** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

| **ý**                                             | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------------------------------------------------------|----------------------------------------------------------------------------------------------|
|                                                   |
| **For the quarterly period ended  September 30, 2002** |
|                                                   |
| **OR**                                                 |
|                                                   |
| **o**                                                  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934** |

 

| **Commission file number 001-16047**                            |
|-----------------------------------------------------------------|
|                                                            |
| **Advanced  Power Technology, Inc.**                            |
| (Exact name of registrant as specified in  its charter)         |
|                                                            |
| **Delaware**                                                    |   | **93-0875072** |
| (State or other Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification Number) |
|                                                            |   |   |
| **405 SW  Columbia Street, Bend, Oregon  97702**           |
| (Address of principal executive offices and Zip Code)           |
|                                                            |   |   |
| **(541)  382-8028**                                             |
| (Registrant’s telephone number)                            |

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange 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 8, 2002 was 10,388,022 shares.

 

 

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**ADVANCEDPOWER TECHNOLOGY, INC.**

**FORM 10-Q**

**TABLE OF CONTENTS**

** **
| **Part I**   |     | **Financial  Information**                                                                              |   |
|--------------|----------|---------------------------------------------------------------------------------------------------------|--------|
|         |     |                                                                                                    |   |
|         | Item 1.  | Financial Statements:                                                                                   |   |
|         |     |                                                                                                    |   |
|         |     | Consolidated Balance Sheets  as of September 30, 2002 and December 31, 2001                             |
|         |     |                                                                                                    |   |
|         |     | Consolidated  Statements of Operations for the three and nine months ended September 30,  2002 and 2001 |
|         |     |                                                                                                    |   |
|         |     | Consolidated  Statements of Cash Flows for the nine months ended September 30, 2002 and  2001           |
|         |     |                                                                                                    |   |
|         |     | Notes to  Consolidated Financial Statements                                                             |
|         |     |                                                                                                    |   |
|         | Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations             |   |
|         |     |                                                                                                    |   |
|         | Item  3. | Quantitative  and Qualitative Disclosure About Market Risk                                              |   |
|         |     |                                                                                                    |   |
|         | Item 4.  | Controls and Procedures                                                                                 |   |
|         |     |
| **Part  II** |     | **Other  Information**                                                                                  |   |
|         |     |
|         | Item 1.  | Legal Proceedings                                                                                       |   |
|         |     |                                                                                                    |   |
|         | Item 6.  | Exhibits and Reports  on Form 8-K                                                                       |   |
|         |     |                                                                                                    |   |
|         |     | Signature                                                                                               |   |
|         |     |                                                                                                    |   |
|         |     | Exhibits                                                                                                |   |
|              |          |                                                                                                         |        |  |  |  |  |  |

 

2

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**ITEM 1. FINANCIAL STATEMENTS**

 

**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATEDBALANCE SHEETS**

** (In thousands, exceptshare amounts)**

 
|                                                                                                                                                                                        |   | **September 30,  2002** |   | **December 31,  2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                                                                                                                                                        |   | **(Unaudited)**         |   |                   |   |
| **Assets**                                                                                                                                                                                  |   |                    |   |                   |   |
| Current assets:                                                                                                                                                                             |   |                    |   |                   |   |
| Cash and cash equivalents                                                                                                                                                                   |   | $                       | 5,747  |                   | $      | 16,102 |   |
| Short-term investments in available-for-sale securities                                                                                                                                     |   | 10,293                  |   | 17,093                 |   |
| Accounts receivable, net of allowance of $291 (2002)  and $59 (2001)                                                                                                                        |   | 8,937                   |   | 3,493                  |   |
| Inventories, net                                                                                                                                                                            |   | 12,371                  |   | 9,307                  |   |
| Prepaid expenses and other current assets                                                                                                                                                   |   | 3,378                   |   | 3,422                  |   |
| Total current assets                                                                                                                                                                        |   | 40,726                  |   | 49,417                 |   |
| Property and equipment, net of accumulated amortization  and depreciation of $10,652 (2002) and $8,804 (2001)                                                                               |   | 10,996                  |   | 5,546                  |   |
| Long-term investments in available-for-sale securities                                                                                                                                      |   | 2,000                   |   | 2,473                  |   |
| Other assets                                                                                                                                                                                |   | 661                     |   | 639                    |   |
| Technology rights, net of accumulated amortization of  $607 (2002)                                                                                                                          |   | 10,155                  |   | —                 |   |
| Goodwill                                                                                                                                                                                    |   | 15,385                  |   | —                 |   |
| Total assets                                                                                                                                                                                |   | $                       | 79,923 |                   | $      | 58,075 |   |
|                                                                                                                                                                                        |   |                    |   |                   |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                               |   |                    |   |                   |   |
| Current liabilities:                                                                                                                                                                        |   |                    |   |                   |   |
| Accounts payable                                                                                                                                                                            |   | $                       | 4,049  |                   | $      | 2,805 |   |
| Accrued expenses                                                                                                                                                                            |   | 2,113                   |   | 1,031                  |   |
| Current portion of capital lease obligations                                                                                                                                                |   | 77                      |   | 73                     |   |
| Total current liabilities                                                                                                                                                                   |   | 6,239                   |   | 3,909                  |   |
| Deferred tax liability                                                                                                                                                                      |   | 2,095                   |   | —                 |   |
| Capital lease obligations, less current portion                                                                                                                                             |   | 15                      |   | 58                     |   |
| Deferred gain on sale leaseback                                                                                                                                                             |   | 147                     |   | 160                    |   |
| Total liabilities                                                                                                                                                                           |   | 8,496                   |   | 4,127                  |   |
|                                                                                                                                                                                        |   |                    |   |                   |   |
| Stockholders’ equity:                                                                                                                                                                  |   |                    |   |                   |   |
| Preferred stock, par value $.001, 1,000,000 shares  authorized; no shares issued and outstanding                                                                                            |   | —                  |   | —                 |   |
| Common stock, par value $.01, 19,000,000 shares  authorized; 10,496,879 issued and 10,388,022 shares outstanding in 2002;  8,836,637 shares issued and 8,727,780 shares outstanding in 2001 |   | 105                     |   | 88                     |   |
| Additional paid-in capital                                                                                                                                                                  |   | 88,308                  |   | 67,640                 |   |
| Treasury stock, at cost, 108,857 shares                                                                                                                                                     |   | (1,700                  | )      | (1,700                 | )      |
| Deferred stock compensation                                                                                                                                                                 |   | (323                    | )      | (166                   | )      |
| Accumulated other comprehensive income                                                                                                                                                      |   | 114                     |   | 117                    |   |
| Accumulated deficit                                                                                                                                                                         |   | (15,077                 | )      | (12,031                | )      |
| Total stockholders’ equity                                                                                                                                                             |   | 71,427                  |   | 53,948                 |   |
| Total liabilities and stockholders’ equity                                                                                                                                             |   | $                       | 79,923 |                   | $      | 58,075 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

