**UNITED STATES**

** **

**SECURITIES AND EXCHANGE COMMISSION**

** **

**Washington,D.C. 20549**

 

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**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 27, 2004** |
| ** **                           |
| **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 CONVERSION CORPORATION**                                  |
|----------------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)                    |
|                                                                       |   |   |
| **MASSACHUSETTS**                                                          | ** ** | **04-2722013** |
| (State or other  jurisdiction of  incorporation or organization)           |   | (I.R.S. employer  identification no.) |
|                                                                       |
| **132  FAIRGROUNDS ROAD, WEST KINGSTON, RHODE ISLAND 02892  401-789-5735** |
| (Address and telephone number  of principal executive offices)             |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.
| YES ý | NO o |
|------------|------|

 

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

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

 

Registrant’s Common Stockoutstanding, $0.01 par value, at July 28, 2004 – 200,389,000 shares

 

 

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**AMERICAN POWER CONVERSIONCORPORATION**

 

**INDEX**

 
| **Part  I - Financial Information:** |       |
|--------------------------------------|------------|
|                                 |       |   |   |
|                                 | Item 1.    | Consolidated Condensed  Financial Statements: |   |
|                                 |       | Consolidated  Condensed Balance Sheets -  June 27, 2004 and December 31, 2003 (Unaudited) |   |
|                                 |       |   |   |
|                                 |       | Consolidated  Condensed Statements of Income -  Three Months and Six Months Ended  June 27, 2004 and June 29, 2003 (Unaudited) |   |
|                                 |       |   |   |
|                                 |       | Consolidated  Condensed Statements of Cash Flows -  Three Months and Six Months Ended  June 27, 2004 and June 29, 2003 (Unaudited) |   |
|                                 |       |   |   |
|                                 |       | Notes  to Consolidated Condensed Financial Statements (Unaudited) |   |
|                                 |       |   |   |
|                                 | Item  2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                 |       |   |   |
|                                 | Item  3.   | Quantitative  and Qualitative Disclosures About Market Risk |   |
|                                 |       |   |   |
|                                 | Item 4.    | Controls and  Procedures |   |
|                                 |       |   |   |
| **Part II - Other  Information:**    |       |
|                                 |       |   |   |
|                                 | Item  1.   | Legal  Proceedings |   |
|                                 |       |   |   |
|                                 | Item 2.    | Changes in  Securities, Use of Proceeds and Issuer Purchases of Equity |   |
|                                 |       |   |   |
|                                 | Item  4.   | Submission  of Matters to a Vote of Security Holders |   |
|                                 |       |   |   |
|                                 | Item  6.   | Exhibits  and Reports on Form 8-K |   |
|                                 |       |   |   |
| **Signatures**                       |       |
| ** **                           | ** ** |
| **Exhibit Index**                    | ** ** |

 

2

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**PART I - CONSOLIDATED CONDENSED FINANCIALSTATEMENTS**

 

**ITEM 1.****  FINANCIAL STATEMENTS**

 

**AMERICAN POWER CONVERSIONCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED BALANCESHEETS**

***Inthousands except per share amount***

***(Unaudited)***

 

**ASSETS**

 
| ** **                                        | ** ** | **June 27,  2004** | ** **    | **December 31,  2003** | ** ** |
|---------------------------------------------------|------------|--------------------|---------------|------------------------|------------|
| Current assets:                                   |       | ** **         |          |                   |       |
| Cash and cash  equivalents                        |       | **$**              | **219,152**   |                   | $          | 252,114 |   |
| Short term  investments (Note 4)                  |       | **572,478**        |          | 496,209                |       |
| Accounts  receivable, less allowance for doubtful |       | ** **         |          |                   |       |
| accounts of  $18,531 in 2004 and $18,987 in 2003  |       | **271,320**        |          | 264,718                |       |
| Inventories:                                      |       | ** **         |          |                   |       |
| Raw materials                                     |       | **221,481**        |          | 185,431                |       |
| Work-in-process  and finished goods               |       | **234,576**        |          | 216,791                |       |
| Total  inventories                                |       | **456,057**        |          | 402,222                |       |
|                                              |       | ** **         |          |                   |       |
| Prepaid expenses  and other current assets        |       | **29,705**         |          | 25,296                 |       |
| Deferred income  taxes                            |       | **64,000**         |          | 57,638                 |       |
|                                              |       | ** **         |          |                   |       |
| Total current  assets                             |       | **1,612,712**      |          | 1,498,197              |       |
|                                              |       | ** **         |          |                   |       |
| Property, plant  and equipment:                   |       | ** **         |          |                   |       |
| Land, buildings  and improvements                 |       | **71,607**         |          | 71,206                 |       |
| Machinery and  equipment                          |       | **210,613**        |          | 207,506                |       |
| Office  equipment, furniture and fixtures         |       | **89,513**         |          | 85,474                 |       |
| Purchased  software                               |       | **37,340**         |          | 35,074                 |       |
|                                              |       | **409,073**        |          | 399,260                |       |
| Less accumulated  depreciation and amortization   |       | **250,949**        |          | 235,309                |       |
| Net property,  plant and equipment                |       | **158,124**        |          | 163,951                |       |
|                                              |       | ** **         |          |                   |       |
| Long term  investments (Note 4)                   |       | **25,477**         |          | 58,525                 |       |
| Goodwill (Note  5)                                |       | **6,679**          |          | 6,679                  |       |
| Other  intangibles, net (Note 5)                  |       | **44,541**         |          | 50,292                 |       |
| Deferred income  taxes                            |       | **28,195**         |          | 25,994                 |       |
| Other assets                                      |       | **2,479**          |          | 2,328                  |       |
|                                              |       | ** **         |          |                   |       |
| Total assets                                      |       | **$**              | **1,878,207** |                   | $          | 1,805,966 |   |

 

*See accompanying notes toconsolidated condensed financial statements.*

 

3

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**LIABILITIES AND SHAREHOLDERS’EQUITY**

 
| ** **                                                | ** ** | **June 27,  2004** | ** **    | **December 31,  2003** | ** ** |
|-----------------------------------------------------------|------------|--------------------|---------------|------------------------|------------|
| Current  liabilities:                                     |       | ** **         |          |                   |       |
| Accounts payable                                          |       | **$**              | **125,618**   |                   | $          | 102,800 |   |
| Accrued  compensation                                     |       | **37,964**         |          | 39,366                 |       |
| Accrued sales  and marketing programs                     |       | **35,673**         |          | 29,947                 |       |
| Accrued warranty  (Note 6)                                |       | **11,934**         |          | 11,709                 |       |
| Other accrued  expenses                                   |       | **29,425**         |          | 34,146                 |       |
| Deferred revenue                                          |       | **29,329**         |          | 24,330                 |       |
| Income taxes  payable                                     |       | **44,869**         |          | 38,428                 |       |
|                                                      |       | ** **         |          |                   |       |
| Total current  liabilities                                |       | **314,812**        |          | 280,726                |       |
|                                                      |       | ** **         |          |                   |       |
| Deferred tax  liability                                   |       | **12,788**         |          | 14,357                 |       |
|                                                      |       | ** **         |          |                   |       |
| Total  liabilities                                        |       | **327,600**        |          | 295,083                |       |
|                                                      |       | ** **         |          |                   |       |
| Shareholders’  equity (Notes 7, 8, 9 and 10):        |       | ** **         |          |                   |       |
| Common stock,  $0.01 par value;                           |       | ** **         |          |                   |       |
| authorized  450,000 shares in 2004 and 2003;              |       | ** **         |          |                   |       |
| issued 200,372  shares in 2004 and 199,982 shares in 2003 |       | **2,004**          |          | 2,000                  |       |
| Additional  paid-in capital                               |       | **189,497**        |          | 182,566                |       |
| Retained  earnings                                        |       | **1,356,156**      |          | 1,326,733              |       |
| Treasury stock,  250 shares, at cost                      |       | **—**         |          | (1,551                 | )          |
| Accumulated  other comprehensive income                   |       | **2,950**          |          | 1,135                  |       |
|                                                      |       | ** **         |          |                   |       |
| Total  shareholders’ equity                          |       | **1,550,607**      |          | 1,510,883              |       |
|                                                      |       | ** **         |          |                   |       |
| Total  liabilities and shareholders’ equity          |       | **$**              | **1,878,207** |                   | $          | 1,805,966 |   |

 

*See accompanying notes toconsolidated condensed financial statements.*

 

4

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**AMERICAN POWER CONVERSIONCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTSOF INCOME**

***Inthousands except earnings per share***

***(Unaudited)***

 
| ** **                                      | ** ** | **Six months ended** | ** **  | **Three months ended** | ** ** |
|-------------------------------------------------|------------|----------------------|-------------|------------------------|------------|
| ** **                                      | ** ** | **June 27,  2004**   | ** **  | **June 29,  2003**     | ** ** | **June 27,  2004** | ** ** | **June 29,  2003** | ** ** |
|                                            |       | ** **           |        |                   |       | ** ** |   |   |   |
| Net sales (Note  11)                            |       | **$**                | **747,414** |                   | $          | 640,471 |   | **$** | **395,663** |   | $ | 331,496 |   |
|                                            |       | ** **           |        |                   |       | ** ** |   |   |   |
| Cost of goods  sold                             |       | **448,800**          |        | 378,545                |       | **246,141** |   | 195,484 |   |
|                                            |       | ** **           |        |                   |       | ** ** |   |   |   |
| Gross profit                                    |       | **298,614**          |        | 261,926                |       | **149,522** |   | 136,012 |   |
|                                            |       | ** **           |        |                   |       | ** ** |   |   |   |
| Operating  expenses:                            |       | ** **           |        |                   |       | ** ** |   |   |   |
| Marketing,  selling, general and administrative |       | **180,832**          |        | 148,924                |       | **94,648** |   | 76,544 |   |
| Research and  development                       |       | **39,849**           |        | 30,807                 |       | **21,446** |   | 16,287 |   |
|                                            |       | ** **           |        |                   |       | ** ** |   |   |   |
| Total operating  expenses                       |       | **220,681**          |        | 179,731                |       | **116,094** |   | 92,831 |   |
|                                            |       | ** **           |        |                   |       | ** ** |   |   |   |
| Operating income                                |       | **77,933**           |        | 82,195                 |       | **33,428** |   | 43,181 |   |
|                                            |       | ** **           |        |                   |       | ** ** |   |   |   |
| Other income,  net                              |       | **3,988**            |        | 5,185                  |       | **2,256** |   | 2,677 |   |
|                                            |       | ** **           |        |                   |       | ** ** |   |   |   |
| Earnings before  income taxes                   |       | **81,921**           |        | 87,380                 |       | **35,684** |   | 45,858 |   |
|                                            |       | ** **           |        |                   |       | ** ** |   |   |   |
| Income taxes                                    |       | **20,480**           |        | 24,292                 |       | **8,921** |   | 12,749 |   |
|                                            |       | ** **           |        |                   |       | ** ** |   |   |   |
| Net income                                      |       | **$**                | **61,441**  |                   | $          | 63,088 |   | **$** | **26,763** |   | $ | 33,109 |   |
|                                            |       | ** **           |        |                   |       | ** ** |   |   |   |
| Basic earnings  per share                       |       | **$**                | **0.31**    |                   | $          | 0.32 |   | **$** | **0.13** |   | $ | 0.17 |   |
|                                            |       | ** **           |        |                   |       | ** ** |   |   |   |
| Basic weighted  average shares outstanding      |       | **200,073**          |        | 196,559                |       | **200,234** |   | 196,717 |   |
|                                            |       | ** **           |        |                   |       | ** ** |   |   |   |
| Diluted earnings  per share                     |       | **$**                | **0.30**    |                   | $          | 0.32 |   | **$** | **0.13** |   | $ | 0.17 |   |
|                                            |       | ** **           |        |                   |       | ** ** |   |   |   |
| Diluted weighted  average shares outstanding    |       | **205,554**          |        | 199,881                |       | **204,992** |   | 199,993 |   |

