**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **ý** |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**  |   |
|------------|--------|-----------------------------------------------------------------------------------------------------|--------|
|       |   |                                                                                                |   |
|       |   | **For the quarterly period ended March 31, 2004**                                              |   |
|       |   |                                                                                                |   |
|       |   | **OR**                                                                                              |   |
|       |   |                                                                                                |   |
| **o**      |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |   |

 

**Commissionfile number 001-16047**

 

**AdvancedPower Technology, Inc.**

(Exact name of registrant as specified in itscharter)

 

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

 

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

(Address of principal executive offices andZip Code)

 

**(541)382-8028**

(Registrant’s telephone number)

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to thefiling requirements for the past 90 days. Yes  ý    No  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act). Yes  ý    No  o

 

The number of shares of the Registrant’s Common Stock outstanding asMay 1, 2004 was 10,565,106 shares.

 

 

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**ADVANCEDPOWER TECHNOLOGY, INC.**

**FORM10-Q**

**TABLEOF CONTENTS**

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

 

2

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**ITEM 1. FINANCIAL STATEMENTS**

 

**ADVANCEDPOWER TECHNOLOGY, INC.**

**CONSOLIDATED BALANCESHEETS**

**(Inthousands, except share amounts)**

 
|                                                                                                                                                                                          |   | **March 31,  2004** |   | **December 31,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                                                                                                                                                                          |   | **(Unaudited)**          |   |                        |   |
| **Assets**                                                                                                                                                                                    |   |                     |   |                        |   |
| Current assets:                                                                                                                                                                               |   |                     |   |                        |   |
| Cash and cash equivalents                                                                                                                                                                     |   | $                        | 11,337 |                        | $      | 11,564 |   |
| Short-term investments in  available-for-sale securities                                                                                                                                      |   | 4,000                    |   | 4,000                       |   |
| Accounts receivable, net of allowance of  $234 (2004) and $213 (2003)                                                                                                                         |   | 8,492                    |   | 7,564                       |   |
| Inventories, net                                                                                                                                                                              |   | 12,169                   |   | 12,382                      |   |
| Prepaid expenses and other current assets                                                                                                                                                     |   | 2,333                    |   | 2,436                       |   |
| Total current assets                                                                                                                                                                          |   | 38,331                   |   | 37,946                      |   |
|                                                                                                                                                                                          |   |                     |   |                        |   |
| Property and equipment, net of accumulated  amortization and depreciation of $15,287 (2004) and $14,417 (2003)                                                                                |   | 10,894                   |   | 11,002                      |   |
| Long-term investments in available-for-sale  securities                                                                                                                                       |   | 1,000                    |   | 1,000                       |   |
| Other assets                                                                                                                                                                                  |   | 113                      |   | 174                         |   |
| Technology assets, net of accumulated  amortization of $2,222 (2004) and $1,953 (2003)                                                                                                        |   | 8,541                    |   | 8,811                       |   |
| Goodwill                                                                                                                                                                                      |   | 15,570                   |   | 15,570                      |   |
| Total assets                                                                                                                                                                                  |   | $                        | 74,449 |                        | $      | 74,503 |   |
|                                                                                                                                                                                          |   |                     |   |                        |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                 |   |                     |   |                        |   |
| Current liabilities:                                                                                                                                                                          |   |                     |   |                        |   |
| Accounts payable                                                                                                                                                                              |   | $                        | 3,345  |                        | $      | 3,471 |   |
| Accrued expenses                                                                                                                                                                              |   | 2,279                    |   | 2,695                       |   |
| Total current liabilities                                                                                                                                                                     |   | 5,624                    |   | 6,166                       |   |
| Other long term liabilities                                                                                                                                                                   |   | 122                      |   | 127                         |   |
| Total liabilities                                                                                                                                                                             |   | 5,746                    |   | 6,293                       |   |
|                                                                                                                                                                                          |   |                     |   |                        |   |
| Stockholders’ equity:                                                                                                                                                                    |   |                     |   |                        |   |
| Preferred stock, par value $.001, 1,000,000  shares authorized; no shares issued and outstanding                                                                                              |   | —                   |   | —                      |   |
| Common stock, par value $.01, 19,000,000  shares authorized; 10,636,906 issued and 10,520,056 shares outstanding in  2004; 10,579,930 shares issued and 10,463,080 shares outstanding in 2003 |   | 106                      |   | 106                         |   |
| Additional paid-in capital                                                                                                                                                                    |   | 88,734                   |   | 88,625                      |   |
| Treasury stock, at cost, 116,850 shares                                                                                                                                                       |   | (1,761                   | )      | (1,761                      | )      |
| Deferred stock compensation                                                                                                                                                                   |   | (11                      | )      | (21                         | )      |
| Accumulated other comprehensive income                                                                                                                                                        |   | 400                      |   | 309                         |   |
| Accumulated deficit                                                                                                                                                                           |   | (18,765                  | )      | (19,048                     | )      |
| Total stockholders’ equity                                                                                                                                                               |   | 68,703                   |   | 68,210                      |   |
| Total liabilities and stockholders’ equity                                                                                                                                               |   | $                        | 74,449 |                        | $      | 74,503 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

3

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**ADVANCEDPOWER TECHNOLOGY, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Inthousands, except per share amounts)**

