**UNITEDSTATES**

**SECURITIESAND 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** |
|------------|--------|----------------------------------------------------------------------------------------------------|

** **

** **

**Forthe quarterly period ended September 30, 2001**

** **

**OR**

 

 

| **o** |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------|---------------------------------------------------------------------------------------------------|

 

 

**Commission file number 001-16047**

 

 

**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) |

 

 

**405SW Columbia Street, Bend, Oregon  97702**

(Address of principalexecutive offices and Zip Code)

 

**(541)382-8028**

(Registrant's telephonenumber)

 

 

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 Act of1934 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

 

The number of shares of the Registrant's Common Stock outstanding as ofNovember 7, 2001 was 8,722,410 shares.

 

 

 

**ADVANCEDPOWER TECHNOLOGY, INC.**

**FORM 10-Q**

**TABLE OF CONTENTS**

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

 

 

 

 

 

 

 

**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED BALANCE SHEETS**

** (In thousands, except share amounts)**

 

 
|                                                                                                                                                                                      |   | ** September 30,** |           | **December 31,** |           |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|----------------|------------------|----------------|
|                                                                                                                                                                                      |   | **2001**                |           | **2000**         |           |
|                                                                                                                                                                                      |   | **(Unaudited)**         |           |             |           |
| **Assets**                                                                                                                                                                                |   |                    |           |             |           |
| Current assets:                                                                                                                                                                           |   |                    |           |             |           |
| Cash and cash equivalents                                                                                                                                                                 |   | $                       | 17,436         |             | $              | 25,326 |   |
| Short-term investments                                                                                                                                                                    |   | 15,185                  |           | 8,118            |           |
| Accounts receivable, net of allowance of $85 (2001) and  $120 (2000)                                                                                                                      |   | 5,236                   |           | 6,776            |           |
| Inventories, net                                                                                                                                                                          |   | 9,185                   |           | 6,814            |           |
| Prepaid expenses and other current assets                                                                                                                                                 |   | 1,895                   |           | 1,799            |           |
| Total current assets                                                                                                                                                                      |   | 48,937                  |           | 48,833           |           |
| Property and equipment, net of accumulated amortization  and depreciation of $8,588 (2001) and $8,273 (2000)                                                                              |   | 5,260                   |      | 4,367            |      |
| Long-term investments                                                                                                                                                                     |   | 3,441                   |           | 3,022            |           |
| Other assets                                                                                                                                                                              |   | 1,164                   |           | 1,091            |           |
| Total assets                                                                                                                                                                              |   | $                       | 58,802         |             | $              | 57,313 |   |
|                                                                                                                                                                                           |   |                    |           |             |           |
| **Liabilities and Stockholders' Equity**                                                                                                                                                  |   |                    |           |             |           |
| Current liabilities:                                                                                                                                                                      |   |                    |           |             |           |
| Accounts payable                                                                                                                                                                          |   | $                       | 2,614          |             | $              | 4,385 |   |
| Accrued expenses                                                                                                                                                                          |   | 1,540                   |           | 1,402            |           |
| Current portion of long–term debt                                                                                                                                                    |   | -                       |           | 21               |           |
| Current portion of capital lease obligations                                                                                                                                              |   | 71                      |           | 80               |           |
| Total current liabilities                                                                                                                                                                 |   | 4,225                   |           | 5,888            |           |
| Capital lease obligations, less current portion                                                                                                                                           |   | 77                      |           | 130              |           |
| Deferred gain on sale leaseback                                                                                                                                                           |   | 164                     |           | 177              |           |
| Total liabilities                                                                                                                                                                         |   | 4,466                   |           | 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; 8,827,441 issued and 8,718,584 shares outstanding in 2001;  8,515,818 shares issued and 8,406,961 shares outstanding in 2000 |   | 88                      |           | 85               |           |
| Additional paid–in capital                                                                                                                                                           |   | 67,323                  |           | 66,826           |           |
| Treasury stock, at cost, 108,857 shares                                                                                                                                                   |   | (1,700                  | )              | (1,700           | )              |
| Deferred stock compensation                                                                                                                                                               |   | (207                    | )              | (330             | )              |
| Accumulated other comprehensive income                                                                                                                                                    |   | 151                     |           | 64               |           |
| Accumulated deficit                                                                                                                                                                       |   | (11,319                 | )              | (13,827          | )              |
| Total stockholders' equity                                                                                                                                                                |   | 54,336                  |           | 51,118           |           |
|                                                                                                                                                                                      |   | $                       | 58,802         |             | $              | 57,313 |   |

 

 

 

See accompanyingnotes to consolidated financial statements.

