**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **ý** |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**  |   |
|------------|--------|-----------------------------------------------------------------------------------------------------|--------|
|       |   |                                                                                                |   |
|       |   | **For the quarterly period ended  June 30, 2004**                                              |   |
|       |   |                                                                                                |   |
|       |   | **OR**                                                                                              |   |
|       |   |                                                                                                |   |
| **o**      |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |   |

 

**Commissionfile number 001-16047**

 

**AdvancedPower Technology, Inc.**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                                                     |   | **93-0875072**                           |
|------------------------------------------------------------------|--------|------------------------------------------|
| (State or other Jurisdiction  of  Incorporation or Organization) |   | (I.R.S. Employer  Identification Number) |
|                                                             |   |                                     |
| **405 SW Columbia Street, Bend, Oregon   97702**            |
| (Address of principal  executive offices and Zip Code)           |
|                                                             |   |                                     |
| **(541) 382-8028**                                               |
| (Registrant’s telephone  number)                            |

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to thefiling requirements for the past 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

 

The number of shares of the Registrant’s Common Stock outstanding asAugust 1, 2004 was 10,680,316 shares.

 

 

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**ADVANCEDPOWER TECHNOLOGY, INC.**

**FORM10-Q**

**TABLEOF CONTENTS**

 
| **Part I**  | **Financial  Information** |                                                                                                  |
|-------------|----------------------------|-------------------------------------------------------------------------------------------------------|
|        |                       |                                                                                                  |
|        | Item 1.                    | Financial Statements:                                                                                 |   |
|        |                       |                                                                                                  |   |
|        |                       | Consolidated Balance Sheets as of June 30, 2004 and  December 31, 2003                      |   |
|        |                       |                                                                                                  |   |
|        |                       | Consolidated Statements of Operations for  the three and six months ended June 30, 2004 and 2003 |   |
|        |                       |                                                                                                  |   |
|        |                       | Consolidated Statements of Cash Flows for  the six months ended June 30, 2004 and 2003           |   |
|        |                       |                                                                                                  |   |
|        |                       | Notes to Consolidated Financial Statements                                                            |   |
|        |                       |                                                                                                  |   |
|        | Item 2.                    | Management’s Discussion and Analysis of  Financial Condition and Results of Operations           |   |
|        |                       |                                                                                                  |   |
|        | Item 3.                    | Quantitative and Qualitative Disclosure  About Market Risk                                            |   |
|        |                       |                                                                                                  |   |
|        | Item 4.                    | Controls and Procedures                                                                               |   |
|        |                       |                                                                                                  |
| **Part II** | **Other  Information**     |                                                                                                  |
|        |                       |                                                                                                  |   |
|        | Item 1.                    | Legal  Proceedings                                                                                    |   |
|        |                       |                                                                                                  |   |
|        | Item 4.                    | Submission of Matters to a Vote of Security  Holders                                                  |   |
|        |                       |                                                                                                  |   |
|        | Item 6.                    | Exhibits and Reports on Form 8-K                                                                      |   |
|        |                       |                                                                                                  |   |
|        |                       | Signature                                                                                             |   |
|        |                       |                                                                                                  |   |
|        |                       | Exhibits                                                                                              |   |

 

2

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**ITEM 1. FINANCIAL STATEMENTS**

 

**ADVANCEDPOWER TECHNOLOGY, INC.**

**CONSOLIDATED BALANCESHEETS**

**(Inthousands, except share amounts)**

 

 
|                                                                                                                                                                                          |   | **June 30,  2004** |   | **December 31,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
|                                                                                                                                                                                          |   | **(Unaudited)**         |   |                        |   |
| **Assets**                                                                                                                                                                                    |   |                    |   |                        |   |
| Current assets:                                                                                                                                                                               |   |                    |   |                        |   |
| Cash and cash equivalents                                                                                                                                                                     |   | $                       | 10,168 |                        | $      | 11,564 |   |
| Short-term investments in  available-for-sale securities                                                                                                                                      |   | 3,800                   |   | 4,000                       |   |
| Accounts receivable, net of allowance of  $279 (2004) and $213 (2003)                                                                                                                         |   | 10,895                  |   | 7,564                       |   |
| Inventories, net                                                                                                                                                                              |   | 12,944                  |   | 12,382                      |   |
| Prepaid expenses and other current assets                                                                                                                                                     |   | 2,414                   |   | 2,436                       |   |
| Total current assets                                                                                                                                                                          |   | 40,221                  |   | 37,946                      |   |
| Property and equipment, net of accumulated  amortization and depreciation of $16,098 (2004) and $14,417 (2003)                                                                                |   | 11,174                  |   | 11,002                      |   |
| Long-term investments in available-for-sale  securities                                                                                                                                       |   | 2,005                   |   | 1,000                       |   |
| Other assets                                                                                                                                                                                  |   | 53                      |   | 174                         |   |
| Technology assets, net of accumulated  amortization of $2,491 (2004) and $1,953 (2003)                                                                                                        |   | 8,272                   |   | 8,811                       |   |
| Goodwill                                                                                                                                                                                      |   | 15,570                  |   | 15,570                      |   |
| Total assets                                                                                                                                                                                  |   | $                       | 77,295 |                        | $      | 74,503 |   |
|                                                                                                                                                                                          |   |                    |   |                        |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                 |   |                    |   |                        |   |
| Current liabilities:                                                                                                                                                                          |   |                    |   |                        |   |
| Accounts payable                                                                                                                                                                              |   | $                       | 4,771  |                        | $      | 3,471 |   |
| Accrued expenses                                                                                                                                                                              |   | 2,423                   |   | 2,695                       |   |
| Total current liabilities                                                                                                                                                                     |   | 7,194                   |   | 6,166                       |   |
| Other long term liabilities                                                                                                                                                                   |   | 117                     |   | 127                         |   |
| Total liabilities                                                                                                                                                                             |   | 7,311                   |   | 6,293                       |   |
|                                                                                                                                                                                          |   |                    |   |                        |   |
| Stockholders’ equity:                                                                                                                                                                    |   |                    |   |                        |   |
| Preferred stock, par value $.001, 1,000,000  shares authorized; no shares issued and outstanding                                                                                              |   | —                  |   | —                      |   |
| Common stock, par value $.01, 19,000,000  shares authorized; 10,794,666 issued and 10,677,816 shares outstanding in  2004; 10,579,930 shares issued and 10,463,080 shares outstanding in 2003 |   | 108                     |   | 106                         |   |
| Additional paid-in capital                                                                                                                                                                    |   | 89,116                  |   | 88,625                      |   |
| Treasury stock, at cost, 116,850 shares                                                                                                                                                       |   | (1,761                  | )      | (1,761                      | )      |
| Deferred stock compensation                                                                                                                                                                   |   | —                  |   | (21                         | )      |
| Accumulated other comprehensive income                                                                                                                                                        |   | 417                     |   | 309                         |   |
| Accumulated deficit                                                                                                                                                                           |   | (17,896                 | )      | (19,048                     | )      |
| Total stockholders’ equity                                                                                                                                                               |   | 69,984                  |   | 68,210                      |   |
| Total liabilities and stockholders’ equity                                                                                                                                               |   | $                       | 77,295 |                        | $      | 74,503 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

3

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**ADVANCED POWER TECHNOLOGY, INC.CONSOLIDATED STATEMENTS OFOPERATIONS(In thousands, except per share amounts)**

