U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____ to _____
Commission file number 1-11056
ADVANCED PHOTONIX, INC. (R)
(Exact name of registrant as specified in its charter)
Delaware 33-0325826
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2925 BOARDWALK
ANN ARBOR, MICHIGAN 48104
(Address of principal executive offices) (Zip Code)
(734) 864-5600
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 Par Value
Class A Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Total revenues for registrant's fiscal year ended March 31, 2006 were
$23,585,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price as reported by the NASDAQ National
Market of the registrant's Common Stock on September 25, 2005, the last business
day of the registrant's most recently completed second fiscal quarter, was
approximately $44.8 million. Shares of voting stock held by each officer and
director and by each person who owns 5% or more of the outstanding voting stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of June 23, 2006 there were 18,942,315 shares of Class A Common Stock and
31,691 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting for 2006 are
incorporated by reference in Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
Advanced Photonix, Inc. (R) (the "Company", "we" or "API"), was incorporated
under the laws of the State of Delaware in June 1988. The Company is engaged in
the development and manufacture of optoelectronic devices and value-added
sub-systems and systems. The Company serves a variety of global Original
Equipment Manufacturers (OEMs), in a variety of industries. The Company supports
the customer from the initial concept and design phase of the product, through
testing to full-scale production. The Company has three manufacturing
facilities; located in Camarillo, CA, Dodgeville, WI and Ann Arbor, MI.
In May 2005, API completed its previously disclosed acquisition of Picotronix,
Inc. through the merger of Picotronix, Inc. (doing business as and referred to
herein as "Picometrix"), a Michigan corporation, with and into Michigan
Acquisition Sub, LLC ("Newco"), a Delaware limited liability company and a
wholly-owned subsidiary of API, pursuant to an Agreement and Plan of Merger
dated March 8, 2005 by and among API, Newco, Picometrix and Robin Risser and
Steven Williamson, the stockholders of Picometrix. Immediately following the
effective time of the merger, the name of Newco was changed to Picometrix, LLC.
Pursuant to the merger between Picometrix and API, API paid consideration of
approximately $17 million in the form of $3.5 million in cash, four-year API
promissory notes in the aggregate principal amount of approximately $2.9 million
(the "API Notes"), $5.4 million in API Class A Common Stock (2,575,000 shares
valued at $2.11 per share), a loan in the amount of approximately $4.2 million
to Picometrix (the "API Loan") was forgiven, the proceeds of which were used to
prepay existing long-term indebtedness of Picometrix to a third party, and
broker fees and other transaction costs directly related to the acquisition of
approximately $900,000. The API Notes are payable in four annual installments
with the first being a payment in the aggregate of $500,000, the second being a
payment in the aggregate of $550,000, the third being a payment in the aggregate
of $900,000 and the fourth being a payment in the aggregate of $950,500. The API
Notes bear an interest rate of prime plus 1.0% and are secured by all of the
intellectual property of Picometrix. API has the option of prepaying the API
Notes without penalty. Immediately following the effective time of the
transaction, the API Loan was contributed to the capital of Picometrix, LLC. In
connection with the transaction, the Company recorded approximately $15 million
in intangible assets (including customer list, non-compete agreement,
trademarks, R & D contracts, and technology/patents) and will amortize these
finite life intangible assets over their various estimated useful lives up to 15
years.
PRODUCTS & TECHNOLOGIES
OUR BUSINESS
Advanced Photonix, Inc. (the Company or API), is a leading supplier of custom
opto-electronic solutions, high-speed optical receivers and Terahertz sensors
and instrumentation, serving a variety of global Original Equipment Manufacturer
(OEM) markets. Our optoelectronic solutions are based on our silicon Large Area
Avalanche Photodiode (LAAPD), PIN photodiode and FILTRODE(R) detectors. Our
patented high-speed optical receivers include Avalanche Photodiode technology
(APD) and PIN (positive-intrinsic-negative) photodiode technology based upon
III-V materials, including InP, InAlAs, and GaAs. Our newly emerging Terahertz
sensor product line is targeted to the industrial non-destructive testing (NDT),
quality control, homeland security and military markets. Using our patented
fiber coupled technology and high speed Terahertz generation and detection
sensors, we are engaged in transferring Terahertz technology from the
application development laboratory to the factory floor. We have three
manufacturing facilities, one in Camarillo, CA, one in Dodgeville, WI and one in
Ann Arbor, MI.
We support the customer from the initial concept and design of the
semiconductor, hybridization of support
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electronics, packaging and signal conditioning or processing from prototype
through full-scale production and validation testing. The target markets served
by us are Military/Aerospace, Homeland Security, Medical, Telecom, and
Industrial Sensing/NDT.
TECHNOLOGY & MANUFACTURING CAPABILITIES
Our basic technologies and manufacturing capabilities include the following:
- Optoelectronic semiconductor design and micro fabrication of Silicon
(Si) and III-V compound semiconductor devices including
photodetectors and terahertz transmitters/receiver antenna,
- MBE growth of high-speed III-V compound semiconductor material
including GaAs, InAlAs and InP.,
- Opto-electronic hybrid packaging of semiconductor devices combining
opto-electronic devices with high-speed electronics and fiber
optics,
- Vapor deposition and/or ion implantation for Silicon based PIN & APD
photo-detectors,
-
- Terahertz (THz) systems, subsystems, transmitters and receivers
- Femtosecond laser pulse control and system integration
CORE PRODUCTS
The core product technologies used in the majority of our products are
opto-electronic semiconductor devices, including photodiodes and antennae made
of silicon (Si) or III-V compound semiconductor material. Photodiodes and
antennae sense light of varying wavelengths and intensity and convert that light
and/or THz wave into electrical signals. We manufacture photodiodes of varying
complexity, from basic positive-intrinsic-negative (PIN) photodiode to the more
sophisticated avalanche photodiode (APD) and antennae that transmit and receive
THz signals (Transceiver). The APD is a specialized photodiode capable of
detecting very low light levels due to an internal gain phenomenon known as
avalanching. All devices are designed by our experienced engineering staff, and
fabricated in state-of-the-art clean rooms. Our products include the following:
- High Speed Optical Receivers (10Gb/s & 40Gb/s) which are packaged
InP, InAlAs, or GaAs PIN and/or APD photodiodes with amplifiers
- Packaged PIN and APD photodiodes in Silicon (Si) and III-V materials
(InP, InAlAs, GaAs)
- Packaged Si APD components, with and without thermo-electric coolers
- Packaged Si Large Area Avalanche Photodiode (LAAPD) components
- Packaged Si photodiodes with patented FILTRODE(R) technology
integrating optical filters directly on photodiode chips
- Terahertz Systems & subsystems utilizing III-V materials for THz
transmitters &/or receivers
TERAHERTZ TECHNOLOGY
The newest technology the Company is pursuing is Terahertz (THz) or the
Company's T-Ray(TM) technology. Terahertz is a region of the electromagnetic
(EM) Spectrum that is just beginning to be explored. THz lies between microwave
and infrared waves on the EM spectrum. While microwaves and infrared waves have
been explored and commercialized for decades, THz waves are in the early stages
of being explored and commercialized due to the fact that they have historically
been very difficult to generate and detect. Recent advances in femtosecond
lasers and ultrafast semiconductor and electro-optic devices combined with
fiber-optic packaging technologies have enabled the development of practical
T-Ray instrumentation and as a result application/market development of THz
technology has recently accelerated. THz can be used to "look"
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through and beneath materials with high 2-dimensional (2-D) and 3-D spatial
resolution roughly equivalent to the resolution of the human eye or better. It
can also uniquely identify the chemical composition of many hidden or subsurface
objects and has been determined to have non-ionizing radiation which is not
harmful to humans at the power levels commonly used today. THz imaging and
spectroscopy market applications include industrial quality control through
non-destructive testing (including aerospace and pharmaceutical markets);
homeland security and defense screening of people, packages and bags for weapons
and weapons of mass destruction; medical imaging and other scientific
applications.
We have had significant Terahertz technology and product development since 1997,
resulting in over 20 patents or patents pending to date. In 2001, we sold the
first commercial Terahertz product, the T-Ray 2000 as a laboratory bench top
instrument for application development with spectroscopy and imaging
capabilities targeted at the research and development and off-line diagnostic
markets. In 2004, we sold the first T-Ray Manufacturing Inspection System
(QA1000) for on-line, real-time inspection to NASA for the space shuttle fuel
tank inspection in the Return to Flight Program.
MARKETS
Our products serve customers in a variety of global markets, typically North
America, Asia, Europe and Australia. The target markets and applications served
by us are as follows:
Military:
- Space
- Defense
Industrial/Non-Destructive Testing:
- Manufacturing
- Instrumentation
- Display
Medical:
- Diagnostic & Monitoring
- Ophthalmic Equipment
- Medical Imaging
Telecommunications:
- Telecom Equipment
- Test and Measurement
- Wireless Communications Equipment
Homeland Security:
- Baggage/Cargo Scanning
- Passenger Screening
RECENT DEVELOPMENTS
Advanced Photonix, Inc. has begun consolidating semiconductor fabrication into
its Ann Arbor, Michigan facility. Advanced Photonix, Inc. has budgeted $2.2
million for operating and capital expenses for this consolidation. As part of
the consolidation API has moved corporate headquarters from Camarillo,
California to Ann Arbor, MI. The Michigan Economic Development Corporation
(MEDC) approved a state Single
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Business Tax credit valued at more than $1.1 million over 10 years to win the
Company's business. The city of Ann Arbor also approved a personal property tax
abatement valued at approximately $103,000 over five years to support the
project.
On June 2, 2006 the Company announced the resignation of Paul Ludwig as a member
of the Board of Directors and President of Advanced Photonix, Inc. Richard Kurtz
CEO and Chairman of the Board assumed the responsibility of President.
RAW MATERIALS
The principal raw materials used by the Company in the manufacture of its
semiconductor components and sensor assemblies are silicon and III-V material
(InP, GaAs) wafers, chemicals, gases and metals used in processing wafers, gold
wire, solders, and a variety of packages and substrates, including metal,
printed circuit board, flex circuits, ceramic and plastic packages. All of these
raw materials can be obtained from several suppliers. From time to time,
particularly during periods of increased industry-wide demand, silicon wafers,
III-V wafers (InP, GaAs), certain metal packages and other materials have been
in short supply. However, the Company has not been materially affected by such
shortages. As is typical in the industry, the Company allows for a significant
lead-time (2 months or greater) between order and delivery of raw materials.
RESEARCH AND DEVELOPMENT
Since its inception in June 1988, the Company has incurred material research and
development expenses, with the intent of commercializing these investments into
profitable new standard and custom product offerings. During the fiscal years
ended in 2006, 2005, and 2004, research and development expenses amounted to
$3,019,000, $146,000, and $280,000 respectively. The increase in R&D costs is
primarily the result of the Picometrix acquisition and other new non-Picometrix
product R&D initiatives. The Company expects that an increase in research and
development funding will be required for new projects/products as well as the
continuing development of new derivatives of the Company's current product line
The Company has in the past, and will continue to pursue customer funded, as
well as internally funded, research and development projects when they are in
support of the Company's development objectives.
As we begin the new fiscal year, the following research and development projects
are currently underway:
- The next generation photodiodes and high-speed optical receivers for both
the 10G and 40G telecommunications market
- Terahertz - development of the next generation system for homeland
security/military, aerospace and pharmaceutical industrial QC markets.
- Si APD performance enhancements - designed specifically for certain
military and medical imaging applications
- Si PIN photodiodes developments to meet unique customer requirements, such
as higher speeds, lower electrical noise, and unique multi-element
geometries.
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ENVIRONMENTAL REGULATIONS
The photonics industry, as well as the semiconductor industry in general, is
subject to governmental regulations for the protection of the environment,
including those relating to air and water quality, solid and hazardous waste
handling, and the promotion of occupational safety. Various federal, state and
local laws and regulations require that the Company maintain certain
environmental permits. The Company believes that it has obtained all necessary
environmental permits required to conduct its manufacturing processes. Changes
in the aforementioned laws and regulations or the enactment of new laws,
regulations or policies could require increases in operating costs and
additional capital expenditures and could possibly entail delays or
interruptions of operations.
BACKLOG AND CUSTOMERS
The Company's sales are made primarily pursuant to standard purchase orders for
delivery of products. However, by industry practice, orders may be canceled or
modified at any time. When customers cancel an order, they are responsible for
all finished goods, all costs, direct and indirect, incurred by the Company, as
well as a reasonable allowance for anticipated profits. No assurance can be
given that the Company will receive these amounts after cancellation.
Customers normally purchase the Company's products and incorporate them into
products that they in turn sell in their own markets on an ongoing basis. As a
result, the Company's sales are dependent upon the success of its customers'
products and its future performance is dependent upon its success in finding new
customers and receiving new orders from existing customers.
MARKETING
The Company markets its products in the United States and Canada through its own
technical sales engineers and through independent sales representatives.
International sales, including Europe, the Middle East and Pacific Rim, are
conducted direct and through foreign distributors. The Company's products are
primarily sold as components or assemblies to original equipment manufacturers
(OEM's). The Company markets its products and capabilities through industry
specific channels, including the Internet, industry trade shows, and in print
through trade journals.
COMPETITION
The Company competes with a range of companies for the custom optoelectronic
products, high-speed optical receiver products and terahertz systems and
instrumentation products in its target markets. The Company believes that its
principal competitors for sales of custom optoelectronic products are small to
medium size companies. In the high-speed optical receiver market the Company
believes that it competitors are medium to large size companies with or without
internally supplied components. Because the THz product offering includes
developing technology and markets, the Company believes the competition is
mainly from research and development centers in business,
governmental/university settings and from small companies.
Because the Company specializes in devices requiring a high degree of
engineering expertise to meet the requirements of specific applications, it
generally does not compete with standard products manufacturing companies to any
significant degree with other large United States, European or Pacific Rim
manufacturers of standard "off the shelf" optoelectronic components or silicon
photodetectors
PROPRIETARY TECHNOLOGY
The Company utilizes proprietary design rules and processing steps in the
development and fabrication of its PIN and APD photodiodes, THz transmitters and
receivers, fiber-coupled THz subsystems/systems, and THz applications. The
Company has a significant number of patents pending and owns the following
patents:
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PATENT # TITLE ISSUE DATE
-------- ----- ----------------
142,195 HIGHLY-DOPED P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE Apr-05
765,715 HIGHLY-DOPED P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE Jan-04
2,345,153 HIGHLY-DOPED P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE Mar-04
4,717,946 THIN LINE JUNCTION PHOTODIODE Jan 1988 (by
predecessor co.)
4,782,382 HIGH QUANTUM EFFICIENCY PHOTODIODE DEVICES Nov 1988 (by
predecessor co.)
5,021,854 SILICON AVALANCHE PHOTODIODE ARRAY Jun-91
5,057,892 LIGHT RESPONSIVE AVALANCHE DIODE Oct-91
5,146,296 DEVICES FOR DETECTING AND/OR IMAGING SINGLE PHOTOELECTRON Sep-92
5,311,044 AVALANCHE PHOTOMULTIPLIER TUBE May-94
5,477,075 SOLID STATE PHOTODETECTOR WITH LIGHT RESPONSIVE REAR FACE Dec-95
5,757,057 LARGE AREA AVALANCHE ARRAY May-98
5,801,430 SOLID STATE PHOTODETECTOR WITH LIGHT RESPONSIVE REAR FACE Sep-98
6,005,276 SOLID STATE PHOTODETECTOR WITH LIGHT RESPONSIVE REAR FACE Dec-99
6,111,299 ACTIVE LARGE AREA AVLANCHE PHOTODIODE ARRAY Aug-00
6,262,465 HIGHLY-DOPED P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE Jul-01
6,320,191 A DISPERSIVE PRECOMPENSATOR FOR USE IN AN ELECTROMAGNETIC RADIATION GENERATION
AND DETECTION SYSTEM Nov-01
6,816,647 COMPACT FIBER PIGTAILED TERAHERTZ IMAGING SYSTEM Nov-04
6,849,852 SYSTEM AND METHOD FOR MONITORING CHANGES IN STATE OF MATTER WITH TERAHERTZ Feb-05
RADIATION
6,936,821 AMPLIFIED PHOTOCONDUCTIVE GATE Aug-05
There can be no assurance that any issued patents will provide the Company with
significant competitive advantages, or that challenges will not be instituted
against the validity or enforceability of any patent owned by the Company, or,
if instituted, that such challenges will not be successful. The cost of
litigation to uphold the validity and to prevent the infringement of a patent
could be substantial. Furthermore, there can be no assurance that the Company's
APD technology will not infringe on patents or rights owned by others, licenses
to which might not be available to the Company. Based on limited patent
searches, contacts with others knowledgeable in the field of APD technology, and
a review of the published materials, the Company believes that its competitors
hold no patents, licenses or other rights to the APD technology which would
preclude the Company from pursuing its intended operations.
In some cases, the Company may rely on trade secrets to protect its innovations.
There can be no assurance that trade secrets will be established, that secrecy
obligations will be honored or that others will not
8
independently develop similar or superior technology. To the extent that
consultants, key employees or other third parties apply technological
information independently developed by them or by others to Company projects,
disputes might arise as to the proprietary rights to such information which may
not be resolved in favor of the Company.