**(Unaudited)**

 
|                                                                                       |   | **Three  Months Ended  March 31,** |   |
|--------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                       |   | **2004**                                |   | **2003** |   |
|                                                                                       |   |                                    |   |   |   |
| Revenues, net                                                                              |   | $                                       | 15,093 |   | $ | 11,159 |   |
|                                                                                       |   |                                    |   |   |   |
| Cost of goods sold                                                                         |   | 9,367                                   |   | 7,752 |   |
| Amortization of technology rights and other  charges                                       |   | 274                                     |   | 284 |   |
| Total cost of goods sold                                                                   |   | 9,641                                   |   | 8,036 |   |
| Gross profit                                                                               |   | 5,452                                   |   | 3,123 |   |
|                                                                                       |   |                                    |   |   |   |
| Operating expenses:                                                                        |   |                                    |   |   |   |
| Research and development                                                                   |   | 887                                     |   | 833 |   |
| Selling, general and administrative                                                        |   | 4,110                                   |   | 3,691 |   |
| Restructuring charges                                                                      |   | 206                                     |   | 240 |   |
| Total operating expenses                                                                   |   | 5,203                                   |   | 4,764 |   |
| Income (loss) from operations                                                              |   | 249                                     |   | (1,641 | ) |
| Interest income, net                                                                       |   | 40                                      |   | 56 |   |
| Other income (expense), net                                                                |   | (6                                      | )      | 11 |   |
| Income (loss) before income tax benefit                                                    |   | 283                                     |   | (1,574 | ) |
| Income tax benefit                                                                         |   | —                                  |   | (565 | ) |
| Net income (loss)                                                                          |   | $                                       | 283    |   | $ | (1,009 | ) |
|                                                                                       |   |                                    |   |   |   |
| Net income (loss) per share:                                                               |   |                                    |   |   |   |
| Basic                                                                                      |   | $                                       | 0.03   |   | $ | (0.10 | ) |
| Diluted                                                                                    |   | 0.03                                    |   | (0.10 | ) |
| Weighted average number of shares used in  the computation of net income (loss) per share: |   |                                    |   |   |   |
| Basic                                                                                      |   | 10,516                                  |   | 10,400 |   |
| Diluted                                                                                    |   | 11,171                                  |   | 10,400 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

4

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**ADVANCEDPOWER TECHNOLOGY, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Inthousands)**

**(Unaudited)**

 
|                                                                                              |         | **Three  Months Ended  March 31,** |   |
|---------------------------------------------------------------------------------------------------|--------------|-----------------------------------------|--------|
|                                                                                              |         | **2004**                                |   | **2003** |   |
| Cash flows from operating activities:                                                             |         |                                    |   |   |   |
| Net income (loss)                                                                                 |         | $                                       | 283    |   | $ | (1,009 | ) |
| Adjustments  to reconcile net income (loss) to net cash (used) provided by operating  activities: |         |                                    |   |   |   |
| Depreciation                                                                                      |         | 871                                     |   | 793 |   |
| Amortization of intangible assets                                                                 |         | 270                                     |   | 270 |   |
| Inventory provisions                                                                              |         | 102                                     |   | (142 | ) |
| Amortization of deferred stock compensation                                                       |         | 10                                      |   | 47 |   |
| Amortization of investment premium                                                                |         | —                                  |   | 13 |   |
| Deferred gain on sale-leaseback                                                                   |         | (4                                      | )      | (4 | ) |
| Changes in operating assets and  liabilities, net of effects of acquisitions:                     |         |                                    |   |   |   |
| Accounts receivable                                                                               |         | (949                                    | )      | (273 | ) |
| Inventories                                                                                       |         | 79                                      |   | 388 |   |
| Prepaid expenses and other assets                                                                 |         | 160                                     |   | (214 | ) |
| Accounts payable and accrued expenses                                                             |         | (392                                    | )      | (272 | ) |
| Net cash (used) provided by operating  activities                                                 |         | 430                                     |   | (403 | ) |
|                                                                                              |         |                                    |   |   |   |
| Cash flows from investing activities:                                                             |         |                                    |   |   |   |
| Purchases of available-for-sale securities                                                        |         | —                                  |   | (1,000 | ) |
| Proceeds from sale of available-for-sale  securities                                              |         | —                                  |   | 3,363 |   |
| Purchase of property and equipment                                                                |         | (764                                    | )      | (676 | ) |
| Net cash (used) provided by investing  activities                                                 |         | (764                                    | )      | 1,687 |   |
|                                                                                              |         |                                    |   |   |   |
| Cash flows from financing activities:                                                             |         |                                    |   |   |   |
| Payments on capital lease obligations                                                             |         | (1                                      | )      | (20 | ) |
| Proceeds from exercise of stock options                                                           |         | 109                                     |   | 12 |   |
| Net cash (used) provided by financing  activities                                                 |         | 108                                     |   | (8 | ) |
| Effects of exchange rate changes on cash                                                          |         | (1                                      | )      | 6 |   |
| Net change in cash and cash equivalents                                                           |         | (227                                    | )      | 1,282 |   |
| Cash and cash equivalents at beginning of  period                                                 |         | 11,564                                  |   | 6,708 |   |
| Cash and cash equivalents at end of period                                                        |         | $                                       | 11,337 |   | $ | 7,990 |   |
|                                                                                              |         |                                    |   |   |   |
| Supplemental disclosure of cash flow  information:                                                |         |                                    |   |   |   |
| Cash received (paid) during the period for:                                                       | Interest     |                                    | $      | (33 | ) | $ | (14 | ) |
|                                                                                              | Income taxes |                                    | (16    | ) | 225 |   |
|                                                                                              |         |                                    |   |   |   |
| Supplemental disclosure of noncash  activities:                                                   |         |                                    |   |   |   |
| Unrealized gain (loss) on short-term and  long-term investments                                   |         | $                                       | — |   | $ | (2 | ) |

 

See accompanying notes to consolidatedfinancial statements.

