                   |       |
| Total  shareholders’ equity                                                                                                      | ** ** | **1,452,138**           |          | 1,510,883              |       |
|                                                                                                                                  |       |                    |          |                   |       |
| Total  liabilities and shareholders’ equity                                                                                      | ** ** | **$**                   | **1,786,783** |                   | $          | 1,805,966 |   |
|                                                                                                                                       |            |                         |               |                        |            |  |  |  |  |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

 

4

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**AMERICANPOWER CONVERSION CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTSOF INC****OME**

***Inthousands except earnings per share***

***(Unaudited)***

 
| ** **                                      | ** ** | **Nine months ended**   | ** **    | **Three months ended**  | ** ** |
|-------------------------------------------------|------------|-------------------------|---------------|-------------------------|------------|
| ** **                                      | ** ** | **September 26,  2004** | ** **    | **September 28,  2003** | ** ** | **September 26,  2004** | ** ** | **September 28,  2003** | ** ** |
|                                            |       |                    |          |                    |       |   |   |   |   |
| Net  sales (Note 11)                            | ** ** | **$**                   | **1,189,085** |                    | $          | 1,034,172 | ** ** | **$** | **441,671** |   | $ | 393,701 |   |
|                                            |       |                    |          |                    |       |   |   |   |   |
| Cost  of goods sold                             | ** ** | **713,785**             |          | 599,362                 | ** ** | **264,985** |   | 220,817 |   |
|                                            |       |                    |          |                    |       |   |   |   |   |
| Gross  profit                                   | ** ** | **475,300**             |          | 434,810                 | ** ** | **176,686** |   | 172,884 |   |
|                                            |       |                    |          |                    |       |   |   |   |   |
| Operating  expenses:                            |       |                    |          |                    |       |   |   |   |   |
| Marketing,  selling, general and administrative | ** ** | **276,455**             |          | 228,893                 | ** ** | **95,623** |   | 79,969 |   |
| Research  and development                       | ** ** | **61,611**              |          | 48,584                  | ** ** | **21,762** |   | 17,777 |   |
|                                            |       |                    |          |                    |       |   |   |   |   |
| Total  operating expenses                       | ** ** | **338,066**             |          | 277,477                 | ** ** | **117,385** |   | 97,746 |   |
|                                            |       |                    |          |                    |       |   |   |   |   |
| Operating  income                               | ** ** | **137,234**             |          | 157,333                 | ** ** | **59,301** | ** ** | **75,138** | ** ** |
|                                            |       |                    |          |                    |       |   |   |   |   |
| Other  income, net                              | ** ** | **6,463**               |          | 7,380                   | ** ** | **2,475** |   | 2,195 |   |
|                                            |       |                    |          |                    |       |   |   |   |   |
| Earnings  before income taxes                   | ** ** | **143,697**             |          | 164,713                 | ** ** | **61,776** | ** ** | **77,333** | ** ** |
|                                            |       |                    |          |                    |       |   |   |   |   |
| Income  taxes                                   | ** ** | **15,090**              |          | 45,790                  | ** ** | **(5,390** | ) | 21,498 |   |
|                                            |       |                    |          |                    |       |   |   |   |   |
| Net  income                                     | ** ** | **$**                   | **128,607**   |                    | $          | 118,923 | ** ** | **$** | **67,166** | ** ** | **$** | **55,835** | ** ** |
|                                            |       |                    |          |                    |       |   |   |   |   |
| Basic  earnings per share                       | ** ** | **$**                   | **0.65**      |                    | $          | 0.60 | ** ** | **$** | **0.34** |   | $ | 0.28 |   |
|                                            |       |                    |          |                    |       |   |   |   |   |
| Basic  weighted average shares outstanding      | ** ** | **198,649**             |          | 196,900                 | ** ** | **195,925** |   | 197,638 |   |
|                                            |       |                    |          |                    |       |   |   |   |   |
| Diluted  earnings per share                     | ** ** | **$**                   | **0.63**      |                    | $          | 0.59 | ** ** | **$** | **0.34** |   | $ | 0.28 |   |
|                                            |       |                    |          |                    |       |   |   |   |   |
| Diluted  weighted average shares outstanding    | ** ** | **203,472**             |          | 200,434                 | ** ** | **199,208** |   | 201,649 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

 

5

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**AMERICANPOWER CONVERSION CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTSOF CAS****H FLOWS**

***Inthousands***

***(Unaudited)***

 
| ** **                                                                         | ** ** | **Nine months ended**   | ** **  | **Three months ended**  | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------|-------------|-------------------------|------------|
| ** **                                                                         | ** ** | **September 26,  2004** | ** **  | **September 28,  2003** | ** ** | **September 26,  2004** | ** ** | **September 28,  2003** | ** ** |
| ***Cash flows from operating activities***                                         |       |                    |        |                    |       |   |   |   |   |
| Net  income                                                                        | ** ** | **$**                   | **128,607** | ** **              | $          | 118,923 |   | **$** | **67,166** | ** ** | $ | 55,835 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Depreciation  and amortization of property, plant and equipment                    |       | **27,349**              | ** **  | 26,635                  |       | **9,055** | ** ** | 9,040 |   |
| Amortization  of other intangibles                                                 | ** ** | **8,713**               | ** **  | 8,934                   |       | **2,916** | ** ** | 2,981 |   |
| Provision  for doubtful accounts                                                   | ** ** | **(1,090**              | **)**       | 3,920                   |       | **(1,231** | **)** | 2,756 |   |
| Provision  for inventories                                                         | ** ** | **17,476**              | ** **  | 3,100                   |       | **13,000** | ** ** | 1,200 |   |
| Deferred  income taxes                                                             | ** ** | **(6,092**              | **)**       | 3,733                   |       | **4,040** | ** ** | (1,024 | ) |
| Other  non-cash items, net                                                         | ** ** | **2,733**               | ** **  | 796                     |       | **918** | ** ** | (346 | ) |
| Changes  in operating assets and liabilities:                                      |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Accounts  receivable                                                               | ** ** | **(42,437**             | **)**       | (32,340                 | )          | **(35,694** | **)** | (46,196 | ) |
| Inventories                                                                        | ** ** | **(80,029**             | **)**       | (77,644                 | )          | **(21,718** | **)** | (9,657 | ) |
| Prepaid  expenses and other current assets                                         | ** ** | **(12,456**             | **)**       | 5,670                   |       | **(8,047** | **)** | 4,661 |   |
| Other  assets                                                                      | ** ** | **(1,552**              | **)**       | (837                    | )          | **(1,355** | **)** | (193 | ) |
| Accounts  payable                                                                  | ** ** | **29,600**              | ** **  | 19,249                  |       | **6,782** | ** ** | 19,396 |   |
| Accrued  expenses                                                                  | ** ** | **22,740**              | ** **  | (11,471                 | )          | **17,913** | ** ** | 828 |   |
| Income  taxes payable                                                              | ** ** | **(9,178**              | **)**       | 87                      |       | **(17,249** | **)** | 14,069 |   |
| Net  cash provided by operating activities                                         | ** ** | **84,384**              | ** **  | 68,755                  |       | **36,496** | ** ** | 53,350 |   |
|                                                                               |       |                    | ** **  |                    |       |   | ** ** |   |   |
| ***Cash flows from investing activities***                                         |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Purchases  of held-to-maturity securities                                          | ** ** | **(1,859,573**          | **)**       | (2,271,487              | )          | **(527,269** | **)** | (873,548 | ) |
| Maturities  of held-to-maturity securities                                         | ** ** | **1,903,425**           | ** **  | 2,189,494               |       | **614,342** | ** ** | 822,103 |   |
| Purchases  of available-for-sale securities                                        | ** ** | **—**              | ** **  | (598                    | )          | **—** | ** ** | (146 | ) |
| Maturities  of available-for-sale securities                                       | ** ** | **—**              | ** **  | 13,131                  |       | **—** | ** ** | 13,131 |   |
| Capital  expenditures                                                              | ** ** | **(22,959**             | **)**       | (14,286                 | )          | **(10,492** | **)** | (5,251 | ) |
| Proceeds  from sale of property, plant and equipment                               |       | **787**                 | ** **  | —                  |       | **787** | ** ** | — |   |
| Net  cash provided by (used in) investing activities                               | ** ** | **21,680**              | ** **  | (83,746                 | )          | **77,368** | ** ** | (43,711 | ) |
|                                                                               |       |                    | ** **  |                    |       |   | ** ** |   |   |
| ***Cash flows from financing activities***                                         |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Purchases  of common stock                                                         | ** ** | **(150,000**            | **)**       | —                  |       | **(150,000** | **)** | — |   |
| Proceeds  from issuances of common stock                                           | ** ** | **9,201**               | ** **  | 23,984                  |       | **2,345** | ** ** | 12,890 |   |
| Dividends  paid on common stock                                                    | ** ** | **(51,309**             | **)**       | (15,826                 | )          | **(19,291** | **)** | (15,826 | ) |
| Net  cash (used in) provided by financing activities                               | ** ** | **(192,108**            | **)**       | 8,158                   |       | **(166,946** | **)** | (2,936 | ) |
|                                                                               |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Net  change in cash and cash equivalents                                           | ** ** | **(86,044**             | **)**       | (6,833                  | )          | **(53,082** | **)** | 6,703 |   |
| Cash  and cash equivalents at beginning of period                                  |       | **252,114**             | ** **  | 209,322                 |       | **219,152** | ** ** | 195,786 |   |
| Cash  and cash equivalents at end of period                                        | ** ** | **$**                   | **166,070** | ** **              | $          | 202,489 |   | **$** | **166,070** | ** ** | $ | 202,489 |   |
|                                                                               |       |                    | ** **  |                    |       |   | ** ** |   |   |
| ***Supplemental cash flow disclosures***                                           |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Cash  paid during the period for:                                                  |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Income  taxes (net of refunds)                                                     | ** ** | **$**                   | **27,980**  | ** **              | $          | 41,563 |   | **$** | **11,202** | ** ** | $ | 9,521 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

 

6

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**AMERICANPOWER CONVERSION CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED CONDENSEDFINANCIA****L STATEMENTS**

***(Unaudited)***

 

**1.****     ManagementRepresentation**

 

The accompanyingunaudited consolidated condensed financial statements should be read inconjunction with the consolidated financial statements included in the AmericanPower Conversion Corporation, APC, Annual Report on Form 10-K for the yearended December 31, 2003. In the opinion of management, the accompanyingunaudited consolidated condensed financial statements contain all adjustments(consisting of only normal recurring accruals) necessary to present fairly theconsolidated financial position and the consolidated results of operations andcash flows for the interim periods. The results of operations for the interimperiods are not necessarily indicative of results to be expected for the fullyear.

 

**2.****     Principlesof Consolidation**

 

The accompanyingconsolidated condensed financial statements include the financial statements ofAmerican Power Conversion Corporation and its wholly-owned subsidiaries. Allsignificant intercompany accounts and transactions are eliminated inconsolidation.

 

**3.****     Restructuring**

 

In early 2002, APCannounced global headcount reductions which impacted personnel worldwide,principally in the U.S., U.K., Ireland, and the Philippines, throughout a broadrange of functions within the organization. The majority of these terminationswere the result of APC’s decision to consolidate its Philippines-basedmanufacturing operations, resulting in the closing of APC’s manufacturingfacility in the province of Laguna. Such restructuring actions were announcedduring the first quarter of 2002 and substantially completed by the end of2002.

 

In the firstquarter of 2002, APC recorded $7.3 million of related restructuring costs ofwhich $4.8 million and $2.5 million were classified in cost of goods sold andoperating expenses, respectively. These costs included the effects ofapproximately 941 employee terminations, principally 54% in manufacturing, 14%in sales and 13% in research and development, based on severance agreements, aswell as facilities closures in the Philippines, U.S. and U.K., and the relatedimpairment of tangible assets, principally buildings and manufacturingequipment, based on management’s assessment of market data. These costs were notallocated to APC’s operating segments, but rather were classified as indirectoperating expenses for segment reporting consistent with APC’s classificationfor its internal financial reporting; also refer to Note 11.

 

7

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In connection withAPC’s decision to consolidate its Philippines-based manufacturing operations,APC closed manufacturing facilities located in the Philippines province ofLaguna, in Maryland, and also in the U.K. APC marketed its Philippines propertywith an intent to sell these assets in 2003. However, APC was unable tocomplete this sale as a result of an unfavorable real estate market. Inaccordance with the provisions of Statement of Financial Accounting StandardsNo. 144, *Accounting for the Impairment orDisposal of Long-Lived Assets*, in the second quarter of 2003 thePhilippines building and equipment previously classified as assetsheld-for-sale were reclassified to held-for-use property, plant, and equipment attheir fair values, which aggregated $3.0 million, and depreciationre-commenced. APC sold a building in Maryland to a third party in October 2002.Also, in connection with the closure of a leased facility in the U.K., APCrecognized a lease liability during the first quarter of 2002; this lease willexpire in 2005.

 

A summary of therelated 2002 restructuring liabilities during the first, second, and third quartersof 2004 and 2003 is outlined below. APC expects all such restructuringliabilities at September 26, 2004 to be fully paid in cash by the end of 2005.