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**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,** |   |
|--------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                                       |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** | ** ** |
|                                                                                       |   |                                  |   |                                 |   |   |   |   |   |
| Revenues, net                                                                              |   | $                                     | 13,052 |                                 | $      | 6,838 |   | $ | 31,985 |   | $ | 31,522 |   |
| Cost of goods sold                                                                         |   | 8,589                                 |   | 5,529                                |   | 21,275 |   | 20,747 |   |
| Amortization of technology rights & other                                              |   | 555                                   |   | —                               |   | 1,512 |   | — |   |
| Total cost of goods sold                                                                   |   | 9,144                                 |   | 5,529                                |   | 22,787 |   | 20,747 |   |
| Gross profit                                                                               |   | 3,908                                 |   | 1,309                                |   | 9,198 |   | 10,775 |   |
| Operating expenses:                                                                        |   |                                  |   |                                 |   |   |   |   |   |
| Research and development                                                                   |   | 1,019                                 |   | 359                                  |   | 3,000 |   | 1,175 |   |
| Selling, general and administrative                                                        |   | 3,335                                 |   | 1,970                                |   | 8,868 |   | 7,364 |   |
| In-process research & development                                                      |   | —                                |   | —                               |   | 2,108 |   | — |   |
| Total operating expenses                                                                   |   | 4,354                                 |   | 2,329                                |   | 13,976 |   | 8,539 |   |
| Income (loss) from operations                                                              |   | (446                                  | )      | (1,020                               | )      | (4,778 | ) | 2,236 |   |
| Interest income, net                                                                       |   | 98                                    |   | 325                                  |   | 479 |   | 1,322 |   |
| Other income (loss), net                                                                   |   | 31                                    |   | (88                                  | )      | 22 |   | 25 |   |
| Income (loss) before income tax expense (benefit)                                          |   | (317                                  | )      | (783                                 | )      | (4,277 | ) | 3,583 |   |
| Income tax expense (benefit)                                                               |   | (381                                  | )      | (366                                 | )      | (1,231 | ) | 1,075 |   |
| Net income (loss)                                                                          |   | $                                     | 64     |                                 | $      | (417 | ) | $ | (3,046 | ) | $ | 2,508 |   |
|                                                                                       |   |                                  |   |                                 |   |   |   |   |   |
| Net income (loss) per share:                                                               |   |                                  |   |                                 |   |   |   |   |   |
| Basic                                                                                      |   | $                                     | 0.01   |                                 | $      | (0.05 | ) | $ | (0.30 | ) | $ | 0.29 |   |
| Diluted                                                                                    |   | 0.01                                  |   | (0.05                                | )      | (0.30 | ) | 0.27 |   |
| Weighted average number of shares used in the computation  of net income (loss) per share: |   |                                  |   |                                 |   |   |   |   |   |
| Basic                                                                                      |   | 10,381                                |   | 8,709                                |   | 10,199 |   | 8,596 |   |
| Diluted                                                                                    |   | 10,935                                |   | 8,709                                |   | 10,199 |   | 9,277 |   |

 

See accompanyingnotes to consolidated financial statements.

 

4

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**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

** **
|                                                                                      |   | **Nine Months Ended  September 30,** |   |
|-------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                      |   | **2002**                             |   | **2001** |   |
| Cash flows from operating activities:                                                     |   |                                 |   |   |   |
| Net income (loss)                                                                         |   | $                                    | (3,046 | ) | $ | 2,508 |   |
| Adjustments to reconcile net income (loss) to net cash  provided by operating activities: |   |                                 |   |   |   |
| Depreciation and amortization                                                             |   | 2,470                                |   | 870 |   |
| Inventory provisions                                                                      |   | 599                                  |   | 382 |   |
| Amortization of deferred stock compensation                                               |   | 381                                  |   | 162 |   |
| Amortization of investment premium                                                        |   | 117                                  |   | 21 |   |
| Deferred gain on sale-leaseback                                                           |   | (13                                  | )      | (13 | ) |
| Non-cash charge for in-process research &  development                                |   | 2,108                                |   | — |   |
| Changes in operating assets and liabilities, net of  effects of acquisitions:             |   |                                 |   |   |   |
| Accounts receivable                                                                       |   | (2,940                               | )      | 1,491 |   |
| Inventories                                                                               |   | 1,432                                |   | (2,788 | ) |
| Prepaid expenses and other assets                                                         |   | 1,254                                |   | (184 | ) |
| Accounts payable and accrued expenses                                                     |   | 1,130                                |   | (1,629 | ) |
| Net cash provided by operating activities                                                 |   | 3,492                                |   | 820 |   |
| Cash flows from investing activities:                                                     |   |                                 |   |   |   |
| Purchases of available-for-sale securities                                                |   | (5,480                               | )      | (17,410 | ) |
| Proceeds from sale of available-for-sale securities                                       |   | 20,196                               |   | 10,033 |   |
| Payment for acquisitions, net of cash acquired                                            |   | (26,625                              | )      | — |   |
| Proceeds from sale of property and equipment                                              |   | 72                                   |   | — |   |
| Purchase of property and equipment                                                        |   | (2,269                               | )      | (1,763 | ) |
| Net cash used in investing activities                                                     |   | (14,106                              | )      | (9,140 | ) |
| Cash flows from financing activities:                                                     |   |                                 |   |   |   |
| Payments on capital lease obligations                                                     |   | (57                                  | )      | (62 | ) |
| Principal payments on long-term debt                                                      |   | —                               |   | (20 | ) |
| Proceeds from exercise of stock options                                                   |   | 358                                  |   | 460 |   |
| Net cash provided by financing activities                                                 |   | 301                                  |   | 378 |   |
| Effects of exchange rate changes on cash                                                  |   | (42                                  | )      | 52 |   |
| Net change in cash and cash equivalents                                                   |   | (10,355                              | )      | (7,890 | ) |
| Cash and cash equivalents at beginning of period                                          |   | 16,102                               |   | 25,326 |   |
| Cash and cash equivalents at end of period                                                |   | $                                    | 5,747  |   | $ | 17,436 |   |
|                                                                                      |   |                                 |   |   |   |
| Supplemental disclosure of cash flow information:                                         |   |                                 |   |   |   |
| Cash received (paid) during the period for:  Interest                                |   | $                                    | (26    | ) | $ | (53 | ) |
| Income taxes                                                                              |   | 1,395                                |   | (1,223 | ) |
|                                                                                      |   |                                 |   |   |   |
| Supplemental disclosure of noncash activities:                                            |   |                                 |   |   |   |
| Unrealized gain (loss) on short-term and long-term  investments                           |   | $                                    | (58    | ) | $ | 80 |   |
| Issuance of stock and options for acquisition of  business                                |   | 20,313                               |   | — |   |

 

See accompanying notes to consolidated financial statements.

