**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-K**

 

| **ý**                                      | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|-------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                            |
| **For the fiscal year ended December 31, 2002** |
|                                            |
| **OR**                                          |
|                                            |
| **o**                                           | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission filenumber 001**-**16047**

 

**ADVANCED POWER TECHNOLOGY, INC.**

(Exact name of registrantas 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)                            |
|                                                             |
| Securities registered pursuant to Section 12(b) of the Act: |
| **None**                                                         |
|                                                             |
| Securities registered pursuant to Section 12(g) of the Act: |
| **Common Stock, par value $.01 per share**                       |

 

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Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to the filing requirements for the past90 days. Yes ý  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not becontained to the best of the registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of thisForm 10-K or in any amendment to this Form 10-K. o

 

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

 

The aggregate market value of the voting stock held by non-affiliates ofthe Registrant as of June 28, 2002, the last trade date for the end of our mostrecent fiscal second quarter, was $87 million based upon the compositeclosing price of the Registrant’s Common Stock on the Nasdaq National MarketSystem on that date.

 

The number of shares of the Registrant’s Common Stock outstanding as ofMarch 3, 2003 was 10,402,010 shares.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of the registrant’s proxy statement in connection with its 2003Annual Meeting of Shareholders are incorporated by reference intoPart III.

 

 

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**ADVANCED POWERTECHNOLOGY, INC.**

**FORM 10-K**

**TABLE OFCONTENTS**

 
| **Part I**   |                                                                                        |
|--------------|---------------------------------------------------------------------------------------------|
| Item 1.      | Business                                                                                    |
| Item 2.      | Properties                                                                                  |
| Item 3.      | Legal Proceedings                                                                           |
| Item  4.     | Submission  of Matters to a Vote of Security Holders                                        |
| **Part II**  |                                                                                        |
| Item  5.     | Market  for Registrant’s Common Equity and Related Stockholder Matters                 |
| Item 6.      | Selected Financial  Data                                                                    |
| Item  7.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| Item  7A.    | Quantitative  and Qualitative Disclosures About Market Risk                                 |
| Item  8.     | Financial  Statements and Supplementary Data                                                |
| Item  9.     | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure       |
| **Part III** |                                                                                        |
| Item  10.    | Directors  and Executive Officers of the Registrant                                         |
| Item 11.     | Executive Compensation                                                                      |
| Item  12.    | Security  Ownership of Certain Beneficial Owners and Management                             |
| Item  13.    | Certain  Relationships and Related Transactions                                             |
| Item 14.     | Controls and  Procedures                                                                    |
| **Part IV**  |                                                                                        |
| Item  15.    | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K                           |
|         | Signatures                                                                                  |
|         | Certifications                                                                              |

 

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**PART I**

 

**ITEM 1. BUSINESS.**

 

*Except asexpressly indicated or unless the context otherwise requires, the “Company”,“APT”, “we”, “our” or “us” means Advanced Power Technology, Inc., a Delawarecorporation, and its subsidiaries. Additional information about our Company, including access to periodicand current reports are available free of charge on our website as soon asreasonably practicable after such material is electronically filed with, orfurnished to, the SEC.  Our websiteaddress is www.advancedpower.com*

 

We are a leading designer, manufacturer and marketer of high-performancepower semiconductors and modules for both switching and Radio Frequency (RF)applications. Power semiconductors manage and regulate electrical power byconverting electricity into a form required by electrical and electronicproducts. Our power semiconductors increase system efficiency, permit thedesign of more compact end products and improve features and functionality. Weare primarily focused on the high power, high frequency segment of the powersemiconductor market. High power refers to the ability to dissipate above onekilowatt, and high frequency refers to the ability to switch on and off atrates above 100 kilohertz. In addition we are strengthening our portfolio of RFproducts that operate at frequencies ranging from 1 megahertz to 100 megahertz.RF generally refers to the ability to operate at frequencies above 1 megahertz.We sell our products primarily in North America, Europe, and Asia, through anetwork of independent sales representatives and distributors.

 

To further our penetration in RF markets, we completed the acquisitionof GHz Technology, 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 and non-cellularcommunications applications.  Theseacquisitions have added valuable RF technology and substantial RF engineering,manufacturing and marketing capability to the Company.

 

**Industry and Market Overview**

 

We believe there are two significant factors driving the general demandfor high performance power semiconductors:

 

•                  Rapid proliferation of sophisticated electronics;and

 

•                  Increasing need for higher power and moreprecisely regulated power quality in electronic equipment.

 

The use of power semiconductors is becoming more pervasive in electronicdevices to convert and control electricity that powers these devices. As aresult, the power semiconductor market is a large and growing segment of thesemiconductor industry. The proliferation of consumer electronic devices,wireless communication, and mobile computing is driving demand for newgenerations of power semiconductors that are smaller, lighter and moreefficient. At the same time, new applications in the areas of medical andindustrial products are creating additional demand for more powerful andreliable power semiconductors.

 

Power semiconductors address the growing demand for energy efficiencyand are used to provide the precisely regulated power required by sophisticatedelectronic products and equipment. The more sophisticated the end product, thegreater its need for specially formatted, finely regulated power. Within theend product, power semiconductors are used to provide the precisely regulatedpower required by sophisticated electronic products and equipment and addressthe growing demand for energy efficiency. RF and microwave semiconductors aretypically used as electronic switches or to amplify electrical signals. Powersemiconductors are typically used to:

 

•                  convert or “rectify” alternating current, or AC,power delivered by electrical utilities to direct current, or DC, power whichis required by most electronic equipment;

 

•                  convert DC power at a certain voltage level to DCpower at a different voltage level to meet the specific voltage requirement ofan application

 

•                  invert DC power to high frequency AC power topermit the processing of  power usingsubstantially smaller electronic components; or

 

•                  rectify high frequency AC power from switch-modepower supplies to meet the specific DC voltage required by an application.

 

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The demand for power semiconductors is also expanding as a result of theproliferation of new technologies that require electricity and the increasinguse of electrical processes and automation in industry to increaseproductivity. Sophisticated electronics are increasing their share of totalelectrical consumption. The increasing complexity and power requirements ofelectronic products, and the rapid increase in electronic features incommunications equipment, consumer electronics and industrial processes allrequire more efficient power management.

 

**Market Size and Trends**

 

The following data has been gathered from published sources that werenot specifically prepared or approved for use in this report. Statisticspublished by the Semiconductor Industry Association (SIA) report in November of2002 forecasted that the worldwide market for all power semiconductors wasprojected to increase by 2% in 2002 to $8.4 billion from $8.2 billionin 2001.  The projected market is$11.1 billion in 2005, representing a compound annual growth rate of 10%from 2002. Based on data from the SIA, the worldwide markets in which weparticipate (radio frequency, or RF transistors, Power MOSFETs, Insulated GateBipolar Transistors, or IGBTs and high power rectifiers), increased byapproximately 4% in 2002 to $5.8 billion compared to $5.6 billion in 2001.  The SIA forecast projects that the worldwidemarkets in which we participate will be $7.9 billion in 2005, representing a compoundgrowth rate of 11% from 2002.  APT’sproduct lines serve a collection of niche markets which make up a subset of theoverall power semiconductor markets listed above, focusing on high power andhigh frequency applications.  Industrystatistics related to these specific markets are not generally available andcannot be reasonably estimated.

 

The primary markets we serve are characterized by rapid technologicaldevelopment and increasing complexity. In addition to more overall power, webelieve these markets will require more reliable and precisely regulated formsof power. The following key trends are driving the demand for high power, highfrequency semiconductors in our primary markets:

 

•                  Convergence of Voice, Video and Data Transmissionand Proliferation of Wireless Systems. As voice, video and data converge intoone digital stream, the power demands of traditional and emerging transmissionsystems are changing. Service providers and equipment manufacturers are lookingto modify and supplement existing infrastructures to address these new demands.Power semiconductors with higher power levels and faster switching speeds giveproviders and manufacturers much more flexibility in addressing these demands,in particular in building base stations for wireless applications and serversfor Internet infrastructure.

 

•                  Demand for Semiconductor Capital Equipment.According to the SIA, the worldwide semiconductor market, which grew by 2% in2002, is forecasted to grow from $141 billion in 2002 to $206 billionin 2005, representing a compound annual growth rate of 13.3%. According toDataquest research, sales for semiconductor capital equipment to produce thesesemiconductor devices are expected to grow at an average growth rate of 33.7%from 2002 through 2005. As semiconductor capital equipment becomes moresophisticated in areas such as thin film deposition and plasma etching, thereis an increasing need for high power, high frequency semiconductors. However,the semiconductor industry has from time to time experienced depressed businessconditions and has rapidly changed from periods of strong demand to periods ofweak demand. Following record growth in 2000, the worldwide semiconductormarket experienced record declines which resulted in decreased demand for semiconductorcapital equipment, depressing our sales into this sector. It is difficult toestimate the duration of this slowing.

 

•                  Emergence of New Applications for High Power, HighFrequency Semiconductors. Continuing demands for higher power, higher voltagesand higher frequencies are expanding the range of applications for whichsophisticated power semiconductor products are suitable. For example, the useof RF power semiconductors presents opportunities to enter new markets. Thesame power delivery systems used for plasma generation in semiconductorprocessing equipment are now finding new applications in the industrial market(such as flat panel displays, optical and glass coatings and tool-hardcoatings) and the data storage market (such as data recording heads as well ashard and compact disc technologies). In addition, RF MOSFETs are now being usedin magnetic resonance imaging equipment in place of vacuum tubes, enhancing theperformance and reducing the size of those systems.  In addition, the acquisitions we made in 2002 provide us with theproducts and technology to sell into additional applications such as radar,avionics and non-cellular communications.

 

**Products**

 

Our semiconductor products combine innovative proprietary and patentedsemiconductor technology, designs, processes and packaging solutions that areoptimized for our customers’ applications. They can be broadly categorized intotwo categories: Switching Power Semiconductors and RF and MicrowaveSemiconductors.

 

Switching PowerSemiconductors are typically used as electronic switches in power supplies forhighly efficient and precise control of electrical power. These power suppliesare often referred to as “switching” or “switch-mode” power supplies and arethe

 

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dominant type of powersupply used for high power applications. The switches in most of the powersupplies turn “on” and “off” from 20,000 to 1,000,000 times per second oroperate in the 20kHz to 1 MHz frequency range.

 

RF and MicrowaveSemiconductors are typically used as electronic switches or to amplifyelectrical signals. These semiconductor devices are generally used in RFamplifiers that operate at frequencies ranging from 1 million to severalbillion cycles per second (1 MHz to several GHz). These devices range from lowto very high power over this frequency range.

 

SwitchingPower Semiconductors are used in virtually all of our end markets and arecomposed of the following product types:

 

•                  Discrete Power Semiconductors - power transistors(MOSFETs, IGBTs) and diodes (Fast Recovery Epitaxial Diodes or FREDs andSchottky Barrier Diodes).  Thetransistors are most often used as the “switches” in “switching” powersupplies. Based on our original core proprietary and patented technology, ourMOSFET products include Power MOS IV® introduced in 1989, Power MOS V®introduced in 1999, Power MOS VI® introduced in 1999 and Power MOS 7®introduced in 2000. Each succeeding generation offers performance improvementsover the preceding generation allowing us to continue to provide leading edgeproducts to our customers. Many of our IGBTs are based on our core MOSFETtechnologies and are used as lower cost alternatives to MOSFETs in manyapplications. The diodes are a complimentary product line to the transistorssince most applications require both transistors and diodes in the design. Thediodes control current flow in circuits by allowing current to pass in onedirection but not in the other. The transistor performance is often affected bythe performance of the diode in the power circuit and our diodes are optimizedto take maximum advantage of our advanced transistor technologies. Our discretepower semiconductors are optimized for high voltage applications between 100and 1400 volts. Our discrete power semiconductors are packaged either inplastic molded packages or hermetically sealed metal cans. Our plastic packagedproducts represent the majority of our unit volumes. Our hermetic products aretypically used in high reliability applications, serving the military andaerospace markets, although there is a trend in these markets toward usingplastic products that are more cost effective. As a result, some of our plasticproducts have been successfully used in aerospace applications including theInternational Space Station.

 

•                  Power Modules provide integrated solutions thatcombine many single components together to provide a power function or powersupply sub-system. These cover a wide range of integration and complexity, fromrelatively simple functions integrating less than ten components to fullyintegrated functions integrating more than 500 components in a single powermodule. Components can include power semiconductors such as transistors anddiodes, integrated circuits, and passive components all assembled together in apredefined custom circuit. These can be the preferred choice over discretepower semiconductors because of one or all of the following reasons: improvedperformance, reduced size, reduced overall cost, limited engineering resourcesavailable to our customers, reduced time to market, or as barriers tocompetition. Since many of these modules are customer dedicated custom designsfor a specific application, they are often referred to as Application SpecificPower Modules or ASPMs. We produce most of the power semiconductors used in ourpower modules. However, we do purchase specific components from other partieswhich complement our overall designs or which provide capabilities outside oursemiconductor product range. Many of our module customers also buy our discretepower semiconductors.

 

RF and Microwave Semiconductors are used in virtually all of our endmarkets and share some of the same customers as our Switching PowerSemiconductors. In 1996 we introduced our first RF MOSFETs for applicationswith frequencies up to 100 megahertz. These were derived from our proprietaryMOSFET technology used for switching power applications. The technology isreferred to as VDMOS which stands for vertically diffused MOSFET. Vertical refersto current flowing vertically through the chip. These RF transistors providedhigher operating voltages (up to 250 volts) than any RF transistors availablein the market. This higher voltage offered many advantages for high powerapplications such as plasma generation for semiconductor capital equipment andmedical imaging (MRI) equipment. In 2002 Advanced Power Technology acquired twoleading suppliers of silicon based radio frequency (RF) power transistors - GHzTechnology, Inc. and the business of Microsemi RF Products, Inc. a wholly ownedsubsidiary of Microsemi Corporation. APT is now a significant provider of RFand microwave silicon based transistors with approximately half of companyrevenues provided by these products. We now offer products to cover bothprevious generation design production requirements as well as new designs. Ourtechnology base is expanded to include LDMOS (lateral diffused MOSFET wherecurrent flows laterally along the surface of the chip) and BJT (BipolarJunction Transistors). All RF and microwave products are based on silicon andspan the frequency range from 1MHz to several GHz with operating voltages fromas low as a few volts to as high as 250V. With these recent acquisitions we are now able to serve applicationswhich include communication radios, non-cellular base stations, broadcast,radar, avionics, and military communications.

 

**Research and Development**

 

Our research and development efforts focus on improving and developingnew core technologies and the products derived from them. For both SwitchingPower Semiconductors and RF and Microwave Semiconductors our existing androadmap technologies are designed to allow our customers to mix and matchtechnologies to provide the optimum product solutions for their applications.For

 

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switchingapplications this is the choice between MOSFET and IGBT transistors, while forRF applications this is the choice between BJT or newer MOSFET technologies.

 

Our research and development engineers work closely with our product andmanufacturing engineers to continually improve our products and our coretechnology. We focus on internal improvements in our technology (such asreducing feature size) to improve the efficiency and speed of our products, andon incorporating outside technological advances, for example in packagingprocesses and materials, to ensure that our products meet our high performancestandards. We also spend significant engineering time modifying our coreproducts in order to address specific customers or market needs. Our discretesemiconductor research and development activities take place at our Bend,Oregon facility. ASPM research and development activity takes place at ourBordeaux, France facility. We incurred expenses of $3.9 million,$1.8 million, $1.1 million in 2002, 2001, and 2000, respectively, forresearch and development. Prior to our IPO in August 2000, capitalconstraints had required us to focus our research and development activityalmost exclusively on enhancing and protecting our core technology. Weincreased our research and development investments in 2001 to accelerate thedevelopment of our core technology and to further expand into growing areassuch as power semiconductors for RF applications.  As a result of our acquisitions in 2002, we further increased ourinvestment in research and development.

 

**Customers**

 

In 2002, we sold our products to over 2,000 customers worldwide througha network of independent sales representatives and distributors, managed by oursales staff. We sell our products primarily in North America, Europe, and Asia.In 2002, approximately 64% of our revenues were from sales to customers in theUnited States, 24% from customers in Europe, and 12% from customers in Asia andthe rest of the world.

 

We sell our products both to original equipment manufacturers, or OEMs,and through distributors. In 2002, approximately 79% of our net sales were toOEMs, and 21% were to distributors. Sales to our five largest customersaccounted for 37%, 38%, and 48% of our net sales in 2002, 2001, and 2000,respectively. Advanced Energy Industries, Inc. accounted for approximately9.5% of our net sales in 2002, 10.8% of our net sales in 2001, and 17.2% of ournet sales in 2000. Richardson Electronics Ltd. accounted for 12.0% of our salesin 2002 and accounted for less than 10% of our sales in 2001 and 2000.  No other customer exceeded 10% of our netsales during these periods. We provide our customers a 12-month repair orreplacement warranty.

 

**Sales, Marketing and Distribution**

 

The principal end-user markets for our products are communications anddata processing, semiconductor capital equipment, industrial/medical, andmilitary/aerospace. Our largest volume OEM customers include Advanced EnergyIndustries, Inc., MKS Instruments, Inc., and Fronius International GmBH.Our leading distributor is Richardson Electronics Ltd. Powersemiconductors are typically critical to the performance of our customers’ endproducts, and we therefore work closely with a number of our large OEMcustomers in the design phase of their products to ensure that we can meettheir performance requirements. Once our products have been designed into endproducts, they tend to be used through the lifecycle of these end products.

 

Our internal sales organization consists of five regional sales managerswho work under the supervision of the vice president of sales. There is onesales manager for each of Europe and Asia, two for North America and oneresponsible for distribution sales. Each regional sales manager directs thesales efforts of the independent manufacturers’ representatives and independentdistributors in his or her region. We currently have 47 independentmanufacturers’ representatives, whose primary focus is developing and servicingmajor OEM accounts.

 

We use independent distributors to develop and service our smallervolume accounts worldwide. We have five national distributors in North America,and 16 single country distributors who cover Western Europe and Asia. In 1998, weentered into a strategic agreement with Richardson Electronics Ltd., aworldwide distributor, under which they stock a broad selection of our productson a worldwide basis. This arrangement has enhanced our ability to meet theneeds of our smaller volume customers and permitted increased sales to largemanufacturing customers by freeing up sales and support resources. Distributorscan return up to 5% of the dollar value of products purchased during the priorsix months upon 30 days notice. We closely monitor inventory levels at ourkey distributors on a monthly basis.

 

Our application engineering, product engineering and product marketingorganizations provide technical support for the sales force. We employ 21engineers in these organizations, as well as support staff. Customer servicefor all of our accounts is handled by our customer service organizations inBend, Oregon, Santa Clara, California, Montgomeryville, Pennsylvania andBordeaux, France. Our website gives our customers access to information aboutus and our products, enables them to request quotations or technical assistanceand provides links to our local sales channels worldwide.

 

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**Manufacturing and Facilities**

 

**RF and Microwave Semiconductors:**

 

The silicon for our RF and Microwave semiconductor products ismanufactured in Bend, Oregon, Santa Clara, California and Montgomeryville,Pennsylvania.  We use our own domesticfacilities in Santa Clara, California and Montgomeryville, Pennsylvania, in additionto subcontractors in Mexico and Malaysia, to package and test our RF andMicrowave semiconductors.  We plan tomove more assembly of these products to Mexico and Malaysia which we expectwill reduce our assembly costs. In addition, in 2003 we plan to consolidate thesilicon manufacturing currently performed in Montgomeryville, Pennsylvania intoour Bend, Oregon manufacturing facility. We expect this consolidation to resultin lower manufacturing costs.