**(Unaudited)**

 
|                                                                                       |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|--------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                                                                       |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
|                                                                                       |   |                                   |   |                                 |   |   |   |   |   |
| Revenues, net                                                                              |   | $                                      | 18,061 |                                 | $      | 12,487 |   | $ | 33,154 |   | $ | 23,646 |   |
| Cost of goods sold                                                                         |   | 10,915                                 |   | 7,777                                |   | 20,282 |   | 15,529 |   |
| Amortization of technology rights and other  charges                                       |   | 274                                    |   | 280                                  |   | 548 |   | 564 |   |
| Total cost of goods sold                                                                   |   | 11,189                                 |   | 8,057                                |   | 20,830 |   | 16,093 |   |
| Gross profit                                                                               |   | 6,872                                  |   | 4,430                                |   | 12,324 |   | 7,553 |   |
| Operating expenses:                                                                        |   |                                   |   |                                 |   |   |   |   |   |
| Research and development                                                                   |   | 783                                    |   | 668                                  |   | 1,670 |   | 1,501 |   |
| Selling, general and administrative                                                        |   | 5,130                                  |   | 3,703                                |   | 9,240 |   | 7,394 |   |
| Restructuring charges                                                                      |   | 115                                    |   | —                               |   | 321 |   | 240 |   |
| Total operating expenses                                                                   |   | 6,028                                  |   | 4,371                                |   | 11,231 |   | 9,135 |   |
| Income (loss) from operations                                                              |   | 844                                    |   | 59                                   |   | 1,093 |   | (1,582 | ) |
| Interest income, net                                                                       |   | 41                                     |   | 52                                   |   | 81 |   | 108 |   |
| Other income (expense), net                                                                |   | 12                                     |   | (145                                 | )      | 6 |   | (134 | ) |
| Income (loss) before income tax benefit                                                    |   | 897                                    |   | (34                                  | )      | 1,180 |   | (1,608 | ) |
| Income tax expense (benefit)                                                               |   | 28                                     |   | 85                                   |   | 28 |   | (480 | ) |
| Net income (loss)                                                                          |   | $                                      | 869    |                                 | $      | (119 | ) | $ | 1,152 |   | $ | (1,128 | ) |
|                                                                                       |   |                                   |   |                                 |   |   |   |   |   |
| Net income (loss) per share:                                                               |   |                                   |   |                                 |   |   |   |   |   |
| Basic                                                                                      |   | $                                      | 0.08   |                                 | $      | (0.01 | ) | $ | 0.11 |   | $ | (0.11 | ) |
| Diluted                                                                                    |   | 0.08                                   |   | (0.01                                | )      | 0.10 |   | (0.11 | ) |
| Weighted average number of shares used in  the computation of net income (loss) per share: |   |                                   |   |                                 |   |   |   |   |   |
| Basic                                                                                      |   | 10,605                                 |   | 10,404                               |   | 10,556 |   | 10,402 |   |
| Diluted                                                                                    |   | 11,261                                 |   | 10,404                               |   | 11,212 |   | 10,402 |   |

 

See accompanying notes to consolidated financialstatements.

 

4

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**ADVANCED POWER TECHNOLOGY, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

**(Unaudited)**

 
|                                                                                      |         | **Six Months  Ended  June 30,** |   |
|-------------------------------------------------------------------------------------------|--------------|--------------------------------------|--------|
|                                                                                      |         | **2004**                             |   | **2003** |   |
| Cash flows from operating activities:                                                     |         |                                 |   |   |   |
| Net income (loss)                                                                         |         | $                                    | 1,152  |   | $ | (1,128 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |         |                                 |   |   |   |
| Depreciation                                                                              |         | 1,685                                |   | 1,556 |   |
| Amortization of intangible assets                                                         |         | 537                                  |   | 538 |   |
| Inventory adjustments                                                                     |         | 169                                  |   | (35 | ) |
| Amortization of deferred stock compensation                                               |         | 21                                   |   | 87 |   |
| Amortization of investment premium                                                        |         | 1                                    |   | 14 |   |
| Deferred gain on sale-leaseback                                                           |         | (8                                   | )      | (8 | ) |
| Loss on disposal of equipment                                                             |         | 2                                    |   | — |   |
| Changes in operating assets and  liabilities:                                             |         |                                 |   |   |   |
| Accounts receivable                                                                       |         | (3,344                               | )      | (414 | ) |
| Inventories                                                                               |         | (749                                 | )      | (632 | ) |
| Prepaid expenses and other assets                                                         |         | 141                                  |   | (86 | ) |
| Accounts payable and accrued expenses                                                     |         | 1,175                                |   | 645 |   |
| Net cash provided by operating activities                                                 |         | 782                                  |   | 537 |   |
| Cash flows from investing activities:                                                     |         |                                 |   |   |   |
| Purchases of available-for-sale securities                                                |         | (1,010                               | )      | (1,000 | ) |
| Proceeds from sale of available-for-sale  securities                                      |         | 200                                  |   | 5,683 |   |
| Purchase of property and equipment                                                        |         | (1,861                               | )      | (1,024 | ) |
| Net cash (used) provided by investing  activities                                         |         | (2,671                               | )      | 3,659 |   |
| Cash flows from financing activities:                                                     |         |                                 |   |   |   |
| Payments on capital lease obligations                                                     |         | (3                                   | )      | (41 | ) |
| Proceeds from exercise of stock options                                                   |         | 493                                  |   | 17 |   |
| Net cash (used) provided by financing  activities                                         |         | 490                                  |   | (24 | ) |
| Effects of exchange rate changes on cash                                                  |         | 3                                    |   | 4 |   |
| Net change in cash and cash equivalents                                                   |         | (1,396                               | )      | 4,176 |   |
| Cash and cash equivalents at beginning of  period                                         |         | 11,564                               |   | 6,708 |   |
| Cash and cash equivalents at end of period                                                |         | $                                    | 10,168 |   | $ | 10,884 |   |
|                                                                                      |         |                                 |   |   |   |
| Supplemental disclosure of cash flow  information:                                        |         |                                 |   |   |   |
| Cash received (paid) during the period for:                                               | Interest     |                                 | $      | (19 | ) | $ | (25 | ) |
|                                                                                      | Income taxes |                                 | (48    | ) | 218 |   |
|                                                                                      |         |                                 |   |   |   |
| Supplemental disclosure of noncash  activities:                                           |         |                                 |   |   |   |
| Unrealized loss on short-term and long-term  investments                                  |         | $                                    | (2     | ) | $ | (2 | ) |

 

See accompanying notes to consolidatedfinancial statements.

 

5

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**ADVANCED POWER TECHNOLOGY, INC.NOTES TO CONSOLIDATED FINANCIALSTATEMENTS(In thousands, except share amounts)(Unaudited)**

 

**Note 1. Basis ofPresentation**

 

The accompanying unaudited consolidated financial statements includenormal recurring adjustments necessary for a fair presentation of AdvancedPower Technology, Inc.’s (APT) interim results.  The consolidated financial statements and notes in this Form 10-Qare presented as permitted by Regulation S-X, and as such, they do not containcertain information included in APT’s 2003 annual consolidated financialstatements and notes.  This Form 10-Qshould be read in conjunction with APT’s consolidated financial statements andnotes included in its Annual Report on Form 10-K for the year endedDecember 31, 2003.  The financialinformation as of December 31, 2003 is derived from the auditedconsolidated financial statements as filed with APT’s Annual Report on Form10-K for the year ended December 31, 2003.  The results of operations for the three and six months endedJune 30, 2004 are not necessarily indicative of the results expected forthe entire fiscal year ending December 31, 2004.

 

APT’s financial quarters are 13 week periods. The second quarter of2004 ended on July 4, 2004 and the second quarter of 2003 ended onJune 29.  For convenience, thesecond quarter of 2004 and 2003 are both shown as ended on June 30.

 

**Note 2. Summary ofSignificant Accounting Policies**

 

***(a)******                                 SalesReturns and Allowances***

 

The balances and changes in reserve for sales allowances, warrantiesand returns for the three and six months ended June 30, 2004 and 2003 areas follows:

 
|                               |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                               |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
|                               |   |                                   |   |                                 |   |   |   |   |   |
| Balance – beginning of period |   | $                                      | 313    |                                 | $      | 289 |   | $ | 431 |   | $ | 351 |   |
| Provisions                         |   | 400                                    |   | 337                                  |   | 719 |   | 581 |   |
| Charge offs                        |   | (190                                   | )      | (251                                 | )      | (627 | ) | (557 | ) |
| Balance – end of period       |   | $                                      | 523    |                                 | $      | 375 |   | $ | 523 |   | $ | 375 |   |

 

***(b)******                                 Stock-BasedCompensation***

 

APT has elected to continue to apply the prescribed accounting inOpinion 25 and provide the required disclosures per SFAS 123 and SFAS 148. APTaccounts for equity instruments issued to non-employees in accordance with theprovisions of SFAS 123 and Emerging Issues Task Force consensus on IssueNo. 96-18, “Accounting for Equity Instruments that are Issued to Other thanEmployees, for Acquiring or in Conjunction with Selling Goods or Services.”

