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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

 

**FORM10-Q**

 
|   | ý | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------|--------|-----------------------------------------------------------------------------------------------|
|   |   |                                                                                          |
|   |   | **For the quarterly period ended July 1, 2001**                                               |
|   |   |                                                                                          |
|   |   | **OR**                                                                                        |
|   |   |                                                                                          |
|   | o      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

**Commission file number001-16047**

**AdvancedPower Technology, Inc.*******(Exact name of registrant as specified in its charter)*

| **Delaware**                       |   | **93-0875072**            |
|------------------------------------|--------|---------------------------|
|                               |   |                      |
| *(State  or other Jurisdiction of* |   | *(I.R.S.  Employer*       |
| *Incorporation  or Organization)*  |   | *Identification  Number)* |

**405 SWColumbia Street, Bend, Oregon  97702***(Address of principal executive offices and Zip Code)*

**(541)382-8028***(Registrant's telephone number)*

Indicate by check mark whether theRegistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to the filing requirements for the past 90 days.  Yes ý    No o

The number of shares of the Registrant'sCommon Stock outstanding as of August 6, 2001 was 8,705,430 shares.

**ADVANCED POWER TECHNOLOGY, INC.FORM 10-QTABLE OF CONTENTS**

| **Part  I** | **Financial  Information** |                                                                                              |
|-------------|----------------------------|---------------------------------------------------------------------------------------------------|
|        |                       |                                                                                              |
|        | Item  1.                   | Financial  Statements:                                                                            |   |
|        |                       |                                                                                              |
|        |                       | Consolidated Balance Sheets  as of June 30, 2001 and December 31, 2000                            |   |
|        |                       |                                                                                              |
|        |                       | Consolidated  Statements of Operations for the three and six months ended June 30, 2001 and  2000 |   |
|        |                       |                                                                                              |
|        |                       | Consolidated  Statements of Cash Flows for the six months ended   June 30, 2001 and 2000          |   |
|        |                       |                                                                                              |
|        |                       | 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                                        |   |
|        |                       |                                                                                              |
| **Part II** | **Other Information**      |                                                                                              |
|        |                       |                                                                                              |
|        | Signature                  |                                                                                              |
|             |                            |                                                                                                   |  |  |  |

 

