Item 1. Business - ------- --------
General - -------
Advanced Photonix, Inc.(R) (with its subsidiary, Silicon Detector Corporation, a California corporation ("SDC"), hereafter referred to together as the "Company"), is engaged in the development and manufacture of optoelectronic semiconductor based components, hybrid assemblies and other proprietary solid state light and radiation detection devices, including proprietary advanced solid state silicon photodetection devices which utilize Avalanche Photodiode ("APD") technology. The Company was incorporated under the laws of the State of Delaware on June 22, 1988. The Company believes that its proprietary APD technology represents a leading-edge advancement in photodetection and imaging, and will become an increasingly important part of its business.
The Company's proprietary technology extends the capability of the traditional APD by introducing a large surface area silicon device or Large Area Avalanche Photodiode (the "LAAPD"). The Company believes that the LAAPD is an alternative to photomultiplier vacuum tubes ("PMT's"), which have been used for many years as the primary technological solution for highly sensitive light detection in certain measurement, control and monitoring applications used in industrial, medical, military, scientific and commercial settings.
The LAAPD and PMT are at the highly complex and engineered end of the spectrum of activities in the photonics industry, which encompasses all light detection devices and associated electronic components. Fundamentally, photodetection devices sense light of varying intensity and convert the light detected to electronic signals that cause the systems of which they are a part, to respond in programmed ways. The photonics industry includes other custom-engineered devices of less complexity than the LAAPD and the PMT such as PIN (Positive-Intrinsic-Negative) photodiodes. The bulk of the Company's revenues continue to be derived from the sale of products based on PIN and other non-proprietary technologies (the "core business").
Products - --------
The Company designs and manufactures optoelectronic semiconductor based components and hybrid assemblies. The Company's product line includes:
o Spectrally enhanced single and multi-element PIN photodetectors
o Photodetector/preamplifier hybrids
o Military/commercial aerospace products
o Custom optoelectronic products, including visible and non visible (infrared) light-emitting diodes ("LED's") and LED displays
o FILTRODE(R) - patented technology integrating spectrally enhanced filters directly onto photodiode wafers
o Small Area Avalanche photodiodes
o Large Area Avalanche photodiodes (LAAPD's, LAAPD Modules and Cooled Heads)
The Company supplies detectors for military/commercial aerospace and other High Reliability ("Hi-Rel") applications. Hi-Rel devices are those which are designed, manufactured, screened and qualified to function under exceptionally severe levels of environmental stress. The Company has many years of experience in supplying Hi-Rel devices which require modern wafer fabrication techniques, a dedicated assembly area, and a well equipped test lab. Hi-Rel products manufactured by the Company include:
o Multi-Element Detector Pre-Amplifier assembly employed on the optical fuse used on the Rolling Airframe Missile (RAM)
o Narrow and Wide Field of View detectors used in various TOW Missile Trackers
o Common Module LED Arrays qualified with the Center for Night Vision Electro Optics for use in displaying thermal images in various night sights
o Quadrant Photodetectors used in the autocollimator for airborne navigation/FLIR POD's
o Multi-Element Detector Arrays used in space-based optical encoders for Space Shuttle Arm Control
The Company's patented FILTRODE(R) technology integrates optical coatings directly on photodiode chips, replacing conventional technology that requires a separate filter glass or pigmented epoxy to be assembled to the top of a detector. While the technology offers a simpler design and lower cost, reliability and performance are improved because the integrated design is resistant to moisture, shock and vibration. Special packaging of this technology allows for unique applications whereby both front and back detector surfaces can be utilized for light detection.
The Company's Small Area Avalanche Photodiodes ("SAAPD's" -- see description of avalanche photodiode technology below) utilize a chip fabricated with a silicon epiplanar structure. SAAPD's have been designed for a variety of very low-light level applications and cover the wavelength from 400 nm to 1000 nm. Typical applications include optical communication, high-sensitivity bar code reading and laser range finding.