EMPLOYEES
At June 26, 2006 the Company had 152 employees, comprised of 145 full time
employees (including 3 officers) and 7 part time employees. Included are 26
engineering and development personnel, 12 sales and marketing personnel, 95
operations personnel, and 19 general and administrative personnel (including 3
officers). The Company may, from time to time, engage personnel to perform
consulting services and to perform research and development under third party
funding. In certain cases, the cost of such personnel may be included in the
direct cost of the contract rather than in payroll expense. None of our
employees are covered by a collective bargaining agreement. We believe our
relations with our employees are good.
Item 1a Risk Factors
Investing in our Class A common stock involves a high degree of risk and
uncertainty. You should carefully consider the risks and uncertainties described
below before investing in our Class A common stock. Our business, prospects,
financial condition and results of operations could be adversely affected due to
any of the following risks. In that case, the value of our Class A common stock
could decline, and you could lose all or part of your investment.
RISKS RELATING TO OUR BUSINESS
WE ARE DEPENDENT UPON SEVERAL SUPPLIERS FOR A SIGNIFICANT PORTION OF RAW
MATERIALS USED IN THE MANUFACTURING OF OUR PRODUCTS.
The principal raw materials we use in the manufacture of our semiconductor
components and sensor assemblies are silicon and III-IV wafers, chemicals and
gases used in processing wafers, gold wire, lead frames, and a variety of
packages and substrates, including metal, printed circuit board, flex circuits,
ceramic and plastic packages. All of these raw materials can be obtained from
several suppliers. From time to time, particularly during periods of increased
industry-wide demand, silicon wafers and other materials have been in short
supply. Any significant interruption in the supply of these raw materials could
have a material adverse effect on us.
CUSTOMER ACCEPTANCE OF OUR PRODUCTS IS DEPENDENT ON OUR ABILITY TO MEET CHANGING
REQUIREMENTS.
Customer acceptance of our products is significantly dependent on our ability to
offer products that meet the changing requirements of our customers, including
the military, medical institutions, industrial laboratories, government agencies
and industrial corporations. Any decrease in the level of customer acceptance of
our products could have a material adverse effect on us.
WE ARE SUBJECT TO MARKET RISK THROUGH OUR SALES TO OVERSEAS MARKETS.
A growing amount of our sales are being derived from overseas markets. These
international sales are primarily focused in Europe and the Middle East. These
operations are subject to risks that are inherent in operating in foreign
countries, including the following:
- foreign countries could change regulations or impose currency
restrictions and other restraints;
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- changes in foreign currency exchange rates and hyperinflation
or deflation in the foreign countries in which we operate;
- exchange controls;
- in some countries, there is a risk that the government may
expropriate assets;
- some countries impose burdensome tariffs and quotas;
- political changes and economic crises may lead to changes in
the business environment in which we operate;
- international conflict, including terrorist acts, could
significantly impact our financial condition and results of
operations; and
- economic downturns, political instability and war or civil
disturbances may disrupt distribution logistics or limit sales
in individual markets.
In addition, we utilize third-party "Distributors" to act as our representative
for the geographic region that they have been assigned. These "Distributors" are
responsible for maintaining customer account management and in some cases
maintaining an inventory of products for those customers within their geographic
region. Our success is dependent on these "Distributors" finding new customers
and receiving new orders from existing customers.
OUR FUTURE PERFORMANCE IS DEPENDENT UPON FINDING NEW CUSTOMERS AND RETAINING OUR
EXISTING CUSTOMERS.
Customers normally purchase our products and incorporate them into products that
they in turn sell in their own markets on an ongoing basis. As a result, our
sales are dependent upon the success of our customers' products and our future
performance is dependent upon our success in finding new customers and receiving
new orders from existing customers. In several of our market, quality and/or
reliability of our products are a major concern for our customers, not only upon
the initial manufacture of the product, but for the life of the product. Many of
our products are used in remote locations, or higher value assembly, making
servicing of our products not feasible. Any failure of the quality and/or
reliability of our products could have an adverse affect on us and on our
ability to maintain or attract customers.
CUSTOMER ORDERS ARE SUBJECT TO CANCELLATION OR MODIFICATION AT ANY TIME.
Our sales are made primarily pursuant to standard purchase orders for delivery
of products. However, by industry practice, orders may be canceled or modified
at any time. When a customer cancels an order, they are responsible for all
finished goods, all costs, direct and indirect, incurred by us, as well as a
reasonable allowance for anticipated profits. No assurance can be given that we
will receive these amounts after cancellation. The current backlog contains only
those orders for which we have received a confirmed purchase order and also
includes contracts which have scheduled shipping dates beyond the upcoming
fiscal year. As such, the current backlog represents only a portion of expected
annual revenues for fiscal year 2006.
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THE MARKETS FOR MANY OF OUR PRODUCTS ARE CHARACTERIZED BY CHANGING TECHNOLOGY.
The markets for many of our products are characterized by changing technology,
new product introductions and product enhancements, and evolving industry
standards. The introduction or enhancement of products embodying new technology
or the emergence of new industry standards could render existing products
obsolete or result in short product life cycles. Accordingly, our ability to
compete is in part dependent on our ability to continually offer enhanced and
improved products.
WE ARE DEPENDENT ON KEY IN-HOUSE MANUFACTURING EQUIPMENT OR PROCESSES TO DELIVER
A CUSTOM PRODUCT (SOLUTION) WITH THE HIGHEST PERFORMANCE AND SHORT TIME TO
MARKET.
We depend on key in-house manufacturing equipment and assembly processes. We
believe that these key manufacturing and assembly process give us the
flexibility and responsiveness to meet our customer delivery schedule and
performance specification with a custom product. This value proposition is an
important component of our offering to our customers. A loss of these
capabilities could have an adverse effect on our existing operations and new
business growth.
CHANGES IN THE SPENDING PRIORITIES OF THE FEDERAL GOVERNMENT CAN MATERIALLY
ADVERSELY AFFECT OUR BUSINESS.
In fiscal 2006, approximately 33.0 % of our sales were related to products
purchased by military contractors. Our business depends upon continued federal
government expenditures on defense, intelligence, aerospace and other programs
that we support. In fiscal 2006, our sales to military contractors enjoyed a
strong steady growth rate. In addition, foreign military sales are affected by
U.S. Government regulations, regulations by the purchasing foreign government
and political uncertainties in the U.S. and abroad. There can be no assurance
that the U.S. defense and military budget will continue to grow or that sales of
defense related items to foreign governments will continue at present levels. In
addition, the terms of defense contracts with the U.S. Government generally
permit the Government to terminate such contracts, with or without cause, at any
time. Any unexpected termination of a significant U.S. Government contract with
a military contractor that we sell our products to could have a material adverse
effect on us.
OUR INDUSTRY IS HIGHLY COMPETITIVE AND FRAGMENTED.
We compete with a range of companies for the custom optoelectronic and silicon
photodetector requirements of customers in our target markets. We believe that
our principal competitors for sales of custom devices are small to medium size
companies. Because we specialize in custom devices requiring a high degree of
engineering expertise to meet the requirements of specific applications, we
generally do not compete to any significant degree with other large United
States, European or Pacific Rim manufacturers of standard "off the shelf"
optoelectronic components or silicon photodetectors. We cannot assure you that
we will be able to compete successfully in our markets against these or any
future competitors.
OUR INDUSTRY IS SENSITIVE TO CHANGING ECONOMIC CONDITIONS.
We believe that many factors affect our industry, including consumer confidence
in the economy, interest rates, fuel prices and credit availability. The overall
economic climate or Gross National Product growth has a direct impact on our
customers and the demand for our products. We cannot assure you that our
business will not be adversely affected as a result of an industry or general
economic downturn.
WE ARE SUBJECT TO ENVIRONMENTAL REGULATIONS.
The photonics industry, as well as the semiconductor industry in general, is
subject to governmental regulations for the protection of the environment,
including those relating to air and water quality, solid and
11
hazardous waste handling, and the promotion of occupational safety. Various
federal, state and local laws and regulations require that we maintain certain
environmental permits. We believe that we have obtained all necessary
environmental permits required to conduct our manufacturing processes. Changes
in the aforementioned laws and regulations or the enactment of new laws,
regulations or policies could require increases in operating costs and
additional capital expenditures and could possibly entail delays or
interruptions of operations.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS ADEQUATELY, THE
VALUE OF OUR PRODUCTS COULD BE DIMINISHED.
We utilize proprietary design rules and processing steps in the development and
fabrication of our PIN photodiodes, avalanche photodiodes and our Terahertz
systems and sensors. In addition, we have over 100 patents or patents pending
utilized in our products. There can be no assurance that any issued patents will
provide us with significant competitive advantages, or that challenges will not
be instituted against the validity or enforceability of any patent utilized by
us, or, if instituted, that such challenges will not be successful. The cost of
litigation to uphold the validity and to prevent the infringement of a patent
could be substantial and could have a material adverse effect on our operating
results. Furthermore, there can be no assurance that our APD technology will not
infringe on patents or rights owned by others, licenses to which might not be
available to us. Based on limited patent searches, contacts with others
knowledgeable in the field of APD technology, and a review of the published
materials, we believe that our competitors hold no patents, licenses or other
rights to the APD technology which would preclude us from pursuing our intended
operations.
In some cases, we may rely on trade secrets to protect our innovations. There
can be no assurance that trade secrets will be established, that secrecy
obligations will be honored or that others will not independently develop
similar or superior technology. To the extent that consultants, key employees or
other third parties apply technological information independently developed by
them or by others to our projects, disputes might arise as to the proprietary
rights to such information which may not be resolved in our favor.
WE FACE STRONG COMPETITION FOR SKILLED WORKERS.
Our success depends in large part on its ability to attract and retain highly
qualified scientific, technical, management, and marketing personnel.
Competition for such personnel is intense and there can be no assurance that we
will be able to attract and retain the personnel necessary for the development
and operation of our business.
WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE FUTURE ACQUISITIONS, WHICH COULD
RESULT IN OUR NOT ACHIEVING THE EXPECTED BENEFITS OF THE ACQUISITION, THE
DISRUPTION OF OUR BUSINESS AND AN INCREASE IN OUR COSTS.
Over the past three years, we have acquired 3 businesses and we continually
explore opportunities to acquire related businesses, some of which could be
material to us. Our ability to continue to grow may depend upon identifying and
successfully acquiring attractive companies, effectively integrating these
companies, achieving cost efficiencies and managing these businesses as part of
our company.
We may not be able to effectively integrate the acquired companies and
successfully implement appropriate operational, financial and management systems
and controls to achieve the benefits expected to result from these acquisitions.
Our efforts to integrate these businesses could be affected by a number of
factors beyond our control, such as regulatory developments, general economic
conditions and increased competition. In addition, the process of integrating
these businesses could cause the interruption of, or loss of momentum in, the
activities of our existing business. The diversion of management's attention and
any delays or difficulties
12
encountered in connection with the integration of these businesses could
negatively impact our business and results of operations. Further, the benefits
that we anticipate from these acquisitions may not develop.
RISKS RELATING TO OUR CLASS A COMMON STOCK
OUR SHARE PRICE HAS BEEN VOLATILE IN THE PAST AND MAY DECLINE IN THE FUTURE.
Our Class A common stock has experienced significant market price and volume
fluctuations in the past and may experience significant market price and volume
fluctuations in the future in response to factors such as the following, some of
which are beyond our control:
- quarterly variations in our operating results;
- operating results that vary from the expectations of securities
analysts and investors;
- changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
- announcements of technological innovations or new products by us or
our competitors;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- changes in the status of our intellectual property rights;
- announcements by third parties of significant claims or proceedings
against us;
- additions or departures of key personnel;
- future sales of our ordinary shares; and
- stock market price and volume fluctuations.
Stock markets often experience extreme price and volume fluctuations. Market
fluctuations, as well as general political and economic conditions, such as a
recession or interest rate or currency rate fluctuations or political events or
hostilities in or surrounding the United States, could adversely affect the
market price of our Class A common stock.
In the past, securities class action litigation has often been brought against
companies following periods of volatility in the market price of its securities.
We may in the future be the target of similar litigation. Securities litigation
could result in substantial costs and divert management's attention and
resources both of which could have a material adverse effect on our business and
results of operations.
FUTURE SALES OF OUR CLASS A COMMON STOCK IN THE PUBLIC MARKET COULD LOWER OUR
STOCK PRICE, AND CONVERSION OF OUR WARRANTS AND ANY ADDITIONAL CAPITAL RAISED BY
US MAY DILUTE YOUR OWNERSHIP IN US.
We may sell additional shares of Class A common stock in subsequent offerings.
In addition, holders of warrants to purchase our Class A common stock will, most
likely, exercise their warrants to purchase shares of our Class A common stock
after this registration statement is declared effective. We cannot predict the
size of future issuances of our Class A common stock or the effect, if any, that
future issuances and sales of shares of our Class A common stock will have on
the market price of our Class A common stock. Sales of substantial amounts of
our Class A common stock, including shares issued in connection with the
exercise of
13
the warrants, or the perception that such sales could occur, may adversely
affect prevailing market prices for our Class A common stock.
SHARES ELIGIBLE FOR PUBLIC SALE IN THE FUTURE COULD DECREASE THE PRICE OF OUR
CLASS A COMMON STOCK AND REDUCE OUR FUTURE ABILITY TO RAISE CAPITAL.
Sales of substantial amounts of our Class A common stock in the public market
could decrease the prevailing market price of our Class A common stock, which
would have an adverse affect on our ability to raise equity capital in the
future.
WE DO NOT INTEND TO PAY DIVIDENDS.
We have never declared or paid any cash dividends on our Class A common stock.
We currently intend to retain future earnings, if any, to finance operations and
expand our business and, therefore, do not expect to pay any dividends in the
foreseeable future.
ITEM 2 PROPERTIES
The Company leases all of its executive offices, research, marketing and
manufacturing facilities. At March 31, 2006, those leases consisted of primarily
95,000 square feet in three facilities. The facility located at 1240 Avenida
Acaso in Camarillo, California is leased through February 2009. A second
manufacturing facility is located at 305 County YZ, Dodgeville, Wisconsin, and
is leased through November 2007. And a third manufacturing facility is located
at 2925 Boardwalk, Ann Arbor, Michigan and is leased through June 2010. The
Company believes that its existing facilities are adequate to meet its needs for
the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Class A Common Stock is traded on the American Stock Exchange
(AMEX) under the symbol "API".
At June 23, 2006, the Company had 104 holders of record for the Class A Common
Stock (including shares held in street name), representing approximately 6,000
beneficial owners of the Class A Common Stock. On
14
the same date, there were 6 holders of record of the Class B Common Stock (none
of which were held in street name).
The following table sets forth the high and low closing prices of the Company's
Class A Common Stock by quarter for fiscal years 2006 and 2005.
Quarterly Stock Market Data
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2006 2005 2006 2005 2006 2005 2006 2005
---- ---- ---- ---- ---- ---- ---- ----
Common Stock(1)
High 3.09 3.21 3.56 2.57 3.24 1.85 2.97 2.17
Low 2.04 2.02 2.62 1.65 2.39 1.57 2.59 1.64
---------------
(1) Price ranges on the American Stock Exchange
The Company has never paid any cash dividends on its capital stock. The Company
intends to retain earnings, if any, for use in its business and does not
anticipate that any funds will be available for the payment of cash dividends on
its outstanding shares in the foreseeable future. The holders of Common Stock
will not be entitled to receive dividends in any year until the holders of the
Class A Redeemable Convertible Preferred Stock receive an annual non-cumulative
dividend preference of $.072 per share. To date, a total of 740,000 shares of
Class A Redeemable Convertible Preferred Stock have been converted into 222,000
shares of Class A Common Stock, leaving outstanding 40,000 shares of Class A
Redeemable Convertible Preferred Stock. The aggregate non-cumulative annual
dividend preference of such Class A Redeemable Convertible Preferred Stock is
$2,880. There is no public market for the Company's Class A Redeemable
Convertible Preferred Stock or Class B Common Stock; however, such stock is
convertible into Class A Common Stock at the option of the holder and upon
transfer by the holder of the Class A Redeemable Convertible Preferred Stock.
ITEM 6 SELECTED FINANCIAL DATA
The selected financial data for each of the five years presented below is
derived from our audited consolidated financial statements and should be read in
conjunction with the consolidated financial statements, the notes to the
consolidated financial statements, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations", all of which are contained in
this report on Form 10-K.
(in thousands, except per share data)
2006 2005 2004 2003 2002
Net Sales $23,585 $ 14,803 $ 12,401 $ 9,147 $ 6,931
Gross Profit $ 9,183 $ 4,732 $ 4,297 $ 2,699 $ 2,761
as a percentage of Sales 39% 32% 35% 30% 40%
Net Income (Loss) $(3,465) $ 5,254 $ 794 $ (803) $ (284)
Earnings (Loss) per common share-Basic $ (0.20) $ 0.39 $ 0.06 $ (0.06) $ (0.02)
Earnings (Loss) per common share-Diluted $ (0.20) $ 0.34 $ 0.06 $ (0.06) $ (0.02)
15
Weighted average common shares outstanding 17,477 13,461 13,400 12,356 12,209
Total Assets $38,001 $ 23,355 $ 12,574 $11,552 $ 9,255
Current Liabilities $ 5,135 $ 3,185 $ 2,858 $ 2,640 $ 612
Long Term Liabilities $ 8,533 $ 4,861 $ 11 $ 22 $ -
Class A redeemable convertible preferred stock $ 32 $ 32 $ 32 $ 32 $ 32
Shareholders' Equity $24,301 $ 15,277 $ 9,673 $ 8,858 $ 8,611
Working Capital $ 9,330 $ 11,261 $ 5,802 $ 4,811 $ 7,461
Dividends declared on Capital Stock $ - $ - $ - $ - $ -
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Application of our accounting policies requires management to make certain
judgments and estimates about the amounts reflected in the financial statements.