**ADVANCEDPOWER TECHNOLOGY, INC.CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)**

|                                                                           | **June 30,**                                                                                                                                                                              |    | **December 31,** |   |
|---------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|------------------|--------|
|                                                                      | **2001**                                                                                                                                                                                  |    | **2000**         |   |
|                                                                      | ****                                                                                                                                                                                      |    | ****             |   |
| **Assets**                                                                | **(Unaudited)**                                                                                                                                                                           |    |             |   |
| Current assets:                                                           |                                                                                                                                                                                      |    |             |   |
|                                                                      | Cash and cash equivalents                                                                                                                                                                 | $       | 18,507           |   | $ | 25,326 |   |
|                                                                      | Short-term investments                                                                                                                                                                    | 12,113  |             | 8,118  |   |
|                                                                      | Accounts receivable, net of allowance of $125 (2001)  and $120 (2000)                                                                                                                     | 7,525   |             | 6,776  |   |
|                                                                      | Inventories, net                                                                                                                                                                          | 8,071   |             | 6,814  |   |
|                                                                      | Prepaid expenses and other current assets                                                                                                                                                 | 1,810   |             | 1,799  |   |
|                                                                      |                                                                                                                                                                                      |         |             |        |   |
|                                                                      | Total current assets                                                                                                                                                                      | 48,026  |             | 48,833 |   |
|                                                                      |                                                                                                                                                                                      |    |             |   |
| Property and equipment, net of accumulated amortization  and depreciation |                                                                                                                                                                                      |    |             |   |
|                                                                      | of $8,422 (2001) and $8,273 (2000)                                                                                                                                                        | 5,291   |             | 4,367  |   |
| Long-term investments                                                     | 5,505                                                                                                                                                                                     |    | 3,022            |   |
| Other assets                                                              | 1,218                                                                                                                                                                                     |    | 1,091            |   |
|                                                                      |                                                                                                                                                                                           |    |                  |   |
|                                                                      | Total assets                                                                                                                                                                              | $       | 60,040           |   | $ | 57,313 |   |
|                                                                           |                                                                                                                                                                                           |    |                  |   |
| **Liabilities and Stockholders' Equity**                                  |                                                                                                                                                                                      |    |             |   |
| Current liabilities:                                                      |                                                                                                                                                                                      |    |             |   |
|                                                                      | Accounts payable                                                                                                                                                                          | $       | 3,526            |   | $ | 4,385 |   |
|                                                                      | Accrued expenses                                                                                                                                                                          | 1,589   |             | 1,402  |   |
|                                                                      | Current portion of long–term debt                                                                                                                                                    | -       |             | 21     |   |
|                                                                      | Current portion of capital lease obligations                                                                                                                                              | 69      |             | 80     |   |
|                                                                      |                                                                                                                                                                                      |         |             |        |   |
|                                                                      | Total current liabilities                                                                                                                                                                 | 5,184   |             | 5,888  |   |
| Capital lease obligations, less current portion                           | 96                                                                                                                                                                                        |    | 130              |   |
| Deferred gain on sale leaseback                                           | 168                                                                                                                                                                                       |    | 177              |   |
|                                                                      |                                                                                                                                                                                           |    |                  |   |
|                                                                      | Total liabilities                                                                                                                                                                         | 5,448   |             | 6,195  |   |
|                                                                      |                                                                                                                                                                                      |    |             |   |
|                                                                      |                                                                                                                                                                                      |    |             |   |
| 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; 8,805,803 issued and 8,696,946 shares outstanding in 2001;  8,515,818 shares issued and 8,406,961 shares outstanding in 2000 | 88      |             | 85     |   |
|                                                                      | Additional paid–in capital                                                                                                                                                           | 67,292  |             | 66,826 |   |
|                                                                      | Treasury stock, at cost, 108,857 shares                                                                                                                                                   | (1,700  | )                |   | (1,700 | ) |   |
|                                                                      | Deferred stock compensation                                                                                                                                                               | (248    | )                |   | (330 | ) |   |
|                                                                      | Accumulated other comprehensive income                                                                                                                                                    | 62      |             | 64     |   |
|                                                                      | Accumulated deficit                                                                                                                                                                       | (10,902 | )                |   | (13,827 | ) |   |
|                                                                      |                                                                                                                                                                                      |         |                  |   |  |  |   |
|                                                                      | Total stockholders' equity                                                                                                                                                                | 54,592  |             | 51,118 |   |
|                                                                      |                                                                                                                                                                                           |         |             |        |  |   |
|                                                                      | $                                                                                                                                                                                         | 60,040  |             | $      | 57,313 |   |
|                                                                      |                                                                                                                                                                                           |         |             |        |  |   |
|                                                                           |                                                                                                                                                                                           |         |                  |        |  |  |  |  |  |  |

Seeaccompanying notes to consolidated financial statements.

**ADVANCEDPOWER TECHNOLOGY, INC.CONSOLIDATED STATEMENTS OFOPERATIONS (In thousands, except per shareamounts)(Unaudited)**