 

**2002Restructuring Plans**

 
| ** **                 | ** ** | **Restructuring  Liabilities at  Beginning  of Quarter** | ** ** | **Total  Charges** | ** ** | **Non-cash  Charges** | ** ** | **Cash  Payments** | ** ** | **Restructuring  Liabilities at  End of  Quarter** | ** ** |
|----------------------------|------------|----------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|----------------------------------------------------|------------|
| * *                   | ** ** | ** **                                               | ** ** | ** **         | ** ** | **(In  thousands)**   | ** ** | ** **         | ** ** | ** **                                         | ** ** |
|                       |       |                                                     |       |               |       |                  |       |               |       |                                               |       |
| **Third Quarter 2004**     |       |                                                     |       |               |       |                  |       |               |       |                                               |       |
| Employee  terminations     | ** ** | **$**                                                    | **25**     | ** **         | **$**      | **—**            | ** ** | **$**              | **—** | ** **                                         | **$**      | **—** | ** ** | **$** | **25** | ** ** |
| Termination  of U.K. lease | ** ** | **320**                                                  | ** ** | **—**         | ** ** | **—**            | ** ** | **(91**            | **)**      | **229**                                            | ** ** |
| ** **                 | ** ** | **$**                                                    | **345**    | ** **         | **$**      | **—**            | ** ** | **$**              | **—** | ** **                                         | **$**      | **(91** | **)** | **$** | **254** | ** ** |
| **Second Quarter 2004**    |       |                                                     |       |               |       |                  |       |               |       |                                               |       |
| Employee  terminations     | ** ** | **$**                                                    | **25**     | ** **         | **$**      | **—**            | ** ** | **$**              | **—** | ** **                                         | **$**      | **—** | ** ** | **$** | **25** | ** ** |
| Termination  of U.K. lease | ** ** | **320**                                                  | ** ** | **—**         | ** ** | **—**            | ** ** | **—**         | ** ** | **320**                                            | ** ** |
| ** **                 | ** ** | **$**                                                    | **345**    | ** **         | **$**      | **—**            | ** ** | **$**              | **—** | ** **                                         | **$**      | **—** | ** ** | **$** | **345** | ** ** |
| **First Quarter 2004**     |       |                                                     |       |               |       |                  |       |               |       |                                               |       |
| Employee  terminations     | ** ** | **$**                                                    | **25**     | ** **         | **$**      | **—**            | ** ** | **$**              | **—** | ** **                                         | **$**      | **—** | ** ** | **$** | **25** | ** ** |
| Termination  of U.K. lease | ** ** | **414**                                                  | ** ** | **—**         | ** ** | **—**            | ** ** | **(94**            | **)**      | **320**                                            | ** ** |
| ** **                 | ** ** | **$**                                                    | **439**    | ** **         | **$**      | **—**            | ** ** | **$**              | **—** | ** **                                         | **$**      | **(94** | **)** | **$** | **345** | ** ** |
| ** **                 | ** ** | ** **                                               | ** ** | ** **         | ** ** | ** **            | ** ** | ** **         | ** ** | ** **                                         | ** ** |
| **Third Quarter 2003**     |       |                                                     |       |               |       |                  |       |               |       |                                               |       |
| Employee  terminations     |       | $                                                        | 25         |               | $          | —                |       | $                  | —     |                                               | $          | — |   | $ | 25 |   |
| Termination  of U.K. lease |       | 558                                                      |       | —             |       | —                |       | (77                | )          | 481                                                |       |
|                       |       | $                                                        | 583        |               | $          | —                |       | $                  | —     |                                               | $          | (77 | ) | $ | 506 |   |
| **Second Quarter 2003**    |       |                                                     |       |               |       |                  |       |               |       |                                               |       |
| Employee  terminations     |       | $                                                        | 25         |               | $          | —                |       | $                  | —     |                                               | $          | — |   | $ | 25 |   |
| Termination  of U.K. lease |       | 617                                                      |       | —             |       | —                |       | (59                | )          | 558                                                |       |
|                       |       | $                                                        | 642        |               | $          | —                |       | $                  | —     |                                               | $          | (59 | ) | $ | 583 |   |
| **First Quarter 2003**     |       |                                                     |       |               |       |                  |       |               |       |                                               |       |
| Employee  terminations     |       | $                                                        | 25         |               | $          | —                |       | $                  | —     |                                               | $          | — |   | $ | 25 |   |
| Termination  of U.K. lease |       | 775                                                      |       | —             |       | —                |       | (158               | )          | 617                                                |       |
|                       |       | $                                                        | 800        |               | $          | —                |       | $                  | —     |                                               | $          | (158 | ) | $ | 642 |   |

 

8

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**4.****     Investments**

 

APCclassifies as short term its investments with original maturities greater thanthree months and less than or equal to one year, and as long term itsinvestments with remaining maturities greater than one year and less than orequal to two years. APC has no investments with maturity dates greater than twoyears. Held-to-maturity securities are carried at amortized cost.Available-for-sale securities are recorded at fair value with net unrealizedgains and losses reported, net of income taxes, in other comprehensive income.Management determines the appropriate classification of securities at the timeof purchase and re-evaluates such designation as of each balance sheet date.Securities are classified as held-to-maturity when APC has the positive intentand ability to hold such securities to maturity. There were no sales ofinvestment securities in the third quarters and first nine months of 2004 and2003.

 
| ** **                         | ** ** | **Amortized  Cost** | ** **  | **Gross  Unrealized  Holding  Gains** | ** ** | **Gross  Unrealized  Holding  Losses** | ** ** | **Fair  Value** | ** ** |
|------------------------------------|------------|---------------------|-------------|---------------------------------------|------------|----------------------------------------|------------|-----------------|------------|
| ** **                         | ** ** | **(In thousands)**  | ** **  |
| **At September 26, 2004**          |       |                |        |                                  |       |                                   |       |            |       |
| ** **                         | ** ** | ** **          | ** **  | ** **                            | ** ** | ** **                             | ** ** | ** **      | ** ** |
| **Held-to-maturity**               | ** ** | ** **          | ** **  | ** **                            | ** ** | ** **                             | ** ** | ** **      | ** ** |
| Certificates  of deposit           | ** ** | **$**               | **162,843** | ** **                            | **$**      | **—**                             | ** ** | **$**           | **—** | ** ** | **$** | **162,843** | ** ** |
| Corporate  bonds                   | ** ** | **247,898**         | ** **  | **28**                                | ** ** | **(1**                                 | **)**      | **247,925**     | ** ** |
| Municipal  bonds and notes         | ** ** | **64,701**          | ** **  | **—**                            | ** ** | **—**                             | ** ** | **64,701**      | ** ** |
| U.S.  government agency securities | ** ** | **35,000**          | ** **  | **—**                            | ** ** | **(94**                                | **)**      | **34,906**      | ** ** |
| ** **                         | ** ** | **510,442**         | ** **  | **28**                                | ** ** | **(95**                                | **)**      | **510,375**     | ** ** |
| **Available-for-sale**             |       |                |        |                                  |       |                                   |       |            |       |
| Equity  investments                | ** ** | **440**             | ** **  | **—**                            |       | —                                 | ** ** | **440**         | ** ** |
| ** **                         | ** ** | ** **          | ** **  | ** **                            | ** ** | ** **                             | ** ** | ** **      | ** ** |
| ** **                         | ** ** | **$**               | **510,882** | ** **                            | **$**      | **28**                                 | ** ** | **$**           | **(95**    | **)** | **$** | **510,815** | ** ** |
| **At December 31, 2003**           |       |                |        |                                  |       |                                   |       |            |       |
| ** **                         | ** ** | ** **          | ** **  | ** **                            | ** ** | ** **                             | ** ** | ** **      | ** ** |
| **Held-to-maturity**               | ** ** | ** **          | ** **  | ** **                            | ** ** | ** **                             | ** ** | ** **      | ** ** |
| Certificates  of deposit           |       | $                   | 209,814     |                                  | $          | —                                 |       | $               | —     |   | $ | 209,814 |   |
| Corporate  bonds                   |       | 236,873             |        | 237                                   |       | —                                 |       | 237,110         |       |
| Municipal  bonds and notes         |       | 66,607              |        | 67                                    |       | —                                 |       | 66,674          |       |
| U.S.  government agency securities |       | 41,000              |        | 5                                     |       | (16                                    | )          | 40,989          |       |
|                               |       | 554,294             |        | 309                                   |       | (16                                    | )          | 554,587         |       |
| **Available-for-sale**             |       |                |        |                                  |       |                                   |       |            |       |
| Equity  investments                |       | 440                 |        | —                                |       | —                                 |       | 440             |       |
|                               |       |                |        |                                  |       |                                   |       |            |       |
|                               |       | $                   | 554,734     |                                  | $          | 309                                    |       | $               | (16        | ) | $ | 555,027 |   |

 

9

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**5.****     Goodwilland Other Intangible Assets**

 

Ateach of September 26, 2004 and December 31, 2003, goodwill of $7.2 million and $6.7million, respectively, was associated with the Small Systems segment. Amortizedintangible assets were as follows:

 
| ** **                         | ** ** | **Weighted**                      | ** ** | **September 26, 2004**      | ** ** | **December 31, 2003**         | ** ** |
|------------------------------------|------------|-----------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| **Amortized  Intangible  Assets**  | ** ** | **Average  Amortization  Period** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                         | ** ** | **($ in thousands)**         | ** ** |
| Technology                         |       | 6 years                           | ** ** | **$**                       | **81,040** | ** **                    | **$**      | **42,581** |   | $ | 80,043 |   | $ | 35,239 |   |
| Customer  lists                    |       | 5 years                           | ** ** | **8,900**                   | ** ** | **5,873**                     |       | 8,900 |   | 4,864 |   |
| Tradenames                         |       | 5 years                           | ** ** | **3,157**                   | ** ** | **2,068**                     |       | 3,157 |   | 1,705 |   |
| Total  amortized intangible assets |       | 6 years                           |       | **$**                       | **93,097** | ** **                    | **$**      | **50,522** |   | $ | 92,100 |   | $ | 41,808 |   |

 

Aggregateamortization expense related to APC’s other intangible assets for the thirdquarters of 2004 and 2003 was $2.9 million and $3.0 million, respectively, andfor the first nine months of 2004 and 2003 was $8.7 million and $8.9 million,respectively. Estimated aggregated amortization for each of the next fivesucceeding fiscal years is $11.7 million for 2004, $11.8 million for 2005, $11.8million for 2006, $9.6 million for 2007, and $5.2 million for 2008. There areno expected residual values related to these intangible assets.

 

**6.****     WarrantyLiability and Product Recall**

 
| ** **              | ** ** | **Product  Warranty  Liability at  Beginning  of Quarter** | ** ** | **Accruals for  Product  Warranties  Issued During  the Quarter** | ** ** | **Adjustments  to Accruals  for Preexisting  Warranties** | ** ** | **Warranty  Payments** | ** ** | **Product  Warranty  Liability at  End of  Quarter** | ** ** |
|-------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|
| ** **              | ** ** | ** **                                                 | ** ** | ** **                                                        | ** ** | **(In thousands)**                                        | ** ** | ** **             | ** ** | ** **                                           | ** ** |
| **Third Quarter 2004**  | ** ** | **$**                                                      | **11,934** | ** **                                                        | **$**      | **5,418**                                                 | ** ** | **$**                  | **—** | ** **                                           | **$**      | **(4,870** | **)** | **$** | **12,482** | ** ** |
| **Second Quarter 2004** | ** ** | **$**                                                      | **12,001** | ** **                                                        | **$**      | **5,001**                                                 | ** ** | **$**                  | **—** | ** **                                           | **$**      | **(5,068** | **)** | **$** | **11,934** | ** ** |
| **First Quarter 2004**  | ** ** | **$**                                                      | **11,709** | ** **                                                        | **$**      | **6,291**                                                 | ** ** | **$**                  | **—** | ** **                                           | **$**      | **(5,999** | **)** | **$** | **12,001** | ** ** |
|                    |       |                                                       |       |                                                              |       |                                                      |       |                   |       |                                                 |       |
| **Third Quarter 2003**  |       | $                                                          | 17,577     |                                                              | $          | 7,342                                                     |       | $                      | (5,500     | )                                                    | $          | (7,854 | ) | $ | 11,565 |   |
| **Second Quarter 2003** |       | $                                                          | 20,746     |                                                              | $          | 5,629                                                     |       | $                      | —     |                                                 | $          | (8,798 | ) | $ | 17,577 |   |
| **First Quarter 2003**  |       | $                                                          | 27,183     |                                                              | $          | 6,965                                                     |       | $                      | —     |                                                 | $          | (13,402 | ) | $ | 20,746 |   |

 

In early 2003, APC announced a product recall ofBack-UPS® CS 350 and 500 models, due to potential safety issues. Prior toannouncing the recall, APC received eight reports worldwide of unitsoverheating, resulting in the melting of the unit’s outer casing, six of whichoccurred in the United States. Three of the reported incidents resulted inminor property damage; no injuries were reported. The total number of affecteddevices recalled worldwide is approximately 2.1 million with approximately900,000 devices recalled in the United States. The recall is limited to twospecific models in APC’s Back-UPS CS product line, the Back-UPS CS 350 and theBack-UPS CS 500, in both 120-volt and 230-volt models. The affected units weremanufactured between November 2000 and December 2002 and were sold primarilythrough computer and electrical distribution, catalog and retail outletsworldwide. In the fourth quarter of 2002, APC accrued a current liability andrecognized additional warranty expense, classified in cost of goods sold, of$19.6 million. Based upon repair cost and return rate experience to-date aswell as then-current estimates of remaining costs to be incurred, APC projectedthat aggregate costs for the recall would be less than originally estimated. Toreflect this change, cost of goods sold was reduced by $5.5 million in thethird quarter of 2003.

 

10

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As of September 26, 2004, APC had incurredapproximately 83% of currently estimated total recall costs. Our estimation ofremaining recall costs of $2.4 million, comprised of $0.9 million for the U.S.and $1.5 million for international geographies, continues to be subject toactual return rates and per unit repair costs (which can vary by country) aswell as estimates for other recall-related costs expected to be incurred. Weexpect that future amounts will not differ materially from our currentestimates.

