** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

** **

**FORM 10-Q**

** **

**(Mark One)**
| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|---------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **For the  quarterly period ended June 26, 2005**                                                  |
|       |       |                                                                                                    |
| **or**     |
|       |       |                                                                                                    |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** ** | ** ** | **For the  transition period from ________________ to ________________**                                |

 

**Commission File Number: 1-12432**

 

**AMERICAN POWER CONVERSIONCORPORATION**

(Exact name of registrant as specified in its charter)

 
| **MASSACHUSETTS**                                              | ** ** | **04-2722013**                      |
|----------------------------------------------------------------|------------|-------------------------------------|
| (State or other  jurisdiction ofincorporation or organization) |       | (I.R.S. employeridentification no.) |

 

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

**401-789-5735**

(Address and telephone number of principal executive offices)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

YES ý     NO o

 

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

YES ý     NO o

 

Registrant’s Common Stock outstanding, $0.01 par value, at July 25,2005 –194,334,000 shares

 

 

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FORM 10-Q

June 26, 2005

 

**AMERICAN POWER CONVERSION CORPORATION**

 

**INDEX**

 
| **Part I -  Financial Information:** |       |
|-------------------------------------------|------------|
|                                      |       |   |
|                                      | Item 1.    | Consolidated Condensed  Financial Statements: |   |
|                                      |       | Consolidated  Condensed Balance Sheets -  June 26, 2005 and December 31, 2004 (Unaudited) |   |
|                                      |       |   |   |
|                                      |       | Consolidated  Condensed Statements of Income -  Three Months and Six Months Ended  June 26, 2005 and June 27, 2004 (Unaudited) |   |
|                                      |       |   |   |
|                                      |       | Consolidated  Condensed Statements of Cash Flows -  Three Months and Six Months Ended  June 26, 2005 and June 27, 2004 (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  4.   | Submission  of Matters to a Vote of Security Holders |   |
|                                      |       |   |   |
|                                      | Item 6.    | Exhibits |   |
|                                      |       |   |
| **Signatures**                            |       |
|                                      |       |
| **Exhibit Index**                    | ** ** |

 

2

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**PART I - FINANCIALINFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

**AMERICAN POWER CONVERSION CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED CONDENSED BALANCESHEETS**

***In thousands except per share amount***

***(Unaudited)***

 

**ASSETS**

 
| ** **                                                                                         | ** ** | **June 26,  2005** | ** **    | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------|---------------|-----------------------------|------------|
| Current assets:                                                                                    |       |                    |          |                        |       |
| Cash and cash  equivalents                                                                         | ** ** | **$**                   | **122,119**   |                        | $          | 72,721 |   |
| Short term  investments (Note 4)                                                                   | ** ** | **638,950**             |          | 642,853                     |       |
| Accounts  receivable, less allowance for doubtful accounts of $16,684 in 2005 and  $16,180 in 2004 | ** ** | **358,209**             |          | 327,547                     |       |
| Inventories:                                                                                       | ** ** | ** **              | ** **    | ** **                  | ** ** |
| Raw materials                                                                                      | ** ** | **186,169**             |          | 212,883                     |       |
| Work-in-process  and finished goods                                                                | ** ** | **284,387**             |          | 253,044                     |       |
| Total  inventories                                                                                 | ** ** | **470,556**             |          | 465,927                     |       |
|                                                                                               |       |                    |          |                        |       |
| Prepaid expenses  and other current assets                                                         | ** ** | **47,765**              |          | 39,294                      |       |
| Deferred income  taxes                                                                             | ** ** | **52,979**              |          | 57,018                      |       |
|                                                                                               |       |                    |          |                        |       |
| Total current  assets                                                                              | ** ** | **1,690,578**           |          | 1,605,360                   |       |
|                                                                                               |       |                    |          |                        |       |
| Property, plant  and equipment:                                                                    |       |                    |          |                        |       |
| Land, buildings  and improvements                                                                  | ** ** | **70,063**              |          | 69,371                      |       |
| Machinery and  equipment                                                                           | ** ** | **220,366**             |          | 217,462                     |       |
| Office  equipment, furniture and fixtures                                                          | ** ** | **94,908**              |          | 92,452                      |       |
| Purchased  software                                                                                | ** ** | **46,340**              |          | 40,817                      |       |
| ** **                                                                                         |       | **431,677**             |          | 420,102                     |       |
| Less accumulated  depreciation and amortization                                                    | ** ** | **279,901**             |          | 265,251                     |       |
| Net property,  plant and equipment                                                                 | ** ** | **151,776**             |          | 154,851                     |       |
|                                                                                               |       |                    |          |                        |       |
| Long term  investments (Note 4)                                                                    | ** ** | **487**                 |          | 5,542                       |       |
| Goodwill (Note  5)                                                                                 | ** ** | **7,179**               |          | 7,179                       |       |
| Other  intangibles, net (Note 5)                                                                   | ** ** | **33,700**              |          | 39,627                      |       |
| Deferred income  taxes                                                                             | ** ** | **37,114**              |          | 28,687                      |       |
| Other assets                                                                                       | ** ** | **4,832**               |          | 2,626                       |       |
|                                                                                               |       |                    |          |                        |       |
| Total assets                                                                                       | ** ** | **$**                   | **1,925,666** |                        | $          | 1,843,872 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

 

3

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**AMERICAN POWER CONVERSION CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED CONDENSED BALANCE SHEETS**

***In thousands except per share amount***

***(Unaudited)***

 

**LIABILITIES AND SHAREHOLDERS’ EQUITY**

 
| ** **                                                                                                                               | ** ** | **June 26,  2005** | ** **    | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|---------------|-----------------------------|------------|
| Current  liabilities:                                                                                                                    |       |                    |          |                        |       |
| Accounts payable                                                                                                                         | ** ** | **$**                   | **135,500**   |                        | $          | 132,213 |   |
| Accrued  compensation                                                                                                                    | ** ** | **44,813**              |          | 43,869                      |       |
| Accrued sales  and marketing programs                                                                                                    | ** ** | **41,659**              |          | 43,209                      |       |
| Accrued warranty  (Note 6)                                                                                                               | ** ** | **11,683**              |          | 13,092                      |       |
| Other accrued  expenses                                                                                                                  | ** ** | **43,997**              |          | 46,929                      |       |
| Deferred revenue                                                                                                                         | ** ** | **37,465**              |          | 35,522                      |       |
| Income taxes  payable                                                                                                                    | ** ** | **14,779**              |          | 11,330                      |       |
|                                                                                                                                     |       |                    |          |                        |       |
| Total current  liabilities                                                                                                               | ** ** | **329,896**             |          | 326,164                     |       |
|                                                                                                                                     |       |                    |          |                        |       |
| Deferred tax  liability                                                                                                                  | ** ** | **15,408**              |          | 15,449                      |       |
|                                                                                                                                     |       |                    |          |                        |       |
| Total  liabilities                                                                                                                       | ** ** | **345,304**             |          | 341,613                     |       |
|                                                                                                                                     |       |                    |          |                        |       |
| Shareholders’  equity (Notes 7, 8, 9 and 10):                                                                                       |       |                    |          |                        |       |
| Common stock,  $0.01 par value;   authorized 450,000 shares in 2005 and 2004;   issued 194,139 shares in 2005 and 192,137 shares in 2004 | ** ** | **1,941**               |          | 1,921                       |       |
| Additional  paid-in capital                                                                                                              | ** ** | **99,770**              |          | 60,081                      |       |
| Retained  earnings                                                                                                                       | ** ** | **1,476,990**           |          | 1,437,691                   |       |
| Accumulated  other comprehensive income                                                                                                  | ** ** | **1,661**               |          | 2,566                       |       |
|                                                                                                                                     |       |                    |          |                        |       |
| Total  shareholders’ equity                                                                                                         | ** ** | **1,580,362**           |          | 1,502,259                   |       |
|                                                                                                                                     |       |                    |          |                        |       |
| Total  liabilities and shareholders’ equity                                                                                         | ** ** | **$**                   | **1,925,666** |                        | $          | 1,843,872 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

 

4

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**AMERICAN POWER CONVERSION CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTSOF INCOME**

***In thousands except earnings per share***

***(Unaudited)***

 
| ** **                                      | ** ** | **Six months ended** | ** **  | **Three months ended** | ** ** |
|-------------------------------------------------|------------|----------------------|-------------|------------------------|------------|
| ** **                                      | ** ** | **June 26,**    | ** **  | **June 27,**      | ** ** | **June 26,** | ** ** | **June 27,** | ** ** |
| ** **                                      | ** ** | **2005**             | ** **  | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                            |       |                 |        |                   |       |   |   |   |   |
| Net sales (Note  11)                            | ** ** | **$**                | **888,609** | ** **             | $          | 747,414 |   | **$** | **480,606** | ** ** | $ | 395,663 |   |
|                                            |       |                 | ** **  |                   |       |   | ** ** |   |   |
| Cost of goods  sold                             | ** ** | **545,893**          | ** **  | 448,800                |       | **302,341** | ** ** | 246,141 |   |
|                                            |       |                 | ** **  |                   |       |   | ** ** |   |   |
| Gross profit                                    | ** ** | **342,716**          | ** **  | 298,614                |       | **178,265** | ** ** | 149,522 |   |
|                                            |       |                 | ** **  |                   |       |   | ** ** |   |   |
| Operating  expenses:                            |       |                 | ** **  |                   |       |   | ** ** |   |   |
| Marketing,  selling, general and administrative |       | **206,198**          | ** **  | 180,832                |       | **105,619** | ** ** | 94,648 |   |
| Research and  development                       | ** ** | **42,975**           | ** **  | 39,849                 |       | **22,736** | ** ** | 21,446 |   |
|                                            |       |                 | ** **  |                   |       |   | ** ** |   |   |
| Total operating  expenses                       | ** ** | **249,173**          | ** **  | 220,681                |       | **128,355** | ** ** | 116,094 |   |
|                                            |       |                 | ** **  |                   |       |   | ** ** |   |   |
| Operating income                                | ** ** | **93,543**           | ** **  | 77,933                 |       | **49,910** | ** ** | 33,428 |   |
|                                            |       |                 | ** **  |                   |       |   | ** ** |   |   |
| Other income,  net                              | ** ** | **8,983**            | ** **  | 3,988                  |       | **5,189** | ** ** | 2,256 |   |
|                                            |       |                 | ** **  |                   |       |   | ** ** |   |   |
| Earnings before  income taxes                   | ** ** | **102,526**          | ** **  | 81,921                 |       | **55,099** | ** ** | 35,684 |   |
|                                            |       |                 | ** **  |                   |       |   | ** ** |   |   |
| Income taxes                                    | ** ** | **24,606**           | ** **  | 20,480                 |       | **13,224** | ** ** | 8,921 |   |
|                                            |       |                 | ** **  |                   |       |   | ** ** |   |   |
| Net income                                      | ** ** | **$**                | **77,920**  | ** **             | $          | 61,441 |   | **$** | **41,875** | ** ** | $ | 26,763 |   |
|                                            |       |                 | ** **  |                   |       |   | ** ** |   |   |
| Basic earnings  per share                       | ** ** | **$**                | **0.40**    | ** **             | $          | 0.31 |   | **$** | **0.22** | ** ** | $ | 0.13 |   |
|                                            |       |                 | ** **  |                   |       |   | ** ** |   |   |
| Basic weighted  average shares outstanding      |       | **192,955**          | ** **  | 200,073                |       | **193,438** | ** ** | 200,234 |   |
|                                            |       |                 | ** **  |                   |       |   | ** ** |   |   |
| Diluted earnings  per share                     | ** ** | **$**                | **0.39**    | ** **             | $          | 0.30 |   | **$** | **0.21** | ** ** | $ | 0.13 |   |
|                                            |       |                 | ** **  |                   |       |   | ** ** |   |   |
| Diluted weighted  average shares outstanding    |       | **199,036**          | ** **  | 205,554                |       | **199,742** | ** ** | 204,992 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

 

5

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**AMERICAN POWER CONVERSION CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTSOF CASH FLOWS**