 

**Switching Power Semiconductors:**

 

The silicon for our switching power semiconductor products ismanufactured in our Bend, Oregon facility and by Infineon Technologies at itsfacility in Austria under a wafer foundry agreement. We use subcontractors inthe Philippines and Taiwan to package and test our plastic discrete products.We manufacture and assemble all of our discrete hermetic packages in Bend.Application Specific Power Modules or ASPMs are manufactured at ourfacility in Bordeaux, France, Bend, Oregon as well as at one of our subcontractor’sfacilities in the Philippines. The decision of where to manufacture theASPMs is based on the complexity of the product, the geographic locationof the customer, and other factors.

 

Our current manufacturing strategy is to expand our use of externalsubcontractors for the manufacture of our highest volume products. We selectedInfineon Technologies as our foundry partner for its ability to process morecost effective six-inch wafers in its state-of-the-art manufacturing facilityand for their familiarity with power semiconductors in general. Our agreementwith Infineon extends indefinitely and requires a two year notice oftermination. In addition, in 2001, in order to provide for additional capacityand capability for silicon manufacturing we signed a foundry agreement with afoundry located in Taiwan.

 

During 2002, equipment utilization at our internal wafer fabricationfacility in Bend was approximately 33%. The Company has implemented twopermanent reductions in force affecting 19 and 17 production personnel inSeptember 2001 and February 2002, respectively. The Company’sinternal wafer fabrication facility has been sized to support technologies notconducive to outside foundries, custom proprietary products, quick turns, andresearch and development efforts. The Company will predominantly rely oncost-effective wafer processing subcontractors to support future growth.

 

We have agreements with Team Pacific and PSI Technologies,subcontractors in the Philippines for assembly and testing of most of ourplastic encapsulated discrete products. Our agreements extend through January26, 2006 and December 31, 2004 with Team Pacific and PSI Technologies,respectively. Our subcontractors currently test a portion of the products thatthey manufacture for us. Many of the discrete power semiconductors are returnedto our Bend facility for further testing prior to shipment to customers. Wehave begun moving more of the testing operations to these subcontractors, whichwill permit direct shipment from the subcontractors to our customers. We expectthis to reduce our manufacturing costs and production cycle times.

 

Our ASPM manufacturing techniques utilize a wide variety of processesand equipment, which allow us to design and produce products of varyingcomplexity for a number of different applications. Our ASPM manufacturingstrategy includes the assembly and testing of certain niche products at ourBend facility, and the assembly and testing of certain high volume products atour subcontractor in the Philippines. We intend to continue manufacturing lowto medium volume and medium to high complexity ASPMs at our facility inBordeaux.

 

Our manufacturing processes emphasize quality and reliability, andinvolve testing at various stages of the manufacturing process. We test 100% ofour products. Our Bend and Santa Clara facilities are certified to IS0-9001standards and to U.S. military specifications.

 

**Competition**

 

We encounter varying degrees of competition for our products, dependingon the nature of the product and the particular market served. Generally, thepower semiconductor industry is highly competitive and subject to priceerosion.  Many of our competitors arelarger companies with greater financial resources. There are a number ofcompanies that manufacture products that compete directly with our products.Our principal competitors include Fairchild Semiconductor, InternationalRectifier, IXYS, MA/Com, Philips and ST Microelectronics.

 

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We believe that the primary elements of competition in our markets areproduct features and performance, quality, reliability, technical support,breadth of product line, competitive pricing and customer service and support.We believe that our proprietary design makes our products more efficient andallows them to operate at higher powers and frequencies than those of ourcompetitors, allowing us to compete effectively in our markets.

 

**Intellectual Property Matters**

 

We have received 17 U.S. patents and 21 foreign patents and haveapplications pending for six additional U.S. and nine foreign patents ondifferent aspects of our core technology. We rely on these patents, tradesecret and other intellectual property laws, as well as confidentiality andintellectual property assignment agreements with our employees in Bend, Oregonto protect our proprietary rights. We regard certain of our processes,information and knowledge that we have developed and use to design andmanufacture our products as proprietary. We have also registered trademarks forPower MOS IV®,  Power MOS V®, Power MOSVI® and Power MOS 7®.

 

We have licensed portions of our intellectual property forcommercialization in certain foreign markets. In 1990, we entered into twonon-exclusive, non-transferable licenses and technology transfer agreements forthe manufacture of our products in Japan. In 1991, we entered into a similararrangement with a manufacturer in the United Kingdom for sales in Europe only.Each of these agreements resulted in one-time payments to us and entitles us tocertain royalties over the life of the licenses. To date, on-going royaltiesfrom these licensing arrangements have not been material. In April of 2000, weentered into a joint venture agreement in China, which includes a license andtechnology transfer agreement for our Power MOS V® and Power MOS VI®technology. This agreement was terminated in accordance with the terms of theagreement by APT in February 2003.

 

**Employees**

 

At December 31, 2002, we had 278 employees. Of these, 143 were atour facilities in Bend, Oregon, 36 were at our facility in Bordeaux, France, 58at our facility in Santa Clara, California, 40 at our facility inMontgomeryville, Pennsylvania and one was located in Boston, Massachusetts. Our continued success depends heavily onour ability to attract and retain qualified personnel. We consider ourrelations with our employees to be good. None of our employees are representedby a union.

 

**Environmental Regulation**

 

While we believe we have the environmental permits necessary to conduct ourbusiness and that our operations conform to present environmental regulations,increased public attention has been focused on the environmental impact ofsemiconductor operations. In the conduct of our manufacturing operations, wehave handled and do handle materials that are considered hazardous, toxic orvolatile under federal, state and local laws; therefore, we are subject toregulations related to the use, storage, discharge and disposal of materials.The risk of accidental release of such materials cannot be completelyeliminated, and if such a release occurs, we could be held financiallyresponsible for the clean up or other consequences of the release. Along withthe rest of the semiconductor industry, we are subject to variableinterpretations and governmental priorities concerning environmental laws andregulations. Environmental statutes have been interpreted to provide for jointand several liability and strict liability regardless of actual fault. We maybe required to incur costs to comply with current or future environmental lawsor regulations, and our operations, business or financial condition could beadversely affected by such requirements.

 

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**ITEM 2. PROPERTIES.**

 

We lease a 41,000 square foot building in Bend, Oregon where ourinternal wafer fab is located, as well as our engineering and research anddevelopment organization. We manufacture four-inch wafers in this facility. Welease an 18,000 square foot building in Bend, Oregon that houses some of ouradministrative functions, as well as some assembly, testing and shipping, and4,125 square feet in an additional building in Bend, which houses additionaladministrative functions. We lease a 10,250 square foot facility in Bordeaux,France that houses our ASPM manufacturing, shipping and warehousing functions,as well as the administrative and product development staff for our Europeanoperation. In connection with our acquisition of GHz Technology, Inc. inJanuary 2002, we assumed leases for a 9,850 square foot building forsemiconductor manufacturing, shipping and warehousing, and research anddevelopment, and a 5,000 square feet building for administrative functions.Both buildings are located in Santa Clara, California. In connection with ouracquisition of the product lines and certain assets of Microsemi RF Products,Inc, a wholly owned subsidiary of Microsemi Corporation, we purchased a 20,600square foot building in Montgomeryville, Pennsylvania.  The facility houses semiconductor manufacturing,shipping, warehousing, research and development, and administrative functionsfor the operation.

 

**ITEM 3. 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 infringement lawsuitagainst APT with the United States District Court, Northern District of California.  The claim filed by IXYS alleges that APTinfringes on their United States Patent No. 5,486,715 and 5,801,419.  The IXYS claim also requested that damagesbe determined at trial and that such damages be trebled. On October 1, 2002,APT filed its answer to the IXYS complaint, denying the allegations of patentinfringement.  In addition, APT filed apatent infringement counterclaim against IXYS, alleging that IXYS infringes onAPT United States Patent No. 5,283,202, entitled “IGBT Device With PlatinumLifetime Control Having Gradient Or Profile Tailored Platinum DiffusionRegions.”  APT has filed with the courtseveral affirmative defenses related to the validity of the IXYS patents.  As stated above, APT does not believe thatit infringes upon the IXYS patents cited in the claim and intends to vigorouslydefend itself in this lawsuit.  Thelength of time and legal fees associated with the patent infringementlitigation with IXYS may be significant.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS.**

 

We did not submit any matters to a vote of our stockholders during thequarter ended December 31, 2002.

 

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**PART II**

 

**ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK ANDRELATED STOCKHOLDER MATTERS.**

 

Our common stock is traded on the Nasdaq National Market under thesymbol “APTI.” Our common stock began trading on August 8, 2000. The highand low sales prices as reported on the Nasdaq National Market for the periodfrom August 8, 2000 to December 31, 2002 were as follows:

 
|                 |   | **High** |   | **Low** |   |
|----------------------|--------|----------|--------|---------|--------|
|                 |   |     |   |    |   |
| **Fiscal year 2002** |   |     |   |    |   |
| Quarter 4            |   | $        | 4.92   |    | $      | 2.30 |   |
| Quarter 3            |   | 15.15    |   | 3.65    |   |
| Quarter 2            |   | 15.13    |   | 11.60   |   |
| Quarter 1            |   | 12.60    |   | 10.40   |   |
| **Fiscal year 2001** |   |     |   |    |   |
| Quarter 4            |   | 11.85    |   | 6.50    |   |
| Quarter 3            |   | 15.25    |   | 9.45    |   |
| Quarter 2            |   | 18.00    |   | 9.13    |   |
| Quarter 1            |   | 21.00    |   | 8.50    |   |
|                      |        |          |        |         |        |  |  |

 

As of March 3, 2003, the last reported sale price of our commonstock on the Nasdaq National Market was $4.11 per share. As of March 3,2003, there were approximately 99 stockholders of record and approximately2,300 beneficial stockholders of our common stock.

 

We have not declared or paid any cash dividends on our capital stock,and we do not anticipate doing so in the foreseeable future. We currentlyintend to retain future earnings, if any, to operate and expand our business.

 

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**ITEM 6. SELECTED FINANCIAL DATA.**

 
|                                            |   | **Years Ended December 31,**              |   |
|-------------------------------------------------|--------|-------------------------------------------|--------|
|                                            |   | **2002**                                  |   | **2001** |   | **2000(2)** |   | **1999(2)** |   | **1998(2)** |   |
|                                            |   | **(In thousands, except per share data)** |   |
|                                            |   |                                      |   |   |   |   |   |   |   |   |   |
| **Consolidated Statement of Operations  Data:** |   |                                      |   |   |   |   |   |   |   |   |   |
| Revenues, net                                   |   | $                                         | 43,425 |   | $ | 36,855 |   | $ | 44,168 |   | $ | 27,461 |   | $ | 24,851 |   |
| Gross profit(1)                                 |   | 12,237                                    |   | 11,832 |   | 17,455 |   | 9,461 |   | 6,412 |   |
| Net income (loss)(1)                            |   | (3,687                                    | )      | 1,796 |   | 3,759 |   | (175 | ) | (1,656 | ) |
| Basic net income (loss) per share               |   | $                                         | (0.36  | ) | $ | 0.21 |   | $ | 0.59 |   | $ | (0.04 | ) | $ | (0.33 | ) |
| Diluted net income (loss) per share             |   | $                                         | (0.36  | ) | $ | 0.19 |   | $ | 0.50 |   | $ | (0.04 | ) | $ | (0.33 | ) |
| **Consolidated Balance Sheet Data:**            |   |                                      |   |   |   |   |   |   |   |   |   |
| Working capital                                 |   | $                                         | 33,181 |   | $ | 45,508 |   | $ | 42,945 |   | $ | (1,803 | ) | $ | 515 |   |
| Total assets                                    |   | 76,948                                    |   | 58,075 |   | 57,313 |   | 14,184 |   | 14,200 |   |
| Long-term obligations, less current portion     |   | —                                    |   | — |   | 130 |   | 3,525 |   | 6,148 |   |
| Stockholders’ equity (deficit)             |   | 71,172                                    |   | 53,948 |   | 51,118 |   | (2,475 | ) | (2,451 | ) |

 

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(1)In 2002, we acquired GHz Technology, Inc. (effective January 25) and theproduct lines and certain assets of Microsemi RF Products, Inc. (effective May24).  As a result of these transactions,during fiscal 2002 we recorded acquisition related charges for purchasedin-process research and development (IPR&D), amortization of intangibleassets, inventory fair value adjustments and deferred compensation amortizationof $4,330, of which $1,974 was included in costs of good sold and $2,356 inoperating expenses.  The total amountnet of taxes was $3,544.

 

(2)In 1992, APT was purchased by Hamilton Sundstrand (Sundstrand). OnSeptember 6, 1995, Tremoliere LLC (Tremoliere), a company owned by APT’smanagement group, purchased 51% of APT from Sundstrand for $250 in cash and$3,320 in a note payable to Sundstrand. On January 5, 1998, Tremolierepurchased the remaining 49% interest in APT from Sundstrand for $2,450 in cash.Tremoliere borrowed $3,000 from APT under a promissory note to purchase theremaining 49% and to pay interest accrued on the $3,320 note payable toSundstrand. In accordance with purchase accounting and push down accounting,APT established a new cost basis for assets and liabilities inJanuary 1998 based on these purchase transactions, and reflected thatbasis in APT’s consolidated financial statements. After the Company’s IPO inAugust of 2000, the notes were repaid.

 

10

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**ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.**

 

**Overview**

 

We are a leading designer, manufacturer and marketer of high-performancepower semiconductors and modules for both switching and RF applications. Powersemiconductors manage and regulate electrical power by converting electricity intoa form required 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 we arestrengthening our portfolio of RF products that operate at frequencies rangingfrom 1 megahertz to 100 megahertz. RF generally refers to the ability tooperate at frequencies above 1 megahertz. We sell our products primarily inNorth America, Europe, and Asia, through a network of independent salesrepresentatives and distributors.

 

To further our penetration in RF markets, we completed the acquisitionof GHz Technology, 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.

 

In August 2000, we completed an initial public offering, or IPO, of4,025,000 shares of our common stock, including the underwriters’over-allotment, at an offering price of $15.00 per share. The IPO included2,830,000 shares sold by APT and 1,195,000 shares sold by shareholders of APT,and resulted in net proceeds to APT of approximately $38.3 million. Thenet remaining proceeds are currently held in various investments and will beused for general corporate purposes, including research and development andpossible acquisitions. Our common stock is listed on the Nasdaq National Marketunder the symbol APTI.

 

The following discussion should be read in conjunction with theconsolidated financial statements provided under Part II, Item 8 of thisAnnual Report on Form 10-K. Certain statements contained herein mayconstitute forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These statements involve a number ofrisks, uncertainties and other factors that could cause actual results todiffer materially, as discussed more fully herein.

 

**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 returns andwarranty obligations, allowance for doubtful accounts, excess and obsolete inventories,income taxes, valuation of intangible assets including goodwill, valuation oflong-lived assets, contingencies and litigation, and excess component ordercancellation costs. APT bases its estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent 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 and WarrantyObligations***

 

Standard product revenue is recognized upon shipment of product. APTrecognizes revenue on customer-specific products or services based on theterms of customer contracts which are generally based on customer acceptance.In general, APT provides for a one-year repair or replacement warranty on itsproducts. Upon shipment, APT also provides for the estimated cost that may beincurred for product warranty and sales returns based on historical experience.APT uses independent distributors to sell its products. Distributors can returnup to 5% of the dollar value of products purchased during the prior six monthsupon a 30 days notice and receive certain price protections on purchasedproducts. Sales to distributors are recognized upon shipment, less an allowancefor estimated returns based on historical experience.

 

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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 incorrecting a product non-conformance. Should actual product non-conformancerates, material usage, service delivery costs, or distributor returns differfrom APT’s estimates, revisions to the estimated warranty liability would berequired.

 

***Allowance for Doubtful Accounts***

 

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 Obsolete Inventories***

 

Inventories are stated at the lower of standard cost (approximatesactual cost on a first-in, first-out basis) or market (net realizablevalue).  APT establishes reserves forestimated obsolescence or unmarketable inventory equal to the differencebetween the cost of inventory and the estimated net realizable value based uponassumptions about future demand and market conditions. APT evaluates historicalusage of the product, current customer demand, and forecasted usage of theproduct.  If actual market conditionsare less favorable than those projected by management, additional inventorywrite-downs 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. While APT considersfuture taxable income and ongoing prudent and feasible tax planning strategiesin assessing the need for the valuation allowance, in the event APT were todetermine that it would be able to realize its deferred tax assets in thefuture in excess of its net recorded amount, an adjustment to the deferred taxasset would increase income in the period such determination was made.Likewise, should APT determine that it would not be able to realize all or partof its net deferred tax asset in the future, an adjustment to the deferred taxasset would be charged to income in the period such determination was made.

 

***Valuation of Goodwill and IntangibleAssets with Indefinite Lives***

 

APT values goodwill and intangible assets with indefinite lives inaccordance with Statement of Financial Accounting Standards No. 142 “Goodwilland Other Intangible Assets” (“SFAS No. 142”). Currently APT carries a goodwill balance in connection with acquisitionsmade in 2002, but has no other intangible assets with indefinite lives.  We annually review goodwill and otherintangible assets that have indefinite lives for impairment and when events orcircumstances indicate the carrying value of these assets might exceed theircurrent fair values. We determine fair value using discounted cash flowanalysis and other acceptable valuation methodologies, which requires us tomake certain assumptions and estimates regarding industry economic factors andfuture profitability.  It is our policyto conduct 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.

 

***Valuation of Long-Lived Assets***

 

APT values goodwill and intangible assets with indefinite lives inaccordance with Statement of Financial Accounting Standards No. 144 “Accountingfor the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). Weevaluate 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 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.

 

***Contingencies and Litigation***

 

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.

 

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**Results of Operations**

 

The following table presents our consolidated statement of operationsdata for the periods indicated as a percentage of net revenue:

 
|                                                |   | **Years Ended December 31,** |   |
|-----------------------------------------------------|--------|------------------------------|--------|
|                                                |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                                |   |                         |   |   |   |   |   |
| Revenues, net                                       |   | 100.0                        | %      | 100.0 | % | 100.0 | % |
| Cost of goods sold                                  |   | 67.3                         |   | 67.9 |   | 60.5 |   |
| Amortization of technology rights and other charges |   | 4.5                          |   | — |   | — |   |
| Total cost of goods sold                            |   | 71.8                         |   | 67.9 |   | 60.5 |   |
|                                                |   |                         |   |   |   |   |   |
| Gross profit                                        |   | 28.2                         |   | 32.1 |   | 39.5 |   |
| Operating expenses:                                 |   |                         |   |   |   |   |   |
| Research and development                            |   | 8.9                          |   | 4.9 |   | 2.5 |   |
| Selling, general and administrative                 |   | 28.4                         |   | 25.1 |   | 22.5 |   |
| In-process research & development               |   | 4.9                          |   | — |   | — |   |
| Total operating expenses                            |   | 42.2                         |   | 30.0 |   | 25.0 |   |
| Income from operations                              |   | (14.0                        | )      | 2.1 |   | 14.5 |   |
| Other income (expense):                             |   |                         |   |   |   |   |   |
| Interest income                                     |   | 1.5                          |   | 4.4 |   | 2.1 |   |
| Interest expense                                    |   | (.1                          | )      | (.1 | ) | (2.8 | ) |
| Other, net                                          |   | 0.0                          |   | 0.0 |   | (0.2 | ) |
| Income before income taxes                          |   | (12.6                        | )      | 6.4 |   | 13.6 |   |
| Income tax (benefit) expense                        |   | (4.1                         | )      | 1.5 |   | 5.1 |   |
| Net income (loss)                                   |   | (8.5                         | )%     | 4.9 | % | 8.5 | % |

 

**Years Ended December 31, 2002 and 2001**

 

*Revenues.*  Our net revenues for 2002 were $43.4million, including $15.1 million from GHz Technology, Inc. (GHz) and thebusiness of Microsemi RF Products, Inc (MSC RF), a wholly owned subsidiary ofMicrosemi Corporation, which APT acquired effective January 25, 2002 and May24, 2002, respectively. This represents an increase of 17.8% compared to thenet revenues of $36.9 million in 2001. Without the additional revenues from our acquisitions, revenues were$28.3 million in 2002, representing a decline of 23.0% over the prior year.Sales to distributors were approximately 20.8% of total revenues in 2002compared to 21.4% in 2001.