 

**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

** (In thousands, except per share amounts)**

**(Unaudited)**

 

** **
|                                                                                       |   | **Three Months  Ended**

**September 30,** |   | **Nine Months  Ended**

**September 30,** |   |
|--------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                       |   | **2001**                                   |   | **2000**                                  |   | **2001** |   | **2000** | ** ** |
|                                                                                       |   |                                       |   |                                      |   |   |   |   |   |
| Revenues, net                                                                              |   | $                                          | 6,838  |                                      | $      | 12,058 |   | $ | 31,522 |   | $ | 31,699 |   |
| Cost of goods sold                                                                         |   | 5,529                                      |   | 7,233                                     |   | 20,747 |   | 19,746 |   |
| Gross profit                                                                               |   | 1,309                                      |   | 4,825                                     |   | 10,775 |   | 11,953 |   |
|                                                                                       |   |                                       |   |                                      |   |   |   |   |   |
| Operating expenses:                                                                        |   |                                       |   |                                      |   |   |   |   |   |
| Research and development                                                                   |   | 359                                        |   | 280                                       |   | 1,175 |   | 762 |   |
| Selling, general and administrative                                                        |   | 1,970                                      |   | 2,764                                     |   | 7,364 |   | 7,363 |   |
| Total operating expenses                                                                   |   | 2,329                                      |   | 3,044                                     |   | 8,539 |   | 8,125 |   |
| Income (loss) from operations                                                              |   | (1,020                                     | )      | 1,781                                     |   | 2,236 |   | 3,828 |   |
| Other income (expense), net                                                                |   | 237                                        |   | (82                                       | )      | 1,347 |   | (869 | ) |
| Income (loss) before income tax expense                                                    |   | (783                                       | )      | 1,699                                     |   | 3,583 |   | 2,959 |   |
| Income tax expense (benefit)                                                               |   | (366                                       | )      | 380                                       |   | 1,075 |   | 1,146 |   |
| Net income (loss)                                                                          |   | $                                          | (417   | )                                         | $      | 1,319 |   | $ | 2,508 |   | $ | 1,813 |   |
|                                                                                       |   |                                       |   |                                      |   |   |   |   |   |
| Net income (loss) per share:                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Basic                                                                                      |   | $                                          | (0.05  | )                                         | $      | 0.19 |   | $ | 0.29 |   | $ | 0.32 |   |
| Diluted                                                                                    |   | (0.05                                      | )      | 0.16                                      |   | 0.27 |   | 0.26 |   |
| Weighted average number of shares used in the  computation of net income (loss) per share: |   |                                       |   |                                      |   |   |   |   |   |
| Basic                                                                                      |   | 8,709                                      |   | 6,869                                     |   | 8,596 |   | 5,621 |   |
| Diluted                                                                                    |   | 8,709                                      |   | 8,155                                     |   | 9,277 |   | 6,925 |   |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financialstatements.

 