 

Had APT determined compensation cost based on the fair value at thegrant date for its stock options under SFAS 123, APT’s net income (loss)would have been the pro forma amounts indicated in the table below:

 

6

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|                                                                                      |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                                                                      |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
|                                                                                      |   |                                   |   |                                 |   |   |   |   |   |
| Net income (loss), as reported                                                            |   | $                                      | 869    |                                 | $      | (119 | ) | $ | 1,152 |   | $ | (1,128 | ) |
| Add: Stock based compensation included in  reported net income (loss)                     |   | 11                                     |   | 40                                   |   | 21 |   | 88 |   |
| Deduct: Stock based compensation determined  under fair value based method for all awards |   | (247                                   | )      | (440                                 | )      | (460 | ) | (879 | ) |
| Pro forma net income (loss)                                                               |   | $                                      | 633    |                                 | $      | (519 | ) | $ | 713 |   | $ | (1,919 | ) |
|                                                                                      |   |                                   |   |                                 |   |   |   |   |   |
| Income (loss) per share:                                                                  |   |                                   |   |                                 |   |   |   |   |   |
| Basic – as  reported                                                                 |   | $                                      | 0.08   |                                 | $      | (0.01 | ) | $ | 0.11 |   | $ | (0.11 | ) |
| Basic – pro  forma                                                                   |   | 0.06                                   |   | (0.05                                | )      | 0.07 |   | (0.18 | ) |
|                                                                                      |   |                                   |   |                                 |   |   |   |   |   |
| Diluted – as  reported                                                               |   | $                                      | 0.08   |                                 | $      | (0.01 | ) | $ | 0.10 |   | $ | (0.11 | ) |
| Diluted  – pro forma                                                            |   | 0.06                                   |   | (0.05                                | )      | 0.06 |   | (0.18 | ) |

 

The effects of applying SFAS 123 in this pro forma disclosure are notindicative of future amounts and additional awards are anticipated in futureyears.

 

The fair value of the compensation costs reflected in the above proforma amounts was determined using the Black-Scholes option pricing model andthe weighted average assumptions as follows:

 
|                    |   | **2004** |   | **2003** |   |
|-------------------------|--------|----------|--------|----------|--------|
|                    |   |     |   |     |   |
| Risk-free interest rate |   | 3.0-3.7  | %      | 2.6-2.9  | %      |
| Expected dividend yield |   | 0        | %      | 0        | %      |
| Expected life           |   | 5 years  |   | 5 years  |   |
| Volatility              |   | 100      | %      | 100      | %      |

 

***(c)******                                  NetIncome (Loss) Per Share***

 

Basic net income (loss) per share is computed using the weightedaverage number of shares of common stock outstanding for the period. Dilutednet income per share is computed using the weighted average number of shares ofcommon stock and dilutive potential common shares related to stock options andwarrants outstanding during the period. Anti-dilutive potential common shares are excluded from the diluted netincome share calculation.  Dilutive netloss per share excludes all potential common shares from the calculation as theimpact would be anti-dilutive. Incremental dilutive shares included in the calculation of diluted netincome per share and incremental anti-dilutive shares that were excluded fromthe calculation of diluted net income per share for the three and six months endedJune 30, 2004 and 2003 are summarized in the following table:

 
|                                                                              |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-----------------------------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                                                              |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
|                                                                              |   |                                   |   |                                 |   |   |   |   |   |
| Incremental dilutive shares included in  diluted net income per share calculation |   | 656,000                                |   | —                               |   | 656,000 |   | — |   |
| Anti-dilutive shares excluded from diluted  net loss per share calculation        |   | 257,000                                |   | 1,233,000                            |   | 543,000 |   | 1,205,000 |   |

 

7

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***(d)******                                 Goodwilland Intangibles***

 

APT values goodwill and intangible assets in accordance with SFAS 142,“Goodwill and Other Intangible Assets.” The costs of internally developedintangible assets are expensed as incurred. The costs of acquired intangible assets are recorded at fair value atacquisition. Intangible assets with finite lives are amortized using thestraight-line method over their estimated useful lives, estimated at ten years,and evaluated for impairment in accordance with SFAS 144. Amortization oftechnology rights was approximately $269 in the second quarters of 2004 and2003, and $538 in the first six months of 2004 and 2003. Amortization oftechnology rights will be $1,076 for the years ending December 31, 2004,2005, 2006, 2007 and 2008.

 

***(e)******                                  IncomeTaxes***

 

Income taxes are accounted for under the asset and liability method.Under the asset and liability method, deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date. Avaluation allowance is established when necessary to reduce deferred tax assetsto the amount expected to be realized. During the fourth quarter of 2003, theCompany determined that a full valuation allowance should be recorded againstits net deferred tax assets. While theCompany has sufficient net operating loss carry-forwards (NOL’s) to offsetfederal taxable income for regular tax purposes, the Company’s use of its NOL’sfor alternative minimum tax (AMT) purposes are limited to 90% of its AMT income(AMTI). Therefore, the Company expects to pay AMT of approximately 20% on theremaining AMTI, resulting in an approximate effective tax rate of 2% for thefirst six months of 2004.

 

**Note 3. RestructuringCharges**

 

Restructuring costs are accounted for in accordance with SFAS 146,“Accounting for Costs Associated with Exit or Disposal Activities.” A liabilityfor a cost associated with an exit or disposal activity is recognized andmeasured at fair value in the period the liability is incurred, except forliabilities related to ongoing service requirements which are recognized overthe service period.

 

As part of management’s strategic plans, the Company announced inNovember of 2003 restructuring actions intended to improve manufacturingefficiencies and lower administrative costs. The actions include consolidationof certain administrative functions, rationalization of internal and externalassembly and test manufacturing, and the reduction of rent expense through thepurchase and resale of one of the two buildings currently occupied by theCompany’s Santa Clara, California subsidiary. These announced actions were inaddition to previously disclosed plans to consolidate our wafer fabricationplant in Montgomeryville, Pennsylvania to Bend, Oregon. Total restructuringrelated charges recognized in 2003 were $645, of which $240 was recognized inthe first quarter of 2003 and $405 was recognized in the fourth quarter of2003.

 

The total severance related charges recognized in 2003 was $295, whichwas recognized as $240 and $55 in the first and fourth quarters of 2003,respectively. The severance charges relate to already separated personnel andpersonnel costs associated with benefits expected to be paid upon completion ofcertain eligible transfer activities. The building purchase is reported as anasset held for sale and is being marketed for sale as APT no longer requiresthe space. In accordance with SFAS 144, an asset held for sale is carried atestimated fair value. As such, APT recorded an impairment charge for thebuilding in the fourth quarter of 2003 of approximately $350. Fair value wasestimated based on comparable sales data of similar commercial space in thearea. The net carrying value of the building as of June 30, 2004 wasapproximately $1 million and is included as a component of other currentassets.

 

During the first six months of 2004, an additional $321 was recognizedfor restructuring related charges, of which $206 was recognized in the firstquarter of 2004 and $115 in the second quarter of 2004. The total severancerelated charges recognized in 2004 was $104, which was recognized as $66 and$38 in the first and second quarters

 

8

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of 2004, respectively. The severance charges relate to alreadyseparated personnel and personnel costs associated with benefits expected to bepaid upon completion of certain eligible transfer activities. Additionalrestructuring costs of $217 associated with costs to exit certain productionactivities were also recognized in the first six months of 2004, of which $140and $77 were recognized in the first and second quarters of 2004, respectively.These charges relate to the write down and closing costs for certain productionrelated equipment.