***In thousands***

***(Unaudited)***

 
| ** **                                                                         | ** ** | **Six months ended**    | ** **  | **Three months ended**  | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------|-------------|-------------------------|------------|
| ** **                                                                         | ** ** | **June 26,  2005** | ** **  | **June 27,  2004** | ** ** | **June 26,  2005** | ** ** | **June 27,  2004** | ** ** |
| ***Cash  flows from operating activities***                                        |       |                    |        |                    |       |   |   |   |   |
| Net income                                                                         | ** ** | **$**                   | **77,920**  | ** **              | $          | 61,441 |   | **$** | **41,875** | ** ** | $ | 26,763 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Depreciation and  amortization of property, plant and equipment                    |       | **18,390**              | ** **  | 18,294                  |       | **9,736** | ** ** | 8,649 |   |
| Amortization of  other intangibles                                                 | ** ** | **5,895**               | ** **  | 5,797                   |       | **2,947** | ** ** | 2,900 |   |
| Provision for  doubtful accounts                                                   | ** ** | **658**                 | ** **  | 141                     |       | **123** | ** ** | 141 |   |
| Provision for  inventories                                                         | ** ** | **3,321**               | ** **  | 4,476                   |       | **2,561** | ** ** | 3,000 |   |
| Compensation  expense – Restricted Stock Units                                | ** ** | **5,692**               | ** **  | —                  |       | **2,625** | ** ** | — |   |
| Deferred income  taxes                                                             | ** ** | **(4,429**              | **)**       | (10,132                 | )          | **(1,024** | **)** | (8,450 | ) |
| Other non-cash  items, net                                                         | ** ** | **(905**                | **)**       | 1,815                   |       | **(501** | **)** | 563 |   |
| Changes in  operating assets and liabilities:                                      |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Accounts  receivable                                                               | ** ** | **(31,320**             | **)**       | (6,743                  | )          | **(30,622** | **)** | (14,953 | ) |
| Inventories                                                                        | ** ** | **(7,950**              | **)**       | (58,311                 | )          | **9,675** | ** ** | (18,929 | ) |
| Prepaid expenses  and other current assets                                         | ** ** | **(8,471**              | **)**       | (4,409                  | )          | **(3,965** | **)** | (3,513 | ) |
| Other assets                                                                       | ** ** | **(2,174**              | **)**       | (197                    | )          | **(259** | **)** | (134 | ) |
| Accounts payable                                                                   | ** ** | **3,287**               | ** **  | 22,818                  |       | **8,410** | ** ** | 6,455 |   |
| Accrued expenses                                                                   | ** ** | **(3,004**              | **)**       | 4,827                   |       | **2,657** | ** ** | 9,695 |   |
| Income taxes  payable                                                              | ** ** | **9,959**               | ** **  | 8,071                   |       | **(11,911** | **)** | 11 |   |
| Net cash  provided by operating activities                                         | ** ** | **66,869**              | ** **  | 47,888                  |       | **32,327** | ** ** | 12,198 |   |
|                                                                               |       |                    | ** **  |                    |       |   | ** ** |   |   |
| ***Cash  flows from investing activities***                                        |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Purchases of  held-to-maturity securities                                          | ** ** | **(624,844**            | **)**       | (245,330                | )          | **(266,230** | **)** | (167,304 | ) |
| Maturities of  held-to-maturity securities                                         | ** ** | **648,297**             | ** **  | 166,184                 |       | **303,748** | ** ** | 135,819 |   |
| Purchases of  available-for-sale securities                                        | ** ** | **(925,525**            | **)**       | (1,623,350              | )          | **(486,075** | **)** | (759,875 | ) |
| Sales of  available-for-sale securities                                            | ** ** | **911,030**             | ** **  | 1,644,675               |       | **447,231** | ** ** | 800,650 |   |
| Capital  expenditures                                                              | ** ** | **(15,315**             | **)**       | (12,467                 | )          | **(10,328** | **)** | (9,159 | ) |
| Net cash (used  in) provided by investing activities                               |       | **(6,357**              | **)**       | (70,288                 | )          | **(11,654** | **)** | 131 |   |
|                                                                               |       |                    | ** **  |                    |       |   | ** ** |   |   |
| ***Cash  flows from financing activities***                                        |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Proceeds from  issuances of common stock                                           | ** ** | **27,507**              | ** **  | 6,856                   |       | **18,775** | ** ** | 2,661 |   |
| Dividends paid  on common stock                                                    | ** ** | **(38,621**             | **)**       | (32,018                 | )          | **(19,366** | **)** | (16,025 | ) |
| Net cash used in  financing activities                                             | ** ** | **(11,114**             | **)**       | (25,162                 | )          | **(591** | **)** | (13,364 | ) |
|                                                                               |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Net change in  cash and cash equivalents                                           | ** ** | **49,398**              | ** **  | (47,562                 | )          | **20,082** | ** ** | (1,035 | ) |
| Cash and cash  equivalents at beginning of period                                  |       | **72,721**              | ** **  | 141,214                 |       | **102,037** | ** ** | 94,687 |   |
| Cash and cash  equivalents at end of period                                        | ** ** | **$**                   | **122,119** | ** **              | $          | 93,652 |   | **$** | **122,119** | ** ** | $ | 93,652 |   |
|                                                                               |       |                    | ** **  |                    |       |   | ** ** |   |   |
| ***Supplemental  cash flow disclosures***                                          |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Cash paid during  the period for:                                                  |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Income taxes  (net of refunds)                                                     | ** ** | **$**                   | **13,983**  | ** **              | $          | 16,778 |   | **$** | **20,265** | ** ** | $ | 12,212 |   |

 

*See accompanying notes to consolidated condensedfinancial statements.*

 

6

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**AMERICAN POWER CONVERSION CORPORATION ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED CONDENSEDFINANCIAL STATEMENTS**

***(Unaudited)***

 

**1.****              ManagementRepresentation**

 

The accompanying unaudited consolidated condensed financial statementsshould be read in conjunction with the consolidated financial statementsincluded in the American Power Conversion Corporation (APC) Annual Report on Form 10-Kfor the year ended December 31, 2004. In the opinion of management, theaccompanying unaudited consolidated condensed financial statements contain alladjustments (consisting of only normal recurring accruals) necessary to presentfairly the consolidated financial position and the consolidated results ofoperations and cash flows for the interim periods. The results of operationsfor the interim periods are not necessarily indicative of results to beexpected for the full year.

 

**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, APC announced global headcount reductions which impactedpersonnel worldwide, principally in the U.S., U.K., Ireland, and thePhilippines, throughout a broad range of functions within the organization. Themajority of these terminations were the result of APC’s decision to consolidateits Philippines-based manufacturing operations, resulting in the closing of APC’smanufacturing facility in the province of Laguna. Such restructuring actionswere announced during the first quarter of 2002 and substantially completed bythe end of 2002.

 

In the first quarter of 2002, APC recorded $7.3 million of relatedrestructuring costs of which $4.8 million and $2.5 million were classified incost of goods sold and operating expenses, respectively. These costs includedthe effects of approximately 941 employee terminations, principally 54% inmanufacturing, 14% in sales, and 13% in research and development, based onseverance agreements, as well as facilities closures in the Philippines, U.S.and U.K., and the related impairment of tangible assets, principally buildingsand manufacturing equipment, based on management’s assessment of market data.These costs were not allocated to APC’s operating segments, but rather wereclassified as indirect operating expenses for segment reporting consistent withAPC’s classification for its internal financial reporting. 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. In connection with the closure of aleased facility in the U.K., APC recognized a lease liability during the firstquarter of 2002. All related restructuring liabilities were fully settledduring the first quarter ended March 27, 2005.

 

7

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**4.****              Investments**

 

APCinvests its excess cash principally in certificates of deposit, corporate andmunicipal bonds and notes, U.S. government agency securities, and auction ratesecurities. APC classifies as short term its investments with originalmaturities greater than three months and less than or equal to one year, and aslong term its investments with remaining maturities greater than one year andless than or equal to two years. APC has no investments with maturity datesgreater than two years, except for auction rate securities. Auction ratesecurities have long-term underlying maturities, however the market is highlyliquid and the interest rates reset every 7, 28 or 35 days. APC classifies itsauction rate securities as short term available-for-sale securities. Managementdetermines the appropriate classification of securities at the time of purchaseand re-evaluates such designation as of each balance sheet date. Securities areclassified as held-to-maturity when APC has the positive intent and ability tohold such securities to maturity. Held-to-maturity securities are carried atamortized cost. Available-for-sale securities are recorded at fair value withnet unrealized gains and losses reported, net of income taxes, in othercomprehensive income.

 

At June 26, 2005 and December 31,2004, APC’s held-to-maturity investments included $421.9 million and $440.3million, respectively, with contractual maturities of one year or less, and $0.5million and $5.5 million, respectively, with contractual maturities between oneto two years; APC’s available-for-sale auction rate securities included $135.7 millionand $95.0 million, respectively, with contractual maturities between 8 to 40years.

 

Proceedsfrom the sales of investment securities available-for-sale were $447.2 millionand $800.7 million in the second quarters of 2005 and 2004, respectively, andwere $911.0 million and $1.645 billion in the first six months of 2005 and2004, respectively.

 
| ** **                         | ** ** | **Amortized  Cost** | ** **  | **Gross Unrealized  Holding Gains** | ** ** | **Gross Unrealized  Holding Losses** | ** ** | **Fair  Value** | ** ** |
|------------------------------------|------------|---------------------|-------------|-------------------------------------|------------|--------------------------------------|------------|-----------------|------------|
| ** **                         | ** ** | **(In thousands)**  | ** **  |
| **At  June 26, 2005**         |       |                | ** **  |                                | ** ** |                                 |       |            |       |
|                               |       |                | ** **  |                                | ** ** |                                 |       |            |       |
| **Held-to-maturity**               | ** ** | ** **          | ** **  | ** **                          | ** ** | ** **                           | ** ** | ** **      | ** ** |
| Certificates of  deposit           | ** ** | **$**               | **360,147** | ** **                          | **$**      | **—**                           | ** ** | **$**           | **—** | ** ** | **$** | **360,147** | ** ** |
| Corporate bonds  and notes         | ** ** | **37,215**          | ** **  | **—**                          | ** ** | **—**                           | ** ** | **37,215**      | ** ** |
| U.S. government  agency securities | ** ** | **25,000**          | ** **  | **—**                          | ** ** | **(93**                              | **)**      | **24,907**      | ** ** |
| ** **                         | ** ** | **422,362**         | ** **  | **—**                          | ** ** | **(93**                              | **)**      | **422,269**     | ** ** |
| **Available-for-sale**             |       |                | ** **  |                                | ** ** |                                 |       |            |       |
| Auction rate  securities           | ** ** | **216,625**         | ** **  | **—**                          | ** ** | **—**                           | ** ** | **216,625**     | ** ** |
| Equity  investments                | ** ** | **450**             | ** **  | **—**                          | ** ** | —                               | ** ** | **450**         | ** ** |
| ** **                         | ** ** | **217,075**         | ** **  | **—**                          | ** ** | **—**                           | ** ** | **217,075**     | ** ** |
| ** **                         | ** ** | ** **          | ** **  | ** **                          | ** ** | ** **                           | ** ** | ** **      | ** ** |
| ** **                         | ** ** | **$**               | **639,437** | ** **                          | **$**      | **—**                           | ** ** | **$**           | **(93**    | **)** | **$** | **639,344** | ** ** |
| **At  December 31, 2004**     |       |                | ** **  |                                | ** ** |                                 |       |            |       |
|                               |       |                | ** **  |                                | ** ** |                                 |       |            |       |
| **Held-to-maturity**               | ** ** | ** **          | ** **  | ** **                          | ** ** | ** **                           | ** ** | ** **      | ** ** |
| Certificates of  deposit           |       | $                   | 127,241     | ** **                          | $          | —                               | ** ** | $               | —     |   | $ | 127,241 |   |
| Corporate bonds  and notes         |       | 283,573             | ** **  | 6                                   | ** ** | (1                                   | )          | 283,578         |       |
| U.S. government  agency securities |       | 35,000              | ** **  | —                              | ** ** | (106                                 | )          | 34,894          |       |
|                               |       | 445,814             | ** **  | 6                                   | ** ** | (107                                 | )          | 445,713         |       |
| **Available-for-sale**             |       |                | ** **  |                                | ** ** |                                 |       |            |       |
| Auction rate  securities           |       | 202,075             | ** **  | —                              | ** ** | —                               |       | 202,075         |       |
| Equity  investments                |       | 506                 | ** **  | —                              | ** ** | —                               |       | 506             |       |
|                               |       | 202,581             | ** **  | —                              | ** ** | —                               |       | 202,581         |       |
|                               |       |                | ** **  |                                | ** ** |                                 |       |            |       |
|                               |       | $                   | 648,395     | ** **                          | $          | 6                                    | ** ** | $               | (107       | ) | $ | 648,294 |   |

 

8

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

 

At each of June 26,2005 and December 31, 2004, goodwill of $7.2 million was associated withthe Small Systems segment. Amortized intangible assets were as follows:

 
| **Amortized  Intangible  Assets**  | ** ** | **Weighted  Average  Amortization  Period** | ** ** | **June 26, 2005**      | ** ** | **December 31, 2004**    | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| **Gross  Carrying  Amount**        | ** ** | **Accumulated  Amortization**               | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** |
| ** **                         | ** ** | **(In thousands)**                          | ** ** |
| Technology                         |       | 6 years                                     | ** ** | **$**                       | **81,007** |                          | **$**      | **50,051** | ** ** | $ | 81,040 |   | $ | 45,071 |   |
| Customer lists                     |       | 5 years                                     | ** ** | **8,900**                   |       | **6,882**                     | ** ** | 8,900 |   | 6,210 |   |
| Tradenames                         |       | 5 years                                     | ** ** | **3,157**                   |       | **2,431**                     | ** ** | 3,157 |   | 2,189 |   |
| Total amortized intangible  assets |       | 6 years                                     | ** ** | **$**                       | **93,064** |                          | **$**      | **59,364** | ** ** | $ | 93,097 |   | $ | 53,470 |   |

 

Aggregate amortization expense related to APC’s other intangible assetsfor the second quarters of 2005 and 2004 was $2.9 million and $2.9 million,respectively, and for the first six months of 2005 and 2004 was $5.9 millionand $5.8 million, respectively. Estimated aggregated amortization for each ofthe next five succeeding fiscal years is $11.8 million for 2005, $11.8 millionfor 2006, $9.6 million for 2007, $5.2 million for 2008, and $1.2 million for2009. There are no 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)**                                         | ** ** |
| **Second  Quarter 2005** | ** ** | **$**                                                      | **12,012** | ** **                                                            | **$**      | **9,189**                                                 | ** ** | **$**                  | **—** | ** **                                           | **$**      | **(9,518** | **)** | **$** | **11,683** | ** ** |
| **First  Quarter 2005**  | ** ** | **$**                                                      | **13,092** | ** **                                                            | **$**      | **5,334**                                                 | ** ** | **$**                  | **—** | ** **                                           | **$**      | **(6,414** | **)** | **$** | **12,012** | ** ** |
|                     |       |                                                       |       |                                                                  |       |                                                      |       |                   |       |                                                 |       |
| **Second  Quarter 2004** |       | $                                                          | 12,001     |                                                                  | $          | 5,001                                                     |       | $                      | —     |                                                 | $          | (5,068 | ) | $ | 11,934 |   |
| **First  Quarter 2004**  |       | $                                                          | 11,709     |                                                                  | $          | 6,291                                                     |       | $                      | —     |                                                 | $          | (5,999 | ) | $ | 12,001 |   |

 

***Product Recall.***  In early 2003, APC announced a product recalldue to potential safety issues. The total number of affected devices recalledworldwide is approximately 2.1 million with approximately 900,000 devicesrecalled in the United States. The recall is limited to two specific models inAPC’s Back-UPS® CS product line, the Back-UPS CS 350 and the Back-UPS CS 500,in both 120-volt and 230-volt models.