|                                                                                |                                |   |                 |       |     |   |     |       |
|-------------------------------------------------------------------------------------|-------------------------------------|--------|----------------------|------------|----------|--------|----------|------------|
|                                                                                | **Three Months Ended**              |   | **Six Months Ended** |       |
|                                                                                | **June 30,**                        |   | **June 30,**         | ** ** |
|                                                                                | ****                                |   | ****                 |       | ****     |   | ****     |       |
|                                                                                | **2001**                            |   | **2000**             |       | **2001** |   | **2000** | ** ** |
|                                                                                | ****                                |   | ****                 |       | ****     |   | ****     |       |
|                                                                                |                                |   |                 |       |     |   |     |       |
| Revenues, net                                                                       | $                                   | 11,526 |                 | $          | 10,080   |   | $        | 24,684     |   | $ | 19,641 |   |
| Cost of goods sold                                                                  | 7,274                               |   | 6,335                |       | 15,218   |   | 12,513   |       |
|                                                                                |                                     |   |                      |       |          |   |          |       |
| Gross profit                                                                        | 4,252                               |   | 3,745                |       | 9,466    |   | 7,128    |       |
|                                                                                |                                |   |                 |       |     |   |     |       |
| Operating expenses:                                                                 |                                |   |                 |       |     |   |     |       |
|                                                                                | Research and development            | 465    |                 | 239        |     | 816    |     | 482        |   |
|                                                                                | Selling, general and administrative | 2,668  |                 | 2,310      |     | 5,394  |     | 4,599      |   |
|                                                                                |                                     |   |                      |       |          |   |          |       |
|                                                                                | Total operating expenses            | 3,133  |                 | 2,549      |     | 6,210  |     | 5,081      |   |
|                                                                                |                                     |   |                      |       |          |   |          |       |
| Income from operations                                                              | 1,119                               |   | 1,196                |       | 3,256    |   | 2,047    |       |
|                                                                                |                                |   |                 |       |     |   |     |       |
| Other income (expense), net                                                         | 506                                 |   | (528                 | )          | 1,110    |   | (787     | )          |
|                                                                                |                                     |   |                      |       |          |   |          |       |
| Income before income tax expense                                                    | 1,625                               |   | 668                  |       | 4,366    |   | 1,260    |       |
| Income tax expense                                                                  | 482                                 |   | 418                  |       | 1,441    |   | 766      |       |
|                                                                                |                                     |   |                      |       |          |   |          |       |
| Net income                                                                          | $                                   | 1,143  |                 | $          | 250      |   | $        | 2,925      |   | $ | 494 |   |
|                                                                                |                                     |   |                      |       |          |   |          |       |
| Net income per share:                                                               |                                |   |                 |       |     |   |     |       |
|                                                                                | Basic                               | $      | 0.13                 |       | $        | 0.05   |     | $          | 0.34 |   | $ | 0.10 |   |
|                                                                                | Diluted                             | 0.12   |                 | 0.04       |     | 0.32   |     | 0.08       |   |
| Weighted average number of shares used in the  computation of net income per share: |                                |   |                 |       |     |   |     |       |
|                                                                                | Basic                               | 8,623  |                 | 5,001      |     | 8,538  |     | 5,001      |   |
|                                                                                | Diluted                             | 9,264  |                 | 6,376      |     | 9,271  |     | 6,324      |   |
|                                                                                     |                                     |        |                      |            |          |        |          |            |  |  |  |  |  |  |

See accompanying notesto consolidated financial statements.

**ADVANCEDPOWER TECHNOLOGY, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)(Unaudited)**

|                                              | **Six Months Ended**                                                               |       |
|---------------------------------------------------|------------------------------------------------------------------------------------|------------|
|                                              | **June 30,**                                                                       |       |
|                                              | ****                                                                               |       |
|                                              | **2001**                                                                           | ** ** | **2000** | ** ** |
|                                              | ****                                                                               |       | **** |   |
| Cash flows from operating activities:             |                                                                               |       |   |   |
|                                              | Net income                                                                         | $          | 2,925 |   | $ | 494 |   |
|                                              | Adjustments to reconcile net income to net cash  provided by operating activities: |       |   |   |   |
|                                              | Depreciation and amortization                                                      | 594        |   | 700 |   |
|                                              | Deferred gain on sale-leaseback                                                    | (9         | ) |   | (12 | ) |   |
|                                              | Non-cash interest expense                                                          | -          |   | 230 |   |
|                                              | Amortization of deferred stock compensation                                        | 82         |   | 144 |   |
|                                              | Changes in operating assets and liabilities:                                       |       |   |   |   |
|                                              | Accounts receivable                                                                | (908       | ) |   | (2,131 | ) |   |
|                                              | Inventories                                                                        | (1,337     | ) |   | (564 | ) |   |
|                                              | Prepaid expenses and other assets                                                  | (179       | ) |   | (108 | ) |   |
|                                              | Accounts payable and accrued expenses                                              | (563       | ) |   | 1,823 |   |
|                                              |                                                                                    |            |   |  |  |   |
|                                              | Net cash provided by operating activities                                          | 605        |   | 576 |   |
|                                              |                                                                               |       |   |   |
| Cash flows from investing activities:             |                                                                               |       |   |   |
|                                              | Purchases of available-for-sale securities                                         | (13,438    | ) |   | - |   |
|                                              | Proceeds from sale of available-for-sale securities                                | 7,033      |   | - |   |
|                                              | Purchase of property and equipment                                                 | (1,517     | ) |   | (1,409 | ) |   |
|                                              |                                                                                    |            |   |  |  |   |
|                                              | Net cash used in investing activities                                              | (7,922     | ) |   | (1,409 | ) |   |
|                                              |                                                                               |       |   |   |
| Cash flows from financing activities:             |                                                                               |       |   |   |
|                                              | Borrowings (payments) on lines of credit, net                                      | (20        | ) |   | 302 |   |
|                                              | Payments on capital lease obligations                                              | (45        | ) |   | (109 | ) |   |
|                                              | Proceeds from issuance of long–term debt                                      | -          |   | 775 |   |
|                                              | Principal payments on long–term debt                                          | -          |   | (328 | ) |   |
|                                              | Proceeds from exercise of stock options                                            | 468        |   | - |   |
|                                              |                                                                                    |            |   |  |  |   |
|                                              | Net cash provided by financing activities                                          | 403        |   | 640 |   |
|                                              |                                                                               |       |   |   |
| Effects of exchange rate changes on cash          | 95                                                                                 |       | (6 | ) |   |
|                                              |                                                                                    |            |   |  |  |   |
|                                              | Net change in cash and cash equivalents                                            | (6,819     | ) |   | (199 | ) |   |
| Cash and cash equivalents at beginning of period  | 25,326                                                                             |       | 316 |   |
|                                              |                                                                                    |            |   |  |  |   |
| Cash and cash equivalents at end of period        | $                                                                                  | 18,507     |   | $ | 117 |   |
|                                              |                                                                                    |            |   |  |  |   |
|                                              |                                                                               |       |   |   |
| Supplemental disclosure of cash flow information: |                                                                               |       |   |   |
|                                              | Cash paid during the period for:                                                   | Interest   | $ | 44 |   | $ | 413 |   |
|                                              | Income taxes                                                                       | 1,223      |   | 357 |   |
|                                              |                                                                               |       |   |   |
| Supplemental disclosure of noncash activities:    |                                                                               |       |   |   |
|                                              | Issuance of warrants in connection with refinancing                                | $          | - |   | $ | 460 |   |
|                                              | Unrealized gain on short-term and long-term investments                            | 73         |   | - |   |
|                                              |                                                                               |       |   |   |
|                                                   |                                                                                    |            |  |  |  |  |  |  |  |  |  |