 

The changes in the reserve for restructuring balance for the three andsix months ended June 30, 2004 and 2003 are shown in the table below.Certain of the restructuring charges were expensed as incurred and thereforeare not included in the provision.

 
|                               |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                               |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
|                               |   |                                   |   |                                 |   |   |   |   |   |
| Balance – beginning of period |   | $                                      | 155    |                                 | $      | 123 |   | $ | 178 |   | $ | — |   |
| Provisions                         |   | 15                                     |   | —                               |   | 143 |   | 240 |   |
| Charge offs                        |   | (47                                    | )      | —                               |   | (198 | ) | (117 | ) |
| Balance – end of period       |   | $                                      | 123    |                                 | $      | 123 |   | $ | 123 |   | $ | 123 |   |

 

**Note 4. ComprehensiveIncome (loss)**

 

Comprehensive income (loss) is the total of net income (loss) and allother non-owner changes in equity. Comprehensive income (loss) includes foreigncurrency translations and unrealized gains and losses from investments, aspresented in the following table.

 
|                                              |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|---------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                              |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
|                                              |   |                                   |   |                                 |   |   |   |   |   |
| Net income (loss)                                 |   | $                                      | 869    |                                 | $      | (119 | ) | $ | 1,152 |   | $ | (1,128 | ) |
| Other comprehensive income (loss):                |   |                                   |   |                                 |   |   |   |   |   |
| Unrealized loss on available for sale  securities |   | (2                                     | )      | —                               |   | (2 | ) | (2 | ) |
| Foreign currency translation adjustment           |   | 19                                     |   | 49                                   |   | 110 |   | 74 |   |
| Comprehensive income (loss)                       |   | $                                      | 886    |                                 | $      | (70 | ) | $ | 1,260 |   | $ | (1,056 | ) |

 

**Note 5. Inventories,net**

 
|              |   | **June 30,  2004** |   | **December 31,  2003** |   |
|-------------------|--------|-------------------------|--------|-----------------------------|--------|
|              |   |                    |   |                        |   |
| Raw materials     |   | $                       | 3,125  |                        | $      | 3,005 |   |
| Work in process   |   | 7,442                   |   | 6,796                       |   |
| Finished goods    |   | 4,545                   |   | 4,617                       |   |
|              |   | 15,112                  |   | 14,418                      |   |
| Valuation reserve |   | (2,168                  | )      | (2,036                      | )      |
| Inventories, net  |   | $                       | 12,944 |                        | $      | 12,382 |   |

 

**Note 6. SegmentInformation**

 

APT operates in one segment and is engaged in themanufacture and marketing of high-performance power semiconductors and modulesfor switching and RF applications. Overall, our revenues by geographic area forthe

 

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second quarter of 2004 were 59.2% in North America,16.0% in Europe and 24.8% in Asia, compared to 66.3% in North America, 18.1% inEurope, and 15.6% in Asia during the second quarter of 2003. Our revenues forby geographic area for the first six months of 2004 were 62.0% in NorthAmerica, 15.3% in Europe, and 22.6% in Asia, compared to 65.6% in NorthAmerica, 21.0% in Europe, and 13.3% in Asia in the first six months of 2003. Weallocated revenue geographically based on the location to which we ship ourproducts.

 

**Note 7. Commitmentsand Contingencies**

 

From time to time the Company is involved in variouslegal matters that arise out of the ordinary conduct of its business, includingthose related to litigation over intellectual property rights, commercialtransactions, contracts and environmental matters.  The Company is currently involved in various legalproceedings.  The Company does notbelieve that the ultimate resolution of such litigation will have a materialadverse effect on the Company’s financial position, results of operations orcash flows. The Company accrues loss contingencies in connection with itslitigation when it is probable that a loss has occurred and the amount of theloss can be reasonably estimated.

 

**ITEM2.****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

Thisdiscussion and analysis is intended to be read in conjunction with Management’sDiscussion and Analysis of Financial Condition and Results of Operations setforth in our Annual Report on Form 10-K for the year ended December 31,2003.

 

**Forward-looking Statements and Risk Factors AffectingBusiness and Results of Operations**

 

Allstatements and trend analyses contained in this item and elsewhere in thisreport on Form 10-Q relative to the future constitute “forward-looking”statements within the meaning of the Private Securities Litigation Reform Actof 1995. Forward-statements are subject to the business and economic risksfaced by us and our actual results of operations may differ materially fromthose contained in the forward-looking statements. In addition, results ofoperations for the periods discussed below should not be considered indicativeof the results to be expected in any future period and fluctuations inoperating results might result in fluctuations in the market price of ourcommon stock. Our quarterly and annual operating results may vary significantlydepending on many factors, including but not limited to the ability ofsubcontractors and key vendors to meet their delivery commitments; unfavorablechanges in industry and competitive conditions; our mix of product shipments;the accuracy of our customers’ forecasts; the effectiveness of our efforts tocontrol and reduce costs; and other risks detailed in “Management’s Discussionand Analysis of Financial Condition and Results of Operations - Risk FactorsAffecting Business and Results of Operations” in our Annual Report on Form 10-Kfor the year ended December 31, 2003, filed with the Securities andExchange Commission.

 

**Business Overview**

 

We are a leading designer, manufacturer and marketer ofhigh-performance RF and switching power semiconductors. Power semiconductorsmanage and regulate electrical power by converting electricity into a formrequired by electrical and electronic products. Our power semiconductorsincrease system efficiency and reliability, permit the design of more compactend products and improve system features and functionality. We primarily focuson high-power, high-speed devices that dissipate at least several hundred wattsof power and require operating frequencies greater than 20 kHz, or 20,000cycles per second. In particular, we continue to strengthen our portfolio of RFproducts that operate at frequencies ranging from 1 MHz to 6 GHz.

 

We sell our products in North America, Europe, and Asia primarilypursuant to customer purchase orders. We sell through a network of independentsales representatives and distributors. We recognize revenue upon shipment ofour products.

 

In 2002, we acquired GHz Technology and the product lines and certainassets of Microsemi RF Products, a wholly owned subsidiary of MicrosemiCorporation, to help us further penetrate the markets for RF powersemiconductors. We believe that these acquisitions have positioned us as aleading supplier of RF power transistors for avionics and radar. They alsoadded valuable technology and substantial engineering, manufacturing and

 

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marketing capabilities. These acquisitions are part of our ongoingstrategy to expand our product and technology portfolio in the RF power arenathrough both internal development and acquisitions. On average, our RF powerproducts provide higher gross margins than switching products, but also requirea higher level of engineering support.

 

We have operations in Bend, Oregon, Santa Clara, California,Montgomeryville, Pennsylvania, and Bordeaux, France. Each site has production,research and development and administrative activities. We also make use ofsubcontract manufacturers for the fabrication of our wafers and for assemblyand test operations.

 

**Our Markets**

 

We operate on a worldwide basis. As such, our operations are affectedby global, regional and industry-specific economic and political factors. Inthe first six months of 2004, 62.0% of our revenues were from customers in theUnited States, 15.4% from customers in Europe, and 22.6% from customers in Asiaand the rest of the world, compared to 65.6%, 21.0%, and 13.4% for the firstsix months of 2003. We allocate revenue geographically based on the location towhich we ship our products. The markets for our products are diversified, andinclude military and aerospace, semiconductor capital equipment, medical andindustrial, and communications and data processing.

 

We believe demand is being driven by the emergence of new applicationsfor higher power, higher frequency semiconductors that more precisely managepower, and also by the need to increase performance and improve power qualityfor existing applications. In particular, demand in our target markets is beingdriven by the cyclical upturn in the semiconductor capital equipment market anda recovery in the communications and data processing market, as well as growthin demand for complex medical equipment and military and commercial radarequipment. We believe demand is also being driven by the need for moreefficient energy use resulting from rising energy costs, government mandatesand environmental concerns.

 

**Critical Accounting Policies and Estimates**

 

The discussion and analysis of our financial condition and results ofoperations are based upon our consolidated financial statements, which havebeen prepared in accordance with United States GAAP. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosures of contingent assets and liabilities. On an on-going basis, weevaluate our estimates, including those related to product returns and warrantyobligations, allowance for doubtful accounts, excess and obsolete inventories,income taxes, valuation of goodwill and intangible assets with indefinitelives, valuation of long-lived assets, and contingencies and litigation. Webase our estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities and the timing of revenue recognition that are not readilyapparent from other sources. Actual results may differ from these estimatesunder different assumptions or conditions.

 

We believe the following critical accounting policies involve moresignificant judgments and estimates used in the preparation of our consolidatedfinancial statements.