 

The semiconductor market experienced recordgrowth up to October 2000, followed by record declines in 2001.  As APT typically lags the overallsemiconductor industry, our revenues peaked in the first quarter of 2001 andthen we experienced sequentially declining revenues through the fourth quarterof 2001.  Our 2002 revenues hadquarterly increases from the low levels of the second half of 2001, but stillremain below the levels achieved in 2001 on a year to date basis excluding theimpact of acquisitions.  We experiencedsequential revenue growth of 16% in each of the first and second quarters of2002, 6% in the third quarter of 2002, followed by a 15% decline in the fourthquarter of 2002, when excluding revenues from both of our acquisitions.  The year over year decline is mainly due tocontinued weakness of our sales into the communications and data processingmarket, which remains well below 2001 levels.

 

Including theimpact of the companies acquired, the 17.8% increase in revenues is largelyattributable to increased sales in the military and aerospace market.  The additional revenues contributed by ouracquisitions are heavily weighted towards the military and aerospace market andthe communications and data processing market, and therefore serve to moreevenly diversify our overall revenues from the various markets that weparticipate in.  In addition, therevenues from the acquired companies significantly increase our position in theRF power market, consistent with our long established strategy.

 

During 2000, we entered into a joint venture agreement in China, whichincluded a license and technology transfer agreement for certain of ourtechnologies, in exchange for cash payments totaling $1.5 million over twoto three years. There were no revenues recognized from the agreement during2002 and 2001. APT terminated this agreement in February of 2003 in accordancewith the terms of the agreement.  As aresult, APT will not receive any future payments relative to this agreement.

 

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*Gross Profit.*  Our gross profit margin was28.2% in 2002 compared to 32.1% in 2001. Excluding the non-cash purchaseaccounting charges for the fair value of inventory acquired and theamortization of the technology rights assets, gross profit margin was 32.7%compared to 32.1% in 2002, which had no purchase accounting charges.  As described above, our revenues peaked inthe first quarter of 2001 and then subsequently declined through the fourthquarter of 2001.  Accordingly, our grossprofit margin in the first half of 2001 was 38.3% followed by 19.4% in thesecond half of 2001 due to the much lower levels of production and underutilization of our internal manufacturing facilities.  During 2002, we experienced quarterly increases in revenues andproduction volumes, leading to improved utilization of our internalmanufacturing facilities.  We also beganto benefit from the cost reduction actions taken in the second half of 2001, asmore fully described in the 2001 versus 2000 gross profit section below, suchas reducing our overall production personnel levels by approximately 35% orabout 35 employees.  Also contributingto our improved gross margins in 2002 is the higher content of our RF powerbusiness due to the acquisitions made during the year, which carry a higheroverall gross profit rate.  Our RFrevenues were approximately 46.3% of total revenue in 2002 compared to 14.5% in2001. We expect to continue to pursue actions in 2003 that will lower ouroverall production costs.  These actionsinclude consolidation of internal wafer fabrication operations, greaterutilization of low cost offshore assembly subcontractors, and the associated downsizingof our internal assembly operations.

 

*Research and Development Expense.*  Ourresearch and development expenses were $3.9 million in 2002 compared to $1.8million in 2001, or approximately 8.9% and 4.9% of revenues in 2002 and 2001,respectively.  The increased spendingover the prior year is primarily due to the additions of GHz and MSC RF, whichcontributed $2.0 million in 2002, consisting mainly of payroll, supplies,facilities and depreciation charges. Excluding the impact of GHz and MSC RF,research and development charges remained flat over the prior year. The Companyplans to continue its research and development programs leading to theintroduction of new products for use in both switching and RF applications.

 

*Selling, General and Administrative Expense.*  Ourselling, general and administrative expenses totaled $12.3 million in 2002compared to $9.3 million in 2001, or approximately 28.4% and 25.1% of revenuesin 2002 and 2001, respectively.  Theincreased spending over the prior year is primarily due to the additions of GHzand MSC RF, which contributed $3.0 million in 2002, consisting mainly ofpayroll, commissions, facilities, and depreciation charges. Excluding theimpact of GHz and MSC RF, selling, general and administrative expenses remainedflat over the prior year.  The graduatedpay reductions implemented in 2001 were discontinued in the third quarter of2002. We expect to continue to take actions to reduce selling andadministrative expenses during 2003, including consolidation of certainadministrative functions and tight control of discretionary spending. We didexperience increased legal expenses over 2001 in connection with ongoing patentlitigation, as more fully explained in Part I, Item III to this filing.  We have denied infringement of the IXYSpatents and have asserted affirmative defenses to our claims.  However, the length of time and legal feesassociated with the patent litigation with IXYS may be significant.

 

*Stock Compensation Expense.*  Stockcompensation expense includes costs relating to stock-based employeecompensation arrangements, and is based on the difference between the fairmarket value of our common stock on the date of grant of options and theexercise price of options to purchase that stock. Stock compensation expense isrecognized over the vesting periods of the related options, typically fiveyears. Stock compensation expense of $498,000 was recorded in 2002 versus$203,000 in 2001. Of this amount, $187,000 was recorded in cost of goods sold,$73,000 was recorded in research and development expense and $238,000 wasrecorded in selling, general and administrative expense. We expect to recordstock compensation expense of approximately $149,000 in 2003.

 

*Interest Income (Expense).*  Interestincome in 2002 was $630,000 compared to $1.7 million in 2001.  The decline in interest income was due tothe use of cash and investments to acquire GHz and MSC RF and also due to lowerinterest rates available in the current market environment.  Interest expense was $60,000 in 2002compared to $55,000 in 2001.

 

*Income Taxes.*  We recorded a tax benefit for2002 at an effective tax rate of approximately 32.4% compared to a tax rate of24.0% in 2001. The effective tax rate benefit in 2002 was lower than thefederal statutory rate primarily due to the in process research and developmentcharges recorded for financial statement purposes in the GHz acquisition underGAAP which are not deductible for tax purposes.  This was partially offset by the benefit of a reduction in thevaluation allowance due to the realization of foreign net operating loss carryforwards and non taxable municipal interest income.  The effective tax rate expense in 2001 was lower than the federalstatutory rate primarily due to a reduction in the valuation allowance due tothe realization of foreign net operating loss carry forwards and non taxablemunicipal interest income.

 

*Net Loss.*Although our revenues increased in 2002 over2001, we experienced a net loss of $3,687 versus net income of $1,796 in 2001.As a result of our acquisitions during fiscal 2002, we recorded acquisitionrelated charges for purchased in-process research and development (IPR&D),amortization of intangible assets, inventory fair value adjustments anddeferred compensation amortization of $4,330, of which $1,974 was included incosts of good sold and $2,356 in operating expenses. The total amount net oftaxes was $3,544. Without these purchase related charges our net loss in 2002would have been $143. This decline in profit is primarily due to a 23% declinein revenues on our existing business before acquisitions, resulting in lowergross profit while our operating expenses remained relatively flat on a beforeacquisition basis. This resulted in an operating loss on our existing business,which was partially offset by an operating

 

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profit on our acquired business. The Company plansto continue pursuing cost containment strategies including consolidation ofmanufacturing and administrative operations in order to lower our expenses.

 

**Years Ended December 31, 2001 and 2000**

 

*Revenues.*  Our net revenues were$36.9 million in 2001, a decrease of 16.6% from net revenues of$44.2 million in 2000. The decrease in net revenues in 2001 resulted fromsignificantly lower sales volumes to our customers in the communications andsemiconductor capital equipment markets, which declined 19.6% and 39.5%,respectively from 2000. Both of these markets experienced rapid and significantdecreases during 2001 as demand from end customers for semiconductor equipmentand telecommunications equipment dropped. However, we experienced relativestability in our sales to the industrial, medical and military markets, whichcombined grew 8.3% from 2000.

 

During 2000, we entered into a joint venture agreement in China, whichincluded a license and technology transfer agreement for certain of ourtechnologies, in exchange for cash payments totaling $1.5 million over twoto three years. Included in revenues in 2000 was $440,000 of technologylicensing revenue associated with our joint venture in China. There were norevenues recognized from the agreement during 2001. APT terminated thisagreement in February of 2003 in accordance with the terms of theagreement.  As a result, APT will notreceive any future payments relative to this agreement.

 

*Gross Profit.*  Our gross profit margin was32.1% in 2001 compared to 39.5% in 2000. The decrease in gross profit margin in2001 was primarily due to significantly lower fixed cost absorption in theCompany’s internal manufacturing facilities, higher levels of non-qualityrelated product returns, and increased inventory reserves.

 

Due to the rapid and significant drop in demand for our products asnoted above, management took direct action to adjust production levels andcontrol inventory. Temporary plant shutdowns were implemented in the third andfourth quarters of 2001. These shutdowns required employees to take time offwithout pay or use accrued vacation balances. In addition, during the fourthquarter, production crews were put on half schedules. These shutdowns did notinvolve permanent plant closures or reductions in staff.

 

However, in addition to the temporary shutdowns described above,permanent work force reductions were also made. The permanent reductions inproduction personnel were 19 employees in September 2001 and an additional17 in February 2002. There were no material severance costs associatedwith either of these workforce reductions and therefore no restructuringaccruals or charges were taken. Orders to our manufacturing subcontractors werealso decreased. The overall result of these actions was to lower waferproduction levels by approximately 40% in the second half of 2001 versus levelsin the first half of 2001. The lower internal production levels contributed tolower fixed cost absorption and deteriorated our margin by approximately 6%.

 

In addition, we had higher levels of non-quality related product returnsdue to stock rotation rights given to our distributors and some customerreturns of excess inventory that bore a high standard margin. Overall, productreturns were approximately 11% in the second half of 2001 versus 3% in thefirst half of 2001 and 2% in 2000. During 2001 we also increased inventoryreserves due to higher estimates of excess inventories on hand. We increasedreserves in the third and fourth quarter of 2001 by $471,000 and in total by$582,000 for 2001 versus $207,000 in 2000. Finally, gross profit in 2000included $440,000 related to the technology licensing revenue associated withour joint venture in China, while in 2001 we had no revenues from the jointventure. (See “Revenues” above.)

 

*Research and Development Expense.*  Ourresearch and development expenses were $1.8 million in 2001, an increaseof 65% from research and development expenses of $1.1 million in 2000. Theincrease in research and development expenses in 2001 primarily resulted fromincreased spending on supplies and materials used in research and developmentprojects. As a percent of net revenues, research and development expenseincreased to 4.9% in 2001 from 2.5% in 2000, due to both increased spending andlower revenues in 2001. Our research and development efforts are focused on theadvancement of our core technologies, as evidenced by the deployment of a largenumber of products based on our Power MOS 7TM technology in 2001, and thedevelopment and introduction of new products in derivative and radio frequencytechnologies.

 

*Selling, General and Administrative Expense.*  Ourselling, general and administrative expenses were $9.3 million in 2001, adecrease of 6.9% from selling, general and administrative expenses of$10.0 million in 2000. The decrease in selling, general and administrativeexpenses in 2001 principally resulted from $492,000 of decreased commissions onlower revenues; $122,000 of lower salaries due to graduated pay reductions andtemporary company shutdowns; and overall reduced discretionary spending in thecurrent market environment. As mentioned above, the Company implementedtemporary shutdowns in the third and fourth quarter of 2001, as well as apermanent reduction in force that affected three administrative employees. Inaddition, in 2001, the Company implemented graduated pay reductions applied toall domestic employees beginning in the third quarter that were increased inthe fourth quarter. As a result of the pay reductions, shutdowns, and workforce reductions, payroll expenses were reduced by 20% on an annualized basisfrom the payroll levels in the first half of 2001. Selling, general and administrativeexpenses also include amortization of goodwill of $262,000 in 2000

 

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versusnone in 2001, related to the purchase of APT by six of our senior officers. Asa percent of net revenues, selling, general and administrative expenseincreased to 25.1% in 2001 from 22.5% in 2000, primarily due to the decrease innet revenues.

 

*Stock Compensation Expense.*  Stockcompensation expense includes costs relating to stock-based employeecompensation arrangements, and is based on the difference between the fairmarket value of our common stock on the date of grant of options and theexercise price of options to purchase that stock. Stock compensation expense isrecognized over the vesting periods of the related options, typically fiveyears. Stock compensation expense of $203,000 was recorded in 2001 versus$277,000 in 2000. Of this amount, $54,000 was recorded in cost of goods sold,$21,000 was recorded in research and development expense and $129,000 wasrecorded in selling, general and administrative expense.

 

*Interest Income (Expense).*  Interestexpense decreased to $55,000 in 2001 from $1.2 million in 2000. Thedecrease in interest expense in 2001 was principally a result of the reductionof outstanding debt from the application of proceeds from our IPO in earlyAugust 2000. See “Overview” above. We had interest income of$1.7 million in 2001 an increase from $938,000 in 2000, nearly all ofwhich we earned on the investment of proceeds from our IPO in August 2000.

 

*Income Taxes.*  Our effective tax rate wasapproximately 24% in 2001 compared to 37% in 2000. The effective tax rate in2001 was lower than the federal statutory rate primarily due to the benefit ofa reduction in the valuation allowance due to the realization of foreign netoperating loss carry forwards. The effective tax rate in 2000 was higher thanthe federal statutory rate primarily due to state taxes and other permanentdifferences and was partially offset by the benefit of a reduction in thevaluation allowance due to the realization of foreign net operating loss carryforwards. The permanent differences in 2000 relate to interest expense on a$3.3 million note payable to Hamilton Sundstrand that was not deductiblefor tax purposes by us and interest income that was recognized for tax purposeson the $3.1 million notes payable from six of our senior officers, but notrecorded on our consolidated financial statements. Additionally, goodwillamortization related to the purchase transactions increased the effective taxrate because the amortization was not deductible for tax purposes.

 

**Liquidity and Capital Resources**

 

In 2002, we generated approximately $5.1 million from operatingactivities.  This resulted from our netloss of $3.7 million offset by non-cash charges for depreciation andamortization of $3.5 million, in process research and development of $2.1million, deferred compensation amortization of $498,000, inventory provisionsof $893,000, and a net positive cash flow from operating assets and liabilitiesof $3.2 million.  A large portion ofcash from operations resulted from a lowering of the inventory levels at ournewly acquired companies.  The decreasein prepaid expenses and other assets was mainly due to the receipt of taxrefunds of $2.1 million.

 

In 2002, we used approximately $14.7 million in investingactivities, which consisted mainly of our acquisitions of GHz and MSC RF,partially offset by net proceeds from the sale and purchase of marketablesecurities of $14.5 million.  Theacquisition of GHz consumed $14.2 million of cash and direct costs, net of cashacquired of $205,000.  The GHz assetsacquired included approximately $205,000 in cash and $7.7 million in marketablesecurities. In addition we issued APT stock and options valued at $20.3million.  We also purchased $2.6 millionof equipment during the period. The acquisition of MSC RF consumed $12.5million of cash, including direct costs of $260,000.

 

In 2002, we generated approximately $289,000 from financing activities,which primarily consisted of net proceeds of $367,000 from the exercise ofstock options.

 

As of December 31, 2002, APT had $33.2 million in working capital.  Our trade accounts receivable balance was$6.9 million reflecting a days sales outstanding ratio of 54 days, compared totrade accounts receivable of $3.5 million at December 31, 2001, reflecting adays sales outstanding ratio of 51 days. Trade accounts receivable balances have increased due to improved salesand the additional companies acquired. Our inventory balance was $11.9 million reflecting inventory turns of2.2 times per year, compared to an inventory balance of $9.3 million atDecember 31, 2001, reflecting inventory turns of 3.1 times per year.  Inventory balances have increased due to thecompanies acquired during 2002. Inventory turns decreased over the prior year average as a result of thedecline in sales levels experienced in the second half of 2001 and into 2002.The calculations above are based on yearly average balances of trade accountsreceivable and inventory, adjusted to include the related opening balances fromour acquisitions.

 

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 of December31, 2002, APT had $19.2 million in cash and cash equivalents andavailable-for-sale securities. APT’s investment policy is to invest in shortterm, high-grade liquid investments with the goal of capital preservation.APT’s ability to generate positive cash flow from operations may be affected bymarket conditions as well as other risk factors as described below. We expectfrom time to time to evaluate potential acquisitions and equity investments complementaryto our market strategy. To the extent we pursue such transactions, we couldrequire additional equity or debt financing to

 

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fundsuch activities 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.

 

As of December 31, 2002, principal commitments consisted ofobligations under operating leases as outlined in Part I, Item 2,Properties and in footnote eight to the financial statements. In addition wehad certain commitments with vendors as outlined in footnote 9 to the financialstatements.  At December 31, 2002 we hadcapital expenditure commitments of approximately $84,000.

 

**Recent Accounting Pronouncements**

 

In June 2002, theFASB issued SFAS 146 - “Accounting for Costs Associated with Exit or DisposalActivities.” SFAS 146 addresses accounting and reporting for costs associatedwith exit or disposal activities and nullifies Emerging Issues Task Force IssueNo. 94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (Including Certain Costs Incurred in aRestructuring).” SFAS 146 requires that a liability for a cost associated withan exit or disposal activity be recognized and measured initially at fair valuewhen the liability is incurred. SFAS 146 is effective for exit or disposalactivities that are initiated after December 31, 2002, with early applicationencouraged.  The adoption of the newrule is not expected to have a material impact on the Company’s statements ofposition, operations or cash flows.

 

In November, 2002,the FASB issued FASB Interpretation No. 45 - “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others” (“FIN 45”). This interpretation elaborates on thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it has issuedand requires that they be recorded at fair value. The initial recognition andmeasurement provisions of this interpretation are to be applied only on aprospective basis to guarantees issued or modified after December 31, 2002. Thedisclosure requirements of this interpretation are effective for financialstatements of interim or annual periods ending after December 15, 2002. The adoptionof the new rule is not expected to have a material impact on the Company’sstatements of position, operations or cash flows.

 

In December 2002,the FASB issued the SFAS 148, “Accounting for Stock-Based Compensation -Transition and Disclosure an amendment of FASB Statement No. 123.” ThisStatement amends SFAS 123, “Accounting for Stock-Based Compensation,” toprovide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. Inaddition, this Statement amends the disclosure requirements of SFAS 123 torequire prominent disclosures in both annual and interim financial statementsabout the method of accounting for stock-based employee compensation and theeffect of the method used on reported results. The amendments to SFAS 123regarding disclosure are effective for financial statements for fiscal yearsending after December 15, 2002. The Company applies APB 25 in accounting forits employee stock option plan.

 

**Risk Factors Affecting Business and Results of Operations**

 

This report contains statements which, to the extent that they do notrecite historical fact, constitute “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. The words “believe,” “expect,”“estimate,” “may,” “will,” “could,” “plan” or “continue” and similarexpressions are intended to identify forward-looking statements. Suchforward-looking information involves important risks and uncertainties thatcould materially alter results in the future from those expressed in anyforward-looking statements made by, or on behalf of, us. These risks anduncertainties include, but are not limited to those listed in this report.

 

We caution you that such forward-looking statements are only predictionsand actual events or results may differ materially. In evaluating suchstatements, you should specifically consider the various factors which couldcause actual events or results to differ materially from those indicated bysuch forward-looking statements, including the factors that we discuss below.We are under no duty to update any of the forward-looking statements after thedate of this report, to conform them to actual results or to changes in ourexpectations.