Seeaccompanying notes to consolidated financial statements.

**ADVANCED POWER TECHNOLOGY, INC.NOTES TO CONSOLIDATED FINANCIALSTATEMENTS(Dollars in thousands)**

**Note 1. BASIS OF PRESENTATION**

             Theaccompanying unaudited consolidated financial statements include normalrecurring adjustments necessary for a fair presentation of Advanced PowerTechnology, Inc.’s (APT) interim results. The consolidated financial statements and notes in this Form 10-Q arepresented as permitted by Regulation S-X, and as such, they do not containcertain information included in APT’s 2000 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 ended December31, 2000.  The financial information asof December 31, 2000 is derived from the audited consolidated financialstatements as filed with APT’s Annual Report on Form 10-K for the year endedDecember 31, 2000.  The results ofoperations for the three and six months ended June 30, 2001 are not necessarilyindicative of the results expected for the entire fiscal year ending December31, 2001.

             APT’sfinancial quarters are 13 week periods. The second quarter of 2001 ended onJuly 1 and the second quarter of 2000 ended on July 2.  For convenience, the first quarters of 2001and 2000 are shown as ended on June 30.

**Note 2. COMPREHENSIVE INCOME**

             Comprehensiveincome is the total of net income and all other non-owner changes in equity.Comprehensive income includes foreign currency translations and unrealizedgains and losses from investments, which were not material in the periodspresented.

**Note 3. INVENTORIES, NET**

|   | **June  30,  2001** |   | **December  31,  2000** |   |
|--------|---------------------|--------|-------------------------|--------|
|   | (unaudited)         |   |                    |   |
|   |                     |   |                         |   |
|   | Raw materials       | $      | 1,329                   |   | $ | 1,205 |   |
|   | Work in process     | 4,966  |                    | 4,114  |   |
|   | Finished goods      | 2,515  |                    | 2,170  |   |
|   |                |        |                         |   |  |  |   |
|   | 8,810               |   | 7,489                   |   |
|   | Valuation reserve   | (739   | )                       |   | (675 | ) |   |
|   |                |        |                         |   |  |  |   |
|   | $                   | 8,071  |                    | $      | 6,814 |   |
|   |                     |        |                    |        |  |   |

**Note 4. NET INCOME PER SHARE**

             Basicnet income per share is computed using the weighted average number of shares ofcommon stock outstanding for the period. Diluted net income per share iscomputed using the weighted average number of shares of common stock anddilutive potential common shares related to stock options and warrantsoutstanding during the period. Incremental shares related to outstanding stockoptions and warrants of approximately 641,000 and 733,000 for the three and sixmonths ended June 30, 2001, respectively and 1,375,000 and 1,323,000 for thethree and six months ended June 30, 2000, respectively, were included in thecalculations of diluted net income per share for those periods.  Incremental shares related to outstandingstock options of 127,600 for the three and six months ended June 30, 2001 wereexcluded from the calculation of diluted net income per share because theeffect would have been anti-dilutive.