 

***Revenue Recognition,Sales Allowances, Returns and Warranty Obligations***

 

Product revenue is recognized upon shipment of product. In general, weprovide for a one-year repair or replacement warranty on our products. Uponshipment, we provide an allowance for the estimated cost that may be incurredfor product warranty and sales returns based on historical experience andcontractual requirements. We use independent distributors to sell some of ourproducts. Distributors can return a contractually agreed upon percentage of thedollar value of products purchased during the prior six months. In addition, wemay on a case-by-case basis grant to distributors certain price protections onpurchased products.

 

While we engage in extensive product quality programs and processes,including actively monitoring and evaluating the quality of our componentsuppliers, our warranty obligation is affected by product non-conformance

 

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rates, material usage and service delivery costs incurred in correctinga product non-conformance. Should actual product non-conformance rates,material usage, service delivery costs, or distributor returns differ from ourestimates, revisions to the estimated warranty liability would be required.

 

***Allowance forDoubtful Accounts***

 

We maintain an allowance for doubtful accounts for estimated lossesresulting from the inability of our customers to make required payments. Weregularly review the adequacy of the allowance after considering the size ofthe accounts receivable balance, historical bad debts, the customer’s expectedability to pay and our collection history with each customer. We reviewsignificant individual accounts that are past due to determine whether anallowance should be made based on these factors. If the financial condition ofour customers were to deteriorate, resulting in an impairment of their abilityto make payments, additional allowances may be required.

 

***Excess and ObsoleteInventories***

 

Inventories are stated at the lower of standard cost (approximatesactual cost on a first-in, first-out basis) or market (net realizable value).We adjust inventory costs for estimated unmarketable (excess) or obsoleteinventory to estimated net realizable value based upon assumptions about futuredemand and market conditions. We establish reserves for excess component ordercancellation costs based on estimated net realizable value of the componentspurchased and any additional cancellation charges. We evaluate historical usageof the product, current customer demand, purchase commitments and forecastedusage of the product. If actual market conditions are less favorable than thoseprojected by management, additional adjustments or reserves may be required.

 

***Income Taxes***

 

We record a valuation allowance to reduce our deferred tax assets tothe amount that is more likely than not to be realized. We consider futuretaxable income and ongoing prudent and feasible tax planning strategies inassessing the need for the valuation allowance. In the event we were todetermine that we would be able to realize our deferred tax assets in thefuture in excess of our net recorded amount, an adjustment to decrease thevaluation allowance would increase income in the period such determination wasmade. Should we determine that we would not be able to realize all or part ofour net deferred tax asset in the future, an adjustment to increase thevaluation allowance would be charged to income in the period such determinationwas made. As of June 30, 2004, we had a full valuation allowance recordedagainst our net deferred tax assets.

 

***Valuation ofGoodwill and Intangible Assets with Indefinite Lives***

 

We value goodwill and intangible assets withindefinite lives in accordance with Statement of Financial Accounting StandardsNo. (SFAS) 142 ‘‘Goodwill and Other Intangible Assets.’’ Currently we carry agoodwill balance in connection with previous acquisitions, but have no otherintangible assets with indefinite lives. We annually review goodwill forimpairment and when events or circumstances indicate the carrying value of theasset might exceed its current fair value. We determine fair value usingdiscounted cash flow analysis and other acceptable valuation methodologies suchas market multiples and comparable transactions. This requires us to makeassumptions and estimates regarding industry economic factors and futureprofitability. It is our policy to conduct impairment testing based on our mostcurrent business plans, which reflect changes we anticipate in the economy andindustry. If actual results are not consistent with our assumptions andjudgments, we could be exposed to a material impairment charge as a result ofwriting down the carrying value of goodwill.

 

***Valuation ofLong-Lived Assets***

 

We value long-lived assets, including intangible assets with finitelives, in accordance with SFAS 144 ‘‘Accounting for the Impairment or Disposalof Long-Lived Assets.’’ We evaluate our long-lived assets for impairmentwhenever events or changes in circumstances indicate that the carrying amountmay not be recoverable. We determine the potential impairment usingundiscounted cash flow analysis, which requires us to make certain assumptionsand estimates regarding industry economic factors and future profitability. Itis our policy to conduct impairment testing based on our most current businessplans, which reflect changes we anticipate in the economy and

 

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industry. If actual results arenot consistent with our assumptions and judgments, we could be exposed to amaterial impairment charge as a result of writing down the carrying value oflong-lived assets. If the operation is determined to be unable to recover thecarrying amount of its assets, then intangible assets are written down first,followed by the other long-lived assets of the operation, to fair value. Fairvalue is determined based on discounted cash flows or appraised values,depending on the nature of the assets. Long-lived assets considered held forsale are valued at the lower of historical cost or fair value less costs tosell. Such assets are not depreciated while so classified.

 

***Contingencies andLitigation***

 

We are subject to the possibility of various loss contingencies arisingin the ordinary course of business. We consider the likelihood of loss orimpairment of an asset or the incurrence of a liability, as well as our abilityto reasonably estimate the amount of loss in determining loss contingencies. Anestimated loss contingency is accrued when it is probable that an asset hasbeen impaired or a liability has been incurred and the amount of loss can bereasonably estimated. We regularly evaluate current information available to usto determine whether such accruals should be adjusted.

 

***Non-GAAP Measures***

 

In this discussion, we include certain non-GAAP measures such as grossprofit excluding amortization of acquired technology assets, net loss excludingacquisition related charges, revenue growth excluding acquisitions, andselling, general and administrative expense excluding certain legal expenses.We believe this disclosure is useful as a way to explain the impact of certainaccounting charges included in our operating results and to provide period toperiod comparability. We recommend that investors carefully review the GAAPfinancial measures from which these non-GAAP measures have been derived.

 

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**Results of Operations**

 

The following table presents our consolidatedstatement of operations data for the periods indicated as a percentage of netrevenue:

 
|                                                 |   | **Three Months  Ended  June 30,** |   | **Six Months  Ended  June 30, 2004** |   |
|------------------------------------------------------|--------|----------------------------------------|--------|-------------------------------------------|--------|
|                                                 |   | **2004**                               |   | **2003**                                  |   | **2004** |   | **2003** |   |
|                                                 |   |                                   |   |                                      |   |   |   |   |   |
| Revenues, net                                        |   | 100.0                                  | %      | 100.0                                     | %      | 100.0 | % | 100.0 | % |
| Cost of goods sold                                   |   | 60.5                                   |   | 62.3                                      |   | 61.2 |   | 65.7 |   |
| Amortization of technology rights and other  charges |   | 1.5                                    |   | 2.2                                       |   | 1.6 |   | 2.4 |   |
| Total cost of goods sold                             |   | 62.0                                   |   | 64.5                                      |   | 62.8 |   | 68.1 |   |
| Gross profit                                         |   | 38.0                                   |   | 35.5                                      |   | 37.2 |   | 31.9 |   |
| Operating expenses:                                  |   |                                   |   |                                      |   |   |   |   |   |
| Research and development                             |   | 4.3                                    |   | 5.3                                       |   | 5.0 |   | 6.3 |   |
| Selling, general and administrative                  |   | 28.4                                   |   | 29.7                                      |   | 27.9 |   | 31.3 |   |
| Restructuring charges                                |   | 0.6                                    |   | —                                    |   | 1.0 |   | 1.0 |   |
| Total operating expenses                             |   | 33.3                                   |   | 35.0                                      |   | 33.9 |   | 38.6 |   |
| Income (loss) from operations                        |   | 4.7                                    |   | 0.5                                       |   | 3.3 |   | (6.7 | ) |
| Interest and other income (expense), net             |   | 0.3                                    |   | (0.8                                      | )      | 0.3 |   | (0.1 | ) |
| Income (loss) before income tax benefit              |   | 5.0                                    |   | (0.3                                      | )      | 3.6 |   | (6.8 | ) |
| Income tax expense (benefit)                         |   | 0.2                                    |   | 0.7                                       |   | 0.1 |   | (2.0 | ) |
| Net income (loss)                                    |   | 4.8                                    | %      | (1.0                                      | )%     | 3.5 | % | (4.8 | )% |

 

*Revenues.*Revenues for the second quarter of 2004 were $18.1 million, up 44.6% from $12.5million in the second quarter of 2003 and sequentially up 19.7% from $15.1million in the first quarter of 2004, with both increases attributable tohigher volumes of shipments. The increase in revenues over the prior yearquarter and sequentially is primarily attributable to expansion in thesemiconductor capital equipment market and communications and data processingmarket, with the latter growth coming from wireless base stations and othercommunications infrastructure primarily in Asia.  The increases in these markets in the second quarter of 2004 overthe prior year quarter were 135.5% and 78.7%, respectively. The sequentialincreases in these markets were 21.2% and 34.2%, respectively. While thesemiconductor capital equipment market appears to remain healthy, based oninputs from our customers in North America we expect our revenues to be flat toslightly down in the third quarter of 2004 for this market. We also experiencedstrong growth in our industrial and medical market applications, with growth of22.4% over the prior year quarter and 20.9% sequential growth.