 

5

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**ADVANCED POWER TECHNOLOGY, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

 

 

**Note 1.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 2001 annualconsolidated financial statements and notes. This Form 10-Q should be read in conjunction with APT’s consolidated financialstatements and notes included in its Annual Report on Form 10-K for the yearended December 31, 2001.  The financialinformation as of December 31, 2001 is derived from the audited consolidatedfinancial statements as filed with APT’s Annual Report on Form 10-K for theyear ended December 31, 2001.  Theresults of operations for the nine months ended September 30, 2002 are notnecessarily indicative of the results expected for the entire fiscal yearending December 31, 2002.

 

APT’s financial quarters are 13 week periods. Thethird quarter of 2002 ended on September 29 and the third quarter of 2001 endedon September 30.  For convenience, thethird quarters of 2002 and 2001 are shown as ended on September 30.

 

 

**Note 2.COMPREHENSIVE INCOME**

 

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

 
|                                                    |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|---------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                    |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** | ** ** |
|                                                    |   |                                  |   |                                 |   |   |   |   |   |
| Net income (loss)                                       |   | $                                     | 64     |                                 | $      | (417 | ) | $ | (3,046 | ) | $ | 2,508 |   |
| Other comprehensive income (loss), net of tax           |   |                                  |   |                                 |   |   |   |   |   |
| Foreign currency translation adjustment                 |   | (47                                   | )      | 54                                   |   | 55 |   | 7 |   |
| Unrealized gain (loss) on available for sale securities |   | (16                                   | )      | 35                                   |   | (58 | ) | 80 |   |
| Comprehensive income (loss)                             |   | $                                     | 1      |                                 | $      | (328 | ) | $ | (3,049 | ) | $ | 2,595 |   |

 

 

**Note 3. INVENTORIES,NET**

 
|               |   | **June 30,  2002** |   | **December  31,  2001** |   |
|--------------------|--------|--------------------|--------|-------------------------|--------|
|               |   | **(unaudited)**    |   |                    |   |
| Raw materials      |   | $                  | 3,701  |                    | $      | 1,254 |   |
| Work in process    |   | 8,289              |   | 5,587                   |   |
| Finished goods     |   | 4,592              |   | 3,407                   |   |
|               |   | 16,582             |   | 10,248                  |   |
| Valuation  reserve |   | (4,211             | )      | (941                    | )      |
|               |   | $                  | 12,371 |                    | $      | 9,307 |   |

 

Included in the September 30, 2002 inventory balances above is $6,714of gross inventory and $2,856 of valuation reserve for a net balance of $3,858for APTRF and APTRF-PA, wholly owned subsidiaries of APT acquired on January25, 2002 and May 24, 2002, respectively (see Note 5 and Note 6).

 

6

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**Note 4.NET INCOME PER SHARE**

 

Basic net income (loss) per share is computed usingthe weighted average number of shares of common stock outstanding for theperiod. Diluted net income per share is computed using the weighted averagenumber of shares of common stock and dilutive potential common shares relatedto stock options and warrants outstanding during the period.  Anti-dilutive potential common shares areexcluded from the diluted net income share calculation.  Dilutive net (loss) per share excludes allpotential common shares from the calculation as the impact would beanti-dilutive.

 

Incremental dilutive shares included in thecalculation of diluted net income (loss) per share and incrementalanti-dilutive shares that were excluded from the calculation of diluted netincome (loss) per share for the three and nine months ended September 30, 2002and 2001 are summarized in the following table.

 
|                                                                                |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                                |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** | ** ** |
|                                                                                |   |                                  |   |                                 |   |   |   |   |   |
| Incremental dilutive shares included in diluted net  income per share calculation   |   | 554,000                               |   | —                               |   | — |   | 681,000 |   |
|                                                                                |   |                                  |   |                                 |   |   |   |   |   |
| Anti-dilutive shares excluded from diluted net income  (loss) per share calculation |   | 606,000                               |   | 740,000                              |   | 952,000 |   | 152,000 |   |

 

 

**Note 5.ACQUISITION OF GHZ TECHNOLOGY, INC.**

 

On January 25, 2002, APT acquired all of theoutstanding shares and stock options of GHz Technology, Inc. (GHz), in exchangefor cash, APT common stock, and APT stock options.  The company was renamed to Advanced Power Technology RF, Inc.(APTRF).  The GHz assets acquired included approximately $205 in cash and $7,656in marketable securities.  Thetransaction was accounted for by the purchase method of accounting, inaccordance with FAS 141, “Business Combinations” and FAS 142, “Goodwill andOther Intangible Assets.” APT has obtained a third party valuation study toestimate the fair value of the acquired intangible assets.  APT began to consolidate the financialresults of GHz on January 25, 2002 and forward.  The purchase price for accounting purposeswas derived as follows:

 

|                 |   | **Shares** |   | **Fair Value** | ** ** |
|----------------------|--------|------------|--------|----------------|------------|
| Cash                 |   |       |   | $              | 13,453     |   |
| Stock                |   | 1,522,976  |   | 16,220         |       |
| Exchanged options    |   | 425,823    |   | 4,093          |       |
| Direct costs         |   |       |   | 905            |       |
| Total purchase price |   |       |   | $              | 34,671     |   |

 

APTcommon stock was valued at the average stock price at the time of thetransaction.  With respect to stockoptions exchanged as part of the merger consideration, all vested and unvestedGHz options exchanged for APT options are included as part of the purchase pricebased on their fair value.  The estimatedfair value of the options to be assumed by APT is based upon the Black-Scholesmodel using the following assumptions:

•                  Expected life of 5 years

•                  Expected volatility of100%

•                  Risk-free interest rateof 4.3%; and

•                  Expected dividend rateof 0%

 

7

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GHz’s products complement APT’scurrent portfolio of Radio Frequency (RF) products that operate at frequenciesranging from 1 MHz to 100 MHz and are sold into applications such assemiconductor capital equipment, medical imaging, and industrial systems. TheGHz products are capable of frequencies ranging from 10 MHz to 3.5 GHz and areprimarily sold into applications such as avionics and radar as well as wirelesscommunications and semiconductor capital equipment

 

Theallocation of purchase price was as follows:

 

| Net book value of tangible assets of GHz                 |   | $      | 12,177 |   |
|----------------------------------------------------------|--------|--------|--------|--------|
| Inventory fair value adjustment                          |   | 450    |   |
| Deferred compensation on unvested stock  options assumed |   | 524    |   |
| Acquired in-process research &  development          |   | 1,897  |   |
| Acquired intangible technology rights                    |   | 7,449  |   |
| Goodwill                                                 |   | 14,269 |   |
| Deferred tax liability                                   |   | (2,095 | )      |
| Allocated purchase price                                 |   | $      | 34,671 |   |

 

In connection with thisacquisition, the Company recorded a one time charge of $1,897 for the write-offof in-process research and development (IPR&D).  The value assigned to IPR&D related to research projects forwhich technological feasibility had not yet been established and for whichthere was no other feasible alternative use for the technology.  In addition, the Company recorded anintangible asset for acquired current technology rights in the amount of$7,449, to be amortized over ten years, the expected life of thetechnologies.  Total goodwill recordedwas $14,269.  The IPR&D, technologyrights and goodwill amounts are not deductible for tax purposes.