**ITEM 2. MANAGEMENT'S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**** **

             Thisdiscussion and analysis is designed 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, 2000. 

**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 PrivateSecurities Litigation Reform Act of 1995. Forward-statements are subject to thebusiness and economic risks faced by us and our actual results of operationsmay differ materially from those contained in the forward-looking statements.In addition, results of operations for the periods discussed below should notbe considered indicative of the results to be expected in any future period andfluctuations in operating results might result in fluctuations in the marketprice of our common stock. Our quarterly and annual operating results may varysignificantly depending on many factors, including but not limited to, theability of subcontractors to meet their delivery commitments; unfavorablechanges in industry and competitive conditions; our mix of product shipments;the accuracy of our customer’s forecasts; the effectiveness of our efforts tocontrol and reduce costs; and other risks detailed in "Management’sDiscussion and Analysis of Financial Condition and Results of Operations - RiskFactors Affecting Business and Results of Operations" in our Annual Reporton Form 10-K for the year ended December 31, 2000, filed with the Securitiesand Exchange Commission. 

**Overview**

             We area leading designer, manufacturer and marketer of high-performance powersemiconductors. Power semiconductors manage and regulate power by convertingelectricity into a form required by electrical and electronic products. Ourpower semiconductors increase system efficiency, permit the design of morecompact end products and improve features and functionality. We are primarilyfocused on the high power, high frequency segment of the power semiconductormarket. High power refers to the ability to handle voltages and currents aboveone kilowatt, and high frequency refers to the ability to switch on and off atspeeds above 100 kilohertz. We sell our products primarily in North America andEurope, with increasing sales in Asia, through a network of independent salesrepresentatives and distributors. 

             InAugust 2000, we completed an initial public offering, or IPO, of 4,025,000shares of our common stock, including the underwriters’ over-allotment, at anoffering price of $15.00 per share. The IPO included 2,830,000 shares sold byAPT and 1,195,000 shares sold by shareholders of APT, and resulted in netproceeds to APT of approximately $38.3 million. 

**Results ofOperations**

             Thefollowing table presents our consolidated statement of operations data for theperiods indicated as a percentage of net revenue:

 

|                             | **Three Months Ended**              |   | **Six Months Ended** |   |
|----------------------------------|-------------------------------------|--------|----------------------|--------|
|                                  | **June 30,**                        |   | **June 30,**         |   |
|                             | ****                                |   | ****                 |   |
|                             | **2001**                            |   | **2000**             |   | **2001** |   | **2000** | ** ** |
|                             |                                     |   |                      |   |  |   |  |   |
|                             | Revenues, net                       | 100.0  | %                    |   | 100.0 | % |   | 100.0 | % |   | 100.0 | % |   |
|                             | Cost of goods sold                  | 63.1   |                 | 62.8   |   | 61.7 |   | 63.7 |   |
|                             |                                     |        |                 |        |  |   |  |  |   |  |  |   |
|                             | Gross profit                        | 36.9   |                 | 37.2   |   | 38.3 |   | 36.3 |   |
|                             | Operating expenses:                 |   |                 |   |   |   |   |   |   |
|                             | Research and development            | 4.0    |                 | 2.4    |   | 3.3 |   | 2.5 |   |
|                             | Selling, general and administrative | 23.2   |                 | 23.0   |   | 21.9 |   | 23.4 |   |
|                             |                                     |        |                 |        |  |   |  |  |   |  |  |   |
|                             | Total operating expenses            | 27.2   |                 | 25.4   |   | 25.2 |   | 25.9 |   |
|                             |                                     |        |                 |        |  |   |  |  |   |  |  |   |
| Income from operations           | 9.7                                 |   | 11.8                 |   | 13.1 |   | 10.4 |   |
| Other income (expense), net      | 4.4                                 |   | (5.2                 | )      |   | 4.5 |   | (4.0 | ) |   |
|                             |                                     |        |                 |        |  |   |  |  |   |  |  |   |
| Income before income tax expense | 14.1                                |   | 6.6                  |   | 17.6 |   | 6.4 |   |
| Income tax expense               | 4.2                                 |   | 4.1                  |   | 5.8 |   | 3.9 |   |
|                             |                                     |        |                 |        |  |   |  |  |   |  |  |   |
| Net income                       | 9.9                                 | %      |                 | 2.5    | % |   | 11.8 | % |   | 2.5 | % |   |
|                                  |                                     |        |                 |        |  |   |  |   |  |  |   |
|                                  |                                     |        |                      |        |  |  |  |  |  |  |  |  |  |  |