 

*See accompanying notes toconsolidated condensed financial statements.*

 

5

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**AMERICANPOWER CONVERSION CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS**

***In thousands***

***(Unaudited******)***

 
| ** **                                                                         | ** ** | **Six months ended** | ** **  | **Three months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|-------------|------------------------|------------|
| ** **                                                                         | ** ** | **June 27,  2004**   | ** **  | **June 29,  2003**     | ** ** | **June 27,  2004** | ** ** | **June 29,  2003** | ** ** |
| ***Cash flows from operating activities***                                         |       |                 |        |                   |       |   |   |   |   |
| Net income                                                                         |       | **$**                | **61,441**  | ** **             | $          | 63,088 |   | **$** | **26,763** | ** ** | $ | 33,109 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       | ** **           | ** **  |                   |       | ** ** | ** ** |   |   |
| Depreciation and  amortization of property, plant and equipment                    |       | **18,294**           | ** **  | 17,595                 |       | **8,649** | ** ** | 8,600 |   |
| Amortization of  other intangibles                                                 |       | **5,797**            | ** **  | 5,953                  |       | **2,900** | ** ** | 2,988 |   |
| Provision for  doubtful accounts                                                   |       | **141**              | ** **  | 1,164                  |       | **141** | ** ** | 542 |   |
| Provision for  inventories                                                         |       | **4,476**            | ** **  | 1,900                  |       | **3,000** | ** ** | 900 |   |
| Deferred income  taxes                                                             |       | **(10,132**          | **)**       | 4,757                  |       | **(8,450** | **)** | 1,310 |   |
| Other non-cash  items, net                                                         |       | **1,815**            | ** **  | 1,142                  |       | **563** | ** ** | (304 | ) |
| Changes in  operating assets and liabilities:                                      |       | ** **           | ** **  |                   |       | ** ** | ** ** |   |   |
| Accounts  receivable                                                               |       | **(6,743**           | **)**       | 13,856                 |       | **(14,953** | **)** | 13,945 |   |
| Inventories                                                                        |       | **(58,311**          | **)**       | (67,987                | )          | **(18,929** | **)** | (34,965 | ) |
| Prepaid expenses  and other current assets                                         |       | **(4,409**           | **)**       | 1,009                  |       | **(3,513** | **)** | 3,557 |   |
| Other assets                                                                       |       | **(197**             | **)**       | (644                   | )          | **(134** | **)** | (774 | ) |
| Accounts payable                                                                   |       | **22,818**           | ** **  | (147                   | )          | **6,455** | ** ** | 4,226 |   |
| Accrued expenses                                                                   |       | **4,827**            | ** **  | (12,299                | )          | **9,695** | ** ** | (2,732 | ) |
| Income taxes  payable                                                              |       | **8,071**            | ** **  | (13,982                | )          | **11** | ** ** | (4,356 | ) |
| Net cash  provided by operating activities                                         |       | **47,888**           | ** **  | 15,405                 |       | **12,198** | ** ** | 26,046 |   |
|                                                                               |       | ** **           | ** **  |                   |       | ** ** | ** ** |   |   |
| ***Cash flows from investing activities***                                         |       | ** **           | ** **  |                   |       | ** ** | ** ** |   |   |
| Purchases of  held-to-maturity securities                                          |       | **(1,332,304**       | **)**       | (1,397,939             | )          | **(655,778** | **)** | (711,837 | ) |
| Maturities of  held-to-maturity securities                                         |       | **1,289,083**        | ** **  | 1,367,391              |       | **631,868** | ** ** | 641,059 |   |
| Purchases of  available-for-sale securities                                        |       | **—**           | ** **  | (452                   | )          | **—** | ** ** | (219 | ) |
| Capital  expenditures                                                              |       | **(12,467**          | **)**       | (9,035                 | )          | **(9,159** | **)** | (5,566 | ) |
| Net cash used in  investing activities                                             |       | **(55,688**          | **)**       | (40,035                | )          | **(33,069** | **)** | (76,563 | ) |
|                                                                               |       | ** **           | ** **  |                   |       | ** ** | ** ** |   |   |
| ***Cash flows from financing activities***                                         |       | ** **           | ** **  |                   |       | ** ** | ** ** |   |   |
| Proceeds from  issuances of common stock                                           |       | **6,856**            | ** **  | 11,094                 |       | **2,661** | ** ** | 8,588 |   |
| Dividends paid on common stock                                                     |       | **(32,018**          | **)**       | —                 |       | **(16,025** | **)** | — |   |
| Net cash (used  in) provided by financing activities                               |       | **(25,162**          | **)**       | 11,094                 |       | **(13,364** | **)** | 8,588 |   |
|                                                                               |       | ** **           | ** **  |                   |       | ** ** | ** ** |   |   |
| Net change in  cash and cash equivalents                                           |       | **(32,962**          | **)**       | (13,536                | )          | **(34,235** | **)** | (41,929 | ) |
| Cash and cash  equivalents at beginning of period                                  |       | **252,114**          | ** **  | 209,322                |       | **253,387** | ** ** | 237,715 |   |
| Cash and cash equivalents  at end of period                                        |       | **$**                | **219,152** | ** **             | $          | 195,786 |   | **$** | **219,152** | ** ** | $ | 195,786 |   |
|                                                                               |       | ** **           | ** **  |                   |       | ** ** | ** ** |   |   |
| ***Supplemental cash flow disclosures***                                           |       | ** **           | ** **  |                   |       | ** ** | ** ** |   |   |
| Cash paid during  the period for:                                                  |       | ** **           | ** **  |                   |       | ** ** | ** ** |   |   |
| Income taxes  (net of refunds)                                                     |       | **$**                | **16,778**  | ** **             | $          | 32,042 |   | **$** | **12,212** | ** ** | $ | 15,744 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

 

6

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**AMERICAN POWER CONVERSIONCORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED CONDENSEDFINANCIAL STATEMENTS**

***(Unaudited)***

 

**1.****              ManagementRepresentation**

 

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

 

**2.****              Principles of Consolidation**

 

The accompanying consolidated condensed financial statements includethe financial statements of American Power Conversion Corporation and itswholly-owned subsidiaries. All significant intercompany accounts andtransactions are eliminated in consolidation.

 

**3.****              Restructuring**

 

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

 

In the first quarter of2002, APC recorded $7.3 million of related restructuring costs of which $4.8million and $2.5 million were classified in cost of goods sold and operatingexpenses, respectively. These costs included the effects of approximately 941employee terminations, principally 54% in manufacturing, 14% in sales and 13%in research and development, based on severance agreements, as well asfacilities closures in the Philippines, U.S. and U.K., and the relatedimpairment of tangible assets, principally buildings and manufacturingequipment, based on management’s assessment of market data. These costs werenot allocated to APC’s operating segments, but rather were classified asindirect operating expenses for segment reporting consistent with APC’sclassification for its internal financial reporting; also refer to Note 11.

 

7

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In connection with APC’sdecision to consolidate its Philippines-based manufacturing operations, APCclosed manufacturing facilities located in the Philippines province of Laguna,in Maryland, and also in the U.K. APC marketed its Philippines property with anintent to sell these assets in 2003. However, APC was unable to complete thissale as a result of an unfavorable real estate market. In accordance with theprovisions of Statement of Financial Accounting Standards No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, in the second quarter of 2003 the Philippinesbuilding and equipment previously classified as assets held-for-sale werereclassified to held-for-use property, plant, and equipment at their fairvalues, which aggregated $3.0 million, and depreciation re-commenced. APC solda building in Maryland to a third party in October 2002. Also, in connectionwith the closure of a leased facility in the U.K., APC recognized a leaseliability during the first quarter of 2002; this lease will expire in 2005.

 

A summary of the related2002 restructuring liabilities during the first and second quarters of 2004 and2003 is outlined below. APC expects all such restructuring liabilities at June27, 2004 to be fully paid in cash by the end of 2005.

 

*In thousands*

 

**2002Restructuring Plans**

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

 

8

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**4.****              Investments**

 

APC classifies as short term its investmentswith original maturities greater than three months and less than or equal toone year, and as long term its investments with remaining maturities greaterthan one year and less than or equal to two years. APC has no investments withmaturity dates greater than two years. Held-to-maturity securities are carriedat amortized cost. Available-for-sale securities are recorded at fair valuewith net unrealized gains and losses reported, net of income taxes, in othercomprehensive income. Management determines the appropriate classification ofsecurities at the time of purchase and re-evaluates such designation as of eachbalance sheet date. Securities are classified as held-to-maturity when APC hasthe positive intent and ability to hold such securities to maturity. There wereno sales of investment securities in the second quarters and first six monthsof 2004 and 2003.

 

*In thousands*

 
| ** **                         | ** ** | **Amortized  Cost** | ** **  | **Gross  Unrealized  Holding  Gains** | ** ** | **Gross  Unrealized  Holding  Losses** | ** ** | **Fair  Value** | ** ** |
|------------------------------------|------------|---------------------|-------------|---------------------------------------|------------|----------------------------------------|------------|-----------------|------------|
|                               |       |                |        |                                  |       |                                   |       |            |       |
| **At June 27, 2004**               |       |                |        |                                  |       |                                   |       |            |       |
| ** **                         | ** ** | ** **          | ** **  | ** **                            | ** ** | ** **                             | ** ** | ** **      | ** ** |
| **Held-to-maturity**               | ** ** | ** **          | ** **  | ** **                            | ** ** | ** **                             | ** ** | ** **      | ** ** |
| Certificates of  deposit           | ** ** | **$**               | **246,593** | ** **                            | **$**      | —                                 | ** ** | **$**           | —     | ** ** | **$** | **246,593** | ** ** |
| Corporate bonds                    | ** ** | **101,577**         | ** **  | **54**                                | ** ** | **(2**                                 | **)**      | **101,629**     | ** ** |
| Municipal bonds  and notes         | ** ** | **209,345**         | ** **  | **10**                                | ** ** | **—**                             | ** ** | **209,355**     | ** ** |
| U.S. government  agency securities | ** ** | **40,000**          | ** **  | **5**                                 | ** ** | **(130**                               | **)**      | **39,875**      | ** ** |
| ** **                         | ** ** | **597,515**         | ** **  | **69**                                | ** ** | **(132**                               | **)**      | **597,452**     | ** ** |
| **Available-for-sale**             |       |                |        |                                  |       |                                   |       |            |       |
| Equity  investments                | ** ** | **440**             | ** **  | **—**                            |       | —                                 | ** ** | **440**         | ** ** |
| ** **                         | ** ** | **$**               | **597,955** | ** **                            | **$**      | **69**                                 | ** ** | **$**           | **(132**   | **)** | **$** | **597,892** | ** ** |
| **At December 31, 2003**           |       |                |        |                                  |       |                                   |       |            |       |
| ** **                         | ** ** | ** **          | ** **  | ** **                            | ** ** | ** **                             | ** ** | ** **      | ** ** |
| **Held-to-maturity**               | ** ** | ** **          | ** **  | ** **                            | ** ** | ** **                             | ** ** | ** **      | ** ** |
| Certificates of  deposit           |       | $                   | 209,814     |                                  | $          | —                                 |       | $               | —     |   | $ | 209,814 |   |
| Corporate bonds                    |       | 236,873             |        | 237                                   |       | —                                 |       | 237,110         |       |
| Municipal bonds  and notes         |       | 66,607              |        | 67                                    |       | —                                 |       | 66,674          |       |
| U.S. government  agency securities |       | 41,000              |        | 5                                     |       | (16                                    | )          | 40,989          |       |
|                               |       | 554,294             |        | 309                                   |       | (16                                    | )          | 554,587         |       |
| **Available-for-sale**             |       |                |        |                                  |       |                                   |       |            |       |
| Equity  investments                |       | 440                 |        | —                                |       | —                                 |       | 440             |       |
|                               |       | $                   | 554,734     |                                  | $          | 309                                    |       | $               | (16        | ) | $ | 555,027 |   |