 

**The semiconductor industry is very cyclical, and an industrydownturn would reduce our revenues.**

 

The semiconductor industry is characterized by:

 

•           rapid technological change;

 

•              cyclical market patterns;

 

•              significant price erosion;

 

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•              periods of over-capacity andproduction shortages;

 

•              variations in manufacturing costsand yields; and

 

•              significant expenditures forcapital equipment and product development.

 

The semiconductor industry has from time to time experienced depressedbusiness conditions. In the past, business conditions in this industry haverapidly changed from periods of strong demand to periods of weak demand. Anyfuture downturn in the industry could harm our business and cause our operatingresults to suffer. We cannot assure you that we will not experience substantialperiod-to-period fluctuations in operating results due to general semiconductorindustry conditions or other factors.

 

**We have historically experienced fluctuations in ouroperating results and expect these fluctuations to continue, which may causeour common stock price to decline.**

 

Our quarterly and annual operating results are affected by a widevariety of factors that could materially and adversely affect our net sales,gross margins and operating results. These factors include:

 

•              the volume and timing of ordersreceived;

 

•              market acceptance of our productsand the products of our customers;

 

•              competitive pricing pressures;

 

•              our ability to expandmanufacturing output to meet increasing demand;

 

•              the timing and extent of ourresearch and development expenses; and

 

•           fluctuations in manufacturing yields.

 

Historically in the semiconductor industry, average selling prices ofproducts have decreased over time. If we are unable to introduce newproprietary products with higher margins or reduce manufacturing costs tooffset anticipated decreases in the prices of our existing products, then ouroperating results will be harmed. Our business is characterized by short-termorders and shipment schedules, and customer orders typically can be canceled orrescheduled without penalty to the customer. Because most of our backlog iscancelable without penalty, we typically plan our production and inventorylevels based on internal forecasts of customer demand, which is highlyunpredictable and can fluctuate substantially. In addition, because of fixedcosts in the semiconductor industry, we are limited in our ability to reducecosts quickly in response to any revenue shortfalls. As a result of theforegoing factors, we may experience material adverse fluctuations in ourfuture operating results on a quarterly or annual basis. We cannot assure youthat we will be profitable on a quarterly or annual basis in future periods.

 

**If we cannot introduce new products on a timely basis,our financial results may suffer.**

 

The markets for our products are characterized by rapid technologicalchange and frequent new product introductions. Our success depends upon ourability to develop improved power semiconductors for new and existing markets,to introduce these products in a timely manner, and to have these products gainmarket acceptance. The development of new power semiconductors is highlycomplex and from time to time we have experienced delays in developing andintroducing new products. Successful product development and introductiondepends on a number of factors, including:

 

•           proper new product definition;

 

•              timely completion of design andtesting of new products;

 

•              achievement of acceptablemanufacturing yields; and

 

•              market acceptance of our productsand the products of our customers.

 

We cannot assure you we will be able to meet these challenges or adjustto changing market conditions as quickly and cost-effectively as necessary tocompete successfully. Due to the complexity and variety of powersemiconductors, the limited number of

 

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qualifieddevelopment engineers and the limited effectiveness of computer-aided designsystems in the design of such circuits, we cannot assure you that we will beable to successfully develop and introduce new products on a timely basis. Wecannot assure you that any products introduced by us will be adopted by existingor potential customers, or that any products initially accepted by ourcustomers will become industry standard products. Our failure to develop andintroduce new products successfully could significantly harm our business andcause our operating results to suffer.

 

Our results of operations are also dependent on our ability to optimizethe mix between sales of relatively higher margin but lower volume products andrelatively higher volume but lower margin products. In order to improve ourmargins, sales of higher margin products must in the future represent a greaterpercentage of our net sales, requiring us to develop, introduce and market newproprietary products. We cannot assure you that we will be successful indeveloping new proprietary products with the features and functionality thatcustomers in our key markets will demand.

 

**Disruption, termination or reduction in the functionsperformed by our key subcontractors could reduce our sales.**

 

We are increasingly more reliant on third party subcontractors in Europeand Asia for manufacturing, assembly and packaging of most of our products. Wehave entered into a wafer foundry agreement with Infineon Technologies, anoutside foundry located in Europe, which currently provides a significantpercentage of our wafers. In addition, during 2001 we signed a wafer foundryagreement with Episil Technologies, located in Taiwan. Our agreement withInfineon extends indefinitely and requires a two-year notice of termination.Our agreement with Episil Technologies extends indefinitely and requires aone-year notice of termination.  We alsorely on agreements with Team Pacific and PSI Technologies, subcontractors inthe Philippines, for assembly and packaging of most of our switching powersemiconductor products. Our agreement with Team Pacific extends through January26, 2006 and requires Team Pacific to assemble all products we send them, basedon rolling periodic forecasts. Our agreement with PSI Technologies extendsthrough December 31, 2004. In addition, we rely on subcontractor services fromVERTEK International, Inc. in Mexico and Semiconductor Assembler &Manufacturer, Sdn. Bhd. (SAM) in Malaysia for assembly and packaging of our RFand microwave products.  The agreementswith VERTEK and SAM are governed by purchase orders which are periodicallyrenewed.

 

Disruption or termination of these arrangements could harm our businessand operating results. Political instability, labor disputes or naturaldisasters could disrupt the operations of our subcontractors. If any of oursubcontractors experience financial, operational, production or qualityassurance difficulties resulting in a reduction or interruption in supply tous, our operating results would suffer until alternate subcontractors, if any,become available. Our subcontractors may not be able to maintain thetechnological capability to meet our future needs. In addition, oursubcontractors also manufacture and package products for our competitors, andthere is a risk that our subcontractors could allocate less of their productioncapacity and resources to our needs.

 

**If our manufacturing processes become obsolete, ourmargins and profitability will be harmed.**

 

Semiconductor design and process methodologies are subject to rapidtechnological change, requiring large expenditures for research and developmentin order to improve product performance and increase manufacturing yields. Wecannot assure you that our current process technology will not become obsolete.If we are unable to develop or obtain access to advanced silicon waferprocessing technologies as they become needed, our future operating resultswill suffer.

 

**If we cannot adequately protect our intellectualproperty rights, our financial results may suffer.**

 

Our success depends on our ability to obtain or maintain protection ofcertain proprietary technologies used in our principal products. We rely on acombination of patents, trademarks, trade secret laws and contractualprovisions to protect our proprietary rights. Our competitors may, however,misappropriate our technology or independently develop technologies that are asgood as or better than ours. We cannot assure you that any patent owned by uswill not be invalidated, circumvented or challenged. Moreover, the process ofseeking patent protection can be long and expensive, and we cannot assure youthat our current patents are or any new patents that may be issued will be ofsufficient scope or strength to provide any meaningful protection or anycompetitive advantage to us. We may also become subject to or initiateinterference proceedings in the U.S. Patent and Trademark office, which candemand significant financial and management resources and could harm ourfinancial results.

 

In addition, we have licensed a portion of our intellectual propertyrights to European and Japanese entities and entered into a joint venture andlicensing and technology transfer agreement in China. The China agreement wassubsequently terminated effective in February of 2003.  Intellectual property law and practicediffers in foreign jurisdictions, and it may prove difficult for us to protectour rights in certain foreign countries. We cannot assure you that ourlicensing and other arrangements with foreign entities will not result ininfringements on our proprietary rights. If we are unable to protect ourintellectual property rights, either in the U.S. or abroad, we could faceincreased competition in the market for our products and technologies, whichcould negatively affect our sales and ability to expand our business.

 

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**We may become involved in costly and lengthy patentinfringement or intellectual property litigation, which could harm ourbusiness.**

 

The semiconductor industry in general is characterized by frequentlitigation regarding patent and other intellectual property rights. Protectingour proprietary rights may require us to defend claims of intellectual propertyinfringement by our competitors. If any such infringements arise or are claimedin the future, we may be exposed to substantial liability for damages and mayneed to obtain licenses from the patent owners, discontinue or change ourprocesses or products or expend significant resources to develop or acquirenon-infringing technologies. We cannot be certain that licenses would beavailable under reasonable terms or that we could successfully develop oracquire non-infringing technologies. Moreover, such efforts would likely betime-consuming and divert management attention and resources. Our futureinvolvement in patent infringement or intellectual property litigation couldharm our operating results and financial condition.

 

Although none of our patents or intellectual property rights has beensuccessfully challenged to date, we have been sued by IXYS Corporation forpurportedly infringing two of its patents covering power MOSFETs.  We have denied infringement of the IXYSpatents and have asserted affirmative defenses to our claims.  Trial is scheduled to commence on May 10,2004.  We intend to contest IXYS’s claimsvigorously but the outcome of this litigation remains uncertain.  No assurance can be provided that a courtruling unfavorable to APT would not materially harm our business.  In addition, the length of time and legalfees associated with the patent litigation with IXYS may be significant.

 

Additionally, in the future we could be accused of infringing theintellectual property rights of other third parties.  We also have certain indemnification obligations to customerswith respect to the infringement of third party intellectual rights by ourproducts.  No assurance can be providedthat any future infringement claims by third parties or claims forindemnification by customers or end users of our products resulting frominfringement claims will not be asserted or that assertions of infringement ifproven to be true will not harm our business.

 

**Strong competition in the power semiconductor marketmay reduce the demand for our products or the prices of our products, whichcould reduce our revenues and harm our business.**

 

The power semiconductor industry is highly competitive and subject torapid technological change. Significant competitive factors in the powersemiconductor market include:

 

•              product features and performance;

 

•              product quality;

 

•              product reliability;

 

•              technical knowledge;

 

•              breadth of product line;

 

•              competitive pricing; and

 

•              customer service and support.

 

Because the market for power semiconductors is diverse and highlyfragmented, we encounter different competitors in our various product markets.Our principal competitors in one or more of our product areas include FairchildSemiconductor, International Rectifier, IXYS, MA/Com, Motorola, Philips and STMicroelectronics.  Many of our competitorshave substantially greater technical, financial and marketing resources andgreater name recognition than we do. We expect intensified competition fromexisting power semiconductor suppliers and the possible entry of newcompetitors. Increased competition could harm our business. We cannot assureyou that we will be able to compete successfully in the future or thatcompetitive pressures will not harm our financial condition or our operatingresults. Competitive pressures could reduce market acceptance of our productsand result in price reductions and increases in expenses that could harm ourbusiness and our financial condition.

 

**Our financial results would be harmed if we were tolose one of our major customers or key distributors.**

 

Several of our major customersaccount for a significant portion of our net sales each year. During 2002, ourtop five customers

 

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accountedfor approximately 37% of our net sales, and one distributor, RichardsonElectronics Ltd, accounted for 12% of our net sales. Revenues from AdvancedEnergy Industries, Inc represented 9.5% of net revenues in 2002. If we lostRichardson Electronics Ltd or one of our other major customers, or if oneof them reduced or canceled significant orders, our net income and operatingresults could be harmed. Richardson Electronics Ltd serves as a significantdistributor of our products. If this relationship were discontinued, or ifRichardson Electronics Ltd should fail to provide adequate service to ourcustomers, we could lose sales and our operating results would suffer.

 

**If we fail tomanage our growth effectively, we may lose business and experience reducedprofitability.**

 

We have at times experienced periods of rapid revenue growth, and weanticipate future growth if demand increases in the markets for our products.To manage this growth successfully, we will need to manage increased productionrequirements, attract, retain and train new employees and management, improveour operational and administrative systems, and manage multiple relationshipswith customers and suppliers. We may be unable to accomplish any of theserequirements, and our failure to do so would harm our operating results.

 

**We may not beable to consummate future acquisitions or integrate acquisition successfullyinto our business.**

 

We have made two acquisitions since we became a public company in Augustof 2000, and we plan to pursue additional acquisitions of relatedbusinesses.  The expense incurred inconsummating the future acquisition of related businesses, or our failure tointegrate such businesses successfully into our existing businesses, couldresult in our company incurring unanticipated expenses and losses.  In addition, we may not be able to identifyor finance additional acquisitions or realize any anticipated benefits fromacquisitions we do complete.  In theevent of future acquisitions, we could:

 

•              use a significant portion of ouravailable cash;

 

•              issue equity securities that woulddilute current stockholders’ percentage ownership;

 

•              incur substantial debt; or

 

•              assume contingent liabilities.

 

Should  we successfully acquireanother business, the process of integrating acquired operations into ourexisting operations may result in unforeseen operating difficulties and mayrequire significant financial resources that would otherwise be available forthe ongoing development or expansion of existing operations.  Some of the risks associated withacquisitions include:

 

•              difficulties in the assimilationof acquired operations, technologies or products;

 

•              unanticipated costs associatedwith the acquisition or joint venture;

 

•              adverse effects on existingbusiness relationships with customers; and

 

•              potential loss of key employees ofacquired organizations.

 

Our ability to successfully manage these risks would be limited by thesmall size of our management team.

 

**Our business issubject to risks associated with operations in foreign countries.**

 

In 2002, approximately 36% of our revenues were from sales to customerslocated outside of the U.S. We are vulnerable to risks associated with doingbusiness in foreign countries, including tariffs, quotas, taxes and othermarket barriers, political and economic instability, currency fluctuations anddifficulties in staffing and management of overseas operations. In addition, wehave supply agreements, assembly agreements, and other relationships withforeign companies that are subject to similar risks.

 

**Failure toattract and retain key technical and management personnel could harm ouroperating results.**

 

Our success depends upon the continued service of our executive officersand other key management and technical personnel, particularly our developmentengineers, and on our ability to continue to attract, retain and motivatequalified personnel, particularly experienced development engineers, systemsapplications engineers and sales managers. There is intense competition for theservices of development engineers in our industry. The loss of the services ofone or more of our development engineers, executive officers or other keypersonnel or our inability to recruit replacements for such personnel or tootherwise attract, retain and motivate qualified personnel

 

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couldharm our business. We do not currently carry life insurance payable to APT withrespect to any of our employees.

 

**Our products are complex and could contain defects,which could reduce sales of those products or result in claims against us.**

 

We develop complex and evolving products. Despite testing by us and ourcustomers, defects or other performance problems may be found in existing ornew products. This could result in delay in recognition or loss of revenues,loss of market share or failure to achieve market acceptance. These defects mayalso cause us to incur significant warranty, support and repair costs, divertthe attention of our engineering personnel from our product development effortsand harm our relationships with our customers. Any defects or other problemswith our products could result in financial or other damages to our customerswho could seek damages from us for their losses. Even an unsuccessful productliability claim would likely be time-consuming and costly to defend.

 

**Interruptions in wafer production may harm our operatingresults.**

 

Any prolonged inability to utilize our Bend, Oregon foundry or thirdparty foundries as a result of fire, natural disaster or otherwise would harmour financial condition and cause our operating results to suffer. If we arenot able to obtain additional foundry capacity as required, our relationshipswith our customers would be harmed and our sales would likely be reduced. Wemay not be able to make arrangements for additional foundry capacity in atimely fashion or at all, and such arrangements, if any, may not be on termsfavorable to us. Moreover, if we are able to secure additional foundrycapacity, we may be obligated to utilize all of that capacity or incurpenalties. These penalties may be expensive and could harm our operatingresults.

 

**We depend on the availability of raw materials tomanufacture our products, and a disruption in supply could harm our operatingresults.**

 

We rely on raw materials to manufacture our products, including silicon,various chemicals, gases and compounds. In particular, we obtain silicon wafersand some packages through limited sources of supply, and in the event of ashortage, we may be forced to locate alternative sources and be forced to payhigher prices. A severe shortage or an increase in the price of silicon wafersor some packages may harm our gross margins and our ability to deliver ourproducts on a timely basis, if at all.

 

**Our business may be adversely effected by acts ofterrorism.**

 

Acts of terrorism could interrupt or restrictour business in several ways.  We relyextensively on the use of air transportation to move our inventory to and fromour vendors and to ship finished products to our customers.  If terrorist acts cause air transportationto be grounded or interrupted, our business would be adversely effected.

 

In addition, acts of terrorism could causeexisting export regulations to be changed, which could limit the extent towhich we are allowed to export our products. To the extent that acts of terrorism also reduce customer confidence andcreate general economic weakness, our business would also be adverselyeffected.

 

**Our manufacturing operations involve hazardoussubstances, and the costs of complying with applicable environmental laws couldharm our financial results.**

 

Our manufacturing operations are subject to various federal, state,local and foreign environmental laws and regulations relating to themanagement, disposal and remediation of hazardous substances and the emissionand discharge of pollutants into the air, water and soil. In the conduct of ourmanufacturing operations, we have handled and do handle materials that areconsidered hazardous, toxic or volatile under federal, state and local laws.The risk of accidental release of such materials cannot be completelyeliminated, and if such an accidental release occurs, we could be heldfinancially responsible for clean-up costs and other consequences of therelease. In addition, if environmental laws become more stringent over time, orexisting laws are more stringently enforced, we could incur greater compliancecosts and be subject to increased risks and penalties for violations. We couldbe held liable for significant damages for violating environmental laws andcould lose certain licenses or permits, which could harm our financial results.

 

**An accident at our manufacturing facility could causeserious damage for which we could be responsible.**

 

Our manufacturing operations involve high voltage equipment, explosivegases and hazardous chemicals. An accident at our manufacturing facility couldresult in serious personal injury or property damage for which we could be heldfinancially responsible. Any financial obligation in excess of availableinsurance could harm our financial results.

 

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**Our charter contains provisions that may hinder orprevent a change in the control of our company.**

 

The authorization of undesignated preferred stock makes it possible forour board of directors to issue preferred stock with voting or other rights orpreferences that could impede the success of any attempt to change control ofAPT. These and other provisions in our charter may defer hostile takeovers ordelay changes in control or management, which could reduce our stock price.Also, there are provisions of Delaware law that may have similar effects.

 

**Six members of management, as a group, own asignificant interest in our common stock.**

 

Six members of our senior management own approximately 40% of ouroutstanding shares of common stock, after the issuance of 1.5 millionshares for the acquisition of GHz Technology Inc. As a result, thesemembers of management exercise significant control over all matters requiringstockholder approval. The concentrated holdings of management may result in adelay of, or serve as a deterrent to, possible changes in control of APT, whichmay reduce the market price of our common stock.

 

**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUTMARKET 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 8. FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA.**

 

The information required by this item is included in Note 11 ofNotes to Consolidated Financial Statements and as listed in Item 14 ofPart IV of this Report.

 

**ITEM 9. CHANGES IN AND DISAGREEMENTSWITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

 

None.

 

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**PART III**

 

**ITEM 10. DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT.**

 

The information required by this item is included in our Proxy Statementfor our 2003 annual meeting of shareholders.

 

**ITEM 11. EXECUTIVE COMPENSATION**.

 

The information required by this item is included in our Proxy Statementfor our 2003 annual meeting of shareholders.

 

**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.**

 

The information required by this item is included in our Proxy Statementfor our 2003 annual meeting of shareholders.

 

**ITEM 13. CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS.**

 

The information required by this item is included in our Proxy Statementfor our 2003 annual meeting of shareholders.

 

**ITEM 14. CONTROLS & PROCEDURES**

 

(a)Evaluation of disclosure controls and procedures.

 

Asrequired by new Rule 13a-15 under the Securities Exchange Act of 1934, withinthe 90 days prior to the date of this report, the Company carried out anevaluation under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures. 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 and procedures for financial reporting, and mayfrom time to time make changes aimed at enhancing their effectiveness and toensure that our systems evolve with our business.

 

Basedon our most recent evaluation of the effectiveness of the design and operationof the Company’s disclosure controls and procedures, the Company did notdiscover:

 

(a) any significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data nor any material weaknesses in internal controls; or

 

(b) any instances offraud, whether or not material, that involved management or other employees whohave a significant role in the registrant’s internal controls.

 

(b) Changes in internal controls

 

None.