 

Revenues for the first six months of 2004 were $33.2 million, up 40.2%from $23.6 million in the first six months of 2003. Increased demand from ourcustomers in the semiconductor capital equipment, communications and dataprocessing, and industrial and medical markets was responsible for our revenuegrowth.  Revenues from our military andaerospace market were down 4.0% in the first six months of 2004 compared to thefirst six months of  2003. However withstrong customer order activity and backlog in the first half of 2004, we expectthis market to contribute significantly to our revenue growth in the secondhalf of 2004.

 

Overall, our revenues by geographic area for the second quarter of 2004were 59.2% in North America, 16.0% in Europe and 24.8% in Asia, compared to66.3% in North America, 18.1% in Europe, and 15.6% in Asia during the secondquarter of 2003. Our revenues for by geographic area for the first six monthsof 2004 were 62.0% in North America, 15.3% in Europe, and 22.6% in Asia,compared to 65.6% in North America, 21.0% in Europe, and 13.3% in Asia in thefirst six months of 2003. We allocated revenue geographically based on thelocation to which we ship our products.

 

Revenues from our higher margin RF products were 44.8% in the secondquarter of 2004 compared to 52.3% in the second quarter of 2003. The decline inRF percentage of revenues was due to our discrete switching products in

 

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the semiconductorcapital equipment and communications and data processing markets growing fasterthan our RF products during the period. However, we expect that as sales to ourmilitary and aerospace market increase, the RF portion of our total sales will increaseto approximately 50% by the end of 2004.

 

*GrossProfit*. Gross margin for the second quarter of 2004 was38.0%, compared to 35.5% in the second quarter of 2003.  Excluding acquisition related non-cashamortization of the technology assets acquired, gross margin was 39.6% in thesecond quarter of 2004 compared to 37.7% in the second quarter of 2003, or animprovement of 190 basis points or 1.9%. The improvement in gross profit marginover the prior year quarter is due to improved fixed cost absorption at bothour Bend, Oregon and Montgomeryville, Pennsylvania facilities, as each of thosefacilities were able to increase revenues on level or only slightly higherproduction spending. In addition, while the higher gross margin RF content ofour revenues was down in the second quarter of 2004 compared to the secondquarter of 2003, revenues in our semiconductor capital equipment and medicalmarkets were strong and carry higher than average gross margins.

 

Gross margin for the first six months of 2004 was 37.2%, compared to31.9% in the first six months of 2003. Excluding acquisition related non-cashamortization of the technology assets acquired, gross margin was 38.8% in thefirst six months of 2004, compared to 34.3% in the first six months of 2003, oran improvement of 450 basis points or 4.5%. The improvement in gross margin inthe first six months of 2004 over the prior year is due to improved fixed costabsorption at both our Bend, Oregon and Montgomeryville, Pennsylvaniafacilities, as each of those facilities were able to increase revenues on levelor only slightly higher production spending. In addition, while the highergross margin RF content of our revenues was down in the first six months of2004 compared to the first six months of 2003, revenues in our semiconductorcapital equipment and medical markets were strong and carry higher than averagegross margins.

 

*Research and Development Expense.*  Second quarter of 2004 research anddevelopment expenses were $783,000 or 4.3% of revenues, compared to $668,000 inthe second quarter of 2003, or 5.3% of revenues.  Research and development expenses in the first six months of 2004and 2003 were $1.7 million and $1.5 million or 5.0% and 6.3% of revenues,respectively.  The dollar increase inboth the quarter over quarter and year to date over year to date spendinglevels on research and development are both attributable to increased payrollexpense for additional personnel dedicated to research and developmentactivities and slightly higher spending on supplies and materials. The Companyplans to continue its research and development programs leading to theintroduction of new products for use in both switching and RF applications. Thedecrease in the percentage of revenue is due to our higher revenue levels in2004.

 

*Selling, General and Administrative Expense.*Second quarter of 2004 selling, general, and administrative expenses were $5.1million or 28.4% of revenues, compared to $3.7 million in the second quarter of2003, or 29.7% of revenues.  Selling,general, and administrative expenses in the first six months of 2004 and 2003was $9.2 million and $7.4 million or 27.9% and 31.3% of revenues, respectively.The increase in both the quarter over quarter and year to date over year todate spending levels are primarily attributable to higher legal costs inconnection with a patent litigation matter, as more fully explained in Part II,Item 1 to this filing. Legal expenses incurred in connection with the IXYSlawsuit were $1.3 million and $224,000 in the second quarters of 2004 and 2003,respectively. For the first six months of 2004 and 2003 these legal expenseswere $1.9 million and $602,000, respectively. As announced in our press releaseon June 16, 2004, the United States District Court of the Northern Districtof California has granted summary judgment in favor of APT, dismissing IXYSCorporation’s claims of patent infringement against APT. The Court held thatIXYS’ United States Patent Nos. 5,486,715 and 5,801,419 are not infringed byAPT’s power MOSFET products, and further held that “IXYS’s patents are invalidbecause obvious.”  Key prior art citedby the Court was APT’s own dual metal power MOSFETs and IGBTs dating from theearly 1990s. Therefore we expect our legal costs will decrease substantially inthe third quarter of 2004. A portion of the increases was also due tocommission expense on higher overall revenues. Selling, general and administrative expenses, other than the IXYSrelated legal expenses and commissions, were $3.1 million in the second quarterof 2004, compared to $3.0 million in the second quarter of 2003. Selling,general and administrative expenses, other than the IXYS related legal expensesand commissions, were $6.1 million in the first six months of 2004, compared to$6.0 million in the first six months of 2003.

 

*Restructuring Activities:* As part ofmanagement’s strategic plans, the Company announced in November of 2003restructuring actions intended to improve manufacturing efficiencies and loweradministrative costs. The actions

 

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include consolidation of certain administrative functions,rationalization of internal and external assembly and test manufacturing, andthe reduction of rent expense through the purchase and resale of one of the twobuildings currently occupied by the Company’s Santa Clara, Californiasubsidiary. These announced actions were in addition to previously disclosedplans to consolidate our wafer fabrication plant in Montgomeryville,Pennsylvania to Bend, Oregon. Total restructuring related charges recognized in2003 were $645,000, of which $240,000 was recognized in the first quarter of2003 and $405,000 was recognized in the fourth quarter of 2003.

 

The total severance related charges recognized in 2003 was $295,000,which was recognized as $240,000 and $55,000 in the first and fourth quartersof 2003, respectively. The severance charges relate to already separatedpersonnel and personnel costs associated with benefits expected to be paid uponcompletion of certain eligible transfer activities. The building purchase isreported as an asset held for sale and is being marketed for sale as APT nolonger requires the space. In accordance with SFAS 144, an asset held for saleis carried at estimated fair value. As such, APT recorded an impairment chargefor the building in the fourth quarter of 2003 of approximately $350,000. Fairvalue was estimated based on comparable sales data of similar commercial spacein the area. The net carrying value of the building as of June 30, 2004was approximately $1 million and is included as a component of other currentassets.

 

During the first six months of 2004, an additional $321,000 wasrecognized for restructuring related charges, of which $206,000 was recognizedin the first quarter of 2004 and $115,000 in the second quarter of 2004. Thetotal severance related charges recognized in the first six months of 2004 was$104,000, which was recognized as $66,000 and $38,000 in the first and secondquarters of 2004, respectively. These severance charges relate to alreadyseparated personnel and personnel costs associated with benefits expected to bepaid upon completion of certain eligible transfer activities. Additionalrestructuring costs of $217,000 associated with costs to exit certain productionactivities were also recognized in the first six months of 2004, of which$140,000 and $77,000 were recognized in the first and second quarters of 2004,respectively. These charges relate to the write down and closing costs forcertain production related equipment.