 

9

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**5.****              Goodwill and OtherIntangible Assets**

 

At each of June 27, 2004 and December 31,2003, goodwill of $6.7 million was associated with the Small Systems segment.Amortized intangible assets were as follows:

 

*In thousands*

 
| ** **                         | ** ** | ** **                                  | ** ** | **June 27, 2004**           | ** ** | **December 31, 2003**         | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| **Amortized  Intangible  Assets**  | ** ** | **Weighted  Average  Amortization  Period** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|                               |       |                                        |       |                        |       |                          |       |   |   |   |   |
| Technology                         |       | 6 years                                     | ** ** | **$**                       | **80,090** | ** **                    | **$**      | **40,122** |   | $ | 80,043 |   | $ | 35,239 |   |
| Customer lists                     |       | 5 years                                     | ** ** | **8,900**                   | ** ** | **5,537**                     |       | 8,900 |   | 4,864 |   |
| Tradenames                         |       | 5 years                                     | ** ** | **3,157**                   | ** ** | **1,947**                     |       | 3,157 |   | 1,705 |   |
| Total amortized  intangible assets |       | 6 years                                     | ** ** | **$**                       | **92,147** | ** **                    | **$**      | **47,606** |   | $ | 92,100 |   | $ | 41,808 |   |

 

Aggregate amortizationexpense related to APC’s other intangible assets for the second quarters of 2004and 2003 was $2.9 million and $3.0 million, respectively, and for the first sixmonths of 2004 and 2003 was $5.8 million and $6.0million, respectively. Estimated aggregated amortization for each of the nextfive succeeding fiscal years is $11.6 million for 2004, $11.6 million for 2005,$11.6 million for 2006, $9.4 million for 2007, and $5.0 million for 2008. Thereare no expected residual values related to these intangible assets.

 

**6.****              Warranty Liabilityand Product Recall**

 

*In thousands*

 
| ** **               | ** ** | **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** | ** ** |
|--------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|
|                     |       |                                                       |       |                                                                  |       |                                                      |       |                   |       |                                                 |       |
| **Second  Quarter 2004** | ** ** | **$**                                                      | **12,001** | ** **                                                            | **$**      | **5,001**                                                 | ** ** | **$**                  | **—** | ** **                                           | **$**      | **(5,068** | **)** | **$** | **11,934** | ** ** |
| **First  Quarter 2004**  | ** ** | **$**                                                      | **11,709** | ** **                                                            | **$**      | **6,291**                                                 | ** ** | **$**                  | **—** | ** **                                           | **$**      | **(5,999** | **)** | **$** | **12,001** | ** ** |
|                     |       |                                                       |       |                                                                  |       |                                                      |       |                   |       |                                                 |       |
| **Second  Quarter 2003** |       | $                                                          | 20,746     |                                                                  | $          | 5,629                                                     |       | $                      | —     |                                                 | $          | (8,798 | ) | $ | 17,577 |   |
| **First  Quarter 2003**  |       | $                                                          | 27,183     |                                                                  | $          | 6,965                                                     |       | $                      | —     |                                                 | $          | (13,402 | ) | $ | 20,746 |   |

 

In early 2003, APCannounced a product recall of Back-UPS® CS 350 and 500 models, due to potentialsafety issues. Prior to announcing the recall, APC received eight reportsworldwide of units overheating, resulting in the melting of the unit’s outercasing, six of which occurred in the United States. Three of the reportedincidents resulted in minor property damage; no injuries were reported. Thetotal number of affected devices recalled worldwide is approximately 2.1million with approximately 900,000 devices recalled in the United States. Therecall is limited to two specific models in APC’s Back-UPS CS product line, theBack-UPS CS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt models.The affected units were manufactured between November 2000 and December 2002and were sold primarily through computer and electrical distribution, catalogand retail outlets worldwide. In the fourth quarter of 2002, APC accrued acurrent liability and recognized additional warranty expense, classified incost of goods sold, of $19.6 million. Based upon repair cost and return rateexperience to-date as well as current estimates of remaining costs to beincurred, APC expects the aggregate costs for the recall to be less thanoriginally estimated. To reflect this change, cost of goods sold was reduced by$5.5 million in the third quarter of 2003. As of June 27, 2004, APC hadincurred approximately 81% of currently estimated total recall costs. Ourestimation of remaining recall costs of $2.6 million, comprised of $1.0 millionfor the U.S. and $1.6 million for international geographies, continues to besubject to actual return rates and per unit repair costs (which can vary bycountry) as well as estimates for other recall-related costs expected to beincurred. We expect that future amounts will not differ materially from ourcurrent estimates.

 

10

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**7.****              Earnings Per Share**

 

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

 

*In thousands*

 
| ** **                                                                                                                     | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                                                                                                     | ** ** | **June 27,  2004**   | ** ** | **June 29,  2003**     | ** ** | **June 27,  2004** | ** ** | **June 29,  2003** | ** ** |
| Basic weighted  average shares outstanding                                                                                     |       | **200,073**          |       | 196,559                |       | **200,234** |   | 196,717 |   |
| Net effect of  dilutive potential common shares outstanding based on the treasury stock  method using the average market price |       | **5,481**            |       | 3,322                  |       | **4,758** |   | 3,276 |   |
| Diluted weighted  average shares outstanding                                                                                   |       | **205,554**          |       | 199,881                |       | **204,992** |   | 199,993 |   |
| Antidilutive  potential common shares excluded from the computation above                                                      |       | **2,725**            |       | 5,674                  |       | **2,712** |   | 5,669 |   |

 

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

 

Changes in paid-in capital for the periods presented relate toissuances of common stock resulting from the exercise of employee stock optionsas well as the tax benefit arising from the disposition of option shares by APCemployees.

 

In June 2003, APC’s Board ofDirectors approved the initiation of a quarterly cash dividend of $0.08 pershare of common stock. Dividends of $0.08 per share were declared and paid ineach subsequent quarter including in April 2004, payable on June 16, 2004 toshareholders of record as of May 26, 2004. In June 2004, APC’s Board ofDirectors approved a 25% increase in its quarterly cash dividend raising thepayout to $0.10 per share, as well as APC’s first quarterly dividend at thisnew rate, payable on September 16, 2004 to shareholders of record as of August26, 2004. It is the intention of the Board of Directors to pay a comparablequarterly dividend on a going forward basis contingent upon continued capitalavailability and a determination that cash dividends continue to be in the bestinterests of APC and its shareholders.

 

In June 2004, APC’s Board of Directors approved a stock repurchaseprogram which authorizes up to $150 million to repurchase outstanding shares ofAPC’s common stock. The purchases would be made on the open market based onmarket and business factors. No such repurchases were made as of June 27, 2004.The repurchase program may be suspended or discontinued at any time withoutprior notice. In March 2004, APC returned its 250,000 treasury shares to anauthorized but not issued status.

 

11

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

 

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

 

*In thousands*

 
| ** **                                               | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **June 27,  2004**   | ** ** | **June 29,  2003**     | ** ** | **June 27,  2004** | ** ** | **June 29,  2003** | ** ** |
| Net income                                               |       | **$**                | **61,441** |                   | $          | 63,088 |   | **$** | **26,763** |   | $ | 33,109 |   |
| Other  comprehensive income (loss), net of tax:          |       | ** **           |       |                   |       | ** ** |   |   |   |
| Change in  foreign currency translation adjustment       |       | **1,815**            |       | 1,268                  |       | **563** |   | (214 | ) |
| Net unrealized  loss on investments, net of income taxes |       | **—**           |       | (126                   | )          | **—** |   | (90 | ) |
| Other  comprehensive income (loss)                       |       | **1,815**            |       | 1,142                  |       | **563** |   | (304 | ) |
| Comprehensive  income                                    |       | **$**                | **63,256** |                   | $          | 64,230 |   | **$** | **27,326** |   | $ | 32,805 |   |

 

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

 

On June 10, 2004, APC’s shareholders approved APC’s 2004 Long-TermIncentive Plan, which replaces the 1997 Stock Option Plan. At June 27, 2004,APC had two stock-based compensation plans, the aforementioned 2004 Long-TermIncentive Plan and the 1997 Non-employee Director Stock Option Plan, and anemployee stock purchase plan, described more fully in Note 11 of Notes toConsolidated Financial Statements in Item 8 of APC’s Form 10-K for the yearended December 31, 2003. As permitted by Statement of Financial AccountingStandards No. 123 as amended by No. 148, *Accountingfor Stock-Based Compensation*, APC accounts for those plans under therecognition and measurement principles of Accounting Principles Board OpinionNo. 25, *Accounting for Stock Issued toEmployees*, and related Interpretations. No stock-based employeecompensation cost is reflected in net income, as all options granted underthose plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant. The following table illustrates the effecton net income and earnings per share if APC had applied the fair valuerecognition provisions of Statement 123 to stock-based employee compensation:

 

*In thousands except per shareamounts*

 
| ** **                                                                                                                                    | ** ** | ** **  | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|----------------------|------------|------------------------|------------|
| ** **                                                                                                                                    | ** ** | ** **  | ** ** | **June 27,  2004**   | ** ** | **June 29,  2003**     | ** ** | **June 27,  2004** | ** ** | **June 29,  2003** | ** ** |
|                                                                                                                                          |       |        |       |                 |       |                   |       |   |   |   |   |
| Net income                                                                                                                                    |       | As reported |       | **$**                | **61,441** | ** **             | $          | 63,088 |   | **$** | **26,763** | ** ** | $ | 33,109 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | Pro forma   |       | **(4,648**           | **)**      | (10,899                | )          | **(2,324** | **)** | (5,442 | ) |
| Net income                                                                                                                                    |       | Pro forma   |       | **$**                | **56,793** | ** **             | $          | 52,189 |   | **$** | **24,439** | ** ** | $ | 27,667 |   |
|                                                                                                                                          |       |        |       | ** **           | ** ** |                   |       | ** ** | ** ** |   |   |
| Basic earnings  per share                                                                                                                     |       | As reported |       | **$**                | **0.31**   | ** **             | $          | 0.32 |   | **$** | **0.13** | ** ** | $ | 0.17 |   |
|                                                                                                                                          |       | Pro forma   |       | **$**                | **0.28**   | ** **             | $          | 0.27 |   | **$** | **0.12** | ** ** | $ | 0.14 |   |
|                                                                                                                                          |       |        |       | ** **           | ** ** |                   |       | ** ** | ** ** |   |   |
| Diluted earnings  per share                                                                                                                   |       | As reported |       | **$**                | **0.30**   | ** **             | $          | 0.32 |   | **$** | **0.13** | ** ** | $ | 0.17 |   |
|                                                                                                                                          |       | Pro forma   |       | **$**                | **0.28**   | ** **             | $          | 0.26 |   | **$** | **0.12** | ** ** | $ | 0.14 |   |

 

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**11.****       Operating SegmentInformation**

 

***Basis for presentation***

APC operates primarily within one industry consisting of threereportable operating segments by which it manages its business and from whichvarious offerings are commonly combined to develop a total solution for thecustomer. These efforts primarily incorporate the design, manufacture, andmarketing of power protection equipment and related software and accessoriesfor computer, communications, and related equipment. APC’s three segmentsare:  Small Systems, Large Systems, andOther. Each of these segments address global markets.The Small Systems segment develops power solutions for servers and networkingequipment commonly used in local area and wide area networks and for personalcomputers and sensitive electronics; additional accessories and softwareproducts are offered to enhance the management of these networks. The LargeSystems segment produces large system products and services that provide powerand availability solutions for data centers, facilities and communicationsequipment. The Other segment principally consists of mobile accessories andreplacement batteries.