 

5

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**ADVANCEDPOWER TECHNOLOGY, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Inthousands, except share amounts)**

**(Unaudited)**

 

**Note 1. Basis ofPresentation**

 

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

 

APT’s financial quarters are 13 week periods. The first quarter of 2004ended on April 4, 2004 and the first quarter of 2003 ended onMarch 30.  For convenience, thefirst quarters of 2004 and 2003 are both shown as ended on March 31.

 

**Note 2. Summary ofSignificant Accounting Policies**

 

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

 

The balances and changes in reserve for warranties and sales returnsfor the three months ended March 31, 2004 and 2003 are as follows:

 
|                               |   | **Three  Months Ended  March 31,** |   |
|------------------------------------|--------|-----------------------------------------|--------|
|                               |   | **2004**                                |   | **2003** |   |
|                               |   |                                    |   |   |   |
| Balance – beginning of period |   | $                                       | 431    |   | $ | 351 |   |
| Provisions                         |   | 319                                     |   | 244 |   |
| Charge offs                        |   | (437                                    | )      | (306 | ) |
| Balance – end of period       |   | $                                       | 313    |   | $ | 289 |   |

 

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

 

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

 

6

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

 
|                                                                                              |   | **Three  Months  Ended March 31,** |   |
|---------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                              |   | **2004**                                |   | **2003** |   |
|                                                                                              |   |                                    |   |   |   |
| Net income (loss), as reported                                                                    |   | $                                       | 283    |   | $ | (1,009 | ) |
| Add: Stock based compensation included in  reported net income (loss), net of related tax effects |   | 10                                      |   | 47 |   |
| Deduct: Stock based compensation determined  under fair value based method for all awards         |   | (213                                    | )      | (438 | ) |
| Pro forma net income (loss)                                                                       |   | $                                       | 80     |   | $ | (1,400 | ) |
|                                                                                              |   |                                    |   |   |   |
| Income (loss) per share:                                                                          |   |                                    |   |   |   |
| Basic – as reported                                                                          |   | $                                       | 0.03   |   | $ | (0.10 | ) |
| Basic – pro forma                                                                            |   | 0.01                                    |   | (0.13 | ) |
|                                                                                              |   |                                    |   |   |   |
| Diluted – as reported                                                                        |   | $                                       | 0.03   |   | $ | (0.10 | ) |
| Diluted – pro forma                                                                          |   | 0.01                                    |   | (0.13 | ) |

 

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

 

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

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

 

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

 

Basic net income (loss) per share is computed using the weightedaverage number of shares of common stock outstanding for the period. Dilutednet income per share is computed using the weighted average number of shares ofcommon stock and dilutive potential common shares related to stock options andwarrants outstanding during the period. Anti-dilutive potential common shares are excluded from the diluted netincome share calculation.  Dilutive netloss per share excludes all potential common shares from the calculation as theimpact would be anti-dilutive.

 

Incremental dilutive shares included in the calculation of diluted netincome per share and incremental anti-dilutive shares that were excluded fromthe calculation of diluted net income per share for the three months endedMarch 31, 2004 and 2003 are summarized in the following table.

 

7

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|                                                                              |   | **Three  Months Ended  March 31,** |   |
|-----------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                              |   | **2004**                                |   | **2003** |   |
|                                                                              |   |                                    |   |   |   |
| Incremental dilutive shares included in  diluted net income per share calculation |   | 655,000                                 |   | — |   |
| Anti-dilutive shares excluded from diluted  net loss per share calculation        |   | 554,000                                 |   | 1,179,000 |   |

 

***(d)******                                 IncomeTaxes***

 

Income taxes are accounted for under the asset and liability method.Under the asset and liability method, deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date. Avaluation allowance is established when necessary to reduce deferred tax assetsto the amount expected to be realized. During the fourth quarter of 2003, theCompany determined that a full valuation allowance should be recorded againstits net deferred tax assets. Therefore no income tax expense was recorded inthe first quarter of 2004.

 

**Note 3. RestructuringCharges**

 

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

 

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

 

The total severance related charges recognized in 2003 was $295, whichwas recognized as $240 and $55 in the first and fourth quarters of 2003,respectively. The severance charges relate to already separated personnel andpersonnel costs associated with benefits expected to be paid upon completion ofcertain eligible transfer activities. The building purchase is reported as anasset held for sale and is being marketed for sale as APT no longer requiresthe space. In accordance with SFAS 144, an asset held for sale is carried atestimated fair value. As such, APT recorded an impairment charge for thebuilding in the fourth quarter of 2003 of approximately $350. Fair value wasestimated based on comparable sales data of similar commercial space in thearea. The net carrying value of the building as of March 31, 2004 wasapproximately $1 million and is included as a component of other currentassets.

 

During the first quarter of 2004 an additional $206 was recognized inrestructuring charges. The charges included $140 associated with costs to exitcertain production activities and $66 associated with additional severancecosts. The changes in the reserve for restructuring balance for the threemonths ended March 31, 2004 and 2003 are shown in the table below.