Management uses historical experience and all available information to make
these estimates and judgments, although differing amounts could be reported if
there are changes in the assumptions and estimates. Estimates are used for, but
not limited to, the accounting for the allowance for doubtful accounts,
inventory allowances, impairment costs, depreciation and amortization, warranty
costs, taxes and contingencies. Management has identified the following
accounting policies as critical to an understanding of our financial statements
and/or as areas most dependent on management's judgment and estimates.
REVENUE RECOGNITION
In accordance with Staff Accounting Bulletin No. 104, we recognize revenue from
the sale of products when the products are shipped to the customer. Revenues
from the sale of services consist of non-recurring engineering charges, which
are recognized when the services have been rendered. Historically, sales returns
have amounted to less than 1% of net income and all sales are recorded net of
sales returns and discounts.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company continually reviews the recoverability of the carrying value of
long-lived assets using the methodology prescribed in Statement of Financial
Accounting Standards (SFAS) 144, "Accounting for the Impairment and Disposal of
Long-Lived Assets." The Company also reviews long-lived assets and the related
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. Upon
such an occurrence, recoverability of these assets is determined by comparing
the forecasted undiscounted net cash flows to which the assets relate, to the
carrying amount. If the asset is determined to be unable to recover its carrying
value, then intangible assets, if any, are written down first, followed by the
other long-lived assets to fair value. Fair value is determined based on
discounted cash flows, appraised values or management's estimates, depending on
the nature of the assets.
DEFERRED TAX ASSET VALUATION ALLOWANCE
The Company has incurred losses over the past years, which creates a deferred
tax benefit. Up to 2005, we have recorded a valuation allowance that fully
reserved the benefit because realization was doubtful. In 2005, with the
addition of Picometrix and having had two years of profitable operations, we
reduced the allowance to approximately half of the deferred asset. With the
acquisition of Picometrix, we recorded a deferred tax liability to reflect the
non- deductible nature of the future amortization of the intangible assets
acquired. That deferred tax liability will be amortized over the same life as
the intangible assets. The results from operations
16
in 2006 were disappointing, so there was more concern regarding utilization of
the net operating loss carry-forwards before they expired. As a result, we
decided to increase the reserve by approximately $1,000,000 to cover the loss
carry-forwards that expire by 2009. While we are still confident that the
Company will generate enough earnings to realize much of the loss
carry-forwards, no assurances can be given that we will generate future earnings
sufficient to cover the entire net asset. We will review the valuation allowance
each year and make adjustments to reflect our best estimate of future tax
benefit realization.
INVENTORIES
The Company's inventories are stated at standard cost (which approximates the
first-in, first-out method) or market. Slow moving and obsolete inventories are
reviewed throughout the year. To calculate a reserve for obsolescence, we begin
with a review of our slow moving inventory. Any inventory, which has been slow
moving within the past 12 months, is evaluated and reserved if deemed
appropriate. In addition, any residual inventory, which is customer specific and
remaining on hand at the time of contract completion, is reserved for at the
standard unit cost. The complete list of slow moving and obsolete inventory is
then reviewed by the production, engineering and/or purchasing departments to
identify items that can be utilized in the near future. These items are then
excluded from the analysis and the remaining amount of slow-moving and obsolete
inventory is then reserved for. Additionally, non-cancelable open purchase
orders for parts we are obligated to purchase where demand has been reduced may
be reserved. Reserves for open purchase orders where the market price is lower
than the purchase order price are also established. If a product that had
previously been reserved for is subsequently sold, the amount of reserve
specific to that item is then reversed.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Allowance for Doubtful Accounts is established by analyzing each account
that has a balance over 90 days past due. Each account is individually assigned
a probability of collection. The total amount determined to be uncollectible in
the 90-days-past-due category is then reserved fully. When other circumstances
suggest that a receivable may not be collectible, it is immediately reserved
for, even if the receivable is not yet in the 90-days-past-due category.
TABLE OF CONTRACTUAL OBLIGATIONS
The following table sets forth the contractual obligations of the Company at
March 31, 2006.
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
----------------------------------------- ------------------------------------------------------------
More than 5
Total Within 1 year 1 - 3 years 3 - 5 years years
---------- ------------- ----------- ----------- -----------
Long-term debt 7,032,000 900,000 5,008,000 776,000 348,000
Capital lease obligations 27,000 27,000 - - -
Operating lease obligations 4,201,000 1,171,000 2,854,000 176,000 -
Purchase Obligations 1,312,000 1,312,000 - - -
Debt to related parties 2,901,000 500,000 1,851,000 550,000 -
---------- --------- --------- --------- -------
Total 15,473,000 3,910,000 9,713,000 1,502,000 348,000
========== ========= ========= ========= =======
17
RESULTS OF OPERATIONS
FISCAL YEAR 2006 COMPARED TO FISCAL YEAR 2005
REVENUES
The Company predominantly operates in one industry segment, light and radiation
detection devices that it sells to multiple markets including
telecommunications, industrial sensing/NDT, military/aerospace, medical, and
homeland security. Revenues by market consisted of the following:
Twelve months ended
March 31,2006 March 27, 2005
------------------------ -----------------------
Telecommunications $ 3,129,000 13% $ 86,000 1%
Industrial Sensing/NDT 10,359,000 44% 7,360,000 49%
Military/Aerospace 5,860,000 25% 4,875,000 33%
Medical 2,228,000 9% 2,482,000 17%
Home Land Security 2,009,000 9% -- 0%
----------- -----------
Total Revenues $23,585,000 100% $14,803,000 100%
The Company's revenues for the fiscal year ended March 31, 2006 (2006) were
$23.6 million, an increase of $8.8 million, or 59% of revenues of $14.8 million
for the fiscal year ended March 27, 2005 (2005).
Approximately $7.6 million of the increase was attributable to revenues from
Picometrix, LLC, which the Company acquired in May 2005 The remaining increase
of $1.2 million reflects an overall increase in shipments of 8% to customers in
each of the Company's remaining markets over the prior year. This represents
approximately $1.4 million in volume increases offset by approximately $0.2
million in price decreases to one customer in the medical market as discussed in
the paragraph below.
The acquisition of Picometrix provided the Company entry into the homeland
security market with its Terahertz products and contracts and significantly
extended its reach in the telecommunication markets with optical receiver
products. The most significant revenue increases are from the telecommunications
market, which increased $3.0 million, all coming from the Picometrix
acquisition. The industrial sensing/NDT market increased 41% or $3.0 million,
over the prior year of which $1.7 million was attributable to Picometrix. Sales
to the military aerospace market increased 20% over the prior year and accounted
for approximately $985,000 of the remaining increase in revenues. Homeland
security accounted for $2.0 million of the increase all attributable to
Picometrix, Inc. and Medical dropped $254,000 over the prior year mainly due to
price reductions for one customer.
As expected, the increased diversification and larger customer base achieved
through the Company's acquisitions have resulted in net revenues meeting our
expectations for the most recent fiscal year.
COSTS AND EXPENSES
Cost of product sales increased to $14.4 million in 2006 from $10.1 million in
2005. Expressed as a percent of net sales, cost of goods sold was 61% in fiscal
year 2006 compared to 68% in fiscal year 2005. As a result, gross profit
increased to $9.2 million in fiscal year 2006 from $4.7 million in fiscal year
2005, an increase of 96%. This increase in gross profit is primarily
attributable to the acquisition of Picometrix, whose products carry higher gross
margins. Stated as a percentage of net sales, material costs were 28% in 2006,
the same as
18
in 2005. Material costs did not decrease in FY 06 as a percent of sales,
primarily as the result of the $1.1 million inventory write-off in our
California facility. The write-off was comprised of $698,000 primarily due to
raw material purchases in excess of requirements and obsolescence due to product
discontinuance and engineering changes. Another $123,000 was due to obsolete
inventory related to the Photonic Detectors Inc. and Texas Optoelectronic Inc.
acquisitions in FY05 & FY 03 respectively. The remaining $330,000 was due to
scrap, shrinkage and standard cost write-downs. Direct labor and other overhead
expenses as a percentage of net sales were 7% and 26% respectively in FY 2006 as
compared to 8% and 32% respectively in FY 2005. While our gross margins at our
California facility fell short of our expectations for FY 2006, due to the
inventory adjustments, scrap and rework, we are actively seeking ways to
minimize our costs and improve our margins, and have made margin improvement a
priority for FY 2007. One of the steps the Company is taking is the
consolidation of wafer fabrication from all three facilities into the Ann Arbor
facility.
Research and development (R&D) costs increased by $2.9 million to $3.0 million
during FY 2006 compared to $146,000 in FY 2005. The increase in R & D costs is
the result of the Company's Picometrix acquisition ($2.7 million) and other
non-Picometrix product R&D initiatives, which amounted to $200,000. We expect
that R&D expenses will increase in the upcoming fiscal year, as we focus on new
opportunities brought to us as a result of the Picometrix acquisition.
Marketing and sales expenses increased by $699,000 (56.8%) to $1.9 million in FY
2006, which is 8% of sales, which is the same percentage as FY 2005. The
acquisition of Picometrix accounted for $545,000 of the sales and marketing
expense increase. Planned additions to the sales department during the year
accounted for $154,000 of increased compensation, travel and related expenses.
Overall advertising and marketing expenses increased by approximately $165,000,
primarily associated with products sold into the telecommunications market. The
Company is committed to building our sales & marketing function in the
telecommunications, home land security, military and industrial sensing markets
and anticipates further increases in compensation, travel and related expenses
during fiscal 2007.
Total general and administrative expenses increased by $4.1 million (151.4%) to
$6.8 million (including amortization and goodwill impairment expense) in FY 2006
as compared to $2.7 million in FY 2005. Expressed as a percentage of net sales,
general and administrative expenses represented 29% in FY 2006 as compared to
18% in FY 2005. The increase is primarily attributable to $2.6 million of
intangible write-off and amortization, comprised of goodwill impairment of
$814,000 for Texas Optoelectronics, intangible amortization of $1.4 million and
amortization of financing expenses of $387,000 related to the acquisition of
Picometrix. The remaining $1.5 million increased G&A costs was the result of
added corporate expenses. The Sarbanes-Oxley Act section 404, internal controls,
requires the Company to be compliant by fiscal year ending March 2008, based on
current market capitalization. External costs required to be in compliance will
materially increase over the next two years.
Interest income for 2006 totaled approximately $ 43,000, same as in 2005, due
primarily to capital financing activities, which resulted in higher cash
balances available for short-term investment. Interest expense for the year was
$917,000, as compared to $154,000 in 2005, also a result of capital financing
activities and the related interest expense. Related party interest accounted
for $206,000 of the total interest expense.
The company recorded an income tax provision of $28,000 for FY 2006 as compared
to a negative income tax provision of $4.7 million for FY 2005. The difference
of $4.7 million is due to the fact that the Company reversed 50% of its deferred
tax valuation allowance, in the amount of $4.7 million in FY 2005.
Net loss for fiscal year 2006 was $3.5 million, as compared to net income $5.3
million in 2005, which included the FY2005 $4.7 million adjustment made to
reduce the deferred tax valuation allowance. The decrease in net income is
attributable to higher operating expenses, interest expense and the inventory
write down at the California facility, offset partially by higher gross profit
attributable to the Picometrix acquisition.
19
INVENTORY
Expense related to Inventory write-offs for FY 2006 compared to FY 2005
increased approximately $1.1 million from $36,000 in FY 2005 to $1.2 million in
FY 2006. This is comprised of slow moving and obsolete inventory of
approximately $821,000; of which $123,000 was associated with the acquisitions
of Texas Optoelectronics Inc. (FY 03) and Photonic Detector Inc. (FY 05). The
balance of $698,000 was slow moving-excess-obsolete inventory from operations.
The remaining $330,000 is derived from standards reductions, physical inventory
quantity adjustments and scrap.
FISCAL YEAR 2005 COMPARED TO FISCAL YEAR 2004
REVENUES
The Company's revenues for the fiscal year ended March 27, 2005 (2005) were
$14.8 million, an increase of $2.4 million, or 19% from revenues of $12.4
million for the fiscal year ended March 28, 2004 (2004).
Approximately $500,000 of the increase was attributable to revenues from
Photonic Detectors, Inc. (PDI), which the Company acquired inDecember 2004. The
remaining increase reflects an overall increase in shipments to customers in
each of the Company's major market segments over the prior year. As has been the
trend for most of the current fiscal year, the most significant revenue
increases are coming from the medical and industrial sensing segments, which
increased by 34% and 17% respectively over the prior year and account for $1.5
million of the total increase. Similarly, sales to the military aerospace and
automotive markets have also increased, by 5% and 17% respectively, and account
for approximately $400,000 of the remaining increase in net revenues. Stated as
a percentage of net revenues, sales to the industrial sensing market represents
49%, sales to the military/ aerospace market represents 33%, medical is 17% and
telecommunications is 1%.
As expected, the increased diversification and larger customer base achieved
through the Company's previous acquisitions resulted in net revenues, which
fully met our expectations for fiscal year 2005.
COSTS AND EXPENSES
Cost of product sales increased to $10.1 million in 2005 from $8.1 million in
2004. Stated as percent of net sales, cost of product sales increased 3
percentage points to 68%, reducing our gross profit margin to 32% in 2005 as
compared to 35% in fiscal year 2004. The reduction in gross margin is primarily
attributable to manufacturing issues; including labor inefficiencies and a
significant increase in material costs related to scrap, rework and assembly
yields. Stated as a percentage of net sales, material costs rose to 28% in 2005
as compared to 25% in 2004. In 2005, we were again faced with heightened
competitiveness in certain markets which caused us to absorb increases in
certain material costs while maintaining or reducing existing pricing in our
efforts to generate new business as well as retain existing business. Direct
labor and other overhead expenses as a percentage of net sales remained flat at
8% and 32%, respectively, in 2005 as compared to 2004. While our gross margins
fell slightly short of our expectations for 2005, we continued to seek ways to
improve our cost and margin structure, and made margin improvement a continued
priority during 2006.
Research and development (R&D) costs decreased by $134,000 (48%) to $146,000
during 2005, compared to $280,000 in 2004. R & D costs decreased significantly
over the past two years as we concentrated our efforts on projects offering the
highest commercial potential per each dollar spent.
Marketing and sales expenses increased by $205,000 (20%) to $1.2 million in
2005. Planned additions to the sales department staff during the year accounted
for $113,000 of increased salary, travel and related expenses. In addition,
increased sales contributed to a $68,000 increase in commission expense and
overall advertising
20
and marketing expenses increased by approximately $24,000. The Company remains
committed to insuring that our customers receive excellent service.
Total general and administrative expenses increased by $541,000 (25%) to $2.7
million in 2005 as compared to approximately $2.1 million in 2004. Approximately
50% of the increase in general and administrative expenses is due to increased
personnel and related expenses, including salaries, bonuses and benefits to
support our growth objectives. In addition, total payroll was increased during
the fourth quarter of fiscal 2005 as a direct result of the PDI acquisition,
which was consummated on December 21, 2004. As part of our integration plan,
selected PDI personnel were either offered a permanent position or requested to
remain as an employee until a date specified by the Company. The net effect of
the additional PDI personnel accounted for approximately $160,000 of the year to
date increase. The remaining increases in general and administrative expenses
were primarily due to acquisition investigation and related expenses, including
consultants, legal, financing and other related expenses, which amounted to
approximately $246,000 in total.
Interest income for 2005 totaled $43,000, an increase of $23,000 over 2004, due
primarily to capital financing activities, which resulted in higher cash
balances available for short-term investment. Interest expense for the year was
$154,000 as compared to $30,000 in 2004, also a result of capital financing
activities and the related interest liabilities.
At March 27, 2005, the Company reversed 50% of its deferred tax valuation
allowance, in the amount of $4.7 million. The deferred tax valuation allowance
had previously been recorded at full value against its deferred tax assets,
reducing the net value of the asset to zero. With the acquisition of both
Photonic Detectors Inc. in December 2004 and Picometrix, Inc. in May 2005, the
Company's management projected that the Company would generate sufficient future
taxable income to utilize at least a portion of its accumulated NOL's before
they expire and has accordingly reduced the deferred tax asset valuation
allowance to $4.7 million against a deferred tax asset of $9.5 million, bringing
the net value of the deferred tax asset to $4.8 million at March 27, 2005. The
reduction in the valuation allowance was recorded as a deferred tax benefit in
the statement of operations.
Net income for fiscal year 2005 was $5.3 million, including the $4.7 million
adjustment made to reduce the deferred tax valuation allowance, as compared to
$794,000 in 2004. Total acquisition-related expenses for fiscal year 2005 which
were necessary to support our growth objectives amounted to $560,000 (which
includes interest expense of $154,000, plus the $406,000 increased general and
administrative expenses associated with PDI and other acquisition investigation
activities, as noted above). Thus, excluding the net impact of the deferred tax
asset adjustment and acquisition-related expenses, net income for fiscal 2005
would have been $1.1 million, or $0.08 per share.