**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

** **

** **
|                                                                               |   | **Nine Months  Ended**

**September 30,** |   |
|------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                               |   | **2001**                                  |   | **2000** | ** ** |
| Cash flows from operating activities:                                              |   |                                      |   |   |   |
| Net income                                                                         |   | $                                         | 2,508  |   | $ | 1,813 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |                                      |   |   |   |
| Depreciation and amortization                                                      |   | 870                                       |   | 1,002 |   |
| Amortization of investment discount                                                |   | 21                                        |   | - |   |
| Net gain on disposal of property and equipment                                     |   | -                                         |   | 15 |   |
| Non-cash income tax expense                                                        |   | -                                         |   | 1,124 |   |
| Deferred gain on sale-leaseback                                                    |   | (13                                       | )      | (8 | ) |
| Non-cash interest expense                                                          |   |                                      |   | 659 |   |
| Amortization of deferred stock compensation                                        |   | 162                                       |   | 211 |   |
| Changes in operating assets and liabilities:                                       |   |                                      |   |   |   |
| Accounts receivable                                                                |   | 1,491                                     |   | (2,430 | ) |
| Inventories                                                                        |   | (2,406                                    | )      | (586 | ) |
| Prepaid expenses and other assets                                                  |   | (184                                      | )      | (729 | ) |
| Accounts payable and accrued expenses                                              |   | (1,629                                    | )      | 1,877 |   |
| Net cash provided by operating activities                                          |   | 820                                       |   | 2,948 |   |
| Cash flows from investing activities:                                              |   |                                      |   |   |   |
| Purchases of available-for-sale securities                                         |   | (17,410                                   | )      | (4,963 | ) |
| Proceeds from sale of available-for-sale securities                                |   | 10,033                                    |   | - |   |
| Purchase of property and equipment                                                 |   | (1,763                                    | )      | (2,032 | ) |
| Net cash used in investing activities                                              |   | (9,140                                    | )      | (6,995 | ) |
| Cash flows from financing activities:                                              |   |                                      |   |   |   |
| Payments on lines of credit, net                                                   |   | -                                         |   | (3,920 | ) |
| Payments on capital lease obligations                                              |   | (62                                       | )      | (145 | ) |
| Proceeds from issuance of long–term debt                                      |   | -                                         |   | 775 |   |
| Principal payments on long–term debt                                          |   | (20                                       | )      | (3,236 | ) |
| Sale of common stock, net of issuance costs                                        |   | -                                         |   | 38,365 |   |
| Payment of note receivable from officers (1)                                       |   | -                                         |   | 3,580 |   |
| Proceeds from exercise of stock options                                            |   | 460                                       |   | - |   |
| Net cash provided by financing activities                                          |   | 378                                       |   | 35,419 |   |
| Effects of exchange rate changes on cash                                           |   | 52                                        |   | (38 | ) |
| Net change in cash and cash equivalents                                            |   | (7,890                                    | )      | 31,334 |   |
| Cash and cash equivalents at beginning of period                                   |   | 25,326                                    |   | 316 |   |
| Cash and cash equivalents at end of period                                         |   | $                                         | 17,436 |   | $ | 31,650 |   |
|                                                                               |   |                                      |   |   |   |
| Supplemental disclosure of cash flow information:                                  |   |                                      |   |   |   |
| Cash paid during the period for:                                                   |   |                                      |   |   |   |   |   |
| Interest:                                                                          |   | $                                         | 53     |   | $ | 563 |   |
| Income taxes                                                                       |   | 1,223                                     |   | 357 |   |
|                                                                               |   |                                      |   |   |   |
| Supplemental disclosure of noncash activities:                                     |   |                                      |   |   |   |
| Tax benefit of warrants exercised                                                  |   |                                      |   |   | $ | 380 |   |
| Payment of note payable to Hamilton Sundstrand (1)                                 |   |                                      |   | 4,091 |   |
| Payments received on note receivable recorded as  additional paid in capital (1)   |   |                                      |   | 3,580 |   |
| Issuance of warrants in connection with refinancing                                |   |                                      |   | 460 |   |
| Unrealized gain on short-term and long-term investments                            |   | $                                         | 80     |   | 43 |   |
|                                                                                    |        |                                           |        |  |  |  |  |  |

----

(1)  See “Management’s Discussionand Analysis of Financial Condition and Results of Operations - Effect of PushDown Accounting"

See accompanying notes toconsolidated financial statements.

 

**ADVANCED POWER TECHNOLOGY, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Dollars in thousands)**

 

**Note1.  BASIS OF PRESENTATION**

 

The accompanying unaudited consolidated financialstatements include normal recurring adjustments necessary for a fairpresentation of Advanced Power Technology, Inc.’s (APT) interim results.  The consolidated financial statements andnotes in this Form 10-Q are presented as permitted by Regulation S-X, and assuch, they do not contain certain information included in APT’s 2000 annualconsolidated financial statements and notes. This Form 10-Q should be read in conjunction with APT’s consolidatedfinancial statements and notes included in its Annual Report on Form 10-K forthe year ended December 31, 2000.  Thefinancial information as of December 31, 2000 is derived from the auditedconsolidated financial statements as filed with APT’s Annual Report on Form10-K for the year ended December 31, 2000. The results of operations for the three and nine months ended September30, 2001 are not necessarily indicative of the results expected for the entirefiscal year ending December 31, 2001.