 

As of June 26,2005, APC had incurred approximately 93% of currently estimated total recallcosts of $14.1 million. Our estimation of remaining recall costs of $1.0million, principally for U.S. recall activity, 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.

 

9

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**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 andthe unvested restricted stock units are assumed to be vested at the beginningof the period or at issuance, if later. The assumed proceeds are then used topurchase common shares at the average market price during the period. Potentialcommon shares for which inclusion would have the effect of increasing dilutedearnings per share (i.e., antidilutive) are excluded from the computation.

 
| ** **                                                                                                                     | ** ** | **Six months ended**    | ** ** | **Three months ended**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                                                                     | ** ** | **June 26,  2005** | ** ** | **June 27,  2004** | ** ** | **June 26,  2005** | ** ** | **June 27,  2004** | ** ** |
| ** **                                                                                                                     | ** ** | **(In thousands)**      | ** ** |
| Basic weighted  average shares outstanding                                                                                     | ** ** | **192,955**             |       | 200,073                 | ** ** | **193,438** |   | 200,234 |   |
| Net effect of  dilutive potential common shares outstanding based on the treasury stock  method using the average market price |       | **6,081**               |       | 5,481                   | ** ** | **6,304** |   | 4,758 | ** ** |
| Diluted weighted  average shares outstanding                                                                                   | ** ** | **199,036**             |       | 205,554                 | ** ** | **199,742** |   | 204,992 |   |
| Antidilutive  potential common shares excluded from the computation above                                                      |       | **588**                 |       | 2,725                   | ** ** | **197** |   | 2,712 |   |

 

**8.****              Shareholders’Equity**

 

***Paid-in Capital.*** The increases in paid-in capital during the second quarter and first sixmonths of 2005 reflected stock issuances relating to stock-based employeebenefit programs, as well as to the financial statement recognition of the taxbenefit afforded to the company as a result of the disposition of option sharesby APC employees. Accounting rules require this corporate tax benefit tobe recorded as an increase in paid-in capital.

 

***Restricted Stock Units.***  In addition, under APC’s 2004 Long-TermIncentive Plan, on June 23, 2005 and on October 25, 2004, APC’s Compensationand Stock Option Committee of the Board of Directors approved the award of 50,000and 951,825 restricted stock units (RSU), respectively. The weighted averagefair value of such units granted during the second quarter of 2005 and the fourthquarter of 2004 was $24.35 and $16.25 per unit, respectively. Under therecognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and related Interpretations,approximately $2.6 million and $5.7 million of stock-based employeecompensation cost was reflected in net income and paid-in capital for suchunits in the second quarter and first six months of 2005, respectively. The RSUawards will vest, and the underlying common stock will concurrently issue,ratably over four years, whereby one-fourth of the units granted in the secondquarter of 2005 will vest on each of June 30, 2006, June 30, 2007, June 30,2008, and June 30, 2009, and one-fourth of the units granted in the fourthquarter of 2004 will vest on each of June 30, 2005, June 30, 2006, June 30,2007, and June 30, 2008.

 

***Dividends.*** Quarterly cash dividends of $0.08 per share were declared and paid in thefirst and second quarters of 2004. In June 2004, APC’s Board of Directorsapproved a 25% increase in its quarterly cash dividend raising the quarterly payoutto $0.10 per share. Dividends of $0.10 per share were declared and paid in eachsubsequent quarter through the second quarter of 2005. It is the intention ofthe Board of Directors to pay a comparable quarterly dividend on a goingforward basis contingent upon continued capital availability and adetermination that cash dividends continue to be in the best interests of APCand its shareholders.

 

10

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**9.****              Comprehensive Income**

 

The components ofcomprehensive income, net of tax, are as follows:

 
| ** **                                         | ** ** | **Six months ended**    | ** ** | **Three months ended**  | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **June 26,  2005** | ** ** | **June 27,  2004** | ** ** | **June 26,  2005** | ** ** | **June 27,  2004** | ** ** |
| ** **                                         | ** ** | **(In thousands)**      | ** ** |
| Net income                                         | ** ** | **$**                   | **77,920** | ** **              | $          | 61,441 |   | **$** | **41,875** | ** ** | $ | 26,763 |   |
| Other  comprehensive income (loss), net of tax:    |       |                    | ** ** |                    |       |   | ** ** |   |   |
| Change in  foreign currency translation adjustment | ** ** | **(905**                | **)**      | 1,815                   |       | **(501** | **)** | 563 |   |
| Other  comprehensive income (loss)                 | ** ** | **(905**                | **)**      | 1,815                   |       | **(501** | **)** | 563 |   |
| Comprehensive  income                              | ** ** | **$**                   | **77,015** | ** **              | $          | 63,256 |   | **$** | **41,374** | ** ** | $ | 27,326 |   |

 

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

 

On June 10, 2004,APC’s shareholders approved APC’s 2004 Long-Term Incentive Plan (2004 LTIPlan), which replaced the 1997 Stock Option Plan. At June 26, 2005, APChad one active stock-based compensation plan, the aforementioned 2004 LTI Plan,and an employee stock purchase plan (ESPP), which are described more fully inNote 10 of Notes to Consolidated Financial Statements in Item 8 of APC’s Form 10-Kfor the year ended December 31, 2004. As permitted by Statement ofFinancial Accounting Standards No. 123 as amended by No. 148, *Accounting for Stock-Based Compensation*, APC accounts forthose plans under the recognition and measurement principles of APB Opinion No. 25,*Accounting for Stock Issued to Employees*,and related Interpretations. No stock-based employee compensation cost relatedto stock options is reflected in net income, as all options granted under thoseplans had an exercise price equal to the market value of the underlying commonstock on the date of grant. The following table illustrates the effect on netincome and earnings per share if APC had applied the fair value recognitionprovisions of Statement 123 to stock-based employee compensation:

 
| ** **                                                                                                                                    | ** ** | ** **  | ** ** | **Six months ended**                        | ** ** | **Three months ended**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|---------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                    | ** ** | ** **  | ** ** | **June 26,  2005**                     | ** ** | **June 27,  2004** | ** ** | **June 26,  2005** | ** ** | **June 27,  2004** | ** ** |
| ** **                                                                                                                                    | ** ** | ** **  | ** ** | **(In thousands except per share amounts)** | ** ** |
|                                                                                                                                          |       |        |       |                                        |       |                    |       |   |   |   |   |
| Net income                                                                                                                                    |       | As reported | ** ** | **$**                                       | **77,920** | ** **              | $          | 61,441 |   | **$** | **41,875** | ** ** | $ | 26,763 |   |
| Add:  Compensation expense recognized during the period, net of related tax effects                                                           |       |        |       | **4,326**                                   | ** ** | —                  |       | **1,995** | ** ** | — |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | Pro forma   |       | **(7,239**                                  | **)**      | (4,648                  | )          | **(3,505** | **)** | (2,324 | ) |
| Net income                                                                                                                                    |       | Pro forma   | ** ** | **$**                                       | **75,007** | ** **              | $          | 56,793 |   | **$** | **40,365** | ** ** | $ | 24,439 |   |
|                                                                                                                                          |       |        |       |                                        | ** ** |                    |       |   | ** ** |   |   |
| Basic earnings  per share                                                                                                                     |       | As reported | ** ** | **$**                                       | **0.40**   | ** **              | $          | 0.31 |   | **$** | **0.22** | ** ** | $ | 0.13 |   |
|                                                                                                                                          | ** ** | Pro forma   |       | **$**                                       | **0.39**   | ** **              | $          | 0.28 |   | **$** | **0.21** | ** ** | $ | 0.12 |   |
|                                                                                                                                          |       |        |       |                                        | ** ** |                    |       |   | ** ** |   |   |
| Diluted earnings  per share                                                                                                                   |       | As reported | ** ** | **$**                                       | **0.39**   | ** **              | $          | 0.30 |   | **$** | **0.21** | ** ** | $ | 0.13 |   |
|                                                                                                                                          | ** ** | Pro forma   |       | **$**                                       | **0.38**   | ** **              | $          | 0.28 |   | **$** | **0.20** | ** ** | $ | 0.12 |   |

 

11

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***Restricted Stock Units. ***Alsounder the aforementioned 2004 LTI Plan, on June 23, 2005 and on October 25,2004, APC’s Compensation and Stock Option Committee of the Board of Directorsapproved the award of 50,000 and 951,825 restricted stock units (RSU),respectively. The weighted average fair value of such units granted during thesecond quarter of 2005 and the fourth quarter of 2004 was $24.35 and $16.25 perunit, respectively. Under the recognition and measurement principles of APBOpinion No. 25, *Accounting for StockIssued to Employees*, and related Interpretations, approximately $2.6million and $5.7 million of stock-based employee compensation cost wasreflected in net income and paid-in capital for such units in the second quarterand first six months of 2005, respectively. Under the 2004 LTI Plan, if APCawards a dividend on its common stock prior to the vesting date of an RSU, theholder of the restricted stock unit would be entitled to receive on the vestingdate a dividend equivalent payment. Dividend equivalents are recognized ascompensation expense when the dividend is declared. The RSU awards will vest,and the underlying common stock will concurrently issue, ratably over fouryears, whereby one-fourth of the units granted in the second quarter of 2005will vest on each of June 30, 2006, June 30, 2007, June 30,2008, and June 30, 2009, and one-fourth of the units granted in the fourthquarter of 2004 will vest on each of June 30, 2005, June 30, 2006, June 30,2007, and June 30, 2008.

 

APC accounts for itsnon-employee stock-based compensation awards in which goods or services are theconsideration received for the equity instruments issued based on the fairvalue of the consideration received or the fair value of the equity instrumentsissued, whichever is more reliably measurable. Compensation cost recognized fornon-employees under these plans in the accompanying consolidated financialstatements is not material.

 

***Share-Based Payment.****** ***InDecember 2004, the Financial Accounting Standards Board issued Statementof Financial Accounting Standards No. 123 (revised 2004), *Share-Based Payment*, which is a revision of Statement No. 123as amended by No. 148, *Accounting for Stock-BasedCompensation*. Statement No. 123(R) supercedes APB Opinion No. 25.Generally, the approach in Statement 123(R) is similar to the approachdescribed in Statement 123. However, Statement 123(R) requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the income statement based on their fair values at the date ofgrant. Pro forma disclosure is no longer an alternative. The U.S. Securitiesand Exchange Commission has extended this Statement’s effective date to thebeginning of a company’s next fiscal year, beginning after June 15, 2005.This Statement is effective for APC beginning with the first quarter of 2006.

 

Statement 123(R) permitspublic companies to adopt its requirements using one of two methods. The “modifiedprospective” method requires compensation cost to be recognized beginning withthe Statement’s effective date (a) based on the requirements of Statement123(R) for all share-based payments granted after the effective date and (b) basedon the requirements of Statement 123 for all awards granted to employees priorto the effective date of Statement 123(R) that remain unvested on the effectivedate. The “modified retrospective” method includes the requirements of themodified prospective method described above, but also permits entities to restatebased on the amounts previously recognized under Statement 123 for purposes ofpro forma disclosures either (a) all prior periods presented or (b) priorinterim periods of the year of adoption.