 

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**PART IV**

 

**ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, ANDREPORTS ON FORM 8-K**

 

(a)                                  1.  Indexto Financial Statements

 
| Report of KPMG LLP                                                                                                                                 |
|----------------------------------------------------------------------------------------------------------------------------------------------------|
| Consolidated Balance Sheets  as of December 31, 2002 and 2001                                                                                      |
| Consolidated  Statements of Operations for the years ended December 31, 2002, 2001, and  2000                                                      |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the  years ended December 31, 2002,  2001, and 2000 |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2002, 2001, and  2000                                                      |
| Notes to  Consolidated Financial Statements                                                                                                        |

 

(a)                                  2. Financial Statement Schedules

 

Scheduleshave been omitted because the information required to be set forth therein isnot applicable or is included in the Consolidated Financial Statements or notesthereto.

 

(a)                                  3.  Indexto Exhibits

 

Thefollowing exhibits are filed with, or incorporated by reference into, thisAnnual Report on Form 10-K:

 
| **Exhibit****Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-----------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 2.1                   |   | Agreement  and Plan of Merger dates as of December 6, 2001, among Advanced Power  Technology, Inc., a Delaware corporation (“Parent”), GHz Acquisition, Inc., a  Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”),  and GHz Technology, Inc. a California corporation (the “Company”),  incorporated by reference to Exhibits to the 8K filed January 25, 2002.                                                                                        |
| 2.2                   |   | Amendment  to Agreement and Plan of Merger dated as of January 10, 2002 among Advanced  Power Technology, Inc. a Delaware corporation, (“Parent”), GHz Acquisition,  Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger  Sub”), and GHz Technology, Inc. a California corporation (the “Company”),  incorporated by reference to Exhibits to the 8K filed January 25, 2002                                                                             |
| 2.3                   |   | Asset  Purchase Agreement as of May 7, 2002 by and between Microsemi RF Products,  Inc., a Delaware corporation (the “Seller”, a wholly owned subsidiary of  Microsemi Corporation, a Delaware corporation (“Microsemi”) and RF  Acquisition Sub, Inc. (the “Purchaser”), a Delaware corporation and a wholly  owned subsidiary of Advanced Power Technology, Inc. a Delaware corporation  (“APT”), incorporated by reference to Exhibits to the 8K filed May 31, 2002. |
| 3.1                   |   | Amended  and Restated Certificate and Articles of Incorporation, incorporated by  reference to Exhibits to the Company’s Registration Statement on Form S-1, as  amended, effective August 8, 2000, Registration No. 333-38418, (“the S-1”)                                                                                                                                                                                                                                                      |
| 3.2                   |   | Amended  and Restated Bylaws, incorporated by reference to Exhibits to the S-1                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.1                   |   | Form  of Common Stock Certificate, incorporated by reference to Exhibits to the S-1                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.3                   |   | Registration  Rights Agreement by and among Advanced Power Technology, Inc., a  Delaware corporation, and the investors listed on Exhibit A, thereto,  incorporated by reference to Exhibits to the 8K filed January 25, 2002                                                                                                                                                                                                                                                                         |
| 4.4                   |   | Escrow  Agreement by and among Advanced Power Technology, Inc., a Delaware  corporation (“APT”), GHz Technology, Inc., a Delaware corporation (“GHz”),  Frank Schneider, solely in his capacity as Shareholder Representative  (“Shareholder Representative”), and Silicon Valley Bank (the “Escrow Agent”),  incorporated by reference to Exhibits to the 8K filed January 25, 2002                                                                               |
| 4.5                   |   | Form  of Common Stock Purchase Warrant between Advanced Power Technology, Inc. and  Mark Gates, incorporated by reference to Exhibits to the 8K filed  January 25, 2002                                                                                                                                                                                                                                                                                                                                    |
| 5.1                   |   | Opinion  of Davis Wright Tremaine as to the legality of securities being registered  through this Registration Statement, incorporated by reference to the  Exhibits of the S-1 filed August 8, 2000.                                                                                                                                                                                                                                                                                                           |

 

25

----

 
| 5.2         |   | Opinion  of Davis Wright Tremaine as to the legality of securities being registered  through this Registration Statement, incorporated by reference to the  Exhibits of the S-8A filed January 25, 2002.                              |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1*       |   | Stock  Option Plan dated December 31, 1995, as amended, incorporated by  reference to Exhibits to the S-1                                                                                                                             |
| 10.2*       |   | Employment  Agreement: Patrick P.H. Sireta, incorporated by reference to Exhibits to the  S-1                                                                                                                                              |
| 10.3*       |   | Employment  Agreement: Russell J. Crecraft, incorporated by reference to Exhibits to the  S-1                                                                                                                                              |
| 10.4*       |   | Employment  Agreement: Greg M. Haugen, incorporated by reference to Exhibits to the S-1                                                                                                                                                    |
| 10.5*       |   | Employment  Agreement: John I. Hess, incorporated by reference to Exhibits to the S-1                                                                                                                                                      |
| 10.6*       |   | Employment  Agreement: Thomas A. Loder, incorporated by reference to Exhibits to the S-1                                                                                                                                                   |
| 10.7*       |   | Employment  Agreement: Dah Wen Tsang, incorporated by reference to Exhibits to the S-1                                                                                                                                                     |
| 10.8        |   | Lease  Agreement between Shevlin No. One and Advanced Power Technology, Inc.  dated as of March 6, 1996, as amended, incorporated by reference to  Exhibits to the S-1                                                           |
| 10.9        |   | Commercial  Lease between Glassow Ventures, L.L.C. and Advanced Power Technology, Inc.  dated March 6, 1996, incorporated by reference to Exhibits to the S-1                                                                              |
| 10.10† |   | North  America Distributor Agreement between Richardson Electronics, Ltd. and  Advanced Power Technology, Inc. dated as of April 1, 1997, incorporated by  reference to Exhibits to the S-1                                                |
| 10.11† |   | Manufacturing  Agreement by and between Siemens AG and Advanced Power Technology, Inc. dated  October 14, 1997, incorporated by reference to Exhibits to the S-1                                                                      |
| 10.12† |   | Agreement  for Wafer Production and Testing by and between Advanced Power Technology,  Inc. and Siemens Aktiengesellschaft dated February 11, 1998, as amended,  incorporated by reference to Exhibits to the S-1                          |
| 10.13† |   | Document  of Understanding between Advanced Energy Industries, Inc. and Advanced Power  Technology, Inc. dated August 14, 1998, as amended, incorporated by  reference to Exhibits to the S-1                                         |
| 10.14† |   | Supply  Contract between Wacker Siltronic Corporation and Advanced Power Technology,  Inc. dated December 17, 1998, incorporated by reference to Exhibits to  the S-1                                                                 |
| 10.15† |   | Master  Agreement by and between Liaoning Heahai Power Electronics Co. Ltd., Advanced  Power Technology, Inc. and Advanced Power Technology Europe SA dated as of  October 15, 1999, incorporated by reference to Exhibits to the S-1 |
| 10.16† |   | Subcontract  Agreement between Team Pacific Corporation and Advanced Power Technology,  Inc. dated January 26, 2000, incorporated by reference to Exhibits to  the S-1                                                                |
| 10.17       |   | Leases:  Bordeaux, France, incorporated by reference to Exhibits to the S-1                                                                                                                                                                |
| 10.19       |   | Agreement  for Wafer Production and Testing between APT and Episil Technologies, Inc.,  incorporated by reference to Exhibits to the 10Q for the third quarter of  2001.                                                                   |
| 21.1        |   | Subsidiaries  of Advanced Power Technology, Inc., incorporated by reference to Exhibits to  the S-1                                                                                                                                        |
| 23.1        |   | Consent  of KPMG LLP                                                                                                                                                                                                                       |
| 99.1        |   | Certification  pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                   |

 

----

†                                          Confidential treatment has been requested withrespect to certain portions of these agreements. The omitted portions have beenfiled separately with the Securities and Exchange Commission.

 

*                                         This Exhibit constitutes a management contract orcompensatory plan or arrangement.

 

(b)                                 Reports on Form 8-K

 

Noreports on Form 8-K were filed during the quarter ended December 31,2002.

 

26

----

 

**SIGNATURES**

 

Pursuantto the requirements of Sections 13 or 15(d) of the Securities Exchange Act of1934, as amended, the Registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized on March 24,2003.

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

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below on March 24, 2003 by the following persons on behalf ofthe Registrant and in the capacities indicated.

 
| **Signature**           |   | **Title**                                                                          |
|-------------------------|--------|------------------------------------------------------------------------------------|
|                    |   |                                                                               |
| /s/ PATRICK P.H. SIRETA |   | Chairman,  President and Chief Executive Officer (Principal Executive Officer)     |
| Patrick P.H. Sireta     |   |                                                                               |
|                    |   |                                                                               |
| /s/ GREG M. HAUGEN      |   | Vice  President, Finance and Administration, Chief Financial Officer and Secretary |
| Greg M. Haugen          |   | (Principal  Financial and Accounting Officer)                                      |
|                    |   |                                                                               |
| /s/ ROBERT C. PEARSON   |   | Director                                                                           |
| Robert C. Pearson       |   |                                                                               |
|                    |   |                                                                               |
| /s/ JAMES E. PETERSEN   |   | Director                                                                           |
| James E. Petersen       |   |                                                                               |
|                    |   |                                                                               |
| /s/ DOUGLAS S. SCHATZ   |   | Director                                                                           |
| Douglas S. Schatz       |   |                                                                               |
|                    |   |                                                                               |
| /s/ ALFRED J. STEIN     |   | Director                                                                           |
| Alfred J. Stein         |   |                                                                               |

 

27

----

 

**CERTIFICATION****PURSUANT TO**

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

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

 

I, Patrick Sireta,certify that:

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

 

 
|   | By: /s/ PATRICK P.H. SIRETA           |   |
|--------|---------------------------------------|--------|
|   | President and Chief Executive Officer |
|   | March 24, 2003                        |

 

28

----

 

**CERTIFICATION PURSUANT TO**

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

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

 

I, Greg Haugen,certify that:

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

 

 
|   | By: /s/ GREG M. HAUGEN                      |   |
|--------|---------------------------------------------|--------|
|   | Vice President, Finance and Administration, |
|   | Chief Financial Officer and Secretary       |
|   | (Principal Financial Officer)               |
|   | March 24, 2003                              |

 

29

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

 

TheBoard of Directors and Shareholders

AdvancedPower Technology, Inc.:

 

We have audited the accompanying consolidatedbalance sheets of Advanced Power Technology, Inc. and subsidiaries as ofDecember 31, 2002 and 2001, and the related consolidated statements ofoperations, stockholders’ equity and comprehensive income (loss), and cashflows for each of the years in the three-year period ended December 31,2002. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Advanced Power Technology, Inc. and subsidiaries asof December 31, 2002 and 2001 and the results of their operations and theircash flows for each of the years in the three-year period endedDecember 31, 2002 in conformity with accounting principles generallyaccepted in the United States of America.

 

 
|                   | **KPMG LLP** |
|------------------------|--------------|
|                   |
| Portland,  Oregon      |
| January 31,  2003 |

 

F-1

----

 

**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATEDBALANCE SHEETS**

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

 
|                                                                                                                                                                                  |   | **December 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|
|                                                                                                                                                                                  |   | **2002**         |   | **2001** |   |
|                                                                                                                                                                                  |   |             |   |   |   |
| **Assets**                                                                                                                                                                            |   |             |   |   |   |
| Current assets:                                                                                                                                                                       |   |             |   |   |   |
| Cash and cash equivalents                                                                                                                                                             |   | $                | 6,708  |   | $ | 16,102 |   |
| Short-term investments in available-for-sale securities                                                                                                                               |   | 10,452           |   | 17,093 |   |
| Accounts receivable, net                                                                                                                                                              |   | 6,899            |   | 3,493 |   |
| Inventories, net                                                                                                                                                                      |   | 11,949           |   | 9,307 |   |
| Prepaid expenses and other current assets                                                                                                                                             |   | 2,521            |   | 3,422 |   |
| Total current assets                                                                                                                                                                  |   | 38,529           |   | 49,417 |   |
| Property and equipment, net                                                                                                                                                           |   | 10,617           |   | 5,546 |   |
| Long-term investments in available-for-sale securities                                                                                                                                |   | 2,000            |   | 2,473 |   |
| Other assets                                                                                                                                                                          |   | 109              |   | 639 |   |
| Intangible assets, net                                                                                                                                                                |   | 9,887            |   | — |   |
| Goodwill                                                                                                                                                                              |   | 15,806           |   | — |   |
| Total assets                                                                                                                                                                          |   | $                | 76,948 |   | $ | 58,075 |   |
|                                                                                                                                                                                  |   |             |   |   |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                         |   |             |   |   |   |
| Current liabilities:                                                                                                                                                                  |   |             |   |   |   |
| Accounts payable                                                                                                                                                                      |   | $                | 2,873  |   | $ | 2,805 |   |
| Accrued expenses                                                                                                                                                                      |   | 2,475            |   | 1,104 |   |
| Total current liabilities                                                                                                                                                             |   | 5,348            |   | 3,909 |   |
| Other  long term liabilities                                                                                                                                                          |   | 428              |   | 218 |   |
| Total liabilities                                                                                                                                                                     |   | 5,776            |   | 4,127 |   |
| Commitments and Contingencies                                                                                                                                                         |   | —           |   | — |   |
| 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; 10,503,219 shares issued and  10,394,362 outstanding in 2002, 8,836,637 shares issued and 8,727,780  outstanding in 2001 |   | 105              |   | 88 |   |
| Additional paid-in capital                                                                                                                                                            |   | 88,490           |   | 67,640 |   |
| Treasury stock, at cost, 108,857 shares                                                                                                                                               |   | (1,700           | )      | (1,700 | ) |
| Deferred stock compensation                                                                                                                                                           |   | (171             | )      | (166 | ) |
| Accumulated other comprehensive income                                                                                                                                                |   | 166              |   | 117 |   |
| Accumulated deficit                                                                                                                                                                   |   | (15,718          | )      | (12,031 | ) |
| Total stockholders’ equity                                                                                                                                                       |   | 71,172           |   | 53,948 |   |
| Total liabilities and stockholders’ equity                                                                                                                                       |   | $                | 76,948 |   | $ | 58,075 |   |

 

See accompanying notes toconsolidated financial statements.

 

F-2

----

 

**ADVANCED POWERTECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
|                                                                                       |   | **Years Ended December 31,** |   |
|--------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                       |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                                                                       |   |                         |   |   |   |   |   |
| Revenues, net                                                                              |   | $                            | 43,425 |   | $ | 36,855 |   | $ | 44,168 |   |
| Cost of goods sold                                                                         |   | 29,214                       |   | 25,023 |   | 26,713 |   |
| Amortization of technology rights and other charges                                        |   | 1,974                        |   | — |   | — |   |
| Total cost of goods sold                                                                   |   | 31,188                       |   | 25,023 |   | 26,713 |   |
| Gross profit                                                                               |   | 12,237                       |   | 11,832 |   | 17,455 |   |
| Operating expenses:                                                                        |   |                         |   |   |   |   |   |
| Research and development                                                                   |   | 3,858                        |   | 1,810 |   | 1,097 |   |
| Selling, general and administrative                                                        |   | 12,313                       |   | 9,268 |   | 9,956 |   |
| In-process research and development charges                                                |   | 2,108                        |   | — |   | — |   |
| Total operating expenses                                                                   |   | 18,279                       |   | 11,078 |   | 11,053 |   |
| Income (loss) from operations                                                              |   | (6,042                       | )      | 754 |   | 6,402 |   |
| Other income (expense):                                                                    |   |                         |   |   |   |   |   |
| Interest income                                                                            |   | 630                          |   | 1,650 |   | 938 |   |
| Interest expense                                                                           |   | (60                          | )      | (55 | ) | (1,230 | ) |
| Other, net                                                                                 |   | 14                           |   | 14 |   | (105 | ) |
| Total other income (expense)                                                               |   | 584                          |   | 1,609 |   | (397 | ) |
| Income (loss) before income taxes                                                          |   | (5,458                       | )      | 2,363 |   | 6,005 |   |
| Income tax (benefit) expense                                                               |   | (1,771                       | )      | 567 |   | 2,246 |   |
| Net income (loss)                                                                          |   | $                            | (3,687 | ) | $ | 1,796 |   | $ | 3,759 |   |
| Net income (loss) per share:                                                               |   |                         |   |   |   |   |   |
| Basic                                                                                      |   | $                            | (0.36  | ) | $ | 0.21 |   | $ | 0.59 |   |
| Diluted                                                                                    |   | (0.36                        | )      | 0.19 |   | 0.50 |   |
| Weighted average number of shares used in the  computation of net income (loss) per share: |   |                         |   |   |   |   |   |
| Basic                                                                                      |   | 10,248                       |   | 8,737 |   | 6,319 |   |
| Diluted                                                                                    |   | 10,248                       |   | 9,368 |   | 7,551 |   |

 

See accompanying notes toconsolidated financial statements.