 

*Interest income and o**therexpense, net*.  Interestincome and other expense, net, which includes interest income, interest expenseand other expense, was a net income of $53,000 in the second quarter of 2004compared to a net loss of $93,000 in the second quarter of 2003.  The primary component is interest incomeearned on our cash and marketable securities. Net interest income was $41,000 in the second quarter of 2004 comparedto $52,000 in the second quarter of 2003. The decline in interest income is primarily due to lower interest ratesavailable in the current investment market and lower invested cash andmarketable securities, as the Company continues to self fund its purchases ofproperty and equipment. The net expense of $145,000 incurred in the secondquarter of 2003 includes $102,000 of estimated accrued cost related to a smallfire at our Montgomeryville, Pennsylvania facility.  This cost estimate was adjusted in the fourth quarter of 2003down to $78,000, of which we recovered $48,000 from our insurance coverage,which was recorded as a gain in the fourth quarter of 2003.

 

*Income Tax Expense (Benefit)*.  For the first six months of 2004, theCompany recorded a tax expense of $28,000, for an effective rate of 2.4%. TheCompany recorded a full valuation allowance against its net deferred tax assetsin the fourth quarter of 2003. In assessing the valuation of deferred taxassets, SFAS No. 109 “Accounting for Income Taxes,” requires a more likely thannot standard. The ultimate realization of deferred tax assets is dependent onthe generation of future domestic taxable income during the periods in whichthe associated temporary differences become deductible. Management considersthe scheduled reversals of deferred tax liabilities, projected future taxableincome, and tax planning strategies in making this assessment. Although theCompany anticipates future long term profitability, SFAS No. 109 requires thatrecent historical operating performance weigh more heavily in assessing the valuationof deferred tax assets. The more likely than not assessment was principallybased upon the losses generated during 2002 and 2003 and the cyclical nature ofthe industry which make projections of industry trends difficult. While the Company has sufficient netoperating loss carry-forwards (NOL’s) to offset federal taxable income forregular tax purposes, the Company’s use of its NOL’s for alternative minimumtax (AMT) purposes are limited to 90% of its AMT income (AMTI). Therefore, theCompany expects to pay AMT of approximately 20% on the remaining AMTI,resulting in an approximate effective tax rate of 2% for the remainder of 2004.

 

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We recorded a tax expense in the second quarter of 2003 of $85,000 on aloss before tax of $34,000 for a negative 250% effective tax rate.  The reason for the recording of a taxexpense on a net loss is due to the mix of our profit (loss) before tax betweenUnited States (U.S.) and foreign tax jurisdictions.  We recorded a profit before tax within the U.S. and a lossoutside of the U.S.  In addition, due toloss carry forward positions outside of the U.S., we have not recorded anyadditional tax benefit for the foreign loss incurred, as we recorded anincrease in our valuation allowance for the tax effect of the foreignloss.  Our effective tax rate for thefirst six months of 2003 was 29.9%, which is lower than the statutory rate alsodue to the mix of our profit (loss) before tax between the U.S. and foreignjurisdictions.

 

**Liquidity and Capital Resources**

 

Management assesses the Company’s liquidityin terms of its ability to generate cash to fund its operating, investing, andfinancing activities. Significant factors affecting the management of liquidityare: cash flows from operating activities, capital expenditures, investments inbusinesses, and access to bank credit when required and at reasonable rates.

 

*Operating Cash Flows:* In the first six months of 2004, wegenerated approximately $782,000 from operating activities. This resulted fromour net income of $1.2 million plus $2.4 million of non-cash charges fordepreciation, amortization, and provisions. This was offset by $2.8 million inadditional working capital requirements, primarily higher trade accounts receivablebalances on higher revenues, which was partially offset by higher payables forgoods and services.

 

*Investing Cash Flows:* In the first six monthsof 2004, we used $2.7 million in investing activities. We invested $1.9 millionin the purchase of property, plant, and equipment, and purchased $1.0 millionof available-for-sale securities with long term maturities.  The additions related to the Bend, Oregonfab expansion and for assembly and test equipment at our Santa Clara,California facility.

 

*Financing Cash Flows:* In the first six monthsof 2004, we generated approximately $490,000 from financing activities, whichprimarily consisted of proceeds from the exercise of stock options.

 

As of June 30, 2004, APT had $33.0 million in workingcapital.  Our trade accounts receivablebalance was $10.9 million reflecting a days sales outstanding ratio of 49 days,compared to trade accounts receivable of $7.6 million at December 31,2003, reflecting a days sales outstanding ratio of 57 days. Based on the geographicmix of our customers and the credit terms we extend, management expects ourdays sales outstanding ratio to range from 50 to 60 days. Our inventory balanceat June 30, 2004 was $12.9 million reflecting inventory turns of 3.6 timesper year, compared to an inventory balance of $12.4 million atDecember 31, 2003, reflecting inventory turns of 2.7 times per year. TheCompany continues to pursue actions to monitor inventory levels and improveinventory turns. The calculations above are based on quarterly average balancesof trade accounts receivable and inventory.

 

On June 16, 2004, APT filed a registration statement on Form S-3,with the SEC to register 3,100,000 shares of our common stock, of which APTwould sell 1,900,000 shares and selling shareholders would sell 1,200,000shares. The selling shareholders include APT officers and one director, and arelisted in the registration statement. The underwriters may also purchase up toan additional 465,000 shares from the selling shareholders at the public offeringprice, less the underwriting discount, within 30 days from the date of thisprospectus to cover over-allotments, if any. At this time, it is uncertain asto whether or not the Company will complete the offering associated with theJune 16, 2004 Form S-3 filing. The Company has incurred $150,000 forprofessional fees as of June 30, 2004, which were recorded as prepaidoffering costs. If the Company elects to not pursue the offering, these costswould be expensed at that time.

 

APT currently expects to fund expenditures for capital requirements aswell as liquidity needs from a combination of available cash balances,internally generated funds and financing arrangements if needed. As ofJune 30, 2004, APT had $16.0 million in cash and cash equivalents andavailable-for-sale securities. APT’s investment policy is to invest in shortterm, high-grade liquid investments with the goal of capital preservation.APT’s ability to generate positive cash flow from operations may be affected bymarket conditions as well as other risk factors as described in our AnnualReport on Form 10-K for the year ended December 31, 2003. We expect fromtime to time to evaluate potential

 

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acquisitions and equity investments complementary to our marketstrategy. To the extent we pursue such transactions, we could requireadditional equity or debt financing to fund such activities or to fund ourworking capital requirements in the event of an industry downturn or anunexpected adverse change in our business operations. To the extent we requireadditional capital we cannot be certain that we will be able to obtain suchfinancing on terms favorable to us, or at all.

 

**Off Balance SheetArrangements & Commitments**

 

As of June 30, 2004 the Company did not have any unconsolidatedentities or off balance sheet financial arrangements, guarantees or similarcommitments with such entities. As of June 30, 2004 the open value ofpurchase order commitments was $14.9 million compared to $12.5 million at December 31,2003. This represents the amounts committed per open purchase orders with thirdparties. The increase over the December 31, 2003 balance is due to thetiming of certain capital expenditures and higher material and subcontractorcommitments in light of higher production volumes in the quarter and expectedinto the next quarter. The Company did not enter or terminate any leaseagreements during the quarter.

 

**ITEM3.****QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKETRISK**

 

We do not use derivative financial instruments in our investmentportfolio. Due to the short duration and conservative nature of our cashequivalents, and the high quality and conservative nature of our long-terminvestments, we do not expect any material loss with respect to our investmentportfolio.

 

Currently less than 2% of our sales are transacted in local currencies,primarily Euros. As a result, our international results of operations havelimited exposure to foreign exchange rate fluctuations. We do not currentlyhedge against foreign currency rate fluctuations. Most of our export sales andsales by APT Europe are in U.S. dollars, and most of our foreign currency salesare from operations with significant expenses in the same currency. As aresult, gains and losses from such fluctuations have not been material to ourconsolidated results of operations.