 

APT’s financial quarters are 13 week periods. Thesecond quarter of 2001 ended on September 30 and the second quarter of 2000ended on October 1.  For convenience,the third quarters of 2001 and 2000 are shown as ended on September 30.

 

**Note2.  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, as presented in the following table(unaudited).

 
|                                                    |   | **Three Months  Ended**

**September 30,** |   | **Nine Months  Ended**

**September 30,** |   |
|---------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                                    |   | **2001**                                   |   | **2000**                                  |   | **2001** |   | **2000** | ** ** |
|                                                    |   |                                       |   |                                      |   |   |   |   |   |
| Net income (loss)                                       |   | $                                          | (417   | )                                         | $      | 1,319 |   | $ | 2,508 |   | $ | 1,813 |   |
|                                                    |   |                                       |   |                                      |   |   |   |   |   |
| Other comprehensive income (loss), net of tax           |   |                                       |   |                                      |   |   |   |   |   |
| Foreign currency translation adjustment                 |   | 54                                         |   | 8                                         |   | 7 |   | 33 |   |
| Unrealized gain (loss) on available for sale securities |   | 35                                         |   | (43                                       | )      | 80 |   | (43 | ) |
| Comprehensive income (loss)                             |   | $                                          | (328   | )                                         | $      | 1,284 |   | $ | 2,595 |   | $ | 1,803 |   |

 

**Note3.  INVENTORIES, NET**

                
|               |   | **September 30,**

**2001** |   | **December 31,**

**2000** |   |
|--------------------|--------|-----------------------------|--------|----------------------------|--------|
|               |   | **(unaudited)**             |   |                       |   |
|               |   |                        |   |                       |   |
| Raw materials      |   | $                           | 1,535  |                       | $      | 1,205 |   |
| Work in process    |   | 5,101                       |   | 4,114                      |   |
| Finished goods     |   | 3,448                       |   | 2,170                      |   |
|               |   | 10,084                      |   | 7,489                      |   |
| Valuation  reserve |   | (899                        | )      | (675                       | )      |
|               |   | $                           | 9,185  |                       | $      | 6,814 |   |

 

 

 

 

 

**Note4.  NET INCOME PER SHARE**

 

Basic net income 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. Incremental shares related tooutstanding stock options and warrants of approximately 681,000 for the ninemonths ended September 30, 2001, and 1,286,000 and 1,304,000 for the three andnine months ended September, 2000, respectively, were included in thecalculations of diluted net income per share for those periods.  Incremental shares related to outstandingstock options of 740,000 and 152,000 for the three and nine months endedSeptember 30, 2001, respectively were excluded from the calculation of dilutednet income per share because the effect would have been anti-dilutive.

 

 

**ITEM2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND**

**RESULTS OF OPERATIONS**

This discussion and analysisis intended to be read in conjunction with Management's Discussion and Analysisof Financial Condition and Results of Operations set forth in our Annual Reporton Form 10-K for the year ended December 31, 2000.

**Forward-lookingStatements and Risk Factors Affecting Business and Results of Operations**

All statements and trendanalyses contained in this item and elsewhere in this report on Form 10-Qrelative to the future constitute "forward-looking" statements withinthe meaning of the Private Securities Litigation Reform Act of 1995. Forward-statementsare subject to the business and economic risks faced by us and our actualresults of operations may differ materially from those contained in theforward-looking statements. In addition, results of operations for the periodsdiscussed below should not be considered indicative of the results to beexpected in any future period and fluctuations in operating results mightresult in fluctuations in the market price of our common stock. Our quarterlyand annual operating results may vary significantly depending on many factors,including but not limited to, the ability of subcontractors to meet theirdelivery commitments; unfavorable changes in industry and competitiveconditions; our mix of product shipments; the accuracy of our customer’s forecasts;the effectiveness of our efforts to control and reduce costs; and other risksdetailed in "Management’s Discussion and Analysis of Financial Conditionand Results of Operations - Risk Factors Affecting Business and Results ofOperations" in our Annual Report on Form 10-K for the year ended December31, 2000, filed with the Securities and Exchange Commission.