 

**7.****     EarningsPer Share**

 

Basic earnings per shareis computed by dividing net income by the weighted average number of commonshares outstanding during the period. Diluted earnings per share is computed bydividing net income by the weighted average number of common shares anddilutive potential common shares outstanding during the period. Under thetreasury stock method, the unexercised options are assumed to be exercised atthe beginning of the period or at issuance, if later. The assumed proceeds arethen used to purchase common shares at the average market price during theperiod. Potential common shares for which inclusion would have the effect ofincreasing diluted earnings per share (i.e., antidilutive) are excluded fromthe computation.

 
| ** **                                                                                                                     | ** ** | **Nine months ended**   | ** ** | **Three months ended**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                                                                     | ** ** | **September 26,  2004** | ** ** | **September 28,  2003** | ** ** | **September 26,  2004** | ** ** | **September 28,  2003** | ** ** |
| ** **                                                                                                                     | ** ** | **(In thousands)**      | ** ** |
| Basic  weighted average shares outstanding                                                                                     | ** ** | **198,649**             |       | 196,900                 | ** ** | **195,925** |   | 197,638 |   |
| Net  effect of dilutive potential common shares outstanding based on the treasury  stock method using the average market price | ** ** | **4,823**               |       | 3,534                   | ** ** | **3,283** |   | 4,011 |   |
| Diluted  weighted average shares outstanding                                                                                   | ** ** | **203,472**             |       | 200,434                 | ** ** | **199,208** |   | 201,649 |   |
| Antidilutive  potential common shares excluded from the computation above                                                      | ** ** | **2,706**               |       | 3,921                   | ** ** | **2,996** |   | 3,249 |   |

 

**8.****     Shareholders’Equity**

 

The decrease in paid-in capitalduring 2004 reflected APC’s third quarter repurchase on the open market ofapproximately 9.3 million shares of its common stock, at an average price of$16.09 per share totaling $150 million, completing a program approved by APC’sBoard of Directors in June 2004. No further repurchases will be made under thisprogram. Such shares have been deemed authorized but not issued. In addition,in March 2004, APC returned its 250,000 treasury shares to an authorized butnot issued status. The total decrease in paid-in capital during 2004 waspartially offset by the exercise of employee stock options as well as the taxbenefit arising from the disposition of option shares by APC employees.

 

In June 2003, APC’s Board of Directors approved the initiationof a quarterly cash dividend of $0.08 per share of common stock. Dividends of$0.08 per share were declared and paid in each subsequent quarter including inApril 2004, payable on June 16, 2004 to shareholders of record as of May 26,2004. In June 2004, APC’s Board of Directors approved a 25% increase in itsquarterly cash dividend raising the payout to $0.10 per share, as well as approvedAPC’s first quarterly dividend at this new rate, payable on September 16, 2004to shareholders of record as of August 26, 2004. It is the intention of theBoard of Directors to pay a comparable quarterly dividend on a going forward basiscontingent upon continued capital availability and a determination that cashdividends continue to be in the best interests of APC and its shareholders.

 

11

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**9.****     ComprehensiveIncome**

 

The components of comprehensiveincome, net of tax, are as follows:

 
| ** **                                               | ** ** | **Nine months ended**   | ** **  | **Three months ended**  | ** ** |
|----------------------------------------------------------|------------|-------------------------|-------------|-------------------------|------------|
| ** **                                               | ** ** | **September 26,  2004** | ** **  | **September 28,  2003** | ** ** | **September 26,  2004** | ** ** | **September 28,  2003** | ** ** |
| ** **                                               | ** ** | **(In thousands)**      | ** **  |
| Net  income                                              | ** ** | **$**                   | **128,607** |                    | $          | 118,923 | ** ** | **$** | **67,166** |   | $ | 55,835 |   |
| Other  comprehensive income (loss), net of tax:          |       |                    |        |                    |       |   |   |   |   |
| Change  in foreign currency translation adjustment       | ** ** | **1,957**               |        | 742                     | ** ** | **142** |   | (526 | ) |
| Net  unrealized gain on investments, net of income taxes |       | **—**              |        | 54                      | ** ** | **—** |   | 180 |   |
| Other  comprehensive income (loss)                       | ** ** | **1,957**               |        | 796                     | ** ** | **142** |   | (346 | ) |
| Comprehensive  income                                    | ** ** | **$**                   | **130,564** |                    | $          | 119,719 | ** ** | **$** | **67,308** |   | $ | 55,489 |   |

 

**10.****  Stock-Based Compensation**

 

On June 10, 2004, APC’sshareholders approved APC’s 2004 Long-Term Incentive Plan (LTI Plan), which replacesthe 1997 Stock Option Plan. At September 26, 2004, APC had two stock-basedcompensation plans, the aforementioned 2004 LTI Plan and the 1997 Non-employeeDirector Stock Option Plan, and an employee stock purchase plan, described morefully in Note 11 of Notes to Consolidated Financial Statements in Item 8 of APC’sForm 10-K for the year ended December 31, 2003. As permitted by Statement ofFinancial Accounting Standards No. 123 as amended by No. 148, *Accounting for Stock-Based Compensation*,APC accounts for those plans under the recognition and measurement principlesof Accounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related Interpretations. Nostock-based employee compensation cost is reflected in net income, as alloptions granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant. The following tableillustrates the effect on net income and earnings per share if APC had appliedthe fair value recognition provisions of Statement 123 to stock-based employeecompensation:

 
| ** **                                                                                                                                    | ** ** | ** **  | ** ** | **Nine months ended**                       | ** **  | **Three months ended**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|---------------------------------------------|-------------|-------------------------|------------|
| ** **                                                                                                                                    | ** ** | ** **  | ** ** | **September 26, 2004**                 | ** **  | **September 28,  2003** | ** ** | **September 26,  2004** | ** ** | **September 28,  2003** | ** ** |
| ** **                                                                                                                                    | ** ** | ** **  | ** ** | **(In thousands except per share amounts)** | ** **  |
| Net  income                                                                                                                                   |       | As reported | ** ** | **$**                                       | **128,607** | ** **              | $          | 118,923 |   | **$** | **67,166** | ** ** | $ | 55,835 |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects |       | Pro forma   |       | **(8,319**                                  | **)**       | (16,511                 | )          | **(3,368** | **)** | (5,612 | ) |
| Net  income                                                                                                                                   |       | Pro forma   | ** ** | **$**                                       | **120,288** | ** **              | $          | 102,412 |   | **$** | **63,798** | ** ** | $ | 50,223 |   |
|                                                                                                                                          |       |        |       |                                        | ** **  |                    |       |   | ** ** |   |   |
| Basic  earnings per share                                                                                                                     |       | As reported | ** ** | **$**                                       | **0.65**    | ** **              | $          | 0.60 |   | **$** | **0.34** | ** ** | $ | 0.28 |   |
|                                                                                                                                          | ** ** | Pro forma   |       | **$**                                       | **0.61**    | ** **              | $          | 0.52 |   | **$** | **0.33** | ** ** | $ | 0.25 |   |
|                                                                                                                                          |       |        |       |                                        | ** **  |                    |       |   | ** ** |   |   |
| Diluted  earnings per share                                                                                                                   |       | As reported | ** ** | **$**                                       | **0.63**    | ** **              | $          | 0.59 |   | **$** | **0.34** | ** ** | $ | 0.28 |   |
|                                                                                                                                          | ** ** | Pro forma   |       | **$**                                       | **0.59**    | ** **              | $          | 0.51 |   | **$** | **0.32** | ** ** | $ | 0.25 |   |

 

On October 25, 2004, APC’sBoard of Directors approved the award of 927,500 restricted stock units (RSU) underthe 2004 LTI Plan. Under the recognition and measurement principles of APBOpinion No. 25, Accounting for Stock Issued to Employees, and relatedInterpretations, stock-based employee compensation cost will be reflected innet income for such units beginning in the fourth quarter of 2004. The RSUAwards will vest, and the underlying common stock will concurrently issue,ratably over four years, whereby one-fourth of the shares will vest on each ofJune 30, 2005, June 30, 2006, June 30, 2007, and June 30, 2008.

 

12

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**11.****  OperatingSegment Information**

 

***Basis forpresentation***

APC operates primarily within one industry consisting of three reportableoperating segments by which it manages its business and from which variousofferings are commonly combined to develop a total solution for the customer.These efforts primarily incorporate the design, manufacture, and marketing ofpower protection equipment and related software and accessories for computer,communications, and related equipment. APC’s three segments are:  Small Systems, Large Systems, and Other. Eachof these segments address global markets. The Small Systems segment developspower solutions for servers and networking equipment commonly used in localarea and wide area networks and for personal computers and sensitiveelectronics; additional accessories and software products are offered toenhance the management of these networks. The Large Systems segment produceslarge system products and services that provide power and availabilitysolutions for data centers, facilities and communications equipment. The Othersegment principally consists of mobile accessories and replacementbatteries.

 

APC measures theprofitability of its segments based on gross margin. Segment gross marginsexclude certain expenses which are managed outside the reportable segments.Costs excluded from segment profit are operating expenses, primarily consistingof research and development, selling and corporate expenses, and income taxes. Inaddition, APC’s third quarter 2004 excess inventory provision and third quarter2003 update to its 2002 product recall provision were not allocated to APC’soperating segments, but rather were classified as indirect operating expensesfor segment reporting consistent with APC’s classification for its internal financialreporting. Expenditures for additions to long-lived assets are not tracked orreported by the operating segments, although depreciation expense is allocatedto and reported by the operating segments.

 

During the fourthquarter of 2003, gross margin was determined to be the most reliable andmeaningful measure of segment profitability for the purpose of executivemanagement’s allocating resources to and assessing the performance of APC’soperating segments for 2003 and future periods. Prior period amounts have beenrestated on this basis in accordance with the requirements of Statement ofFinancial Accounting Standards No. 131, “*Disclosuresabout Segments of an Enterprise and Related Information.”*

 

Summary operatingsegment information is as follows:

 
| ** **                              | ** ** | **Nine months ended**   | ** **    | **Three months ended**  | ** ** |
|-----------------------------------------|------------|-------------------------|---------------|-------------------------|------------|
| ** **                              | ** ** | **September 26,  2004** | ** **    | **September 28,  2003** | ** ** | **September 26,  2004** | ** ** | **September 28,  2003** | ** ** |
| ** **                              | ** ** | **(In thousands)**      | ** **    |
| **Segment net sales**                   | ** ** | ** **              | ** **    | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Small  Systems                          | ** ** | **$**                   | **919,830**   | ** **              | $          | 813,323 |   | **$** | **343,593** | ** ** | $ | 313,277 |   |
| Large  Systems                          | ** ** | **214,458**             | ** **    | 163,390                 |       | **78,226** | ** ** | 59,800 |   |
| Other                                   | ** ** | **46,726**              | ** **    | 51,461                  |       | **16,820** | ** ** | 18,264 |   |
| Total  segment net sales                | ** ** | **1,181,014**           | ** **    | 1,028,174               |       | **438,639** | ** ** | 391,341 |   |
| Shipping  and handling revenues         | ** ** | **8,071**               | ** **    | 5,998                   |       | **3,032** | ** ** | 2,360 |   |
| Total  net sales                        | ** ** | **$**                   | **1,189,085** | ** **              | $          | 1,034,172 |   | **$** | **441,671** | ** ** | $ | 393,701 |   |
|                                    |       |                    | ** **    |                    |       |   | ** ** |   |   |
| **Segment profits**                     |       |                    | ** **    |                    |       |   | ** ** |   |   |
| Small  Systems                          | ** ** | **$**                   | **443,841**   | ** **              | $          | 387,033 |   | **$** | **168,551** | ** ** | $ | 149,382 |   |
| Large  Systems                          | ** ** | **37,935**              | ** **    | 33,073                  |       | **17,425** | ** ** | 14,686 |   |
| Other                                   | ** ** | **29,816**              | ** **    | 29,491                  |       | **11,142** | ** ** | 10,694 |   |
| Total  segment profits                  | ** ** | **511,592**             | ** **    | 449,597                 |       | **197,118** | ** ** | 174,762 |   |
| Shipping  and handling net costs        | ** ** | **24,792**              | ** **    | 20,287                  |       | **8,932** | ** ** | 7,378 |   |
| Provision  for excess inventory         | ** ** | **11,500**              | ** **    | —                  |       | **11,500** | ** ** | — |   |
| Update  to provision for product recall | ** ** | **—**              | ** **    | (5,500                  | )          | **—** | ** ** | (5,500 | ) |
| Other  indirect operating expenses      | ** ** | **338,066**             | ** **    | 277,477                 |       | **117,385** | ** ** | 97,746 |   |
| Other  income, net                      | ** ** | **6,463**               | ** **    | 7,380                   |       | **2,475** | ** ** | 2,195 |   |
| Earnings  before income taxes           | ** ** | **$**                   | **143,697**   | ** **              | $          | 164,713 |   | **$** | **61,776** | ** ** | $ | 77,333 |   |

 

13

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**12.****  Litigation**

 

On January 10,2003, Powerware Corporation filed in the United States District Court for theEastern District of North Carolina (the “Court”) a complaint alleginginfringement of three United States patents. On May 7, 2003, PowerwareCorporation filed with the Court an amended complaint modifying its allegationsof infringement regarding the Powerware Patents. APC was served with theamended complaint on May 9, 2003. Powerware Corporation is seeking unspecifieddamages and injunctive relief. On May 28, 2003, APC filed its answer to theamended complaint and on June 17, 2003 APC filed its first amended answer andcounterclaims alleging infringement by Powerware Corporation of three UnitedStates patents owned by APC. On July 3, 2003, Powerware Corporation filed itsanswer to counterclaims. On March 18, 2004, Powerware Corporation amended itscomplaint to add an additional patent to the litigation.

