** **

**UNITED STATESSECURITIES 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, 2003** |
|                                                   |
| **OR**                                                 |
|                                                   |
| **o**                                                  | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF  THE 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

 

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 as ofOctober 31, 2003 was 10,416,816 shares.

 

 

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**ADVANCED POWER TECHNOLOGY, INC.**

**FORM10-Q**

**TABLEOF CONTENTS**

** **
| **Part I**  | **Financial  Information**                                                                             |
|-------------|--------------------------------------------------------------------------------------------------------|
|        |                                                                                                   |
| Item 1.     | Financial Statements:                                                                                  |
|        |                                                                                                   |
|        | Consolidated Balance Sheets as of September 30, 2003 and December 31,  2002                            |
|        |                                                                                                   |
|        | Consolidated Statements of Operations for  the three and nine months ended September 30, 2003 and 2002 |
|        |                                                                                                   |
|        | Consolidated Statements of Cash Flows for  the nine months ended September 30, 2003 and 2002           |
|        |                                                                                                   |
|        | 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.CONSOLIDATED BALANCE SHEETS(In thousands, except share amounts)**

 
|                                                                                                                                                                                          |   | **September  30,  2003** |       | **December  31,  2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|-------------------------|------------|
|                                                                                                                                                                                          |   | **(Unaudited)**          |       |                    |       |
| **Assets**                                                                                                                                                                                    |   |                     | ** ** |                    | ** ** |
| Current assets:                                                                                                                                                                               |   |                     |       |                    |       |
| Cash and cash equivalents                                                                                                                                                                     |   | $                        | 10,561     |                    | $          | 6,708 |   |
| Short-term investments in  available-for-sale securities                                                                                                                                      |   | 6,590                    |       | 10,452                  |       |
| Accounts receivable, net of allowance of  $225 (2003) and $70 (2002)                                                                                                                          |   | 8,082                    |       | 6,899                   |       |
| Inventories, net                                                                                                                                                                              |   | 12,385                   |       | 11,949                  |       |
| Prepaid expenses and other current assets                                                                                                                                                     |   | 2,461                    |       | 2,521                   |       |
| Total current assets                                                                                                                                                                          |   | 40,079                   |       | 38,529                  |       |
|                                                                                                                                                                                          |   |                     |       |                    |       |
| Property and equipment, net of accumulated  amortization and depreciation  of $13,680 (2003) and $11,410 (2002)                                                                               |   | 10,093                   |       | 10,617                  |       |
| Long-term investments in available-for-sale  securities                                                                                                                                       |   | 1,000                    |       | 2,000                   |       |
| Other assets                                                                                                                                                                                  |   | 257                      |       | 109                     |       |
| Technology rights, net of accumulated  amortization of $1,684 (2003) and $876 (2002)                                                                                                          |   | 9,080                    |       | 9,887                   |       |
| Goodwill                                                                                                                                                                                      |   | 15,570                   |       | 15,806                  |       |
| Total assets                                                                                                                                                                                  |   | $                        | 76,079     |                    | $          | 76,948 |   |
|                                                                                                                                                                                          |   |                     |       |                    |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                 |   |                     |       |                    |       |
| Current liabilities:                                                                                                                                                                          |   |                     |       |                    |       |
| Accounts payable                                                                                                                                                                              |   | $                        | 3,651      |                    | $          | 2,873 |   |
| Accrued expenses                                                                                                                                                                              |   | 2,066                    |       | 2,475                   |       |
| Total current liabilities                                                                                                                                                                     |   | 5,717                    |       | 5,348                   |       |
| Other long term liabilities                                                                                                                                                                   |   | 411                      |       | 428                     |       |
| Total liabilities                                                                                                                                                                             |   | 6,128                    |       | 5,776                   |       |
|                                                                                                                                                                                          |   |                     |       |                    |       |
| 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; 10,523,489 issued and 10,414,632 shares outstanding in  2003; 10,503,219 shares issued and 10,394,362 shares outstanding in 2002 |   | 105                      |       | 105                     |       |
| Additional paid-in capital                                                                                                                                                                    |   | 88,546                   |       | 88,490                  |       |
| Treasury stock, at cost, 108,857 shares                                                                                                                                                       |   | (1,700                   | )          | (1,700                  | )          |
| Deferred stock compensation                                                                                                                                                                   |   | (50                      | )          | (171                    | )          |
| Accumulated other comprehensive income                                                                                                                                                        |   | 234                      |       | 166                     |       |
| Accumulated deficit                                                                                                                                                                           |   | (17,184                  | )          | (15,718                 | )          |
| Total stockholders’ equity                                                                                                                                                               |   | 69,951                   |       | 71,172                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                               |   | $                        | 76,079     |                    | $          | 76,948 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