**Overview**

 

                We are a leading designer,manufacturer and marketer of high-performance power semiconductors. Powersemiconductors manage and regulate power by converting electricity into a formrequired by electrical and electronic products. Our power semiconductorsincrease system efficiency, permit the design of more compact end products andimprove features and functionality. We are primarily focused on the high power,high frequency segment of the power semiconductor market. High power refers tothe ability to handle voltages and currents above one kilowatt, and highfrequency refers to the ability to switch on and off at speeds above 100kilohertz. We sell our products primarily in North America and Europe, withincreasing sales in Asia, through a network of independent salesrepresentatives and distributors.

In August 2000, we completedan initial public offering, or IPO, of 4,025,000 shares of our common stock,including the underwriters’ over-allotment, at an offering price of $15.00 pershare. The IPO included 2,830,000 shares sold by APT and 1,195,000 shares soldby shareholders of APT, and resulted in net proceeds 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**

**September 30,** |   | **Nine Months  Ended**

**September 30,** |   |
|-----------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                    |   | **2001**                                   |   | **2000**                                  |   | **2001** |   | **2000** | ** ** |
|                                    |   |                                       |   |                                      |   |   |   |   |   |
| Revenues, net                           |   | 100.0                                      | %      | 100.0                                     | %      | 100.0 | % | 100.0 | % |
| Cost of goods sold                      |   | 80.9                                       |   | 60.0                                      |   | 65.8 |   | 62.3 |   |
| Gross profit                            |   | 19.1                                       |   | 40.0                                      |   | 34.2 |   | 37.7 |   |
| Operating expenses:                     |   |                                       |   |                                      |   |   |   |   |   |
| Research and development                |   | 5.3                                        |   | 2.3                                       |   | 3.7 |   | 2.4 |   |
| Selling, general and administrative     |   | 28.8                                       |   | 22.9                                      |   | 23.4 |   | 23.2 |   |
| Total operating expenses                |   | 34.1                                       |   | 25.2                                      |   | 27.1 |   | 25.6 |   |
| Income (loss) from operations           |   | (15.0                                      | )      | 14.8                                      |   | 7.1 |   | 12.1 |   |
| Other income (expense), net             |   | 3.5                                        |   | (0.7                                      | )      | 4.3 |   | (2.8 | ) |
| Income (loss) before income tax expense |   | (11.5                                      | )      | 14.1                                      |   | 11.4 |   | 9.3 |   |
| Income tax (benefit) expense            |   | (5.4                                       | )      | 3.2                                       |   | 3.4 |   | 3.6 |   |
| Net income (loss)                       |   | (6.1)                                      | %      | 10.9                                      | %      | 8.0 | % | 5.7 | % |

 

*                Revenues.*  Revenuesfor the third quarter of 2001 were $6.8 million, down 43.3 percent compared to$12.1 million in the third quarter of 2000 and down 40.7 percent sequentiallyfrom the $11.5 million recorded in the second quarter of 2001.  Approximately $2.0 million of the sequentialdecline in revenue was due to lower shipments to distributors as the companytook proactive steps to align distributors’ inventories with reduced demand.Revenues to distributors declined 66.1 percent sequentially while revenues toOEM customers declined 31.5 percent sequentially.  We did observe a marked slow down toward the end of the quarter.However we have no specific and identified reason to believe that our financialresults for the third quarter were materially impacted by the September 11th,2001 terrorist action.

 

                While the company saw across the board weakness inthe third quarter, we believe that the fundamental dynamics continue to beweakness in the communications and the semiconductor capital equipment marketsand relative strength in the industrial, medical and military and aerospacemarkets. Based on identified customer demand for the fourth quarter of 2001, weexpect our sales to the communications and the semiconductor capital equipmentmarkets to decline year over year by approximately 14 percent and 38 percent,respectively, while our sales to the combined industrial, medical and militaryand aerospace markets are expected to grow by approximately 8 percent.