*             Revenues.*  Our net revenueswere $11.5 million in the second quarter of 2001, an increase of 14.3%from net revenues of $10.1 million in the second quarter of 2000, and$24.7 million in the first six months of 2001, an increase of 25.7% from netrevenues of $19.6 million in the first six months of 2000. The increase in netrevenues in the second quarter of 2001, as compared to the second quarter of2000, resulted from increased sales of our products in the industrial andmedical markets, offset partially by a decline in the semiconductor capitalequipment market. During the first half of 2001, we began to see weakeningdemand from certain customers in the communications and Internet infrastructuremarkets. Additionally, recent substantial slowing of worldwide semiconductorsales has resulted in a decline in demand for semiconductor capital equipment,which is expected to decrease our sales in this sector. The weakness in both ofthese industry segments will result in lower revenues and profits in the thirdquarter of 2001.We have limited visibility as to the duration of this slowing.

             During2000, we entered into a joint venture agreement in China, which included alicense and technology transfer agreement for certain of our technologies, inexchange for cash payments totaling $1.5 million over two to three years. The$1.5 million is being recognized as revenue as specific milestones under thecontract for the implementation of the technology transferred to the jointventure are met. An immaterial amount of technology license revenue wasincluded in revenues for the second quarters of 2001 and 2000.

             *GrossProfit.*  Our gross profitmargin was 36.9% in the second quarter of 2001 compared to 37.2% in the secondquarter of 2000. The decrease in gross profit margin in the second quarter of2001, as compared to the second quarter of 2000, resulted from lower grossmargin product mix and lower fixed cost absorption in our internalmanufacturing facilities due to declining production volumes.  Our gross profit is expected to decline inthe third quarter of 2001 due to continued low fixed cost absorption in ourinternal manufacturing facilities as we implement intermittent productionshutdowns in order to control inventory levels and continue to experience aless favorable product mix.

*             Research and Development Expense.*  Our research anddevelopment expenses were $465,000 in the second quarter of 2001, an increaseof 94.6% from research and development expenses of $239,000 in the secondquarter of 2000. The increase in research and development expenses in thesecond quarter of 2001, as compared to the second quarter of 2000, primarilyresulted from increased use of materials associated with our research anddevelopment efforts. We expect that our research and development efforts willcontinue to increase in 2001. As a percent of net revenues, research anddevelopment expense increased to 4.0% in second quarter of 2001 from 2.4% inthe second quarter of 2000.

             *Selling, General and Administrative Expense.*  Our selling,general and administrative expenses were $2.7 million in the second quarterof 2001, an increase of 15.5% from selling, general and administrative expensesof $2.3 million in the first quarter of 2000. The increase in selling,general and administrative expenses in the second quarter of 2001, as comparedto the second quarter of 2000, principally resulted from $220,000 of increasedpayroll from additional personnel; $86,000 of increased commissions on higherrevenues; and $100,000 of expenses related to the growth of our business andbeing a public company, including board of director fees and increased feesfrom accounting, legal and other outside services. These increases were offsetby the decrease in goodwill amortization to $0 in the second quarter of 2001,from $99,000 in the second quarter of 2000. (See "Effects of Push DownAccounting" below.)

             As apercent of net revenues, selling, general and administrative expense increasedto 23.2% in the second quarter of 2001 from 23.0% in the second quarter of2000. 

*             Stock Compensation Expense.*  Stockcompensation expense includes costs relating to stock–based employeecompensation arrangements, and is based on the difference between the fairmarket value of our common stock on the date of grant of options and theexercise price of options to purchase that stock. Stock compensation expense isrecognized over the vesting periods of the related options, typically fiveyears. Stock compensation expense of $80,000 was recorded in the second quarterof 2001. Of this amount, $13,500 was recorded in cost of goods sold, $5,000 wasrecorded in research and development expense and $61,500 was recorded inselling, general and administrative expense. Stock compensation expense of$72,000 was recorded in the second quarter of 2000. Of this amount, $25,000 wasrecorded in cost of goods sold, $8,000 was recorded in research and developmentexpense and $39,000 was recorded in selling, general and administrativeexpense. We expect to record stock compensation expense of $41,000 in the thirdquarter of 2001.