 

In April 2005, theU.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 107.The Bulletin confirms the latitude in Statement 123(R)’s provisions onselecting models for valuing share options and clarifies other positions onaccounting and disclosure for share-based-payment arrangements. In addition,the Bulletin permits registrants to choose from different models to estimatethe fair value of share options, provides guidance on developing assumptionsused in the models, and addresses the interaction between Statement 123(R) andother SEC literature.

 

APC has yet to determinewhich method to use in adopting Statement 123(R). As permitted by Statement123, APC currently accounts for share-based payments to employees using APBOpinion No. 25’s intrinsic value method and, as such, generally recognizesno compensation cost for employee stock options. Accordingly, the adoption ofStatement 123(R)’s fair value method will have a significant impact on APC’sresults of operations, although it will have no impact on APC’s overallfinancial position. APC is evaluating Statement 123(R) and has not yetdetermined the amount of stock option expense which will be incurred in futureperiods.

 

12

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

 

***Basis for presentation. ***APC operates primarilywithin one industry consisting of three reportable operating segments by whichit manages its business and from which various offerings are commonly combinedto develop a total solution for the customer. These efforts primarily incorporatethe design, manufacture, and marketing of power protection equipment andrelated software and accessories for computer, communications, and relatedequipment. APC’s three segments are: Small Systems, Large Systems, and “Other.”Each of these segments address global markets.

 

***Small Systems.***  TheSmall Systems segment develops power devices and accessories for servers andnetworking equipment commonly used in local area and wide area networks and forpersonal computers and sensitive electronics. Major product offerings includethe Back-UPS, Smart-UPS®, and Symmetra® Power Array® single-phase family ofUPSs. Also included are SurgeArrest® surge suppressors as well as cabling andconnectivity products. Additional accessories and software products are offeredto enhance the management of these networks, including APC’s PowerChute®software and NetShelter® server enclosures. Products are sold to home andcommercial users primarily through an indirect selling model consisting ofcomputer distributors and dealers, value-added resellers, mass merchandisers,catalog merchandisers, E-commerce vendors, and strategic partnerships.

 

***Large Systems.***  TheLarge Systems segment provides systems, products and services that primarilyprovide back-up power, power distribution and cooling for data centers,facilities, and communications equipment for both commercial and industrialapplications. Product offerings include major components of InfraStruXureTMsystems, Silcon® UPSs, NetworkAIR® precision cooling equipment, DC and broadbandpower systems, and services. Products are sold to commercial users through botha direct and indirect selling model consisting of value-added resellers andstrategic partnerships. Additionally, APC utilizes manufacturer representativesto identify and secure projects.

 

***“Other” Segment.***  TheOther segment consists principally of mobile accessories and replacementbattery products. The distribution model of products in the Other segment isconsistent with that of the Small Systems segment.

 

APC measures the profitability of its segments based on gross margin.Segment gross margins exclude certain expenses which are managed outside thereportable segments. Costs excluded from segment profit are operating expenses,primarily consisting of R&D, selling and corporate expenses, and incometaxes. 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.

 

Summary operating segment information is as follows:

 
| ** **                         | ** ** | **Six months ended**    | ** **  | **Three months ended**  | ** ** |
|------------------------------------|------------|-------------------------|-------------|-------------------------|------------|
| ** **                         | ** ** | **June 26,  2005** | ** **  | **June 27,  2004** | ** ** | **June 26,  2005** | ** ** | **June 27,  2004** | ** ** |
| ** **                         | ** ** | **(In thousands)**      | ** **  |
| **Segment  net sales**             | ** ** | ** **              |        |                    | ** ** | ** ** |   |   |   |
| Small Systems                      | ** ** | **$**                   | **663,692** | ** **              | $          | 576,237 |   | **$** | **356,231** | ** ** | $ | 301,143 |   |
| Large Systems                      | ** ** | **185,549**             | ** **  | 136,232                 |       | **104,876** | ** ** | 77,911 |   |
| Other                              | ** ** | **33,692**              | ** **  | 29,906                  |       | **16,359** | ** ** | 13,737 |   |
| Total segment  net sales           | ** ** | **882,933**             | ** **  | 742,375                 |       | **477,466** | ** ** | 392,791 |   |
| Shipping and  handling revenues    | ** ** | **5,676**               | ** **  | 5,039                   |       | **3,140** | ** ** | 2,872 |   |
| Total net sales                    | ** ** | **$**                   | **888,609** | ** **              | $          | 747,414 |   | **$** | **480,606** | ** ** | $ | 395,663 |   |
|                               |       |                    | ** **  |                    |       |   | ** ** |   |   |
| **Segment  profits**               |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Small Systems                      | ** ** | **$**                   | **307,497** | ** **              | $          | 275,290 |   | **$** | **160,989** | ** ** | $ | 137,825 |   |
| Large Systems                      | ** ** | **36,635**              | ** **  | 20,510                  |       | **19,188** | ** ** | 12,239 |   |
| Other                              | ** ** | **19,510**              | ** **  | 18,674                  |       | **9,244** | ** ** | 8,124 |   |
| Total segment  profits             | ** ** | **363,642**             | ** **  | 314,474                 |       | **189,421** | ** ** | 158,188 |   |
| Shipping and  handling net costs   | ** ** | **20,924**              | ** **  | 15,860                  |       | **11,155** | ** ** | 8,666 |   |
| Other indirect  operating expenses | ** ** | **249,175**             | ** **  | 220,681                 |       | **128,356** | ** ** | 116,094 |   |
| Other income,  net                 | ** ** | **8,983**               | ** **  | 3,988                   |       | **5,189** | ** ** | 2,256 |   |
| Earnings before  income taxes      | ** ** | **$**                   | **102,526** | ** **              | $          | 81,921 |   | **$** | **55,099** | ** ** | $ | 35,684 |   |

 

13

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**12.****       Litigation**

 

As previouslyreported in APC’s Form 10-Q for the quarter ended March 27,2005,on February 5, 2004, Liebert Corporation and Zonatherm Products, Inc.,Liebert’s sales representative firm in the Chicago area, filed a lawsuit in theCircuit Court of Cook County, Illinois, Chancery Division (the “Court”) againstAPC, 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,tortious interference with contract, tortious interference with prospectiveeconomic advantage, civil conspiracy and conspiracy to breach fiduciary duties.Liebert and Zonatherm are seeking compensatory and punitive damages andinjunctive relief. On February 18, 2004, the Court denied plaintiffs’motion for a temporary restraining order. On July 16, 2004, the Courtdismissed without prejudice all claims except the Illinois Trade Secret Actclaim. On August 6, 2004, plaintiffs filed a second amended complaintreasserting the claims dismissed by the Court on July 16, 2004. On August 20,2004, the Court denied plaintiffs’ motion for preliminary injunction as toviolation of the Illinois Trade Secrets Act. On September 21, 2004,plaintiffs filed a Notice of Appeal of the August 20, 2004 ruling with theIllinois Appellate Court. On January 12, 2005, the Court dismissed withoutprejudice all claims against APC except the Illinois Trade Secret Act claim. OnMarch 1, 2005 the Illinois Appellate Court issued an opinion on the appealpursuant to which it affirmed the Court on the issue of non-trade secret natureof plaintiff’s customer lists, and remanded the matter for the Court to enteran injunction against one of the individual former employees of Zonatherm fromusing certain pricing books. On March 16, 2005, plaintiffs filed a thirdamended complaint reasserting claims substantially similar to those dismissedby the Court in its January 12, 2005 ruling. On May 19, 2005, APCfiled a motion to dismiss plaintiffs’ third amended complaint. On May 24,2005, the Court issued an injunction against one of the former employees ofZonatherm enjoining him from using certain pricing books of plaintiff. Noinjunction was issued against APC. On June 30, 2005, plaintiffs filed anappeal with the Illinois Appellate Court seeking to increase the scope of theCourt’s order.

 

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

 

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.

 

**ITEM 2.****                                                  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

We begin Management’s Discussion and Analysis of Financial Conditionand Results of Operations (MD&A) with a discussion of our business outlookfor the remainder of 2005. We also provide a discussion of our Results ofOperations for the second quarter and first six months of 2005 compared to thesecond quarter and first six months of 2004. This discussion includes anoverview of our operating results and the directions in which our markets,segments, and geographies are moving. We then provide a Liquidity and Capital Resourcesdiscussion of the significant changes in our balance sheet during the first sixmonths of 2005, and cash flows for the second quarter and first six months of2005 compared to the second quarter and first six months of 2004, as well asour contractual obligations and foreign currency activity. This is followed bya discussion of the Critical Accounting Policies that we believe are importantto our business operations and understanding of our results of operations. Weconclude with information about factors that may affect our future results.

 

This MD&A should be read in conjunction with the other sections ofthis report, including “Item 1. Financial Statements” and also our AnnualReport on Form 10-K for the year ended December 31, 2004, including “Item1: Business;” “Item 6: Selected Financial Data;” “Item 8: Financial Statementsand Supplementary Data;” and “Item 9A: Controls and Procedures.”

 

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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.

 

**BUSINESSOUTLOOK**

 

While there continues tobe uncertainty around interest rate levels, energy costs and, in general,macroeconomic conditions and their potential impact on corporate investment andconsumer spending, we maintain a cautious but optimistic outlook for ourbusiness. We are also pleased with APC’s performance during our second quarter andfirst half of 2005. For the eighth consecutive quarter APC’s year-over-yearrevenue growth was in double-digits. We are confident that the strongyear-over-year growth can be attributed to what we believe is an attractivemacro-economic environment for IT spending and is the result of our continuedinvestments in sales and marketing activities and the growing adoption of APC’snetwork-critical physical infrastructure, or NCPI, architecture. The investmentwe have made to educate the market and drive adoption of the technology, webelieve, is paying off as customers are embracing the modular, standardizedapproach APC has pioneered in network-critical physical infrastructure.

 

Against this background,we are planning for continued growth in annual revenue and increasing grossprofit and operating profit dollars in 2005. We believe that we are very wellpositioned competitively, financially and strategically. We will continue to befocused on empowering IT professionals with the knowledge, tools and solutionsthey need to effectively design, build and manage network-critical physicalinfrastructure. Our objective is for APC to become a trusted, global partnerfor the long term, committed to solving our customers’ network-criticalphysical infrastructure problems of today, and helping them anticipate theirchallenges of tomorrow, thereby allowing them to focus on their corecompetencies. We believe that we can accomplish this by dramatically reducingour customers’ level of complexity and their total cost of ownership involvedin designing, building, and managing the network-critical physicalinfrastructure that is at the very core of maintaining business continuity,application availability, and network reliability.

 

As we look ahead into thesecond half of 2005, we continue to plan for annual revenue growth in all threeof our reportable segments: Small Systems, Large Systems and “Other.” Similarto 2004, we expect the rate of revenue growth of our Large Systems segment tobe greater than the growth expected for Small Systems due to the assumedcontinued success of our overall strategy and the acceptance of our products inspecific market segments.

 

Overall gross margins for2005 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 plannedprice reductions that we anticipate will be partially offset by the favorableimpact of the expected cost reduction of our products, particularly materialcosts, as a result of assumed unit volume growth and our continued efforts toimprove manufacturing cost efficiencies. We also expect, albeit to a lesserdegree than in 2004, favorable pricing arrangements with our suppliers. Grossmargin variability could result from changing revenue levels, which aredependent on unit volumes, prices and currency trends as well as the mix ofproducts sold, unit costs and yield issues associated with production at ourfactories, transfers of production to our low cost facilities, excessmanufacturing capacity, excess inventory, inventory obsolescence and variationsin inventory valuation.

 

We have dedicatedsignificant efforts to optimize our overall manufacturing capacity andlocations over recent years and we will continue to plan for future capacityrequirements based on the assumed continued acceptance and demand for ourproducts in the specific market segments they were designed to address. Wecurrently expect that capital spending will be between $30 million and $40million in 2005, compared to $29.3 million in 2004. We expect that most of ourcapital spending for 2005 will go toward maintaining, upgrading and expandingour current manufacturing capacity, as well as investments to upgrade currenthardware and software office technologies.

 

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We are committed tosustaining our R&D efforts to meet the future needs of our customers acrossall segments and potentially expanding into emerging, high-growth areas. Wecontinue to advance our NCPI systems in addition to ensuring our end-to-endoffering is the best in the industry. We will remain focused on aggressivelydriving our growth of our network-critical physical infrastructure solutions,which will require sustaining and increasing our operating expense investmentsin sales and marketing, as well as making incremental investments in globalcustomer education initiatives.

 

In 2004, we educated nearly100,000 individuals on the InfraStruXure solution concept. Our investmentposture remains intact and we are firmly committed to supporting the level ofsales and marketing spending necessary to educate customers and channelpartners on the inherent performance and total cost of ownership benefits of amodular, standardized solution such as InfraStruXure.

 

We currently expect our tax rate to be approximately 24% for 2005,excluding the potential tax impact of the repatriation of offshore earningsdiscussed below. The estimated effective tax rate is based on current tax lawand the current expected income. The tax rate may be affected by thejurisdictions in which profits are determined to be earned and taxed, ourability to successfully implement additional tax savings planning opportunitiesand our ability to realize deferred tax assets.