 

As previously reported in APC’s Form 10-Q for the quartersended March 28, 2004 and June 27, 2004, on February 5, 2004, LiebertCorporation and Zonatherm Products, Inc., Liebert’s sales representative firmin the Chicago area, filed a lawsuit in the Circuit Court of Cook County,Illinois, Chancery Division (the “Court”) against APC, Aerico, LLC, a salesrepresentative firm formed by former employees of Zonatherm Products, and theformer employees of Zonatherm Products who formed Aerico, LLC. The lawsuit allegedwillful violation of the Illinois Trade Secrets Act, tortious interference withcontract, tortious interference with prospective economic advantage, civilconspiracy and conspiracy to breach fiduciary duties. Liebert and Zonatherm areseeking compensatory and punitive damages and injunctive relief. On February18, 2004, the Court denied plaintiffs’ motion for a temporary restrainingorder. On July 16, 2004, the Court dismissed without prejudice all claimsexcept the Illinois Trade Secret Act claim. On August 6, 2004, plaintiffs fileda second amended complaint reasserting the claims dismissed by the Court onJuly 16, 2004. On August 20, 2004, the Court denied plaintiffs’ motion forpreliminary injunction as to violation of the Illinois Trade Secrets Act. OnSeptember 21, 2004, plaintiffs filed a Notice of Appeal of the August 20, 2004ruling.

 

In addition, APC is involvedin various other claims and legal actions arising in the ordinary course ofbusiness.

 

While managementcurrently believes that resolving all pending legal matters, individually or inaggregate, will not have a material adverse impact on APC’s financial position,the litigation and other claims noted above are subject to inherentuncertainties, including the risk of an unfavorable outcome, and management’sview of these matters may change in the future. An unfavorable outcome couldinclude monetary damages or, in cases where injunctive relief is sought, aninjunction prohibiting certain activities. Were an unfavorable final outcome tooccur, there exists the possibility of a material adverse impact on APC’sfinancial position, cash flows and results of operations for the period inwhich the effect becomes reasonably estimable.

 

**13.****  SubsequentEvents**

 

In October 2004, APC’sBoard of Directors approved a quarterly dividend payable on December 15, 2004 toshareholders of record as of November 24, 2004. It is the intention of theBoard of Directors to pay a comparable quarterly dividend on a going forwardbasis contingent upon continued capital availability and a determination thatcash dividends continue to be in the best interests of APC and its shareholders.

 

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| **ITEM 2.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINAN****CIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|----------------------------------------------------------------------------------------------------|

 

We beginManagement’s Discussion and Analysis of Financial Condition and Results ofOperations (MD&A) with a discussion of our business outlook for theremainder of this fiscal year.  We alsoprovide a discussion of our Results of Operations for the third quarter andfirst nine months of 2004 compared to the third quarter and first nine months of2003. This discussion includes an overview of our operating results and thedirections in which we believe our markets, segments, and geographies aremoving. We then provide a Liquidity and Financial Resources discussion of thesignificant changes in our balance sheet during the first nine months of 2004,and cash flows for the third quarter and first nine months of 2004 compared tothe third quarter and first nine months of 2003, as well as our contractualobligations and foreign currency activity. This is followed by a discussion ofthe Critical Accounting Policies that we believe are important to our businessoperations and understanding of our results of operations. We conclude withinformation about factors that may affect our future results.

 

This MD&Ashould be read in conjunction with the other sections of this report, including“Item 1. Financial Statements” and also our Annual Report on Form 10-K for theyear ended December 31, 2003, including “Item 1. Business;” “Item 6. SelectedFinancial Data;” and “Item 8. Financial Statements and Supplementary Data.”

 

Inaddition to historical consolidated financial information, the followingdiscussion contains forward-looking statements that reflect our plans,estimates and beliefs. Our actual results could differ materially from thosediscussed in the forward-looking statements. Factors that could cause orcontribute to these differences include those discussed below and elsewhere inthis Form 10-Q.

 

**BUSINESS OUTLOOK**

 

We entered 2004 in asstrong a competitive and financial position as ever before, and we areleveraging this strength throughout our business. It is evident that APCsolutions are resonating with customers across their networks as we experiencedgrowth in our major business segments. Not only have our core UPS offeringsgrown, but increasingly APC solutions, specifically our InfraStruXurearchitecture, are being specified for network-critical physical infrastructure(NCPI) requirements. As customers implement adaptable, on-demand informationtechnology (IT) systems, we believe that APC’s products are supporting NCPIneeds more quickly and more cost-effectively than ever before.

 

As we approach the end of2004, we currently expect growth in our overall annual revenue drivenprincipally by anticipated continued revenue growth in our Small and LargeSystems reportable segments. We expect the rate of growth of our Large Systemsproducts to be greater than the growth expected for Small Systems due to theassumed continued success of our overall strategy and the acceptance of ourproducts in specific market segments.

 

Overall gross margins for2004 are currently expected to be impacted by a shift in product mix toward thefaster-growing, lower-margin Large Systems products. Gross margins,particularly for Small Systems products, are expected to be impacted by pricereductions. Gross margin variability could result from changing revenue levels,which are dependent on unit volumes and prices as well as the mix of productssold, unit costs and yield issues associated with production at our factories, currencytrends, changing component and commodity costs, excess manufacturing capacity,excess inventory, inventory obsolescence and variations in inventory valuation.

 

We have dedicatedsignificant efforts to rationalize our overall manufacturing capacity over thepast three years and we will continue to plan for future capacity requirementsbased on the assumed continued acceptance and demand for our products in thespecific market segments they were designed to address. We currently expectthat capital spending will be between $25 million and $35 million in 2004,compared to $21.6 million in 2003. We expect that most of the capital spendingfor 2004 will go toward maintaining, upgrading, and expanding currentmanufacturing capacity, as well as investing to upgrade current hardware andsoftware office technologies. We are also in the process of building productdemonstration sites in selected locations around the world in support of ourpresent strategy.

 

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We are committed to sustaining our R&Defforts to meet the future needs of our customers across all segments andpotentially expanding into emerging, high-growth areas. We continue to dedicateresources to support our investment in research and development with a primaryfocus on driving product innovation through increasing engineering efforts. Webelieve that continued product innovation through development is necessary forour existing products to remain competitive in our markets, as well as to createopportunities from new product introductions, including our InfraStruXurearchitecture.

 

We will remain focused on aggressively driving the growth of ournetwork-critical physical infrastructure solutions such as InfraStruXure, whichwill require sustaining and increasing our operating expense investments insales and marketing. A primary focus is increasing the awareness of existingand prospective customers, particularly in relation to our InfraStruXurearchitecture. Overall we are expanding sales and support teams, developing newchannels such as manufacturer representatives and engineering contractors,funding our educational efforts through high-level customer and partner events,as well as increasing sales and marketing support of our core reseller channels.

 

We currently expect our tax rate to beapproximately 15% for 2004. This rate includes the effect of a net taxcredit in the third quarter of 2004 of approximately $20.8 million associatedwith the reversal of income tax provisioning resulting from the favorableoutcome of recent tax audits by U.S. federal and state taxing authorities. The estimated effective tax rate is basedon current tax law and the current expected income. The tax rate may beaffected by the jurisdictions in which profits are determined to be earned andtaxed, our ability to successfully implement additional tax savings planningopportunities, the outcome of tax audits, and our ability to realize deferredtax assets. We expect our tax rate forthe fourth quarter of 2004 to return to levels similar to the first half of2004. In October 2004, the American Jobs Creation Act of 2004 was enacted.This Act repealed the tax code’s extraterritorial income (ETI) exclusion inresponse to the World Trade Organization’s challenge that the ETI exclusion wasa prohibited tax subsidy. The repeal will be phased in through 2006. The Actreplaced the ETI exclusion with a 9% domestic deduction for domestic productionactivities effective for APC’s 2005 tax year. The Act also provides for anelective tax-favored repatriation of offshore earnings, provided that thedividends are invested in the United States under a properly approved domesticreinvestment plan. The election to apply an 85% dividends-received deductionagainst cash dividends made by APC’s offshore subsidiaries can be made ineither 2004 or 2005. We are currently reviewing the Act to determine its impacton APC.

 

Weare currently a party to various legal proceedings and claims, including aclaim alleging patent infringement. As a result of expected costs related tothe defense of such matters, we expect 2004 legal costs to exceed 2003 legalcosts. We currently do not believe that the ultimate outcome of these legalproceedings and claims will have a material adverse effect on our financial positionor overall trends in results of operations. However, litigation is subject toinherent uncertainties, including the risk of an unfavorable outcome, andmanagement’s view of these matters may change in the future. An unfavorableoutcome could include monetary damages or, in cases where injunctive relief issought, an injunction prohibiting certain activities. If an unfavorable outcomewere to occur in any specific period, there exists the possibility of amaterial adverse impact on the results of operations of that period or futureperiods. We believe that, given our current liquidity and cash and investmentbalances, even an adverse judgment would not have a material impact on cash andinvestments or liquidity. We also expect that our administrative spending for2004 will increase year-over-year in support of our on-going efforts to complywith the provisions of the Sarbanes-Oxley Act of 2002.

 

OnOctober 25, 2004, APC’s Board of Directors approved the award of 927,500restricted stock units under the 2004 LTI Plan. Under the recognition andmeasurement principles of APB Opinion No. 25, Accounting for Stock Issued toEmployees, and related Interpretations, stock-based employee compensation costwill be reflected in net income for such units beginning in the fourth quarterof 2004.

 

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**RESULTS OF OPERATIONS COMPARISON OF THE THREE AND NINEMONTH PERIODS ENDED SEPTEMBER 26, 2004 AND SEPTEMBER 28, 2003**

 

**Revenues**

 

Net sales were $441.7 million for the third quarter of 2004, anincrease of 12.2% compared to $393.7 million for the same period in 2003. Netsales for the first nine months of 2004 were $1.189 billion compared to $1.034billion in 2003, an increase of 15.0%. These increases were attributable tostrength in our major product segments, the Small and Large System segments, aswell as growth across our major geographies. Demand for information technologyhardware continued to be healthy in the third quarter 2004. Our product segmentgrowth was driven by ongoing advancement of our data center initiatives. Managementcontinues to believe our InfraStruXureTM systems are increasingly beingspecified for network-critical physical infrastructure (NCPI) requirements. Ourcore uninterruptible power supply (UPS) offerings also contributed solid growthduring the third quarter and first nine months of 2004. For further informationabout revenues by segment, refer to the *Segment Results*section below.

 

***Revenues byGeography.**** *The following tablessummarize our revenues on a geographic basis for the three and nine monthperiods ended September 26, 2004 and September 28, 2003.

 

| ** **                                 | ** ** | **Three months ended**       | ** ** |
|--------------------------------------------|------------|------------------------------|------------|
| ** **                                 | ** ** | **September 26,  2004** | ** ** | **%****of  Total** | ** ** | **September 28,  2003** | ** ** | **%****of  Total** | ** ** |
| ** **                                 | ** ** | **($ in millions)**     | ** ** |
| North and Latin America (the Americas)     | ** ** | **$**                        | **226.1**  | ** ** | **51.2** | % | $ | 206.1 |   | 52.4 | % |
| Europe, the Middle East, and Africa (EMEA) | ** ** | **137.7**                    | ** ** | **31.2** | % | 117.1 |   | 29.7 | % |
| Asia                                       | ** ** | **77.9**                     | ** ** | **17.6** | % | 70.5 |   | 17.9 | % |
| Total Net Sales                            | ** ** | **$**                        | **441.7**  | ** ** | **100.0** | % | $ | 393.7 |   | 100.0 | % |

 

| ** **                                 | ** ** | **Nine months ended**        | ** **  |
|--------------------------------------------|------------|------------------------------|-------------|
| ** **                                 | ** ** | **September 26,  2004** | ** **  | **%****of  Total** | ** ** | **September 28,  2003** | ** ** | **%****of  Total** | ** ** |
| ** **                                 | ** ** | **($ in millions)**     | ** **  |
| North and Latin America (the Americas)     | ** ** | **$**                        | **601.1**   | ** ** | **50.6** | % | $ | 529.1 |   | 51.2 | % |
| Europe, the Middle East, and Africa (EMEA) | ** ** | **367.5**                    | ** **  | **30.9** | % | 316.9 |   | 30.6 | % |
| Asia                                       | ** ** | **220.5**                    | ** **  | **18.5** | % | 188.2 |   | 18.2 | % |
| Total Net Sales                            | ** ** | **$**                        | **1,189.1** | ** ** | **100.0** | % | $ | 1,034.2 |   | 100.0 | % |

 

In the third quarter of 2004, net sales of theAmericas increased 9.7% over the third quarter of 2003. In the first ninemonths of 2004, net sales of the Americas increased 13.6% over the first ninemonths of 2003. Net sales of EMEA increased 17.6% in the third quarter of 2004over the third quarter of 2003 and increased 16.0% in the first nine months of2004 over the first nine months of 2003. Net sales of Asia increased 10.5% inthe third quarter of 2004 over the third quarter of 2003, and increased 17.2%in the first nine months of 2004 over the first nine months of 2003.

 

In the third quarter of 2004, on a constant currencybasis, EMEA’s net sales increased 12.0% and Asia’s net sales increased 7.6%over the third quarter of 2003. In the first nine months of 2004, on a constantcurrency basis, EMEA’s net sales increased 9.6% and Asia’s net sales increased 11.4%over the first nine months of 2003. Total third quarter and first nine months 2004net sales grew 10.0% and 11.9%, respectively, on a constant currency basis overthe comparable prior year periods. EMEA’s revenues would have been lower, on aconstant currency basis, by $6.6 million in the third quarter of 2004 and by $20.3million in the first nine months of 2004, principally due to strengthening ofthe Euro and British pound. Asia’s revenues would have been lower, on aconstant currency basis, by $2.0 million in the third quarter of 2004 and by $10.9million in the first nine months of 2004, principally due to strengthening ofthe Japanese yen and Australian dollar. In total, the impact of currencyexchange rate changes worldwide added $8.6 million and $31.7 million to netsales in the third quarter and first nine months of 2004, respectively. Webelieve constant currency information is useful for an understanding of ouroperating results. Revenues on a constant currency basis differ from revenuespresented in accordance with accounting principles generally accepted in theUnited States.