 

The values of IPR&D andtechnology rights were determined by estimating the net cash flows from thesale of products from these technologies over a ten year period and discountingthe net cash flows back to their present value using risk adjusted interestrates of 15-20% for current technologies and 25-40% for in-processtechnologies.  The estimated net cashflows from these products were based on management’s estimates of relatedrevenues, costs of goods sold, operating expenses, income taxes, and additionalcosts to completion for in-process technologies.

 

The nature of the efforts todevelop the in-process technology into commercially viable products principallyrelate to the completion of all designing, prototyping, verification andtesting activities that are necessary to establish that the product can beproduced to meet its design specifications, including function, features, andtechnical performance requirements.  GHzhad three main product groups under development at the acquisition date thatmet the minimum development requirements for IPR&D projects.  Each contributed from 11% to 62% of thetotal IPR&D value.  The projectsincluded L Band and S Band radar as well as commercial LDMOS applications.  The projects ranged from 65% to 75%complete.  All projects had expectedcompletion dates within 12 to 18 months and an estimated aggregate cost tocomplete of $1,200.

 

 

**Note 6.ACQUISITION OF MICROSEMI RF PRODUCTS, INC., A WHOLLY OWNED SUBSIDIARY OF MICROSEMICORPORATION**

 

On May 24, 2002, APT acquired the product lines andcertain assets of Microsemi RF Products, Inc. (MSC RF), a wholly ownedsubsidiary of Microsemi Corporation, for $12,200 in cash.  The company was renamed to Advanced PowerTechnology RF Pennsylvania, Inc. (APTRF-PA). The transaction was accounted for bythe purchase method of accounting, in accordance with FAS 141, “BusinessCombinations” and FAS 142, “Goodwill and Other Intangible Assets.” APT hasobtained a third party valuation study to estimate the fair value of theacquired intangible assets.  APT beganto consolidate the financial results of the acquired business on May 24, 2002and forward.  The purchase pricefor accounting purposes was $12,200 in cash and $260 in direct costs.

 

MSC RF produces and sells bipolarRF transistors that are used in a variety of radar, avionics, communicationsand general purpose applications.  MSCRF’s products complement GHz’s technology (see Note 5) as well as APT’s currentportfolio of RF products.  Thecombination of the three companies’ RF products and technologies positions APT

8

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as an emerging dominant supplier in bipolar RFpower transistors for avionics, radar and non-cellular communications applications.

 

Theallocation of purchase price was as follows:

 

| Net book value of tangible assets acquired             |   | $     | 7,106  |   |
|--------------------------------------------------------|--------|-------|--------|--------|
| Inventory fair value adjustment                        |   | 505   |   |
| Property, plant & equipment fair value  adjustment |   | 208   |   |
| Acquired in-process research &  development        |   | 211   |   |
| Acquired intangible technology rights                  |   | 3,314 |   |
| Goodwill                                               |   | 1,116 |   |
| Allocated purchase price                               |   | $     | 12,460 |   |

 

In connection with thisacquisition, the Company recorded a one time charge of $211 for the write-offof IPR&D.  The value assigned toIPR&D related to research projects for which technological feasibility hadnot yet been established and for which there was no other feasible alternativeuse for the technology.  In addition,the Company recorded an intangible asset for acquired current technology rightsin the amount of $3,314, to be amortized over ten years, the expected life ofthe technologies.  Total goodwillrecorded was $1,116.  The IPR&D,technology rights and goodwill amounts are deductible for tax purposes.

 

The values of IPR&D and technologyrights were determined by estimating the net cash flows from the sale ofproducts from these technologies over a ten year period and discounting the netcash flows back to their present value using risk adjusted interest rates of30% for current technologies and 35-40% for in-process technologies.  The estimated net cash flows from theseproducts were based on management’s estimates of related revenues, costs ofgoods sold, operating expenses, income taxes, and additional costs tocompletion for in-process technologies.

 

The nature of the efforts to develop the in-processtechnology into commercially viable products principally related to thecompletion of all designing, prototyping, verification and testing activitiesthat are necessary to establish that the product can be produced to meet itsdesign specifications, including function, features, and technical performancerequirements.  MSC RF had two mainproduct groups under development at the acquisition date that met the minimumdevelopment requirements for IPR&D projects.  The two projects contributed 88% and 12% to the total IPR&Dvalue.  The projects consisted ofJunction Field Effect Transistor (JFET) and Powermite3 applications.  Each project had expected completion dateswithin 12 to 18 months and an estimated aggregate cost to complete of $30.

 

9

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**Note 7. PRO FORMA CONDENSED CONSOLIDATED RESULTS**

 

The following table reflects the unaudited combinedresults of APT, GHz, and MSC RF as if the acquisitions had taken place as ofJanuary 1, 2001 and 2002, respectively. The pro forma information includes non-cash charges for amortization oftechnology rights, inventory fair value adjustments, depreciation and deferredcompensation related to the acquisitions, consistent with generally acceptedaccounting principles.  Both periodsexclude a charge of $2,108 for in-process research and developmentexpense.  Both periods include theresults of GHz and the acquired business of MSC RF beginning on January 1, 2002and 2001, respectively, including an after-tax charge of $1,077 for impairmentof fixed assets recorded by GHz in the third quarter of 2001.  The pro forma information does notnecessarily reflect the actual results that would have occurred if the companieshad been combined during the periods nor is it necessarily indicative of futureresults of operations for the combined companies.

 
|                                                                                       |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  June 30,** |   |
|--------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|---------------------------------|--------|
|                                                                                       |   | **2002**                              |   | **2001**                        |   | **2002** |   | **2001** |   |
|                                                                                       |   |                                  |   |                            |   |   |   |   |   |
| Revenues, net                                                                              |   | $                                     | 13,052 |                            | $      | 12,481 |   | $ | 36,119 |   | $ | 48,538 |   |
| Net income (loss)                                                                          |   | 222                                   |   | (2,416                          | )      | (1,649 | ) | (1,019 | ) |
|                                                                                       |   |                                  |   |                            |   |   |   |   |   |
| Net income (loss) per share:                                                               |   |                                  |   |                            |   |   |   |   |   |
| Basic                                                                                      |   | $                                     | 0.02   |                            | $      | (0.24 | ) | $ | (0.16 | ) | $ | 0.10 |   |
| Diluted                                                                                    |   | 0.02                                  |   | (0.24                           | )      | (0.16 | ) | 0.10 |   |
| Weighted average number of shares used in the  computation of net income (loss) per share: |   |                                  |   |                            |   |   |   |   |   |
| Basic                                                                                      |   | 10,381                                |   | 10,232                          |   | 10,617 |   | 10,119 |   |
| Diluted                                                                                    |   | 10,935                                |   | 10,232                          |   | 10,617 |   | 10,119 |   |

 

 

**Note 8. SEGMENT INFORMATION**

 

APT operates in one segment andis engaged in the manufacture and marketing of high-performance powersemiconductors and modules for switching and RF applications.