Large Area Avalanche Photodiode Technology - ------------------------------------------
An Avalanche Photodiode is a specialized silicon photodiode capable of sensing very low levels of light through an internal gain phenomenon known as "avalanching". This fundamental performance characteristic is not present in the more conventional PIN photodiode technology.
The first APD was developed in the late 1960's and gave promise as a solid state replacement for the photomultiplier vacuum tube for sensing extremely low levels of electromagnetic radiation. However, design and manufacturing limitations have generally restricted APD's to small diameters (5mm or less) that can only be practically used with optical fiber, thus sharply limiting the range of useful applications.
The Company has developed and patented various aspects of an LAAPD with dimensions of up to 25 mm. The LAAPD is a fast pulse detector of low light levels spanning the near UV (ultraviolet), visible and near IR (infrared) spectra, and, when coupled to a scintillator, of x-rays and gamma-rays. It is also sensitive to electrons accelerated to potentials greater than a few thousand electron-volts. The LAAPD offers capabilities well beyond those of the existing primary photodetection devices - the PIN photodiode, the small area APD and the PMT. Its advantages over PIN photodiodes include higher sensitivity at higher bandwidths. Its advantages over small area APD's include larger active areas to collect more light when the source is diffused and greater sensitivity up to about an order of magnitude. Its advantages over PMT's include superior spectral bandwidth, greater counting sensitivity to pulses above 500 photons in the visible and near IR spectra, higher dynamic range by two orders of magnitude, and a more rugged structure suitable for operation in harsh environments. LAAPD's feature superior quantum efficiency in both visible, near IR and UV regions that cannot be matched by any PMT photocathode. Other features which differentiate LAAPD's from PMT's include greater dynamic range (by two orders of magnitude), open face design for direct low energy x-ray detection, immunity to higher magnetic fields and ease of thermal stabilization allowing much more stable operation. In addition, a more rugged and compact design, and operation requiring far less power, make LAAPD's more advantageous in many portable applications.
The LAAPD sensitivity in the UV region was greatly enhanced in 1995 when the Company developed new processing techniques to improve UV quantum efficiency. This capability is crucial for many applications in high energy and particle physics (calorimetry). The improvement in the UV sensitivity will also facilitate
the design of more powerful imaging and analytical instruments for medical, chemical and biotechnology markets.
The Company expects, but there is no assurance, that its proprietary APD technology, employed in the development of the LAAPD, will form the basis for continuing the investigation and potential commercial development of other lines of advanced silicon avalanche photonics products which will have a broader range of commercial and military applications than the PMT and PIN arrays. For example:
o LAAPD Arrays - the Company's patented technology where the rear surface of an LAAPD is segmented to create isolated pixels, each with a separate electronic lead to be accessed in parallel fashion for imaging applications.
o Vacuum Avalanche Photodiode (VAPD) - another patented technology, which combines a photocathode and an LAAPD in a vacuum tube and functions as a detector for high resolution, single photon-counting and low light level detection.
The Company has identified target markets for its LAAPD products based on customer evaluations and in-house tests. Evaluation detectors are sold to original equipment manufacturers ("OEM's"), engineers and scientists who report information to the Company concerning potential applications and markets, as well as suggesting improvements and pricing objectives. It is expected, but there is no assurance, that original equipment manufacturers who can take advantage of the performance capabilities of LAAPD's will be the source of repeat business for production quantities. Targeted markets, which have been identified include:
o Ranging, Tracking & Imaging - Smart image surveillance/security cameras, 3D collision avoidance cameras, missile guidance, threat warning, underwater mine detection, and mapping & salvaging.
o Medical Imaging - Detectors which image human physiology in slices, and look for pathology. Included in this category are PET scanners, CT scanners, bone densitometers and gamma cameras.
o Industrial Scanning/Process Control - Industrial CT inspection, aerospace ice inspection, drum/flat bed scanning, semiconductor wafer defect scanning and film to video conversion.