21
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2006, the Company had unrestricted cash and cash equivalents of
$5.9 million, an increase of $4.4 million, from $1.5 million as of March 27,
2005. The Company believes that current cash levels combined with our revolving
line of credit will be sufficient for our 2007 fiscal year. On March 21, 2006,
the Company received $4 million in net proceeds from the placement of a note
payable that is convertible into Class A Common stock as discussed below.
The Company maintains a revolving line of credit with a regional bank that
provides for borrowings up to $3.0 million, based on 80% of the Company's
eligible accounts receivable and 40% of the Company's eligible inventory,
subject to certain limitations as defined by the agreement. At March 31, 2006,
the outstanding balance on the line was $1.0 million. All business assets of the
Company secure the line. As most recently amended, repayment is interest only
monthly, with principal due at maturity date on November 3, 2006. Interest is
computed at the prime rate as published in the Wall Street Journal plus -1/2%
with a floor of 6.5%. The prime interest rate was 7.75% at March 31, 2006.
In May 2005, the Company borrowed $2.7 million from a regional bank. The loan is
guaranteed by all of the Company's subsidiaries. Repayment is principal of
$75,000 per month, plus interest, until maturity on May 2, 2008. Interest is
computed at the prime rate as published in the Wall Street Journal plus 1% with
a ceiling of 7.75% and a floor of 6%.
During Q2 06, $3.5 million of the senior convertible notes were converted into
1,802,953 shares of the Company's Class A Common Stock at $1.9393 per share. The
investors exercised their option and provided an additional $1.0 million of
senior convertible notes in September 2005 that can be converted into 472,678
shares at 2.1156 per share and received warrants to purchase 170,164 shares of
Class A Common Stock at $1.78 per share.
During Q3 06, $1.0 million of the senior convertible notes were converted into
472,678 shares of the Company's Class A Common Stock at $2.1156 per share.
During Q3 06, warrants were converted into 85,082 shares of Class A Common Stock
at $1.78 per share The company received $151,446 in cash as a result of this
conversion. The investor has warrants remaining to purchase 85,082 shares of
Class A Common Stock at $1.78 per share.
During Q4 06, the investors exercised their option and provided an additional
$4.0 million of senior convertible notes in March 2006 that can be converted
into 1,890,717 shares at 2.1156 per share and received warrants to purchase
680,658 shares of Class A Common Stock at $1.78 per share. The company received
$4.0 million in cash as a result of this conversion. At the end of Q4 06, the
outstanding senior convertible notes totaled $5.5 million that can be converted
into 2,666,015 shares of Class A Common Stock and their were outstanding
detachable warrants to purchase 1,446,398 shares of Class A Common Stock at
$1.78 per share.
Convertible
Convertible notes -
notes - Face Notes Balance Conversion Outstanding Exercise
value Converted 3/31/06 Price Warrants Price
------------ ---------- ----------- ---------- ----------- --------
Round 1 $ 5,000,000 $3,475,000 $ 1,525,000 $ 1.9393 680,658 $ 1.78
financing
Round 2 5,000,000 1,000,000 4,000,000 $ 2.1156 765,740 $ 1.78
Financing
------------ ---------- ----------- -----------
Total $ 10,000,000 $4,475,000 $ 5,525,000 1,446,398
22
Operating Activities
Net cash used in operating activities of $783,000 for the year ended March 31,
2006 was primarily the result of our net operating loss of ($3,465,000), an
increase in accounts receivable of $712,000, an increase in prepaid expenses of
$355,000, a decrease in accrued expenses of $645,000, and a decrease in accounts
payable of $336,000; offset by decreases in goodwill due to impairment charges
of $814,000, decreases in inventory (including the provision for obsolescence)
of $958,000, and other assets of $158,000.
Net cash provided by operating activities of $228,000 for the year ended March
27, 2005 was primarily the result of our net operating profit of $5,254,000, a
decrease in our deferred tax valuation allowance of $4,749,000, an increase in
inventory of $291,000, an increase in prepaid acquisition and capital finance
expenses of $532,000, an increase in prepaid expenses of $193,000, and a
decrease in customer deposits of $477,000; offset by an increase in accounts
payable and other accrued expenses of $507,000 and a decrease in accounts
receivable of $71,000.
Net cash provided by operating activities of $1,216,000 for the year ended March
28, 2004 was primarily the result of our net operating profit of $794,000, an
increase in accounts receivable of $176,000, a decrease in accounts payable of
$73,000, a decrease in other accrued expenses of $125,000; offset by a decrease
in inventory of $307,000.
Investing Activities
Net cash used in investing activities was $3.0 million for the year ended March
31, 2006. The amount primarily consisted of cash paid for the acquisition of
Picometrix of $3.5 million and related expenses of $936,000, net of cash
acquired of $678,000 and change in restricted cash of $1.3 million. Capital
expenditure activity for the year accounted for $263,000 of the cash used, and
patent expenditures were $191,000 for the year.
Net cash used in investing activities was $5,049,000 for the year ended March
27, 2005. The amount primarily consisted of $4,228,000 loan to Picometrix,
$1,254,000 in a restricted cash collateral account subject to release upon
satisfaction of certain conditions (which conditions were subsequently met),
$193,000 was used for capital expenditures required primarily for necessary
computer and manufacturing equipment upgrades or replacements, and $1,117,000
for purchases of outstanding shares of PDI common stock; offset by $1,700,000
transferred from short-term investments into cash.
Net cash used in investing activities was $608,000 for the year ended March 28,
2004. The amount primarily consisted of a $300,000 transfer of cash to short
term investments and $298,000 used for capital expenditures.
Financing Activities
Net cash provided by financing activities was $8.4 million for the year ended
March 31, 2006. This primarily reflects the $2.7 million cash proceeds from the
term loan relating to the Picometrix acquisition reduced by ten months of loan
repayment of $750,000, $5.0 million of cash proceeds from convertible notes ($1
million in September 05 and $4 million in March 06), $455,000 of cash paid for
warrants to purchase the Company's Class A Common Stock and $600,000 of cash
proceeds from a tem loan by the Michigan Economic Development Corporation.
Payments of $300,000 were made during the year to equipment vendors to adhere to
unsecured financing arrangements. Employees exercised stock options for
approximately $47,000.
23
Net cash provided by financing activities was $5.0 million for the year ended
March 27, 2005. The amount primarily consisted of $5.0 million obtained through
private placement of a convertible note, a revolving line of credit of
$1,000,000; offset by a pay-down of $900,000 against the secured term loan and
repayment of a PDI line of credit of $78,000.
Net cash used in financing activities was $211,000 for the year ended March 28,
2004. The amount primarily consisted of $23,000 in proceeds from the sale of
fixed assets, proceeds from exercise of stock options of $66,000; offset by a
pay-down of $300,000 against the secured term loan.
The Company is exposed to interest rate risk for marketable securities. We
continually monitor interest rates and will attempt to utilize the best possible
avenues of investment as excess cash becomes available.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2006, most of the Company's interest rate exposure is linked to the
prime rate, subject to certain limitations. Offset by cash investment tied to
prime rate. As such, we are at risk to the extent of changes in the prime rate
and do not believe that moderate changes in the prime rate will materially
affect our operating results or financial condition.
FORWARD LOOKING STATEMENTS
The information contained herein includes forward looking statements that are
based on assumptions that management believes to be reasonable but are subject
to inherent uncertainties and risks including, but not limited to, risks
associated with the integration of newly acquired businesses, unforeseen
technological obstacles which may prevent or slow the development and/or
manufacture of new products, limited (or slower than anticipated) customer
acceptance of new products which have been and are being developed by the
Company, the availability of other competing technologies and a decline in the
general demand for optoelectronic products.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of Advanced Photonix, Inc. are included in
Item 8:
Page
-----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 26
FINANCIAL STATEMENTS:
Consolidated Balance Sheets,
As of March 31, 2006 and March 27, 2005 27-28
Consolidated Statements of Operations
for the years ended March 31, 2006, March 27, 2005
and March 28, 2004 29
Consolidated Statements of Shareholders' Equity
for the years ended March 31, 2006, March 27, 2005 and
March 28, 2004 30
Consolidated Statements of Cash Flows
for the years ended March 31, 2006, March 27, 2005 and
March 28, 2004 31-33
Notes to Consolidated Financial Statements 34-56
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Advanced Photonix, Inc.:
We have audited the accompanying consolidated balance sheets of Advanced
Photonix, Inc. (the "Company") as of March 31, 2006 and March 27, 2005 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years ended March 31, 2006, March 27, 2005 and March 28,
2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of the Company at March
31, 2006 and March 27, 2005 and the results of its operations and its cash flows
for the years ended March 31, 2006, March 27, 2005 and March 28, 2004 in
conformity with accounting principles generally accepted in the United States.
/s/ Farber Hass Hurley & McEwen LLP
June 9, 2006
26
ADVANCED PHOTONIX, INC.
CONSOLIDATED BALANCE SHEETS
As of: MARCH 31, 2006 MARCH 27, 2005
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,933,000 $ 1,503,000
Restricted cash -- 1,254,000
Accounts receivable, net of allowance for doubtful accounts of
$46,000 and $24,000 for March 31, 2006 and March 27, 2005,
respectively. 4,387,000 2,610,000
Note receivable from Picometrix -- 4,228,000
Inventory , less allowance of $2,181,000 in 2006 and $1,032,000 in
2005 3,434,000 3,644,000
Prepaid expenses and other current assets 711,000 563,000
Deferred tax asset, current portion -- 644,000
-------------- --------------
Total current assets 14,465,000 14,446,000
Equipment and leasehold improvements
Equipment and leasehold improvements 7,923,000 5,118,000
Accumulated depreciation (4,548,000) (3,719,000)
-------------- --------------
Equipment and leasehold improvements, net 3,375,000 1,399,000
Other assets
Goodwill, net of accumulated amortization of $353,000 for March 31,
2006 and March 27, 2005. 4,719,000 2,421,000
Intangibles, net of accumulated amortization of $1,399,000 and
$181,000 for March 31, 2006 and March 27, 2005, respectively 14,155,000 481,000
Patents, net of accumulated amortization of $55,000 and $51,000 for
March 31, 2006 and March 27, 2005, respectively 16,000 13,000
Patents pending 184,000 --
Prepaid capital finance expenses, net of current portion and
accumulated amortization in 2006 and 2005 of $181,000 and $83,000,
respectively 84,000 315,000
Certificates of deposit 275,000 --
Security deposits and other assets 105,000 175,000
Deferred income taxes 623,000 4,105,000
-------------- --------------
Total other assets 20,161,000 7,510,000
-------------- --------------
Total assets $ 38,001,000 $ 23,355,000
============== ==============
(Continued)
27
ADVANCED PHOTONIX, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
MARCH 31, 2006 MARCH 27, 2005
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit $ 1,000,000 $ 1,000,000
Accounts payable 982,000 1,053,000
Compensation and related withholdings 697,000 529,000
Customer deposits 1,000 -
Deferred income 76,000 271,000
Other accrued expenses 952,000 321,000
Current portion of long-term debt, related party 500,000 -
Current portion of long-term debt 927,000 11,000
-------------- --------------
Total current liabilities 5,135,000 3,185,000
Long-term debt, less current portion 6,132,000 4,861,000
Long-term debt, less current portion - related party 2,401,000 -
-------------- --------------
Total liabilities 13,668,000 8,046,000
COMMITMENTS AND CONTINGENCIES:
CLASS A redeemable convertible preferred stock, $.001 par value; 780,000
shares authorized; 2006 and 2005 - 40,000 shares issued and
outstanding; liquidation preference $32,000 32,000 32,000
SHAREHOLDERS' EQUITY:
PREFERRED stock, $.001 par value; 10,000,000 shares authorized; 780,000
shares designated Class A redeemable convertible; 2006 and
2005 - no shares issued and outstanding - -
CLASS A common stock, $.001 par value, 50,000,000 authorized;
2006 - 18,885,006 shares issued and outstanding, 2005 - 13,512,631 shares
issued and outstanding. 19,000 13,000
CLASS B common stock, $.001 par value; 4,420,113 shares authorized,
2006 and 2005 - 31,691 issued and outstanding. - -
Additional paid-in capital 40,478,000 27,995,000
Accumulated deficit (16,196,000) (12,731,000)
-------------- --------------
Total shareholders' equity 24,301,000 15,277,000
-------------- --------------
Total liabilities and shareholders' equity $ 38,001,000 $ 23,355,000
============== ==============
See notes to consolidated financial statements.
28
ADVANCED PHOTONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 2006, March 27, 2005 and March 28, 2004
2006 2005 2004
------------ ----------- -----------
Sales, net $ 23,585,000 $14,803,000 $12,401,000
Cost of products sold 14,402,000 10,071,000 8,104,000
------------ ----------- -----------
Gross profit 9,183,000 4,732,000 4,297,000
Research and development expenses 3,019,000 146,000 280,000
Sales and marketing expenses 1,930,000 1,231,000 1,009,000
General and administrative expenses 4,157,000 2,491,000 2,087,000
Amortization expense 1,403,000 117,000 78,000
Amortization - Capital finance expense 387,000 81,000 --
Goodwill impairment expense 814,000 -- --
------------ ----------- -----------
Total operating expenses 11,710,000 4,066,000 3,454,000
------------ ----------- -----------
Income (loss) from operations (2,527,000) 666,000 843,000
Other income (expense):
Interest income 43,000 43,000 20,000
Interest expense (322,000) (13,000) (30,000)
Interest expense related to convertible notes (389,000) (141,000) --
Interest expense, related party (206,000) -- --
Other income (expense) (36,000) (35,000) (34,000)
------------ ----------- -----------
Income (Loss) before provision (benefit) for income taxes (3,437,000) 520,000 799,000
Provision (benefit) for income taxes
Provision (benefit) for income taxes - current 28,000 18,000 12,000
Provision (benefit) for income taxes - deferred -- (4,752,000) (7,000)
------------ ----------- -----------
Total provision (benefits) for income taxes 28,000 (4,734,000) 5,000
Net income (loss) $ (3,465,000) $ 5,254,000 $ 794,000
============ =========== ===========
Basic earnings (loss) per share $ (0.20) $ 0.39 $ 0.06
Diluted earnings (loss) per share $ (0.20) $ 0.34 $ 0.06
Weighted average common shares outstanding 17,477,000 13,461,000 13,400,000
See notes to consolidated financial statements.
29
ADVANCED PHOTONIX, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended March 31, 2006, March 27, 2005 and March 28, 2004
Class A Class B
Common Stock Common Stock Additional
------------ ------------ Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
---------- ------- ------ ------ ----------- ------------ -----------
BALANCE AT MARCH 30, 2003 13,369,258 $13,000 31,691 $ - $27,625,000 $(18,780,000) $ 8,858,000
Exercise of Options 77,801 - - - 67,000 - 67,000
Shares issued to acquire TOI assets (50,000) - - - (46,000) - (46,000)
Net loss - - - - - 794,000 794,000
---------- ------- ------ ------ ----------- ------------ -----------
BALANCE AT MARCH 28, 2004 13,397,059 13,000 31,691 - 27,646,000 (17,986,000) 9,673,000
Exercise of Options 2,000 - - - 1,000 - 1,000
Shares issued to acquire PDI 113,572 - - - 207,000 - 207,000
Discount on note payable (fair value of
detachable warrants issued) - - - - 141,000 - 141,000
Net Income - - - - - 5,255,000 5,255,000
---------- ------- ------ ------ ----------- ------------ -----------
BALANCE AT MARCH 27, 2005 13,512,631 13,000 31,691 - 27,995,000 (12,731,000) 15,277,000
Exercise of Options 266,500 - - - 272,000 - 272,000
Notes Conversions 2,264,560 3,000 - - 4,473,000 - 4,476,000
Shares issued for interest 11,069 - - - 21,000 - 21,000
Discount on note payable (fair value of
detachable warrants issued) - - - - 1,832,000 - 1,832,000
Warrants exercised 255,246 - - - 454,000 - 454,000
Shares issued to acquire Picometrix 2,575,000 3,000 - - 5,431,000 - 5,434,000
Net Income - - - - - (3,465,000) (3,465,000)
---------- ------- ------ ------ ----------- ------------ -----------
BALANCE AT MARCH 31, 2006 18,885,006 $19,000 31,691 $ - $40,478,000 $(16,196,000) $24,301,000
========== ======= ====== ====== =========== ============ ===========
See notes to consolidated financial statements.