 

8

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|                               |   | **Three  Months Ended  March 31,** |   |
|------------------------------------|--------|-----------------------------------------|--------|
|                               |   | **2004**                                |   | **2003** |   |
|                               |   |                                    |   |   |   |
| Balance – beginning of period |   | $                                       | 178    |   | $ | — |   |
| Provisions                         |   | 128                                     |   | 240 |   |
| Charge offs                        |   | (151                                    | )      | (117 | ) |
| Balance – end of period       |   | $                                       | 155    |   | $ | 123 |   |

 

**Note 4. ComprehensiveIncome (loss)**

 

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

 
|                                              |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------------------|--------|-----------------------------------------|--------|
|                                              |   | **2004**                                |   | **2003** |   |
|                                              |   |                                    |   |   |   |
| Net income (loss)                                 |   | $                                       | 283    |   | $ | (1,009 | ) |
|                                              |   |                                    |   |   |   |
| Other comprehensive income (loss), net of  tax:   |   |                                    |   |   |   |
| Unrealized loss on available for sale  securities |   | —                                  |   | (2 | ) |
| Foreign currency translation adjustment           |   | 91                                      |   | 25 |   |
| Comprehensive income (loss)                       |   | $                                       | 374    |   | $ | (986 | ) |

 

**Note 5. Inventories,net**

 
|              |   | **March 31,  2004** |   | **December 31,  2003** |   |
|-------------------|--------|--------------------------|--------|-----------------------------|--------|
|              |   |                     |   |                        |   |
| Raw materials     |   | $                        | 2,935  |                        | $      | 3,005 |   |
| Work in process   |   | 7,032                    |   | 6,796                       |   |
| Finished goods    |   | 4,358                    |   | 4,617                       |   |
|              |   | 14,325                   |   | 14,418                      |   |
| Valuation reserve |   | (2,156                   | )      | (2,036                      | )      |
| Inventories, net  |   | $                        | 12,169 |                        | $      | 12,382 |   |

 

**Note 8. SegmentInformation**

 

APT operates in one segment and is engaged in themanufacture and marketing of high-performance power semiconductors and modulesfor 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 its business, includingthose related to litigation over intellectual property rights, commercialtransactions, contracts and environmental matters.  The Company is currently involved in various legalproceedings.  The Company does notbelieve that the ultimate resolution of such litigation will have a materialadverse effect on the Company’s financial position, results of operations orcash flows.  However, the length of timeand legal fees associated with the patent litigation with IXYS are expected tobe significant. The Company accrues loss contingencies in connection with itslitigation when it is probable that a loss has occurred and the amount of theloss can be reasonably estimated.

 

9

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**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

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

 

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

 

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

 

***Business Overview***

 

Advanced Power Technology, Inc. is a leading designer, manufacturer andmarketer of high-performance power semiconductors and modules for RadioFrequency (RF), Linear, and Switchmode applications. Power semiconductorsmanage and regulate electrical 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 dissipate above one kilowatt, and high frequency refers to theability to switch on and off at rates above 100 kilohertz. In addition, wecontinue to strengthen our portfolio of RF products that operate at frequenciesranging from 1 megahertz to 100 megahertz. RF generally refers to the abilityto operate at frequencies above 1 megahertz. We sell our products primarily inNorth America, Europe, and Asia, through a network of independent salesrepresentatives and distributors.

 

The acquisition of GHz Technology, Inc. and the business ofMicrosemi RF Products, Inc. in 2002 helped us to further penetrate RFmarkets.  We believe that theseacquisitions serve to position APT as an emerging, dominant supplier in bipolarRF power transistors for avionics, radar and non-cellular communicationsapplications operating at frequency ranges from 1 megahertz to multiplegigahertz and add valuable RF technology and substantial RF engineering, manufacturingand marketing capability to the Company. These acquisitions are part of theCompany’s ongoing strategy to expand its product and technology portfolio inthe RF power arena through both internal development and acquisitions.

 

APT has operations in Bend, Oregon, Santa Clara, California,Montgomeryville, Pennsylvania, and Bordeaux, France.  Each site has production, research and development andadministrative activities. We also make use of subcontract manufacturers forthe fabrication of our wafers and for assembly and test operations.

 

**Critical Accounting Policies and Estimates**

 

Advanced Power Technology’s discussion and analysis of its financialcondition and results of operations are based upon consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires APT to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosures of contingent assets and liabilities. On an on-going basis, APTevaluates its estimates, including those related to product

 

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returns and warranty obligations, allowance for doubtful accounts,excess and obsolete inventories, income taxes, valuation of intangible assetsincluding goodwill, valuation of long-lived assets, contingencies andlitigation, and excess component order cancellation costs. APT bases itsestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

 

APT believes the following critical accounting policies affect its moresignificant judgments and estimates used in the preparation of its consolidatedfinancial statements.

 

***Product Returns andWarranty Obligations***

 

Product revenue is recognized upon shipment of product. In general, APTprovides for a one-year repair or replacement warranty on its products. Uponshipment, APT provides for the estimated cost that may be incurred for productwarranty and sales returns based on historical experience. APT uses independentdistributors to sell some of its products. Distributors can return acontractually agreed upon percentage of the dollar value of products purchasedduring the prior six months and receive certain price protections on purchasedproducts. Sales to distributors are recognized upon shipment, less an allowancefor estimated returns based on historical experience.