 

F-3

----

 

**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS****’ EQUITY AND COMPREHENSIVE INCOME (LOSS)**

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

 
|                                            |   | **Common Stock** |       | **Treasury Stock** |       | **Additional********Paid-In Capital** |     | **Deferred Stock  Compensation** |   | **Accumulated Other  Comprehensive Income** |   | **Comprehensive  Income (Loss)** |   | **Accumulated  Deficit** |   | **Total** |   |
|-------------------------------------------------|--------|------------------|------------|--------------------|------------|---------------------------------------|----------|----------------------------------|--------|---------------------------------------------|--------|----------------------------------|--------|--------------------------|--------|-----------|--------|
| **Shares**                                      |   | **Amount**       | **Shares** |               | **Amount** |
|                                            |   |             |       |               |       |                                  |     |                             |   |                                        |   |                             |   |                     |   |      |   |   |   |   |   |
| Balance, December 31, 1999                      |   | 5,000,020        |       | $                  | 50         |                                  | —   |                             | — |                                        | $      | 15,048                           |   | $                        | (31    | )         | $      | 44 |   |   |   | $ | (17,586 | ) | $ | (2,475 | ) |
| Exercise of stock options                       |   | 16,155           |       | —             |       | 571                                   |     | (17                              | )      | 22                                          |   | —                           |   | —                   |   |      |   | — |   | 5 |   |
| Issuance of warrants                            |   | —           |       | —             |       | —                                |     | —                           |   | 460                                         |   | —                           |   | —                   |   |      |   | — |   | 460 |   |
| Exercise of warrants                            |   | 669,643          |       | 7                  |       | 108,286                               |     | (1,683                           | )      | 1,676                                       |   | —                           |   | —                   |   |      |   | — |   | — |   |
| Tax benefit from exercise of  warrants          |   | —           |       | —             |       | —                                |     | —                           |   | 3,117                                       |   | —                           |   | —                   |   |      |   | — |   | 3,117 |   |
| Deferred stock compensation                     |   | —           |       | —             |       | —                                |     | —                           |   | 576                                         |   | (576                             | )      | —                   |   |      |   | — |   | — |   |
| Amortization of deferred stock  compensation    |   | —           |       | —             |       | —                                |     | —                           |   | —                                      |   | 277                              |   | —                   |   |      |   |   |   | 277 |   |
| Issuance of common stock, net                   |   | 2,830,000        |       | 28                 |       | —                                |     | —                           |   | 38,256                                      |   | —                           |   | —                   |   |      |   | — |   | 38,284 |   |
| Payment of notes related to  purchase of APT    |   | —           |       | —             |       | —                                |     | —                           |   | 7,671                                       |   | —                           |   | —                   |   |      |   | — |   | 7,671 |   |
| Net income                                      |   | —           |       | —             |       | —                                |     | —                           |   | —                                      |   | —                           |   | —                   |   | $         | 3,759  |   | 3,759 |   | 3,759 |   |
| Unrealized gain on investments                  |   | —           |       | —             |       | —                                |     | —                           |   | —                                      |   | —                           |   | 10                       |   | 10        |   | — |   | 10 |   |
| Foreign currency translation                    |   | —           |       | —             |       | —                                |     | —                           |   | —                                      |   | —                           |   | 10                       |   | 10        |   | — |   | 10 |   |
| Comprehensive income                            |   |             |       |               |       |                                  |     |                             |   |                                        |   |                             |   |                     |   | $         | 3,779  |   |   |   |   |   |
| Balance, December 31, 2000                      |   | 8,515,818        |       | 85                 |       | (108,857                              | )        | (1,700                           | )      | 66,826                                      |   | (330                             | )      | 64                       |   |      |   | (13,827 | )  | 51,118 |   |
| Exercise of stock options                       |   | 320,819          |       | 3                  |       | —                                |     | —                           |   | 471                                         |   | —                           |   | —                   |   |      |   | — |   | 474 |   |
| Tax benefit from exercise of  options           |   | —           |       | —             |       | —                                |     | —                           |   | 304                                         |   | —                           |   | —                   |   |      |   | — |   | 304 |   |
| Stock compensation                              |   | —           |       | —             |       | —                                |     | —                           |   | 39                                          |   | —                           |   | —                   |   |      |   | — |   | 39 |   |
| Amortization of deferred stock  compensation    |   | —           |       | —             |       | —                                |     | —                           |   | —                                      |   | 164                              |   | —                   |   |      |   | — |   | 164 |   |
| Net income                                      |   | —           |       | —             |       | —                                |     | —                           |   | —                                      |   | —                           |   | —                   |   | $         | 1,796  |   | 1,796 |   | 1,796 |   |
| Unrealized gain on investments                  |   | —           |       | —             |       | —                                |     | —                           |   | —                                      |   | —                           |   | 61                       |   | 61        |   | — |   | 61 |   |
| Foreign currency translation                    |   | —           |       | —             |       | —                                |     | —                           |   | —                                      |   | —                           |   | (8                       | )      | (8        | )      | — |   | (8 | ) |
| Comprehensive income                            |   |             |       |               |       |                                  |     |                             |   |                                        |   |                             |   |                     |   | $         | 1,849  |   |   |   |   |   |
| Balance, December 31, 2001                      |   | 8,836,637        |       | 88                 |       | (108,857                              | )        | (1,700                           | )      | 67,640                                      |   | (166                             | )      | 117                      |   |      |   | (12,031 | ) | 53,948 |   |
| Issuance of shares for  acquisition             |   | 1,522,976        |       | 15                 |       | —                                |     | —                           |   | 16,205                                      |   | —                           |   | —                   |   |      |   | — |   | 16,220 |   |
| Issuance of stock options for  acquisition      |   | —           |       | —             |       | —                                |     | —                           |   | 4,093                                       |   | —                           |   | —                   |   |      |   | — |   | 4,093 |   |
| Deferred stock compensation  due to acquisition |   | —           |       | —             |       | —                                |     | —                           |   | —                                      |   | (497                             | )      | —                   |   |      |   | — |   | (497 | ) |
| Exercise of stock options                       |   | 143,606          |       | 2                  |       | —                                |     | —                           |   | 365                                         |   | —                           |   | —                   |   |      |   | — |   | 367 |   |
| Tax benefit from exercise of  options           |   | —           |       | —             |       | —                                |     | —                           |   | 180                                         |   | —                           |   | —                   |   |      |   | — |   | 180 |   |
| Amortization of deferred  compensation          |   | —           |       | —             |       | —                                |     | —                           |   | —                                      |   | 485                              |   | —                   |   |      |   | — |   | 485 |   |
| Stock compensation                              |   | —           |       | —             |       | —                                |     | —                           |   | 14                                          |   | —                           |   | —                   |   |      |   | — |   | 14 |   |
| Forfeiture of stock options                     |   | —           |       | —             |       | —                                |     | —                           |   | (7                                          | )      | 7                                |   | —                   |   |      |   | — |   | — |   |
| Net loss                                        |   | —           |       | —             |       | —                                |     | —                           |   | —                                      |   | —                           |   | —                   |   | $         | (3,687 | ) | $ | (3,687 | ) | (3,687 | ) |
| Unrealized loss on investments                  |   | —           |       | —             |       | —                                |     | —                           |   | —                                      |   | —                           |   | (68                      | )      | (68       | )      | — |   | (68 | ) |
| Foreign currency translation                    |   | —           |       | —             |       | —                                |     | —                           |   | —                                      |   | —                           |   | 117                      |   | 117       |   | — |   | 117 |   |
| Comprehensive loss                              |   |             |       |               |       |                                  |     |                             |   |                                        |   |                             |   |                     |   | $         | (3,638 | )  |   |   |   |   |
| Balance, December 31, 2002                      |   | 10,503,219       |       | $                  | 105        |                                  | (108,857 | )                                | $      | (1,700                                      | )      | $                                | 88,490 |                     | $      | (171      | )      | $ | 166 |   |   |   | $ | (15,718 | )  | $ | 71,172 |   |
|                                                 |        |                  |            |                    |            |                                       |          |                                  |        |                                             |        |                                  |        |                          |        |           |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes toconsolidated financial statements.

 

F-4

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**ADVANCED POWERTECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

 
|                                                                                      |   | **Years Ended December 31,** |   |
|-------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                      |   | **2002**                     |   | **2001** |   | **2000** |   |
| Cash flows from operating activities:                                                     |   |                         |   |   |   |   |   |
| Net income (loss)                                                                         |   | $                            | (3,687 | ) | $ | 1,796 |   | $ | 3,759 |   |
| Adjustments to reconcile net income (loss) to net cash  provided by operating activities: |   |                         |   |   |   |   |   |
| Depreciation and amortization                                                             |   | 3,498                        |   | 1,156 |   | 1,226 |   |
| Inventory provision                                                                       |   | 893                          |   | 582 |   | 207 |   |
| In-process research and development charges                                               |   | 2,108                        |   | — |   | — |   |
| Net gain on disposal of property and equipment                                            |   | —                       |   | — |   | 13 |   |
| Tax benefit from exercise of warrants and options                                         |   | 180                          |   | 304 |   | 3,117 |   |
| Deferred taxes                                                                            |   | (1,716                       | )      | 298 |   | (527 | ) |
| Deferred gain on sale-leaseback                                                           |   | (18                          | )      | (17 | ) | — |   |
| Non-cash interest expense                                                                 |   | —                       |   | — |   | 659 |   |
| Amortization of deferred stock compensation                                               |   | 498                          |   | 203 |   | 277 |   |
| Amortization of investment discount                                                       |   | 154                          |   | 62 |   | — |   |
| Changes in operating assets and liabilities, net of  effects of acquisitions:             |   |                         |   |   |   |   |   |
| Accounts receivable                                                                       |   | (835                         | )      | 3,214 |   | (2,352 | ) |
| Inventories                                                                               |   | 1,626                        |   | (3,129 | ) | (1,891 | ) |
| Prepaid expenses and other assets                                                         |   | 2,718                        |   | (1,660 | ) | (852 | ) |
| Accounts payable and accrued expenses                                                     |   | (345                         | )      | (1,742 | ) | 1,350 |   |
| Net cash provided by operating activities                                                 |   | 5,074                        |   | 1,067 |   | 4,986 |   |
| Cash flows from investing activities:                                                     |   |                         |   |   |   |   |   |
| Purchases of available-for-sale securities                                                |   | (10,333                      | )      | (21,918 | ) | (11,140 | ) |
| Proceeds from available-for-sale securities                                               |   | 24,838                       |   | 13,529 |   | — |   |
| Acquisitions, net of cash acquired                                                        |   | (26,632                      | )      | — |   | — |   |
| Purchase of property and equipment                                                        |   | (2,649                       | )      | (2,335 | ) | (2,957 | ) |
| Proceeds from sale of property and equipment                                              |   | 72                           |   | — |   | — |   |
| Net cash used in investing activities                                                     |   | (14,704                      | )      | (10,724 | ) | (14,097 | ) |
| Cash flows from financing activities:                                                     |   |                         |   |   |   |   |   |
| Payments on lines of credit, net                                                          |   | —                       |   | — |   | (4,851 | ) |
| Payments on capital lease obligations                                                     |   | (78                          | )      | (79 | ) | (176 | ) |
| Proceeds from issuance of long-term debt                                                  |   | —                       |   | — |   | 775 |   |
| Principal payments on long-term debt                                                      |   | —                       |   | (20 | ) | (3,486 | ) |
| Sale of common stock, net of issuance costs                                               |   | —                       |   | — |   | 38,284 |   |
| Payment of note receivable from officers                                                  |   | —                       |   | — |   | 3,580 |   |
| Exercise of stock options                                                                 |   | 367                          |   | 474 |   | 5 |   |
| Net cash provided by financing activities                                                 |   | 289                          |   | 375 |   | 34,131 |   |
| Effects of exchange rate changes on cash                                                  |   | (53                          | )      | 58 |   | (10 | ) |
| Net change in cash and cash equivalents                                                   |   | (9,394                       | )      | (9,224 | ) | 25,010 |   |
| Cash and cash equivalents at beginning of year                                            |   | 16,102                       |   | 25,326 |   | 316 |   |
| Cash and cash equivalents at end of year                                                  |   | $                            | 6,708  |   | $ | 16,102 |   | $ | 25,326 |   |
|                                                                                      |   |                         |   |   |   |   |   |
| Supplemental disclosure of cash flow information:                                         |   |                         |   |   |   |   |   |
| Cash (paid) received during the year for: Interest                                        |   | $                            | (28    | ) | $ | (55 | ) | $ | (591 | ) |
| Income taxes                                                                              |   | 2,098                        |   | (1,223 | ) | (402 | ) |
| Supplemental disclosure of non-cash activities:                                           |   |                         |   |   |   |   |   |
| Issuance of stock and options for acquisitions                                            |   | 20,313                       |   | — |   | — |   |
| Issuance of warrants in connection with refinancing                                       |   | —                       |   | — |   | 460 |   |
| Payment of note payable to Hamilton Sundstrand                                            |   | —                       |   | — |   | 4,091 |   |
| Unrealized gain (loss) on short-term and long-term  investments                           |   | (68                          | )      | 61 |   | 28 |   |

 

See accompanying notes toconsolidated financial statements.

 

F-5

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**ADVANCED POWER TECHNOLOGY, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

 

**(1)           Summary ofSignificant Accounting Policies**

 

***(a)Company Background***

 

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

 

To further our penetration in RF markets, wecompleted the acquisition of GHz Technology, Inc. and the business ofMicrosemi RF Products, Inc. in January 2002 and May 2002 respectively.  These acquisitions are part of the Company’songoing strategy to expand its product and technology portfolio in the RF powerarena through both internal development and acquisitions.  We believe that these acquisitions serve toposition APT as an emerging, dominant supplier in bipolar RF power transistorsfor avionics, radar and non-cellular communications applications.  These acquisitions have added valuable RFtechnology and substantial RF engineering, manufacturing and marketingcapability to the Company.

 

In August 2000, we completed an initialpublic offering, or IPO, of 4,025,000 shares of our common stock, including theunderwriters’ over-allotment, at an offering price of $15.00 per share. The IPOincluded 2,830,000 shares sold by APT and 1,195,000 shares sold by shareholdersof APT, and resulted in net proceeds to APT of approximately$38.3 million. The net remaining proceeds are currently held in variousinvestments and will be used for general corporate purposes, including researchand development and possible acquisitions. Our common stock is listed on theNasdaq National Market under the symbol APTI.

 

***(b)Principles of Consolidation***

 

The accompanying consolidated financial statementsinclude the accounts of APT and its wholly-owned subsidiaries, AdvancedPower Technology Europe, SA, Advanced Power Technology RF, Inc. and AdvancedPower Technology RF Pennsylvania, Inc. All intercompany balances have been eliminated in the consolidation offinancial statements.

 

***(c)Revenue Recognition, Sales Returns and Allowances***

 

APT complies with the revenue recognition guidancesummarized in Staff Accounting Bulletin No. 101, “Revenue Recognition inFinancial Statements.” Standard product revenue is recognized upon shipment ofproduct. APT recognizes revenue on customer-specific products or servicesbased on the terms of customer contracts which are generally based on customeracceptance. In general, APT provides for a one-year repair or replacementwarranty on its products. Upon shipment, APT also provides for the estimatedcost that may be incurred for product warranty and sales returns based onhistorical experience. APT uses independent distributors to sell its products.Distributors can return up to 5% of the dollar value of products purchasedduring the prior six months upon a 30 days notice. Sales to distributorsare recognized upon shipment, less an allowance for estimated returns based onhistorical experience. Revenue from certain contractual product sales orlicense arrangements is deferred and recognized when earned in accordance withthe arrangement. The reserve for warranties and sales returns was $351 and $365as of December 31, 2002 and 2001, respectively. The changes in the reservefor warranties and sales returns for the year ended December 31, 2002 are asfollows:

 
| Balance—beginning of year                     |   | $      | 365    |   |
|----------------------------------------------------|--------|--------|--------|--------|
| Fair value of acquisition related balance (Note 3) |   | 133    |   |
| Provision                                          |   | 1,295  |   |
| Charge offs                                        |   | (1,442 | )      |
| Balance—end of year                           |   | $      | 351    |   |

 

F-6

----

 

***(d)Cash Equivalents and Investments***

 

APT classifies highly liquid investments purchasedwith an original maturity of three months or less as cash equivalents.Short-term investments consist of U.S. government debt securities and otherhighly liquid investments with original maturities in excess of three months,but less than one year. Long-term investments consist of highly liquid debt securitieswith maturities greater than one year. Investments are classified asavailable-for-sale in accordance with Statement of Financial AccountingStandards (SFAS) 115, “Accounting for Certain Investments in Debt and EquitySecurities.” Investments are carried at fair market value with unrealized gainsand losses reported in stockholders’ equity as a component of othercomprehensive income. The following is a summary of cash, cash equivalents andinvestments.

 
|                            |   | **December 31,** |   |
|---------------------------------|--------|------------------|--------|
|                            |   | **2002**         |   | **2001** |   |
|                            |   |             |   |   |   |
| Cash and cash equivalents:      |   |             |   |   |   |
| Municipal bonds and notes       |   | $                | 1,950  |   | $ | 11,150 |   |
| Money market fund               |   | 1,653            |   | 4,634 |   |
| Total cash equivalents          |   | 3,603            |   | 15,784 |   |
| Cash                            |   | 3,105            |   | 318 |   |
| Total cash and cash equivalents |   | $                | 6,708  |   | $ | 16,102 |   |
|                            |   |             |   |   |   |
| Short-term investments:         |   |             |   |   |   |
| Municipal bonds and notes       |   | $                | 9,952  |   | $ | 12,525 |   |
| Certificates of deposit         |   | 500              |   | — |   |
| Corporate debt securities       |   | —           |   | 4,568 |   |
| Total short-term investments    |   | $                | 10,452 |   | $ | 17,093 |   |
|                            |   |             |   |   |   |
| Long-term investments:          |   |             |   |   |   |
| Commercial paper                |   | $                | 1,000  |   | — |   |
| Municipal bonds and notes       |   | 1,000            |   | $ | 1,060 |   |
| U.S. government debt securities |   | —           |   | 1,413 |   |
| Total long-term investments     |   | $                | 2,000  |   | $ | 2,473 |   |

 

***(e)Trade Accounts Receivable and Allowance for Doubtful Accounts***

 

Trade accounts receivable are recorded at theinvoiced amount and do not bear interest. The allowance for doubtful accountsis APT’s best estimate of the amount of probable credit losses in the existingaccounts receivable. APT determines the allowance based on historical write-offexperience, evaluation of the customer credit condition and general economicdata. The allowance for doubtful accounts is reviewed monthly. Past duebalances over 60 days and other specified accounts as necessary are reviewedindividually. Account balances are charged off against the allowance after allmeans of collection have been exhausted and the potential for recovery isconsidered remote.  APT does not haveany off-balance sheet credit exposure with its customers.

 

Accounts receivable are shown net of allowance fordoubtful accounts of $70, $59, and $120 at December 31, 2002, 2001, and2000, respectively. The following table presents a roll forward of theallowance for doubtful accounts for the indicated periods:

 
|                           |   | **December 31,** |   |
|--------------------------------|--------|------------------|--------|
|                           |   | **2002**         |   | **2001** |   | **2000** |   |
|                           |   |             |   |   |   |   |   |
| Balance—beginning of year |   | $                | 59     |   | $ | 120 |   | $ | 62 |   |
| Provision (reduction)          |   | 14               |   | (34 | ) | 58 |   |
| Charge offs                    |   | (3               | )      | (27 | ) | — |   |
| Balance—end of year       |   | $                | 70     |   | $ | 59 |   | $ | 120 |   |

 

F-7

----

 

***(f)Inventories***

 

Inventories are stated at the lower of standardcost (approximates actual cost on a first-in, first-out basis) or market (netrealizable value). The cost of certain inventories has been reduced by $1,690and $941 as of December 31, 2002 and 2001, respectively.

 

***(g)Property, Equipment, and Long-Lived Assets***

 

Property and equipment are recorded at cost.Machinery and equipment under capital lease are stated at the lower of thepresent value of the minimum lease payments at the beginning of the lease termor the fair value of the leased assets at the inception of the lease.

 

Depreciation is provided using the straight-linemethod over estimated useful lives, five years for machinery, furniture andequipment. Leased assets and leasehold improvements are amortized over the shorterof the estimated life of the asset or the term of the related lease, rangingfrom three to ten years. Depreciation begins on assets in process at the timethe related assets are placed in service. Maintenance and repairs are expensedas incurred.

 

As required by SFAS 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” management reviews long-livedassets and intangible assets for impairment whenever events or changes incircumstances indicate the carrying amount of the assets may not berecoverable. Recoverability of these assets is determined by comparing theforecasted undiscounted net cash flows of the operation to which the assetsrelate, to the carrying amount including associated intangible assets of theoperation. If the operation is determined to be unable to recover the carryingamount of its assets, then intangible assets are written down first, followedby the other long-lived assets of the operation, to fair value. Fair value isdetermined based on discounted cash flows or appraised values, depending on thenature of the assets.

 

***(h)Goodwill and Intangible Assets***

 

APT values goodwill and intangible assets inaccordance with SFAS 142, “Goodwill and Other Intangible Assets.” The costs ofinternally developed intangible assets are expensed as incurred.  The costs of acquired intangible assets arerecorded at fair value at acquisition. Intangible assets with finite lives areamortized using the straight-line method over their estimated useful lives,estimated at ten years, and evaluated for impairment in accordance with SFAS144. Goodwill and intangible assets with indefinite lives are carried at fairvalue and reviewed at least annually for impairment, in accordance with SFAS142, using a discounted cash flow methodology.

 

During 2002, goodwill was recognized in connectionwith two business acquisitions as described in Note 3.  Pursuant to SFAS 142, goodwill is no longeramortized. Amortization of goodwill from acquisitions prior to 2002 was $262for the year ended December 31, 2000. There was no amortization of goodwill in 2002 or 2001.

 

***(i)Income Taxes***

 

APT accounts for income taxes under the asset andliability method. Under the asset and liability method, deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income in the period that includes theenactment date. A valuation allowance is established when necessary to reducedeferred tax assets to the amount expected to be realized.

 

***(j)Research and Product Development Expenses***

 

APT expenses the cost of research and developmentas incurred.  Research and developmentexpenses principally consist of payroll and related costs, facilities andequipment costs, and the costs of prototypes.