o Analytical Chemistry - Analyzing the chemical "recipe" of samples, from glucose levels in the blood to pesticides in ground water.
o Medical Diagnostics - Human fluids are analyzed to diagnose a medical pathology or condition. A partial list of conditions which are diagnosed every day using photonics technology include diabetes, lipid metabolism disorders, myocardial infarction, gout, liver diseases, renal diseases, pancreatitis, anemia, and electrolyte disturbances. It is expected that this list will grow dramatically in the coming years with the explosion of methods now available to perform immunodiagnostics. Examples of forthcoming diagnostics include those targeting thyroid and sexually transmitted disease conditions and wide field retinal visualization.
o Environmental Monitoring - Atmospheric meteorology LIDAR (light detection and ranging), radiation dose monitors, airborne and liquid particle measurement, optical air data systems, airport wind shear, atmospheric pollution monitoring.
o Scientific Research - High energy physics fiber tracking, space particle experiments and Neutrino experiments.
The Company's products are primarily sold as components or assemblies to OEMs or OEMs and the Company does not manufacture any end-user products within the above or any other markets.
Raw Materials - -------------
The principal raw materials used by the Company in the manufacture of its semiconductor chip components and assemblies are silicon wafers, chemicals and gases used in processing wafers, gold wire, lead frames, metal and plastic packages that house the chip and the various custom assemblies. 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. 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 between order and delivery of raw materials.
Research and Development - ------------------------
The Company undertakes both internally funded and customer funded research and development programs when they are in support of the Company's development objectives. The Company has obtained federal government research and development funding supporting the next generation LAAPD products. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more detail on these contracts. Since its inception in June 1988, the Company has incurred material amounts of research and development expenses. During the fiscal years ended in 1999, 1998 and 1997, research and development expenses amounted to $.6 million, $1.2 million and $1.9 million, respectively. Additional research and development funding will be required for LAAPD arrays and VAPD's if the Company decides to commercialize these products.
Manufacturing - -------------
Located in Camarillo, CA, the Company has an approximately 39,000 sq. ft. manufacturing facility which includes various fully equipped clean room areas from Class 100 to Class 100,000 for fabrication, processing, handling and characterizing a number of semiconductor compounds. In-house processes include photolithography, diffusion, metalization, lapping, oxide growth and parametric testing and analysis. An extensive library of different photodiode shapes and sizes is maintained to provide the customer with many options when a custom device is required. The Company estimates that these facilities, with some modifications, will be sufficient to accommodate the expected growth in both the core and LAAPD businesses for the foreseeable future.
The Company has made a significant investment in the area of production automation for its core business, which has enhanced manufacturing repeatability and reliability, leading to higher quality and lower cost for finished products. The automation techniques are employed on many different package configurations, including PC boards, ceramic substrates, dual in-line and TO style packages.
For high volume/low cost manufacturing, the Company maintains a strategic alliance with an optoassembly facility in the Pacific Rim. That facility uses the latest in assembly and test equipment, and employs a Company approved quality program which includes Statistical Process Control (SPC) and a preventive maintenance program. The Facility is UL, FDA and ISO 9002 approved. All Pacific Rim manufactured products are assembled in a Class 100,000 clean room.
Environmental Regulations - -------------------------
The photonics industry, similar to the semiconductor industry, is subject to governmental regulations for the protection of the environment, including those that relate 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 the Company to maintain certain environmental permits. The Company believes that it has obtained all necessary environmental permits to conduct its manufacturing. Changes in the aforementioned federal and state environmental laws and regulations or enactment or promulgation of new laws and regulations could require increases in operating costs and delays or interruptions of operations and may require additional capital expenditures.
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, with the customer being responsible for all finished goods, all costs, direct and indirect, incurred by the Company and a reasonable allowance for anticipated profits. No assurance can be given that such amounts will be received by the Company after cancellation. The Company had approximately $4.5 million of backlog at the end of fiscal 1999 compared with a backlog of approximately $5.8 million at the end of fiscal 1998. The Company expects that approximately $2.9 million of the backlog orders will be filled in fiscal year 2000.