 

 

**Note 9. COMMITMENTS AND CONTINGENCIES**

 

From time to time the Company is involved in variouslegal matters that arise out of the ordinary conduct of our business, includingthose related to litigation over intellectual property rights, commercialtransactions, contracts and environmental matters.  The Company is currently involved in various legalproceedings.  The Company does not believethat the ultimate resolution of such litigation will have a material adverseeffect on the Company’s financial position, results of operations or cashflows.  The Company accrues losscontingencies in connection with its litigation when it is probable that a losshas occurred and the amount of the loss can be reasonably estimated.

 

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

 

This discussion and analysis is intended to be read inconjunction with Management’s Discussion and Analysis of Financial Conditionand Results of Operations set forth in our Annual Report on Form 10-K for theyear ended December 31, 2001.

 

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

 

All statements and trend analyses contained in thisitem and elsewhere in this report on Form 10-Q relative to the futureconstitute “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, the costand liability associated with patent infringement litigation, the ability ofsubcontractors to meet their delivery commitments; unfavorable changes inindustry and competitive conditions; our mix of product shipments; the accuracyof our customer’s forecasts; the effectiveness of our efforts to control andreduce costs; and other risks detailed in “Management’s Discussion and Analysisof Financial Condition and Results of Operations - Risk Factors AffectingBusiness and Results of Operations” in our Annual Report on Form 10-K for theyear ended December 31, 2001, filed with the Securities and ExchangeCommission.

 

**Overview**

 

We are a leading designer, manufacturer and marketerof high-performance power semiconductors and modules for switching and RadioFrequency (RF) applications. Power semiconductors manage and regulateelectrical power by converting electricity into a form required by electricaland electronic products. Our power semiconductors increase system efficiency,permit the design of more compact end products and improve features andfunctionality. We are primarily focused on the high power, high frequencysegment of the power semiconductor market. High power refers to the ability todissipate above one kilowatt, and high frequency refers to the ability toswitch on and off at rates above 100 kilohertz. In addition we arestrengthening our portfolio of RF products that operate at frequencies rangingfrom 1 megahertz to 100 megahertz. RF generally refers to the ability tooperate at frequencies above 1 megahertz. We sell our products primarily inNorth America, Europe, and Asia, through a network of independent salesrepresentatives and distributors.

 

To further our penetration in RF power markets wecompleted the acquisition of GHz Technology, Inc. in January 2002, whichhas a portfolio of products capable of frequencies ranging from 10 megahertz to3.5 gigahertz and are primarily sold into applications such as avionics andradar.  In addition, in May 2002, wecompleted the acquisition of the product lines and certain assets of MicrosemiRF Products, Inc., a wholly owned subsidiary of Microsemi Corporation. Theacquisitions were recorded as purchase transactions and we recorded one-timecharges for purchased in-process research and development expenses in the firstand second quarters of 2002. We will also incur ongoing acquisition relatedexpenses for amortization of intangible assets and deferred compensationrelated to stock options.

 

**Critical Accounting Policies andEstimates**

 

AdvancedPower Technology’s discussion and analysis of its financial condition andresults of operations are based upon consolidated financial statements, whichhave been prepared in accordance with accounting principles generally acceptedin the United States. The preparation of these financial statements requiresAPT to make estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosures of contingentassets and liabilities. On an on-going basis, APT evaluates its estimates,including those related to product returns and warranty obligations, bad debts,inventories, investments, income taxes, excess component order cancellationcosts, valuation of intangible assets including goodwill, and contingencies andlitigation. APT bases its estimates on historical experience and on variousother assumptions that are believed to be reasonable under the

 

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circumstances, the results of which form the basis for making judgmentsabout the carrying values of assets and liabilities that are not readilyapparent from other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.

 

APT believes the followingcritical accounting policies affect its more significant judgments andestimates used in the preparation of its consolidated financial statements.

 

•                                          APT maintains allowances for doubtful accounts forestimated losses resulting from the inability of its customers to make requiredpayments. If the financial condition of our customers were to deteriorate,resulting in an impairment of their ability to make payments, additionalallowances may be required.

 

•                                          APT provides for the estimated cost of productwarranties at the time revenue is recognized. While the Company engages inextensive product quality programs and processes, including actively monitoringand evaluating the quality of its component suppliers, APT’s warrantyobligation is affected by product non-conformance rates, material usage andservice delivery costs incurred in correcting a product non-conformance. Shouldactual product non-conformance rates, material usage or service delivery costsdiffer from APT’s estimates, revisions to the estimated warranty liabilitywould be required.

 

•                                          APT establishes reserves for estimatedobsolescence or unmarketable inventory equal to the difference between the costof inventory and the estimated net realizable value based upon assumptionsabout future demand and market conditions. If actual market conditions are lessfavorable than those projected by management, additional inventory write-downsmay be required.

 

•                                          APT records a valuation allowance to reduce itsdeferred tax assets to the amount that is more likely than not to be realized.While APT has considered future taxable income and ongoing prudent and feasibletax planning strategies in assessing the need for the valuation allowance, inthe event APT were to determine that it would be able to realize its deferredtax assets in the future in excess of its net recorded amount, an adjustment tothe deferred tax asset would increase income in the period such determinationwas made. Likewise, should APT determine that it would not be able to realizeall or part of its net deferred tax asset in the future, an adjustment to thedeferred tax asset would be charged to income in the period such determinationwas made.

 

•                                          APT performs goodwill and intangible assetimpairment tests on an annual basis and between annual tests if there are keyindications that impairment has occurred. We evaluate our business in light of changes in industry and marketconditions and assess the valuation of our intangible assets based on thesefactors.  Should any of these marketconditions or valuation inputs differ from management estimates, then anintangible asset or goodwill impairment charge may be required.

 

•                                          APT is subject to the possibility of various losscontingencies arising in the ordinary course of business.  We consider the likelihood of loss orimpairment of an asset or the incurrence of a liability, as well as our abilityto reasonably estimate the amount of loss in determining losscontingencies.  An estimated losscontingency is accrued when it is probable that an asset has been impaired or aliability has been incurred and the amount of loss can be reasonablyestimated.  We regularly evaluatecurrent information available to us to determine whether such accruals shouldbe adjusted.