3

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

**(Unaudited)**

** **
|                                                                                       |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|------------|
|                                                                                       |   | **2003**                               |   | **2002**                              |       | **2003** |   | **2002** | ** ** |
|                                                                                       |   |                                   |   |                                  |       |   |   |   |   |
| Revenues, net                                                                              |   | $                                      | 12,708 |                                  | $          | 13,052 |   | $ | 36,354 |   | $ | 31,985 |   |
|                                                                                       |   |                                   |   |                                  |       |   |   |   |   |
| Cost of goods sold                                                                         |   | 8,363                                  |   | 8,589                                 |       | 23,892 |   | 21,275 |   |
| Amortization of technology rights and other  charges                                       |   | 278                                    |   | 555                                   |       | 842 |   | 1,512 |   |
| Total cost of goods sold                                                                   |   | 8,641                                  |   | 9,144                                 |       | 24,734 |   | 22,787 |   |
| Gross profit                                                                               |   | 4,067                                  |   | 3,908                                 |       | 11,620 |   | 9,198 |   |
|                                                                                       |   |                                   |   |                                  |       |   |   |   |   |
| Operating expenses:                                                                        |   |                                   |   |                                  |       |   |   |   |   |
| Research and development                                                                   |   | 550                                    |   | 1,019                                 |       | 2,051 |   | 3,000 |   |
| Selling, general and administrative                                                        |   | 3,672                                  |   | 3,335                                 |       | 11,306 |   | 8,868 |   |
| In-process research and development                                                        |   | —                                 |   | —                                |       | — |   | 2,108 |   |
| Total operating expenses                                                                   |   | 4,222                                  |   | 4,354                                 |       | 13,357 |   | 13,976 |   |
| Loss from operations                                                                       |   | (155                                   | )      | (446                                  | )          | (1,737 | ) | (4,778 | ) |
|                                                                                       |   |                                   |   |                                  |       |   |   |   |   |
| Interest income, net                                                                       |   | 56                                     |   | 98                                    |       | 164 |   | 479 |   |
| Other income (expense), net                                                                |   | 16                                     |   | 31                                    |       | (118 | ) | 22 |   |
| Loss before income tax expense (benefit)                                                   |   | (83                                    | )      | (317                                  | )          | (1,691 | ) | (4,277 | ) |
| Income tax expense (benefit)                                                               |   | 255                                    |   | (381                                  | )          | (225 | ) | (1,231 | ) |
| Net income (loss)                                                                          |   | $                                      | (338   | )                                     | $          | 64 |   | $ | (1,466 | ) | $ | (3,046 | ) |
|                                                                                       |   |                                   |   |                                  |       |   |   |   |   |
| Net income (loss) per share:                                                               |   |                                   |   |                                  |       |   |   |   |   |
| Basic                                                                                      |   | $                                      | (0.03  | )                                     | $          | 0.01 |   | $ | (0.14 | ) | $ | (0.30 | ) |
| Diluted                                                                                    |   | (0.03                                  | )      | 0.01                                  |       | (0.14 | ) | (0.30 | ) |
| Weighted average number of shares used in  the computation of net income (loss) per share: |   |                                   |   |                                  |       |   |   |   |   |
| Basic                                                                                      |   | 10,413                                 |   | 10,381                                |       | 10,406 |   | 10,199 |   |
| Diluted                                                                                    |   | 10,413                                 |   | 10,935                                |       | 10,406 |   | 10,199 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

4

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

** **
|                                                                             |   | **Nine  Months Ended  September 30,** |   |
|----------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                             |   | **2003**                              |   | **2002** | ** ** |
| Cash flows from operating activities:                                            |   |                                  |   |   |   |
| Net loss                                                                         |   | $                                     | (1,466 | ) | $ | (3,046 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |   |                                  |   |   |   |
| Depreciation                                                                     |   | 2,316                                 |   | 1,863 |   |
| Amortization of intangible assets                                                |   | 807                                   |   | 607 |   |
| Inventory provisions                                                             |   | 175                                   |   | 599 |   |
| Amortization of deferred stock compensation                                      |   | 121                                   |   | 381 |   |
| Amortization of investment premium                                               |   | 14                                    |   | 117 |   |
| Deferred gain on sale-leaseback                                                  |   | (13                                   | )      | (13 | ) |
| Non-cash charge for in-process research and  development                         |   | —                                |   | 2,108 |   |
| Changes in operating assets and  liabilities, net of effects of acquisitions:    |   |                                  |   |   |   |
| Accounts receivable                                                              |   | (1,115                                | )      | (2,940 | ) |
| Inventories                                                                      |   | (528                                  | )      | 1,432 |   |
| Prepaid expenses and other assets                                                |   | 164                                   |   | 1,254 |   |
| Accounts payable and accrued expenses                                            |   | 331                                   |   | 1,130 |   |
| Net cash provided by operating activities                                        |   | 807                                   |   | 3,492 |   |
|                                                                             |   |                                  |   |   |   |
| Cash flows from investing activities:                                            |   |                                  |   |   |   |
| Purchases of available-for-sale securities                                       |   | (2,000                                | )      | (5,480 | ) |
| Proceeds from sale of available-for-sale  securities                             |   | 6,843                                 |   | 20,196 |   |
| Payment for acquisitions, net of cash  acquired                                  |   | —                                |   | (26,625 | ) |
| Proceeds from sale of property and  equipment                                    |   | 97                                    |   | 72 |   |
| Purchase of property and equipment                                               |   | (1,888                                | )      | (2,269 | ) |
| Net cash (used) provided by investing  activities                                |   | 3,052                                 |   | (14,106 | ) |
|                                                                             |   |                                  |   |   |   |
| Cash flows from financing activities:                                            |   |                                  |   |   |   |
| Payments on capital lease obligations                                            |   | (57                                   | )      | (57 | ) |
| Proceeds from exercise of stock options                                          |   | 56                                    |   | 358 |   |
| Net cash (used) provided by financing  activities                                |   | (1                                    | )      | 301 |   |
| Effects of exchange rate changes on cash                                         |   | (5                                    | )      | (42 | ) |
| Net change in cash and cash equivalents                                          |   | 3,853                                 |   | (10,355 | ) |
| Cash and cash equivalents at beginning of  period                                |   | 6,708                                 |   | 16,102 |   |
| Cash and cash equivalents at end of period                                       |   | $                                     | 10,561 |   | $ | 5,747 |   |
|                                                                             |   |                                  |   |   |   |
| Supplemental disclosure of cash flow information:                                |   |                                  |   |   |   |
| Cash received (paid) during the period  for:  Interest                      |   | $                                     | (24    | ) | $ | (26 | ) |
| Income taxes                                                                     |   | 199                                   |   | 1,395 |   |
|                                                                             |   |                                  |   |   |   |
| Supplemental disclosure of noncash  activities:                                  |   |                                  |   |   |   |
| Unrealized gain (loss) on short-term and  long-term investments                  |   | $                                     | (3     | ) | $ | (58 | ) |
| Issuance of stock and options for  acquisition of business                       |   | —                                |   | 20,313 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