 

***American Jobs Creation Act of2004 — Repatriation of Foreign Earnings. ***In October 2004, the American Jobs Creation Act of 2004 wasenacted. This Act repealed the tax code’s extraterritorial income (ETI)exclusion in response to the World Trade Organization’s challenge that the ETIexclusion was a prohibited tax subsidy. The repeal will be phased in through2006. The Act replaced the ETI exclusion with a 3% domestic deduction fordomestic production activities effective for APC’s 2005 tax year. The Act alsoprovides for a temporary 85% dividends received deduction on certain foreignearnings repatriated during a one-year period. The deduction would result in anapproximate 5.25% federal tax rate on the repatriated earnings. To qualify forthe deduction, the earnings must be reinvested in the United States pursuant toa domestic reinvestment plan established by a company’s chief executive officerand approved by its board of directors. Certain other criteria in the Jobs Actmust be satisfied as well. The maximum amount of APC’s foreign earnings thatqualify for the temporary deduction is $500 million. For APC, the one-yearperiod during which the qualifying distributions can be made is 2005. Noqualifying distributions were made during 2004.

 

APC is in theprocess of evaluating whether it will repatriate any foreign earnings under therepatriation provisions of the Jobs Act and, if so, the amount that it willrepatriate. The range of reasonably possible amounts that APC is consideringfor repatriation, which would be eligible for the temporary deduction, is zeroto approximately $500 million. If APC determines to repatriate foreignearnings, we are likely to repatriate amounts in the high end of our range. APCexpects to determine the amounts and sources of foreign earnings to berepatriated, if any, during the third quarter of fiscal 2005. Use of the fundswill be governed by a domestic reinvestment plan, as required by the Jobs Act.

 

Repatriation ofthe maximum amount eligible for the temporary deduction, which is $500 million,could result in additional United States federal income tax expense, which APCcurrently estimates to be between zero and $22.7 million, in fiscal 2005. We were able to lower our previouslyestimated range of zero to $38.2 million as a result of favorable IRS guidancereleased in May 2005. Repatriationalso would substantially increase liquidity in the United States, although useof the additional liquidity would be restricted by the domestic reinvestmentplan. There would be a corresponding reduction in liquidity at APC’s foreignsubsidiaries. Some foreign subsidiaries may be required to borrow in order torepatriate their earnings to the U.S.

 

We are currently a partyto various legal proceedings and claims. The costs to litigate such matterswere significant in 2004 and we expect such costs in 2005 to be less than the levelsincurred during the prior year, as a result of our settling two patentinfringement suits. We currently do not believe that the ultimate outcome ofthese legal proceedings and claims will have a material adverse effect on ourfinancial position or overall trends in results of operations. However,litigation is subject to inherent uncertainties, including the risk of anunfavorable outcome, and management’s view of these matters may change in thefuture. An unfavorable outcome could include monetary damages or, in caseswhere injunctive relief is sought, an injunction prohibiting certainactivities. If an unfavorable outcome were to occur in any specific period,there exists the possibility of a material adverse impact on the results 

 

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of operations of thatperiod or future periods. We believe that, given our current liquidity and cashand investment balances, even an adverse judgment would not have a materialimpact on cash and investments or liquidity.

 

The statements below donot include any impact related to the expensing of stock options according toStatement of Financial Accounting Standards No. 123(R), *Share-Based Payment*, which will be effective for APCbeginning with the first quarter of 2006. The pro forma earnings impact ofexpensing of stock options on our results of operations for the second quartersand first six months of 2005 and 2004 is described in Note 10 of Notes toConsolidated Financial Statements in Item 1 of this report.

 

**RESULTS OFOPERATIONS**

 

**COMPARISON OF THE THREE AND SIX MONTH PERIODSENDED JUNE 26, 2005 AND JUNE 27, 2004**

** **

**Revenues**

 

Net sales were $480.6 million for the second quarter of 2005, anincrease of 21.5% compared to $395.7 million for the comparable period in 2004.Net sales for the first six months of 2005 were $888.6 million, an increase of18.9% compared to $747.4 million for the same period in 2004. These increaseswere attributable to strength across all of our product segments, particularlythe Large Systems segment, as well as growth across all of our majorgeographies.

 

Led by continued growth year-over-year in InfraStruXure revenue, APC’sLarge Systems segment set the pace for total company growth. We continued tomake investments in supporting our efforts in these network-critical physicalinfrastructure markets and our top line advances highlight the resulting strongperformance. Additionally, our engineered-to-order industrial systems were alsoa solid contributor to the Large Systems segment’s year-over-year performance. OurSmall Systems segment also reported solid performance. Led by solid growth in ourBack-UPS desktop UPS and our Smart-UPS server family, this segment continues toproduce strong results that reflect APC’s position as a preferred partner inthe mid-market and consumer power protection markets. Management believes that increasinglyAPC solutions, particularly our InfraStruXure architecture, are being specifiedfor network-critical physical infrastructure requirements. For furtherinformation about revenues by segment, refer to the *SegmentResults* section below.

 

***Revenues byGeography.**** *The following tablesummarizes our revenues on a geographic basis for the three and six monthperiods ended June 26, 2005 and June 27, 2004.

 
| ** **                                  | ** ** | **Six months ended**    | ** ** | **Three months ended** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **June 26,  2005** | ** ** | **% of  Total**        | ** ** | **June 27,  2004** | ** ** | **% of  Total** | ** ** | **June 26,  2005** | ** ** | **% of  Total** | ** ** | **June 27,  2004** | ** ** | **% of  Total** | ** ** |
| ** **                                  | ** ** | **(In millions)**       | ** ** |
| North and Latin  America (the Americas)     | ** ** | **$**                   | **462.0**  |                   | **52.0**   | **%** | $ | 375.0 | ** ** | 50.2 | % | **$** | **257.8** |   | **53.6** | **%** | $ | 211.1 | ** ** | 53.4 | % |
| Europe, the  Middle East, and Africa (EMEA) | ** ** | **256.9**               |       | **28.9**               | **%**      | 229.8 | ** ** | 30.7 | % | **140.2** |   | **29.2** | **%** | 119.2 | ** ** | 30.1 | % |
| Asia                                        | ** ** | **169.7**               |       | **19.1**               | **%**      | 142.6 | ** ** | 19.1 | % | **82.6** |   | **17.2** | **%** | 65.4 | ** ** | 16.5 | % |
| Total Net Sales                             | ** ** | **$**                   | **888.6**  |                   | **100.0**  | **%** | $ | 747.4 | ** ** | 100.0 | % | **$** | **480.6** |   | **100.0** | **%** | $ | 395.7 | ** ** | 100.0 | % |

 

The Americas’ net sales increased 22.2% in thesecond quarter of 2005 over the second quarter of 2004, and increased 23.2% inthe first six months of 2005 over the first six months of 2004. EMEA’s netsales increased 17.6% in the second quarter of 2005 over the second quarter of2004, and increased 11.8% in the first six months of 2005 over the first sixmonths of 2004. Asia’s net sales increased 26.2% in the second quarter of 2005over the second quarter of 2004, and increased 19.0% in the first six months of2005 over the first six months of 2004.

 

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**Cost of Goods Sold**

 

Cost of goods sold was $302.3million or 62.9% of net sales in the second quarter of 2005 compared to $246.1million or 62.2% of net sales in the second quarter of 2004. Cost of goods soldwas $545.9 million or 61.4% of net sales in the first six months of 2005compared to $448.8 million or 60.0% of net sales in the first six months of2004. Gross margins for the second quarter of 2005 were 37.1% of net sales,approximately 70 basis points lower than in the second quarter of 2004. Grossmargins for the first six months of 2005 were 38.6% of net sales, approximately140 basis points lower than in the first six months of 2004. The lower secondquarter and first half 2005 gross margins were attributable to a segment mixshift toward our Large Systems segment, as well as increased costs, includingcosts incurred to transfer products to low cost production facilities. Inaddition, the unfavorable impact of price erosion in the Small Systems segment wasfavorably offset by year-over-year currency trends, particularly in Europe. Forfurther information about gross margins by segment, refer to the *Segment Results* section below.

 

***Inventory Reserves.***  Totalinventory reserves at June 26, 2005 were $40.9 million compared to $39.4million at December 31, 2004. Total inventory reserves increased slightly,reflecting routine provisioning that was necessary as a result of applying APC’sinventory reserve methodology throughout the year, substantially offset by thephysical disposition of inventories covered by APC’s inventory reserves. APC’sreserve estimate methodology involves quantifying the total inventory positionhaving potential loss exposure. Loss exposure generally results from severalbusiness factors, including product or component discontinuance, unplannedchanges in demand, product design changes, and factory transitions. Quantifyingsuch loss exposure is the result of combining the cost of inventoriesspecifically identified as having little or no opportunity for sale or use(thus available for physical disposition) plus the cost of inventories having ahigh risk of no future sale or use based upon an analysis of on-hand quantitiescompared to historical and anticipated future sale or use. APC maintains anon-going business process for the physical disposition of inventoriespreviously identified. Inventory write-offs occur at the time of physicaldisposition. Inventories, once reserved, are not written back up as suchreserve adjustments are considered to be a permanent decrease to the cost basisof the excess or obsolete inventory.

 

**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)

 
| ** **                         | ** ** | **Six months ended**    | ** **  | **Three months ended**  | ** ** |
|------------------------------------|------------|-------------------------|-------------|-------------------------|------------|
| ** **                         | ** ** | **June 26,  2005** | ** **  | **June 27,  2004** | ** ** | **June 26,  2005** | ** ** | **June 27,  2004** | ** ** |
| ** **                         | ** ** | **(In thousands)**      | ** **  |
| **Segment  net sales**             |       |                    |        |                    |       |   |   |   |   |
| Small Systems                      | ** ** | **$**                   | **663,692** | ** **              | $          | 576,237 |   | **$** | **356,231** | ** ** | $ | 301,143 |   |
| Large Systems                      | ** ** | **185,549**             | ** **  | 136,232                 |       | **104,876** | ** ** | 77,911 |   |
| Other                              | ** ** | **33,692**              | ** **  | 29,906                  |       | **16,359** | ** ** | 13,737 |   |
| Total segment  net sales           | ** ** | **882,933**             | ** **  | 742,375                 |       | **477,466** | ** ** | 392,791 |   |
| Shipping and  handling revenues    | ** ** | **5,676**               | ** **  | 5,039                   |       | **3,140** | ** ** | 2,872 |   |
| Total net sales                    | ** ** | **$**                   | **888,609** | ** **              | $          | 747,414 |   | **$** | **480,606** | ** ** | $ | 395,663 |   |
|                               |       |                    | ** **  |                    |       |   | ** ** |   |   |
| **Segment  profits**               |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Small Systems                      | ** ** | **$**                   | **307,497** | ** **              | $          | 275,290 |   | **$** | **160,989** | ** ** | $ | 137,825 |   |
| Large Systems                      | ** ** | **36,635**              | ** **  | 20,510                  |       | **19,188** | ** ** | 12,239 |   |
| Other                              | ** ** | **19,510**              | ** **  | 18,674                  |       | **9,244** | ** ** | 8,124 |   |
| Total segment  profits             | ** ** | **363,642**             | ** **  | 314,474                 |       | **189,421** | ** ** | 158,188 |   |
| Shipping and  handling net costs   | ** ** | **20,924**              | ** **  | 15,860                  |       | **11,155** | ** ** | 8,666 |   |
| Other indirect  operating expenses | ** ** | **249,175**             | ** **  | 220,681                 |       | **128,356** | ** ** | 116,094 |   |
| Other income,  net                 | ** ** | **8,983**               | ** **  | 3,988                   |       | **5,189** | ** ** | 2,256 |   |
| Earnings before  income taxes      | ** ** | **$**                   | **102,526** | ** **              | $          | 81,921 |   | **$** | **55,099** | ** ** | $ | 35,684 |   |

 

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*** ***

***Small Systems.***  Net sales for products in the Small Systemssegment, which provides power protection, UPS and management products for thePC, server and networking markets, increased in the second quarter of 2005 by 18.3%over the second quarter of 2004, and increased in the first six months of 2005by 15.2% over the first six months of 2004. Our Back-UPS and Smart-UPS familieswere strong drivers of the year-over-year growth in this segment. Additionally,we continue to see strong adoption of our new Smart-UPS RT® family of on-line UPSs.InfraStruXure related revenue from product categories such as physical infrastructureand power distribution were also solid contributors to this segment’sperformance.

 

Second quarter and first half 2005 grossmargins for the Small Systems segment of 45.2% and 46.3%, respectively, declined60 basis points and 150 basis points, respectively, from the comparableperiods in 2004. These declines resultedfrom increased costs, including warehousing and transportation costs incurredto meet customer product and delivery needs, as well as the unfavorable impactof price erosion in this segment.