 

APC measures theprofitability of its segments based on gross margin. Segment gross marginsexclude certain expenses which are managed outside the reportable segments.Costs excluded from segment profit are operating expenses, primarily consistingof research and development, selling and corporate expenses, and income taxes.Expenditures for additions to long-lived assets are not tracked or reported bythe operating segments, although depreciation expense is allocated to andreported by the operating segments.

 

During the fourth quarterof 2003, gross margin was determined to be the most reliable and meaningfulmeasure of segment profitability for the purpose of executive management’sallocating resources to and assessing the performance of APC’s operatingsegments for 2003 and future periods. Prior period amounts have been restatedon this basis in accordance with the requirements of Statement of FinancialAccounting Standards No. 131, “*Disclosuresabout Segments of an Enterprise and Related Information.”*

 

Summary operating segmentinformation is as follows:

 

*In thousands*

 
| ** **                        | ** ** | **Six months ended** | ** **  | **Three months ended** | ** ** |
|-----------------------------------|------------|----------------------|-------------|------------------------|------------|
| ** **                        | ** ** | **June 27,  2004**   | ** **  | **June 29,  2003**     | ** ** | **June 27,  2004** | ** ** | **June 29,  2003** | ** ** |
| **Segment  net sales**            |       |                 |        |                   |       |   |   |   |   |
| Small Systems                     |       | **$**                | **576,237** |                   | $          | 500,046 |   | **$** | **301,143** |   | $ | 257,520 |   |
| Large Systems                     |       | **136,232**          |        | 103,590                |       | **77,911** |   | 55,997 |   |
| Other                             |       | **29,906**           |        | 33,197                 |       | **13,737** |   | 15,860 |   |
| Total segment net sales           |       | **742,375**          |        | 636,833                |       | **392,791** |   | 329,377 |   |
| Shipping and handling revenues    |       | **5,039**            |        | 3,638                  |       | **2,872** |   | 2,119 |   |
| Total net sales                   |       | **$**                | **747,414** |                   | $          | 640,471 |   | **$** | **395,663** |   | $ | 331,496 |   |
|                              |       | ** **           |        |                   |       | ** ** |   |   |   |
| **Segment  profits**              |       | ** **           |        |                   |       | ** ** |   |   |   |
| Small Systems                     |       | **$**                | **275,290** |                   | $          | 237,651 |   | **$** | **137,825** |   | $ | 123,069 |   |
| Large Systems                     |       | **20,510**           |        | 18,387                 |       | **12,239** |   | 10,480 |   |
| Other                             |       | **18,674**           |        | 18,797                 |       | **8,124** |   | 8,563 |   |
| Total segment profits             |       | **314,474**          |        | 274,835                |       | **158,188** |   | 142,112 |   |
| Shipping and handling net costs   |       | **15,860**           |        | 12,909                 |       | **8,666** |   | 6,100 |   |
| Other indirect operating expenses |       | **220,681**          |        | 179,731                |       | **116,094** |   | 92,831 |   |
| Other income, net                 |       | **3,988**            |        | 5,185                  |       | **2,256** |   | 2,677 |   |
| Earnings before income taxes      |       | **$**                | **81,921**  |                   | $          | 87,380 |   | **$** | **35,684** |   | $ | 45,858 |   |

 

13

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**12.****       Litigation**

 

On January 10, 2003,Powerware Corporation filed in the United States District Court for the EasternDistrict of North Carolina (the “Court”) a complaint alleging infringement ofthree United States patents. On May 7, 2003, Powerware Corporation filed withthe Court an amended complaint modifying its allegations of infringementregarding the Powerware Patents. APC was served with the amended complaint onMay 9, 2003. Powerware Corporation is seeking unspecified damages andinjunctive relief. On May 28, 2003, APC filed its answer to the amendedcomplaint and on June 17, 2003 APC filed its first amended answer andcounterclaims alleging infringement by Powerware Corporation of three UnitedStates patents owned by APC. On July 3, 2003, Powerware Corporation filed itsanswer to counterclaims. On March 18, 2004, Powerware Corporation amended itscomplaint to add an additional patent to the litigation.

 

As previouslyreported in APC’s Form 10-Q for the first quarter ended March 28, 2004, onFebruary 5, 2004, Liebert Corporation and Zonatherm Products, Inc., Liebert’ssales representative firm in the Chicago area, filed a lawsuit in the CircuitCourt of Cook County, Illinois, Chancery Division (the “Court”) against APC,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, tortuous interference with contract, tortuous 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, theCourt dismissed without prejudice all claims except the Illinois Trade SecretAct claim.

 

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

 

While management currently believes that resolving all pending legalmatters, individually or in aggregate, will not have a material adverse impacton APC’s financial position, the litigation and other claims noted above aresubject to inherent uncertainties, including the risk of an unfavorable outcome, and management’s view of these matters may changein the future. An unfavorable outcome could include monetary damages or, incases where injunctive relief is sought, an injunction prohibiting certainactivities. Were an unfavorable final outcome to occur, there exists the possibilityof a material adverse impact on APC’s financial position, cash flows andresults of operations for the period in which the effect becomes reasonablyestimable.

 

**13.****       Subsequent Events**

 

In June 2004, APC’s Board of Directors approved a 25% increase in itsquarterly cash dividend raising the payout to $0.10 per share. APC’s nextquarterly dividend is payable on September 16, 2004 to shareholders of recordas of August 26, 2004. It is the intention of the Board of Directors to pay acomparable quarterly dividend on a going forward basis contingent uponcontinued capital availability and a determination that cash dividends continueto be in the best interests of APC and its shareholders.

 

APC commenced the repurchase of its common stock in early August and, asof August 6, 2004, had repurchased approximately 2.3 million shares on the openmarket at an average price of approximately $15 per share.

 

14

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**ITEM 2.****  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

We begin Management’sDiscussion and Analysis of Financial Condition and Results of Operations(MD&A) with a discussion of our business outlook for the remainder of thisfiscal year.  We also provide adiscussion of our Results of Operations for the second quarter and first sixmonths of 2004 compared to the second quarter and first six months of 2003.This discussion includes an overview of our operating results and thedirections in which we believe our markets, segments, and geographies aremoving. We then provide a Liquidity and Financial Resources discussion of thesignificant changes in our balance sheet during the first six months of 2004,and cash flows for the second quarter and first six months of 2004 compared tothe second quarter and first six months of 2003, as well as our contractualobligations and foreign currency activity. This is followed by a discussion of the Critical Accounting Policiesthat we believe are important to our business operations and understanding ofour results of operations. We conclude with information about factors that mayaffect our future results.

 

This MD&A should beread in conjunction with the other sections of this report, including “Item 1.Financial Statements” and also our Annual Report on Form 10-K for the yearended December 31, 2003, including “Item 1. Business;” “Item 6. Selected Financial Data;” and “Item 8.  FinancialStatements and Supplementary Data.”

 

**BUSINESS OUTLOOK**

 

We entered 2004 in as strong a competitive and financial position asever before, and we are leveraging this strength throughout our business. It isevident that APC solutions are resonating with customers across their networksas we experienced growth in our major business segments. Not only have our coreUPS offerings grown, but increasingly APC solutions, specifically ourInfraStruXure architecture, are being specified for network-critical physicalinfrastructure (NCPI) requirements. As customers implement adaptable, on-demandinformation technology (IT) systems, APC’s products are supporting NCPI needsmore quickly and more cost-effectively than ever before.

 

As we look ahead to the second half of 2004, we are currently planningfor growth in our overall annual revenue driven principally by anticipated revenuegrowth in our Small and Large Systems reportable segments. We expect the rateof growth of our Large Systems products to be greater than the growth expectedfor Small Systems due to the assumed continued success of our overall strategyand the acceptance of our products in specific market segments.

 

Overall gross margins for 2004 are currently expected to be impacted by ashift in product mix toward the faster-growing, lower-margin Large Systemsproducts. Gross margins, particularly for Small Systems products, are expectedto be impacted by price reductions. Gross margin variability could result fromchanging revenue levels, which are dependent on unit volumes and prices as wellas the mix of products sold, unit costs and yield issues associated with productionat our factories, changing component and commodity costs, excess manufacturingcapacity, excess inventory, inventory obsolescence and variations in inventoryvaluation.

 

We have dedicated significant efforts to rationalize our overallmanufacturing capacity over the past three years and we will continue to planfor future capacity requirements based on the assumed continued acceptance anddemand for our products in the specific market segments they were designed toaddress. We currently expect that capital spending will be between $25 millionand $35 million in 2004, compared to $21.6 million in 2003. We expect that mostof the capital spending for 2004 will go toward maintaining, upgrading, andexpanding current manufacturing capacity, as well as investing to upgradecurrent hardware and software office technologies. We are also planning onbuilding product demonstration sites in selected locations around the world insupport of our present strategy.

 

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

 

We will remain focused on aggressivelydriving the growth of our network-critical physical infrastructure solutionssuch as InfraStruXure, which will require sustainingand increasing our operating expense investments in sales and marketing. Aprimary focus is increasing the awareness of existing and prospectivecustomers, particularly in relation to our InfraStruXure architecture. Overallwe are expanding sales and support teams, developing new channels such as manufacturerrepresentatives and engineering contractors, funding our educational effortsthrough high-level customer and partner events, as well as increasing sales andmarketing support of our core reseller channels.

 

We currently expect our tax rate to be approximately25% for 2004. The estimated effective tax rate is based on current tax law andthe current expected income. The tax rate may be affected by the jurisdictionsin which profits are determined to be earned and taxed, our ability tosuccessfully implement additional tax savings planning opportunities, theoutcome of tax audits, and our ability to realize deferred tax assets.

 

We are currently a party to various legal proceedings and claims,including a claim alleging patent infringement. As a result of expected costsrelated to the defense of such matters, we expect 2004 legal costs to exceed2003 legal costs. 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 ofoperations of that period or future periods. We believe that, given our currentliquidity and cash and investment balances, even an adverse judgment would nothave a material impact on cash and investments or liquidity. We also expectthat our administrative spending for 2004 will increase year-over-year insupport of our on-going efforts to comply with the provisions of theSarbanes-Oxley Act of 2002.

 

In June 2004, APC’s Board of Directors approved a stock repurchaseprogram which authorizes up to $150 million to repurchase outstanding shares ofAPC’s common stock.  No such repurchaseswere made as of June 27, 2004.  APCcommenced the repurchase of its common stock in early August and expects tomake purchases on the open market based on market and business factors.  The repurchase program may be suspended ordiscontinued at any time without prior notice.

 

**RESULTS OF OPERATIONS**

 

**COMPARISON OF THE THREE AND SIX MONTHPERIODS ENDED JUNE 27, 2004 AND JUNE 29, 2003**

 

**Revenues**

 

Net sales were $395.7million for the second quarter of 2004, an increase of 19.4% compared to $331.5million for the same period in 2003. Net sales for the first six months of 2004were $747.4 million compared to $640.5 million in 2003, an increase of 16.7%.These increases were attributable to strength in our major product segments,the Small and Large System segments, as well as growth across our majorgeographies. Our product segment growth was driven by our InfraStruXureTMsystems, which management believes are increasingly being specified fornetwork-critical physical infrastructure (NCPI) requirements, as well as ourcore uninterruptible power supply (UPS) offerings which also contributed solidgrowth during the second quarter and first six months of 2004. For furtherinformation about revenues by segment, refer to the *SegmentResults* section below.

 

***Revenues by Geography.**** *The following table summarizes our revenues on a geographic basis for thethree and six month periods ended June 27, 2004 and June 29, 2003.