5

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

 

**Note 1. Basis ofPresentation**

 

The accompanying unaudited consolidated financial statements includenormal recurring adjustments necessary for a fair presentation of AdvancedPower Technology, Inc.’s (APT) interim results.  The consolidated financial statements and notes in this Form 10-Qare presented as permitted by Regulation S-X, and as such, they do not containcertain information included in APT’s 2002 annual consolidated financialstatements and notes.  This Form 10-Qshould be read in conjunction with APT’s consolidated financial statements andnotes included in its Annual Report on Form 10-K for the year ended December31, 2002.  The financial information asof December 31, 2002 is derived from the audited consolidated financialstatements as filed with APT’s Annual Report on Form 10-K for the year endedDecember 31, 2002.  The results ofoperations for the three and nine months ended September 30, 2003 are notnecessarily indicative of the results expected for the entire fiscal yearending December 31, 2003.

 

APT’s financial quarters are 13 week periods. The third quarter of 2003ended on September 28 and the third quarter of 2002 ended on September 29.  For convenience, the third quarters of 2003and 2002 are both shown as ended on September 30.

 

**Note 2. Summary ofSignificant Accounting Policies**

 

***(a) Sales Returnsand Allowances***

 

The balancesand changes in reserve for warranties and sales returns for the three and ninemonths ended September 30, 2003 and 2002 are as follows:

 
|                                      |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|-------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                      |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
|                                      |   |                                   |   |                                  |   |   |   |   |   |
| Balance – beginning of period        |   | $                                      | 375    |                                  | $      | 520 |   | $ | 351 |   | $ | 365 |   |
| Fair value of acquisition related balance |   | —                                 |   | —                                |   | — |   | 133 |   |
| Provisions                                |   | 235                                    |   | 405                                   |   | 816 |   | 996 |   |
| Charge offs                               |   | (317                                   | )      | (535                                  | )      | (874 | ) | (1,104 | ) |
| Balance – end of period              |   | $                                      | 293    |                                  | $      | 390 |   | $ | 293 |   | $ | 390 |   |

 

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

 

APT haselected to continue to apply the prescribed accounting in Opinion 25 andprovide the required disclosures per SFAS 123 and SFAS 148. APT accounts forequity instruments issued to non-employees in accordance with the provisions ofSFAS 123 and Emerging Issues Task Force consensus on Issue No. 96-18, “Accountingfor Equity Instruments that are Issued to Other than Employees, for Acquiringor in Conjunction with Selling Goods or Services.”

 

6

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Had APTdetermined compensation cost based on the fair value at the grant date for itsstock options under SFAS 123, APT’s net loss would have been the pro formaamounts indicated in the table below.

 
|                                                                                                                  |   | **Three  Months  Ended September 30,** |   | **Nine  Months  Ended September 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                                                                                  |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
|                                                                                                                  |   |                                   |   |                                  |   |   |   |   |   |
| Net income (loss), as reported                                                                                        |   | $                                      | (338   | )                                     | $      | 64 |   | $ | (1,466 | ) | $ | (3,046 | ) |
| Add: Stock based compensation included in  reported net income (loss), net of related tax effects                     |   | 33                                     |   | 105                                   |   | 121 |   | 381 |   |
| Deduct: Stock based compensation determined  under fair value based method for all awards, net of related tax effects |   | (465                                   | )      | (641                                  | )      | (1,344 | ) | (1,763 | ) |
| Pro forma net loss                                                                                                    |   | $                                      | (770   | )                                     | $      | (472 | ) | $ | (2,689 | ) | $ | (4,428 | ) |
|                                                                                                                  |   |                                   |   |                                  |   |   |   |   |   |
| Income (loss) per share:                                                                                              |   |                                   |   |                                  |   |   |   |   |   |
| Basic – as reported                                                                                              |   | $                                      | (0.03  | )                                     | $      | 0.01 |   | $ | (0.14 | ) | $ | (0.30 | ) |
| Basic – pro forma                                                                                                |   | (0.07                                  | )      | (0.04                                 | )      | (0.26 | ) | (0.43 | ) |
|                                                                                                                  |   |                                   |   |                                  |   |   |   |   |   |
| Diluted – as reported                                                                                            |   | $                                      | (0.03  | )                                     | $      | 0.01 |   | $ | (0.14 | ) | $ | (0.30 | ) |
| Diluted – pro forma                                                                                              |   | (0.07                                  | )      | (0.04                                 | )      | (0.26 | ) | (0.43 | ) |

 

The effects ofapplying SFAS 123 in this pro forma disclosure are not indicative of futureamounts and additional awards are anticipated in future years.

 

The fair valueof the compensation costs reflected in the above pro forma amounts wasdetermined using the Black-Scholes option pricing model and the weightedaverage assumptions as follows:

 
|                    |   | **2003** |   | **2002** |   |
|-------------------------|--------|----------|--------|----------|--------|
|                    |   |     |   |     |   |
| Risk-free interest rate |   | 2.6-3.2  | %      | 3.8      | %      |
| Expected dividend yield |   | 0        | %      | 0        | %      |
| Expected life           |   | 5 years  |   | 5 years  |   |
| Volatility              |   | 100      | %      | 100      | %      |

 

***(c) Net Income(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 (loss) per share for the three and ninemonths ended September 30, 2003 and 2002 are summarized in the following table.