30
ADVANCED PHOTONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 2006, March 27, 2005 and March 28, 2004
2006 2005 2004
------------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (3,465,000) $ 5,254,000 $ 794,000
Adjustment to reconcile net income (loss) to net cash provided by
(used in) operating activitie
Depreciation 829,000 369,000 328,000
Amortization 1,790,000 198,000 78,000
Disposal of fixed assets -- 56,000 39,000
Goodwill impairment charges 814,000 -- --
Amortization convertible note discount 181,000 -- --
Provision for doubtful accounts -- -- (36,000)
Provision for obsolete inventory 821,000 -- 70,000
Provision for warranty expense -- 15,000 --
Increase (decrease) in deferred tax valuation allowance -- (4,749,000) --
Changes in operating assets and liabilities:
Accounts receivable (712,000) 71,000 (176,000)
Inventories 137,000 (291,000) 307,000
Prepaid expenses and other current assets (355,000) (193,000) 27,000
Prepaid acquisition costs -- (134,000) (17,000)
Prepaid capital finance expenses -- (398,000) --
Other assets 158,000 -- --
Accounts payable (336,000) 428,000 (73,000)
Customer deposit liability -- (477,000) --
Accrued expenses (645,000) 79,000 (125,000)
------------- ------------ -----------
Net cash provided by (used in) operating activities (783,000) 228,000 1,216,000
------------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (263,000) (193,000) (298,000)
Patent expenditures (191,000) -- --
Short term investments -- 1,700,000 (300,000)
Change in restricted cash 1,254,000 (1,254,000) --
Cash acquired through acquisition of Photonic Detectors, Inc. -- 44,000 --
Cash acquired through acquisition of Picotronix, Inc. 678,000 -- --
Cash paid for Picotronix, Inc acquisition (3,500,000) -- --
Cash paid for acquisition related costs (936,000) -- --
Purchase of outstanding shares of Photonic Detectors, Inc.
common stock -- (1,117,000) --
Loan to Picometrix, Inc. -- (4,228,000) --
Intangible assets acquired -- -- (10,000)
Purchase of selected net assets of Silicon Sensors, LLC -- -- --
------------- ------------ -----------
Net cash used in investing activities (2,958,000) (5,048,000) (608,000)
------------- ------------ -----------
(continued)
31
ADVANCED PHOTONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For the years ended March 31, 2006, March 27, 2005 and March 28, 2004
2006 2005 2004
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Photonic Detectors, Inc. line of credit -- (78,000) --
Advanced Photonix, Inc. secured term loan 1,950,000 (900,000) (300,000)
Advanced Photonix, Inc. revolving line of credit (asset-based) -- 1,000,000 --
Payments on notes payable 119,000 -- --
Proceeds from private placement of convertible note 5,000,000 5,000,000 --
Proceeds from sale of fixed assets -- -- 23,000
Proceeds from MEDC term loan 600,000 -- --
Proceeds from exercise of warrants 455,000 -- --
Proceeds from exercise of stock options 47,000 2,000 66,000
---------- ---------- ----------
Net cash provided by (used in) financing activities 8,171,000 5,024,000 (211,000)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,430,000 204,000 397,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,503,000 1,299,000 902,000
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $5,933,000 $1,503,000 $1,299,000
========== ========== ==========
See notes to consolidated financial statements.
32
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
2006 2005 2004
---- ---- ----
Cash paid for interest $623,000 $153,000 $ 30,000
Cash paid for income taxes $ 17,000 $ 19,000 $ 5,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING, INVESTING AND FINANCING
ACTIVITIES:
PICOMETRIX ACQUISITION IN FY 2006
Assets acquired $19,404,000
Liabilities assumed (2,406,000)
-----------
Net assets acquired 16,998,000
Cash Paid (3,500,000)
Broker fees and other direct costs (936,000)
-----------
12,562,000
Non-cash investing activities:
Common stock issued (5,433,000)
Note payable - related (2,901,000)
Picometrix note retired (4,228,000)
-----------
Net balance $ --
In October 2004 (FY05), the Company issued $5.0 million in secured debt to be
used for future acquisition. In conjunction with that debt, the Company issued
warrants convertible into 850,822 shares of the Company's common stock. The
warrants issued were adjusted to present value. The adjustment was $141,000 to
additional paid-in capital. The company amortized $120,000 of the discount to
interest expense in FY2006. The remaining balance of $21,000 will be amortized
over the remaining life of the convertible note which matures in Oct 2007 or
sooner if the note is converted. During FY 2006 $4,475,000 of the convertible
notes was converted into 2,275,631 shares of the Company's Class "A" Common
Stock.
33
ADVANCED PHOTONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION - Advanced Photonix, Inc. (the Company or API), is a
leading supplier of custom opto-electronic solutions, high-speed optical
receivers and Terahertz sensors and instrumentation, serving a variety of
global Original Equipment Manufacturer (OEM) markets including
telecommunications, military/aerospace, industrial sensing/NDT, medical
and homeland security. Our optoelectronic solutions are based on our
silicon Large Area Avalanche Photodiode (LAAPD), PIN photodiode and
FILTRODE(R) detectors. Our patented high-speed optical receivers include
Avalanche Photodiode technology (APD) and PIN
(positive-intrinsic-negative) photodiode technology based upon III-V
materials, including InP, InAlAs, and GaAs. Our newly emerging Terahertz
sensor product line is targeted to the industrial non-destructive testing
(NDT), quality control, homeland security and military markets. Using our
patented fiber coupled technology and high speed Terahertz generation and
detection sensors, we are engaged in transferring Terahertz technology
from the application development laboratory to the factory floor. We have
three manufacturing facilities, one in Camarillo, CA, one in Dodgeville,
WI and one in Ann Arbor, MI.
The Company's wholly owned subsidiary, Silicon Sensor, Inc. (SSI) (see
Note 9 - Acquisitions), manufactures silicon photodiodes and
optoelectronic devices in a manufacturing facility in Dodgeville,
Wisconsin.
The Company's wholly owned subsidiary, Texas Optoelectronics, Inc. (TOI)
(see Note 9 - Acquisitions), manufactured optoelectronic devices in a
facility in Garland, Texas. The Company shut down the Garland facility in
May 2003 and relocated the TOI assets to the Company's facilities in
Dodgeville, Wisconsin and Camarillo, California.
In December 2004 the Company acquired all of the outstanding shares of
Photonic Detectors, Inc. (PDI) (see Note 9 - Acquisitions), PDI
manufactured optoelectronic devices in a facility in Simi Valley,
California. The acquired facility was shut down in March 2005 and all
assets were merged into the operations in Dodgeville, Wisconsin and
Camarillo, California.
In May 2005 the Company acquired all the outstanding shares of Picotronix,
Inc. through the merger of Picotronix, Inc. (doing business as and
referred to herein as "Picometrix"), a Michigan corporation, with and into
Michigan Acquisition Sub, LLC ("Newco"), a Delaware limited liability
company and a wholly-owned subsidiary of the Company, pursuant to an
Agreement and Plan of Merger dated March 8, 2005 by and among the Company,
Newco, Picometrix and Robin Risser and Steven Williamson, the stockholders
of Picometrix. Immediately following the effective time of the merger, the
name of Newco was changed to Picometrix, LLC and continues its operations
in Ann Arbor, Michigan.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the financial statements of the Company and its wholly owned
subsidiaries. All significant inter-company balances and transactions have
been eliminated in consolidation.
RECLASSIFICATIONS - Certain prior year balances have been reclassified in
the consolidated financial statements to conform to the current year
presentation. Sales in the automotive market, which were $698,000 and
$838,000 in FY 2006 and FY 2005, respectively, are now classified with
Industrial/NDT market.
FISCAL YEAR-END - With the fiscal 2006 year-end, the Company's fiscal year
ends on the last calendar day in
34
March. Prior fiscal years ended on the last Sunday of March. As a result of this
change, fiscal year ended March 31, 2006 contains fifty-three weeks. The prior
two fiscal years ending March 27, 2005 and March 28, 2004 contain fifty-two
weeks each.
OPERATING SEGMENT INFORMATION - The Company predominantly operates in one
industry segment, light and radiation detection devices.
SIGNIFICANT ACCOUNTING POLICIES
PERVASIVENESS OF ESTIMATES - The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
REVENUE RECOGNITION - The Company recognizes revenues upon shipment. Provision
for estimated losses, if any, is made in the period in which such losses are
determined.
Revenues from research and development cost reimbursement-type contracts are
recorded as costs are incurred based upon the relationship between actual
incurred costs, total estimated costs and the amount of the contract or grant
award. Estimation of cost is reviewed periodically and any anticipated losses
are recognized in the period in which they first become determinable.
WARRANTIES - The Company typically warrants its products against defects in
material and workmanship. Custom opto products shipped from the California and
Wisconsin facilities are warranted for a period of 90 days from the date of
shipment. Optical receiver and Terahertz products shipped from the Michigan
facility are warranted for a period of 1 year from the date of shipment.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of all financial
instruments potentially subject to valuation risk (principally consisting of
cash equivalents, accounts receivable, accounts payable, notes receivable and
notes payable) approximates fair value based upon prevailing interest rates
available to the Company.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments,
with an original maturity of three months or less when purchased, to be cash
equivalents.
As of March 31, 2006, the Company held $4.0 million in a short-term Master
Hold-in-Custody Repurchase agreement with a major California bank. Repurchase
agreements are not considered a bank deposit, and are therefore not insured by
the FDIC. These funds are backed by securities owned by Pacific Capital Bank,
N.A. and are held in a safekeeping account. Current interest earned on this
short-term investment range from 4-5 %. The investment period ranges from 7-30
days.
RESTRICTED CASH - As a condition of the Senior Convertible Note (see note 14),
the Company established a cash collateral account with a bank and a control
agreement with a collateral agent. The agreement grants the holder of the note a
first priority-perfected interest in the account. Conditioned upon certain
defined events and permitted acquisitions; the collateral agent may release the
funds to the Company. In May 2005 (see note 9) the Company concluded a
permitted acquisition allowing for the release of the restricted funds.
ACCOUNTS RECEIVABLE. Receivables are stated at amounts estimated by management
to be the net realizable value. The allowance is based on specific
identification. Accounts receivable are charged off when it becomes apparent
based upon age or customer circumstances that such amounts will not be
collected. Collateral is not typically required, nor is interest charged on
accounts receivable balances.
35
Accounts receivable are unsecured and the Company is at risk to the extent such
amount becomes uncollectible. The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require collateral.
As of March 31, 2006, one customer comprised 14% of accounts receivable. As of
March 27, 2005, one customer comprised 22% of accounts receivable. As of March
28, 2004, two customers comprised 14% and 13%, respectively, of accounts
receivable. As of March 31, 2006, the Company had 18 customers with balances
over 90 days.
INVENTORIES - Inventories, which include material, labor and manufacturing
overhead, are stated at standard cost (which approximates the first in, first
out method) or market. Slow moving and obsolete inventories are reviewed
throughout the year. To calculate a reserve for obsolescence, we begin with a
review of our slow moving inventory. Any inventory, which has been slow moving
within the past 12 months, is evaluated and reserved if deemed appropriate. In
addition, any residual inventory, which is customer specific and remaining on
hand at the time of contract completion, is reserved for at the standard unit
cost. The complete list of slow moving and obsolete inventory is then reviewed
by the production, engineering and/or purchasing departments to identify items
that can be utilized in the near future. These items are then excluded from the
analysis and the remaining amount of slow-moving and obsolete inventory is then
reserved for. Additionally, non-cancelable open purchase orders for parts we are
obligated to purchase where demand has been reduced may be reserved. Reserves
for open purchase orders where the market price is lower than the purchase order
price are also established. If a product that had previously been reserved for
is subsequently sold, the amount of reserve specific to that item is then
reversed.
CONCENTRATION OF CREDIT RISK - Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist principally of cash
equivalents and trade accounts receivable. The Company maintains cash balances
at five financial institutions that are insured by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000. As of March 31, 2006, the Company had cash at
three financial institutions in excess of federally insured amounts. As excess
cash is available, the Company invests in short-term and long-term investments,
primarily consisting of Government Securities Money Market instruments, and
Repurchase agreements. For fiscal years 2006, 2005 and 2004, cash deposits held
at financial institutions in excess of FDIC insured amounts were as follows:
2006 2005 2004
---------- ---------- ----------
$1,433,000 $2,421,000 $1,013,000
SIGNIFICANT CUSTOMER - During the fiscal year ended March 31, 2006, no single
customer accounted for more than 10% of the Company's net sales. During the
fiscal years ended March 27, 2005, two customers represented 12% and 12% of the
Company's net sales, and March 28, 2004, no customer accounted for more than 10%
of the Company's net sales.
SHIPPING AND HANDLING COSTS -- The Company's policy is to classify shipping and
handling costs as a component of Costs of Goods Sold in the Statement of
Operations.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Equipment and leasehold improvements are
stated at cost. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets or lease term
ranging from three to nine years.
INTANGIBLE ASSETS
INTANGIBLE ASSETS -- The Company records goodwill assets, which
represents the excess of cost over fair value of net assets. Other
intangibles are recorded at cost. These intangible assets are associated
with the value of the acquired non-compete agreement, customer list,
trademarks, R&D contacts, and technology/patents. These
36
intangible assets are amortized using the straight-line method over their
various estimated useful lives up to 15 years.
PATENTS - Patents represent costs incurred in connection with patent
applications. Such costs are amortized using the straight-line method over
the useful life of the patent once issued, or expensed immediately if any
specific application is unsuccessful.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company accounts for goodwill in
accordance with Statement of Financial Accounting Standards No. 142.
"Goodwill and Intangible Assets" ("SFAS 142"). In accordance with SFAS 142
goodwill is not amortized but instead will be tested for impairment at
least annually and more frequently if certain indicators are present. The
Company recognizes impairment losses on long-lived assets used in
operations when the undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying amount. In such
circumstances, those assets are written down to estimate fair value.
Long-lived assets consist primarily of goodwill and fixed assets.
RESEARCH AND DEVELOPMENT COSTS - The Company charges all research and
development costs, including costs associated with development contract
revenues, to expense when incurred. Manufacturing costs associated with the
development of a new fabrication process or a new product are expensed until
such times as these processes or products are proven through final testing and
initial acceptance by the customer. Costs related to revenues on non-recurring
engineering services billed to customers are generally classified as cost of
product sales. The company generally retains intellectual property rights
related to paid research and development contracts.
ACCOUNTING FOR STOCK OPTION BASED COMPENSATION - SFAS No. 123, "Accounting for
Stock Based Compensation", sets forth accounting and reporting standards for
stock based employee compensation plans. As allowed by SFAS 123, the Company
continues to measure compensation cost under Accounting Principles Board Opinion
No. 25 ("APB 25"), "Accounting for Stock Issued to Employees" and complies with
the pro forma disclosure requirements of the standard (see Note 12).
2. INVENTORIES
Inventories consist of the following at March 31, 2006 and March 27, 2005
2006 2005
----------- -----------
Raw material $ 4,288,000 $3,129,000
Work-in-process 937,000 1,245,000
Finished products 390,000 302,000
----------- -----------
Total inventories 5,615,000 4,676,000
Less reserve (2,181,000) (1,032,000)
----------- -----------
Inventories, net $ 3,434,000 $3,644,000
=========== ==========
INVENTORY ADJUSTMENTS - FY 2006
Past company practice was to review items with no movement and reserve
100% of those with no movement in the past twenty-four (24) months and 40%
with no movement in the past twelve (12) months. The Company expanded its
review of slow moving and obsolete to include items that had minimal
movement in the past twelve (12) months and to review inventory with no
movement in the past twelve (12) months to determine the appropriateness
of the 40% reserve. The table below summarizes the $1.15 million charge to
material cost of goods sold and reduction in inventory for FY 2006.
Approximately $1.0 million of this charge occurred in the fourth quarter.
37
FY 2006 INVENTORY ADJUSTMENTS
Increase in provision for slow moving/excess/obsolete inventory $ 698,000
Write-off obsolete-slow moving inventory from acquisitions (PDI/TOI) 123,000
----------
Subtotal - obsolete inventory 821,000
Scrap inventory 159,000
Reduction in material standards 118,000
Inventory shrinkage 53,000
----------
Subtotal - Other 330,000
----------
Total inventory reduction $1,151,000
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following at March 31,
2006 and March 27, 2005:
2006 2005
----------- -----------
Machinery and equipment $ 6,133,000 $ 3,795,000
Furniture and fixtures 516,000 154,000
Leasehold improvements 394,000 294,000
Data processing equipment 439,000 322,000
Vehicles 26,000 26,000
Capitalized software 401,000 382,000
Construction-in-process 14,000 68,000
Assets held for sale or disposal 0 77,000
----------- -----------
Total assets 7,923,000 5,118,000
Accumulated depreciation (4,548,000) (3,719,000)
----------- -----------
Net plant, property & equipment $ 3,375,000 $ 1,399,000
Depreciation expense was $829,000 for fiscal year ended March 31, 2006,
$369,000 for fiscal year ended March 27, 2005 and $328,000 for fiscal year
ended March 28, 2004.
4. INTANGIBLE ASSETS AND GOODWILL
INTANGIBLE ASSETS - In October 2004 the Company entered into a definitive
agreement for $5,000,000 of senior convertible notes, (see note 14). In
connection with the agreement costs of approximately $646,000 were
incurred which are being amortized over the 36-month term of the agreement
or expensed when the notes are converted. In March 2006, the amortization
of prepaid capital finance expense was accelerated to reflect the portion
of the convertible notes that were converted during the year. The
remaining balance of $217,000 will be amortized at approximately $11,400
per month over the remaining life of the notes.
In December 2004 the Company acquired Photonic Detectors, Inc. (see note
10). The Company recorded an intangible asset of $635,000, which
represents the excess of cost over fair value of net assets. This
intangible asset is associated with the value of the acquired customer
list. The intangible asset is being amortized over a period of 60 months
beginning January 2005. Monthly amortization is $10,000 per month. Each
year the Company evaluates the present value of future cash flows
associated with the list. Any impairment would be
38
recognized when the expected future operating cash flows from such
intangible assets is less than their carrying value.
In May 2005 the Company completed the acquisition of Picotronix, Inc., dba
Picometrix, Inc. The Company recorded intangible assets of $14,920,000,
which represents the excess of cost over fair value of net assets. These
intangible assets are associated with the value of the acquired
non-compete agreement, customer list, trademarks, R&D contacts, and
technology/patents. These intangible assets are being amortized over their
various estimated useful lives up to 15 years. Amortization is $116,200
per month.