 

                During 2000, we entered into ajoint venture agreement in China, which included a license and technologytransfer agreement for certain of our technologies, in exchange for cashpayments totaling $1.5 million over two to three years. The $1.5 million isbeing recognized as revenue as specific milestones under the contract for theimplementation of the technology transferred to the joint venture are met.   Included in revenues during the thirdquarter of 2000 was $220,000 of technology licensing revenue associated withour joint venture in China.  Animmaterial amount of technology license revenue was included in revenues forthe third quarter of 2001.

 

                *Gross Profit.*  Gross margin for the third quarter of 2001was 19.1 percent compared to 40.0 percent for the third quarter of 2000 and36.9 percent for the second quarter of 2001. The decrease in gross margin was primarily due to significantly lowerfixed cost absorption in the Company's internal manufacturing facilities,decreased utilization of lower-cost outside manufacturing subcontractors,non-quality related product returns from customers and increased inventoryreserves of $241,000.

At the current revenuelevels, the Company expects gross margins to continue to be significantly belowprior year levels, due to the negative leverage associated with increasedunder-utilization of the Company’s in-house manufacturing capacity.  In addition, until orders increasesignificantly, the company will be unable to fully realize the benefits of itslower-cost third-party manufacturing partnerships. In the current uncertainenvironment the Company is taking actions to adjust production levels toreduced demand levels and to simultaneously reduce inventories even though thiscreates strong pressure on gross margin. Current fourth quarter projections arefor the Company’s wafer fabrication operations to operate at approximately 24percent of capacity and for purchases from wafer foundries to be downapproximately 68 percent from their peak level.  The combination of these two factors is expected to cause grossmargin in the fourth quarter to be in the mid teen range.

 

*                Research and DevelopmentExpense.*  Third quarter research anddevelopment expenses totaled $359,000 or 5.3 percent of revenues, compared to$280,000, or 2.3 percent of revenue in last year’s third quarter. Year-to-date,research and development expenses increased 54.2% to $1.18 million from$762,000 in the year ago period. In spite of the difficult market environmentthe Company has been accelerating its research and development programs leadingto the introduction of new products.

 

*                Selling, General andAdministrative Expense.*  Selling, general and administrativeexpenses totaled $1.97 million in the third quarter, or 28.8 percent ofrevenues, a 28.7 percent decrease compared to $2.76 million in last year’scomparable period and 26.2 percent below $2.67 million in the second quarter.The Company has instituted a number of expense and cost-reduction programs,including a reduction of employment, a wage freeze and graduated pay reductionsfor domestic salaried and hourly workers, and planned company-wide shutdowns.  Thedecrease in selling, general and administrative expenses in the third quarterof 2001, as compared to the third quarter of 2000, principally resulted from$222,000 of decreased payroll due to salary reductions and company shutdowns;$240,000 of decreased commissions on lower revenues; and lower overall spendinglevels pursuant to cost reduction initiatives currently in place. In additionto these decreases, goodwill amortization was $0 in the third quarter of 2001,compared to $67,000 in the third quarter of 2000. (See "Effects of PushDown Accounting" below.)

 

*                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 $41,000 was recorded in the third quarterof 2001. Of this amount, $13,500 was recorded in cost of goods sold, $5,000 wasrecorded in research and development expense and $22,500 was recorded inselling, general and administrative expense. Stock compensation expense of$67,000 was recorded in the third quarter of 2000. Of this amount, $23,000 wasrecorded in cost of goods sold, $7,000 was recorded in research and developmentexpense and $37,000 was recorded in selling, general and administrativeexpense. We expect to record stock compensation expense of $41,000 in thefourth quarter of 2001.

 

                *Other income (expense), net*.Other income (expense), net, which includes interest expense, interest incomeand other expense, was $237,000 in the third quarter of 2001 and $(82,000) inthe third quarter of 2000.  Included inother income (expense) in the third quarter of 2001 was $325,000 of interestincome primarily earned on the investment of proceeds from our IPO in August2000, compared to $0 interest income in the third quarter of 2000. Included inother income (expenses) in the third quarter of 2000 was $80,000 of interestexpense principally composed of imputed interest related to the issuance ofwarrants to Advanced Energy Industries, Inc, interest expense related to the$3.3 million note payable to Hamilton Sundstrand for the purchase of APTby our six senior officers (see "Effects of Push Down Accounting” below)and other outstanding debt related to our operations, compared to an immaterialamount of interest expense in the third quarter of 2001.