 

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**Results of Operations**

 

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

 
|                                              |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|---------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                              |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| Revenues, net                                     |   | 100.0                                 | %      | 100.0                                | %      | 100.0 | % | 100.0 | % |
| Cost of goods sold                                |   | 65.8                                  |   | 80.9                                 |   | 66.5 |   | 65.8 |   |
| Amortization of technology rights, other          |   | 4.3                                   |   | —                               |   | 4.7 |   | — |   |
| Total cost of goods sold                          |   | 70.1                                  |   | 80.9                                 |   | 71.2 |   | 65.8 |   |
| Gross profit                                      |   | 29.9                                  |   | 19.1                                 |   | 28.8 |   | 34.2 |   |
| Operating expenses:                               |   |                                  |   |                                 |   |   |   |   |   |
| Research and development                          |   | 7.8                                   |   | 5.3                                  |   | 9.4 |   | 3.7 |   |
| Selling, general and administrative               |   | 25.6                                  |   | 28.8                                 |   | 27.7 |   | 23.4 |   |
| In-process research and development               |   | —                                |   | —                               |   | 6.6 |   | — |   |
| Total operating expenses                          |   | 33.4                                  |   | 34.1                                 |   | 43.7 |   | 27.1 |   |
| Income (loss) from operations                     |   | (3.5                                  | )      | (15.0                                | )      | (14.9 | ) | 7.1 |   |
| Interest and other income, net                    |   | 1.1                                   |   | 3.5                                  |   | 1.6 |   | 4.3 |   |
| Income (loss) before income tax expense (benefit) |   | (2.4                                  | )      | (11.5                                | )      | (13.3 | ) | 11.4 |   |
| Income tax (benefit) expense                      |   | (2.9                                  | )      | (5.4                                 | )      | (3.8 | ) | 3.4 |   |
| Net income (loss)                                 |   | 0.5                                   | %      | (6.1                                 | )%     | (9.5 | )% | 8.0 | % |

 

*Revenues.*  Revenues for the thirdquarter of 2002 were $13.1 million, including $5.4 million from GHz TechnologyInc. (GHz) and Microsemi RF Products, Inc (MSC RF), a wholly owned subsidiaryof Microsemi Corporation, which Advanced Power Technology acquired effectiveJanuary 25 and May 24, 2002, respectively. This represents an increase of 90.9% compared to the $6.8 million in thethird quarter of 2001 and an increase of 22.1% sequentially from the secondquarter of 2002.  Without the additionalrevenues from our acquisitions, revenues were $7.7 million in the third quarterof 2002 representing a 12.1% increase over the prior year quarter.  Revenues increased by 9.2% sequentially fromthe second quarter of 2002 when excluding the revenues of Microsemi RF whichcontributed only one month in the second quarter of 2002.  The improvement in our revenues both yearover year and sequentially is mainly attributable to increased demand in thesemiconductor capital equipment market from the extreme lows experienced in thesecond half of 2001 as explained below. During the period from the third quarter of 2001 to the third quarter of2002 our sales to this market increased by 107.9%.

 

Revenues for the first nine months of 2002 were $32.0million, including $10.9 million from GHz and MSC RF, compared to $31.5 millionin the first nine months of 2001, which represents a 1.5% increase.  The semiconductor market experienced recordgrowth up to October 2000, followed by record declines in 2001. As APTtypically lags the overall semiconductor industry, our revenues peaked in thefirst quarter of 2001. Our 2002 revenues have shown some sequential increasefrom the low levels of the second half of 2001, but still remain below thelevels achieved in the first half of 2001. We have experienced sequential revenue growth of 16% in each of thefirst and second quarters of 2002 and 6% in the third quarter of 2002 whenexcluding revenues from both of our acquisitions.  Sales to distributors were approximately 20.0% in the first ninemonths of 2002 compared to 21.7% in the first nine months of 2001.

 

Although we have been able to increase our sales intothe semiconductor capital equipment market from the extremely low levels in thesecond half of 2001, we have begun to see renewed slowing of demand which willadversely impact our fourth quarter 2002 sales into this market.  We believe this is due to reduced end marketdemand and is not attributable to reduced market share.  As a result we expect to see our revenuesdecline in the fourth quarter of 2002 to a range of $10.4 million to $11.0million.  We are unable to predict theduration or amount of the decline at this time.

 

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*Gross Profit.*  Gross profit for thethird quarter of 2002 was 29.9% compared to 19.1% for the third quarter of2001.  Excluding the non-cash purchaseaccounting adjustments for the fair value of inventory acquired and theamortization of the technology rights asset, gross profit was 34.2% for thethird quarter of 2002. The improvement in gross profit over the prior yearquarter is primarily due to higher fixed cost absorption in the Company’sinternal manufacturing facilities in the current quarter attributed toincreased production volumes to support near term demand in the semiconductorcapital equipment market.  Our revenuesdropped by 44.6% in the third quarter of 2001 compared to the run rate in thefirst half of 2001.  This contributed toextremely low fixed cost absorption in the third quarter of 2001 resulting inlow gross profit.  In addition, sincethat time the Company has taken actions to reduce manufacturing levels andexpenses to be consistent with our lower revenues, including reductions indirect labor personnel at our Bend, Oregon facility by approximately 37.8% from82 to 51 employees.

 

Gross profit for the first nine months of 2002 was28.8% compared to 34.2% for the first nine months of 2001.  Excluding the non-cash purchase accountingadjustments for the fair value of inventory acquired and the amortization ofthe technology rights asset, gross profit was 33.5% for the first nine monthsof 2002. The decline in gross profit over the prior year is primarily due tolower fixed cost absorption in the Company’s internal manufacturing facilitiesdue to lower volumes partially offset by the cost reduction actions asexplained above.  Mitigating some of thegross profit margin decline is the contribution to gross profit by our RFbusiness which carries a higher overall gross profit rate.  Our RF revenues were approximately 44.5% oftotal revenue in the first nine months of 2002 compared to 10.9% in the firstnine months of 2001.

 

*Research and Development Expense.*  Third quarterof 2002 research and development expenses totaled $1 million or 7.8% ofrevenues, compared to $359,000, or 5.3% of revenue in the third quarter of2001, and $960,000 in the second quarter of 2002.  The increased spending overthe prior year quarter is primarily due to the addition of GHz and MSC RF,which was $619,000 in the third quarter of 2002, consisting mainly of payroll,supplies, and depreciation charges. Excluding the acquisition of GHz and MSC RF, research and developmentexpenses increased from the prior year quarter by 11.4% mainly due to higherspending on supplies and payroll.  TheCompany plans to continue its research and development programs leading to theintroduction of new products for use in both switching and RF applications.

 

*Selling, General and Administrative Expense.*  Selling,general and administrative expenses totaled $3.3 million in the third quarterof 2002, or 25.6% of revenues, a 69.3% increase compared to the $2.0 million inthe third quarter of 2001.  The changefrom the prior year quarter is primarily due to the acquisitions of GHz and MSCRF, which contributed $886,000 of selling, general and administrative expensesin the third quarter of 2002, consisting mainly of payroll, commissions, andfacility and depreciation expense.  Theremaining increase in expenses was due to higher payroll cost as the graduatedpay reductions implemented in 2001 were discontinued in the third quarter of2002 and higher legal expenses incurred in ongoing patent litigation, asexplained in Part II, Item 1 to this filing.

 

*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 five years.On a consolidated basis, stock compensation expense of $106,000 was recorded inthe third quarter of 2002. Of this amount, $41,000 was recorded in cost ofgoods sold, $15,000 was recorded in research and development expense and$50,000 was recorded in selling, general and administrative expense. Stockcompensation expense of $41,000 was recorded in the third quarter of 2001. Ofthis amount, $13,000 was recorded in cost of goods sold, $5,000 was recorded inresearch and development expense and $23,000 was recorded in selling, generaland administrative expense. The increase in deferred compensation expense overthe prior year quarter is due to stock options issued in connection with theacquisition of GHz.  We expect to recordstock compensation expense of $87,000 in the fourth quarter of 2002.