Intangible assets that have definite lives consist of the following (in
thousands):
MARCH 31, 2006 MARCH 27, 2005
WEIGHTED
AVERAGE CARRYING ACCUMULATED INTANGIBLES CARRYING ACCUMULATED INTANGIBLES
LIVES VALUE AMORTIZATION NET VALUE AMORTIZATION NET
-------- -------- ------------ ----------- -------- ------------ -----------
Non-Compete
agreement 15 $ 130 $ 38 $ 92 $ 225 $ 194 $ 31
Customer list 3 825 170 655 635 32 603
Trademarks 15 2,270 135 2,135 - - -
R&D contracts 15 1,380 82 1,298 - - -
Patents 70 54 16 63 50 13
Patents pending 184 184
Technology 10 10,950 975 9,975 - - -
-------- ------------ ----------- -------- ------------ -----------
TOTAL
INTANGIBLES 11.4 $ 15,809 $ 1,454 $ 14,355 $ 923 $ 276 $ 647
Balances for March 31, 2006 reflect intangible amounts not recognized in
the March 27, 2005 values. Those prior year balances were included in
Prepaid and Other current assets.
Amortization expense for the fiscal year ended March 31, 2006 was
approximately $1,403,000. Patent amortization expense was approximately
$3,000 in fiscal 2006, 2005 and 2004, respectively. The current patents
held by the Company have remaining useful lives ranging from 2 years to 20
years, with a weighted average remaining useful life of 3.5 years
Assuming no impairment to the intangible value, future amortization
expense for intangible assets and patents are as follows:
INTANGIBLE ASSETS PATENTS
----------------- -------
2007 $ 1,522,000 2007 $4,100
2008 1,521,000 2008 2,400
2009 1,486,000 2009 1,400
2010 1,453,000 2010 900
2011 1,361,000 2011 900
2012 & after 6,812,000 2012 & after 6,100
Total $14,155,000 Total $15,800
39
Patent pending costs will be amortized beginning the month the patents are
granted.
IMPAIRMENT OF GOODWILL - The excess of cost over the purchase price of
acquired net assets is amortized on a straight-line basis over a 25-year
period. In accordance with SFAS 142, Goodwill and other Intangible Assets,
the Company ceased amortizing goodwill on April 1, 2002. The Company
annually evaluates the recoverability of goodwill by assessing whether the
recorded value of the goodwill will be recovered through future expected
operating results. As a result of the Company's evaluation, goodwill
recorded from the Texas Optoelectronics Inc. acquisition in 2003 of
approximately $1.4 million was reduced $814,000 in Q4 FY06 based on the
net present value of the estimated future cash flow as a result of the
acquisition.
5. FOREIGN SALES
In fiscal 2006, 2005 and 2004, the Company had export sales of
approximately $2.1 million, $2.5 million and $1.2 million, respectively,
made primarily to customers in North America, Asia and Europe. All foreign
sales are denominated in U.S. dollars. Sales to specific countries, stated
as a percentage of total sales, consist of the following:
2006 2005 2004
---- ---- ----
Australia 1% -- --
Canada -- 2% --
Japan -- 2% --
Spain -- 5% --
United Kingdom 4% 2% 4%
All other countries 4% 6% 6%
--- --- ---
Total export sales 9% 17% 10%
6. ADVERTISING EXPENSE - Advertising costs are expensed as incurred.
Advertising expense was approximately $133,000, $84,000 and $57,000 in
fiscal 2006, 2005 and 2004, respectively.
7. WARRANTIES - Warranty costs were approximately $23,000, $15,000 and $0 in
fiscal 2006, 2005 and 2004, respectively.
8. NET INCOME (LOSS) PER SHARE - Net income (loss) per share calculations are
in accordance with SFAS No. 128, "Earnings per Share". Accordingly, basic
earnings (loss) per share are computed by dividing net income (loss) by
the weighted average number of shares outstanding for each year. . The
impact of Statement 128 on the calculation of earnings per share is as
follows:
2006 2005 2004
------------- ----------- -----------
BASIC
Average Shares Outstanding 17,477,000 13,461,000 13,400,000
Net Income (Loss) $ (3,465,000) $ 5,254,000 $ 794,000
Basic Income (Loss) Per Share $ (0.20) $ 0.39 $ 0.06
40
DILUTED
Average Shares Outstanding 17,477,000 13,461,000 13.400.000
Net Effect of Shares Issuable pursuant to terms of
convertible note, based on a weighted average 1,476,000 1,176,000 --
Net Effect of Dilutive Stock Options and Warrants
based on the treasury stock method using average
market price 2,666,000 962,000 562.000
Total Shares 21,619,000 15,599,000 13,962,000
Net Income (Loss), adjusted for interest expense
on convertible note (net of tax) $ (3,076,000) $ 5,304,000 $ 794,000
Diluted Earnings Per Share $ (0.20) $ 0.34 $ 0.06
anti dilutive
Average Market Price of Common Stock $ 2.82 $ 2.18 $ 1.57
Ending Market Price of Common Stock $ 2.71 $ 2.11 $ 2.05
The following stock options granted to Company employees, directors, and
former owners were excluded from the calculation of earnings per share in
the financial statements because they were anti-dilutive for the periods
reported:
2006 2005 2004
No. Shares No. Shares No. Shares
Exercise Price Underlying Exercise Price Underlying Exercise Price Underlying
per Share Options per Share Options per Share Options
-------------- ---------- -------------- ---------- -------------- -----------
2.8700 3,750 2.2500 35,400 1.8750 64,000
2.8900 10,000 2.5000 27,700 2.5000 27,700
3.0940 1,000 3.0940 1,000 3.0940 1,000
3.1875 350,000 3.1875 350,000 3.1875 350,000
5.3440 50,000 5.3440 50,000 5.3440 50,000
---------- ---------- -----------
Total 414,750 Total 464,100 Total 492,700
9. ACQUISITIONS
In August 2002, SSI, a newly formed wholly-owned subsidiary of the
Company, purchased substantially all of the assets and selected
liabilities of Silicon Sensors LLC, a closely-held manufacturer of
opto-electronic semiconductor based components located in Dodgeville,
Wisconsin. The financial purchase price was $1.7 million in cash, plus the
assumption of the Seller's trade accounts payable and accrued liabilities,
amounting to approximately $282,000.
In January 2003, the Company purchased all of the issued and outstanding
shares of common stock of TOI, a privately owned custom manufacturer of
opto-electronic components and assemblies. The purchase price was
1,009,110 shares of API Class A Common Stock (issued at $0.92 per share)
and repayment of a debt of TOI in the amount of $1.2 million representing
principal and interest.
In December 2004, the Company purchased all of the issued and outstanding
shares of common stock of PDI, a privately owned manufacturer of
opto-electronic components and assemblies located in Simi Valley,
California. The purchase price was 113,572 shares of API Class A Common
Stock (issued at $1.82 per
41
share) plus $1.1 million in cash and the assumption of the seller's trade
accounts payable, accrued liabilities, and bank line of credit amounting
to approximately $259,000. In addition, the purchase agreement contains a
contingent purchase price during the five year contract period following
the closing date upon which the Company shall pay the seller an amount
equal to 20% of incremental sales as defined, subject to specific sales
targets being met. The Company incurred $42,000 of expenses in connection
with this acquisition. The Company has closed the Simi Valley location and
integrated its business into the Camarillo, California and Dodgeville,
Wisconsin facilities. In connection with the transaction, the Company
recorded a $635,000 intangible asset ("Customer List") which it will
amortize over a 5 year period, beginning January 2005. A summary of the
assets and liabilities acquired at fair market value is as follows:
Assets Acquired
Cash $ 44,000
Accounts receivable 239,000
Inventories 423,000
Prepaid & other assets 3,000
Furniture and equipment 239,000
Customer list 635,000
-----------
Total Assets Acquired $ 1,583,000
Liabilities Assumed
Accounts payable $ (159,000)
Accrued salaries (22,000)
Bank line of credit (78,000)
-----------
Total Liabilities $ (259,000)
Total Purchase price $ 1,324,000
In May 2005, the Company completed its previously disclosed acquisition of
Picotronix, Inc. through the merger of Picotronix, Inc. (doing business as
and referred to herein as "Picometrix"), a Michigan corporation, with and
into Michigan Acquisition Sub, LLC ("Newco"), a Delaware limited liability
company and a wholly-owned subsidiary of the Company, pursuant to an
Agreement and Plan of Merger dated March 8, 2005 by and among the Company,
Newco, Picometrix and Robin Risser and Steven Williamson, the stockholders
of Picometrix. Immediately following the effective time of the merger, the
name of Newco was changed to Picometrix, LLC. Pursuant to the merger
between Picometrix and the Company, the Company paid consideration of
approximately $17 million in the form of $3.5 million in cash, four-year
API promissory notes in the aggregate principal amount of approximately
$2.9 million (the "API Notes"), $5.4 million in API Class A Common Stock
(2,575,000 shares valued at $2.11 per share), a loan in the amount of
approximately $4.2 million to Picometrix (the "API Loan") which was
forgiven and the proceeds of which were used to prepay existing long-term
indebtedness of Picometrix to a third party, and broker fees and other
transaction costs directly related to the acquisition of approximately
$900,000. The API notes are payable in four annual installments with the
first being a payment of $500,000, the second being a payment of $550,000,
the third being a payment of $900,000 and the fourth being a payment of
$950,500. The API notes bear an interest rate of prime plus 1.0% and are
secured by all of the intellectual property of Picometrix. API has the
option of prepaying the API Notes without penalty. Immediately following
the effective time of the transaction, the API Loan was contributed to the
capital of Picometrix, LLC. In connection with the transaction, the
Company recorded approximately $15 million in intangible assets (including
customer list, non-compete agreement, trademarks, R & D contracts, and
technology/patents) and will amortize these finite life intangible assets
over their various estimated useful lives up to 15 years. The transaction
was accounted for as a purchase in accordance with Statement of Financial
Accounting Standard No. 141 "Business Combinations" ("SFAS 141");
therefore, the tangible assets acquired were recorded at fair value on
acquisition date. The initial purchase price was allocated based upon the
fair market value on the acquisition date without consideration of
deferred tax liability, arising from the intangibles. As a result, the
discount to fair value was spread proportionately across
42
the acquired fixed assets and intangibles. Upon computation of the tax
affect, due to the non-deductible nature of intangibles for tax purposes,
a deferred tax liability of $4,127,000 was recorded with a corresponding
increase to fair market value in fixed assets and intangibles and a
recording of $3,111,000 of goodwill.. See the below table for the adjusted
FY2006 allocation
A portion of the purchase price was allocated to customer list,
non-compete agreements, trademarks, R&D contracts, technology/patents
which includes products that are already technologically feasible and
under development. Picometrix, Inc., developed product technology is
primarily comprised of high-speed optoelectronic devices including
photodiodes and THz transceivers made of III-V compound semiconductor
material, and high-speed optical receiver components and THz
sub-systems/systems. The Income Approach, which is based on the premise
that the value of an asset is the present value of its future earning
capacity, was the primary valuation technique employed. A discount rate of
24% was applied to developed product technology. The acquired intangible
assets are being amortized over their estimated useful lives, which are
presented in note 1 and 4 above.
Goodwill, which represents the excess of the purchase price over the fair
value of tangible and identified intangible assets acquired, is not being
amortized but will be reviewed annually for impairment, or more frequently
if impairment indicators arise, in accordance with SFAS 142. Goodwill is
not expected to be deductible for tax purposes under section 197 of the
Internal Revenue Code. The results of operations of Picometrix LLC have
been included in the Company's consolidated financial statements
subsequent to the date of acquisition.
A summary of the Picotronix assets and liabilities acquired at fair value
is as follows:
FY2006 Adjusted FY2006
------------ ---------------
ASSETS ACQUIRED
Cash and cash equivalents $ 678,000 678,000
Accounts receivable 1,065,000 1,065,000
Inventories 748,000 748,000
Prepaid expenses and other current assets 98,000 98,000
Net fixed assets 2,458,000 2,541,000
Goodwill -- 3,111,000
Customer list 178,000 190,000
Non-compete agreement 122,000 130,000
Trademarks 2,128,000 2,270,000
R&D contracts 1,294,000 1,380,000
Technology/patents 10,265,000 10,950,000
Deposits and other assets 370,000 370,000
------------ ---------------
Total assets acquired $ 19,404,000 23,531,000
------------ ---------------
LIABILITIES ASSUMED
Accounts payable $ (265,000) $ (265,000)
Capital lease payable (89,000) (89,000)
Other accrued expenses (874,000) (874,000)
Notes payable (877,000) (877,000)
Deferred revenue and deposits (301,000) (301,000)
Deferred tax liability -- (4,127,000)
------------ ---------------
Total liabilities assumed $ (2,406,000) $ (6,533,000)
------------ ---------------
Net assets acquired $ 16,998,000 $ 16,998,000
============ ===============
43
10. CAPITALIZATION
The Company's Certificate of Incorporation provides for two classes of
common stock, a Class A for which 50,000,000 shares are authorized for
issuance and a Class B for which 4,420,113 shares are authorized for
issuance. The par value of each class is $.001. Subject to certain limited
exceptions, shares of Class B Common Stock are automatically converted
into an equivalent number of Class A shares upon the sale or transfer of
the Class B Common Stock by the original holder. The holder of each share
of Class A and Class B Common Stock is entitled to one vote per share.
The Company has authorized 10,000,000 shares of Preferred Stock, of which
780,000 shares have been designated Class A Redeemable Convertible
Preferred Stock with a par value of $.001 per share. 40,000 shares of
Class A Redeemable Convertible Preferred Stock ("Class A Preferred") were
issued and outstanding at March 31, 2006. The Class A Preferred Stock has
a liquidation preference equal to its issue price ($.80 per share) and is
convertible at any time, at the option of the holder, into .3 shares of
Class B Common Stock for each share of Class A Preferred Stock converted.
The Class A Preferred Stock is subject to redemption at the Company's
option for $.80 per share at any time. The Company would be required to
pay approximately $25,000 to redeem these shares. The holders of the Class
A Preferred Stock are entitled to an annual non-cumulative dividend
preference of $.072 per share when the Company's net earnings per share of
Class A Preferred Stock equals or exceed $.072. The Class A Preferred
stockholders do not have voting rights except as required by applicable
law.
11. INCOME TAXES
At March 31, 2006, the Company had net operating loss carry forwards
(NOL's) of approximately $23 million for Federal income tax purposes and
$4 million for state income tax purposes that expire at various dates
through fiscal year 2026. The tax laws related to the utilization of loss
carry forwards are complex and the amount of the Company's loss carry
forward that will ultimately be available to offset future taxable income
may be subject to annual limitations under IRC Section 382 resulting from
changes in the ownership of the Company's common stock.
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets at March 27, 2005 were substantially
composed of the Company's net operating loss carry forwards for which the
Company had made a deferred tax asset valuation allowance of $4.7 million
based upon the acquisition of both Photonic Detectors Inc. in December
2004 and Picometrix, Inc. in May 2005. Based upon the FY 2006 results, the
Company management has projected that the Company will generate sufficient
future taxable income to utilize some of the carry-forwards that expire by
2009.
Realization of the deferred tax asset is dependent upon generating
sufficient taxable income prior to expiration of any NOL's. Although
realization is not assured, management believes it is more likely than not
that the recorded deferred asset will be realized. Accordingly the Company
has increased the deferred tax asset valuation allowance to $5.7 million
at March 31, 2006. In addition, the Company has reduced the deferred tax
asset by the deferred tax liability of $ 3.5 million from the Picometrix
acquisition.
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment.
44
The tax provision for the year ended March 31, 2006 is composed of the
Wisconsin state income tax. The tax provision for the year ended March 27,
2005 was composed of Wisconsin state income tax and the minimum California
franchise tax and reversal of the deferred tax asset valuation allowance.
The tax provision for the year ended March 28, 2004 was composed of
Wisconsin state income tax and the minimum California franchise tax.