 

While the Company engages in extensive product quality programs andprocesses, including actively monitoring and evaluating the quality of itscomponent suppliers, APT’s warranty obligation is affected by productnon-conformance rates, material usage and service delivery costs incurred in correctinga product non-conformance. Should actual product non-conformance rates,material usage, service delivery costs, or distributor returns differ fromAPT’s estimates, revisions to the estimated warranty liability would berequired.

 

***Allowance for DoubtfulAccounts***

 

APT maintains an allowance for doubtful accounts for estimated lossesresulting from the inability of its customers to make required payments.Management regularly reviews the adequacy of the allowance after consideringthe size of the accounts receivable balance, historical bad debts, thecustomer’s expected ability to pay and our collection history with eachcustomer. Management reviews significant individual accounts that are past dueto determine whether an allowance should be made based on these factors.  If the financial condition of our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances may be required.

 

***Excess and ObsoleteInventories***

 

*** ***Inventories arestated at the lower of standard cost (approximates actual cost on a first-in,first-out basis) or market (net realizable value).  APT establishes reserves for estimated unmarketable (excess) orobsolete inventory equal to the difference between the cost of inventory andthe estimated net realizable value based upon assumptions about future demandand market conditions. APT establishes reserves for excess component ordercancellation costs based on estimated net realizable value of the componentspurchased and any additional cancellation charges. APT evaluates historicalusage of the product, current customer demand, purchase commitments andforecasted usage of the product.  Ifactual market conditions are less favorable than those projected by management,additional reserves may be required.

 

***Income Taxes***

 

APT records a valuation allowance to reduce its deferred tax assets tothe amount that is more likely than not to be realized. APT considers futuretaxable income and ongoing prudent and feasible tax planning strategies in assessingthe need for the valuation allowance. In the event APT were to determine thatit would be able to realize its deferred tax assets in the future in excess ofits net recorded amount, an adjustment to decrease the valuation allowancewould increase income in the period such determination was made. Should APTdetermine that it would not be able to realize all or part of its net deferredtax asset in the future, an adjustment to increase the valuation allowancewould be charged to income in the period such determination was made.  During 2003, the Company determined that afull valuation allowance should be recorded against its net deferred taxassets.

 

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

 

APT values goodwill and intangible assets with indefinite lives inaccordance with Statement of Financial Accounting Standards No. (SFAS) 142“Goodwill and Other Intangible Assets.” Currently APT carries a goodwill balance in connection with previousacquisitions, but has no other intangible assets with indefinite lives.  We annually review goodwill for impairmentand when events or circumstances indicate the carrying value of the asset mightexceed its current fair value. We determine fair value using discounted cashflow analysis and other acceptable valuation methodologies such as marketmultiples and comparable transactions. This requires us to make certainassumptions and estimates regarding industry economic factors and future profitability.  It is our policy to conduct impairmenttesting based on our most current business plans, which reflect changes weanticipate in the economy and industry. If actual results are not consistent with our assumptions and judgments,we could be exposed to a material impairment charge as a result of writing downthe carrying value of goodwill.

 

***Valuation ofLong-Lived Assets***

 

APT values long-lived assets, including intangible assets with finitelives, in accordance with SFAS 144 “Accounting for the Impairment or Disposalof Long-Lived Assets.” We evaluate our long-lived assets for impairmentwhenever events or changes in circumstances indicate that the carrying amountmay not be recoverable.  We determinethe potential impairment using undiscounted cash flow analysis, which requiresus to make certain assumptions and estimates regarding industry economicfactors and future profitability.  It isour policy to conduct impairment testing based on our most current businessplans, which reflect changes we anticipate in the economy and industry.  If actual results are not consistent withour assumptions and judgments, we could be exposed to a material impairmentcharge as a result of writing down the carrying value of long-lived assets. Ifthe operation is determined to be unable to recover the carrying amount of itsassets, then intangible assets are written down first, followed by the otherlong-lived assets of the operation, to fair value. Fair value is determinedbased on discounted cash flows or appraised values, depending on the nature ofthe assets. Long-lived assets considered held for sale are valued at the lowerof historical cost or fair value less costs to sell. Such assets are notdepreciated while so classified.

 

***Contingencies andLitigation***

 

APT is subject to the possibility of various loss contingencies arisingin the ordinary course of business.  Weconsider the likelihood of loss or impairment of an asset or the incurrence ofa liability, as well as our ability to reasonably estimate the amount of lossin determining loss contingencies.  Anestimated loss contingency is accrued when it is probable that an asset hasbeen impaired or a liability has been incurred and the amount of loss can bereasonably estimated.  We regularlyevaluate current information available to us to determine whether such accrualsshould be adjusted. (Refer to Part II, Item I “Legal Proceedings” of thisfiling).