 

***(k)Stock-Based Compensation***

 

SFAS 123, “Accounting for Stock-BasedCompensation,” as amended by SFAS 148, “Accounting for Stock Based Compensation – Transitionand Disclosure an amendment of FASB Statement No. 123,” defines a fair valuebased method of accounting for employee stock options or similar instruments.Under the fair value based method, compensation cost is measured at the grantdate based on the value of the award and is recognized over the service period,which is usually the vesting period. However, SFAS 123 also allows anentity to continue to measure

 

F-8

----

 

compensationcost using the intrinsic value based method of accounting prescribed by APBOpinion No. 25 (“Opinion 25”), “Accounting for Stock Issued to Employees”.Under the intrinsic value based method, compensation cost is the excess, ifany, of the quoted market price of the stock at grant date or other measurementdate over the amount an employee must pay to acquire the stock. Entitieselecting to remain with the accounting in Opinion 25 must make pro formadisclosures of net income (loss) and, if presented, earnings per share, as ifthe fair value based method had been applied.

 

APT has elected to continue to apply theprescribed accounting in Opinion 25 and provide the required disclosures perSFAS 123 and SFAS 148. APT accounts for equity instruments issued tonon-employees in accordance with the provisions of SFAS 123 and EmergingIssues Task Force consensus on Issue No. 96-18, “Accounting for EquityInstruments that are Issued to Other than Employees, for Acquiring or inConjunction with Selling Goods or Services.”

 

APTapplies Opinion 25 in accounting for its Plan. Had APT determined compensationcost based on the fair value at the grant date for its stock options underSFAS 123, APT’s net income (loss) would have been the pro forma amountsindicated in the table below.

 
|                                                                                                                  |   | **Years Ended December 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                                  |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                                                                                                  |   |                         |   |   |   |   |   |
| Net income (loss):                                                                                                    |   |                         |   |   |   |   |   |
| As reported                                                                                                           |   | $                            | (3,687 | ) | $ | 1,796 |   | $ | 3,759 |   |
| Add: Stock based compensation included in reported net  income (loss), net of related tax effects                     |   | 498                          |   | 203 |   | 277 |   |
| Deduct: Stock based compensation determined under fair  value based method for all awards, net of related tax effects |   | (2,469                       | )      | (1,639 | ) | (756 | ) |
| Pro forma net income (loss)                                                                                           |   | $                            | (5,658 | ) | $ | 360 |   | $ | 3,280 |   |
|                                                                                                                  |   |                         |   |   |   |   |   |
| Earnings (loss) per share:                                                                                            |   |                         |   |   |   |   |   |
| Basic – as reported                                                                                              |   | $                            | (0.36  | ) | $ | 0.21 |   | $ | 0.59 |   |
| Basic – pro forma                                                                                                |   | $                            | (0.55  | ) | $ | 0.04 |   | $ | 0.52 |   |
|                                                                                                                  |   |                         |   |   |   |   |   |
| Diluted – as reported                                                                                            |   | $                            | (0.36  | ) | $ | 0.19 |   | $ | 0.50 |   |
| Diluted – pro forma                                                                                              |   | $                            | (0.56  | ) | $ | 0.04 |   | $ | 0.43 |   |

 

The effects of applying SFAS 123 in this pro forma disclosure arenot indicative of future amounts and additional awards anticipated in futureyears. The fair value of compensation costs reflected in the above pro formaamounts were determined using the Black-Scholes option pricing model and thefollowing weighted average assumptions:

 
|                    |   | **Years Ended December 31,** |   |
|-------------------------|--------|------------------------------|--------|
|                    |   | **2002**                     |   | **2001** |   | **2000** |   |
|                    |   |                         |   |   |   |   |   |
| Risk-free interest rate |   | 3.8                          | %      | 4.6 | % | 6.2 | % |
| Expected dividend yield |   | 0                            | %      | 0 | % | 0 | % |
| Expected life           |   | 5 years                      |   | 5 years |   | 5 years |   |
| Volatility              |   | 100                          | %      | 100 | % | 100 | % |

 

***(l)Foreign Currency***

 

The local currency of APT’s foreign subsidiary isthe functional currency. Assets and liabilities of APT’s foreign operation aretranslated into U.S. dollars using exchange rates in effect at the translationdate, and revenue and expenses are translated into U.S. dollars using averageexchange rates. The effects of foreign currency translation adjustments areincluded as a component of stockholder’s equity (deficit). Gains and lossesfrom foreign currency transactions are included in the consolidated statementsof operations in other income (expense).

 

***(m)Advertising Costs***

 

The cost of advertising is expensed as incurred.Advertising costs were not significant during the periods presented.

 

F-9

----

 

***(n)Net Income (Loss) per Share***

 

Basic net income (loss) per shareis computed using the weighted average number of shares of common stockoutstanding for the period. Diluted net income per share is computed using theweighted average number of shares of common stock and dilutive potential commonshares related to stock options and warrants outstanding during theperiod.  Anti-dilutive potential commonshares are excluded from the diluted net income share calculation.  Dilutive net (loss) per share excludes allpotential common shares from the calculation as the impact would beanti-dilutive.

 

Incremental dilutive sharesincluded in the calculation of diluted net income (loss) per share andincremental anti-dilutive shares that were excluded from the calculation ofdiluted net income (loss) per share for years ended December 31, 2002, 2001 and2000 are summarized in the following table.

 
|                                                                                     |   | **For the year ended December 31,** |   |
|------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                                     |   | **2002**                            |   | **2001** |   | **2000** |   |
|                                                                                     |   |                                |   |   |   |   |   |
| Incremental dilutive shares included in diluted net  income (loss) per share calculation |   | —                              |   | 631,000 |   | 1,232,000 |   |
|                                                                                     |   |                                |   |   |   |   |   |
| Anti-dilutive shares excluded from diluted net income  (loss) per share calculation      |   | 1,105,000                           |   | 241,000 |   | — |   |

 

***(o)Risk of Technological Change***

 

The markets in which APT competes or seeks tocompete are subject to rapid technological change, frequent new productintroductions, changing customer requirements for new products and features,and evolving industry standards. The introduction of new technologies and theemergence of new industry standards could render APT’s products less desirableor obsolete, which could harm its business.

 

***(p)Costs of Software Developed or Obtained for Internal Use***

 

Internal use software development costs areaccounted for in accordance with Statement of Position 98-1, Accounting for theCosts of Computer Software Developed or Obtained for Internal Use. Costsincurred in the preliminary project stage are expensed as incurred and costsincurred in the application and development stage, which meet the capitalizationcriteria, are capitalized and amortized on a straight-line basis over fiveyears, the estimated useful life of the asset.

 

***(q)Management Estimates***

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates. Significant estimates and judgments made bymanagement include those related to product returns and warranty obligations,allowance for doubtful accounts, excess and obsolete inventories, income taxes,valuation of intangible assets including goodwill, valuation of long-livedassets, contingencies and litigation, and excess component order cancellationcosts.

 

***(r)Fair Value of Financial Instruments***

 

The carrying amount of cash and cash equivalents,short-term investments, accounts receivable and accounts payable approximatefair value due to the short-term nature of these instruments. The carryingamount of long-term investments approximates fair value based on quoted marketrates. The carrying amount of amounts due under long-term obligationsapproximate fair value since the interest rates approximate current ratesavailable to APT.

 

***(s)Concentration of Suppliers***

 

APT relies on external subcontractors for themanufacture of wafers and substantially all the assembly and packaging ofcertain products. The failure to perform by one of these suppliers could have amaterial impact on APT’s growth and results of operations.

 

F-10

----

 

**(2)           BalanceSheet Components**

 

***(a)Inventories***

 

Inventories consist of the following:

 
|              |   | **December 31,** |   |
|-------------------|--------|------------------|--------|
|              |   | **2002**         |   | **2001** |   |
|              |   |             |   |   |   |
| Raw materials     |   | $                | 2,806  |   | $ | 1,254 |   |
| Work in process   |   | 6,705            |   | 5,587 |   |
| Finished goods    |   | 4,128            |   | 3,407 |   |
| Valuation reserve |   | (1,690           | )      | (941 | ) |
| Inventories, net  |   | $                | 11,949 |   | $ | 9,307 |   |

 

The following table presents a roll forward of theinventory valuation reserve:

 
|                           |   | **For the years ended December 31,** |   |
|--------------------------------|--------|--------------------------------------|--------|
|                           |   | **2002**                             |   | **2001** |   | **2000** |   |
|                           |   |                                 |   |   |   |   |   |
| Balance—beginning of year |   | $                                    | 941    |   | $ | 675 |   | $ | 749 |   |
| Provision                      |   | 893                                  |   | 582 |   | 207 |   |
| Write offs                     |   | (144                                 | )      | (316 | ) | (281 | ) |
| Balance—end of year       |   | $                                    | 1,690  |   | $ | 941 |   | $ | 675 |   |

 

***(b)Property and Equipment***

 

Property and equipment consist of the following:

 
|                                           |   | **December 31,** |   |
|------------------------------------------------|--------|------------------|--------|
|                                           |   | **2002**         |   | **2001** |   |
|                                           |   |             |   |   |   |
| Machinery, furniture and equipment             |   | $                | 19,963 |   | $ | 12,925 |   |
| Leasehold improvements                         |   | 1,217            |   | 578 |   |
| Assets in process                              |   | 847              |   | 847 |   |
|                                           |   | 22,027           |   | 14,350 |   |
| Less accumulated depreciation and amortization |   | (11,410          | )      | (8,804 | ) |
|                                           |   | $                | 10,617 |   | $ | 5,546 |   |

 

***(c)Accrued Expenses***

 

Accrued expenses consist of the following:

 
|                                         |   | **December 31,** |   |
|----------------------------------------------|--------|------------------|--------|
|                                         |   | **2002**         |   | **2001** |   |
|                                         |   |             |   |   |   |
| Payroll, commissions and related liabilities |   | $                | 431    |   | $ | 180 |   |
| Vacation accrual                             |   | 443              |   | 258 |   |
| Income taxes payable                         |   | 562              |   | — |   |
| Reserve for warranty and sales return        |   | 351              |   | 365 |   |
| Other                                        |   | 688              |   | 301 |   |
|                                         |   | $                | 2,475  |   | $ | 1,104 |   |

 

F-11

----

 

 

**(3)           Acquisitions**

 

**(a) GHz Technology, Inc.**

 

On January 25, 2002, APT acquired all of theoutstanding shares and stock options of GHz Technology, Inc. (GHz), in exchangefor cash, APT common stock, and APT stock options.  The company was renamed to Advanced Power Technology RF, Inc.(APTRF).  The GHz assets 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.  The purchase price foraccounting purposes was derived as follows:

 
|                  |   | **Shares** |   | **Fair Value** |   |
|-----------------------|--------|------------|--------|----------------|--------|
| Cash                  |   |       |   | $              | 13,453 |   |
| Stock                 |   | 1,522,976  |   | 16,220         |   |
| Exchanged  options    |   | 425,823    |   | 4,093          |   |
| Direct  costs         |   |       |   | 910            |   |
| Total  purchase price |   |       |   | $              | 34,676 |   |

 

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

 

•      Expected life of 5 years

•      Expected volatility of 100%

•      Risk-free interest rate of 4.3%; and

•      Expected dividend rate of 0%

 

GHz’s products complement APT’scurrent portfolio of RF products that operate at frequencies ranging from 1 MHzto 100 MHz and are sold into applications such as semiconductor capitalequipment, medical imaging, and industrial systems. The GHz products arecapable of frequencies ranging from 10 MHz to 3.5 GHz and are primarily soldinto applications such as avionics and radar as well as wireless communicationsand semiconductor capital equipment.

 

Theallocation of purchase price was as follows:

 
| Inventory                                                |   | $      | 1,944  |   |
|----------------------------------------------------------|--------|--------|--------|--------|
| Property and equipment                                   |   | 2,029  |   |
| Other tangible assets                                    |   | 8,653  |   |
| Deferred compensation on unvested stock options  assumed |   | 496    |   |
| Acquired in-process research and development             |   | 1,897  |   |
| Acquired intangible technology rights                    |   | 7,449  |   |
| Goodwill                                                 |   | 14,196 |   |
| Net deferred tax liability                               |   | (1,988 | )      |
| Allocated purchase price                                 |   | $      | 34,676 |   |

 

In connection with thisacquisition, the APT recorded a charge of $1,897 for the write-off ofin-process research and development (IPR&D).  The value assigned to IPR&D related to research projects forwhich technological feasibility had not yet been established and for whichthere was no other feasible alternative use for the technology.  In addition, APT recorded an intangibleasset for acquired current technology rights in the amount of $7,449, to beamortized over ten years, the expected life of the technologies.  Total goodwill recorded was $14,196.  The IPR&D, technology rights andgoodwill amounts are not deductible for tax purposes.

 

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

 

The nature of the efforts todevelop the in-process technology into commercially viable products principallyrelate to the completion of all designing, prototyping, verification andtesting activities that are necessary to establish that the product can beproduced to meet its design

 

F-12

----

 

specifications, including function, features, and technical performancerequirements.  GHz had three mainproduct groups under development at the acquisition date that met the minimumdevelopment requirements for IPR&D projects.  Each contributed from 11% to 62% of the total IPR&Dvalue.  The projects included L Band andS Band radar as well as commercial LDMOS applications.  The projects ranged from 65% to 75%complete.  All projects had expectedcompletion dates within 12 to 18 months and an estimated aggregate cost tocomplete of $1,200.  As of December 31,2002 the projects ranged from 85% to 95% complete with expected completiondates within 2 to 8 months and estimated aggregate cost to complete of $220.

 

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

 

On May 24, 2002, APT acquired theproduct lines and certain assets of Microsemi RF Products, Inc. (MSC RF), awholly-owned subsidiary of Microsemi Corporation, for $12,200 in cash.  The company was renamed to Advanced PowerTechnology RF Pennsylvania, Inc. (APTRF-PA). The transaction was accounted for 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 financialresults of the acquired business on May 24, 2002 and forward.  The purchase price for accounting purposeswas $12,200 in cash and $260 in direct costs.

 

MSC RF produces and sells bipolarRF transistors that are used in a variety of radar, avionics, communicationsand general purpose applications.  MSCRF’s products complement GHz’s technology as well as APT’s current portfolio ofRF products.  The combination of thethree companies’ RF products and technologies positions APT as an emergingdominant supplier in bipolar RF power transistors for avionics, radar andnon-cellular communications applications.

 

The allocation of purchase price was as follows:

 
| Inventory                                      |   | $     | 3,068  |   |
|------------------------------------------------|--------|-------|--------|--------|
| Property and equipment                         |   | 3,089 |   |
| Other tangible assets                          |   | 1,168 |   |
| Acquired in-process research & development |   | 211   |   |
| Acquired intangible technology rights          |   | 3,314 |   |
| Goodwill                                       |   | 1,610 |   |
| Allocated purchase price                       |   | $     | 12,460 |   |

 

In connection with thisacquisition, APT recorded a charge of $211 for the write-off of IPR&D.  The value assigned to IPR&D related toresearch projects for which technological feasibility had not yet beenestablished and for which there was no other feasible alternative use for thetechnology.  In addition, APT recordedan intangible asset for acquired current technology rights in the amount of$3,314, to be amortized over ten years, the expected life of thetechnologies.  Total goodwill recordedwas $1,610.  The IPR&D, technologyrights and goodwill amounts are deductible for tax purposes.

 

The values of IPR&D andtechnology rights were determined by estimating the net cash flows from thesale of products from these technologies over a ten year period and discountingthe net cash flows back to their present value using risk adjusted interestrates of 30% for current technologies and 35-40% for in-process technologies.  The estimated net cash flows from theseproducts were based on management’s estimates of related revenues, costs ofgoods sold, operating expenses, income taxes, and additional costs tocompletion for in-process technologies.

 

The nature of the efforts todevelop the in-process technology into commercially viable products principallyrelated to the completion of all designing, prototyping, verification andtesting activities that are necessary to establish that the product can beproduced to meet its design specifications, including function, features, andtechnical performance requirements.  MSCRF had two main product groups under development at the acquisition date thatmet the minimum development requirements for IPR&D projects.  The two projects contributed 88% and 12% tothe total IPR&D value.  The projectsconsisted of Junction Field Effect Transistor and Powermite3 applications.  Each project had expected completion dateswithin 12 to 18 months and an estimated aggregate cost to complete of $30.  As of December 31, 2002 the status of theseprojects had not changed.

 

**(c)           Pro FormaCondensed Consolidated Results**

 

The following table reflects theunaudited combined results of APT, GHz, and MSC RF as if the acquisitions hadtaken place as of January 1, 2001 and 2002, respectively.  The pro forma information includes non-cashcharges for amortization of technology rights, inventory fair valueadjustments, depreciation and deferred compensation related to theacquisitions, consistent with generally accepted accounting principles.  Both periods exclude a charge of $2,108 forin-process research and development expense. Both periods include the results of GHz and the acquired business of MSCRF beginning on January 1, 2002 and 2001, respectively, including an after-taxcharge of $1,077 for impairment of fixed assets recorded by GHz in the thirdquarter of 2001.  The pro formainformation does not necessarily reflect the actual results that would haveoccurred if the companies had been combined during the periods nor is itnecessarily indicative of future results of operations for the combinedcompanies.

 

 

F-13

----

 
|                                                                              |   | **Years Ended December 31,** |   |
|-----------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                              |   | **2002**                     |   | **2001** |   |
|                                                                              |   |                         |   |   |   |
| Revenues, net                                                                     |   | $                            | 47,559 |   | $ | 58,546 |   |
| Net loss                                                                          |   | (2,183                       | )      | (2,193 | ) |
|                                                                              |   |                         |   |   |   |
| Net loss per share:                                                               |   |                         |   |   |   |
| Basic                                                                             |   | $                            | (0.21  | ) | $ | (0.21 | ) |
| Diluted                                                                           |   | $                            | (0.21  | ) | (0.21 | ) |
| Weighted average number of shares used in the  computation of net loss per share: |   |                         |   |   |   |
| Basic                                                                             |   | 10,352                       |   | 10,260 |   |
| Diluted                                                                           |   | 10,352                       |   | 10,260 |   |

 

**(4)           Leases**

 

APT leases its facilities and certain officeequipment under non-cancelable operating leases, which expire over the nextnine years. Rental expense was $1,534, $526, and $483 for the years endedDecember 31, 2002, 2001, and 2000, respectively.

 

Future minimum lease payments under non-cancelableoperating leases (with initial or remaining lease terms in excess of one year)are as follows as of December 31, 2002:

 
| **Year ending December 31:** |   |   |   |
|------------------------------|--------|--------|--------|
| 2003                         |   | $      | 1,554  |   |
| 2004                         |   | 1,371  |   |
| 2005                         |   | 1,349  |   |
| 2006                         |   | 812    |   |
| 2007                         |   | 312    |   |
| Total                        |   | $      | 5,398  |   |

 

During 1996, APT sold its fabrication facility inBend, Oregon for $1,550 and leased it back under a fifteen-year operating leaseagreement. The transaction produced a gain of approximately $259 that is beingdeferred and amortized over the fifteen-year lease period.