The Company currently supplies core business products in support of satellites, aircraft and ground vehicle missile guidance and tracking systems. Product sales to affiliates and divisions of Raytheon, in the aggregate over several programs, represent approximately 12%, 26% and 19% of the Company's revenues for the fiscal years ending 1999, 1998 and 1997, respectively.
Customers normally purchase the Company's products and incorporate them in products that they in turn sell into 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 through its own technical sales staff and through independent sales representatives. International sales, principally Western Europe, are conducted through foreign distributors (see Note 2 to Consolidated Financial Statements).
In marketing LAAPD products, the Company has recognized that it must compete with producers of PMT's, which have dominated low light level detection markets for many years. Even if the Company can establish that its LAAPD's are a potential alternative to PMT's for certain commercial applications, and assuming that testing of the LAAPD currently being conducted by OEM's and other third parties proves successful, the ability to successfully market its LAAPD devices on a volume basis will be substantially dependent upon the willingness of potential customers who currently use PMT's to incur the substantial expense and expend the time and effort necessary for the redesign of their products to accommodate the LAAPD devices.
Competition - -----------
The Company competes with a range of companies for the custom optoelectronic and silicon photodetector requirements of vendors of medical instruments, computer peripherals, a variety of industrial products and specialized military and commercial aerospace applications. The Company believes its principal competitors for sales of custom devices are small to medium size companies. Because the Company
specializes in custom devices requiring a high degree of engineering expertise to meet the requirements of specific applications, it generally does not compete to any significant degree with other large United States, European or Far Eastern manufacturers of standard "off-the-shelf" optoelectronic components or silicon photodetectors.
The Company believes that the principal competition for its silicon LAAPD photodetection devices lies with producers of PMT's, the only product currently available for many of the applications for which the Company's LAAPD products are designed. The Company believes that there are a number of manufacturers of PMT's, most of which have significantly greater financial, technological, marketing and personnel resources than the Company. In addition, several companies produce solid state detectors based on small area APD technology. Although a few additional photodetector companies are engaged in developing APD's, the Company believes that most of these companies are limited by their technology to small area APD devices which the Company believes are considerably less useful than the Company's LAAPD devices in broadening the applicability of APD technology to imaging and the sensing of extremely low light levels. The Company's LAAPD products have electronic signal gain of up to 300 (one photoelectron converted to 300 photoelectrons) while typical small area APD devices have a gain of about 50 and, therefore, are not competitive with the Company's LAAPD devices in certain applications.
PMT's were first invented in the 1940's. It is possible that existing PMT manufacturers or other photodetector manufacturers will begin APD development and eventually manufacture competitive APD devices.
Proprietary Technology - ----------------------
The Company has been issued patents as follows:
US PATENT NO. DESCRIPTION DATE ISSUED - ------------- --------------------------------- ---------------------- 5,801,430 Solid State Photodetector with Light-Responsive Rear Face September 1998 5,757,057 Large Area Avalanche Array May 1998 5,477,075 Solid State Photodetector with Light-Responsive Rear Face December 1995 5,311,044 Avalanche Photomultiplier Tube May 1994 5,146,296 Devices for Detecting and/or Imaging Single Photoelectron September 1992 5,057,892 Light Responsive Avalanche Diode October 1991 5,021,854 Silicon Avalanche Photodiode Array June 1991 4,717,946 Thin Line Junction Photodiode By predecessor company 4,782,382 High Quantum Efficiency Photodiode Devices By predecessor company
Other patent submissions are currently under review by the U.S. Patent and Trademark Office. There can be no assurance that the pending patent applications will issue as patents, 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 prevent infringement of a patent could be substantial. If the Company is unable to obtain patents for its proposed applications, other entities may exploit the Company's developments in APD technology. Furthermore, there can be no assurance the Company's APD technology will not infringe patents or other rights owned by others, licenses to which may 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 pertinent published materials, to the Company's knowledge, its competitors hold no patents, licenses or other rights to the APD technology which would preclude the Company from pursuing its intended operations or from obtaining patent protection for its proposed applications.