 

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**Resultsof Operations**

 

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

 
|                                                 |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                 |   | **2004**                                |   | **2003** |   |
|                                                 |   |                                    |   |   |   |
| Revenues, net                                        |   | 100.0                                   | %      | 100.0 | % |
|                                                 |   |                                    |   |   |   |
| Cost of goods sold                                   |   | 62.1                                    |   | 69.5 |   |
| Amortization of technology rights and other  charges |   | 1.8                                     |   | 2.5 |   |
| Total cost of goods sold                             |   | 63.9                                    |   | 72.0 |   |
| Gross profit                                         |   | 36.1                                    |   | 28.0 |   |
| Operating expenses:                                  |   |                                    |   |   |   |
| Research and development                             |   | 5.9                                     |   | 7.5 |   |
| Selling, general and administrative                  |   | 27.2                                    |   | 33.1 |   |
| Restructuring charges                                |   | 1.4                                     |   | 2.1 |   |
| Total operating expenses                             |   | 34.5                                    |   | 42.7 |   |
| Income (loss) from operations                        |   | 1.6                                     |   | (14.7 | ) |
| Interest income and other expense, net               |   | 0.3                                     |   | 0.6 |   |
| Income (loss) before income tax benefit              |   | 1.9                                     |   | (14.1 | ) |
| Income tax benefit                                   |   | —                                  |   | (5.1 | ) |
| Net income (loss)                                    |   | 1.9                                     | %      | (9.0 | )% |

 

*Revenues.*Revenues for the first quarter of 2004 were $15.1 million, up 35.3% from $11.2million in the first quarter of 2003 and sequentially up 20.4% from $12.5million in the fourth quarter of 2003, with both increases attributable to highervolume shipments. The increase in revenue over the prior year quarter andsequentially are due to improved market conditions in the various markets weserve and due to designs we have won that are now moving into production.

 

As the overall semiconductor market has improved, the demand for newfabrication plants and semiconductor capital equipment has increased. Revenuesfor the Company into this market increased by 145.6% over the prior yearquarter and 24.9% sequentially.  We alsoexperienced increased revenues in the communications and data processingmarket, especially in the Asian markets. Revenues increased by 46.5% over the prior year quarter and 45.2%sequentially. The Company has continued to build its sales efforts in the Asiamarket to benefit from the increased demand in this region. The first quarterof 2004 marked the second consecutive quarter that revenues into the Asiaregion exceeded our European revenues. Revenues into the industrial/medical market increased by 0.7% over theprior year quarter and 3.0% sequentially. Our programs into implantable deviceswere up, but were offset by lower unit sales to an Asian customer.  Revenues in the military/aerospace marketincreased by 2.3% over the prior year quarter and 16.5% sequentially.

 

Overall, our revenues by geographic area for the first quarter of 2004were 65.4% in North America, 14.5% in Europe and 20.1% in Asia, compared to64.8% in North America, 24.3% in Europe, and 10.8% in Asia during the firstquarter of 2003. Revenues of our higher margin RF products were 49.1% in thefirst quarter of 2004 compared to 47.8% in the first quarter of 2003. As oursales to the semiconductor capital equipment and military/aerospace marketsincrease, there is the possibility that the RF percent of total revenue toexceed the 50% level for some period of time.

 

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*GrossProfit*. Gross profit for the first quarter of 2004 was 36.1%compared to 28.0% in first quarter of 2003 and 31.0% in the fourth quarter of2003. Excluding acquisition related non-cash amortization of the technologyassets acquired, gross profit margin was 37.9% in the first quarter of 2004compared to 30.5% in the first quarter of 2003 and 33.2% in the fourth quarterof 2003.  The improvement in grossprofit margin over the prior year quarter is due to improved fixed costabsorption at both our Bend, Oregon and Santa Clara, California facilities onhigher production volumes. This contributed approximately an additional 5.3% ingross margin in the first quarter of 2004 compared to the first quarter of2003. Additional improvement resulted from the mix of products sold, whichcontributed approximately 2.5% in additional gross margin. The sequentialimprovement due to a higher margin mix of products sold contributed 2.9%, whileimproved absorption at our Bend, Oregon and Montgomeryville, Pennsylvaniafacilities contributed to the balance of the improvement. The transfer of theMontgomeryville, Pennsylvania wafer fabrication plan is still underway and isexpected to be completed during 2004.

 

*Research and Development Expense.*  Our research and development expenses were$887,000 in the first quarter of 2004 compared to $833,000 in the first quarterof 2003 and $950,000 in the fourth quarter of 2003, or approximately 5.9%,7.5%, and 7.6% of revenues, respectively. The increase in research anddevelopment spending over the prior year quarter is due to additional payrollfor personnel assigned from other functional areas of the company to focus onproduct research and development. This will add approximately $40,000 perquarter to research and development spending. The sequential decline inspending is due to lower material charges for prototype builds in the quarter.The decrease in the percentage of revenue in the first quarter of 2004 is alsodue to our higher revenue levels in 2004. The Company plans to continue its research and development programsleading to the introduction of new products for use in both switching and RFapplications. Therefore, we expect the level of research and developmentexpenses to be approximately 7% over sustained periods of time.

 

*Selling, General and Administrative Expense.*Selling, general, and administrative expenses were $4.1 million in the firstquarter of 2004 compared to $3.7 million in the first and fourth quarters of2003, or approximately 27.2%, 33.1%, and 29.5% of revenues, respectively.  Our selling, general, and administrativeexpenses include legal expenses in connection with ongoing patent litigation,as more fully explained in Part II, Item I of this report. We have deniedinfringement of the IXYS patents and have asserted affirmative defenses andcounterclaims. However, the length of time and legal fees associated withpatent litigation with IXYS are expected to be significant. Legal expensesassociated with patent litigation were $602,000 in the first quarter of 2004,$193,000 in the first quarter of 2003, and $261,000 in the fourth quarter of2003.  Excluding the legal feesassociated with the IXYS patent litigation, our selling, general, andadministrative expenses in the first quarter of 2004, first quarter of 2003,and fourth quarter of 2003 would have been approximately $3.5 million eachquarter.