 

7

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|                                                                              |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|-----------------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                                              |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** | ** ** |
|                                                                              |   |                                   |   |                                  |   |   |   |   |   |
| Incremental dilutive shares included in  diluted net income per share calculation |   | —                                 |   | 554,000                               |   | — |   | — |   |
| Anti-dilutive shares excluded from diluted  net loss per share calculation        |   | 1,266,000                              |   | 606,000                               |   | 1,283,000 |   | 952,000 |   |

 

***(d) Income Taxes***

 

During thethird quarter of 2003 the Company recorded a non-cash tax expense of $480,000related to the valuation of the Company’s net deferred tax asset previouslyrecognized in the first six months of 2003. We recorded this non-cash expense in accordance with SFAS 109,“Accounting for Income Taxes” guidance on valuation of deferred tax assets, asit was determined that it was more likely than not that a portion of thedeferred tax asset might not be realized.

 

**Note 3. ComprehensiveIncome (loss)**

 

Comprehensive income (loss) is the total of net income(loss) and all other non-owner changes in equity. Comprehensive income (loss)includes foreign currency translations and unrealized gains and losses frominvestments, as presented in the following table.

 
|                                              |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** | ** ** |
|---------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|------------|
|                                              |   | **2003**                               |   | **2002**                              |       | **2003** |   | **2002** | ** ** |
|                                              |   |                                   |   |                                  |       |   |   |   |   |
| Net income (loss)                                 |   | $                                      | (338   | )                                     | $          | 64 |   | $ | (1,466 | ) | $ | (3,046 | ) |
|                                              |   |                                   |   |                                  |       |   |   |   |   |
| Other comprehensive income (loss), net of  tax:   |   |                                   |   |                                  |       |   |   |   |   |
| Unrealized loss on available for sale  securities |   | (1                                     | )      | (16                                   | )          | (3 | ) | (58 | ) |
| Foreign currency translation adjustment           |   | (3                                     | )      | (47                                   | )          | 71 |   | 55 |   |
| Comprehensive income (loss)                       |   | $                                      | (342   | )                                     | $          | 1 |   | $ | (1,398 | ) | $ | (3,049 | ) |

 

**Note 4. Inventories,net**

 
|              |   | **September  30,  2003** |   | **December  31,  2002** |   |
|-------------------|--------|--------------------------|--------|-------------------------|--------|
|              |   |                     |   |                    |   |
| Raw materials     |   | $                        | 2,979  |                    | $      | 2,806 |   |
| Work in process   |   | 6,882                    |   | 6,705                   |   |
| Finished goods    |   | 4,414                    |   | 4,128                   |   |
|              |   | 14,275                   |   | 13,639                  |   |
| Valuation reserve |   | (1,890                   | )      | (1,690                  | )      |
|              |   | $                        | 12,385 |                    | $      | 11,949 |   |

 

8

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**Note 5. Acquisitions**

 

***(a)******                                 GHzTechnology, 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 Advanced Power Technology RF, Inc.(APTRF).  The GHz assets acquiredincluded approximately $205 in cash and $7,656 in marketable securities.  The transaction was accounted for by thepurchase method of accounting, in accordance with SFAS 141, “BusinessCombinations” and SFAS 142.  APTobtained a third party valuation study to estimate the fair value of theacquired intangible assets.  APT beganto consolidate the financial results of GHz on January 25, 2002 andforward.

 

***(b)******                                 MicrosemiRF Products, Inc.***

 

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 Advanced PowerTechnology RF Pennsylvania, Inc. (APTRF-PA). The transaction was accounted for by the purchase method of accounting,in accordance with SFAS 141 and SFAS 142. APT obtained a third party valuationstudy to estimate the fair value of the acquired intangible assets.  APT began to consolidate the financial resultsof the acquired business on May 24, 2002 and forward.

 

***(c)******                                  ProForma 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, 2002.  The pro formainformation includes non-cash charges for amortization of technology rights,inventory fair value adjustments, depreciation and deferred compensationrelated to the acquisitions, consistent with generally accepted accountingprinciples.  The pro forma resultsexclude a charge of $1,897 for in-process research and developmentexpense.  The pro forma information doesnot necessarily reflect the actual results that would have occurred if thecompanies had been combined during the period nor is it necessarily indicativeof future results of operations for the combined companies.

 
|                                                                                       |   | **Three  Months  Ended  September 30,  2002** |   | **Nine  Months  Ended  September 30,  2002** | ** ** |
|--------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|----------------------------------------------|------------|
|                                                                                       |   |                                          |   |                                         |       |
| Revenues, net                                                                              |   | $                                             | 13,052 |                                         | $          | 36,119 |   |
| Net income (loss)                                                                          |   | 222                                           |   | (1,649                                       | )          |
|                                                                                       |   |                                          |   |                                         |       |
| Net income (loss) per share:                                                               |   |                                          |   |                                         |       |
| Basic                                                                                      |   | $                                             | 0.02   |                                         | $          | (0.16 | ) |
| Diluted                                                                                    |   | 0.02                                          |   | (0.16                                        | )          |
| Weighted average number of shares used in  the computation of net income (loss) per share: |   |                                          |   |                                         |       |
| Basic                                                                                      |   | 10,381                                        |   | 10,617                                       |       |
| Diluted                                                                                    |   | 10,935                                        |   | 10,617                                       |       |

 

**Note 8.SEGMENT INFORMATION**

 

APT operates in one segment and is engaged in themanufacture and marketing of high-performance power semiconductors and modulesfor switching and RF applications.

 

9

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**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 or cashflows.  However, the length of time andlegal fees associated with the patent litigation with IXYS may be significant.The Company accrues loss contingencies in connection with its litigation whenit is probable that a loss has occurred and the amount of the loss can bereasonably estimated.

 

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

 

This discussion and analysis is intended to be readin conjunction 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, 2002.

 

**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 theability of subcontractors to meet their delivery commitments; unfavorablechanges in industry and competitive conditions; our mix of product shipments;the accuracy of our customer’s forecasts; the effectiveness of our efforts tocontrol and reduce costs; 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, 2002, filed with the Securities and ExchangeCommission.