 

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**Cost of GoodsSold**

 

Cost of goods sold was $265.0million or 60.0% of net sales in the third quarter of 2004 compared to $220.8million or 56.1% of net sales in the third quarter of 2003. Cost of goods soldwas $713.8 million or 60.0% of net sales in the first nine months of 2004compared to $599.4 million or 58.0% of net sales in the first nine months of2003. Gross margins for the third quarter of 2004 were 40.0% of net sales,approximately 390 basis points lower than in the third quarter of 2003. Grossmargins for the first nine months of 2004 were 40.0% of net sales,approximately 200 basis points lower than in the first nine months of 2003. Grossmargins in the third quarter and first nine months of 2004 were negativelyimpacted by pricing actions and, to a lesser extent, product mix shifts,notably within our Small Systems segment toward lower-margin products combinedwith strong sales growth in our lower-margin Large Systems segment. Thedownward pressure of these factors was substantially offset by costreductions, particularly in the Small Systems segment, from declining materialcosts and select product transitions tolow cost manufacturing locations, but not to the extent of prior periods,as well as the favorable pricing impactof a weakening U.S. dollar, particularly in Europe. For further informationabout gross margins by segment, refer to the *SegmentResults* section below.

 

***Provision for excess inventory***.  Additionally, third quarter 2004 grossmargins included the effects of a $11.5 million incremental charge for excessinventory related to specifically-identified finished goods and raw materialsinventories deemed obsolete as the result of recently commenced efforts toreduce the number of unique product offerings in several of our product lines,as well as the result of new product introductions. There were no additionalinventory charges, other than APC’s standard provisioning, during the thirdquarters and first nine months of 2004 and 2003.

 

***Product Recall*.**  In early 2003, we announced aproduct recall of Back-UPS CS 350 and 500 models, due to potential safetyissues. Prior to announcing the recall, APC received eight reports worldwide ofunits overheating, resulting in the melting of the unit’s outer casing, six ofwhich occurred in the United States. Three of the reported incidents resultedin minor property damage; no injuries were reported. The total number ofaffected devices recalled worldwide is approximately 2.1 million withapproximately 900,000 devices recalled in the United States. The recall islimited to two specific models in APC’s Back-UPS CS product line, the Back-UPSCS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt models. Theaffected units were manufactured between November 2000 and December 2002and were sold primarily through computer and electrical distribution, catalogand retail outlets worldwide. In the fourth quarter of 2002, APC accrued acurrent liability and recognized additional warranty expense, classified incost of goods sold, of $19.6 million. Based upon repair cost and return rateexperience to-date as well as then-current estimates of remaining costs to beincurred, APC projected that aggregate costs for the recall would be less thanoriginally estimated. To reflect this change, cost of goods sold was reduced by$5.5 million in the third quarter of 2003. As of September 26, 2004, APChad incurred approximately 83% of currently estimated total recall costs. Ourestimation of remaining recall costs of $2.4 million, comprised of $0.9 millionfor the U.S. and $1.5 million for international geographies, continues to besubject to actual return rates and per unit repair costs (which can vary bycountry) as well as estimates for other recall-related costs expected tobe incurred. We expect that futureamounts will not differ materially from our current estimates.

 

***Inventory Reserves.***  Totalinventory reserves at September 26, 2004 were $50.6 million compared to$38.8 million at December 31, 2003. This increase was due primarily to theaforementioned charge for excess inventory as well as routine provisioning thatwas necessary as a result of applying APC’s inventory reserve methodologythroughout the year. APC’s reserve estimate methodology involves quantifyingthe total inventory position having potential loss exposure. Loss exposuregenerally results from several business factors, including product or componentdiscontinuance, unplanned changes in demand, product design changes, andfactory transitions. Quantifying such loss exposure is the result of combiningthe cost of inventories specifically identified as having little or noopportunity for sale or use (thus available for physical disposition) plus thecost of inventories having a high risk of no future sale or use based upon ananalysis of on-hand quantities compared to historical and anticipated futuresale or use. APC maintains an on-going business process for the physicaldisposition of inventories previously identified. Inventory write-offs occur atthe time of physical disposition. Inventories, once reserved, are not writtenback up as such reserve adjustments are considered to be a permanent decreaseto the cost basis of the excess or obsolete inventory.

 

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**Segment Results**(Also refer toNote 11 of Notes to Consolidated Financial Statements in Item 1 of this reportfor important information regarding APC’s reportable segments)

 
| ** **                             | ** ** | **Nine months ended**        | ** **    | **Three months ended**       | ** ** |
|----------------------------------------|------------|------------------------------|---------------|------------------------------|------------|
| ** **                             | ** ** | **September 26,  2004** | ** **    | **September 28,  2003** | ** ** | **September 26,  2004** | ** ** | **September 28,  2003** | ** ** |
| ** **                             | ** ** | **(In thousands)**           | ** **    |
| **Segment net sales**                  | ** ** | ** **                   | ** **    | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Small Systems                          | ** ** | **$**                        | **919,830**   |                         | $          | 813,323 | ** ** | **$** | **343,593** |   | $ | 313,277 |   |
| Large Systems                          | ** ** | **214,458**                  |          | 163,390                      | ** ** | **78,226** |   | 59,800 |   |
| Other                                  | ** ** | **46,726**                   |          | 51,461                       | ** ** | **16,820** |   | 18,264 |   |
| Total segment net sales                | ** ** | **1,181,014**                |          | 1,028,174                    | ** ** | **438,639** |   | 391,341 |   |
| Shipping and handling revenues         | ** ** | **8,071**                    |          | 5,998                        | ** ** | **3,032** |   | 2,360 |   |
| Total net sales                        | ** ** | **$**                        | **1,189,085** |                         | $          | 1,034,172 | ** ** | **$** | **441,671** |   | $ | 393,701 |   |
|                                   |       |                         |          |                         |       |   |   |   |   |
| **Segment profits**                    |       |                         |          |                         |       |   |   |   |   |
| Small Systems                          | ** ** | **$**                        | **443,841**   |                         | $          | 387,033 | ** ** | **$** | **168,551** |   | $ | 149,382 |   |
| Large Systems                          | ** ** | **37,935**                   |          | 33,073                       | ** ** | **17,425** |   | 14,686 |   |
| Other                                  | ** ** | **29,816**                   |          | 29,491                       | ** ** | **11,142** |   | 10,694 |   |
| Total segment profits                  | ** ** | **511,592**                  |          | 449,597                      | ** ** | **197,118** |   | 174,762 |   |
| Shipping and handling net costs        | ** ** | **24,792**                   |          | 20,287                       | ** ** | **8,932** |   | 7,378 |   |
| Provision for excess inventory         | ** ** | **11,500**                   |          | —                       | ** ** | **11,500** |   | — |   |
| Update to provision for product recall | ** ** | **—**                   |          | (5,500                       | )          | **—** |   | (5,500 | ) |
| Other indirect operating expenses      | ** ** | **338,066**                  |          | 277,477                      | ** ** | **117,385** |   | 97,746 |   |
| Other income, net                      | ** ** | **6,463**                    |          | 7,380                        | ** ** | **2,475** |   | 2,195 |   |
| Earnings before income taxes           | ** ** | **$**                        | **143,697**   |                         | $          | 164,713 | ** ** | **$** | **61,776** |   | $ | 77,333 |   |

 

***Small Systems.***  Net sales for products in the Small Systemssegment, which provides power protection, UPS, and management products for thePC, server, and local area networking markets, increased in the third quarterof 2004 by 9.7% over the third quarter of 2003, and increased in the first ninemonths of 2004 by 13.1% over the first nine months of 2003. Solid performancein this segment was driven by strong Smart-UPS® sales. This segment alsobenefited from strength in NCPI and InfraStruXure related products.

 

Gross margins for the Small Systems segment increasedin the third quarter and first nine months of 2004 from the comparableperiods in 2003. The factors favorablyinfluencing the gross margins of this segment included product cost reductions and favorable currency trends. Our Small Systemscost reductions were achieved through a combination of product transitions tolow cost manufacturing locations and material cost reductions from our supplierbase. Our product cost reductions were driven principally by material costimprovements and favorably impacted gross margins in the Small Systems segmentby approximately 280 basis points in the third quarter of 2004 and 340 basispoints in the first nine months of 2004. Partially offsetting the favorableproduct cost and currency trends were the impact of pricing actions and productmix shifts within the segment.

 

***Large Systems.***  Net sales for products in theLarge Systems segment, consisting primarily of three-phase UPS, services,precision cooling products and ancillary products for data centers, facilities,and communication applications, increased in the third quarter of 2004 by 30.8%over the third quarter of 2003, and increased in the first nine months of 2004by 31.3% over the first nine months of 2003. With approximately 72% ofInfraStruXure revenue included in the Large Systems segment, InfraStruXuresales were a major contributor to the year-over-year growth of this segment. Ona product level, Symmetra three-phase, the primary power component of anInfraStruXure system, our industrial products, and services were leading growthdrivers.

 

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Gross margins for the Large Systems segment decreasedin the third quarter and first nine months of 2004 from the comparable prioryear levels. This decline was theresult of increased costs within our service business, particularly in the U.S.and Europe, as well as increasing material costs on select product lines,including cooling and Silcon products. These increases were partially offset byvolume-driven cost improvements on Symmetra 3-phase products. Symmetra’sincreasing share of Large Systems revenue further enhanced the favorable impactof these cost improvements.

 

***“Other” Segment.***  Netsales for products in the Other segment, consisting principally of mobileaccessories and replacement batteries, decreased in the third quarter of 2004by 7.9% from the third quarter of 2003, and decreased in the first nine monthsof 2004 by 9.2% from the first nine months of 2003. The year-over-year decreaseswere attributable to softness in mobile accessories, partially offset by growthin replacement batteries.

 

Gross margins for the Othersegment improved in the third quarter and first nine months of 2004 from the comparableprior year levels. Strength in replacement battery sales and product costreductions drove the year-over-year improvements. These cost reductions favorably impactedgross margins in the Other segment by approximately 240 basis points in thethird quarter of 2004 and 390 basis points in the first nine months of 2004.

 

## **OperatingExpenses**

 

***Marketing, Selling, General, and Administrative (SG&A)Expenses.***  SG&A expenses in the third quarter of 2004were $95.6 million or 21.7% of net sales compared to $80.0 million or 20.3% ofnet sales in the third quarter of 2003. SG&A expenses in the first ninemonths of 2004 were $276.5 million or 23.2% of net sales compared to $228.9million or 22.1% of net sales in the first nine months of 2003. We continue to supportour data center initiatives, with a primary focus on increasing the awarenessof our existing and prospective customers, particularly in relation to ourInfraStruXure architecture. The increases in total spending in the third quarterand first nine months of 2004 reflected ongoing sales and promotional effortswhich involve expanding our sales and support teams, developing new channelssuch as manufacturer representatives and engineering contractors, andincreasing sales and marketing support of our core reseller channels, as wellas funding our educational efforts through high-level customer and partnerevents. Also contributing to the increases in total spending were higherprofessional service costs in the third quarter and first nine months of 2004 insupport of ongoing litigation and Sarbanes-Oxley compliance.

 

The allowance for bad debts was 5.4% of grossaccounts receivable at September 26, 2004 compared to 6.7% at December 31,2003. Accounts receivable balances outstanding over 60 days represented 13.2%of total receivables at September 26, 2004 compared to 13.5% at December 31,2003. We continue to experience strong collection performance. Write-offs ofuncollectable accounts represent less than 1% of net sales. Commencing in August 2004,we expanded APC’s receivables insurance coverage to include U.S.-based sales. Asa result of this increased coverage, in the third quarter of 2004 we were ableto reduce our allowance for doubtful accounts by approximately $1.5 million. Amajority of international customer balances continue to be covered byreceivables insurance.

 

***Research and Development (R&D).*** R&D expenditures were $21.8 million or 4.9% of net sales in the thirdquarter of 2004, up from $17.8 million or 4.5% of net sales in the thirdquarter of 2003. R&D expenditures were $61.6 million or 5.2% of net salesin the first nine months of 2004, up from $48.6 million or 4.7% of net sales inthe first nine months of 2003. We continue to commit resources to support ourinvestment in research and development with a primary focus on driving productinnovation through increasing engineering efforts. We believe that continuedproduct innovation through development is necessary for our existing productsto remain competitive in our markets, as well as creating opportunities fromnew product introductions. The increases in total R&D spending primarilyreflect increased numbers of software and hardware engineers and costsassociated with new product development and engineering support.

 

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**Other Income, Net and Income Taxes**

 

***Other Income, Net.***  Otherincome is comprised principally of interest income. Although global interestincome for the first nine months of 2004 was lower than the comparable periodlast year, such income increased in the third quarter of 2004 over the thirdquarter of 2003 as a result of increasing interest rates and investments inforeign-sourced commercial paper. On a year-to-date basis, the decreasereflected our strategic purchase of additional tax-exempt securities as well asan overall decline in the bond market.

 

At September 26, 2004, APC had $677.0million of total cash and investments, down from $806.8 million at December 31,2003, all of which are stated at fair value. This decrease reflected APC’sthird quarter repurchase on the open market of approximately 9.3 million sharesof its common stock, at an average price of $16.09 per share totaling $150million, completing a program approved by APC’s Board of Directors in June 2004.We manage APC’s cash and investmentbalances to preserve principal and liquidity while maximizing our return on thetotal investment portfolio. We diversify our investment portfolio by investingin multiple types of investment-grade securities with multiple investmentbrokers. Based on APC’s investment portfolio and interest rates at September,2004, a 100 basis point increase or decrease in interest rates would haveresulted in an increase or decrease of approximately $7 million in our annualinterest income.