 

*Restructuring Activities:* As part ofmanagement’s strategic plans, the Company announced in November of 2003restructuring actions intended to improve manufacturing efficiencies and loweradministrative costs. The actions include consolidation of certainadministrative functions, rationalization of internal and external assembly andtest manufacturing, and the reduction of rent expense through the purchase andresale of one of the two buildings currently occupied by the Company’s SantaClara, California subsidiary. These announced actions were in addition to previouslydisclosed plans to consolidate our wafer fabrication plant in Montgomeryville,Pennsylvania to Bend, Oregon. Total restructuring related charges recognized in2003 were $645,000, of which $240,000 was recognized in the first quarter of2003 and $405,000 was recognized in the fourth quarter of 2003.

 

The total severance related charges recognized in 2003 were $295,000,which was recognized as $240,000 and $55,000 in the first and fourth quartersof 2003, respectively. The severance charges relate to already separatedpersonnel and personnel costs associated with benefits expected to be paid uponcompletion of certain eligible transfer activities. The building purchase isreported as an asset held for sale and is being marketed for sale as APT nolonger requires the space. In accordance with SFAS 144, an asset held for saleis carried at estimated fair value. As such, APT recorded an impairment chargefor the building in the fourth quarter of 2003 of approximately $350,000. Fairvalue was estimated based on comparable sales data of similar commercial spacein the area. The net carrying value of the building as of March 31, 2004was approximately $1 million and is included as a component of other currentassets.

 

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During the first quarter of 2004 an additional $206,000 was recognizedin restructuring charges. The charges included $140,000 associated with coststo exit certain production activities and $66,000 associated with additionalseverance costs.

 

*Interest income and o**therexpense, net*.  Interestincome and other expense, net, which includes interest income, interest expenseand other expense, was a net income of $34,000 in the first quarter of 2004compared to a net income of $67,000 in the first quarter of 2003.  The primary component is interest incomeearned on our cash and marketable securities. Net interest income was $40,000 in the first quarter of 2004 compared to$56,000 in the first quarter of 2003. The decline in interest income is primarily due to lower interest ratesavailable in the current investment market and lower invested cash andmarketable securities, as the Company continues to self fund its purchases ofproperty and equipment.

 

*Income Tax Expense (Benefit)*.  During the first quarter of 2004, theCompany recorded no tax expense on the $283,000 of income before taxes, as theCompany recorded a full valuation allowance against its net deferred tax assetsin the fourth quarter of 2003. In assessing the valuation of deferred tax assets,SFAS No. 109 “Accounting for Income Taxes,” requires a more likely than notstandard. The ultimate realization of deferred tax assets is dependent on thegeneration of future domestic taxable income during the periods in which theassociated temporary differences become deductible. Management considers thescheduled reversals of deferred tax liabilities, projected future taxableincome, and tax planning strategies in making this assessment. Although theCompany anticipates future long term profitability, SFAS No. 109 requires thatrecent historical operating performance weigh more heavily in assessing thevaluation of deferred tax assets. The more likely than not assessment wasprincipally based upon the losses generated during 2002 and 2003 and the cyclicalnature of the industry which make projections of industry trends difficult. While the Company has sufficient netoperating loss carry-forwards (NOL’s) to offset federal taxable income forregular tax purposes, the Company’s use of its NOL’s for alternative minimumtax (AMT) purposes are limited to 90% of its AMT income (AMTI). Therefore, theCompany expects to pay AMT of approximately 20% on the remaining AMTI,resulting in an approximate effective tax rate of 2% for the remainder of 2004.We recorded a tax benefit in the first quarter of 2003, at an effectivetax rate of 35.9%.  The first quarter2003 tax rate benefit is lower than the expected tax rate primarily due to aforeign net operating loss in the quarter which carries a full valuationallowance. During the first quarter of 2003, the Company had not yetestablished a valuation allowance against its domestic deferred tax assets.

 

**Liquidity and Capital Resources**

 

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

 

*Operating Cash Flows:* In the first three months of 2004, wegenerated approximately $430,000 from operating activities. This resulted fromour net income of $283,000 plus $1.2 million of non-cash charges fordepreciation, amortization, and provisions. This was offset by $1.1 million inadditional working capital requirements, primarily higher trade accountsreceivable balances on higher revenues.

 

*Investing Cash Flows:* In the first threemonths of 2004, we used $764,000 in investing activities for the purchase ofproperty, plant, and equipment.  Theadditions related to the Bend, Oregon fab expansion and for assembly and testequipment at our Santa Clara, California facility.

 

*Financing Cash Flows:* In the first threemonths of 2004, we generated approximately $108,000 from financing activities,which primarily consisted of proceeds from the exercise of stock options.

 

As of March 31, 2004, APT had $32.7 million in workingcapital.  Our trade accounts receivablebalance was $8.5 million reflecting a days sales outstanding ratio of 49 days,compared to trade accounts receivable of $7.6 million at December 31,2003, reflecting a days sales outstanding ratio of 57 days. Based on thegeographic mix of our customers and the credit terms we extend, managementexpects our days sales outstanding ratio to range from 50 to 60 days. Our

 

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inventory balance at March 31, 2004 was $12.2 million reflectinginventory turns of 3.1 times per year, compared to an inventory balance of$12.4 million at December 31, 2003, reflecting inventory turns of 2.7times per year. The Company continues to pursue actions to monitor inventorylevels and improve inventory turns. The calculations above are based on quarterlyaverage balances of trade accounts receivable and inventory.