 

***Large Systems.***  Net sales for products in theLarge Systems segment, consisting primarily of 3-phase UPS, services, precisioncooling and ancillary products for data centers, facilities and communicationapplications, increased in the second quarter of 2005 by 34.6% over the secondquarter of 2004, and increased in the first six months of 2005 by 36.2% overthe first six months of 2004. The Large Systems segment continued to outpacethe growth of our other segments. InfraStruXure-related revenue continued to bea driver of growth in this segment, including our Symmetra 3-phase, theUPS component of our InfraStruXure solution, and ancillary products. Additionally, our engineered-to-order industrialsystems were also a solid contributor to this segment’s year-over-yearperformance.

 

Second quarter and first half 2005 gross margins forthe Large Systems segment of 18.3% and 19.7%, respectively, increased 260 basispoints and 460 basis points, respectively, from the comparable periods in 2004.As a result of year-over-year InfraStruXure sales growth, this segment is continuingto experience positive margin trends from a favorable shift to these highergross margin product lines, particularly the Symmetra 3-phase, coupled withimproved price yield on select 3-phase and precision cooling products.

 

***“Other” Segment.***  Netsales for products in the Other segment, consisting principally of mobile accessoriesand replacement battery products, increased in the second quarter of 2005 by 19.1%over the second quarter of 2004, and increased in the first six months of 2005by 12.7% over the first six months of 2004. The improvement was mainlyattributable to organic growth of existing products across the segment.

 

Second quarter and firsthalf 2005 gross margins for the Other segment of 56.5% and 57.9%, respectively,decreased 260 basis points and 450 basis points, respectively, from thecomparable periods in 2004, driven principally by an unfavorable mix shifttoward lower gross margin mobile accessories, as well as a charge for costs associatedwith the resolution of a vendor matter.

 

## **OperatingExpenses**

## ** **

***Marketing, Selling, General, and Administrative (SG&A)Expenses.***SG&A expenses in the second quarter of 2005 were $105.6 million or 22.0% ofnet sales compared to $94.6 million or 23.9% of net sales in the second quarterof 2004. SG&A expenses in the first six months of 2005 were $206.2 millionor 23.2% of net sales compared to $180.8 million or 24.2% of net sales in thefirst six months of 2004.We continue to support our data center initiatives,with a primary focus on increasing the awareness of our existing andprospective customers, particularly in relation to our InfraStruXurearchitecture. The increase in total spending in the first half of 2005reflected ongoing sales and promotional efforts which involve expanding oursales and support teams, developing new channels such as manufacturerrepresentatives and engineering contractors, and increasing sales and marketingsupport of our core reseller channels, as well as funding our educationalefforts through high-level customer and partner events. In addition, theyear-over-year increase in operating expenses included incremental compensationcosts associated with restricted stock units awarded during the fourth quarterof 2004.

 

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The allowance for bad debts was 4.5% of grossaccounts receivable at June 26, 2005 compared to 4.7% at December 31,2004. Accounts receivable balances outstanding over 60 days represented 14.0%of total receivables at June 26, 2005 compared to 11.7% at December 31,2004. This increase is due in part to a growing portion of our businessattributable to sales where longer payment terms are customary combined withtiming of certain second quarter and first half 2005 collections in Europe. A majorityof U.S. and international customer balances continue to be covered byreceivables insurance. We continue to experience strong collection performance.Write-offs of uncollectable accounts have represented less than 1% of netsales.

 

***Research and Development (R&D).*** R&D expenditures were $22.7 million or 4.7% of net sales in thesecond quarter of 2005, up from $21.4 million or 5.4% of net sales in thesecond quarter of 2004. R&D expenditures were $43.0 million or 4.8% of netsales in the first six months of 2005, up from $39.8 million or 5.3% of netsales in the first six months of 2004. We continue to commit resources tosupport our investment in research and development with a primary focus ondriving product innovation through increasing engineering efforts. We believethat continued product innovation through development is necessary for ourexisting products to remain competitive in our markets, as well as creatingopportunities from new product introductions. The increases in total R&Dspending primarily reflect increased numbers of software and hardware engineersand costs associated with new product development and engineering support.

 

**Other Income, Net and Income Taxes**

 

***Other Income, Net.***  Otherincome is comprised principally of interest income which increased during the secondquarter and first half of 2005 due principally to higher average cash balancesavailable for investment as well as rising interest rates.

 

At June 26, 2005, APC had $761.6 millionof total cash and investments, up from $721.1 million at December 31, 2004.We manage APC’s cash and investment balances to preserve principal andliquidity while maximizing our return on the total investment portfolio. Wediversify our investment portfolio by investing in multiple types ofinvestment-grade securities with multiple investment brokers. Based on APC’sinvestment portfolio and interest rates, at June 26, 2005, a 100 basispoint increase or decrease in interest rates would have resulted in an increaseor decrease of approximately $8 million in our annual interest income.

 

***Income Taxes.***  Oureffective income tax rate was approximately 24.0% and 25.0% for the secondquarters and first six months ended June 26, 2005 and June 27, 2004,respectively. The decrease in 2005 from 2004 is due to the tax savings from anincreasing portion of taxable earnings anticipated to be generated from APC’soperations in jurisdictions currently having lower income tax rates than thepresent U.S. statutory income tax rate. This shift resulted partially from ourproduct transitions to lower cost, lower tax, manufacturing locations. APC has tax holidays in China and India whichreduce or eliminate the income taxes paid in those countries. We expect APC’seffective income tax rate to remain considerably lower than the U.S. statutoryfederal corporate tax rate of 35%.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

**Working Capital**

 

Working capital at June 26, 2005 was $1.361billion compared to $1.279 billion at December 31, 2004. Our cash, cashequivalents, and short-term investments position increased to $761.1 million atJune 26, 2005 from $715.6 million at December 31, 2004. APC’scontinued positive operating results allowed us to pay a quarterly dividend andcontinue to internally finance the capital investment, R&D, sales andmarketing spending required to expand our operations.

 

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**Cash Flows**

 

The table below summarizes our cash flows forthe second quarters and first six months ended June 26, 2005 and June 27,2004.

 
| ** **                                           | ** ** | **Six months ended**    | ** **  | **Three months ended**  | ** ** |
|------------------------------------------------------|------------|-------------------------|-------------|-------------------------|------------|
| ** **                                           | ** ** | **June 26,  2005** | ** **  | **June 27,  2004** | ** ** | **June 26,  2005** | ** ** | **June 27,  2004** | ** ** |
| ** **                                           | ** ** | **(In thousands)**      | ** **  |
| Net cash  provided by operating activities           | ** ** | **$**                   | **66,869**  | ** **              | $          | 47,888 |   | **$** | **32,327** | ** ** | $ | 12,198 |   |
|                                                 |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Net cash (used  in) provided by investing activities | ** ** | **(6,357**              | **)**       | (70,288                 | )          | **(11,654** | **)** | 131 |   |
|                                                 |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Net cash used in  financing activities               | ** ** | **(11,114**             | **)**       | (25,162                 | )          | **(591** | **)** | (13,364 | ) |
|                                                 |       |                    | ** **  |                    |       |   | ** ** |   |   |
| Net change in  cash and cash equivalents             | ** ** | **49,398**              | ** **  | (47,562                 | )          | **20,082** | ** ** | (1,035 | ) |
| Cash and cash  equivalents at beginning of period    | ** ** | **72,721**              | ** **  | 141,214                 |       | **102,037** | ** ** | 94,687 |   |
| Cash and cash  equivalents at end of period          | ** ** | **$**                   | **122,119** | ** **              | $          | 93,652 |   | **$** | **122,119** | ** ** | $ | 93,652 |   |

 

***Cash Flows from OperatingActivities****.*  Ourcash flows from operations for the second quarter and first six months of 2005 reflectedhigher profit levels compared to the prior year, which were partially offset by increased account receivable balances asa result of higher second quarter and first half sales.

 

***Cash Flows from InvestingActivities****.*  Ourinvesting activities cash flows were used mainly for the purchase ofavailable-for-sale and held-to-maturity securities and for capital spending,principally purchased software applications, manufacturing and officeequipment, and building improvements. Our investment approach and thecomposition of our investment portfolio remained relatively constant overallwith noinvestments having maturity dates greater than two years, except for ourauction rate securities.

 

***Cash Flows from FinancingActivities****.*  Ourcash flows from financing activities included the payment of common stockdividends of approximately $19.4 million and $16.0 million during the secondquarters of 2005 and 2004, respectively, and $38.6 million and $32.0 millionduring the first six months of 2005 and 2004, respectively. These outflows werepartially offset by proceeds from issuances of common stock relating toemployee stock plans during each of the periods presented.

 

**Inventories**

 

Worldwide inventories were $470.6 million at June 26,2005, up from $465.9 million at December 31, 2004. A decrease in rawmaterials was more than offset by an increase in finished goods during thefirst half of 2005. The decrease in raw materials can be attributed to ourefforts to improve our supply chain management of component inventories.However, higher levels of on-hand finished goods were required duringthe first half of 2005 to meet increasing current and anticipated demand,particularly for InfraStruXure product offerings, as well as to manage thesupply chain requirements associated with continuing transfers of production ofa wide range of Small and Large Systems products to and among our low costmanufacturing regions. In addition, we increased our inventory levelsstrategically to support in-region lead time initiatives, as well as to supportcontinuing new product introductions. Despite increasing inventory levels,inventory as a percentage of quarterly net sales was 98% in the second quarterof 2005, down from 118% in the first quarter of 2005, and 115% in the secondquarter of 2004, reflecting our strong second quarter 2005 net salesperformance. There were no inventory charges, other than APC’s standardprovisioning, during the second quarters and first six months of 2005 and 2004.

 

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** **

**Contractual Obligations**

 

Thefollowing table summarizes our significant contractual obligations at June 26,2005, and the effect such obligations are expected to have on our liquidity andcash flows in future periods. This table excludes amounts already recorded onour balance sheet as current liabilities at June 26, 2005.

 
| ** **                   | ** ** | **Payments Due By Period** | ** ** |
|------------------------------|------------|----------------------------|------------|
| ** **                   | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                   | ** ** | **(In millions)**          | ** ** |
| Operating Lease  Obligations |       | $                          | 25.9       |   | $ | 4.2 |   | $ | 12.3 |   | $ | 7.8 |   | $ | 1.6 |   |
|                              |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

## **APC’s non-cancelable operating leases, primarily forwarehousing and office space, expire at various dates through 2011. Theseleases contain renewal options for periods ranging from one to seven years andrequire APC to pay its proportionate share of utilities, taxes, and insurance.APC is not able to determine the aggregate amount of purchase orders thatrepresent contractual obligations for the purchase of goods and services, assuch 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 allsignificant terms, including: fixed or minimum quantities to be purchased;fixed, minimum, or variable price provisions; the approximate timing of thetransaction, and contain no provisions allowing for cancellation withoutsignificant penalty. Our purchase orders for raw materials or purchasedfinished products are based on our current manufacturing needs and/or demandforecasts and are fulfilled by our vendors within short time horizons. We donot have significant agreements for the purchase of raw materials or finishedproducts specifying minimum quantities or set prices that exceed our expectedrequirements for three months.**

## ** **

**CapitalExpenditures and Capital Commitments**

 

During the second quarters of 2005 and 2004,our capital expenditures, net of capital grants, amounted to approximately $10.3million and $9.2 million, respectively. During the first six months of 2005 and2004, our capital expenditures, net of capital grants, amounted toapproximately $15.3 million and $12.5 million, respectively. Our capitalspending during the second quarters and first six months of 2005 and 2004 consistedprimarily of purchased software applications, manufacturing and officeequipment, and building improvements. Such spending focused on funding continuinginvestment in information technologies, as well as additional equipment needs and improving existing factories,principally in the U.S., India, the Philippines, and Ireland. Substantially all of APC’s net capitalexpenditures were financed from available operating cash.

 

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 $30 million and $40 million in 2005, compared to $29.3million in 2004. We expect that most of the capital spending for 2005 will gotoward maintaining, upgrading, and expanding current manufacturing capacity, aswell as investing to upgrade current hardware and software office technologies.

 

We had no material capital commitments duringthe second quarters and first six months of 2005 and 2004, or at June 26,2005 and December 31, 2004.

 

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, of suchcosts 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 separate agreements with the IDA, we receive directreimbursement of training costs at our Galway and Castlebar facilities for upto $3,000 and $12,500, respectively, per new employee hired. Also refer to Note16 of Notes to Consolidated Financial Statements in Item 8 of American PowerConversion Corporation’s Annual Report on Form 10-K for the year ended December 31,2004.

 

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APCalso has an agreement with the IDA for a research and development grant towardsthe costs of a project for the development of software products. Theavailability of the grant is contingent on meeting certain milestones in theprogress of the project as well as meeting certain employment goals on theproject within the Galway facility. The amount of grant assistance available onsatisfaction of all conditions is 28% of the eligible expenditure to a maximumof €714,588. At June 26, 2005, no grant claims had been claimed orreceived.

 

**Borrowing Facilities and Financial Commitments**

 

APChad no borrowing facilities or significant financial commitments, other thanthose required in the normal course of business, during the second quarters andfirst six months of 2005 and 2004, or at June 26, 2005 and December 31,2004.

 

**Off-Balance-Sheet Arrangements**

 

APChad no significant off-balance sheet arrangements during the second quartersand first six months of 2005 and 2004, or at June 26, 2005 and December 31,2004.