 

*In millions*

 
| ** **                                  | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** |
|---------------------------------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **June 27,  2004**   | ** ** | **% of  Total**        | ** ** | **June 29,  2003** | ** ** | **%****of  Total** | ** ** | **June 27,  2004** | ** ** | **% of  Total** | ** ** | **June 29,  2003** | ** ** | **%****of  Total** | ** ** |
| North and Latin  America (the Americas)     |       | **$**                | **375.0**  |                   | **50.2**   | **%** | $ | 323.0 |   | 50.4 | % | **$** | **211.1** |   | **53.4** | **%** | $ | 171.7 |   | 51.8 | % |
| Europe, the  Middle East, and Africa (EMEA) |       | **229.8**            |       | **30.7**               | **%**      | 199.8 |   | 31.2 | % | **119.2** |   | **30.1** | **%** | 100.2 |   | 30.2 | % |
| Asia                                        |       | **142.6**            |       | **19.1**               | **%**      | 117.7 |   | 18.4 | % | **65.4** |   | **16.5** | **%** | 59.6 |   | 18.0 | % |
| Total Net Sales                             |       | **$**                | **747.4**  |                   | **100.0**  | **%** | $ | 640.5 |   | 100.0 | % | **$** | **395.7** |   | **100.0** | **%** | $ | 331.5 |   | 100.0 | % |

 

In the second quarter of 2004, net sales of theAmericas increased 22.9% over the second quarter of 2003. In the first sixmonths of 2004, net sales of the Americas increased 16.1% over the first sixmonths of 2003. EMEA increased 18.9% in the second quarter of 2004 over the secondquarter of 2003 and increased 15.0% in the first six months of 2004 over thefirst six months of 2003. Asia increased 9.9% in the second quarter of 2004over the second quarter of 2003, and increased 21.2% in the first six months of2004 over the first six months of 2003.

 

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In the second quarter of 2004, on a constantcurrency basis, EMEA’s net sales increased 14.8% and Asia’s net sales increased5.3% over the second quarter of 2003. In the first six months of 2004, on aconstant currency basis, EMEA’s net sales increased 8.1% and Asia’s net salesincreased 13.7% over the first six months of 2003. Total second quarter andfirst half 2004 net sales grew 17.3% and 13.1%, respectively, on a constant currencybasis over the comparable prior year periods. EMEA’s revenues would have beenlower, on a constant currency basis, by $4.1 million in the second quarter of2004 and by $13.7 million in the first six months of 2004, principally due tostrengthening of the Euro and British pound. Asia’s revenues would have beenlower, on a constant currency basis, by $2.7 million in the second quarter of2004 and by $8.9 million in the first six months of 2004, principally due tostrengthening of the Japanese yen and Australian dollar. In total, the impactof currency exchange rate changes worldwide added $6.7 million and $23.0million to net sales in the second quarter and first six months of 2004,respectively. We believe constant currency information is useful for an understandingof our operating results. Revenues on a constant currency basis differ fromrevenues presented in accordance with accounting principles generally acceptedin the United States.

 

**Cost of Goods Sold**

Cost of goods sold was $246.1 million or 62.2% of net sales in thesecond quarter of 2004 compared to $195.5 million or 59.0% of net sales in thesecond quarter of 2003. Cost of goods sold was $448.8 million or 60.0% of netsales in the first six months of 2004 compared to $378.5 million or 59.1% of netsales in the first six months of 2003. Gross margins for the second quarter of2004 were 37.8% of net sales, approximately 320 basis points lower than in thesecond quarter of 2003. Gross margins for the first six months of 2004 were40.0% of net sales, approximately 90 basis points lower than in the first sixmonths of 2003. The gross margin reductions in the second quarter and first sixmonths of 2004 resulted principally from discrete pricing actions anddiscounting, as well as mix shifts between and within segments and productlines, notably within our Small Systems segment toward lower-margin Back-UPSproducts combined with strong sales growth in our lower-margin Large Systemssegment. The downward pressure of these factors was partially offset by thefavorable pricing impact of a weakening U.S. dollar, particularly in Europe, aswell as cost reductions, particularly in the Small Systems segment, fromdeclining material costs and select product transitions to low costmanufacturing locations, but not to the extent of prior periods. For furtherinformation about gross margins by segment, refer to the Segment Resultssection below.

 

***Inventory Reserves.***  Totalinventory reserves at June 27, 2004 were $41.4 million compared to $38.8million at December 31, 2003. This increase was due primarily to routineprovisioning that was necessary as a result of applying APC’s inventory reservemethodology throughout the year. APC’s reserve estimate methodology involvesquantifying the total inventory position having potential loss exposure. Lossexposure generally results from several business factors, including product orcomponent discontinuance, unplanned changes in demand, product design changes,and factory transitions. Quantifying such loss exposure is the result ofcombining the cost of inventories specifically identified as having little orno opportunity for sale or use (thus available for physical disposition) plusthe cost of inventories having a high risk of no future sale or use based uponan analysis of on-hand quantities compared to historical and anticipated futuresale or use. APC maintains an on-going business process for the physicaldisposition of inventories previously identified. Inventory write-offs occur atthe time of physical disposition. Inventories, once reserved, are not writtenback up as such reserve adjustments are considered to be a permanent decreaseto the cost basis of the excess or obsolete inventory.

 

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**SegmentResults**(Also refer to Note 11 of Notes to ConsolidatedFinancial Statements in Item 1 of this report for important informationregarding APC’s reportable segments)

 

*Inthousands*

 
| ** **                        | ** ** | **Six months ended** | ** **  | **Three months ended** | ** ** |
|-----------------------------------|------------|----------------------|-------------|------------------------|------------|
| ** **                        | ** ** | **June 27,  2004**   | ** **  | **June 29,  2003**     | ** ** | **June 27,  2004** | ** ** | **June 29,  2003** | ** ** |
| **Segment  net sales**            |       |                 |        |                   |       |   |   |   |   |
| Small Systems                     |       | **$**                | **576,237** |                   | $          | 500,046 |   | **$** | **301,143** |   | $ | 257,520 |   |
| Large Systems                     |       | **136,232**          |        | 103,590                |       | **77,911** |   | 55,997 |   |
| Other                             |       | **29,906**           |        | 33,197                 |       | **13,737** |   | 15,860 |   |
| Total segment net sales           |       | **742,375**          |        | 636,833                |       | **392,791** |   | 329,377 |   |
| Shipping and handling revenues    |       | **5,039**            |        | 3,638                  |       | **2,872** |   | 2,119 |   |
| Total net sales                   |       | **$**                | **747,414** |                   | $          | 640,471 |   | **$** | **395,663** |   | $ | 331,496 |   |
|                              |       | ** **           |        |                   |       | ** ** |   |   |   |
| **Segment  profits**              |       | ** **           |        |                   |       | ** ** |   |   |   |
| Small Systems                     |       | **$**                | **275,290** |                   | $          | 237,651 |   | **$** | **137,825** |   | $ | 123,069 |   |
| Large Systems                     |       | **20,510**           |        | 18,387                 |       | **12,239** |   | 10,480 |   |
| Other                             |       | **18,674**           |        | 18,797                 |       | **8,124** |   | 8,563 |   |
| Total segment profits             |       | **314,474**          |        | 274,835                |       | **158,188** |   | 142,112 |   |
| Shipping and handling net costs   |       | **15,860**           |        | 12,909                 |       | **8,666** |   | 6,100 |   |
| Other indirect operating expenses |       | **220,681**          |        | 179,731                |       | **116,094** |   | 92,831 |   |
| Other income, net                 |       | **3,988**            |        | 5,185                  |       | **2,256** |   | 2,677 |   |
| Earnings before income taxes      |       | **$**                | **81,921**  |                   | $          | 87,380 |   | **$** | **35,684** |   | $ | 45,858 |   |

 

***Small Systems.***  Net sales for products in the Small Systemssegment, which provides power protection, UPS, and management products for thePC, server, and local area networking markets, increased in the second quarterof 2004 by 16.9% over the second quarter of 2003, and increased in the firstsix months of 2004 by 15.2% over the first six months of 2003. Performance inthis segment was driven by strong growth in our core Smart-UPS® and Back-UPSfamilies. The Smart-UPS family experienced growth across its offerings, andBack-UPS revenue was also strong with particular strength in low-end retail andOEM products. This segment also benefited from strength in NCPI andInfraStruXure related products, including NetShelter racks and rack PowerDistribution Units.

 

Gross margins for the Small Systems segment decreased in the secondquarter of 2004 from the comparable period in 2003, and remained substantiallyunchanged for the first six months of 2004 compared to the first six months of2003. The factors influencing the gross margins of this segment included theimpact of pricing actions and product mix shifts within the segment, aslower-margin desktop power protection products experienced strong growth in thesecond quarter of 2004, as well as within product lines comprising the segment,as exhibited by growth in Smart-UPS lower-margin models, partially offset byfavorable currency trends and product cost reductions. APC’s Small Systems costreductions were achieved through a combination of product transitions to lowcost manufacturing locations and material cost reductions from APC’s supplierbase. Our product cost reductions favorably impacted gross margins in the SmallSystems segment by approximately 455 basis points in the second quarter of 2004and 375 basis points in the first six months of 2004, and were drivenprincipally by material cost improvements.

 

***Large Systems.***  Netsales for products in the Large Systems segment, consisting primarily ofthree-phase UPS, services, precision cooling products and ancillary productsfor data centers, facilities, and communication applications, increased in thesecond quarter of 2004 by 39.1% over the second quarter of 2003, and increasedin the first six months of 2004 by 31.5% over the first six months of 2003.With approximately 75% of InfraStruXure revenue included in the Large Systemssegment, InfraStruXure sales were a major contributor to year-over-year growthof this segment. On a product level, Symmetra three-phase, the primary powercomponent of an InfraStruXure system, was a leading growth driver. In addition,we experienced strong year-over-year growth from ancillary products and fromour industrial product business. Also contributing to improvement in the firstsix months of 2004 was solid growth during the first quarter of 2004 ofour service revenue, ancillary products, and precision cooling solutions.

 

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Gross margins forthe Large Systems segment decreased in the second quarter and first six monthsof 2004 from the comparable prior year levels. This decline was the result of increased costs within our servicebusiness as well as increasing material costs on cooling products and costinefficiencies from product lines experiencing declining volumes, partiallyoffset by the volume-driven cost improvements on Symmetra 3-phase products. Thefavorable impact of these cost improvements were further enhanced by Symmetra’sincreasing share of Large Systems revenue. Gross margins in the LargeSystems segment for the first six months of 2004 were negatively impacted byaggressive pricing in the precision cooling product category in the firstquarter of 2004.

 

***“Other” Segment.***  Netsales for products in the Other segment, consistingprincipally of mobile accessories and replacement batteries, decreased in thesecond quarter of 2004 by 13.4% from the second quarter of 2003, and decreasedin the first six months of 2004 by 9.9% from the first six months of 2003. Webelieve that softness in the markets for this segment’s major productcategories, i.e., mobile accessories and replacement batteries, contributed tothe decrease.

 

Gross margins for the Other segment improved inthe second quarter and first six months of 2004 from the comparable prior yearlevels. The gross margin improvements were the result of one-time start-upcosts incurred last year relating to our TravelPower Cases combined with afavorable mix shift within the segment toward higher-margin replacementbatteries, partially offset by the impact of pricing actions taken on selectproducts.

 

## **Operating Expenses**

 

***Marketing, Selling, General, and Administrative (SG&A)Expenses.***  SG&A expenses in the second quarter of2004 were $94.6 million or 23.9% of net sales compared to $76.5 million or23.1% of net sales in the second quarter of 2003. SG&A expenses in thefirst six months of 2004 were $180.8 million or 24.2% of net sales compared to$148.9 million or 23.3% of net sales in the first six months of 2003. Wecontinue to commit resources to support our sales and marketing objectives,with a primary focus on increasing the awareness of our existing and prospectivecustomers, particularly in relation to our InfraStruXure architecture. Theincreases in total spending in the second quarter and first six months of 2004reflected 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. Also contributing tothe increases in total spending were higher professional service costs in thesecond quarter and first six months of 2004 in support of ongoing litigationand Sarbanes-Oxley compliance.