 

**ITEM4.****CONTROLS AND PROCEDURES**

 

(a)          *Evaluation of Disclosure Controlsand Procedures*. Our management, with the participation of our Chief Executive Officer (“CEO”)and Chief Financial Officer (“CFO”), carried out an evaluation of theeffectiveness of the Company’s disclosure controls and procedures as of the endof the period covered by this report pursuant to Securities Exchange Act Rule13a-15(e) and 15d-15(e).  Based upon this evaluation, our CEO and CFOconcluded that our controls and procedures are effective in timely alertingthem to material information regarding the Company (including its consolidatedsubsidiaries) required to be included in our periodic SEC filings.

 

(b)         *Changes in Internal Controls*.  There have been no significantchanges in our internal controls over financial reporting during the mostrecent quarter that has materially affected or is reasonably likely tomaterially affect our internal controls over financial reporting.

 

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**PARTII.  OTHERINFORMATION**

 

**ITEM1.****  LEGALPROCEEDINGS**

 

From time to time the Company is involved in various legal matters thatarise out of the ordinary conduct of our business, including those related tolitigation over intellectual property rights, commercial transactions,contracts, product liability, environmental, safety and health, and employmentmatters.  The Company is currently involvedin various legal proceedings.  TheCompany does not believe that the ultimate resolution of such litigation willhave a material adverse effect on the Company’s financial position, results ofoperations or cash flows.  The Companyaccrues loss contingencies in connection with its litigation when it isprobable that a loss has occurred and the amount of the loss can be reasonablyestimated.

 

On August 15, 2002, IXYS Corporation filed a patent infringementlawsuit against APT with the United States District Court, Northern District ofCalifornia.  The claim filed by IXYSalleges that APT infringes on their United States Patent No. 5,486,715 and5,801,419.  The IXYS claim alsorequested that damages be determined at trial and that such damages be trebled.On June 16, 2004, the United States District Court of the NorthernDistrict of California granted summary judgment in favor of APT, dismissingIXYS Corporation’s claims of patent infringement against APT. The Court heldthat IXYS’ United States Patent Nos. 5,486,715 and 5,801,419 are not infringedby APT’s power MOSFET products. The court found that “APT has proven by clearand convincing evidence that the inventions described in the ‘715 and ‘419patents would have been contemporaneously obvious to one skilled in the art.”and further found “ ‘715 patent claims 1, 4, 5, 23, 26, 27, and 30 and ‘419patent claims 1, 5, 6, 8, 9, 10, 11, 15, 16, 18, 19, and 20 invalid.” APT’spatent infringement claims against IXYS under APT’s United States Patent Nos.5,283,202 and 5,262,336 remain pending and are scheduled for trial inJanuary 2005.

 

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**ITEM4.****SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

At Advanced Power Technology Inc.’s Annual Shareholders’ Meeting on May4, 2004, shareholders elected each of the director nominees, ratified theappointment our independent auditors, and approved the amendment to theAdvanced Power Technology Inc. Stock Option Plan to increase the share reservefrom 2,250,000 to 2,400,000 shares.

 

Directors are elected by a plurality of the votes cast. That is, thesix directors receiving the highest number of votes are elected, regardless ofwhether that number represents a majority of the votes cast. The ratificationof the appointment of the independent auditors requires the affirmative vote ofa majority of the shares of Common Stock present or represented and entitled tovote at the Annual Meeting. The ratification of the amendment to the 1995 StockOption Plan requires the affirmative vote of a majority of the total number ofvotes cast at the meeting. Abstentions and broker non-votes have no effect onthe voting on a matter that requires the affirmative vote of a certainpercentage of the votes cast or shares voting on a matter. However, becauseshares that abstain and shares represented by broker non-votes are nonethelessconsidered outstanding shares, abstentions and broker non-votes have the sameeffect as a vote against a proposal which requires the affirmative vote of amajority of the shares of Common Stock outstanding. Under the rules of theNASDAQ, if shareholders do not give instructions to their bank or brokeragefirm, it will still be able to vote the shares with respect to certain“discretionary” items, but will not be allowed to vote the shares with respect tocertain “non-discretionary” items. In the case of non-discretionary items, theshares will be treated as “broker non-votes.” A brief description and the voting results for each proposal voted on atthe meeting is included in the tables below:

 
|                                                                                                                                                                                          |   | **Number of  Shares** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                                                                                                                                          |   | **Voted For**         |   | **Withheld** |   |
|                                                                                                                                                                                          |   |                  |   |   |   |
| **Election of  Directors.** To elect six directors, to hold office  until the 2005 Annual Meeting of Shareholders or until their successors are  elected and qualified (Proposal No. 1); |   |                  |   |   |   |
| Patrick P. H. Sireta                                                                                                                                                                          |   | 8,344,104             |   | 1,107,936 |   |
| Robert C. Pearson                                                                                                                                                                             |   | 9,360,954             |   | 91,086 |   |
| James E. Petersen                                                                                                                                                                             |   | 8,118,115             |   | 1,333,925 |   |
| Douglas S. Schatz                                                                                                                                                                             |   | 8,118,315             |   | 1,333,725 |   |
| Alfred J. Stein                                                                                                                                                                               |   | 9,264,015             |   | 188,025 |   |
| Ronald F. McKenna                                                                                                                                                                             |   | 9,363,154             |   | 88,886 |   |

 
|                                                                                                                                                                                                                                                                              |   | **Number of  Shares** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                                                                                                                                                                                                                              |   | **For**               |   | **Against** |   | **Abstain** |   | **Broker Non-  Vote** |   |
| **Ratification of  Appointment of Independent Auditors.** To ratify the  appointment of KPMG LLP as the Company’s independent auditors for the year  ending December 31, 2004 (Proposal No. 2);                                                                         |   | 9,4443,662            |   | 5,028 |   | 3,350 |   | — |   |
|                                                                                                                                                                                                                                                                              |   |                  |   |   |   |   |   |   |   |
| **Ratification of  Amendment to Advanced Power Technology, Inc. Stock Option Plan.**  To ratify an amendment to the Advanced  Power Technology, Inc. Stock Option Plan (1995 Stock Option Plan) to increase  the share reserve from 2,250,000 to 2,400,000 (Proposal No. 3); |   | 7,557,282             |   | 332,741 |   | 3,546 |   | 1,558,471 |   |

 

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**ITEM6.****EXHIBITS AND REPORTS ON FORM 8-K**

 

(a) The exhibits filed as part of this report are listed below:

 
| **Exhibit No.** |   |                                                                                                                               |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                               |
| 31.1            |   | Rule13a-14(a)/15d-14(a) Certification, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                 |
|            |   |                                                                                                                               |
| 31.2            |   | Rule13a-14(a)/15d-14(a) Certification, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                 |
|            |   |                                                                                                                               |
| 32              |   | Certification pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

(b) Reports on Form 8-K

 

Filed: 

There were no reports filed on Form 8-K during the second quarter of2004.

 

Furnished:

The following reports were furnished on Form 8-K during the secondquarter of 2004.

 
| **Date of Report**     |   | **Date Furnished**  |   | **Description**                                                                                                                  |
|------------------------|--------|---------------------|--------|----------------------------------------------------------------------------------------------------------------------------------|
| February 24, 2004 |   | April 2, 2004  |   | Earnings release for fourth quarter 2003 financial results.                                                                      |
| April 5, 2004     |   | April 6, 2004  |   | Financial release regarding pre-announcement of revenue and earnings  estimates for first quarter 2004 financial results.        |
| April 22, 2004    |   | April 26, 2004 |   | Earnings release for first quarter 2004 financial results.                                                                       |
| June 16, 2004     |   | June 18, 2004  |   | Press release regarding grant of summary judgment dismissing IXYS  Corporation’s claims of patent infringement against APT. |

 

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**SIGNATURE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized this 12th day of August, 2004

 

 
|   | ADVANCED POWER TECHNOLOGY, INC.             |
|--------|---------------------------------------------|
|   |                                        |
|   |                                        |
|   | By:                                         | /s/ GREG M. HAUGEN |   |
|   |                                        |
|   | Greg M. Haugen                              |
|   | Vice President, Finance and Administration, |
|   | Chief Financial Officer and Secretary       |
|   | (Principal Financial Officer)               |

 

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