 

***Income Taxes.***  Oureffective income tax rate was approximately -8.7% and 27.8% for the thirdquarters and 10.5% and 27.8% for the first nine months ended September 26,2004 and September 28, 2003, respectively. The decrease in 2004 from 2003was principally attributable to a net tax credit of approximately $20.8 millionassociated with the reversal of income tax provisioning resulting from thefavorable outcome of recent tax audits by U.S. federal and state taxingauthorities. In connection with the completion of the examination of its 2000-2002U.S. federal tax returns, APC adjusted certain income tax related reservesestablished in prior years due to the expiration of the statute of limitationsprimarily related to transfer pricing reserves established for the Philippineoperations, offset by the additional tax due agreed to as a result of theexamination, as well as an upward revision of reserves for years remaining openunder the statute of limitations. This revision relates primarily to transferpricing matters concerning our manufacturing subsidiaries in India and Chinaand our sales subsidiaries in Europe. In addition, APC recorded an additionaltax credit to the third quarter tax rate with respect to the reversal of a taxreserve established for potential state taxes. APC prevailed on a 1996-1997state tax appeal concerning a sales apportionment matter and this, along withthe expiration of the statue of limitations for all years through 2000,resulted in this tax credit.

 

The decrease in our effective tax rate in 2004 from2003 also reflected tax savings from an increasing portion of taxable earnings anticipatedto be generated from APC’s operations in jurisdictions currently having lowerincome tax rates than the present U.S. statutory income tax rate. This shiftresulted partially from our product transitions to lower cost, lower tax,manufacturing locations. APC has taxholidays in China, India, and the Philippines, which reduce or eliminate theincome taxes paid in those countries. A substantial portion of APC’s taxholiday in the Philippines expired in the third quarter of 2003. Although thiswill have the effect of increasing APC’s foreign taxes, APC’s effectiveincome tax rate will remain considerably lower than the U.S. statutory federalcorporate tax rate of 35%.

 

In October 2004, theAmerican Jobs Creation Act of 2004 was enacted. This Act repealed the tax code’sextraterritorial income (ETI) exclusion in response to the World TradeOrganization’s challenge that the ETI exclusion was a prohibited tax subsidy.The repeal will be phased in through 2006. The Act replaced the ETI exclusionwith a 9% domestic deduction for domestic production activities effective for APC’s2005 tax year. The Act also provides for an elective tax-favored repatriationof offshore earnings, provided that the dividends are invested in the UnitedStates under a properly approved domestic reinvestment plan. The election toapply an 85% dividends-received deduction against cash dividends made by APC’soffshore subsidiaries can be made in either 2004 or 2005. We are currentlyreviewing the Act to determine its impact on APC.

 

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**LIQUIDITYAND FINANCIAL RESOURCES**

 

**Working Capital.**  Workingcapital at September 26, 2004 was $1.216 billion, substantially unchangedfrom $1.217 billion at December 31, 2003. APC’s continued positiveoperating results have allowed us to repurchase on the open marketapproximately 9.3 million shares of our common stock, at an average price of$16.09 per share totaling $150million, in the third quarter of 2004, as well as pay a quarterly dividend and continueto internally finance the capital investment, R&D, sales and marketingspending required to expand our operations.

 

**Cash Flows*.***  The following table summarizesour cash flows for the three and nine month periods ended September 26,2004 and September 28, 2003.

 
| ** **                                          | ** ** | **Nine months ended**        | ** **  | **Three months ended**       | ** ** |
|-----------------------------------------------------|------------|------------------------------|-------------|------------------------------|------------|
| ** **                                          | ** ** | **September 26,  2004** | ** **  | **September 28,  2003** | ** ** | **September 26,  2004** | ** ** | **September 28,  2003** | ** ** |
| ** **                                          | ** ** | **(In thousands)**           | ** **  |
|                                                |       |                         | ** **  | ** **                   |       |   | ** ** |   |   |
| Net cash provided by operating activities           | ** ** | **$**                        | **84,384**  | ** **                   | $          | 68,755 |   | **$** | **36,496** | ** ** | $ | 53,350 |   |
|                                                |       |                         | ** **  |                         |       |   | ** ** |   |   |
| Net cash provided by (used in) investing activities | ** ** | **21,680**                   | ** **  | (83,746                      | )          | **77,368** | ** ** | (43,711 | ) |
|                                                |       |                         | ** **  |                         |       |   | ** ** |   |   |
| Net cash (used in) provided by financing activities | ** ** | **(192,108**                 | **)**       | 8,158                        |       | **(166,946** | **)** | (2,936 | ) |
|                                                |       |                         | ** **  |                         |       |   | ** ** |   |   |
| Net change in cash and cash equivalents             | ** ** | **(86,044**                  | **)**       | (6,833                       | )          | **(53,082** | **)** | 6,703 |   |
| Cash and cash equivalents at beginning of period    | ** ** | **252,114**                  | ** **  | 209,322                      |       | **219,152** | ** ** | 195,786 |   |
| Cash and cash equivalents at end of period          | ** ** | **$**                        | **166,070** | ** **                   | $          | 202,489 |   | **$** | **166,070** | ** ** | $ | 202,489 |   |
|                                                     |            |                              |             |                              |            |  |  |  |  |  |  |  |  |  |

 

***Cash Flows from Operating Activities****.* Our cash flows from operations for the thirdquarter and first nine months of 2004 reflected higher profit levels aswell as the favorable impact ofincreasing accounts payable and other liabilities, partially offset by increasedinventory and higher accounts receivable balances consistent with our strongsales growth.

 

***Cash Flows from Investing Activities****.* Our investing activities cash flows wereused mainly for the purchase of held-to-maturity securities and for capitalspending, principally manufacturing and office equipment, purchased softwareapplications, and building improvements. Cash available from operationsresulted in net purchases of investments in the third quarter and first ninemonths of 2004, including the purchase of additional tax-exempt securities. Ourinvestment approach and the composition of our investment portfolio remainedrelatively constant overall with no investments having maturity dates greater thantwo years.

 

***Cash Flows from Financing Activities****.* Our cash flows from financing activities includedthe aforementioned $150 million stock repurchase during the third quarter of2004 as well as the payment of common stock dividends of approximately $19.3million and $15.8 million during the third quarters of 2004 and 2003,respectively, and approximately $51.3 and $15.8 million during the first ninemonths of 2004 and 2003, respectively. These outflows were partially offset by proceedsfrom issuances of common stock relating to employee stock plans during each ofthe periods presented.

 

**Inventories.**  Worldwide inventories were $464.8 million at September 26,2004, up from $402.2 million at December 31, 2003. Higher levels ofon-hand raw materials and finished goods were required during the first ninemonths of 2004 to meet increasing current and anticipated demand, particularlyInfraStruXure demand, as well as to manage the supply chain requirementsassociated with continuing transfers of production of a wide range of Small andLarge Systems products to and among our low cost manufacturing regions in 2004.In addition, we increased our inventory levels of price-sensitive materials tohedge against the risk of current and anticipated commodity cost trends, aswell as to support continuing new product introductions. Despite increasinginventory levels, inventory as a percentage of quarterly net sales was 105% inthe third quarter of 2004, down from 115% in the second quarter of 2004,reflecting our strong third quarter 2004 net sales performance.

 

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***Provision for excess inventory***.  Additionally, APC’s third quarter 2004results included the effects of a $11.5 million incremental charge for excessinventory related to specifically-identified finished goods and raw materialsinventories deemed obsolete as the result of recently commenced efforts toreduce the number of unique product offerings in several of our product lines,as well as the result of new product introductions. There were no additionalinventory charges, other than APC’s standard provisioning, during the thirdquarters and first nine months of 2004 and 2003.

 

***Product Recall*.**  Inearly 2003, we announced a product recall of Back-UPS CS 350 and 500 models,due to potential safety issues. Prior to announcing the recall, APC receivedeight reports worldwide of units overheating, resulting in the melting of theunit’s outer casing, six of which occurred in the United States. Three of thereported incidents resulted in minor property damage; no injuries werereported. The total number of affected devices recalled worldwide isapproximately 2.1 million with approximately 900,000 devices recalled in theUnited States. The recall is limited to two specific models in APC’s Back-UPSCS product line, the Back-UPS CS 350 and the Back-UPS CS 500, in both 120-voltand 230-volt models. The affected units were manufactured between November 2000and December 2002 and were sold primarily through computer and electricaldistribution, catalog and retail outlets worldwide. In the fourth quarter of2002, APC accrued a current liability and recognized additional warrantyexpense, classified in cost of goods sold, of $19.6 million. Based upon repaircost and return rate experience to-date as well as then-current estimates ofremaining costs to be incurred, APC projected that aggregate costs for therecall would be less than originally estimated. To reflect this change, cost ofgoods sold was reduced by $5.5 million in the third quarter of 2003. As of September 26,2004, APC had incurred approximately 83% of currently estimated total recallcosts. Our estimation of remaining recall costs of $2.4 million, comprised of $0.9million for the U.S. and $1.5 million for international geographies, continuesto be subject to actual return rates and per unit repair costs (which can varyby country) as well as estimates for other recall-related costs expectedto be incurred. We expect that futureamounts will not differ materially from our current estimates.

 

## **ContractualObligations***.*  Our future contractualobligations have not changed significantly from the amounts reported in ourAnnual Report on Form 10-K for the year ended December 31, 2003. Ourcontractual obligations principally includenon-cancelable operating leases, primarilyfor warehousing and office space, which expire at various dates through 2012.These leases contain renewal options for periods ranging from one to nine yearsand require APC to pay its proportionate share of utilities, taxes, andinsurance. APC is not able to determine the aggregate amount of purchase ordersthat represent contractual obligations for the purchase of goods and services,as such purchase orders may represent authorizations to purchase rather thanbinding agreements. For the purposes of this disclosure, contractualobligations for the purchase of goods and services are defined as agreementsthat are enforceable and legally binding on APC and that specify all significantterms, including: fixed or minimum quantities to be purchased; fixed, minimum,or variable price provisions; the approximate timing of the transaction, andcontain no provisions allowing for cancellation without significant penalty.Our purchase orders for raw materials or purchased finished products are basedon our current manufacturing needs and/or demand forecasts and are fulfilled byour vendors within short time horizons. We do not have significant agreementsfor the purchase of raw materials or finished products specifying minimumquantities or set prices that exceed our expected requirements for threemonths.

## ** **

**CapitalExpenditures and Capital Commitments*.*** During the third quarters of 2004 and 2003, our capital expenditures,net of capital grants, amounted to approximately $10.5 million and $5.3million, respectively. During the first nine months of 2004 and 2003, ourcapital expenditures, net of capital grants, amounted to approximately $23.0million and $14.3 million, respectively. Our capital spending consistedprimarily of manufacturing and office equipment, purchased softwareapplications, and building improvements. Capital spending in the third quarterand first nine months of 2004 focused on funding additional equipment needs andimproving existing factories, principally in the U.S., India, Ireland, thePhilippines, and Denmark, as well as continuing investment in informationtechnologies. Substantially all of APC’s net capital expenditures were financedfrom available operating cash.

 

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We have dedicated significant efforts torationalize our overall manufacturing capacity over the past three years and wewill continue to plan for future capacity requirements based on the assumedcontinued acceptance and demand for our products in the specific marketsegments they were designed to address. We currently expect that capitalspending will be between $25 million and $35 million in 2004, compared to $21.6million in 2003. We expect that most of the capital spending for 2004 will gotoward maintaining, upgrading, and expanding current manufacturing capacity, aswell as investing to upgrade current hardware and software office technologies.We are also in the process of building product demonstration sites in selectedlocations around the world in support of our present strategy.

 

We had no material capital commitments duringthe third quarters and first nine months of 2004 and 2003, or at September 26,2004 and December 31, 2003.

 

APChas agreements with the Industrial Development Authority of Ireland, otherwiseknown as the IDA. Under these agreements, we receive grant monies for costsincurred for machinery, equipment, and building improvements for our Galway andCastlebar facilities. These grants are equal to 40% and 60%, respectively, ofsuch costs up to a maximum of $13.1 million for Galway and $1.3 million forCastlebar. Such grant monies are subject to APC meeting certain employmentgoals and maintaining operations in Ireland until termination of the respectiveagreements. Under a separate agreement with the IDA, we receive directreimbursement of a portion of costs of certain projects at our Galway andCastlebar facilities related to the development of software products. Thisgrant may reimburse up to 28% of actual eligible expenditures subject to amaximum of €714,588.

 

**Borrowing Facilities and Financial Commitments*.***  At September 26, 2004 and December 31,2003, we had available for future borrowings $65.0 million under an unsecuredline of credit agreement at a floating interest rate equal to the bank’s costof funds rate plus 0.625%. No borrowings were outstanding under this facilityduring the third quarters and first nine months of 2004 and 2003, or at September 26,2004 and December 31, 2003. APC had no significant financial commitments,other than those required in the normal course of business, during the thirdquarters and first nine months of 2004 and 2003, or at September 26, 2004and December 31, 2003.

 

**Off-Balance-Sheet Arrangements*.***  APC had no significantoff-balance sheet arrangements during the third quarters and first nine monthsof 2004 and 2003, or at September 26, 2004 and December 31, 2003.

 

**Quarterly Cash Dividends*.***  In June 2003, APC’s Board ofDirectors approved the initiation of a quarterly cash dividend of $0.08 pershare of common stock. Dividends of $0.08 per share were announced and paid ineach subsequent quarter including in April 2004 payable on June 16,2004 to shareholders of record as of May 26, 2004. In June 2004, APC’sBoard of Directors approved a 25% increase in its quarterly cash dividendraising the payout to $0.10 per share, as well as approved APC’s first quarterlydividend at this new rate, payable on September 16, 2004 to shareholdersof record as of August 26, 2004. In October 2004, APC’s Board ofDirectors approved a quarterly dividend payable on December 15, 2004 toshareholders of record as of November 24, 2004. It is the intention of theBoard of Directors to pay a comparable quarterly dividend on a going forwardbasis contingent upon continued capital availability and a determination thatcash dividends continue to be in the best interests of APC and itsshareholders.