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 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 may arise as to the proprietary rights to such information which may not be resolved in favor of the Company.
Employees - ---------
At June 22, 1999, the Company employed 65 full-time employees (including 3 officers), 11 engineering and development personnel, 42 operations personnel, 7 sales and marketing personnel (including 1 officer), and 5 general administrative personnel (including 2 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 as payroll expense.
Item 2.
Item 2. Properties - ------- ----------
The Company leases its executive offices, research, marketing and manufacturing facility which consists of approximately 39,000 square feet in a building complex located at 1240 Avenida Acaso, Camarillo, California. The lease expires in February 2004. The Company believes that its existing facility is adequate to meet its needs for the foreseeable future. See "Business - Manufacturing."
Item 3.
Item 3. Legal Proceedings - ------- ----------------- None
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- None
PART II
Item 5.
Item 5. Market for the Registrant's Securities and Related Stockholder Matters ---------------------------------------------------------------------
The Company's Class A Common Stock is traded on the American Stock Exchange ("AMEX") under the symbol "API". The Company's Class B Common Stock is not publicly traded.
At June 16, 1999, the Company had 78 holders of record for the Class A Common Stock, representing approximately 1,300 holders owning shares of Class A Common Stock in street name. On the same date, there were 9 holders of the Class B Common Stock.
The following table sets forth high and low closing prices by quarter for fiscal years 1999 and 1998.
The Company has not 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. As of June 11, 1999, 700,000 shares of Class A Redeemable Convertible Preferred Stock had been converted into 210,000 shares of Class B Common Stock, leaving outstanding 80,000 shares of Class A Redeemable Convertible Preferred Stock. The aggregate non-cumulative annual dividend preference of such Class A Redeemable Convertible Preferred Stock is $5,760. 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 or Class B Common Stock.
Item 6.
Item 6. Selected Financial Data
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Fiscal year 1999 Compared to Fiscal Year 1998 - ---------------------------------------------
REVENUES The Company's revenues for the fiscal year ended March 28, 1999 ("1999") were $7.3 million, an increase of 4% from revenues of $7.0 million for the fiscal year ended March 29, 1998 ("1998").
Net product sales of $7.3 million increased $648,000 (10%) in 1999. As detailed below, this increase reflects higher shipments of military aerospace products, partially offset by lower shipments of commercial products. Volume in military aerospace products increased by approximately 14% in 1999 compared to 1998. The increase in military aerospace products was partially offset by lower shipments of commercial products which decreased by approximately 2% in 1999 compared to 1998. During 1999, shipments of Large Area Avalanche Photodiode
(LAAPD) products (included in net product sales) rose by 94%, to $403,000 (highest in Company history), when compared to the same period in the prior year. While sales from these products represented only 6% of total net product sales during 1999, the Company anticipates increasing volume from sales of its proprietary LAAPD products as markets begin to implement this "enabling" technology.
Development contract revenues during 1999 decreased by $346,000. The Company was awarded a Phase II Department of Energy (DOE) grant of approximately $750,000 in June 1995, and in December 1995, was awarded a $1.1 million contract from the Advanced Research Projects Agency of the Pentagon and the Aircraft Division of the Naval Air Warfare Center (ARPA/NAWC). Both contracts were completed during fiscal 1998, the DOE in Q3 and ARPA/NAWC in Q4. The Company is currently not working on any government funded development contracts.
COSTS AND EXPENSES Cost of product sales increased by $522,000 (13%) in 1999 compared to 1998. Cost of product sales as a percent of net product sales increased by 2% and gross profit margin on net product sales decreased 2 percentage points to 39% compared to 1998. This was primarily due to product mix as the Company completed a large program in early 1999, which generated high margins in its initial phase that began in early 1998.