 

**Overview**

 

We are aleading designer, manufacturer and marketer of high-performance powersemiconductors and modules for both switching and RF applications. Powersemiconductors manage and regulate electrical power by converting electricityinto a form required by electrical and electronic products. Our powersemiconductors increase system efficiency, permit the design of more compactend products and improve features and functionality. We are primarily focusedon the high power, high frequency segment of the power semiconductor market.High power refers to the ability to dissipate above one kilowatt, and highfrequency refers to the ability to switch on and off at rates above 100kilohertz. In addition we have strengthened our portfolio of RF products thatoperate at frequencies ranging from 1 megahertz to 100 megahertz. RF generallyrefers to the ability to operate at frequencies above 1 megahertz. We sell ourproducts primarily in North America, Europe, and Asia, through a network ofindependent sales representatives and distributors. Our common stock is listedon the NASDAQ National Market under the symbol APTI.

 

To further ourpenetration in RF markets, we completed the acquisition of GHzTechnology, Inc. and the business of Microsemi RF Products, Inc. inJanuary 2002 and May 2002, respectively. These acquisitions are part of the Company’s ongoing strategy to expandits product and technology portfolio in the RF power arena through bothinternal development and acquisitions. We believe that these acquisitions serve to position APT as an emerging,dominant supplier in bipolar RF power transistors for avionics, radar andnon-cellular communications applications. These acquisitions have added valuable RF technology and substantial RFengineering, manufacturing and marketing capability to the Company.

 

The followingdiscussion should be read in conjunction with the consolidated financialstatements provided under Part II, Item 8 of our Annual Report onForm 10-K. Certain statements contained herein may constitute

 

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forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of 1995.These statements involve a number of risks, uncertainties and other factorsthat could cause actual results to differ materially, as discussed more fullyherein.

 

**Critical Accounting Policies and Estimates**

 

Advanced PowerTechnology’s discussion and analysis of its financial condition and results ofoperations are based upon consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires APT tomake 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, allowancefor doubtful accounts, excess and obsolete inventories, income taxes, valuationof intangible assets including goodwill, valuation of long-lived assets,contingencies and litigation, and excess component order cancellation costs.APT bases its estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions.

 

APT believesthe following critical accounting policies affect its more significantjudgments and estimates used in the preparation of its consolidated financialstatements.

 

***Product Returns andWarranty Obligations***

 

Productrevenue is recognized upon shipment of product. In general, APT provides for aone-year repair or replacement warranty on its products. Upon shipment, APTprovides for the estimated cost that may be incurred for product warranty andsales returns based on historical experience. APT uses independent distributorsto sell some of its products. Distributors can return a contractually agreedupon percentage of the dollar value of products purchased during the prior sixmonths and receive certain price protections on purchased products. Sales todistributors are recognized upon shipment, less an allowance for estimatedreturns based on historical experience.

 

While theCompany engages in extensive product quality programs and processes, includingactively monitoring and evaluating the quality of its component suppliers,APT’s warranty obligation is affected by product non-conformance rates,material usage and service delivery costs incurred in correcting a productnon-conformance. Should actual product non-conformance rates, material usage,service delivery costs, or distributor returns differ from APT’s estimates,revisions to the estimated warranty liability would be required.

 

***Allowance forDoubtful Accounts***

 

APT maintainsan allowance for doubtful accounts for estimated losses resulting from theinability of its customers to make required payments. Management regularlyreviews the adequacy of the allowance after considering the size of theaccounts receivable balance, historical bad debts, the customer’s expectedability to pay and our collection history with each customer. Managementreviews significant individual accounts that are past due to determine whetheran allowance should be made based on these factors.  If the financial condition of our customers were to deteriorate,resulting in an impairment of their ability to make payments, additionalallowances may be required.

 

***Excess and ObsoleteInventories***

 

Inventoriesare stated at the lower of standard cost (approximates actual cost on afirst-in, first-out basis) or market (net realizable value).  APT establishes reserves for estimatedunmarketable (excess) or obsolete inventory equal to the difference between thecost of inventory and the estimated net realizable value based upon assumptionsabout future demand and market conditions. APT evaluates historical usage ofthe product, current customer demand, and forecasted usage of the product.  If actual market conditions are lessfavorable than those projected by management, additional inventory reserves maybe required.

 

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***Income Taxes***

 

APT records avaluation allowance to reduce its deferred tax assets to the amount that ismore likely than not to be realized. While APT considers future taxable incomeand ongoing prudent and feasible tax planning strategies in assessing the needfor the valuation allowance, in the event APT were to determine that it wouldbe able to realize its deferred tax assets in the future in excess of its netrecorded amount, an adjustment to the deferred tax asset would increase incomein the period such determination was made. Likewise, should APT determine thatit would not be able to realize all or part of its net deferred tax asset inthe future, an adjustment to the deferred tax asset would be charged to incomein the period such determination was made.

 

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

 

APT valuesgoodwill and intangible assets with indefinite lives in accordance withStatement of Financial Accounting Standards No. (SFAS) 142 “Goodwill and OtherIntangible Assets.”  Currently APTcarries a goodwill balance in connection with previous acquisitions, but has noother intangible assets with indefinite lives. We annually review goodwill for impairment and when events orcircumstances indicate the carrying value of the asset might exceed its currentfair value. We determine fair value using discounted cash flow analysis andother acceptable valuation methodologies, which requires us to make certainassumptions and estimates regarding industry economic factors and futureprofitability.  It is our policy toconduct impairment testing based on our most current business plans, whichreflect 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 goodwill.

 

***Valuation ofLong-Lived Assets***

 

APT valueslong-lived assets, including intangible assets with finite lives, in accordancewith SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”We evaluate our long-lived assets for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable.  We determine the potential impairment usingundiscounted cash flow analysis, which requires us to make certain assumptionsand estimates regarding industry economic factors and futureprofitability.  It is our policy toconduct impairment testing based on our most current business plans, whichreflect 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.