 

**StockRepurchase Program.**  Duringthe third quarter of 2004, APC repurchased on the open market approximately 9.3million shares of its common stock, at an average price of $16.09 per sharetotaling $150 million, completing a program approved by APC’s Board ofDirectors in June 2004. No further repurchases will be made under thisprogram. The repurchased shares have been deemed authorized but unissuedshares. In March 2004, APC also returned its 250,000 treasury shares to anauthorized but not issued status.

 

APC has historically generated annual cashflows from operating activities as a result of strong operating results and, attimes, improvement in working capital. We believe that current internal cashflows together with available cash, available credit facilities or, if needed,the proceeds from the sale of additional equity, will be sufficient to supportanticipated capital spending, dividend payments, and other working capitalrequirements for the foreseeable future.

 

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## **Foreign Currency Activity**.  We invoice our customers in variouscurrencies. Realized and unrealized transaction gains or losses are included inthe results of operations and are measured based upon the effect of changes inexchange rates on the actual or expected amount of functional currency cashflows. Transaction gains and losses were not material to the results ofoperations in the third quarters and first nine months of 2004 and 2003.

## ** **

At September 26, 2004,APC’s unhedged foreign currency accounts receivable, by currency, were asfollows:

 

| ** **     | ** ** | **Foreign Currency** | ** ** | **U.S. Dollars** | ** ** |
|----------------|------------|----------------------|------------|------------------|------------|
| ** **     | ** ** | **(In thousands)**   | ** ** |
| European Euros |       | 39,277               |       | $                | 48,157     |   |
| Swiss Francs   |       | 28,349               |       | $                | 22,484     |   |
| Japanese Yen   |       | 2,926,085            |       | $                | 26,464     |   |
| British Pounds |       | 9,675                |       | $                | 17,343     |   |

 

APC also had non-tradereceivables denominated in European Euros of approximately U.S.$0.9 million,liabilities denominated in various European currencies of approximately U.S.$64.0million, and liabilities denominated in Japanese Yen of approximately U.S.$13.7million.

 

We continually review ourforeign exchange exposure and consider various risk management techniques,including the netting of foreign currency receipts and disbursements, rateprotection agreements with customers/vendors and derivatives arrangements,including foreign exchange contracts. We presently do not utilize rateprotection agreements or derivative arrangements.

 

**CRITICALACCOUNTING POLICIES**

 

The discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. The U.S.Securities and Exchange Commission has defined critical accounting policies asthose that are both most important to the portrayal of our financial conditionand results and which require our most difficult, complex or subjectivejudgments or estimates. Based on this definition, we have identified thepolicies below as critical to our business operations and the understanding ofour results of operations. The impact and any associated risks related to thesepolicies on our business operations is discussed throughout Management’sDiscussion and Analysis of Financial Condition and Results of Operations wheresuch policies affect our reported and expected financial results. For allfinancial statement periods presented, there have been no material modificationsto the application of these critical accounting policies. For a detaileddiscussion on the application of these and other accounting policies, alsorefer to Note 1 of Notes to Consolidated Financial Statements in Item 8 ofAmerican Power Conversion Corporation’s Annual Report on Form 10-K for the yearended December 31, 2003.

 

On an on-going basis, weevaluate the judgments and estimates underlying all of our accounting policies,including those related to revenue recognition, product returns, bad debts,inventories, impairment of long-lived assets, deferred tax valuationallowances, restructuring reserves and contingencies, and litigation. We baseour estimates on historical experience and on various other assumptions thatare believed to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Materiallydifferent results in the amount and timing of our actual results for any periodcould occur if we made different judgments or utilized different estimates.Actual results may differ from those estimates.

 

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Our critical accounting policies are as follows:

 

***Revenue Recognition***

 

We follow very specific and detailed guidelines in measuring revenue;however, certain judgments affect the application of our revenue policy.Revenue results are difficult to predict, and any shortfall in revenue or delayin recognizing revenue could cause our operating results to vary significantlyfrom quarter to quarter. In general, revenue is recognized when title haspassed at the time of delivery of product for all of our operating segments asstipulated by the delivery terms for the sales transactions. In addition, priorto revenue recognition, we require persuasive evidence of the arrangement, thatthe price is fixed or determinable, and that collectibility is reasonablyassured. Installation is not applicable for Small Systems and Other segmentproducts based on the nature of the products sold. Generally, revenueassociated with Large Systems sales is also recognized at the time of deliverypursuant to the delivery terms. Delivery terms vary, but often includeorigin-based terms (e.g., FOB Shipping Point and Ex-works) anddestination-based terms (e.g., DDU/DDP (delivered duty unpaid/delivered dutypaid)).

 

Certain Large Systems product lines and, at times, one product lineincluded in the Small Systems segment require electrical hardwire installationor duct installation which is performed by the customer or their contractedlicensed contractor/electrician. Since we do not perform the installation,revenue recognition at the time of delivery is proper as customer acceptance ofthe unit is not required. Also, payment by the customer is not contingent uponinstallation of the product.

 

We offer additionalservices to customers depending on the type of product the customer haspurchased, including on-site services, installation consulting services, remotemonitoring services, power audit services, and network integration services.Revenue is recognized at the time services are provided or is deferred andrecognized over the service period (where applicable). The fair value of theseservices are based upon the rates that we charge customers in separatelynegotiated transactions and such services are not essential to thefunctionality of the delivered product.

 

For all sales, except those completed over the Internet, we use abinding purchase order as evidence of an arrangement. For sales over theInternet (excluding sales orders received via EDI transmission), we use acredit card authorization as evidence of an arrangement. Sales through certaincustomers are evidenced by a master agreement governing the relationshiptogether with binding purchase orders on a transaction by transaction basis.

 

Our arrangements do notgenerally include acceptance clauses. However, if an arrangement includes acustomer specified acceptance provision, acceptance generally occurs at ourfactory prior to delivery. As we continue to introduce new products in 2004 and2005, we anticipate that installation and customer acceptance provisions maybecome more common, and therefore increasingly significant for determiningdelivery and performance and consequently our entitlement to recognize revenue.

 

***EstimatingValuation Allowances and Accrued Liabilities — Allowances for Sales Returns,Doubtful Accounts, Inventory Obsolescence and Product Recall, and Assessment ofthe Probability of the Outcome of our Current Litigation***

 

Significant management judgments that affect the application of ourrevenue policy also include estimates of potential future product returnsrelated to current period product revenue. We analyze historical returns,current economic trends, and channel inventories when evaluating the adequacyof the sales returns and other allowances. Significant management judgments andestimates must be made and used in connection with establishing the salesreturns and other allowances in any accounting period. Material differences mayresult in the amount and timing of our revenue for any period if managementmade different judgments or utilized different estimates.

 

We provide limited rightsof return to distributors and retailers for our Small Systems product lines. Weprovide appropriate reserves for returns at the time that related revenue isrecognized, based on historical patterns of returns and contractual provisionsin accordance with the provisions of Statement of Financial AccountingStandards No. 48, *Revenue Recognition WhenRight of Return Exists*, and U.S. Securities and Exchange CommissionStaff Accounting Bulletin No. 104. Returns of Large Systems products generallydo not occur. Historically, returns have represented 3% of gross sales and havenot differed significantly from prior estimates.

 

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Similarly, we must make estimates of the uncollectability of ouraccounts receivables. Management specifically analyzes accounts receivablebalances in view of customer credit-worthiness, customer concentrations,historical bad debts, current economic trends, and changes in our customerpayment terms when evaluating the adequacy of the allowance for doubtfulaccounts. Commencing in August 2004,we expanded APC’s receivables insurance coverage to include U.S.-based sales. Amajority of international customer balances continue to be covered byreceivables insurance. Historically, bad debts have been less than 1% ofnet sales.

 

Our inventory reserve estimate methodology involves quantifying thetotal inventory position having potential loss exposure. Loss exposuregenerally results from several business factors, including product or componentdiscontinuance, unplanned changes in demand, product design changes, andfactory transitions. Quantifying such loss exposure is the result of combiningthe cost of inventories specifically identified as having little or noopportunity for sale or use (thus available for physical disposition) plus thecost of inventories having a high risk of no future sale or use based upon ananalysis of on-hand quantities compared to historical and anticipated futuresale or use. We maintain an on-going business process for the physicaldisposition of inventories previously identified. Inventory write-offs occur atthe time of physical disposition. Inventories, once reserved, are not writtenback up as such reserve adjustments are considered to be a permanent decreaseto the cost basis of the excess or obsolete inventory. If actual marketconditions are less favorable than those projected by management, additionalinventory write-downs may be required.

 

In early 2003, we announced a product recall ofBack-UPS CS 350 and 500 models, due to potential safety issues. Prior toannouncing the recall, APC received eight reports worldwide of unitsoverheating, resulting in the melting of the unit’s outer casing, six of whichoccurred in the United States. Three of the reported incidents resulted inminor property damage; no injuries were reported. The total number of affecteddevices recalled worldwide is approximately 2.1 million with approximately900,000 devices recalled in the United States. The recall is limited to twospecific models in APC’s Back-UPS CS product line, the Back-UPS CS 350 and theBack-UPS CS 500, in both 120-volt and 230-volt models. The affected units weremanufactured between November 2000 and December 2002 and were soldprimarily through computer and electrical distribution, catalog and retailoutlets worldwide. In the fourth quarter of 2002, APC accrued a currentliability and recognized additional warranty expense, classified in cost ofgoods sold, of $19.6 million. Based upon repair cost and return rate experienceto-date as well as then-current estimates of remaining costs to be incurred,APC projected that aggregate costs for the recall would be less than originallyestimated. To reflect this change, cost of goods sold was reduced by $5.5million in the third quarter of 2003. As of September 26, 2004, APC hadincurred approximately 83% of currently estimated total recall costs. Ourestimation of remaining recall costs of $2.4 million, comprised of $0.9 millionfor the U.S. and $1.5 million for international geographies, continues to be subjectto actual return rates and per unit repair costs (which can vary by country) aswell as estimates for other recall-related costs expected to be incurred.Actual return rates may vary significantly among different geographies. Themost significant risks associated with our return rate assumptions includevarying degrees of product recall regulation by geography as well as varyingconsumer awareness levels and access to timely recall information. Actual perunit repair cost includes principally transportation costs which will beinfluenced by the proximity of customer locations to the service centerlocation as well as the priority level of delivery requirements. We expect thatactual future amounts will not differ materially from our current estimates.

 

We are, and may in the future become, involved in litigation involvingour business, products or operations. For pending claims for which there is anestimatable range of loss greater than zero, we record the best estimate ofliability within the range. If no point within the range is considered the bestestimate, we record the minimum estimated liability. Because of uncertaintiesrelated to the identifiable range of loss on any pending claims, we may beunable to make a reasonable estimate of the liability that could result from anunfavorable outcome. As additional information becomes available, we assess thepotential liability related to our pending claims and revise our estimates.Such revisions in our estimates of the potential liability could materiallyimpact our results of operation and financial position. The litigation processis uncertain and includes the risk of an unexpected, unfavorable result. We maybe materially adversely impacted by any such litigation.

 

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***Valuation ofLong-lived Tangible and Intangible Assets including Goodwill***

 

We assess the impairment of long-lived tangible and intangible assetsincluding goodwill on an ongoing basis and whenever events or changes incircumstances indicate that the carrying value may not be recoverable. Shouldour assessment suggest impairment, we would determine recoverability based onan estimate of future undiscounted cash flows resulting from our use of theasset and its eventual disposition. Factors we consider that could trigger animpairment review include the following:

 

•                    significantunderperformance relative to expected historical or projected future operatingresults;

 

•                    significantchanges in the manner of our use of the acquired assets or the strategy for ouroverall business;

 

•                    significantnegative industry or economic trends; and

 

•                    significanttechnological changes, which would render equipment and manufacturing process,obsolete.

 

We evaluate each of our reporting units with goodwill during the fourthquarter of each fiscal year or more frequently if impairment indicators arise.

 

***Accounting forIncome Taxes***

 

As part of the process of preparing our consolidated financialstatements, we are required to estimate our income taxes in each of the jurisdictionsin which we operate. This process involves estimating our actual current taxexposure together with assessing temporary differences resulting from differingtreatment of items, such as deferred revenue, for tax and accounting purposes.These differences result in deferred tax assets and liabilities, which areincluded within our consolidated balance sheet. We must then assess thelikelihood that our deferred tax assets will be recovered from future taxableincome. Expectations about future taxable income incorporate numerousassumptions about actions, elections and strategies to minimize income taxes infuture years. Our ability to take such actions, make preferred elections andimplement tax-planning strategies may be adversely impacted by enacted changesin tax laws and/or tax rates, as well as successful challenges by taxauthorities resulting from differing interpretations of tax laws andregulations.In October 2004, the American Jobs Creation Act of 2004 was enacted. ThisAct repealed the tax code’s extraterritorial income (ETI) exclusion in responseto the World Trade Organization’s challenge that the ETI exclusion was aprohibited tax subsidy. The repeal will be phased in through 2006. The Actreplaced the ETI exclusion with a 9% domestic deduction for domestic productionactivities effective for APC’s 2005 tax year. The Act also provides for anelective tax-favored repatriation of offshore earnings, provided that thedividends are invested in the United States under a properly approved domesticreinvestment plan. The election to apply an 85% dividends-received deductionagainst cash dividends made by APC’s offshore subsidiaries can be made ineither 2004 or 2005. We are currently reviewing the Act to determine its impacton APC.