Research and development ("R&D") costs decreased by $690,000 (56%) to $552,000 during 1999 compared to 1998. The decrease in R&D costs is primarily due to the lower level of R&D effort on government contracts (see "Revenues" above) as well as a general reduction in internal R&D efforts as the Company has commercialized its discrete line of LAAPD products which in previous years were still under development. The Company continues development of its next generation line of LAAPD array products. R&D costs have varied significantly in the past, and may continue to do so, due to the level of activity associated with development contracts as well as the number and complexity of new process and product development projects, the qualification of new process developments and customer evaluation and acceptance of new products.
Marketing and sales expenses decreased by $19,000 (2%) to $959,000 in 1999. Marketing and sales expenses are expected to increase as the Company pursues its plan for growth and commercialization of the LAAPD family of products.
General and administrative expenses increased by $70,000 (7%) to $1.1 million in 1999 compared to 1998. During Q2 1997 the Company recorded a one-time reorganization charge of approximately $288,000 related to management changes and during Q2 1998 reversed approximately $100,000 of this accrual. General and administrative expenses, before the impact of the one-time reversal of reorganization charges in Q2 1998, decreased by $30,000 (3%) in 1999 compared to 1998.
Interest income in 1999 of $115,000 was $8,000 lower than 1998 as a result of lower available interest rates.
Fiscal year 1998 Compared to Fiscal Year 1997 - ---------------------------------------------
REVENUES The Company's revenues for the fiscal year ended March 29, 1998 ("1998") were $7.0 million, an increase of 10% from revenues of $6.4 million for the fiscal year ended March 30, 1997 ("1997").
Net product sales of $6.7 million increased $870,000 (15%) in 1998. As detailed below, this increase reflects higher shipments of military aerospace products, partially offset by lower shipments of commercial products. Volume in military aerospace products increased by approximately 54% in 1998 compared to 1997. The increase in military aerospace products was partially offset by lower shipments of commercial products which decreased by approximately 7% in 1998 compared to 1997. The Company believes that cutbacks in its sales and marketing efforts during fiscal 1996 impacted its ability to book new orders and resulted in lower sales during the second half of 1997 and the first half of 1998. These cutbacks were a result of cash conservation measures put in place
prior to the Company completing a private placement in August 1995. After receiving the additional equity financing, the Company hired and replaced employees in the sales department and otherwise increased marketing efforts including additional trade-show attendance and advertising. These efforts have resulted in an increase in commercial backlog and helped to increase commercial sales during the fourth quarter of 1998 by approximately 24% compared to the same period in the prior year.
Development contract revenues during 1998 decreased by $237,000 (41%) when compared to 1997. The Company was awarded a Phase II Department of Energy (DOE) grant of approximately $750,000 in June 1995, and in December 1995, was awarded a $1.1 million contract from the Advanced Research Projects Agency of the Pentagon and the Aircraft Division of the Naval Air Warfare Center (ARPA/NAWC). These types of government development contracts are typically multi-year awards and are subject to periodic review and cancellation by the government due to a variety of reasons including a lack of funding. During the third quarter of 1998, revenues from the DOE contract began to wind down and the contract was completed. The ARPA/NAWC contract was completed during the fourth quarter.
COSTS AND EXPENSES Cost of product sales increased by only $20,000 (1%) in 1998 despite the 15% increase in net product sales (see "Revenues" above). Cost of product sales as a percent of net product sales decreased by 13% and gross profit margin on net product sales increased 8 percentage points to 41% compared to 1997. The improvement is attributable to a number of factors including improvements in operating efficiencies as well as improved margins on product mix. In line with the reduction in product shipments which spanned the second half of fiscal 1997 through the first half of fiscal 1998, the Company reduced its workforce from 86 to 69 during fiscal 1997 through attrition and a reduction in force in February 1997.