 

Theallowance for bad debts was 6.4% of gross accounts receivable at June 27, 2004compared to 6.7% at December 31, 2003. Accounts receivable balances outstandingover 60 days represented 13.7% of total receivables at June 27, 2004 comparedto 13.5% at December 31, 2003. This increase reflects a growing portion of ourbusiness originating in areas where longer payment terms are customary,including a growing contribution from international markets. We continue toexperience strong collection performance. Write-offs of uncollectable accountsrepresent less than 1% of net sales. A majority of international customerbalances continue to be covered by receivables insurance.

 

***Research and Development (R&D).*** R&D expenditures were $21.4 million or 5.4% of net sales in thesecond quarter of 2004, up from $16.3 million or 4.9% of net sales in thesecond quarter of 2003. R&D expenditures were $39.8 million or 5.3% of netsales in the first six months of 2004, up from $30.8 million or 4.8% of netsales in the first six months of 2003. 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.

 

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**Other Income, Net andIncome Taxes**

 

***Other Income, Net.***  Otherincome is comprised principally of interest income. Global interest incomedecreased in the second quarter and first six months of 2004 from thecomparable periods last year, principally due to the strategic purchase ofadditional tax-exempt securities as well as an overall decline in the bondmarket, partially offset by an increase in average cash balances available forinvestment during the first quarter of 2004.

 

AtJune 27, 2004, APC had $817.1 million of total cash and investments, up from$806.8 million at December 31, 2003, all of which are stated at fair value. Wemanage APC’s cash and investment balances to preserve principal and liquiditywhile maximizing our return on the total investment portfolio. We diversify ourinvestment portfolio by investing in multiple types of investment-gradesecurities with multiple investment brokers. Based on APC’s investment portfolioand interest rates at June 27, 2004, a 100 basis point increase or decrease ininterest rates would have resulted in an increase or decrease of approximately$8 million in our annual interest income.

 

***Income Taxes.***  Oureffective income tax rate was approximately 25.0% and 27.8% for the secondquarters and first six months ended June 27, 2004 and June 29, 2003,respectively. The decrease in 2004 from2003 is attributable to tax savings from an increasing portion of taxableearnings anticipated to be generated from APC’s operations in jurisdictionscurrently having lower income tax rates than the present U.S. statutory incometax rate. This shift resulted partially from our product transitions to lowercost, lower tax, manufacturing locations. APC has tax holidays in China, India, and the Philippines, which reduceor eliminate the income taxes paid in those countries. A substantial portion ofAPC’s tax holiday in the Philippines expired in the third quarter of 2003.Although this will have the effect of increasing APC’s foreign taxes,APC’s effective income tax rate will remain considerably lower than the U.S.statutory federal corporate tax rate of 35%.

 

**LIQUIDITY AND FINANCIAL RESOURCES**

 

***Working Capital*.**  Working capital at June 27, 2004was $1.298 billion compared to $1.217 billion at December 31, 2003. APC hasbeen able to increase its working capital position as the result of continuedpositive operating results and despite internally financing the capitalinvestment required to expand its operations as well as R&D, sales andmarketing spending.

 

***Cash Flows.***  Thefollowing table summarizes our cash flows for the three and six month periodsended June 27, 2004 and June 29, 2003.

 

*In thousands*

 
| ** **                                          | ** ** | **Six months ended** | ** **  | **Three months ended** | ** ** |
|-----------------------------------------------------|------------|----------------------|-------------|------------------------|------------|
| ** **                                          | ** ** | **June 27,  2004**   | ** **  | **June 29,  2003**     | ** ** | **June 27,  2004** | ** ** | **June 29,  2003** | ** ** |
|                                                |       |                 |        |                   |       |   |   |   |   |
| Net cash  provided by operating activities          |       | **$**                | **47,888**  | ** **             | $          | 15,405 |   | **$** | **12,198** | ** ** | $ | 26,046 |   |
|                                                |       | ** **           | ** **  |                   |       | ** ** | ** ** |   |   |
| Net cash used in investing activities               |       | **(55,688**          | **)**       | (40,035                | )          | **(33,069** | **)** | (76,563 | ) |
|                                                |       | ** **           | ** **  |                   |       | ** ** | ** ** |   |   |
| Net cash (used in) provided by financing activities |       | **(25,162**          | **)**       | 11,094                 |       | **(13,364** | **)** | 8,588 |   |
|                                                |       | ** **           | ** **  |                   |       | ** ** | ** ** |   |   |
| Net change in cash and cash equivalents             |       | **(32,962**          | **)**       | (13,536                | )          | **(34,235** | **)** | (41,929 | ) |
| Cash and cash equivalents at beginning of period    |       | **252,114**          | ** **  | 209,322                |       | **253,387** | ** ** | 237,715 |   |
| Cash and cash equivalents at end of period          |       | **$**                | **219,152** | ** **             | $          | 195,786 |   | **$** | **219,152** | ** ** | $ | 195,786 |   |

 

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*Cash Flows from Operating Activities.* Our cash flow from operations for the secondquarter and first six months of 2004 were impacted by lower profit levels andreflected increased investment in working capital, particularly inventories aswell as higher accounts receivable balances consistent with our strong salesgrowth. These factors were partially offset in the first six months of 2004, bythe favorable impact of increasing accounts payable and other liabilities.

 

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

 

*Cash Flows from Financing Activities.* Our cash flows from financing activitiesresulted from proceeds from issuances of common stock relating to employeestock plans, and were more than offset during the second quarter and first sixmonths of 2004 by the payment of approximately $16.0 million and $32.0 million,respectively, of common stock dividends.

 

***Inventories*.**  Worldwide inventories were $456.1 million atJune 27, 2004, up from $402.2 million at December 31, 2003. Higher levels ofon-hand raw materials and finished goods were required during the first sixmonths of 2004 to meet increasing current and anticipated demand, particularlyInfraStruXure demand, as well as to manage the supply chain requirementsassociated with continuing transfers of production of a wide range of Small andLarge Systems products to and among our low cost manufacturing regions in 2004.In addition, we increased our inventory levels of price-sensitive materials tohedge against the risk of current and anticipated commodity cost trends, aswell as to support continuing new product introductions. Despite increasinginventory levels, inventory as a percentage of quarterly net sales was 115% inthe second quarter of 2004, down from 125% in the first quarter of 2004, and116% in the second quarter of 2003, reflecting our strong second quarter 2004net sales performance. There were no inventory charges, other than APC’sstandard provisioning, during the second quarters and first six months of 2004and 2003.

 

***Product Recall*.**  Inearly 2003, we announced a product recall of Back-UPS CS 350 and 500 models,due to potential safety issues. Prior to announcing the recall, APC receivedeight reports worldwide of units overheating, resulting in the melting of theunit’s outer casing, six of which occurred in the United States. Three of thereported incidents resulted in minor property damage; no injuries werereported. The total number of affected devices recalled worldwide isapproximately 2.1 million with approximately 900,000 devices recalled in theUnited States. The recall is limited to two specific models in APC’s Back-UPSCS product line, the Back-UPS CS 350 and the Back-UPS CS 500, in both 120-voltand 230-volt models. The affected units were manufactured between November 2000and December 2002 and were sold primarily through computer and electricaldistribution, catalog and retail outlets worldwide. In the fourth quarter of2002, APC accrued a current liability and recognized additional warrantyexpense, classified in cost of goods sold, of $19.6 million. Based upon repaircost and return rate experience to-date as well as current estimates ofremaining costs to be incurred, APC expects the aggregate costs for the recallto be less than originally estimated. To reflect this change, cost of goodssold was reduced by $5.5 million in the third quarter of 2003. As of June 27,2004, APC had incurred approximately 81% of currently estimated total recallcosts. Our estimation of remaining recall costs of $2.6 million, comprised of$1.0 million for the U.S. and $1.6 million for international geographies,continues to be subject to actual return rates and per unit repair costs (whichcan vary by country) as well as estimates for other recall-related costsexpected to be incurred. We expect thatfuture amounts will not differ materially from our current estimates.

 

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## ***ContractualObligations****.*  Our future contractual obligations have not changedsignificantly from the amounts reported in our Annual Report on Form 10-K forthe year ended December 31, 2003. Our contractual obligations principallyincludenon-cancelableoperating leases, primarily for warehousing and office space, which expire atvarious dates through 2012. These leases contain renewal options for periodsranging from one to nine years and require APC to pay its proportionate shareof utilities, taxes, and insurance. APC is not able to determine the aggregateamount of purchase orders that represent contractual obligations for thepurchase of goods and services, as such purchaseorders may represent authorizations to purchase rather than binding agreements.For the purposes of this disclosure, contractual obligations for the purchaseof goods and services are defined as agreements that are enforceable andlegally binding on APC and that specify all significant terms, including: fixedor minimum quantities to be purchased; fixed, minimum, or variable priceprovisions; the approximate timing of the transaction, and contain noprovisions allowing for cancellation without significant penalty. Our purchaseorders for raw materials or purchased finished products are based on ourcurrent manufacturing needs and/or demand forecasts and are fulfilled by ourvendors within short time horizons. We do not have significant agreements forthe purchase of raw materials or finished products specifying minimumquantities or set prices that exceed our expected requirements for threemonths.

 

***Capital Expenditures and Capital Commitments.*** During the second quarters of 2004 and 2003, our capital expenditures,net of capital grants, amounted to approximately $9.2 million and $5.6 million,respectively. During the first six months of 2004 and 2003, our capitalexpenditures, net of capital grants, amounted to approximately $12.5 millionand $9.0 million, respectively. Our capital spending consisted primarily ofmanufacturing and office equipment, purchased software applications, andbuilding improvements. Capital spending in the second quarter and first sixmonths of 2004 focused on funding additional equipment needs and improvingexisting factories, principally in the U.S., India, and Denmark, as well ascontinuing investment in information technologies. Substantially all of APC’snet capital expenditures were financed from available operating cash.

 

Wehave dedicated significant efforts to rationalize our overall manufacturingcapacity over the past three years and we will continue to plan for futurecapacity requirements based on the assumed continued acceptance and demand forour products in the specific market segments they were designed to address. Wecurrently expect that capital spending will be between $20 million and $30million in 2004, compared to $21.6 million in 2003. We expect that most of thecapital spending for 2004 will go toward maintaining, upgrading, and expandingcurrent manufacturing capacity, as well as investing to upgrade currenthardware and software office technologies. We are also planning on buildingproduct demonstration sites in selected locations around the world in supportof our present strategy.

 

Wehad no material capital commitments during the second quarters and first sixmonths of 2004 and 2003, or at June 27, 2004 and December 31, 2003.

 

APC has agreements with the IndustrialDevelopment Authority of Ireland, otherwise known as the IDA. Under theseagreements, we receive grant monies for costs incurred for machinery,equipment, and building improvements for our Galway and Castlebar facilities.These grants are equal to 40% and 60%, respectively, of such costs up to amaximum of $13.1 million for Galway and $1.3 million for Castlebar. Such grantmonies are subject to APC meeting certain employment goals and maintainingoperations in Ireland until termination of the respective agreements. Under aseparate agreement with the IDA, we receive direct reimbursement of a portionof costs of certain projects at our Galway and Castlebar facilities related tothe development of software products. This grant may reimburse up to 28% ofactual eligible expenditures subject to a maximum of €714,588 whichever is thelesser.

 

***BorrowingFacilities and Financial Commitments.***  AtJune 27, 2004 and December 31, 2003, we had available for future borrowings$65.0 million under an unsecured line of credit agreement at a floatinginterest rate equal to the bank’s cost of funds rate plus 0.625%. No borrowingswere outstanding under this facility during the second quarters and first sixmonths of 2004 and 2003, or at June 27, 2004 and December 31, 2003. APC had nosignificant financial commitments, other than those required in the normalcourse of business, during the second quarters and first six months of 2004 and2003, or at June 27, 2004 and December 31, 2003.