 

                *Income Tax Expense*.  Our effective tax rate was approximately30.0% in the first nine months of 2001. We expect our annual effective tax rate will approximate 30% for 2001.  The effective tax rate in the first ninemonths of 2001 was lower than the federal statutory rate primarily due to thebenefit of a reduction in the valuation allowance due to the realization offoreign net operating loss carry forwards. The effective tax rate in the first nine months of 2000 was approximately38.7%.  The effective tax rate in the firstnine months of 2000 was higher than the federal statutory rate primarily due topermanent differences and was partially offset by the benefit of a reduction inthe valuation allowance due to the realization of foreign net operating losscarry forwards.  The permanentdifferences in the first nine months of 2000 relate to interest expense on a$3.3 million note payable to Hamilton Sundstrand that was not deductible fortax purposes by us and interest income that was recognized for tax purposes on$3.1 million notes payable from our six senior officers, but not recorded onour consolidated financial statements. Additionally, goodwill amortization related to the purchase transactionsincreased the effective tax rate because the amortization was not deductiblefor tax purposes.  See "Effects ofPush Down Accounting" below.

 

**Effects of PushDown 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 the HamiltonSundstrand 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 balancesheet, 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 APT byour six senior officers using the purchase method of accounting, which requiredthat the purchase price be allocated to the net assets acquired based on therelative fair value of assets acquired. The amount of the purchase price inexcess of the fair value of the net assets acquired was classified as goodwill.We recorded approximately $983,000 of goodwill related to the purchasetransactions. Goodwill amortization is included in selling, general andadministrative expense in our consolidated statements of operations. As ofSeptember 30, 2000, goodwill associated with the purchase transactions wasfully amortized.

 

**Liquidity andCapital Resources**

 

In the first nine months of2001, we generated approximately $820,000 from operating activities, primarilyfrom net income of $2.5 million adjusted for depreciation and amortization of$870,000, a decrease in accounts receivable of $1.5 million, partially offset by an increase in inventories of $2.4million. Accounts receivable have declined and inventories have increased as aresult of decreased sales in the third quarter of 2001.

 

                In the first nine months of2001, we used approximately $9.1 million in investing activities, whichconsisted of the purchase of $17.4 million of available-for-sale securities andthe purchase of $1.8 million of equipment, partially offset by proceeds fromthe sale of available-for-sale securities of $10.0 million. At September 30,2001 we had capital expenditure commitments of approximately $302,000.

 

                Inthe first nine months of 2001, we generated approximately $378,000 fromfinancing activities, which primarily consisted of net proceeds of $460,000from the exercise of stock options.

 

                Wehad two lines of credit with a bank for up to a total of $6.0 million toprovide funds for our continuing operations. The lines of credit were extendedin May 2001 through the end of July 2001 and bore 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 the lines of credit were subjectto financial covenants, including minimum tangible net worth, maximum debt totangible net worth, minimum debt service ratio and quick ratio. The lines ofcredit expired in July 2001. We expect to renew the lines of credit as the needarises.

 

                We believe our existing cash andcash equivalents and expected cash flow from operations will be sufficient tosupport our operating cash requirements for at least the next 12 monthsand the foreseeable future. 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.

 

**Quantitative and Qualitative DisclosureAbout Market Risk**

 

                We do not use derivative financial instruments in ourinvestment portfolio.  Due to the shortduration and conservative nature of our cash equivalents, and the high qualityand conservative nature of our investments, we do not expect any material losswith respect to our investment portfolio.

 

                Currently less than 3% of oursales are transacted in local currencies, primarily French francs. As a result,our international results of operations are subject to foreign exchange ratefluctuations. We do not currently hedge against foreign currency ratefluctuations. Most of our export sales and sales by APT Europe are inU.S. dollars, and most of our foreign currency sales are from operationswith significant expenses in the same currency. As a result, gains and lossesfrom such fluctuations have not been material to our consolidated results ofoperations.

 

 

 

**PART II.  OTHERINFORMATION**

 

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

 

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

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

 

 

(b) Reports onForm 8-K

 

           No reports on Form 8-K were filedduring the quarter ended September 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 12th day of November, 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)               |
|        |        |                                             |  |  |