Below are reconciliations between the provisions for income taxes compared
with the amounts at the United States federal statutory rate:
YEARS ENDED MARCH 31, 2006 MARCH 27, 2005 MARCH 28, 2004
----------- -------------- -------------- --------------
Federal income tax at statutory rates (1,173,000) 177,000 272,000
State income taxes, net of federal benefit (194,000) 39,000 45,000
Amortization of Goodwill -- -- (1,400)
Utilization of NOL Carryforwards 307,000 (211,000) (161,000)
Change in valuation allowance 967,000 (4,749,000) (150,000)
Other 121,000 10,000 1,000
-------------- -------------- --------------
Effective federal income tax 28,000 (4,734,000) 5,000
Deferred Tax Assets at March 31, 2006 are as follows, at a projected tax
rate of 34% for federal income tax purposes and 8.5% for state income tax
purposes:
Federal State
------- -----
Current -- --
Long Term 623,000 --
------- -----
623,000 --
The Company's net deferred tax assets consist of the following components,
for fiscal years 2006 and 2005:
2006 2005
----------- ----------
Sec. 263A adjustment 36,000 59,000
Accrued Bonus 0 63,000
Inventory reserve 719,000 409,000
Utility accruals 7,000 7,000
Warranty reserve 25,000 13,000
Accounts receivable allowance 16,000 9,000
Accrued vacation 90,000 77,000
Charitable contributions 4,000 --
NOL Carryforwards 7,865,000 8,217,000
Accumulated amortization 163,000 32,000
Accumulated depreciation (50,000) (149,000)
R&D credits 675,000 721,000
Goodwill amortization 322,000 --
California Mfg. credit 39,000 40,000
Other 2,000 --
----------- ----------
Total 9,913,000 9,498,000
Valuation allowance (5,717,000) (4,749,000)
Deferred tax liability - Picometrix acquisition (3,573,000) --
----------- ----------
Net deferred tax asset 623,000 4,749,000
45
At March 31, 2006 the Company's net operating loss carry forwards will
expire on the following dates:
Federal California
Amount Expiration Amount Expiration
----------- -------------- ---------- ---------------
$ 3,171,670 March 21, 2007 $2,071,225 March 31, 2007
2,226,072 March 31, 2008 82,141 March 31, 2013
3,816,200 March 31, 2009 973,927 March 31, 2014
1,947,320 March 31, 2010 471,220 March 31, 2015
30,267 March 31, 2011 287,371 March 31, 2016
----------
1,548,581 March 31, 2012
599,421 March 31, 2013
250,133 March 31, 2019
6,096,005 March 31, 2020
82,471 March 31, 2021
1,868,504 March 31, 2022
50 March 31, 2022
846,957 March 31, 2023
753,118 March 31, 2023
1,500 March 31, 2024
1,500 March 31, 2025
8,368 March 31, 2026
-----------
$23,248,137 $3,885,884
=========== ==========
At March 31, 2006 the Company's Federal R&D tax credit carry forwards will
expire on the following dates:
Amount Expiration
---------- ---------------
$ 111,773 March 31, 2006
40,963 March 31, 2007
80,385 March 31, 2008
66,489 March 31, 2009
17,847 March 31, 2010
63,832 March 31, 2011
34,245 March 31, 2012
16,737 March 31, 2018
168,399 March 31, 2019
9,217 March 31, 2020
100,338 March 31, 2021
87,020 March 31, 2022
99,925 March 31, 2023
82,575 March 31, 2024
143,990 March 31, 2025
140,000 March 31, 2026
$1,263,735
===========
12. STOCK OPTIONS & WARRANTS
The Company has four stock option plans: The 1990 Incentive Stock Option
and Non-Qualified Stock
46
Option Plan, the 1991 Directors' Stock Option Plan ("The Directors'
Plan"), the 1997 Employee Stock Option Plan and the 2000 Stock Option
Plan. The Company measures compensation for these plans under APB Opinion
No. 25. No compensation cost has been recognized as all options were
granted at the fair market value or the greater of the underlying stock at
the date of grant. Had compensation expense for these plans been
determined consistent with SFAS No. 123, the Company's net income (loss)
and net income (loss) per share would be as follows:
2006 2005 2004
----------- ---------- ---------
Net Income (loss) , as reported $(3,465,000) $5,254,000 $ 794,000
Net income (loss), proforma $(3,612,000) $5,208,000 $ 723,000
Basic income (loss) per share, as reported $ (0.20) $ 0.39 $ 0.06
Basic income (loss) per share, proforma $ (0.21) $ 0.39 $ 0.05
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to April 3, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 2006, 2005 and 2004,
respectively: risk-free interest rates of 4%, 3% and 2%, expected
volatility of 8% and expected lives of 10 years in all periods. No
dividends were assumed in the calculations.
The Company's various stock option plans provide for the granting of
non-qualified and incentive stock options to purchase up to 3,700,000
shares of common stock for periods not to exceed 10 years. Options
typically vest at the rate of 25% per year over four years, except for
options granted under The Directors' Plan, which typically vest at the
rate of 50% per year over two years. Under these plans, the option
exercise price equals the stock's market price on the date of grant.
Options may be granted to employees, officers, directors and consultants.
The Company has also granted options, under similar terms as above, under
no specific shareholder approved plan.
Stock option transactions for fiscal years 2005 and 2006 are summarized as
follows:
Shares (000) Weight Average Exercise Price
----------- -----------------------------
Outstanding, March 28, 2004 1,961 $1.39
Granted 401 $1.88
Exercised (2) $0.65
Expired (5) $1.86
Outstanding, March 27, 2005 2,355 $1.47
----- -----
Exercisable, March 27, 2005 1,776 $1.48
Outstanding, March 27, 2005 2,355 $1.47
Granted 871 $2.23
Exercised (267) $1.08
Expired -- --
Outstanding, March 31, 2006 2,959 $1.74
Exercisable, March 31, 2006 2,025 $1.64
47
Information regarding stock options outstanding as of March 31, 2006 is as
follows:
Options Outstanding
--------------------------------------
(in 000s) Weighted Average Weighted Average
Price Range Shares Exercise Price Remaining Life
-------------- -------- ---------------- ----------------
$ 0.50 - $1.25 1,769 $0.77 3.62
$ 1.50 - $2.50 741 $2.09 6.75
$ 2.87 - $5.34 449 $3.39 6.49
Options Exercisable
--------------------------------------
(in 000s) Weighted Average Weighted Average
Price Range Shares Exercise Price Remaining Life
-------------- -------- ---------------- ----------------
$ 0.50 - $1.25 1,096 $0.76 3.38
$ 1.50 - $2.50 514 $2.05 5.22
$ 2.87 - $5.34 415 $3.44 5.00
Warrants Outstanding & Exercisable
(in 000s) Remaining Life
Shares Exercise Price (in yrs)
--------- -------------- --------------
681 $1.78 4.7
766 $1.78 5.5
13. LINE OF CREDIT/SHORT TERM DEBT
The Company has a revolving line of credit from a regional bank, which
provides for borrowings up to $3.0 million. The line allows for borrowings
on 80% of eligible accounts receivable and 40% on eligible inventory, as
defined, limited to $1.5 million. All business assets of the Company
secure the line. Repayment is interest only, monthly, with principal due
at maturity, November 3, 2006. Interest is computed at the Wall Street
Journal Prime plus 1/2% with a floor rate of 6.5%. The prime interest rate
was 7.75% at March 31, 2006.
14. DEBT & NOTES PAYABLE
In October 2004, the Company entered into a definitive agreement for the
private placement to four institutional investors of $5 million aggregate
principal amount of its senior convertible notes. The original Securities
Purchase Agreement was filed with the Securities and Exchange Commission
on October 12, 2004. The notes are convertible at the option of the holder
under certain circumstances into shares of the Company's Class A Common
Stock at an initial conversion price of $1.9393 per share, subject to
adjustment. The notes pay interest at an annual rate of prime plus 1% and
will mature on October 12, 2007. At the time of the closing of the private
placement, $2.5 million of the purchase price for the notes was being held
in a cash collateral account subject to release upon satisfaction of
certain conditions specified in the purchase agreement. The original
conditions of release provided for $1.25 million to be eligible for
release if the Company had entered into a definitive agreement for a
permitted acquisition on or before January 31, 2005. Subsequently, any
balance remaining in the cash collateral account, up to the full $2.5
million, would be released upon the Company's consummation of a permitted
acquisition on or before March 31, 2005. Letters of agreement between API
and the investors dated March 9, 2005 modified the original terms. The
modified terms provide for $1.25 million to be released upon entry into a
definitive
48
agreement for a permitted acquisition on or before March 11, 2005 and for
the remaining funds to be released upon the consummation of that
acquisition on or before May 1, 2005. A "permitted acquisition" is defined
in the Securities Purchase Agreement as the purchase by the Company of an
entity with (1) EBITDA of not less than $750,000 during the twelve months
immediately preceding the acquisition and (2) revenues of not less than
$4.0 million during the twelve months immediately preceding the
acquisition. Since Photonic Detectors, Inc. did not qualify as a
"permitted acquisition" no funds were released as a result of completing
that transaction. However, $1.25 million was released in March 2005, upon
signing an Agreement and Plan of Merger with Picometrix, Inc. and $1.25
million remained as restricted cash in the cash collateral account at
March 27, 2005. The remaining amount of restricted cash was released to
the Company in May 2005, upon the completion of the acquisition of
Picometrix, Inc.
In connection with the transaction, the Company had issued to the
investors five-year warrants to purchase 850,822 shares of the Company's
Class A Common Stock at an exercise price of $2.1156 per share, subject to
adjustment. The Company has agreed to register the shares of common stock
issuable upon conversion of the notes and upon exercise of the warrants
for resale under the Securities Act of 1933. The investors have the option
for a period of one year following effectiveness of the registration
statement to acquire an additional $5 million aggregate principal amount
of the notes with an initial conversion price of $2.1156 per share and
five-year warrants purchasing an additional 850,822 shares of common
stock. The original terms of the warrants issued and, the additional
warrants to be issued, in the private placement to the investors were also
modified on March 9, 2005 to reduce the exercise price from $2.1156 per
share of Class A Common Stock of API to $1.78 per share (see Note 20
"Subsequent Events"). Similarly, on March 9, 2005, the terms of the notes
issued in connection with the private placement (the "Notes") were
modified to (i) provide that the interest rate shall not be less than 6.5%
at any time and (ii) increase the amount of "Permitted Indebtedness" (as
such term is defined in the Notes) from $3 million to $6 million and (iii)
decrease the amount of "Permitted Acquisition Indebtedness" (as such term
is defined in the Notes) from $6 million to $3 million. In addition, the
investors in the private placement agreed to subordinate, pursuant to a
form of subordination agreement in form and substance reasonable
satisfactory to them, (i) the principal and interest payments on the Notes
to the "Permitted Bank Debt" (as such term is defined in the letters of
agreement) and (ii) their liens on the Company's assets to any lien
granted by the Company as security for the "Permitted Bank Debt".
In accordance with APB 14, the Company has recorded a discount to the note
of $141,000 to account for the fair value associated with the note's
detachable warrants. Upon any exercise of the conversion feature, the
notes will then be converted from debt to equity. A copy of the original
agreement and all related documents were filed with the Securities and
Exchange Commission on October 12, 2004 on Form 8-K, and the foregoing
summary is qualified in its entirety by reference thereto.
During FY2006 $3.475 million of the $5 million Convertible debt
(Convertible Debt 1st Tranche) was converted into 1,792,000 shares leaving
a Convertible Debt 1st Tranche balance of $1,503,000 (net of discount) at
March 31, 2006. In addition, 170,164 of the warrants were converted and
the Company received $299,490 in cash. At March 31, 2006 the balance of
unexercised warrants was 680,658.
In September 2005, the Company issued $1.0 million of convertible debt
with warrants to purchase 170,164 shares of common stock (Convertible Debt
2nd Tranche). The Company originally valued the warrants and recorded an
increase to additional paid-in-capital amounting to $1.0 million.
Subsequently the Company determined that the beneficial conversion option
and the warrants should have been valued using the "Relative Fair Value"
approach. Accordingly, the Company recognized a $574,000 debt discount on
the $1.0 million principal value of the convertible note payable and is
amortizing the debt discount over the life of the note. The note was
converted in November 2005 into 472,678 shares of Class A common stock. In
addition, 85,082 of the warrants were converted and the Company received
$151,446 in cash. At March 31, 2006 the balance of unexercised warrants
was 85,082.
49
In March 2006, the Company issued $4.0 million of convertible debt
(Convertible Debt 2nd Tranche) with warrants to purchase 680,658 shares of
common stock. The Company valued the warrants and recorded an increase to
additional paid-in-capital amounting to $1.8 million using the "Relative
Fair Value" approach. Accordingly, the Company recognized a $1.8 million
debt discount on the $4.0 million principal value of the convertible note
payable and is amortizing the debt discount to interest expense over the
life of the note. At March 31, 2006 the Convertible Debt 2nd Tranche was
$2.2 million (net of the debt discount).
In May 2005, the Company borrowed $2.7 million from a regional bank (term
loan). The loan is guaranteed by all of the Company's, and its
subsidiaries, assets excluding Picometrix LLC intellectual property.
Repayment is principal of $75,000 per month, plus interest, until maturity
on May 2, 2008. Interest is computed at the Wall Street Journal Prime plus
1% with a ceiling of 7.75% and a floor of 6%. The prime interest rate was
7.75% as of March 31, 2006.
The Michigan Economic Development Corporation (MEDC) entered into two loan
agreements with Picometrix LLC, one in 2004 (MEDC-loan 1) and one in 2005
(MEDC-loan 2). Both loans are unsecured. MEDC-loan 1 is for an amount up
to $1,024,000 with an interest rate of 7% and is fully amortized by the
end of an eight (8) year period (ending on September 15, 2012). Interest
is accrued during the first four years, but not paid, after which time
principle plus accrued interest is paid over the remaining four years. On
September 15, 2004 the Company borrowed $750,000 against the $1.0 million.
MEDC-loan 2 is for an amount up to $1.2 million with an interest rate of
7% and is fully amortized by the end of a six (6) year period (ending on
September 15, 2011). Interest is accrued during the first two years and
paid ratably over the third year. Beginning in the fourth year principle
and accrued interest is paid over the remaining three years. On September
15, 2005 the Company borrowed $600,000 against the $1.2 million.
As a result of the acquisition of Picotronix, Inc. (dba Picometrix), the
stockholders of Picometrix received four-year API promissory notes in the
aggregate principal amount of $2.9 million ("Debt to Related Parties").
The notes are payable in four annual installments with the first being a
payment of $500,000 due May 2006, the second being a payment of $550,000,
the third being a payment of $900,000 and the fourth being a payment of
$950,500. The notes bear an interest rate of prime plus 1.0% and are
secured by all of the intellectual property of Picometrix. API has the
option of prepaying the API Notes without penalty.
DEBT MATURITY TABLE (IN 000'S)
Balance FY2007 FY2008 FY2009 FY2010 FY2011 FY2012
3/31/06 &
Beyond
------- ------ ------ ------ ------ ------ ------
Bank Term Loan - SBB&T $ 1,950 $ 900 $ 900 $ 150
Credit Line - SBB&T 1,000 1,000
MEDC- loan 1 750 109 188 188 265
MEDC - loan 2 600 117 200 200 83
Convertible Debt 1st 1,503 1,503
Tranche
Convertible Debt 2nd 2,229 2,229
Tranche
Debt to Related Parties 2,901 500 550 900 951
Capital leases 27 27
TOTAL $10,960 $2,427 $5,182 $1,276 $1,339 $ 388 $ 348
50
15. RELATED PARTY TRANSACTIONS
As a result of the acquisition of Picotronix, Inc. (dba Picometrix), the
stockholders of Picometrix received four-year API promissory notes in the
aggregate principal amount of $2.9 million ("Debt to Related Parties").
The notes are payable in four annual installments with the first being a
payment of $500,000 due May 2006, the second being a payment of $550,000,
the third being a payment of $900,000 and the fourth being a payment of
$950,500. The notes bear an interest rate of prime plus 1.0% and are
secured by all of the intellectual property of Picometrix. API has the
option of prepaying the API Notes without penalty. On March 31, 2006 the
remaining balance on the notes was $2.9 million and paid $206,000 to the
note holders in FY2006. Note holders include Robin Risser and Steve
Williamson, the Company's CFO and CTO respectively.
16. CAPITALIZED LEASE OBLIGATIONS
The Company has a capitalized lease obligation, which provides for monthly
payments of $889. The lease matures October 2007 and is collateralized by
certain equipment with a net book amount of approximately $27,000. Future
payments on the lease obligations are as follows:
2007 $ 27,000
Less interest (2,300)
Present value of net minimum lease payments 24,700
17. COMMITMENTS & CONTINGENCIES
The Company leases its manufacturing and office facilities and certain
office equipment under non-cancelable operating leases. Minimum future
lease payments under all non-cancelable operating leases expiring at
various dates through fiscal 2011 are as follows:
2007 $1,171,000
2008 1,115,000
2009 1,035,000
2010 704,000
2011 176,000
----------
Total $4,201,000
==========
Rent expense was approximately $1,183,000, $482,000 and $441,000 in fiscal
2006, 2005 and 2004, respectively.
The Company leases all of its executive offices, research, marketing and
manufacturing facilities. At March 31, 2006, those leases consisted of
primarily 95,000 square feet in three facilities. The facility located at
1240 Avenida Acaso in Camarillo, California is leased through February
2009. A second manufacturing facility is located at 305 County YZ,
Dodgeville, Wisconsin, and is leased through October 2006, with one (1)
five (5) year option to renew at the current lease rate. The Corporate
office with the third manufacturing
51
facility is located at 2925 Boardwalk, Ann Arbor, Michigan and is leased
through June 2010, with two (2) five (5) year options to renew at the
current lease rate with a CPI adjuster. In addition the Company has the
right of first refusal to purchase the facility. The Company believes that
its existing facilities are adequate to meet its needs for the foreseeable
future.
18. LEGAL
The Company is, from time to time, subject to legal and other matters in
the normal course of its business. While the results of such matters
cannot be predicted with certainty, management does not believe that the
final outcome of any pending matters will have a material effect on the
financial position and results of operations of the Company.
19. EMPLOYEES' RETIREMENT PLAN
The Company maintains a 401(k) Plan which is qualified under the Internal
Revenue Code. All full-time employees are eligible to participate in the
Plan. Employees may make voluntary contributions to the Plan which is
matched by the Company at the rate of $1.00 for every $1.00 of employee
contribution up to 3% of wages, and $.50 for every $1.00 of employee
contributions on the next 2% of wages, subject to certain limitations.
Employer contributions are fully vested when earned. The Company
contributions and administration costs recognized as expense were
approximately $181,000, $62,000 and $71,000 in fiscal 2006, 2005 and 2004,
respectively.