 

**Quarterly Cash Dividends**

 

Quarterly cash dividends of $0.08 per share were declared and paid inthe first and second quarters of 2004. In June 2004, APC’s Board ofDirectors approved a 25% increase in its quarterly cash dividend raising the quarterlypayout to $0.10 per share. Dividends of $0.10 per share were declared and paidin each subsequent quarter through the second quarter of 2005. It is theintention of the Board of Directors to pay a comparable quarterly dividend on agoing forward basis contingent upon continued capital availability and adetermination that cash dividends continue to be in the best interests of APCand its shareholders.

 

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.

 

## **Foreign Currency Activity**

 

## **We invoice our customersin various currencies. Realized and unrealized transaction gains or losses areincluded in the results of operations and are measured based upon the effect ofchanges in exchange rates on the actual or expected amount of functionalcurrency cash flows. Transaction gains and losses were not material to theresults of operations in the second quarters and first six months of 2005 and2004.**

## ** **

The table below summarizes information on balancesthat are sensitive to foreign currency exchange rates and presents such amountsin U.S. dollar equivalents. APC’s U.S. dollar functional currency entities aresensitive to changes principally in the Euro and British pound. APC’s Swissfranc functional currency entity is sensitive to changes principally in theEuro and U.S. dollar.

 
| ** **                       | ** ** | **June 26, 2005**   | ** ** | **December 31, 2004** | ** ** |
|----------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                       | ** ** | **Accounts  Receivable** | ** ** | **Liabilities**            | ** ** | **Accounts  Receivable** | ** ** | **Liabilities** | ** ** |
| ** **                       | ** ** | **(In millions)**        | ** ** |
| U.S. dollar  functional currency | ** ** | **$**                    | **90.6**   | ** **                 | **$**      | **97.3** |   | $ | 97.6 |   | $ | 101.9 |   |
| Swiss franc  functional currency | ** ** | **$**                    | **15.3**   | ** **                 | **$**      | **7.3** |   | $ | 17.2 |   | $ | 8.4 |   |

 

APC also had non-trade receivables denominated inEuros of approximately U.S.$0.9 million and U.S.$0.8 million at June 26,2005 and December 31, 2004, respectively.

 

We continually review our foreign exchange exposureand consider various risk management techniques, including the netting offoreign currency receipts and disbursements, rate protection agreements withcustomers/vendors and derivatives arrangements, including foreign exchangecontracts. We presently do not utilize rate protection agreements or derivativearrangements.

 

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**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 all financialstatement periods presented, there have been no material modifications to theapplication of these critical accounting policies. For a detailed discussion onthe application of these and other accounting policies, also refer to Note 1 ofNotes to Consolidated Financial Statements in Item 8 of American PowerConversion Corporation’s Annual Report on Form 10-K for the year ended December 31,2004.

 

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.

 

Our critical accounting policies are as follows:

 

***Revenue Recognition. ***Wefollow very specific and detailed guidelines in measuring revenue; however,certain judgments affect the application of our revenue policy. Revenue resultsare difficult to predict, and any shortfall in revenue or delay in recognizingrevenue could cause our operating results to vary significantly from quarter toquarter. In general, revenue is recognized when title has passed at the time ofdelivery of product for all of our operating segments as stipulated by thedelivery terms for the sales transactions. In addition, prior to revenuerecognition, we require persuasive evidence of the arrangement, that the priceis fixed or determinable, and that collectibility is reasonably assured.Installation is not applicable for Small Systems and “Other” segment productsbased on the nature of the products sold. Generally, revenue associated withLarge Systems sales is also recognized at the time of delivery and/orinstallation pursuant to the delivery and/or installation terms. Delivery termsvary, but often include origin-based terms (e.g., FOB Shipping Point andEx-works) and destination-based terms (e.g., DDU/DDP (delivered dutyunpaid/delivered duty paid)).

 

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. Where we do not perform such 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 has purchased,including product-based and professional services. Revenue is recognized at thetime services are provided or is deferred and recognized over the serviceperiod (where applicable). The fair value of these services are based upon therates that we charge customers in separately negotiated transactions and suchservices are not essential to the functionality of the delivered product.

 

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For all sales, exceptthose completed over the Internet, we use a binding purchase order as evidenceof an arrangement. For sales over the Internet, we use a credit cardauthorization as evidence of an arrangement. Sales through certain customersare evidenced by a master agreement governing the relationship together withbinding 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 2005, weanticipate that installation and customer acceptance provisions may become morecommon, and therefore increasingly significant for determining delivery andperformance and consequently our entitlement to recognize revenue.

 

***Estimating Valuation Allowances and Accrued Liabilities –Allowances for Sales Returns, Doubtful Accounts, Inventory Obsolescence andProduct Recall, and Assessment of the Probability of the Outcome of our CurrentLitigation. ***Significantmanagement judgments that affect the application of our revenue policy alsoinclude estimates of potential future product returns related to current periodproduct revenue. We analyze historical returns, current economic trends, andchannel inventories when evaluating the adequacy of the sales returns and otherallowances. Significant management judgments and estimates must be made andused in connection with establishing the sales returns and other allowances inany accounting period. Material differences may result in the amount and timingof our revenue for any period if management made different judgments orutilized 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 RecognitionWhen Right of Return Exists*, and U.S. Securities and ExchangeCommission Staff Accounting Bulletin No. 104. Returns of Large Systemsproducts generally do not occur. Historically, returns have representedapproximately 3% of gross sales and have not differed significantly from priorestimates.

 

Similarly, we must make estimates of the uncollectability of ouraccounts receivable. 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 U.S. and international customer balances continue to be covered byreceivables insurance. Historically, write-offs of uncollectable accounts have represented less than 1%of net 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, and factorytransitions. Quantifying such loss exposure is the result of combining the costof inventories specifically identified as having little or no opportunity forsale or use (thus available for physical disposition) plus the cost ofinventories having a high risk of no future sale or use based upon an analysisof on-hand quantities compared to historical and anticipated future sale oruse. We maintain an on-going business process for the physical disposition ofinventories previously identified. Inventory write-offs occur at the time ofphysical disposition. Inventories, once reserved, are not written back up assuch reserve adjustments are considered to be a permanent decrease to the costbasis of the excess or obsolete inventory. If actual market conditions are lessfavorable than those projected by management, additional inventory write-downsmay be required.

 

In early 2003, APC announced a product recall due topotential safety issues. The total number of affected devices recalledworldwide is approximately 2.1 million with approximately 900,000 devicesrecalled in the United States. The recall is limited to two specific models inAPC’s Back-UPS® CS product line, the Back-UPS CS 350 and the Back-UPS CS 500,in both 120-volt and 230-volt models. As of June 26, 2005, APC hadincurred approximately 93% of currently estimated total recall costs of $14.1million. Our estimation of remaining recall costs of $1.0 million, principallyfor U.S. recall activity, continues to be subject to actual return rates and perunit repair costs (which can vary by country) as well as estimates for otherrecall-related costs expected to be incurred. The most significant risksassociated with our return rate assumptions include varying degrees of productrecall regulation by 

 

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geography as well as varying consumer awareness levelsand access to timely recall information. Actual per unit repair cost includesprincipally transportation costs which will be influenced by the proximity ofcustomer locations to the service center location as well as the priority levelof delivery requirements. We expect that actual future amounts will not differmaterially from our current estimates.

 

We are, and may in thefuture become, involved in litigation involving our business, products oroperations. For pending claims for which there is an estimatable range of lossgreater than zero, we record the best estimate of liability within the range.If no point within the range is considered the best estimate, we record theminimum estimated liability. Because of uncertainties related to theidentifiable range of loss on any pending claims, we may be unable to make areasonable estimate of the liability that could result from an unfavorableoutcome. As additional information becomes available, we assess the potentialliability related to our pending claims and revise our estimates. Suchrevisions in our estimates of the potential liability could materially impactour results of operation and financial position. The litigation process isinherently uncertain and includes the risk of an unexpected, unfavorableresult. We may be materially adversely impacted by any such litigation.

 

***Valuation of Long-lived Tangible and Intangible Assetsincluding Goodwill. ***Weassess the impairment of long-lived tangible and intangible assets on anongoing basis and whenever events or changes in circumstances indicate that thecarrying value may not be recoverable. Should our assessment of long-lived andamortizable intangible assets suggest impairment, we would determinerecoverability based on an estimate of future undiscounted cash flows resultingfrom our use of the asset and its eventual disposition. Factors we considerthat could trigger an impairment review include the following:

 

•                  significant underperformance relativeto expected historical or projected future operating results;

•                  significant changes in the manner ofour use of the acquired assets or the strategy for our overall business;

•                  significant negative industry oreconomic trends; and

•                  significant technological 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.Impairment losses are determined based upon the excess of carrying amounts overdiscounted expected future cash flows of the underlying business.

 

***Accounting for Income Taxes. ***As part of the process of preparing ourconsolidated financial statements, we are required to estimate our income taxesin each of the jurisdictions in which we operate. This process involvesestimating our actual current tax exposure together with assessing temporarydifferences resulting from differing treatment of items, such as deferredrevenue, for tax and accounting purposes. These differences result in deferredtax assets and liabilities, which are included within our consolidated balancesheet. We must then assess the likelihood that our deferred tax assets will berecovered from future taxable income. Expectations about future taxable incomeincorporate numerous assumptions about actions, elections and strategies tominimize income taxes in future years. Our ability to take such actions, makepreferred elections and implement tax-planning strategies may be adverselyimpacted by enacted changes in tax laws and/or tax rates, as well as successfulchallenges by tax authorities resulting from differing interpretations of taxlaws and regulations.

 

***American Jobs Creation Act of2004 — Repatriation of Foreign Earnings. ***In October 2004, the American Jobs Creation Act of 2004 wasenacted. This Act repealed the tax code’s extraterritorial income (ETI)exclusion in response to the World Trade Organization’s challenge that the ETIexclusion was a prohibited tax subsidy. The repeal will be phased in through2006. The Act replaced the ETI exclusion with a 3% domestic deduction fordomestic production activities effective for APC’s 2005 tax year. The Act alsoprovides for a temporary 85% dividends received deduction on certain foreignearnings repatriated during a one-year period. The deduction would result in anapproximate 5.25% federal tax rate on the repatriated earnings. To qualify forthe deduction, the earnings must be reinvested in the United States pursuant toa domestic reinvestment plan established by a company’s chief executive officerand approved by its board of directors. Certain other criteria in the Jobs Actmust be satisfied as well. The maximum amount of APC’s foreign earnings thatqualify for the temporary deduction is $500 million. For APC, the one-yearperiod during which the qualifying distributions can be made is 2005. Noqualifying distributions were made during 2004.

 

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APC is in theprocess of evaluating whether it will repatriate any foreign earnings under therepatriation provisions of the Jobs Act and, if so, the amount that it willrepatriate. The range of reasonably possible amounts that APC is consideringfor repatriation, which would be eligible for the temporary deduction, is zeroto approximately $500 million. If APC determines to repatriate foreignearnings, we are APC is likely to repatriate amounts in the high end of ourrange. APC expects to determine the amounts and sources of foreign earnings tobe repatriated, if any, during the third quarter of fiscal 2005. Use of thefunds will be governed by a domestic reinvestment plan, as required by the JobsAct.

 

Repatriation ofthe maximum amount eligible for the temporary deduction, which is $500 million,could result in additional United States federal income tax expense, which APCcurrently estimates to be between zero and $22.7 million, in fiscal 2005. We were able to lower our previously estimatedrange of zero to $38.2 million as a result of favorable IRS guidance releasedin May 2005. Repatriation alsowould substantially increase liquidity in the United States, although use ofthe additional liquidity would be restricted by the domestic reinvestment plan.There would be a corresponding reduction in liquidity at APC’s foreignsubsidiaries. Some foreign subsidiaries may be required to borrow in order torepatriate their earnings to the U.S.

 

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 effective tax rate in a given financial statement period could bematerially 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 managementjudgment is required in determining our provision for income taxes, ourdeferred tax assets and liabilities and any valuation allowance recordedagainst our net deferred tax assets. At June 26, 2005 and December 31,2004, we provided a valuation allowance on certain of our deferred tax assets,primarily consisting of net operating losses generated in 2001 through the secondquarter of 2005 for the start up and continuing operations of Brazilianoperations, because of uncertainty regarding their realizability. The valuationallowance is based on our estimates of taxable income by jurisdiction in whichwe operate and the period over which our deferred tax assets will berecoverable. In the event that actual results differ from these estimates or weadjust these estimates in future periods we may need to establish an additionalvaluation allowance which could materially impact our financial position andresults of operations.

 

## **RECENTLY ISSUEDACCOUNTING STANDARDS**

## ** **

***Accounting for Electronic Equipment Waste Obligations. ***In June 2005, theFinancial Accounting Standards Board issued Staff Position No. 143-1, *Accounting for Electronic Equipment Waste Obligations.*ThisPosition addresses the accounting for obligations associated with Directive2002/96/EC on Waste Electrical and Electronic Equipment (the “Directive”)adopted by the European Union. This Position refers to and paraphrases variousprovisions of the Directive. This Statement is effective for APC upon adoptionof the Directive by the individual European Union countries. This Statement mayhave a material impact on our consolidated financial position or results ofoperations.  We are currently evaluatingthe guidance in this Position to determine the impact of its provisions.