 

APT currently expects to fund expenditures for capital requirements aswell as liquidity needs from a combination of available cash balances,internally generated funds and financing arrangements if needed. As ofMarch 31, 2004, APT had $16.3 million in cash and cash equivalentsand available-for-sale securities. APT’s investment policy is to invest inshort term, high-grade liquid investments with the goal of capitalpreservation. APT’s ability to generate positive cash flow from operations maybe affected by market conditions as well as other risk factors as describedbelow. We expect from time to time to evaluate potential acquisitions andequity investments complementary to our market strategy. To the extent wepursue such transactions, we could require additional equity or debt financingto fund such activities or to fund our working capital requirements in theevent of an industry downturn or an unexpected adverse change in our businessoperations. To the extent we require additional capital we cannot be certainthat we will be able to obtain such financing on terms favorable to us, or atall.

 

**Off Balance SheetArrangements & Commitments**

 

As of March 31, 2004 the Company did not have any unconsolidatedentities or off balance sheet financial arrangements, guarantees or similarcommitments with such entities. As of March 31, 2004 the open value ofpurchase order commitments was $7.5 million compared to $5.2 million atDecember 31, 2003. This represents the amounts committed per open purchaseorders with third parties. The increase over the December 31, 2003 balanceis due to the timing of certain capital expenditures and higher material andsubcontractor commitments in light of higher production volumes in the quarterand expected into the next quarter. The Company did not enter or terminate anylease agreements during the quarter.

 

**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

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

 

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

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

*(a)**       Evaluation of disclosurecontrols and procedures.*

 

As required by new Rule 13a-15 under the Securities Exchange Act of1934, the Company 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, as ofthe end of the period covered by this report. Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that theCompany’s disclosure controls and procedures are effective to ensure thatinformation required to be disclosed by the Company in the reports it files orsubmits under the Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the Securities and Exchange Commission’srules and forms. In connection with the new rules, we currently are in theprocess of further reviewing and documenting our disclosure controls andprocedures, including our internal controls over financial reporting, and mayfrom time to time make changes aimed at enhancing their effectiveness and toensure that our systems evolve with our business.

 

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Based on our most recent evaluation of the effectiveness of the designand operation of the Company’s disclosure controls and procedures, the Companydid not discover:

 
| (i)  |   | Any significant deficiencies or material weaknesses in the design or  operation of internal control over financial reporting which are reasonably  likely to adversely affect the registrant’s ability to record, process,  summarize and report financial information; |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (ii) |   | Any instances of fraud, whether or not material, that involved  management or other employees who have a significant role in the registrant’s  internal control over financial reporting                                                                                |

 

*(b)**       Changes in internalcontrols*

 

None.

 

**PART II.  OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

From time to time the Company is involved in various legal matters thatarise out of the ordinary conduct of our business, including those related tolitigation over intellectual property rights, commercial transactions,contracts, product liability, environmental, safety and health, and employmentmatters.  The Company is currentlyinvolved in various legal proceedings. The Company does not believe that the ultimate resolution of suchlitigation will have a material adverse effect on the Company’s financialposition, results of operations or cash flows. The Company accrues loss contingencies in connection with its litigationwhen it is probable that a loss has occurred and the amount of the loss can bereasonably estimated.

 

On August 15, 2002, IXYS Corporation filed a patent infringementlawsuit against APT with the United States District Court, Northern District ofCalifornia.  The claim filed by IXYSalleges that APT infringes on their United States Patent No. 5,486,715 and5,801,419.  The IXYS claim alsorequested that damages be determined at trial and that such damages be trebled.On October 1, 2002, APT filed its answer to the IXYS complaint, denyingthe allegations of patent infringement. In addition, APT filed a patent infringement counterclaim against IXYS,alleging that IXYS infringes on APT United States Patent No. 5,283,202,entitled “IGBT Device With Platinum Lifetime Control Having Gradient Or ProfileTailored Platinum Diffusion Regions.” APT has filed with the court several affirmative defenses related to thevalidity of the IXYS patents.  Trial isscheduled to commence in July of 2004. As stated above, APT does notbelieve that it infringes upon the IXYS patents cited in the claim and intendsto vigorously defend itself in this lawsuit. The length of time and legal fees associated with the patentinfringement litigation with IXYS are expected to be significant.

 

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

 

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

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

 

(b) Reports on Form 8-K

 

Filed: 

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

 

Furnished:

There were no reports furnished on Form 8-K during the first quarter of2004. The following reports were furnished in the second quarter of 2004 priorto this filing on Form 10-Q.

 
| **Date of Report**     |   | **Date  Furnished** |   | **Description**                                                                                                           |
|------------------------|--------|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------|
|                   |   |                |   |                                                                                                                      |
| February 24, 2004 |   | April 2, 2004  |   | Earnings release for fourth quarter 2003 financial results.                                                               |
| April 5, 2004     |   | April 6, 2004  |   | Financial release regarding pre-announcement of revenue and earnings  estimates for first quarter 2004 financial results. |
| April 22, 2004    |   | April 26, 2004 |   | Earnings release for first quarter 2004 financial results.                                                                |

 

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**SIGNATURE**

 

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

 

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

 

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