 

APC is routinely under audit by federal, foreign, state, or localauthorities in the areas of income taxes and the remittance of sales and usetaxes. These audits include questioning the timing and amount of deductions,the nexus of income among various tax jurisdictions and compliance withfederal, foreign, state, and local tax laws. In evaluating the exposureassociated with various tax filing positions, we often accrue for probableexposures. To the extent APC were to prevail in matters for which accruals havebeen established or were to be required to pay amounts in excess of reserves,APC’s cash flows and effective tax rate in a given financial statement periodcould be materially affected.

 

To the extent webelieve that recovery of deferred tax assets is not likely, we must establish avaluation allowance. To the extent we establish a valuation allowance orincrease this allowance in a period, we must include an expense within the taxprovision in the consolidated statements of income. Significant management judgmentis required in determining our provision for income taxes, our deferred taxassets and liabilities and any valuation allowance recorded against our netdeferred tax assets. At September 26, 2004 and December 31, 2003, weprovided a valuation allowance on certain of our deferred tax assets, primarilyconsisting of net operating losses generated in 2001 through 2004 for the startup and continuing operations of Brazilian operations, because of uncertaintyregarding their realizability. The valuation allowance is based on ourestimates of taxable income by jurisdiction in which we operate and the periodover which our deferred tax assets will be recoverable. In the event thatactual results differ from these estimates or we adjust these estimates in futureperiods we may need to establish an additional valuation allowance which couldmaterially impact our financial position and results of operations.

 

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## **RECENTLY ISSUEDACCOUNTING STANDARDS**

 

We have determined that there are no recently issued accountingstandards expected to have a material impact on APC’s consolidated financialposition or results of operations.

 

## **FACTORS THAT MAY AFFECTFUTURE RESULTS**

 

This document containsforward-looking statements that involve risks and uncertainties, both known andunknown. Our actual results could differ materially from those anticipated inthese forward looking statements as a result of certain factors, including therisks faced by us described below and elsewhere in this document.

 

The factors that couldcause actual results to differ materially include the following: costs tocomply with the provisions of the Sarbanes-Oxley Act of 2002 are greater thancurrently anticipated; impact on order management and fulfillment, financialreporting and supply chain management processes as a result of APC’s relianceon a variety of computer systems, including Oracle 11*i*which is periodically upgraded; costs incurred by APC for the product recall ofselect Back-UPS CS models are greater than or less than currently anticipated; theimpact of increasing competition which could adversely affect APC’s revenuesand profitability; the impact of foreign currency exchange rate fluctuations;the impact on demand, component availability and pricing, and logistics, andthe disruption of Asian manufacturing operations that result from labordisputes, war, acts of terrorism or political instability; ramp up, expansionand rationalization of global manufacturing capacity; the potential impact of complyingwith changing environmental regulations; the discovery of a latent defect inany of APC’s products; APC’s ability to effectively align operating expensesand production capacity with the current demand environment; general worldwideeconomic conditions, and, in particular, the possibility that the PC andrelated markets decline; growth rates in the power protection industry andrelated industries, including but not limited to the PC, server, networking,telecommunications and enterprise hardware industries; competitive factors andpricing pressures; product mix changes and the potential negative impact ongross margins from such changes; changes in the seasonality of demand patterns;inventory risks due to shifts in market demand; component constraints,shortages, pricing and quality; risk of nonpayment of accounts receivable; theuncertainty of the litigation process including risk of an unexpected,unfavorable result of current or future litigation; and the risks describedfrom time to time in APC’s filings with the Securities and Exchange Commission.

 

We caution readers not to place undue reliance on any suchforward-looking statements, which speak only as of the date they are made. Wedisclaim any obligation to publicly update or revise any such statements toreflect any change in our expectations or in events, conditions, orcircumstances on which any such statements may be based, or that may affect thelikelihood that actual results will differ from those set forth in theforward-looking statements.

 

For a discussion of these and other risk factors, please refer to Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations included in our Annual Report on Form 10-K for the year ended December 31,2003.

 

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**ITEM 3.****  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

We, in the normal courseof business, are exposed to market risks relating to fluctuations in foreigncurrency exchange rates. The information required under this section relatedto such risks is included in the *ForeignCurrency Activity* section of Management’s Discussion andAnalysis of Financial Condition and Results of Operations in Item 2 of thisreport and is incorporated herein by reference.

 

We, in the normal courseof business, are also exposed to market risks relating to fluctuations ininterest rates and the resulting rates of return on investments in marketablesecurities. The information required under this section related to suchrisks is included in the *Other Income, Net*section of Management’s Discussion and Analysis of Financial Condition andResults of Operations in Item 2 of this report and is incorporated herein byreference.

 

**ITEM 4.****  CONTROLSAND PROCEDURES**

 

**(A)****       Evaluation of disclosurecontrols and procedures**

 

Our chief executive officer and our chief financialofficer, after evaluating the effectiveness of APC’s “disclosure controls andprocedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)and 15d-15(e) as of a date (the “EvaluationDate”) as of the end of the period covering this quarterly report, haveconcluded that as of the Evaluation Date, our disclosure controls andprocedures were adequate and designed to ensure that material informationrelating to us and our consolidated subsidiaries would be made known to them byothers within those entities.

 

**(B)****       Changes in internalcontrols over financial reporting**

 

There were no significantchanges in our internal controls over financial reporting or, to our knowledge,in other factors that could significantly affect our internal controls overfinancial reporting subsequent to the Evaluation Date.

 

No corrective actionswere taken as there were no material weaknesses identified in the evaluation.

 

***Limitations Inherent inall Controls*****.**APC’s management, includingour chief executive officer and our chief financial officer, recognize that ourdisclosure controls and our internal controls (discussed above) cannot preventall error or all attempts at fraud. Any controls system, no matter how wellcrafted and operated, can only provide reasonable, and not absolute, assuranceof achieving the desired control objectives, and management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures. Because of the inherent limitations in anycontrol system, no evaluation or implementation of a control system can providecomplete assurance that all control issues and all possible instances of fraudhave been or will be detected.

 

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**PART II - OTHER INFORMATION**

 

**ITEM 1.****     LEGALPROCEEDINGS**

 

On January 10, 2003, Powerware Corporation filed in the UnitedStates District Court for the Eastern District of North Carolina (the “Court”)a complaint alleging infringement of three United States patents. On May 7,2003, Powerware Corporation filed with the Court an amended complaint modifyingits allegations of infringement regarding the Powerware Patents. APC was servedwith the amended complaint on May 9, 2003. Powerware Corporation is seekingunspecified damages and injunctive relief. On May 28, 2003, APC filed itsanswer to the amended complaint and on June 17, 2003, APC filed its firstamended answer and counterclaims alleging infringement by Powerware Corporationof three United States patents owned by APC. On July 3, 2003, PowerwareCorporation filed its answer to counterclaims. On March 18, 2004,Powerware Corporation amended its complaint to add an additional patent to thelitigation.

 

As previously reported in APC’s Form 10-Q for the quartersended March 28, 2004 and June 27, 2004, on February 5, 2004,Liebert Corporation and Zonatherm Products, Inc., Liebert’s salesrepresentative firm in the Chicago area, filed a lawsuit in the Circuit Courtof Cook County, Illinois, Chancery Division (the “Court”) against APC, Aerico,LLC, a sales representative firm formed by former employees of ZonathermProducts, and the former employees of Zonatherm Products who formed Aerico, LLC.The lawsuit alleged willful violation of the Illinois Trade Secrets Act, tortiousinterference with contract, tortious interference with prospective economicadvantage, civil conspiracy and conspiracy to breach fiduciary duties. Liebertand Zonatherm are seeking compensatory and punitive damages and injunctiverelief. On February 18, 2004, the Court denied plaintiffs’ motion for atemporary restraining order. On July 16, 2004, the Court dismissed withoutprejudice all claims except the Illinois Trade Secret Act claim. On August 6,2004, plaintiffs filed a second amended complaint reasserting the claimsdismissed by the Court on July 16, 2004. On August 20, 2004, theCourt denied plaintiffs’ motion for preliminary injunction as to violation ofthe Illinois Trade Secrets Act. On September 21, 2004, plaintiffs filed aNotice of Appeal of the August 20, 2004 ruling.

 

In addition, APC isinvolved in various other claims and legal actions arising in the ordinarycourse of business.

 

While management currently believes that resolving all pending legalmatters, individually or in aggregate, will not have a material adverse impacton APC’s financial position, the litigation and other claims noted above aresubject to inherent uncertainties, including the risk of an unfavorableoutcome, and management’s view of these matters may change in the future. Anunfavorable outcome could include monetary damages or, in cases whereinjunctive relief is sought, an injunction prohibiting certain activities. Werean unfavorable final outcome to occur, there exists the possibility of amaterial adverse impact on APC’s financial position, cash flows and results ofoperations for the period in which the effect becomes reasonably estimable.

 

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**ITEM 2.****                 UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

 

The following tablesummarizes information relating to purchases made by APC of shares of ourcommon stock during the three months ended September 26, 2004.

 

**ISSUER PURCHASES OF EQUITY SECURITIES**

 
| **Period**                                      | ** ** | **Total  Number  of Shares  Purchased**     | ** ** | **Average  Price  Paid per  Share** | ** ** | **Total Number  of Shares  Purchased as  Part of  Publicly  Announced  Plans or  Programs** | ** ** | **Approximate  Dollar Value  of Shares  that May Yet  Be Purchased  Under the  Plans or  Programs** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **(in thousands except per share amounts)** | ** ** |
| June 28, 2004 to July 25, 2004        |       | —                                      |       | $                                   | —     |                                                                                        | —     |                                                                                                | $          | 150,000 |   |
| July 26, 2004 to August 22, 2004      |       | 6,326                                       |       | $                                   | 15.68      |                                                                                        | 6,326      |                                                                                                | $          | 50,678 |   |
| August 23, 2004 to September 26, 2004 |       | 2,987                                       |       | $                                   | 16.95      |                                                                                        | 2.987      |                                                                                                | $          | — |   |
| Total                                           |       | 9,313                                       |       | $                                   | 16.09      |                                                                                        | 9,313      |                                                                                                | $          | — |   |

 

In June, 2004, APC’sBoard of Directors approved a stock repurchase program authorizing therepurchase of up to $150 million of APC’s common stock. During the thirdquarter of 2004, APC repurchased on the open market approximately 9.3 millionshares of its common stock, at an average price of $16.09 per share, totaling$150 million. Accordingly, this repurchase plan has been completed and nofurther repurchases will be made under this program. The repurchased shares havebeen deemed authorized but unissued shares.

 

In March 2004, APCreturned its 250,000 treasury shares to an authorized but not issued status.

 

**ITEM 6.  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 Current Report  on Form 8-K, filed on October 29, 2004, and incorporated herein by  reference (File No. 1-12432)                                      |
|             |   |                                                                                                                                                                                                                                              |
| Exhibit No. 31.1 |   | Certification of  Rodger B. Dowdell, Jr., Chief Executive Officer, pursuant to Rules 13a-14(a)  and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 (filed herewith) |
|             |   |                                                                                                                                                                                                                                              |
| Exhibit No. 31.2 |   | Certification of  Donald M. Muir, Chief Financial Officer, pursuant to Rules 13a-14(a) and  15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 (filed herewith)         |
|             |   |                                                                                                                                                                                                                                              |
| Exhibit No. 32.1 |   | Certification of  Rodger B. Dowdell, Jr., Chief Executive Officer, pursuant to Rules 13a-14(b)  and 15d-14(b) of the Securities Exchange Act of 1934, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 (filed herewith) |
|             |   |                                                                                                                                                                                                                                              |
| Exhibit No. 32.2 |   | Certification of  Donald M. Muir, Chief Financial Officer, pursuant to Rules 13a-14(b) and  15d-14(b) of the Securities Exchange Act of 1934, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 (filed herewith)         |
|             |   |                                                                                                                                                                                                                                              |

 

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FORM 10-Q

September 26, 2004

 

SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

**AMERICAN POWER CONVERSION CORPORATION**

 

Date:  November 5, 2004

 
|   |                                           | /s/ Donald M. Muir |   |   |
|--------|------------------------------------------------|--------------------|--------|--------|
|   |                                           |               |
|   | Donald M. Muir                                 |               |
|   | *Chief Financial Officer*                      |               |
|   | *(Principal Accounting And Financial Officer)* |               |

 

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**AMERICAN POWER CONVERSION CORPORATION ANDSUBSIDIARIES**

 

**EXHIBITINDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                    | ** ** |   |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------|
|                |       |                                                                                                                                                                                                                                               |       |   |
| 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  Current Report on Form 8-K, filed on October 29, 2004, and incorporated  herein by reference (File No. 1-12432)                                       |       |   |
|                |       |                                                                                                                                                                                                                                               |       |   |
| 31.1                |       | Certification  of Rodger B. Dowdell, Jr., Chief Executive Officer, pursuant to Rules  13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed  herewith) |       |   |
|                |       |                                                                                                                                                                                                                                               |       |   |
| 31.2                |       | Certification  of Donald M. Muir, Chief Financial Officer, pursuant to Rules 13a-14(a) and  15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 (filed herewith)          |       |   |
|                |       |                                                                                                                                                                                                                                               |       |   |
| 32.1                |       | Certification  of Rodger B. Dowdell, Jr., Chief Executive Officer, pursuant to Rules  13a-14(b) and 15d-14(b) of the Securities Exchange Act of 1934, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed  herewith) |       |   |
|                |       |                                                                                                                                                                                                                                               |       |   |
| 32.2                |       | Certification  of Donald M. Muir, Chief Financial Officer, pursuant to Rules 13a-14(b) and  15d-14(b) of the Securities Exchange Act of 1934, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 (filed herewith)          |       |   |

 

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