 

**(5)           Taxes**

 

Domestic and foreign pre-tax income (loss)consists of the following:

 
|     |   | **Years Ended December 31,** |   |
|----------|--------|------------------------------|--------|
|     |   | **2002**                     |   | **2001** |   | **2000** |   |
|     |   |                         |   |   |   |   |   |
| Domestic |   | $                            | (5,968 | ) | $ | 1,599 |   | $ | 5,147 |   |
| Foreign  |   | 510                          |   | 764 |   | 858 |   |
|     |   | $                            | (5,458 | ) | $ | 2,363 |   | $ | 6,005 |   |

 

F-14

----

 

Income tax expense (benefit) consists of thefollowing:

 
|      |   | **Years Ended December 31,** |   |
|-----------|--------|------------------------------|--------|
|      |   | **2002**                     |   | **2001** |   | **2000** |   |
|      |   |                         |   |   |   |   |   |
| Current:  |   |                         |   |   |   |   |   |
| Federal   |   | $                            | (46    | ) | $ | 226 |   | $ | 2,192 |   |
| State     |   | (9                           | )      | 43 |   | 536 |   |
| Foreign   |   | —                       |   | — |   | 45 |   |
|      |   | (55                          | )      | 269 |   | 2,773 |   |
| Deferred: |   |                         |   |   |   |   |   |
| Federal   |   | (1,455                       | )      | 223 |   | (370 | ) |
| State     |   | (261                         | )      | 75 |   | (157 | ) |
|      |   | (1,716                       | )      | 298 |   | (527 | ) |
| Total     |   | $                            | (1,771 | ) | $ | 567 |   | $ | 2,246 |   |

 

The actual income tax (benefit) expense differsfrom the expected tax (benefit) expense computed by applying the U.S. federalcorporate income tax rate of 34% to income (loss) before income taxes asfollows:

 
|                                             |   | **Years Ended December 31,** |   |
|--------------------------------------------------|--------|------------------------------|--------|
|                                             |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                             |   |                         |   |   |   |   |   |
| Expected income tax (benefit) expense            |   | (34                          | )%     | 34 | % | 34 | % |
| Tax exempt municipal interest                    |   | (2                           | )      | (6 | ) | — |   |
| Change in valuation allowance                    |   | (4                           | )      | (11 | ) | (6 | ) |
| State income taxes, net of federal benefit       |   | (3                           | )      | 4 |   | 4 |   |
| Non deductible IPR&D charges                 |   | 12                           |   | — |   | — |   |
| Goodwill amortization                            |   | —                       |   | — |   | 1 |   |
| Difference in tax status for pass through entity |   | —                       |   | — |   | 2 |   |
| Other                                            |   | (1                           | )      | 3 |   | 2 |   |
| Actual income tax (benefit) expense              |   | (32                          | )%     | 24 | % | 37 | % |

 

The income tax effect of temporary differences andcarry forwards which give rise to significant portions of deferred tax assetsand liabilities are as follows:

 
|                                      |   | **December 31,** |   |
|-------------------------------------------|--------|------------------|--------|
|                                      |   | **2002**         |   | **2001** |   |
| Deferred tax assets:                      |   |             |   |   |   |
| Reserves and allowances                   |   | $                | 965    |   | $ | 559 |   |
| Accrued vacation pay                      |   | 102              |   | 53 |   |
| Net operating loss carry forwards         |   | 2,503            |   | 1,222 |   |
| Depreciation and amortization differences |   | —           |   | 142 |   |
| R&E Credit carry forwards             |   | 629              |   | 146 |   |
| Other                                     |   | 57               |   | 25 |   |
| Total gross deferred tax assets           |   | 4,256            |   | 2,147 |   |
| Less valuation allowance                  |   | (840             | )      | (1,029 | ) |
| Net deferred tax asset                    |   | 3,416            |   | 1,118 |   |
| Deferred tax liabilities:                 |   |             |   |   |   |
| Depreciation and amortization differences |   | (2,570           | )      | — |   |
| Net deferred tax assets                   |   | $                | 846    |   | $ | 1,118 |   |

 

F-15

----

 

 

As of December 31, 2002, the net deferred taxasset of $846 is recorded on the balance sheet as $1,124 in other currentassets and $278 in other long term liabilities. As of December 31, 2001, thenet deferred tax asset of $1,118 is recorded on the balance sheet as $636 inother current assets and $482 in other long term assets.

 

The net changes in the valuation allowance for theyears ended December 31, 2002, 2001, and 2000 were decreases of $189,$282, and $357, respectively. APT’s management believes it is more likely thannot that APT will realize the benefit of the deferred tax assets, net of theexisting valuation allowance, at December 31, 2002.

 

As of December 31, 2002, APT has federal and statenet operating loss carry forwards of $4,160 and $5,701, respectively, whichexpire beginning in years 2020 through 2022. In addition, APT has federal andstate research and experimentation credit carry forwards of $694 which expirebeginning in years 2019 through 2022. APT also has foreign net operating losscarry forwards for tax purposes available to offset future income of APT Europeof approximately (Euros) EUR2,165 ($2,270) based on the exchange rate as ofDecember 31, 2002; all of which are available indefinitely.

 

During the year ended December 31, 2002, APTacquired a net deferred tax liability of $1,988 in connection with theacquisition of GHz Technology, Inc. (See Note 3(a)).

 

**(6)           Stockholders’Equity**

 

***(a)Initial Public Offering***

 

In August 2000, APT completed an initialpublic offering (IPO) of 4,025,000 shares of common stock, including theunderwriters’ over-allotment, at an offering price of $15.00 per share. The IPOincluded 2,830,000 shares sold by APT and 1,195,000 shares sold by shareholdersof APT, and resulted in net proceeds to APT of approximately$38.3 million.

 

***(b)Stock Option Plan***

 

The 1995 Stock Option Plan (the Plan) provides forthe granting of stock options to employees, directors and consultants topurchase up to 2,250,000 shares of common stock. Options granted under the Planare generally granted with exercise prices equal to the stock market price onthe date of grant, must generally be exercised while the individual is anemployee and within ten years of the date of grant. Options granted typicallyvest at a rate of 20% per year for five years. As of December 31, 2002,options available for grant were 193,228.

 

Under the Black-Scholes option pricingmodel, the weighted average fair value of options granted during the year endedDecember 31, 2002 was $8.65 for options with exercise prices that wereless than market price of the stock on date of grant and $8.09 for all otheroptions which had exercise prices equal to stock market price at the time ofgrant.  During 2002, 425,823 optionswere issued with exercise prices that were less than the stock market price onthe date of grant in connection with the acquisition of GHz Technology, Inc andexchange of outstanding GHz options. (See Note 3(a)). For the years ended December 31, 2001 and 2000, theweighted average fair value of options granted was approximately $9.82 and$8.03, respectively.  All options issuedin 2001 and 2000 had exercise prices equal to market price of the stock on dateof grant.

 

APT has recorded deferred stock compensation of$1,094 through December 31, 2002. This deferred stock compensation isbased on the difference between the deemed fair market value of common stockand the exercise price of the option or stock on the grant date. Deferred stockcompensation is being amortized on an accelerated basis over the vestingperiod, generally five years, approximately 45%, 26%, 16%, 9% and 4% in yearsone through five, respectively, consistent with the method described in FASBInterpretation No. 28, “Accounting for Stock Appreciation Rights and OtherVariable Stock Options or Award Plans,” or FIN 28. APT recognized compensationexpense of $485, $164, and $277 during the years ended December 31, 2002,2001, and 2000, respectively, related to these grants.

 

Deferred stock compensation was $171 as ofDecember 31, 2002 and future amortization expense will be approximately$149 and $22 for the years ending December 31, 2003 and 2004,respectively.

 

F-16

----

 

Stock option activity was as follows:

 
|                                     |   | **Number********of  Shares** |   | **Weighted Average  Exercise Price** |   |
|------------------------------------------|--------|------------------------------|--------|--------------------------------------|--------|
|                                     |   |                         |   |                                 |   |
| Options outstanding at December 31, 1999 |   | 809,847                      |   | $                                    | 1.45   |   |
| Granted                                  |   | 269,100                      |   | 7.77                                 |   |
| Exercised                                |   | (16,155                      | )      | 1.43                                 |   |
| Forfeited                                |   | (5,760                       | )      | 1.48                                 |   |
| Options outstanding at December 31, 2000 |   | 1,057,032                    |   | 3.06                                 |   |
| Granted                                  |   | 174,087                      |   | 13.29                                |   |
| Exercised                                |   | (320,819                     | )      | 1.50                                 |   |
| Forfeited                                |   | (15,429                      | )      | 4.63                                 |   |
| Options outstanding at December 31, 2001 |   | 894,871                      |   | 5.58                                 |   |
| Granted                                  |   | 923,875                      |   | 7.17                                 |   |
| Exercised                                |   | (143,606                     | )      | 2.62                                 |   |
| Forfeited                                |   | (98,878                      | )      | 8.42                                 |   |
| Options outstanding at December 31, 2002 |   | 1,576,172                    |   | 6.61                                 |   |
|                                          |        |                              |        |                                      |        |  |

 

 

The following table summarizes information aboutstock options as of December 31, 2002:

 
|                                           |   | **Options Outstanding**      |   |                                                        |   | **Options Exercisable**                          |   |
|------------------------------------------------|--------|------------------------------|--------|-------------------------------------------------------------|--------|--------------------------------------------------|--------|
| **Range of********Exercise Prices  Per Share** |   | **Number of****O****ptions** |   | **Weighted  Average  Remaining  Contractual  Life (Years)** |   | **Weighted  Average  Exercise Price  Per Share** |   | **Number of  Options** |   | **Weighted  Average  Exercise Price  Per Share** |   |
|                                           |   |                         |   |                                                        |   |                                             |   |   |   |   |   |
| $1.40-3.60                                     |   | 698,337                      |   | 5.2                                                         |   | $                                                | 1.53   |   | 552,394 |   | $ | 1.54 |   |
| 3.61-10.80                                     |   | 321,466                      |   | 8.8                                                         |   | 6.80                                             |   | 88,848 |   | 7.09 |   |
| 10.81 - 14.40                                  |   | 444,919                      |   | 8.8                                                         |   | 11.78                                            |   | 100,497 |   | 12.92 |   |
| 14.41 - 36.00                                  |   | 111,450                      |   | 8.1                                                         |   | 17.25                                            |   | 48,890 |   | 18.73 |   |
|                                           |   | 1,576,172                    |   |                                                        |   |                                             |   | 790,629 |   |   |   |
|                                                |        |                              |        |                                                             |        |                                                  |        |  |  |  |  |  |  |

 

***(c)Warrants***

 

On September 6, 1995, APT issued threewarrants to financing companies and a bank. Two of the warrants permit theholders to purchase 35,715 shares each and one warrant permits the holder topurchase 35,714 shares of APT’s common stock, each at exercise prices of $1.40per share. The fair value of $77 was determined using the Black-Scholesmethodology using the refinancing date as the measurement date, a risk-freerate of 5.2%, expected dividend yield of 0%, 2-year term and expectedvolatility of 65%. One warrant to purchase 35,715 shares was exercised inAugust 2000 and the warrant to purchase 35,714 shares was exercised inSeptember 2000. The remaining warrant to purchase 35,715 shares is exercisablethrough December 31, 2005.

 

On November 5, 1998, APT issued warrants totwo financing companies in connection with the renegotiations of certaincommitments. The warrants permitted the holders to purchase a total of 10,000shares of APT’s common stock at $1.40 per share. The fair value of the warrantsissued of $87 was determined by applying the Black-Scholes methodology usingthe issuance date as the measurement date, a risk-free rate of 5.15%, expecteddividend yield of 0%, a seven-year term and expected volatility of 80%. Thewarrant values represented a deferred financing cost and were amortized overthe term of the debt facility of sixteen months. Warrants to purchase 2,500shares were exercised in August 2000. The remaining warrant to purchase 7,500shares is exercisable through December 31, 2005.

 

F-17

----

 

On January 25, 2002, APT issued warrants topurchase 5,000 shares of common stock at $1.16 in exchange for an existingoutstanding warrant for GHz shares in connection with the purchase of GHz byAPT (See Note 3).  The deemed fair valueof the warrant issued was immaterial as determined by applying theBlack-Scholes methodology, and was capitalized as part of the acquisitioncosts.  The warrant is exercisablethrough July 31, 2006.

 

As of December 31, 2002, warrants to purchase48,215 shares of common stock were outstanding and exercisable at a weightedaverage exercise price of $1.38 per share.

 

**(7)           RetirementBenefit Plan**

 

APT has a defined contribution 401(k) plan (401k).Employees in the United States who are at least eighteen years old and have sixmonths of service are eligible to participate in the 401k. Participants maydefer up to 15% of eligible compensation. During 2002, APT did not provide anymatching contributions to the plan. During 2001, APT provided matching contributions for the 401k at therate of 25% of each dollar contributed up to 3% of eligible compensation.Contributions by APT in 2001 were $59. There were no matching contributions tothe plan in 2002 or 2000.

 

**(8)           RelatedParty Transactions**

 

The chief executive officer of Advanced EnergyIndustries, Inc (Advanced Energy), who is a substantial shareholder of AdvancedEnergy, serves as a director of APT. For the years ended December 31,2002, 2001, and 2000, sales to Advanced Energy were approximately $4,122,$4,140, and $7,603, respectively. Accounts receivable from Advanced Energy were$319 and $194  at December 31, 2002and 2001, respectively.

 

**(9)           SegmentInformation**

 

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

 

***(a)Geographic Information***

 

APT’s geographic revenues, operating income (loss)and identifiable assets are summarized as follows:

 
|                     |   | **Years Ended December 31,** |   |
|--------------------------|--------|-----------------------------------|--------|
|                     |   | **2002**                          |   | **2001** |   | **2000** |   |
|                     |   |                              |   |   |   |   |   |
| Geographic revenues:     |   |                              |   |   |   |   |   |
| United States            |   | $                                 | 27,831 |   | $ | 19,722 |   | $ | 24,300 |   |
| Austria                  |   | 2,889                             |   | 3,189 |   | 1,030 |   |
| Germany                  |   | 2,828                             |   | 3,288 |   | 3,814 |   |
| China                    |   | 2,293                             |   | 3,534 |   | 3,647 |   |
| Other                    |   | 7,584                             |   | 7,122 |   | 11,377 |   |
|                     |   | $                                 | 43,425 |   | $ | 36,855 |   | $ | 44,168 |   |
|                     |   |                              |   |   |   |   |   |
| Operating income (loss): |   |                              |   |   |   |   |   |
| United States            |   | $                                 | (6,628 | ) | $ | (54 | ) | $ | 5,305 |   |
| France                   |   | 586                               |   | 808 |   | 1,097 |   |
|                     |   | $                                 | (6,042 | ) | $ | 754 |   | $ | 6,402 |   |

 
|                 |   | **December 31,** |   |
|----------------------|--------|------------------|--------|
|                 |   | **2001**         |   | **2001** |   |
| Identifiable assets: |   |             |   |   |   |
| United States        |   | $                | 74,038 |   | $ | 55,898 |   |
| France               |   | 2,910            |   | 2,177 |   |
|                 |   | $                | 76,948 |   | $ | 58,075 |   |
|                      |        |                  |        |  |  |  |  |  |  |

 

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***(b)Significant Customers***

 

During 2002, the largest customer was our key distributor,Richardson Electronics Ltd., representing 12.0%, 7.9%, and 9.7% of our revenuesin 2002, 2001, and 2000, respectively. Revenues from Advanced Energyrepresented 9.5%, 10.8%, and 17.2% of net revenues in 2002, 2001, and 2000,respectively.

 

**(10)         Commitmentsand Contingencies**

 

From time to time the Company is involved invarious legal matters that arise out of the ordinary conduct of our business,including those related to litigation over intellectual property rights,commercial transactions, contracts, product liability, environmental, safetyand health, and employment matters.  TheCompany is currently involved in various legal proceedings.  The Company does not believe that theultimate resolution of such litigation will have a material adverse effect onthe Company’s financial position, results of operations or cash flows. However,the length of time and legal fees associated with such litigation may besignificant. 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.

 

APT has agreements with foundry partners in Europeand Taiwan to process wafers. APT also has agreements with subcontractors inthe Philippines, Malaysia, and Mexico for assembly and testing of most of itsplastic encapsulated products, which extend through January 2003. AtDecember 31, 2002, APT had commitments to purchase approximately $720 fromits foundry partner and $400 from its packaging and testing subcontractors.

 

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**(11)         QuarterlyFinancial Data (Unaudited)**

 
|                                |   | **Year Ended December 31, 2002**          |   |
|-------------------------------------|--------|-------------------------------------------|--------|
|                                |   | **(In thousands, except per share data)** |   |
|                                |   | **1st Qtr**                               |   | **2nd Qtr** |   | **3rd Qtr** |   | **4th Qtr** |   |
|                                |   |                                      |   |   |   |   |   |   |   |
| Revenues, net                       |   | $                                         | 8,239  |   | $ | 10,694 |   | $ | 13,052 |   | $ | 11,440 |   |
| Gross profit(1)                     |   | 2,235                                     |   | 3,055 |   | 3,908 |   | 3,039 |   |
| Operating loss(1)                   |   | (3,193                                    | )      | (1,139 | ) | (446 | ) | (1,264 | ) |
| Net income (loss)(1)                |   | (2,565                                    | )      | (545 | ) | 64 |   | (641 | ) |
| Basic net income (loss) per share   |   | $                                         | (0.26  | ) | $ | (0.05 | ) | $ | 0.01 |   | $ | (0.06 | ) |
| Diluted net income (loss) per share |   | $                                         | (0.26  | ) | $ | (0.05 | ) | $ | 0.01 |   | $ | (0.06 | ) |

 

 
|                                |   | **Year Ended December 31, 2001**          |   |
|-------------------------------------|--------|-------------------------------------------|--------|
|                                |   | **(In thousands, except per share data)** |   |
|                                |   | **1st Qtr**                               |   | **2nd Qtr** |   | **3rd Qtr** |   | **4th Qtr** |   |
|                                |   |                                      |   |   |   |   |   |   |   |
| Revenues, net                       |   | $                                         | 13,158 |   | $ | 11,526 |   | $ | 6,838 |   | $ | 5,333 |   |
| Gross profit                        |   | 5,214                                     |   | 4,252 |   | 1,309 |   | 1,057 |   |
| Operating income (loss)             |   | 2,137                                     |   | 1,119 |   | (1,020 | ) | (1,482 | ) |
| Net income (loss)                   |   | 1,782                                     |   | 1,143 |   | (417 | ) | (712 | ) |
| Basic net income (loss) per share   |   | $                                         | 0.21   |   | $ | 0.13 |   | $ | (0.05 | ) | $ | (0.08 | ) |
| Diluted net income (loss) per share |   | $                                         | 0.19   |   | $ | 0.12 |   | $ | (0.05 | ) | $ | (0.08 | ) |

 

 
|                         |   | **Year Ended December 31, 2000**          |   |
|------------------------------|--------|-------------------------------------------|--------|
|                         |   | **(In thousands, except per share data)** |   |
|                         |   | **1st Qtr**                               |   | **2nd Qtr** |   | **3rd Qtr** |   | **4th Qtr** |   |
|                         |   |                                      |   |   |   |   |   |   |   |
| Revenues, net                |   | $                                         | 9,561  |   | $ | 10,080 |   | $ | 12,058 |   | $ | 12,469 |   |
| Gross profit                 |   | 3,383                                     |   | 3,745 |   | 4,825 |   | 5,502 |   |
| Operating income             |   | 851                                       |   | 1,196 |   | 1,781 |   | 2,574 |   |
| Net income                   |   | 244                                       |   | 250 |   | 1,319 |   | 1,946 |   |
| Basic net income per share   |   | $                                         | 0.05   |   | $ | 0.05 |   | $ | 0.19 |   | $ | 0.23 |   |
| Diluted net income per share |   | $                                         | 0.04   |   | $ | 0.04 |   | $ | 0.16 |   | $ | 0.21 |   |

 

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(1)  In 2002, we acquired GHzTechnology, Inc. (effective January 25) and the product lines and certainassets of Microsemi RF Products, Inc. (effective May 24).  As a result of these transactions, duringfiscal 2002 we recorded acquisition related charges for purchased in-processresearch and development (IPR&D), amortization of intangible assets,inventory fair value adjustments and deferred compensation amortization of$4,330, of which $1,974 was included in costs of good sold and $2,356 inoperating expenses.  The total amountnet of taxes was $3,544. The total charges by quarter were pre-tax $2,353,$842, $603, $532 and after tax $2,178, $519, $483, $364 in the first, second,third and fourth quarters, respectively.

 

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