 

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***Off-Balance-SheetArrangements.***  APC had no significantoff-balance sheet arrangements during the second quarters and first six monthsof 2004 and 2003, or at June 27, 2004 and December 31, 2003.

 

***Quarterly Cash Dividends.***  In June 2003, APC’s Board of Directorsapproved the initiation of a quarterly cash dividend of $0.08 per share ofcommon stock. Dividends of $0.08 per share were announced and paid in eachsubsequent quarter including in April 2004 payable on June 16, 2004 toshareholders of record as of May 26, 2004. In June 2004, APC’s Board ofDirectors approved a 25% increase in its quarterly cash dividend raising thepayout to $0.10 per share, as well as APC’s first quarterly dividend at thisnew rate, payable on September 16, 2004 to shareholders of record as of August26, 2004. It is the intention of the Board of Directors to pay a comparablequarterly dividend on a going forward basis contingent upon continued capitalavailability and a determination that cash dividends continue to be in the bestinterests of APC and its shareholders.

 

***Stock Repurchase Program*.**  In June 2004, APC’s Board of Directorsapproved a stock repurchase program which authorizes up to $150 million torepurchase outstanding shares of APC’s common stock. The purchases would be madeon the open market based on market and business factors. No such repurchaseswere made as of June 27, 2004. The repurchase program may be suspended ordiscontinued at any time without prior notice. In March 2004, APC returned its250,000 treasury shares to an authorized but not issued status.

 

APChas historically generated annual cash flows from operating activities as aresult of strong operating results and, at times, improvement in workingcapital. We believe that current internal cash flows together with availablecash, available credit facilities or, if needed, the proceeds from the sale ofadditional equity, will be sufficient to support anticipated capital spending,dividend payments, and other working capital requirements for the foreseeable future.

 

## ***ForeignCurrency Activity*.**  We invoiceour customers in various currencies. Realized and unrealized transaction gainsor losses are included in the results of operations and are measured based uponthe effect of changes in exchange rates on the actual or expected amount offunctional currency cash flows. Transaction gains and losses were not materialto the results of operations in the second quarters and first six months of2004 and 2003.

 

At June 27, 2004, APC’sunhedged foreign currency accounts receivable, by currency, were as follows:

 

| **In  thousands** | ** ** | **Foreign Currency** | ** ** | **U.S. Dollars** | ** ** |
|-------------------|------------|----------------------|------------|------------------|------------|
| European Euros    |       | 34,951               |       | $                | 42,259     |   |
| Swiss Francs      |       | 27,623               |       | $                | 22,038     |   |
| Japanese Yen      |       | 2,187,991            |       | $                | 20,165     |   |
| British Pounds    |       | 8,333                |       | $                | 15,144     |   |

 

APC also had non-tradereceivables denominated in European Euros of approximately U.S.$0.9 million, liabilities denominated in various Europeancurrencies of approximately U.S.$62.7 million, and liabilities denominated inJapanese Yen of approximately U.S.$10.9 million.

 

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

 

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**CRITICAL ACCOUNTING POLICIES**

 

The discussion and analysis of our financial condition and results ofoperations are based upon our consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States. The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. The U.S. Securities and Exchange Commission has definedcritical accounting policies as those that are both most important to theportrayal of our financial condition and results and which require our mostdifficult, complex or subjective judgments or estimates. Based on thisdefinition, we have identified the policies below as critical to our business operationsand the understanding of our results of operations. The impact and anyassociated risks related to these policies on our business operations isdiscussed throughout Management’s Discussion and Analysis of FinancialCondition and Results of Operations where such policies affect our reported andexpected financial results. For all financial statement periods presented,there have been no material modifications to the application of these criticalaccounting policies. For a detailed discussion on the application of these andother accounting policies, also refer to Note 1 of Notes to ConsolidatedFinancial Statements in Item 8 of American Power Conversion Corporation’sAnnual Report on Form 10-K for the year ended December 31, 2003.

 

On an on-going basis, we evaluate the judgments and estimatesunderlying all of our accounting policies, including those related to revenuerecognition, product returns, bad debts, inventories, impairment of long-livedassets, deferred tax valuation allowances, restructuring reserves andcontingencies, and litigation. We base our estimates on historical experienceand on various other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Materially different results in the amount and timing ofour actual results for any period could occur if we made different judgments orutilized different estimates. Actual results may differ from those estimates.

 

Our critical accountingpolicies are as follows:

 

***Revenue Recognition***

We follow very specificand detailed guidelines in measuring revenue; however, certain judgments affectthe application of our revenue policy. Revenue results are difficult topredict, and any shortfall in revenue or delay in recognizing revenue couldcause our operating results to vary significantly from quarter to quarter. Ingeneral, revenue is recognized when title has passed at the time of delivery ofproduct for all of our operating segments as stipulated by the delivery termsfor the sales transactions. In addition, prior to revenue recognition, werequire persuasive evidence of the arrangement, thatthe price is fixed or determinable, and that collectibility is reasonablyassured. Installation is not applicable for Small Systems and Other segment products based on the nature of the productssold. Generally, revenue associated with Large Systems sales is also recognizedat the time of delivery pursuant to the delivery terms. Delivery terms vary,but often include origin-based terms (e.g., FOB Shipping Point and Ex-works)and destination-based terms (e.g., DDU/DDP (delivered duty unpaid/deliveredduty paid)).

 

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Certain Large Systemsproduct lines and, at times, one product line included in the Small Systemssegment require electrical hardwire installation or duct installation which isperformed by the customer or their contracted licensed contractor/electrician.Since we do not perform the installation, revenue recognition at the time ofdelivery is proper as customer acceptance of the unit is not required. Also,payment by the customer is not contingent upon installation of the product.

 

We offer additional services to customers depending on the type ofproduct the customer has purchased, including on-site services, installationconsulting services, remote monitoring services, power audit services, andnetwork integration services. Revenue is recognized at the time services areprovided or is deferred and recognized over the service period (whereapplicable). The fair value of these services arebased upon the rates that we charge customers in separately negotiatedtransactions and such services are not essential to the functionality of thedelivered product.

 

For all sales, exceptthose completed over the Internet (excluding sales orders received via EDItransmission), we use a binding purchase order as evidence of an arrangement.For sales over the Internet, we use a credit card authorization as evidence ofan arrangement. Sales through certain customers are evidenced by a masteragreement governing the relationship together with binding purchase orders on atransaction by transaction basis.

 

Our arrangements do not generally include acceptance clauses. However,if an arrangement includes a customer specified acceptance provision,acceptance generally occurs at our factory prior to delivery. As we continue tointroduce new products in 2004, we anticipate that installation and customeracceptance provisions may become more common, and therefore increasinglysignificant for determining delivery and performance and consequently ourentitlement 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***

 

Significant managementjudgments that affect the application of our revenue policy also includeestimates of potential future product returns related to current period productrevenue. We analyze historical returns, current economic trends, and channelinventories 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 rights of return to distributors and retailers forour Small Systems product lines. We provide appropriate reserves for returns atthe time that related revenue is recognized, based on historical patterns ofreturns and contractual provisions in accordance with the provisions ofStatement of Financial Accounting Standards No. 48, *Revenue Recognition When Right of Return Exists*, and U.S.Securities and Exchange Commission Staff Accounting Bulletin No. 104. Returnsof Large Systems products generally do not occur. Historically, returns haverepresented 3% of gross sales and have not differed significantly from priorestimates.

 

Similarly, we must makeestimates of the uncollectability of our accounts receivables. Managementspecifically analyzes accounts receivable balances in view of customercredit-worthiness, customer concentrations, historical bad debts, currenteconomic trends, and changes in our customer payment terms when evaluating theadequacy of the allowance for doubtful accounts. A majority of internationalcustomer balances are covered by receivables insurance. Historically, bad debtshave been less than 1% of net sales.

 

Our inventory reserveestimate methodology involves quantifying the total inventory position havingpotential loss exposure. Loss exposure generally results from several businessfactors, including product or component discontinuance, unplanned changes indemand, product design changes, and factory transitions. Quantifying such lossexposure is the result of combining the cost of inventories specificallyidentified as having little or no opportunity for sale or use (thus availablefor physical disposition) plus the cost of inventories having a high risk of nofuture sale or use based upon an analysis of on-hand quantities compared tohistorical and anticipated future sale or use. We maintain an on-going businessprocess for the physical disposition of inventories previously identified.Inventory write-offs occur at the time of physical disposition. Inventories,once reserved, are not written back up as such reserve adjustments areconsidered to be a permanent decrease to the cost basis of the excess orobsolete inventory.

 

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If actual marketconditions are less favorable than those projected by management, additionalinventory write-downs may be required.

 

In early 2003, weannounced a product recall of Back-UPS CS 350 and 500 models, due to potentialsafety issues. Prior to announcing the recall, APC received eight reportsworldwide of units overheating, resulting in the melting of the unit’s outercasing, six of which occurred in the United States. Three of the reported incidentsresulted in minor property damage; no injuries were reported. The total numberof affected devices recalled worldwide is approximately 2.1 million withapproximately 900,000 devices recalled in the United States. The recall islimited to two specific models in APC’s Back-UPS CS product line, the Back-UPSCS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt models. Theaffected units were manufactured between November 2000 and December 2002 andwere sold primarily through computer and electrical distribution, catalog andretail outlets worldwide. In the fourth quarter of 2002, APC accrued a currentliability and recognized additional warranty expense, classified in cost ofgoods sold, of $19.6 million. Based upon repair cost and return rate experienceto-date as well as current estimates of remaining costs to be incurred, APCexpects the aggregate costs for the recall to be less than originallyestimated. To reflect this change, cost of goods sold was reduced by $5.5million in the third quarter of 2003. As of June 27, 2004, APC had incurredapproximately 81% of currently estimated total recall costs. Our estimation ofremaining recall costs of $2.6 million, comprised of $1.0 million for the U.S.and $1.6 million for international geographies, continues to be subject toactual return rates and per unit repair costs (which can vary by country) aswell as estimates for other recall-related costs expected to be incurred.Actual return rates may vary significantly among different geographies. The mostsignificant risks associated with our return rate assumptions include varyingdegrees of product recall regulation by geography as well as varying consumerawareness levels and access to timely recall information. Actual per unitrepair cost includes principally transportation costs which will be influencedby the proximity of customer locations to the service center location as wellas the priority level of delivery requirements. We expect that actual futureamounts will not differ materially 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 isuncertain and includes the risk of an unexpected, unfavorable result. We may bematerially adversely impacted by any such litigation.

 

***Valuation of Long-lived Tangible and Intangible Assetsincluding Goodwill***

We assess the impairmentof long-lived tangible and intangible assets including goodwill on an ongoingbasis and whenever events or changes in circumstances indicate that thecarrying value may not be recoverable. Should our assessment suggestimpairment, we would determine recoverability based on an estimate of futureundiscounted cash flows resulting from our use of the asset and its eventualdisposition. Factors we consider that could trigger an impairment reviewinclude the following:

 

•                  significant underperformance relative to expected historicalor projected future operating results;

•                  significant changes in the manner of our use of the acquiredassets or the strategy for our overall business;

•                  significant negative industry or economic trends; and

•                  significant technological changes, which would renderequipment and manufacturing process, obsolete.

 

We evaluate each of ourreporting units with goodwill during the fourth quarter of each fiscal year ormore frequently if impairment indicators arise.

 

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***Accounting for Income Taxes***

As part of the process ofpreparing our consolidated financial statements, we are required to estimateour income taxes in each of the jurisdictions in which we operate. This processinvolves estimating our actual current tax exposure together with assessingtemporary differences resulting from differing treatment of items, such asdeferred revenue, for tax and accounting purposes. These differences result indeferred tax assets and liabilities, which are included within our consolidatedbalance sheet. We must then assess the likelihood that our deferred tax assetswill be recovered from future taxable income. Expectations about future taxableincome incorporate numerous assumptions about actions, elections and strategiesto minimize income taxes in future years. Our ability to take such actions,make preferred 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.