20. SUBSEQUENT EVENTS
On June 2, 2006 the Company announced the resignation of Paul Ludwig as a
member of the Board of Directors and President of Advanced Photonix, Inc.
Richard Kurtz CEO and Chairman of the Board assumed the responsibility of
President.
21. NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised
2004), "Share-Based Payment" ("SFAS No. 123R") which replaces SFAS No.
123, supersedes Accounting Principles Board (APB) No. 25 and related
interpretations and amends SFAS No. 95, "Statement of Cash Flows." The
provisions of SFAS No. 123R are similar to those of SFAS No. 123; however,
SFAS No. 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial
statement as compensation cost based on their fair value on the date of
the grant. The fair value of the share-based awards will be determined
using an option-pricing model on the grant date. SFAS No. 123R is
effective at the beginning of the first fiscal year beginning after June
15, 2005. The Company will adopt SFAS No. 123R in the first quarter of
fiscal 2007. The adoption of SFAS No. 123R in the first quarter of 2007 is
not expected to have a material impact on the Company's financial
statements, although the future impact of the adoption of SFAS No. 123R is
dependent upon the future issuance of stock option grants that will be
determined by the Company's Compensation Committee.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs -- An
Amendment of Accounting Research Bulletin No. 43, Chapter 4" ("SFAS No.
151"). SFAS No. 151 clarifies that abnormal amounts of idle facility
expense, freight, handling costs and spoilage should be expensed as
incurred and not included in overhead. The provisions in SFAS No. 151 must
be applied prospectively to the Company's inventory costs incurred after
January 1, 2006. The adoption of SFAS No. 151 is not expected to have an
impact on the Company's financial statements.
In March 2005, the FASB issued FASB Interpretation No. ("FIN") 47,
"Accounting for Conditional Asset Retirement Obligations," an
interpretation of FASB Statement No. 143." This Interpretation clarifies
that the term conditional asset retirement activity in which the timing
and (or) method of settlement are conditional
52
on a future event that may or may not be within the control of the entity.
The obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and (or) method of
settlement. Accordingly, an entity is required to recognize a liability
for the fair value of a conditional asset retirement obligation if the
fair value of the liability can be reasonably estimated. The adoption of
FIN 47 in fiscal 2006 did not have a material effect on the Company's
financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections -- a Replacement of APB No. 20 and SFAS No. 3." SFAS No. 154
changes the requirements for the accounting for, and reporting of, a
change in accounting principle. Previously, voluntary changes in
accounting principles were generally recognized by way of a cumulative
effect adjustment within net earnings during the period of change. SFAS
No. 154 requires retrospective application to prior period financial
statements, unless it is impracticable to determine either the
period-special effects or the cumulative effect of the change. SFAS No.
154 is effective for accounting changes made in fiscal years beginning
after December 15, 2005; however, the statement does not change the
transition provisions of any existing accounting pronouncements. The
Company does not believe the adoption of SFAS No. 154 will have a material
effect on its financial statements.
In October 2005, the FASB issued FSP FAS 13-1, "Accounting for Rental
Costs Incurred during a Construction Period", which addresses the
accounting for rental costs associated with operating leases that are
incurred during a construction period. This FSP requires that rental costs
associated with ground or building operating leases incurred during a
construction period be recognized as rental expense and included in income
from continuing operations. The guidance in this FSP shall be applied to
the first reporting period beginning after December 15, 2005, with early
adoption permitted. The Company does not believe the adoption of SFAS No.
154 will have a material effect on its financial statements.
53
22. QUARTERLY FINANCIAL DATA
The Company recorded 4th quarter adjustments of $_333,000 comprised of
convertible interest expense from the `Relative Fair Value' of $
181,000_and Capital Finance Expense of $152,000, the majority of which
happened in the 2nd Quarter of FY 2006.
The table below lists financial information (unaudited) by quarter for
each of the three fiscal years ending March 31, 2006, March 27, 2005, and
March 28, 2004.
FIRST SECOND THIRD FOURTH TOTAL YEAR
------------- ------------- ---------- ------------- -------------
2006
Net Sales $ 5,077,000 $ 5,194,000 $ 6,511,000 $ 6,803,000 $ 23,585,000
Cost of Sales 2,929,000 3,070,000 3,513,000 4,890,000 14,402,000
Gross Profit 2,148,000 2,124,000 2,998,000 1,913,000 9,183,000
Research & Development Expenses 452,000 795,000 836,000 936,000 3,019,000
Selling, General & Administrative Expenses 1,669,000 1,969,000 1,902,000 3,151,000 8,691,000
Net Income (Loss) $ (134,000) $ (834,000) $ 127,000 $ (2,624,000) $ (3,465,000)
Basic Income (Loss) per Common Share $ (0.01) $ (0.05) $ 0.01 $ (0.14) $ (0.20)
Diluted Income (Loss) per Common Share anti-dilutive anti-dilutive $ 0.01 anti-dilutive anti-dilutive
Weighted Average Common Shares Outstanding 15,133,000 17,252,000 18,563,000 18,882,000 17,477,000
2005
Net Sales $ 3,253,000 $ 3,709,000 $ 3,852,000 $ 3,989,000 $ 14,803,000
Cost of Sales 1,956,000 2,451,000 2,832,000 2,832,000 10,071,000
Gross Profit 1,297,000 1,258,000 1,020,000 1,157,000 4,732,000
Research & Development Expenses 42,000 37,000 33,000 34,000 146,000
Selling, General & Administrative Expenses 902,000 982,000 870,000 1,166,000 3,920,000
Net Income (Loss) $ 347,000 $ 260,000 $ 35,000 $ 4,612,000 $ 5,254,000
Basic Income (Loss) per Common Share $ 0.03 $ 0.02 $ 0.00 $ 0.34 $ 0.39
Diluted Income (Loss) per Common Share $ 0.02 $ 0.02 $ 0.00 $ 0.31 $ 0.34
Weighted Average Common Shares Outstanding 13,431,000 13,431,000 13,437,000 13,544,000 13,461,000
2004
Net Sales $ 2,647,000 $ 3,256,000 $ 2,933,000 $ 3,565,000 $ 12,401,000
Cost of Sales 1,774,000 2,131,000 1,895,000 2,304,000 8,104,000
Gross Profit 873,000 1,125,000 1,038,000 1,261,000 4,297,000
Research & Development Expenses 78,000 80,000 32,000 90,000 280,000
Selling, General & Administrative Expenses 684,000 819,000 756,000 915,000 3,174,000
Net Income (Loss) $ 113,000 $ 225,000 $ 255,000 $ 201,000 $ 794,000
Basic & Diluted Income (Loss) per Common
Share $ 0.01 $ 0.02 $ 0.02 $ 0.01 $ 0.06
Weighted Average Common Shares Outstanding 12,247,000 13,449,000 13,458,000 13,479,000 13,400,000
54
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (the "Certifying
Officers") are responsible for establishing and maintaining disclosure controls
and procedures for the Company. The Certifying Officers have designed such
disclosure controls and procedures to ensure that material information is made
known to them, particularly during the period in which this report was prepared.
The Certifying Officers have evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)
and 15d-15(e)) as of the end of the period covered by this quarterly report and
believe that the Company's disclosure controls and procedures are effective
based on the required evaluation. During the past twelve months the Company's
Camarillo location has had turnover in two key accounting positions. In
addition, in the Company's recently consummated and previously reported
acquisition of Picometrix, Inc., API gained three additional accounting
personnel in our Ann Arbor location. In view of these two events, API management
plans to reconfigure our Corporate and Camarillo accounting and disclosure
controls and also transfer certain accounting and external reporting functions
to our Ann Arbor office. We will continue to review and assess future needs and
responsibilities in all locations and may make future changes. We believe that
these changes may have a material affect on our internal controls and
Procedures.
In February 2005, Susan Schmidt resigned from her position as Chief Financial
Officer, effective March 11, 2005, citing personal reasons. On March 11, 2005
Richard Kurtz, Chairman of the Board and Chief Executive Officer, assumed the
position of interim principal financial officer until the appointment of Robin
Risser as Chief Financial Officer on May 2, 2005. During the interim period
March 11, 2005 through July 2005 Ms. Schmidt continued on with the Company in
the capacity of a consultant, assisting management in the evaluation and
reporting of financial information and maintaining consistency in our disclosure
and internal controls and procedures.
DISCLOSURE CONTROLS
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (or Exchange Act)). Based on this evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures are effective in alerting them in a timely manner to material
information required to be disclosed in our periodic reports filed with the SEC.
55
CHANGES IN INTERNAL CONTROLS
During our most recent fiscal quarter, there has not occurred any change in our
internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B OTHER INFORMATION
None
56
PART III
In accordance with General Instruction G (3), and except for certain of the
information called for by Items 10 and 12 which is set forth below, the
information called for by Items 10 through 13 of Part III is incorporated by
reference from the Company's definitive proxy statement ("Proxy Statement") to
be filed pursuant to Regulation 14A promulgated under the Securities Exchange
Act of 1934 in connection with the Company's 2005 Annual Meeting of
Stockholders.
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS
CODE OF ETHICS
The Company has adopted a Code of Ethics for Senior Financial Officers, pursuant
to the Sarbanes-Oxley Act of 2002. The Code of Ethics is published on the
Company's web site, www.advancedphotonix.com on the Investor Relations page.
ITEM 11 EXECUTIVE COMPENSATION
The response to this item is incorporated by reference from the Company's Proxy
Statement.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 2006, the aggregated information
pertaining to all securities authorized for issuance under the Company's equity
compensation plans:
Number of Securities to be Weighted-average
issued upon exercise of exercise price of
outstanding options, outstanding options, Number of securities remaining
Plan Category warrants and rights warrants and rights available for future issuance
------------- -------------------------- ------------------- -------------------------------
Equity compensation plans
approved by shareholders 2,025,400 $1.64 218,222
Equity compensation plans not
approved by shareholders - - -
Total 2,025,400 $1.64 218,2222
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated by reference from the Company's Proxy
Statement.
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
The response to this item is incorporated by reference from the Company's Proxy
Statement.
57
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following is a list of the financial statements, schedules and exhibits
filed herewith.
(1) Financial Statements: No financial statements have been filed with
this Form 10-K other than those listed in Item 8.
(2) Financial Statement Schedules: Schedules for which provisions are
made in the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related instructions,
or are disclosed in the accompanying consolidated financial
statements, or are inapplicable and, therefore, have been omitted.
(3) Exhibits:
EXHIBIT
NO. Description
------- ------------
2.1 Stock Purchase Agreement dated December 21, 2004 between Advanced
Photonix, Inc. and Photonic Detectors, Inc. - incorporated by
reference to Exhibit 2.1 to the Registrant's Form 8-K, as filed with
the Securities and Exchange Commission on December 23, 2004
2.2 Agreement and Plan of Merger between Advanced Photonix, Inc. and
Michigan Acquisition Sub, LLC, Picotronix, Inc., Robin Risser and
Steven Williamson, dated March 8, 2005 - incorporated by reference
to Exhibit 2.1 to the Registrant's Form 8-K, as filed with the
Securities and Exchange Commission on March 14, 2005
3.1 Certificate of Incorporation of the Registrant, as amended -
incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1, filed with the Securities and
Exchange Commission on November 23, 1990
3.1.1 Amendment to Certificate of Incorporation of the Registrant, dated
October 29, 1992-incorporated by reference to the Registrant's March
31, 1996 Annual Report on Form 10-K
3.1.2 Amendment to Certificate of Incorporation of the Registrant, dated
September 9, 1992-incorporated by reference to the Registrant's
March 31, 1996 Annual Report on Form 10-K
3.2 By-laws of the Registrant, as amended - incorporated by reference to
Exhibit 3.(ii) to the Registrant's Form 8-K as filed with the
Securities and Exchange Commission on June 8, 2005
4.1 Rights Agreement, by and between the Company and Continental Stock
Transfer and Trust Company, as amended - incorporated by reference
to Exhibit 4.1 to the Registrant's Form 8-K filed with the
Securities and Exchange Commission on February 9, 2005
10.1 Advanced Photonix, Inc. 1991 Special Directors Stock Option Plan -
incorporated by reference to Exhibit 10.9 to the Registrant's March
31, 1991 Annual Report on Form 10-K
58
10.2 Advanced Photonix, Inc. 1990 Incentive Stock Option and
Non-Qualified Stock Option Plan - incorporated by reference to
Exhibit No. 10.11 to the Registrant's Registration Statement on Form
S-1, filed with the Securities and Exchange Commission on November
23, 1990
10.3 Advanced Photonix, Inc. 1997 Employee Stock Option Plan -
incorporated by reference to Exhibit 10.13 to the Registrant's March
30, 1997 Annual Report on Form 10-K
10.4 Amendment No. 1 to 1997 Employee Stock Option Plan of Advanced
Photonix, Inc. - incorporated by reference to Exhibit 10.14 to the
Registrant's December 28, 1997 Quarterly report on Form 10-Q
10.5 Advanced Photonix, Inc. 2000 Stock Option Plan, as amended -
incorporated by reference to Exhibit 99.1 to the Registrant's Form
8-K, as filed with the Securities and Exchange Commission on
November 19, 2004
10.9 Lease Agreement dated February 23, 1998 between Advanced Photonix,
Inc. and High Tech No. 1, Ltd. - incorporated by reference to
Exhibit 10.9 to the Registrant's March 29, 1998 Annual Report on
Form 10-K
10.10 Form of Indemnification Agreement provided to Directors and
Principal Officers of Advanced Photonix, Inc. - incorporated by
reference to Exhibit 10.15 to the Registrant's December 28, 1997
Quarterly report on Form 10-Q
10.11 Employment Agreement dated August 21, 2002 between Advanced
Photonix, Inc. and Paul D. Ludwig - incorporated by reference to
Exhibit 10.1 to the Registrant's Form 8-K as filed with the
Securities and Exchange Commission on September 5, 2002
10.12 Employment Agreement dated February 10, 2003 between Advanced
Photonix, Inc. and Richard D. Kurtz - incorporated by reference to
Exhibit 10.12 to the Registrant's March 30, 2003 Annual Report on
Form 10-KSB
10.20 Securities Purchase Agreement, Registration Rights Agreement, Senior
Subordinated Convertible Note, Warrant to Purchase Class A Common
Stock, and Additional Investment Right dated October 12, 2004
between Advanced Photonix, Inc. and private investors - incorporated
by reference to Exhibits 10.13 through 10.13.4 to the Registrant's
Form 8-K, as filed with the Securities and Exchange Commission on
October 12, 2004
10.20.1 Letters of Agreement amending the Securities Purchase Agreement and
Warrant to Purchase Class A Common Stock, dated March 9, 2005,
between Advanced Photonix, Inc. and private investors - incorporated
by reference to Exhibits 10.2 through 10.5 to the Registrant's Form
8-K, as filed with the Securities and Exchange Commission on March
14, 2005
10.26.1 Promissory Note between Picotronix, Inc. and Advanced Photonix,
Inc., dated March 10, 2005 - incorporated by reference to Exhibit
10.1 to the Registrant's Form 8-K, as filed with the Securities and
Exchange Commission on March 14, 2005
10.26.2 Secured Promissory Note between Advanced Photonix, Inc. and Robin
Risser, dated May 2, 2005 - incorporated by reference to Exhibit
10.1 to the Registrant's Form 8-K, as filed with the Securities and
Exchange Commission on May 6, 2005
59
10.26.3 Secured Promissory Note between Advanced Photonix, Inc. and Steven
Williamson, dated May 2, 2005 - incorporated by reference to Exhibit
10.2 to the Registrant's Form 8-K, as filed with the Securities and
Exchange Commission on May 6, 2005
10.26.4 Employment Agreement between Advanced Photonix, Inc. and Robin
Risser, dated May 2, 2005 - incorporated by reference to Exhibit
10.3 to the Registrant's Form 8-K, as filed with the Securities and
Exchange Commission on May 6, 2005
10.26.5 Employment Agreement between Advanced Photonix, Inc. and Steven
Williamson, dated May 2, 2005 - incorporated by reference to Exhibit
10.4 to the Registrant's Form 8-K, as filed with the Securities and
Exchange Commission on May 6, 2005
21.1 List of Subsidiaries of Registrant - incorporated by reference to
Exhibit 21.1 to the Registrant's March 30, 2003 Annual Report on
Form 10-KSB
31.1 Certification of the Registrant's Chairman, Chief Executive Officer
and Director pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of the Registrant's Chairman, Chief Financial Officer
and Director pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ADVANCED PHOTONIX, INC.
By: /s/ Richard Kurtz
-----------------------
CEO & President
Date: June 29, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature Title Date
---------- ----- -----
/s/ Richard D. Kurtz Chairman of the Board, June 29, 2006
------------------------------------
Richard D. Kurtz
s/ Robin Risser Chief Financial Office and Director June 29, 2006
------------------------------------
Robin Risser
/s/ M. Scott Farese Director June 29, 2006
------------------------------------
M. Scott Farese
/s/ Lance Brewer Director June 29, 2006
------------------------------------
Lance Brewer
/s/ Donald Pastor Director June 29, 2006
-----------------------------------
Donald Pastor
/s/ Stephen P. Soltwedel Director June 29, 2006
-----------------------------------
Stephen P. Soltwedel
61
EXHIBIT INDEX
EX NO. DESCRIPTION
----- ----------------
31.1 Certification of the Registrant's Chairman, Chief Executive Officer
and Director pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of the Registrant's Chairman, Chief Financial Officer
and Director pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002