 

***Contingencies andLitigation***

 

APT is subjectto the possibility of various loss contingencies arising in the ordinary courseof business.  We consider the likelihoodof loss or impairment of an asset or the incurrence of a liability, as well asour ability to 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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**Resultsof 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,** |   |
|------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                 |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
|                                                 |   |                                   |   |                                  |   |   |   |   |   |
| Revenues, net                                        |   | 100.0                                  | %      | 100.0                                 | %      | 100.0 | % | 100.0 | % |
|                                                 |   |                                   |   |                                  |   |   |   |   |   |
| Cost of goods sold                                   |   | 65.8                                   |   | 65.8                                  |   | 65.7 |   | 66.5 |   |
| Amortization of technology rights and other  charges |   | 2.2                                    |   | 4.3                                   |   | 2.3 |   | 4.7 |   |
| Total cost of goods sold                             |   | 68.0                                   |   | 70.1                                  |   | 68.0 |   | 71.2 |   |
| Gross profit                                         |   | 32.0                                   |   | 29.9                                  |   | 32.0 |   | 28.8 |   |
| Operating expenses:                                  |   |                                   |   |                                  |   |   |   |   |   |
| Research and development                             |   | 4.3                                    |   | 7.8                                   |   | 5.6 |   | 9.4 |   |
| Selling, general and administrative                  |   | 28.9                                   |   | 25.6                                  |   | 31.1 |   | 27.7 |   |
| In-process research and development                  |   | —                                 |   | —                                |   | — |   | 6.6 |   |
| Total operating expenses                             |   | 33.2                                   |   | 33.4                                  |   | 36.7 |   | 43.7 |   |
| Loss from operations                                 |   | (1.2                                   | )      | (3.5                                  | )      | (4.7 | ) | (14.9 | ) |
| Interest income and other expense, net               |   | 0.5                                    |   | 1.1                                   |   | 0.1 |   | 1.6 |   |
| Loss before income tax expense (benefit)             |   | (0.7                                   | )      | (2.4                                  | )      | (4.6 | ) | (13.3 | ) |
| Income tax expense (benefit)                         |   | 2.0                                    |   | (2.9                                  | )      | (0.6 | ) | (3.8 | ) |
| Net income (loss)                                    |   | (2.7                                   | )%     | 0.5                                   | %      | (4.0 | )% | (9.5 | )% |

 

*Revenues.*  Revenues for the third quarter of 2003 were$12.7 million, down 2.6% from $13.1 million in the third quarter of 2002 and up1.8% from $12.5 million in the second quarter of 2003. The decline over theprior year quarter is primarily due to lower demand in the semiconductorcapital equipment market, which has shown significant quarter to quartervariability over the last several quarters. In addition, although our sales tothe industrial/medical market increased by 9% over the prior year quarter thiswas a combination of strong increases in medical applications offset by adecline in revenues as the result of an end of life customer program thatconcluded in the fourth quarter of 2002. The termination of this programcontributed to the 2.6% decline over the prior year quarter.

 

Revenues forthe first nine months of 2003 were $36.4 million, up 13.7% from $32.0 millionin the first nine months of 2002. Excluding the acquisition of the business of Microsemi RF Products Inc.,which was completed on May 24, 2002, revenues increased by 7.3%.  The increase over the prior year nine monthsis attributable to stronger sales volumes across each of the markets that weserve. These markets we serve are categorized as communications and dataprocessing, semiconductor capital equipment, industrial and medical, andmilitary and aerospace.

 

We haveexperienced sequential increases over the last three quarters in thecommunications and data processing market, with increases of 5%, 10%, and 9%,respectively for the first three quarters of 2003.  The semiconductor capital equipment market continues to exhibitsignificant quarter to quarter variability, and it remains difficult to predictshort term customer demand with any real degree of certainty.  Our products in the industrial and medicalmarkets increased by 12% over the second quarter of 2003, mainly on thestrength of our medical implantable business offset slightly by pockets ofweakness on certain industrial products. The military and aerospace market remained level from the prior yearquarter.  However, shipments in thismarket tend to occur in a less even and consistent quarter-to-quarter patternthan other markets we serve, and we do expect a sequential revenue decline inthe fourth quarter of 2003 in the military and aerospace market, due tospecific customer program delays rather than lost market share orcancellations.

 

Sales todistributors were approximately 25% of revenues in the third quarter of 2003and year to date 2003, compared to 21% in the third quarter of 2002 and 20%year to date 2002. We monitor inventory levels at our

 

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distributors on a monthlybasis.  Our higher margin RF productsrepresented approximately 48% of revenues in the third quarter of 2003 comparedto 50% in the third quarter of 2002.

 

*Gross Profit.* Grossprofit for the third quarter of 2003 was 32.0% compared to 29.9% in the thirdquarter of 2002 and 35.5% in the second quarter of 2003.  Excluding acquisition related non-cashpurchase accounting adjustments for the fair value of inventory acquired andthe amortization of the technology rights asset, gross profit was 34.2% forboth the third quarter of 2003 and 2002, compared to 37.7% in the secondquarter of 2003.  The decline in proforma gross margin from the second quarter of 2003 was primarily due to lowerfactory utilization and a less favorable mix of products sold including a lowerRF content as mentioned above.