 

*Interest and o**ther income, net*.  Interestand other income, net, which includes interest income, interest expense andother expense, was $129,000 in the third quarter of 2002 compared to $237,000in the third quarter of 2001.  Theprimary component is interest income earned on our cash and marketablesecurities.  Net interest income was$98,000 in the third quarter of 2002 compared to $325,000 in the third quarterof 2001.  The decline in interest incomeis primarily due to lower interest rates available in the current investmentmarket and a lower investment balance due to cash used for the acquisition ofGHz and MSC RF.

 

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*IncomeTax Expense (Benefit)*. We recorded a tax benefit in the third quarter of 2002, at an effectivetax rate of 120.2%.  The third quartertax rate benefit is greater than the expected tax rate primarily due to thereduction in the valuation allowance due to the realization of foreign netoperation loss carry forwards and a reduction in income taxes payable.  Our effective tax rate through the firstnine months of 2002 is 28.8%, which is less than the expected tax rateprimarily due to the fact that in process research and development expensesrecorded for financial statement purposes in the GHz acquisition under GAAP arenot deductible for tax purposes.  Thiswas partially offset by the benefits listed above.   We expect our annual effective tax rate will approximate 31.5%for 2002. The effective tax rate in the first nine months of 2001 wasapproximately 30.0%.  The rate is lessthan the expected tax rate due to the benefit of a reduction in the valuationallowance due to the realization of foreign net operation loss carry forwards.

 

**Liquidity and Capital Resources**

 

In the first nine months of 2002, we generatedapproximately $3.5 million from operating activities.  This  resulted from ournet loss of $3.0 million offset by non-cash charges for depreciation andamortization of $2.5 million, IPR&D of $2.1 million and a net positive cashflow from operating assets and liabilities of $876,000.  The decrease in prepaid and other assets wasmainly due to tax refunds received for $1.4 million.

 

In the first nine months of 2002,we used approximately $14.1 million in investing activities, whichconsisted mainly of our acquisitions of GHz and MSC RF, partially offset by netproceeds from the sale and purchase of marketable securities of $14.7million.  The acquisition of GHzconsumed $14.1 million of cash and direct costs, net of cash acquired of$205,000.  In addition we issued APTstock and options valued at $20.3 million. We also purchased $2.3 million of fixed assets during the period.  The GHz assets acquired includedapproximately $205,000 in cash and $7.7 million in marketable securities.  The acquisition of MSC RF consumed $12.5million of cash, including direct costs of $260,000.

 

In the first nine months of 2002,we generated approximately $301,000 from financing activities, which primarilyconsisted of net proceeds of $358,000 from the exercise of stock options.

 

As of September 30, 2002 APT had$34.5 million in working capital.  Ourtrade accounts receivable balance was $8.9 million reflecting a days salesoutstanding ratio of 57 days, compared to trade accounts receivable of $3.5million at December 31, 2001, reflecting a days sales outstanding ratio of 75days.  Trade accounts receivablebalances have increased due to improved sales and the additional companiesacquired.  Our inventory balance was $12.4million reflecting inventory turns of 2.9 times per year, compared to aninventory balance of $9.3 million at December 31, 2001, reflecting inventoryturns of 1.8 times per year.  Inventorybalances have increased due to the additional companies acquired.  Inventory turns improved as a result ofactions the Company took to lower inventory levels through decreased productionand improved sales.  The calculationsabove are based on quarterly average balances of trade accounts receivable andinventory and annualized quarterly sales and cost of goods sold.

 

APT currently expects to fundexpenditures for capital requirements as well as liquidity needs from acombination of available cash balances, internally generated funds andfinancing arrangements if needed. As of September 30, 2002, APT had$18.0 million in cash and cash equivalents and available-for-salesecurities. APT’s investment policy is to invest in short term, high-gradeliquid investments with the goal of capital preservation. APT’s ability to generatepositive cash flow from operations may be affected by market conditions as wellas other risk factors as described in our Annual Report on Form 10-K for theyear ended December 31, 2001. 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.

 

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**Recent Accounting Pronouncements**

** **

In October 2001, the FASB issuedStatement of Financial Accounting Standards No. 144 (SFAS 144) *“Accountingfor the Impairment or Disposal of Long-Lived Assets”*, whichaddresses financial accounting and reporting for the impairment or disposal oflong-lived assets. This statement supersedes FASB Statement No. 121, *“Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to BeDisposed Of”*, and the accounting and reporting provisions of APBOpinion No. 30, *“Reporting and Results of Operations – Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions”,* for the disposal ofa segment of a business. This statement also amends Accounting ResearchBulletin No. 51, *“Consolidated Financial Statements”*, toeliminate the exception to consolidation for a subsidiary for which control islikely to be temporary. The provisions of SFAS 144 are effective for fiscalyears beginning after December 15, 2001. The adoption of the new rule did nothave a material impact on its statements of position, operations or cash flowsdue to the adoption of SFAS 144.

 

In June 2002, the FASB issuedStatement of Financial Accounting Standards No. 146 (SFAS 146) *“Accountingfor Costs Associated with Exit or Disposal Activities”*, whichaddresses the accounting and financial reporting for costs associated with exitor disposal activities and nullifies Emerging Issues Task Force (EITF) IssueNo. 94-3, *“LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).”*  The principal difference between the newstatement and the Issue No 94-3 is that a liability for a cost associated withan exit activity will be recognized when incurred, rather than when an entityhas made a commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activitiesthat are initiated after December 31, 2002, with early application encouraged.The Company does not expect any material impact on its statements of position,operations or cash flows due to the adoption of SFAS 146.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK**

 

We do not use derivative financial instruments in ourinvestment portfolio. Due to the short duration and conservative nature of ourcash equivalents, and the high quality and conservative nature of ourinvestments, we do not expect any material loss with respect to our investmentportfolio.

 

Currently less than 3% of oursales are transacted in local currencies, primarily Euros. As a result, ourinternational results of operations are subject to foreign exchange ratefluctuations, but only to a limited degree. We do not currently hedge againstforeign currency rate fluctuations. Most of our export sales and sales by APTEurope are in U.S. dollars, and most of our foreign currency sales arefrom operations with significant expenses in the same currency. As a result, gainsand losses from such fluctuations have not been material to our consolidatedresults of operations.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

*(a) Evaluation of disclosure controls and procedures.*

 

As required by new Rule 13a-15 under the SecuritiesExchange Act of 1934, within the 90 days prior to the date of this report, theCompany carried out an evaluation under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures. Basedupon that evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures are effectiveto ensure that information required to be disclosed by the Company in thereports it files or submits under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the Securitiesand Exchange Commission’s rules and forms. In connection with the new rules, wecurrently are in the process of further reviewing and documenting ourdisclosure controls and procedures, including our internal controls andprocedures for financial reporting, and may from time to time make changesaimed at enhancing their effectiveness and to ensure that our systems evolvewith our business.