 

***Accounting Changes and ErrorCorrections. ***In May 2005, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards No.154, *Accounting Changes and Error Corrections*. This Statementchanges the requirements for the accounting for and reporting of a change inaccounting principle. It requires retrospective application to prior periods’financial statements of changes in accounting principle, unless it isimpracticable to determine either the period specific effects or the cumulativeeffect of the change. This Statement applies to all voluntary changes inaccounting principle. It also applies to changes required by an accountingpronouncement in the unusual instance that the pronouncement does not includespecific transition provisions. When a pronouncement includes specifictransition provisions, those provisions should be followed. ThisStatement is

 

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effective for APC beginning with the first quarter of 2006. It is notexpected to have a material impact on our consolidated financial position orresults of operations.

 

***Accounting for Conditional AssetRetirement Obligations. ***In March 2005, the Financial AccountingStandards Board issued Interpretation No. 47, *Accountingfor Conditional Asset Retirement Obligations*. This Interpretationclarifies that the term “conditional asset retirement obligation” as used inStatement No. 143, *Accounting for AssetRetirement Obligations*, refers to a legal obligation to perform anasset retirement activity in which the timing and (or) method of settlement areconditional on a future event that may or may not be within the control of theentity. This Interpretation also clarifies when an entity would have sufficientinformation to reasonably estimate the fair value of an asset retirementobligation. This Interpretation is effective no later than the end of fiscalyears ending after December 15, 2005 (December 31, 2005, for calendaryear enterprises). This Statement is effective for APC beginning with thefourth quarter of 2005. Adoptionof the guidance in this consensus is not expected to have a material impact onour consolidated financial position or results of operations.

 

***Share-Based Payment.***  In December 2004, the FinancialAccounting Standards Board issued Statement of Financial Accounting Standards No. 123(revised 2004), *Share-Based Payment*, which is arevision of Statement No. 123 as amended by No. 148, *Accounting for Stock-Based Compensation*. Statement No. 123(R)supercedes APB Opinion No. 25. Generally, the approach in Statement 123(R)is similar to the approach described in Statement 123. However, Statement123(R) requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the income statement based on theirfair values at the date of grant. Pro forma disclosure is no longer analternative. The U.S. Securities and Exchange Commission has extended thisStatement’s effective date to the beginning of a company’s next fiscal year.This Statement is effective for APC beginning with the first quarter of 2006.

 

Statement 123(R) permits public companies to adopt its requirementsusing one of two methods. The “modified prospective” method requirescompensation cost to be recognized beginning with the Statement’s effectivedate (a) based on the requirements of Statement 123(R) for all share-basedpayments granted after the effective date and (b) based on therequirements of Statement 123 for all awards granted to employees prior to theeffective date of Statement 123(R) that remain unvested on the effective date.The “modified retrospective” method includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under Statement 123 for purposes of proforma disclosures either (a) all prior periods presented or (b) priorinterim periods of the year of adoption.

 

In April 2005, the U.S. Securities and Exchange Commission issuedStaff Accounting Bulletin No. 107. The Bulletin confirms the latitude inStatement 123(R)’s provisions on selecting models for valuing share options andclarifies other positions on accounting and disclosure for share-based-paymentarrangements. In addition, the Bulletin permits registrants to choose fromdifferent models to estimate the fair value of share options, provides guidanceon developing assumptions used in the models, and addresses the interactionbetween Statement 123(R) and other SEC literature.

 

APC has yet todetermine which method to use in adopting Statement 123(R). As permitted byStatement 123, APC currently accounts for share-based payments to employeesusing APB Opinion No. 25’s intrinsic value method and, as such, generallyrecognizes no compensation cost for employee stock options. Accordingly, theadoption of Statement 123(R)’s fair value method will have a significant impacton APC’s results of operations, although it will have no impact on APC’soverall financial position. APC is evaluating Statement 123(R) and has not yetdetermined the amount of stock option expense which will be incurred in futureperiods.

 

## **FACTORS THAT MAY AFFECTFUTURE RESULTS**

## ** **

This document containsforward-looking statements that involve risks and uncertainties. Our actualresults could differ materially from those anticipated in these forward lookingstatements as a result of certain factors, including the risks faced by usdescribed below and elsewhere in this document.

 

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The factors that couldcause actual results to differ materially include the following: costs tomaintain compliance with the provisions of the Sarbanes-Oxley Act of 2002 aregreater than currently anticipated; the impact of increasing competition whichcould adversely affect APC’s revenues and profitability; the impact of foreigncurrency exchange rate fluctuations; the impact on demand, componentavailability and pricing, and logistics, and the disruption of Asianmanufacturing operations that result from labor disputes, war, acts ofterrorism or political instability; ramp up, expansion and rationalization ofglobal manufacturing capacity; the potential impact of complying with changingenvironmental regulations; impact on order management and fulfillment,financial reporting and supply chain management processes as a result of APC’sreliance on a variety of computer systems, including Oracle 11i which isperiodically upgraded; the discovery of a latent defect in any of APC’sproducts; APC’s ability to effectively align operating expenses and productioncapacity with the current demand environment; general worldwide economicconditions, and, in particular, the possibility that the PC and related marketsdecline; growth rates in the power protection industry and related industries,including but not limited to the PC, server, networking, telecommunications andenterprise hardware industries; competitive factors and pricing pressures;product mix changes and the potential negative impact on gross margins fromsuch changes; changes in the seasonality of demand patterns; inventory risksdue to shifts in market demand; component constraints, shortages, pricing andquality; risk of nonpayment of accounts receivable; the uncertainty of thelitigation process including risk of an unexpected, unfavorable result ofcurrent or future litigation; and the risks described from time to time in APC’sfilings 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 the forward-lookingstatements.

 

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 31,2004.

 

**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.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

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

 

As of the end of the period covered by this report,management carried out an evaluation, under the supervision and with theparticipation of APC’s Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of disclosure controls and procedures as defined in Rule 13a-15(e) ofthe Securities Exchange Act of 1934, as amended. Based on such evaluation, theChief Executive Officer and Chief Financial Officer have concluded that as ofthe end of the period covered by this report, APC’s disclosure controls andprocedures were effective in timely alerting them to material informationrequired to be included in APC’s periodic filings with the U.S. Securities andExchange Commission.

 

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

 

There were no changes inour internal control over financial reporting during APC’s last fiscal quarterthat have materially affected, or are reasonably likely to materially affect,APC’s internal control over financial reporting.

 

***Limitations Inherent in all Controls*****.**APC’smanagement, including our Chief Executive Officer and our Chief FinancialOfficer, recognize that our disclosure controls and our internal controls(discussed above) cannot prevent all error or all attempts at fraud. Anycontrols system, no matter how well crafted and operated, can only providereasonable, and not absolute, assurance of achieving the desired controlobjectives, and management necessarily was required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures.Because of the inherent limitations in any control system, no evaluation orimplementation of a control system can provide complete assurance that allcontrol issues and all possible instances of fraud have been or will bedetected.

 

**PART II - OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

As previously reported in APC’s Form 10-Q for the quarter ended March 27,2005, on February 5, 2004, Liebert Corporation and Zonatherm Products, Inc.,Liebert’s sales representative firm in the Chicago area, filed a lawsuit in theCircuit Court of Cook County, Illinois, Chancery Division (the “Court”) againstAPC, Aerico, LLC, a sales representative firm formed by former employees ofZonatherm Products, and the former employees of Zonatherm Products who formedAerico, LLC. The lawsuit alleged willful violation of the Illinois TradeSecrets Act, tortious interference with contract, tortious interference withprospective economic advantage, civil conspiracy and conspiracy to breachfiduciary duties. Liebert and Zonatherm are seeking compensatory and punitivedamages and injunctive relief. On February 18, 2004, the Court deniedplaintiffs’ motion for a temporary restraining order. On July 16, 2004,the Court dismissed without prejudice all claims except the Illinois TradeSecret Act claim. On August 6, 2004, plaintiffs filed a second amendedcomplaint reasserting the claims dismissed by the Court on July 16, 2004.On August 20, 2004, the Court denied plaintiffs’ motion for preliminaryinjunction as to violation of the Illinois Trade Secrets Act. On September 21,2004, plaintiffs filed a Notice of Appeal of the August 20, 2004 rulingwith the Illinois Appellate Court. On January 12, 2005, the Courtdismissed without prejudice all claims against APC except the Illinois TradeSecret Act claim. On March 1, 2005 the Illinois Appellate Court issued anopinion on the appeal pursuant to which it affirmed the Court on the issue ofnon-trade secret nature of plaintiff’s customer lists, and remanded the matterfor the Court to enter an injunction against one of the individual formeremployees of Zonatherm from using certain pricing books. On March 16,2005, plaintiffs filed a third amended complaint reasserting claims substantiallysimilar to those dismissed by the Court in its January 12, 2005 ruling. OnMay 19, 2005, APC filed a motion to dismiss plaintiffs’ third amendedcomplaint. On May 24, 2005, the Court issued an injunction against one ofthe former employees of Zonatherm enjoining him from using certain pricingbooks of plaintiff. No injunction was issued against APC. On June 30,2005, plaintiffs filed an appeal with the Illinois Appellate Court seeking toincrease the scope of the Court’s order.

 

In addition, APC is involved in various other claims and legal actionsarising in the ordinary course of business.

 

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.

 

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**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

The Annual Meeting of Shareholders was held on June 9, 2005 atwhich APC’s shareholders approved the following:

 

(i)                         bya vote of 177,135,221 shares in favor, 1,135,365 opposed, and 1,436,157abstaining, the number of directors was fixed at seven.

 

(ii)                      thefollowing persons (with vote results) were elected to serve another term asDirectors of APC:

 

| ** **                   | ** ** | **For**     | ** ** | **Withheld** | ** ** |
|------------------------------|------------|-------------|------------|--------------|------------|
| Rodger B.  Dowdell, Jr. |       | 176,409,258 |       | 3,297,485    |       |
| Neil E.  Rasmussen           |       | 176,407,782 |       | 3,298,961    |       |
| Ervin F. Lyon                |       | 167,008,224 |       | 12,698,519   |       |
| James D. Gerson              |       | 177,278,474 |       | 2,428,269    |       |
| John G. Kassakian            |       | 177,897,171 |       | 1,809,572    |       |
| John F.  Keane, Sr.     |       | 175,220,148 |       | 4,486,595    |       |
| Ellen B.  Richstone          |       | 177,877,650 |       | 1,829,093    |       |

 

(iii)                   by a vote of 176,796,948 shares infavor, 1,495,310 opposed, and 1,414,485 abstaining, the ratification of theappointment of APC’s independent auditors, KPMG LLP, was approved.

 

**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 dated  October 29, 2004, and incorporated herein by reference (File  No. 1-12432)                                                                                                                                                        |
|                       |   |                                                                                                                                                                                                                                                                                                                                                                      |
| Exhibit No. 10.1 |   | Form of Amendment to Change-in-Control  Severance Agreement between APC and each of Roger B. Dowdell, Jr., Neil  E. Rasmussen, Aaron L. Davis, Edward D. Bednarcik and Edward W. Machala,  previously filed as an exhibit to APC’s Current Report on Form 8-K dated  July 29, 2005 and incorporated herein by reference (File  No. 1-12432) |
|                       |   |                                                                                                                                                                                                                                                                                                                                                                      |
| Exhibit No. 10.2 |   | Change-in-Control Severance Agreement, dated  July 11, 2005, between APC and Richard J. Thompson, previously filed as  an exhibit to APC’s Current Report on Form 8-K dated July 11, 2005  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 Richard J. Thompson, 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 Richard J. Thompson, 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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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: August 5, 2005                                      |
|                                                           |
|                                                           |
|                                                           | /s/ Richard J. Thompson |   |
|                                                           |
| Richard J. Thompson                                            |
| *Senior Vice President, Finance, and Chief  Financial Officer* |
| *(Principal Accounting and Financial Officer)*                 |

 

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**AMERICAN POWER CONVERSION CORPORATION ANDSUBSIDIARIES**

**EXHIBIT INDEX**

 
| **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 dated  October 29, 2004 and incorporated herein by reference (File  No. 1-12432)                                                                                                                                                         |       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                      |       |
| 10.1                |       | Form of Amendment to Change-in-Control  Severance Agreement between APC and each of Roger B. Dowdell, Jr., Neil  E. Rasmussen, Aaron L. Davis, Edward D. Bednarcik and Edward W. Machala,  previously filed as an exhibit to APC’s Current Report on Form 8-K dated  July 29, 2005 and incorporated herein by reference (File  No. 1-12432) |       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                      |       |
| 10.2                |       | Change-in-Control Severance Agreement, dated  July 11, 2005, between APC and Richard J. Thompson, previously filed as  an exhibit to APC’s Current Report on Form 8-K dated July 11, 2005  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 Richard J. Thompson, 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 Richard J. Thompson, 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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