             *Other income(expense), net*. Other income (expense), net, which includes interestexpense, interest income and other expense, was $506,000 in the second quarterof 2001 and $(528,000) in the second quarter of 2000.  Included in other income (expense) in the second quarter of 2001was $474,000 of interest income primarily earned on the investment of proceedsfrom our IPO in August 2000, compared to $0 interest income in the secondquarter of 2000. Included in other income (expenses) in the second quarter of2000 was $520,000 of interest expense principally composed of imputed interestrelated to the issuance of warrants to Advanced Energy Industries, Inc,interest expense related to the $3.3 million note payable to HamiltonSundstrand for the purchase of APT by our six senior officers (see "Effectsof Push Down Accounting” below) and other outstanding debt related to ouroperations, compared to an immaterial amount of interest expense in the secondquarter of 2001. 

             *IncomeTax Expense*.  Our effective tax rate was approximately29.7% in the second quarter of 2001. We expect our annual effective tax ratewill approximate 33% for 2001.  Theeffective tax rate in the second quarter of 2001 was lower than the federalstatutory rate primarily due to the benefit of a reduction in the valuationallowance due to the realization of foreign net operating loss carryforwards.  The effective tax rate in thesecond quarter of 2000 was approximately 62.6%. The effective tax rate in thesecond quarter of 2000 was higher than the federal statutory rate primarily dueto permanent differences and was partially offset by the benefit of a reductionin the valuation allowance due to the realization of foreign net operating losscarry forwards.  The permanentdifferences in the second quarter of 2000 relate to interest expense on a $3.3million note payable to Hamilton Sundstrand that was not deductible for taxpurposes by us and interest income that was recognized for tax purposes on $3.1million notes payable from our six senior officers, but not recorded on ourconsolidated financial statements. Additionally, goodwill amortization related to the purchase transactionsincreased the effective tax rate because the amortization was not deductiblefor tax purposes. See "Effects of PushDown Accounting” below.

**Effects of Push Down Accounting**

             InSeptember 1995, our six senior officers purchased a controlling 51%interest in APT for approximately $3.6 million, of which approximately$3.3 million was funded with a note payable to Hamilton Sundstrand, theseller, and the balance was funded from the personal assets of these officers.In January 1998, these same officers purchased the remaining interest inAPT for approximately $2.5 million. We loaned our six senior officers$3.0 million, an amount sufficient to purchase the remaining 49% interestand to pay interest on the note owed to Hamilton Sundstrand. In addition, weloaned $100,000 to our six senior officers in 1999 to pay interest on theHamilton Sundstrand note. In accordance with purchase accounting and push downaccounting rules, we were required to establish a new cost basis for our assetsand liabilities in January 1998, based on these purchase transactions and toreflect that basis in our consolidated financial statements. The effects ofapplying push down accounting to our accompanying consolidated financialstatements were as follows: 

•            In1998, we recorded the $3.3 million note payable to Hamilton Sundstrandrelated to the 1995 purchase as long-term debt on our consolidated balancesheet and we have included corresponding interest expense in our consolidatedstatements of operations. In August 2000, our six senior officers used aportion of their proceeds from the sale of shares of common stock in our IPO torepay the $3.3 million note payable and accrued interest of $771,000 toHamilton Sundstrand, which eliminates our interest expense related to this debtgoing forward. 

•            The$3.1 million in notes payable to APT and accrued interest related to the1998 purchase was not recorded as a liability on our consolidated balance sheet,but was reflected as a reduction to stockholders' equity.  In August 2000, our six senior officers useda portion of their proceeds from the sale of shares of common stock in our IPOto repay the $3.1 million notes payable and accrued interest of $481,000 toAPT, which increased our stockholders' equity.

•            We accounted for the purchase of APTby our six senior officers using the purchase method of accounting, whichrequired that the purchase price be allocated to the net assets acquired basedon the relative fair value of assets acquired. The amount of the purchase pricein excess of the fair value of the net assets acquired was classified asgoodwill. We recorded approximately $983,000 of goodwill related to thepurchase transactions. Goodwill amortization is included in selling, generaland administrative expense in our consolidated statements of operations. As ofSeptember 30, 2000, goodwill associated with the purchase transactions wasfully amortized. 