 

Gross marginfor the first nine months of 2003 was 32.0% compared to 28.8% in the first ninemonths of 2002. Excluding the acquisition related purchase accountingadjustments for the fair value of inventory acquired and the amortization ofthe technology rights asset, gross profit was 34.3% for the first nine monthsof 2003 compared to 33.5% for the first nine months of 2002. The increase in grossprofit margin is in part due to the higher RF product content of our sales mixin 2003 versus 2002.  Overall factoryutilization was improved at our Bend, Oregon and Santa Clara, Californiafacilities in the first nine months of 2003 as compared to 2002, but waspartially offset by the low fixed cost absorption at our Montgomeryville,Pennsylvania operation which we acquired May 24, 2002.  In order to reduce our production costs, theCompany is implementing a consolidation of the Pennsylvania wafer fab operationsto our Bend, Oregon facility, which we expect to be completed by the secondquarter of 2004, as well as programs to greater utilize lower cost offshoreassembly subcontractors with corresponding downsizing of internal assemblyoperations.

 

*Research and Development Expense.*  Third quarter of 2003 research anddevelopment expenses were $550,000 or 4.3% of revenues, compared to $1.0million or 7.8% of revenues in the third quarter of 2002.  Research and development expenses in thefirst nine months of 2003 and 2002 were $2.1 million and $3.0 million or 5.6%and 9.4% of revenues, respectively. The decrease in research and developmentspending over the prior year quarter and year to date is primarily due tocredits associated with pre-production and prototype lots, especially for ourPower MOS7® technology, initially accounted for as R&D expenditures.  Many of these lots ultimately were qualifiedas salable product and valued as production inventory resulting in a reductionof our research and development expenses in 2003. The decrease in thepercentage of revenue is also due to our higher revenue levels in 2003.  The Company plans to continue its researchand development programs leading to the introduction of new products for use inboth switching and RF applications. Therefore, we expect the level of researchand development expenses to be approximately 7% over sustained periods of time.

 

*Selling, General and Administrative Expense.*  Third quarter of 2003 selling, general, andadministrative expenses were $3.7 million or 28.9% of revenues, compared to$3.3 million or 25.6% of revenues in the third quarter of 2002 and $3.7 millionor 29.7% of revenues in the second quarter of 2003.  Selling, general and administrative expenses in the first ninemonths of 2003 and 2002 were $11.3 million and $8.9 million or 31.1% and 27.7%of revenues, respectively.  The increasein expenses over the prior year quarter and year to date level is attributableto higher payroll costs as a result of the discontinuance of the graduated payreductions we implemented in 2001 and the first half of 2002, as well asadditional personnel in selling, general and administrative functions due tonew hires and to transferring of job functions from other operating areas ofthe Company.  In addition we incurredincreased legal expenses in connection with ongoing patent litigation, as morefully explained in Part II, Item 1 to this filing. We have denied infringementof the IXYS patents and have asserted affirmative defenses and counterclaims.  However, the length of time and legal feesassociated with patent litigation with IXYS may be significant. Our increase inexpenses is also attributable to the selling, general, and administrativeexpenses associated with the subsidiaries we acquired at the end of January andMay of 2002, including a $240,000 severance charge in the first quarter of 2003due to an organizational restructuring.

 

*Interest income and o**therexpense, net*.  Interestincome and other expense, net, which includes interest income, interest expenseand other expense, was a net income of $72,000 in the third quarter of 2003compared to a net income of $129,000 in the third quarter of 2002.  The primary component is interest incomeearned on our cash and marketable securities. Net interest income was $56,000 in the third quarter of 2003 compared to$98,000 in the third quarter of 2002. The decline in interest income is primarily due to lower interest ratesavailable in the current

 

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investment market.  The net other expense of $118,000 for thenine months of 2003 includes $102,000 of an estimated accrued loss related to asmall fire at our Montgomeryville, Pennsylvania facility.  We have insurance which covers this type ofdamage and we expect to recover approximately half of the accrued loss throughour insurance claims proceeds, which will be recorded as a gain at the time ofthe receipt.

 

*Income Tax Expense (Benefit)*.  We recorded a tax expense in the thirdquarter of 2003 of $255,000 on a loss before tax of $83,000 for a negative 307%effective tax rate.  During the thirdquarter of 2003 we recorded a non-cash tax expense of $480,000 related to thevaluation of the Company’s net deferred tax asset previously recognized in thefirst six months of 2003.  We recordedthis non-cash expense in accordance with SFAS 109, “Accounting for IncomeTaxes” guidance on valuation of deferred tax assets.  This expense was partially offset by a reduction of taxes payableof $225,000 related the resolution of a previous tax position.  Other than the $225,000 tax benefitrecorded, our effective tax rate was 0% for the first nine months of 2003 andwe expect it to be 0% for the year 2003 as well.  For the third quarter of 2002 we recorded a tax benefit $381,000for an effective tax rate of 120%.  Thethird quarter of 2002 tax rate benefit is greater than the expected tax rateprimarily due to the reduction in the valuation allowance due to therealization of foreign net operation loss carry forwards and a reduction inincome taxes payable.  Our effective taxrate through the first nine months of 2002 was 29%, which is less than theexpected tax rate primarily due to the fact that in process research anddevelopment expenses recorded for financial statement purposes in the GHzacquisition under GAAP are not deductible for tax purposes.  This was partially offset by the benefitslisted above.

 

*Restructuring Actions.*  The Company also plans to take severaladditional consolidation and restructuring actions beyond those mentionedabove, that are expected to result in an estimated annual cost reduction ofapproximately $1.4 million dollars and will result in a one time charge ofapproximately $500,000 in the fourth quarter of 2003. These actions are inaddition to the previously announced consolidation of the Company’sPennsylvania wafer fabrication facility into the Company’s Bend, Oregon waferfabrication facility which is expected to be completed by the end of the secondquarter 2004 and will result in lower fixed manufacturing costs.

 

The additional actions include: further consolidation of administrativefunctions; further rationalization of internal and external assembly and testmanufacturing; and a reduction of rent expense through the purchase and resale ofone of the two buildings currently occupied by the Company’s Californiasubsidiary, Advanced Power Technology RF, Inc. This last item comprisesapproximately $350,000 of the total charge to be taken in the fourth quarter of2003.