 

Based on our most recent evaluation of theeffectiveness of the design and operation of the Company's disclosure controlsand procedures, the Company did not discover:

 

a)                 anysignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant's ability to record, process, summarizeand report financial data nor any material weaknesses in internal controls;

b)                anyinstances of fraud, whether or not material, that involved management or otheremployees who have a significant role in the registrant's internal controls.

 

*(b)Changes in internal controls.*

 

None.

 

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**PART II.  OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

On August 15, 2002, IXYS Corporation filed a patent infringementlawsuit against APT with the United States District Court, Northern District ofCalifornia.  The claim filed by IXYS allegesthat APT infringes on their United States Patent No. 5,486,715 and5,801,419.  The IXYS claim alsorequested that damages be determined at trial and that such damages be trebled.On October 1, 2002, APT filed its answers to the IXYS allegations of patentinfringement.  In addition, APT filed apatent infringement counterclaim against IXYS, alleging that IXYS infringes onAPT United States Patent No. 5,283,202, entitled “IGBT Device With PlatinumLifetime Control Having Gradient Or Profile Tailored Platinum DiffusionRegions.”  APT has filed with the courtseveral affirmative defenses related to the validity of the IXYS patents.  In addition, APT does not believe that it infringesupon the IXYS patents cited in the claim. APT will vigorously defend itself in this lawsuit.

 

**ITEM 6. EXHIBITS ANDREPORTS ON FORM 8-K**

 

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

 
| **Exhibit No.** |   |                                                                                                                     |
|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                     |
| 99.1            |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|            |   |                                                                                                                     |
| 99.2            |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

(b) Reports on Form 8-K

 

During the three month period ended September 30,2002, a report on Form 8-K/A was filed on August 14, 2002, which amended areport on Form 8-K was filed on June 17, 2002. These reports were filed in connection with the acquisition of MicrosemiRF Products, Inc. a wholly owned subsidiary of Microsemi Corporation byAdvanced Power Technology, Inc. on May 31, 2002.

 

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**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized this  13th day of November, 2002.

 

 
|   |   | 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)               |
|        |        |                                             |  |  |  |

 

 

18

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**CERTIFICATION PURSUANT TO**

**RULE 13a-14 AND 15d-14 OF THE SECURITIES AND EXCHANGE ACT OF1934**

**AS ADOPTED PURSANT TO SECTION 302 OF THE SARBANES-OXLEY ACTOF 2002**

 
| I, Patrick Sireta, certify that: |
|----------------------------------|
|                             |   |   |   |
| 1.                               |   | I have reviewed this quarterly report on Form 10-Q  of Advanced Power Technology; |
|                             |   |   |   |
| 2.                               |   | Based on my knowledge, this quarterly report does  not contain any untrue statement of a material fact or omit to state a  material fact necessary to make the statements made, in light of the  circumstances under which such statements were made, not misleading with  respect to the period covered by this quarterly report; |
|                             |   |   |   |
| 3.                               |   | Based on my knowledge, the financial statements, and  other financial information included in this quarterly report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this  quarterly report; |
|                             |   |   |   |
| 4.                               |   | The registrant’s other certifying officers and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have: |
|                             |   |   |   |
|                             |   | a) | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this quarterly report is  being prepared; |
|                             |   |   |   |
|                             |   | b) | evaluated the effectiveness of this registrant’s  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this quarterly report (the “Evaluation Date”) ; and |
|                             |   |   |   |
|                             |   | c) | presented in this quarterly report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of Evaluation Date; |
|                             |   |   |   |
| 5.                               |   | The registrant’s other certifying officers and I  have disclosed, based on our most recent evaluation, to the registrant’s  auditors and the audit committee of registrant’s board of directors: |
|                             |   |   |   |
|                             |   | a) | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize and report financial data and have  identified for the registrant’s auditors any material weaknesses in internal  controls; and |
|                             |   | b) | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and |
|                             |   |   |   |
| 6.                               |   | The registrant’s other certifying officers and I  have indicated in this quarterly report whether or not there were significant  changes in internal controls or in other factors that could significantly  affect internal controls subsequent to the date of our most recent  evaluation, including any corrective actions with regard to significant  deficiencies and material weaknesses. |
|                                  |  |  |  |  |

 

 

 
|   | By: /S/ PATRICK SIRETA                |   |
|--------|---------------------------------------|--------|
|   | President and Chief Executive Officer |
|   | November 13, 2002                     |

 

 

19

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**CERTIFICATION PURSUANT TO**

**RULE 13a-14 AND 15d-14 OF THESECURITIES AND EXCHANGE ACT OF 1934**

**AS ADOPTED PURSANT TO SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002**

 
| I, Greg Haugen, certify that: |
|-------------------------------|
|                          |   |   |   |
| 1.                            |   | I have reviewed this quarterly report on Form 10-Q  of Advanced Power Technology; |
|                          |   |   |   |
| 2.                            |   | Based on my knowledge, this quarterly report does  not contain any untrue statement of a material fact or omit to state a  material fact necessary to make the statements made, in light of the circumstances  under which such statements were made, not misleading with respect to the  period covered by this quarterly report; |
|                          |   |   |   |
| 3.                            |   | Based on my knowledge, the financial statements, and  other financial information included in this quarterly report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this  quarterly report; |
|                          |   |   |   |
| 4.                            |   | The registrant’s other certifying officers and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have: |
|                          |   |   |   |
|                          |   | a) | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this quarterly report is  being prepared; |
|                          |   |   |   |
|                          |   | b) | evaluated the effectiveness of this registrant’s disclosure  controls and procedures as of a date within 90 days prior to the filing date  of this quarterly report (the “Evaluation Date”) ; and |
|                          |   |   |   |
|                          |   | c) | presented in this quarterly report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of Evaluation Date; |
|                          |   |   |   |
| 5.                            |   | The registrant’s other certifying officers and I  have disclosed, based on our most recent evaluation, to the registrant’s  auditors and the audit committee of registrant’s board of directors: |
|                          |   |   |   |
|                          |   | a) | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize and report financial data and have  identified for the registrant’s auditors any material weaknesses in internal  controls; and |
|                          |   | b) | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and |
|                          |   |   |   |
| 6.                            |   | The registrant’s other certifying officers and I  have indicated in this quarterly report whether or not there were significant  changes in internal controls or in other factors that could significantly  affect internal controls subsequent to the date of our most recent  evaluation, including any corrective actions with regard to significant  deficiencies and material weaknesses. |
|                               |  |  |  |  |

 

 

 
|   | By: /s/ GREG HAUGEN                         |   |
|--------|---------------------------------------------|--------|
|   | Vice President, Finance and Administration, |
|   | Chief Financial Officer and Secretary       |
|   | (Principal Financial Officer)               |
|   | November 13, 2002                           |

 

 

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