**Liquidityand Capital Resources**

             Inthe first six months of 2001, we generated approximately $605,000 fromoperating activities, primarily from net income of $2.9 million adjusted fordepreciation and amortization of $594,000, offset by an increase in accountsreceivable of  $908,000 and an increasein inventories of $1.3 million. Accounts receivable and inventories increasedas a result of increased sales in the second quarter of 2001, but alsorepresent slightly higher balances in relation to revenues as compared to thesecond quarter of 2000. 

             In thefirst six months of 2001, we used approximately $7.9 million in investingactivities, which consisted of the purchase of $13.4 million ofavailable-for-sale securities and the purchase of $1.5 million of equipment,partially offset by proceeds from the sale of available-for-sale securities of$7.0 million. At June 30, 2001 we had capital expenditure commitments ofapproximately $466,000. 

             Inthe first six months of 2001, we generated approximately $403,000 fromfinancing activities, which primarily consisted of net proceeds of $468,000from the exercise of stock options.

             Wehave two lines of credit with a bank for up to a total of $6.0 million toprovide funds for our continuing operations. No amounts were outstanding underthe lines of credit at June 30, 2001. The lines of credit were extended inMay 2001 through the end of July 2001 and, bear interest at prime plus1.0% or 1.25% based on the ratio of debt to equity and are secured by accountsreceivable and inventories. Borrowings under our lines of credit are subject tofinancial covenants, including minimum tangible net worth, maximum debt totangible net worth, minimum debt service ratio and quick ratio. We were incompliance with all covenants as of June 30, 2001. We expect to renew the linesof credit as the need arises.

             Webelieve our existing cash and cash equivalents and expected cash flow fromoperations will be sufficient to support our operating cash requirements for atleast the next 12 months. We expect from time to time to evaluate potentialacquisitions and equity investments complementary to our market strategy. Tothe extent we pursue such transactions, we could require additional equity ordebt financing to fund such activities or to fund our working capitalrequirements in the event of an industry downturn or an unexpected adversechange in our business operations. To the extent we require additional capital,we cannot assure you that we will be able to obtain such financing on termsfavorable to us, or at all.  

**RecentAccounting Pronouncements  **

             InJuly 2001, the Financial Accounting Standards Board (FASB) issued FASBStatements Nos. 141 and 142 (FAS 141 and 142), Business Combinations andGoodwill and Other Intangible Assets. FAS 141 replaces APB 16 and eliminates pooling-of-interests accountingprospectively.  It also providesguidance on purchase accounting related to the recognition of intangible assetsand accounting for negative goodwill. FAS 142 changes the accounting for goodwill from an amortization methodto an impairment-only approach.  UnderFAS 142, goodwill will be tested annually and whenever events or circumstancesoccur indicating that goodwill might be impaired.  FAS 141 and 142 are effective for all business combinationsinitiated after June 30, 2001.

Uponadoption of FAS 142, amortization of goodwill recorded for businesscombinations consummated prior to July 1, 2001 will cease, and intangibleassets acquired prior to July 1, 2001 that do not meet the criteria forrecognition under FAS 141 will be reclassified to goodwill.  Companies are required to adopt FAS 142 forfiscal years beginning after December 15, 2001.  The Company will adopt FAS 142 on January 1, 2002. In connectionwith the adoption of FAS 142, the Company will be required to perform atransitional goodwill impairment assessment. The Company has determined that the impact of these standards will nothave a material impact on its results of operations and financial position whenimplemented.

**Quantitativeand Qualitative Disclosure About Market Risk**

             Wedo not use derivative financial instruments in our investment portfolio. Due tothe short duration and conservative nature of our cash equivalents, and thehigh quality and conservative nature of our investments, we do not expect anymaterial loss with respect to our investment portfolio. 

             Currentlyless than 3% of our sales are transacted in local currencies, primarily Frenchfrancs. As a result, our international results of operations are subject toforeign exchange rate fluctuations. We do not currently hedge against foreigncurrency rate fluctuations. Most of our export sales and sales by APT Europeare in U.S. dollars, and most of our foreign currency sales are fromoperations with significant expenses in the same currency. As a result, gains andlosses from such fluctuations have not been material to our consolidatedresults of operations. 

**PART II.  OTHERINFORMATION**

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

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

 

| Exhibit  No. |   |
|--------------|--------|
|         |   |
| None         |   |

(b) Reports on Form 8-K

             No reports on Form 8-K were filed during the quarterended June 30, 2001*. *

**SIGNATURE**

             Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized this 10th day of August, 2001.

 

|   |   | 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)                     |