 

**Liquidity and CapitalResources**

 

In thefirst nine months of 2003, we generated approximately $807,000 from operatingactivities.  This primarily resultedfrom our net loss of $1.5 million and a negative cash flow from operatingassets and liabilities of $1.1 million, offset by non-cash charges fordepreciation and amortization of $3.4 million.

 

In thefirst nine months of 2003, we generated $3.1 million from investing activities,which consisted mainly of net proceeds from the sale of available-for-salesecurities of $4.8 million, offset by purchases of $1.9 million of fixedassets.  Our purchases of fixed assetswere for information technology infrastructure and facility and equipmentexpenditures at our Bend facility in support of the consolidation of wafer faboperations from our Pennsylvania facility to Bend.

 

In the first nine months of 2003, we usedapproximately $1,000 in financing activities, which primarily consisted of thepayment of capital lease obligations of $57,000 offset by the net proceeds of$56,000 from the exercise of stock options.

 

As of September 30, 2003 APT had $34.4 million inworking capital.  Our trade accountsreceivable balance was $8.1 million reflecting a days sales outstanding ratioof 55 days, compared to trade accounts receivable of $6.9 million at December31, 2002, reflecting a days sales outstanding ratio of 63 days.  Our inventory balance at September 30, 2003was $12.4 million reflecting inventory turns of 2.8 times per year, compared toan inventory balance of $11.9 million at December 31, 2002, reflectinginventory turns of 2.8 times per year. The calculations above are based onquarterly average balances of trade accounts receivable and inventory andannualized quarterly sales and cost of goods sold.

 

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In November of 2003, APT plans to close on thepurchase of a 5,000 square foot administrative building located in Santa Clara,California, which has been under lease. The building lease was assumed by APT in connection with our acquisitionof GHz Technology, Inc. in January of 2002. APT expects to pay $1.3 million for the building out of currentavailable cash and available-for-sale securities.  The building will be an asset held for sale and actively marketedas APT no longer requires the space.  Inaccordance with SFAS 144, an asset held for sale is carried at estimated fairvalue. As such, APT will record a write down from the purchase price paid forthe building in the fourth quarter of 2003 of approximately $350,000 (seeRestructuring Actions above). The buyout will reduce our operating leasecommitments by approximately $530,000 over the next two years.

 

APT currently expects to fund expenditures for capitalrequirements as well as liquidity needs from a combination of available cashbalances, internally generated funds and financing arrangements if needed. Asof September 30, 2003, APT had $18.2 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 described inour Annual Report on Form 10-K for the year ended December 31, 2002. We expectfrom time to time to evaluate potential acquisitions and equity investmentscomplementary to our market strategy. To the extent we pursue suchtransactions, we could require additional equity or debt financing to fund suchactivities or to fund our working capital requirements in the event of anindustry downturn or an unexpected adverse change in our business operations.To the extent we require additional capital, we cannot assure you that we willbe able to obtain such financing on terms favorable to us, or at all.

 

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

 

We do not usederivative financial instruments in our investment portfolio. Due to the shortduration and conservative nature of our cash equivalents, and the high qualityand conservative nature of our long-term investments, we do not expect anymaterial loss with respect to our investment portfolio.

 

Currently lessthan 2% of our sales are transacted in local currencies, primarily Euros. As aresult, our international results of operations have limited exposure toforeign exchange rate fluctuations. We do not currently hedge against foreigncurrency rate fluctuations. Most of our export sales and sales by APT Europeare in U.S. dollars, and most of our foreign currency sales are from operationswith significant expenses in the same currency. As a result, gains and lossesfrom such fluctuations have not been material to our consolidated results ofoperations.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

*(a) Evaluation ofdisclosure controls 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 Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures, as of the end ofthe period covered by this report. Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective to ensure that informationrequired to be disclosed by the Company in the reports it files or submitsunder the Exchange Act is recorded, processed, summarized and reported, withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms. In connection with the new rules, we currently are in the process offurther reviewing and documenting our disclosure controls and procedures,including our internal controls over financial reporting, and may from time totime make changes aimed at enhancing their effectiveness and to ensure that oursystems evolve with our business.

 

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:

 

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(i) Any significant deficiencies or material weaknesses in the designor operation of internal control over financial reporting which are reasonablylikely 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 involvedmanagement or other employees who have a significant role in the registrant’sinternal control over financial reporting.

 

*(b) Changes ininternal controls*

 

None.

 

**PART II.  OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

On August 15, 2002, IXYS Corporation filed a patent infringementlawsuit against APT in the United States District Court, Northern District ofCalifornia.  The claim filed by IXYSalleges that APT infringes 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 allegations of patentinfringement setting forth several affirmative defenses related to the validityof the IXYS patents.  In addition, APTfiled a patent infringement counterclaim against IXYS, alleging that IXYSinfringes APT United States Patent No. 5,283,202, entitled “IGBT Device WithPlatinum Lifetime Control Having Gradient Or Profile Tailored PlatinumDiffusion Regions.”  In addition, APT doesnot believe that it infringes the IXYS patents cited in the claim.  APT plans to vigorously defend itself inthis lawsuit.

 

**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 quarter.

 

Furnished:

 
| **Date of  Report** |   | **Date Furnished** |   | **Description**                                                                                |
|---------------------|--------|--------------------|--------|------------------------------------------------------------------------------------------------|
|                |   |               |   |                                                                                           |
| October 23, 2003    |   | October 24, 2003   |   | Earnings release for third quarter 2003 financial results.                                     |
| November 6, 2003    |   | November 7, 2003   |   | Financial release regarding restructuring actions and charges for the  fourth quarter of 2003. |

 

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**SIGNATURE**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized this 10th day of November, 2003

 

 
|   | 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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