 

APC is routinely underaudit by federal, foreign, state, or local authorities in the areas of incometaxes and the remittance of sales and use taxes. These audits includequestioning the timing and amount of deductions, the nexus of income amongvarious tax jurisdictions and compliance with federal, foreign, state, andlocal tax laws. In evaluating the exposure associated with various tax filingpositions, we often accrue for probable exposures. To the extent APC were toprevail in matters for which accruals have been established or were to berequired to pay amounts in excess of reserves, APC’s cash flows and effectivetax rate in a given financial statement period could be materially affected. Inlate 2003, the Internal Revenue Service began an examination of APC’s 2002 taxyear. Although the outcome of tax audits is always uncertain, managementbelieves that adequate amounts of tax have been reserved for any adjustmentsthat are expected to result from this examination.

 

To the extent we believe that recovery of deferred taxassets is not likely, we must establish a valuation allowance. To the extent weestablish a valuation allowance or increase this allowance in a period, we mustinclude an expense within the tax provision in the consolidated statements ofincome. Significant management judgment is required in determining our provisionfor income taxes, our deferred tax assets and liabilities and any valuationallowance recorded against our net deferred tax assets. At June 27, 2004 andDecember 31, 2003, we provided a valuation allowance on certain of our deferredtax assets, primarily consisting of net operating losses generated in 2001through 2004 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 ISSUED ACCOUNTING STANDARDS**

 

We have determined thatthere are no recently issued accounting standardsexpected to have a material impact on APC’s consolidated financial position orresults of operations.

 

## **FACTORS THAT MAYAFFECT FUTURE 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.

 

The factors that couldcause actual results to differ materially include the following: costs tocomply with the provisions of the Sarbanes-Oxley Act of 2002 are greater thancurrently anticipated; impact on order management and fulfillment, financialreporting and supply chain management processes as a result of APC’s relianceon a variety of computer systems, including Oracle 11i which is periodicallyupgraded; costs incurred by APC for the product recall of select Back-UPS CSmodels are greater than or less than currently anticipated; the impact ofincreasing competition which could adversely affect APC’s revenues andprofitability; the impact of foreign currency exchange rate fluctuations; theimpact on demand, component availability and pricing, and logistics, and thedisruption of Asian manufacturing operations that result from labor

 

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disputes, war, acts ofterrorism or political instability; ramp up, expansion and rationalization ofglobal manufacturing capacity; 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 inAPC’s filings with the Securities and Exchange Commission.

 

We caution readers not toplace undue reliance on any such forward-looking statements, which speak onlyas of the date they are made. We disclaim any obligation to publicly update orrevise any such statements to reflect any change in our expectations or inevents, conditions, or circumstances on which any such statements may be based,or that may affect the likelihood that actual results will differ from thoseset forth in the forward-looking statements.

 

For a discussion of theseand other risk factors, please refer to Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations included in ourAnnual Report on Form 10-K for the year ended December 31, 2003.

 

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

 

We, in the normal course of business, are exposed to market risksrelating to fluctuations in foreign currency exchange rates. The informationrequired under this section related to such risks is included in the *Foreign Currency Activity* section ofManagement’s Discussion and Analysis of Financial Condition and Results ofOperations in Item 2 of this report and is incorporated herein by reference.

 

We, in the normal course of business, are also exposed to market risksrelating to fluctuations in interest rates and the resulting rates of return oninvestments in marketable securities. The information required under thissection related to such risks is included in the *Other Income, Net* section of Management’s Discussion andAnalysis of Financial Condition and Results of Operations in Item 2 of thisreport and is incorporated herein by reference.

 

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

 

**(A)     Evaluation ofdisclosure controls and procedures**

 

Our chief executive officer and our chief financial officer, afterevaluating the effectiveness of APC’s “disclosure controls and procedures” (asdefined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) asof a date (the “Evaluation Date”) as of the end of the period covering thisquarterly report, have concluded that as of the Evaluation Date, our disclosurecontrols and procedures were adequate and designed to ensure that materialinformation relating to us and our consolidated subsidiaries would be madeknown to them by others within those entities.

 

**(B)     Changes ininternal controls over financial reporting**

 

There were no significant changes in our internal controls overfinancial reporting or, to our knowledge, in other factors that couldsignificantly affect our internal controls over financial reporting subsequentto the Evaluation Date.

 

There were no significantdeficiencies or material weaknesses identified in the evaluation and,therefore, no corrective actions were taken.

 

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

 

**PART II -OTHER INFORMATION**

 

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

 

On January 10, 2003,Powerware Corporation filed in the United States District Court for the EasternDistrict of North Carolina (the “Court”) a complaint alleging infringement ofthree United States patents. On May 7, 2003, Powerware Corporation filed withthe Court an amended complaint modifying its allegations of infringementregarding the Powerware Patents. APC was served with the amended complaint onMay 9, 2003. Powerware Corporation is seeking unspecified damages andinjunctive relief. On May 28, 2003, APC filed its answer to the amendedcomplaint and on June 17, 2003, APC filed its first amended answer andcounterclaims alleging infringement by Powerware Corporation of three UnitedStates patents owned by APC. On July 3, 2003, Powerware Corporation filed its answerto counterclaims. On March 18, 2004, Powerware Corporation amended itscomplaint to add an additional patent to the litigation.

 

As previouslyreported in APC’s Form 10-Q for the first quarter ended March 28, 2004, onFebruary 5, 2004, Liebert Corporation and Zonatherm Products, Inc., Liebert’ssales representative firm in the Chicago area, filed a lawsuit in the CircuitCourt of Cook County, Illinois, Chancery Division (the “Court”) against APC,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, tortuous interference with contract, tortuous 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, theCourt dismissed without prejudice all claims except the Illinois Trade SecretAct claim.

 

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

 

While management currentlybelieves 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’s view of these matters may change in the future. An unfavorableoutcome could include monetary damages or, in cases where injunctive relief issought, an injunction prohibiting certain activities. Were an unfavorable finaloutcome to occur, there exists the possibility of a material adverse impact onAPC’s financial position, cash flows and results of operations for the periodin which the effect becomes reasonably estimable.

 

**ITE****M 2.****     CHANGESIN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OFEQUITY SECURITIES.**

 

In June 2004, APC’s Board of Directors approved a stock repurchaseprogram which authorizes up to $150 million to repurchase outstanding shares ofAPC’s common stock. The purchases would be made on the open market based onmarket and business factors. No such repurchases were made as of June 27,2004.  The repurchase program may besuspended or discontinued at any time without prior notice. 

 

APC commenced the repurchase of its common stock in early August and,as of August 6, 2004, had repurchased approximately 2.3 million shares on theopen market at an average price of approximately $15 per share.

 

In March 2004, APC returned its 250,000 treasury shares to anauthorized but not issued status.

 

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**ITEM 4.****     SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

The Annual Meeting ofShareholders was held on June 10, 2004 at which APC’s shareholders approved thefollowing:

 

(i)                         by a vote of 180,720,866 shares in favor, 1,253,464 opposed,and 718,204 abstaining, the number of directors was fixed at eight.

 

(ii)                      the following persons (with vote results) were elected toserve another term as Directors of APC:

 

| ** **              | ** ** | **For**     | ** ** | **Withheld** | ** ** |
|-------------------------|------------|-------------|------------|--------------|------------|
| Rodger B.  Dowdell, Jr. |       | 145,576,667 |       | 37,115,867   |       |
| Emanuel E.  Landsman    |       | 141,108,354 |       | 41,584,180   |       |
| Neil E.  Rasmussen      |       | 145,791,548 |       | 36,900,986   |       |
| Ervin F. Lyon           |       | 135,851,433 |       | 46,841,101   |       |
| James D. Gerson         |       | 178,119,031 |       | 4,573,503    |       |
| John G.  Kassakian      |       | 179,456,779 |       | 3,235,755    |       |
| John F. Keane,  Sr.     |       | 174,950,972 |       | 7,741,562    |       |
| Ellen B.  Richstone     |       | 179,545,208 |       | 3,147,326    |       |

 

(iii)                   by a vote of 131,953,073 shares in favor, 23,257,955opposed, 1,076,895 abstaining, and 26,404,611 broker non-votes, APC’s 2004Long-Term Incentive Plan was approved.

 

(iv)                  by a vote of 181,567,248 shares in favor, 933,119 opposed,and 192,167 abstaining, the ratification of the appointment of APC’sindependent auditors, KPMG LLP, was approved.

 

**ITEM 6.****     EXHIBITSAND REPORTS ON FORM 8-K**

 

**(A)****     Exhibits**

 
| Exhibit No. 3.01 | Articles of  Organization of APC, as amended, previously filed as an exhibit to APC’s  Quarterly Report on Form 10-Q for the fiscal quarter ended June 27, 1999 and  incorporated herein by reference (File No. 1-12432)                |
|------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |                                                                                                                                                                                                                                         |
| Exhibit No. 3.02 | By-Laws of APC,  as amended and restated, previously filed as an exhibit to APC’s Annual  Report on Form 10-K for the fiscal year ended December 31, 1998 and  incorporated herein by reference (File No. 1-12432)                      |
|             |                                                                                                                                                                                                                                         |
| Exhibit No. 31.1 | Certification of Rodger B. Dowdell, Jr., Chief  Executive Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (filed herewith) |
|             |                                                                                                                                                                                                                                         |
| Exhibit No. 31.2 | Certification of  Donald M. Muir, Chief Financial Officer, pursuant to Rules 13a-14(a) and  15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)         |
|             |                                                                                                                                                                                                                                         |
| Exhibit No. 32.1 | Certification of Rodger B. Dowdell, Jr., Chief  Executive Officer, pursuant to Rules 13a-14(b) and 15d-14(b) of the  Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (filed herewith) |
|             |                                                                                                                                                                                                                                         |
| Exhibit No. 32.2 | Certification of  Donald M. Muir, Chief Financial Officer, pursuant to Rules 13a-14(b) and  15d-14(b) of the Securities Exchange Act of 1934, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)         |

 

**(B)  Reports on Form 8-K**– None

 

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SIGNATURES

 

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

**AMERICANPOWER CONVERSION CORPORATION**

 
| Date:  August 6, 2004                      |
|-------------------------------------------------|
|                                            |
|                                            |
|                                            | /s/ Donald M. Muir |   |
| Donald M. Muir                                  |
| *Chief  Financial Officer*                      |
| *(Principal  Accounting And Financial Officer)* |

 

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**AMERICAN POWER CONVERSIONCORPORATION AND SUBSIDIARIES**

**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 Annual  Report on Form 10-K for the fiscal year ended   December 31, 1998 and incorporated herein by reference (File No.  1-12432)                           |
|                 |       |                                                                                                                                                                                                                                                           |
| 31.1                 |       | Certification of  Rodger B. Dowdell, Jr., Chief Executive Officer, pursuant  to Rules 13a-14(a) and 15d-14(a) of the  Securities Exchange Act of 1934,  as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed  herewith)      |
|                 |       |                                                                                                                                                                                                                                                           |
| 31.2                 |       | Certification of Donald M. Muir, Chief Financial  Officer, pursuant  to Rules 13a-14(a)  and 15d-14(a) of the Securities Exchange Act of 1934,  as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002  (filed  herewith)        |
|                 |       |                                                                                                                                                                                                                                                           |
| 32.1                 |       | Certification of  Rodger B. Dowdell, Jr., Chief Executive Officer, pursuant to  Rules 13a-14(b) and 15d-14(b) of the  Securities Exchange Act of 1934,  as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (filed herewith) |
|                 |       |                                                                                                                                                                                                                                                           |
| 32.2                 |       | Certification of Donald M. Muir, Chief Financial  Officer, pursuant to  Rules 13a-14(b)  and 15d-14(b) of the Securities Exchange Act of 1934,  as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (filed herewith)               |

 

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