Research and development ("R&D") costs decreased by $670,000 (35%) to $1.2 million in 1998. The decrease in R&D costs is primarily due to the lower level of R&D effort on government contracts (see "Revenues" above) as well as a general reduction in internal R&D efforts as the Company focused more on the commercialization/manufacture of the LAAPD. In conjunction with its commercialization efforts, the Company has consolidated its core business and LAAPD manufacturing operations which previously had been managed as separate operational centers. In addition, the Company has better controlled internal R&D activities. R&D costs have varied significantly in the past, and may continue to do so, due to the level of activity associated with development contracts as well as the number and complexity of new process and product development projects, the qualification of new process developments and customer evaluation and acceptance of new products.
Marketing and sales expenses decreased by $19,000 (2%) to $978,000 in 1998.
General and administrative expenses decreased by $644,000 (40%) to $983,000 in 1998 primarily due to lower labor related costs partially offset by higher consultant costs. During 1997, the Company recorded a one-time reorganization charge of approximately $323,000 related to management changes and during the second quarter of 1998 reversed approximately $100,000 of this accrual. During 1998, general and administrative expenses, before the impact of these adjustments, decreased by $221,000 (17%) to $1.1 million. These decreases were due to a number of factors including lower compensation, training, management systems, amortization and consulting costs.
Interest income in 1998 of $123,000 was $44,000 lower than 1997 as a result of lower average cash balances and lower available interest rates. In August 1995, the Company completed a private placement which increased its average cash balances during Q3 and Q4 of 1996 and all of 1997.
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------
At March 28, 1999, the Company had cash, cash equivalents and
short-term investments of $2.5 million, working capital of $4.4 million and an accumulated deficit of $17.3 million. The Company's cash, cash equivalents and
short-term investments increased $168,000 during the twelve months ended March 28, 1999. Cash expenditures were primarily impacted by a reduction of $448,000 in accounts payable and other accrued expenses. This reduction was primarily due to material and other manufacturing related purchases/accruals incurred during 1998 leading to a high level of revenues produced in Q1 1999 (revenues of $2.0 million were recorded in Q1 1999). Revenues in Q1 2000 are not projected to be as high and, therefore, the accounts payable and other accrued expenses are lower as of March 28, 1999. Accounts receivable increased by $20,000 in 1999. Capital spending during 1999 was $147,000 compared to $163,000 during 1998.
To enable the Company to meet its capital commitment needs, the Company has historically supplemented cash provided by operations with proceeds from private and public sales of capital stock and borrowings. These funds have been used to grow the core business and finance the development and initial commercialization of the Company's LAAPD technology. While the Company believes that initial commercialization has been completed and has reduced its expenditures for research and development, it continues development of proof-of-concept, LAAPD pixelized arrays as well as other derivatives of the base technology. The continued development of LAAPD arrays beyond the proof-of-concept phase may require additional funds.
The Company has a revolving line of credit agreement with a bank for the lesser of $1,000,000 or 75 percent of eligible trade accounts receivable, as defined by the agreement. The agreement which is renewed annually will expire on July 16, 1999, and provides for interest to be paid monthly at prime plus .5 percent. The Company must adhere to certain requirements and provisions to be in compliance with the terms of the agreement. Borrowings under the line of credit are secured by accounts receivable, inventory, equipment and general intangibles. At March 28, 1999, no amounts were outstanding under any bank line of credit and there were no stockholder loans to the Company.
The Company is exposed to interest rate risk for marketable securities and its bank line of credit. At March 28, 1999, the Company had $1,867,000 of short-term investments with a weighted average interest rate of 5.00%, primarily commercial paper, all of which matures in fiscal year 2000.
The Company believes that the moderate rate of inflation over the past few years has not had a significant impact on the Company's sales or operating results.
YEAR 2000 ISSUES
The Company is aware of the potential for Year 2000 software failures and the associated impact on business operations. Such computer programs utilizing a two digit date field may recognize a date using "00" as the year 1900 rather than the year 2000 (the "Year 2000 Issue"). The Year 2000 Issue could potentially result in a system failure or in miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, send invoices or engage in other similar normal business activities. The Company developed a plan and identified Year 2000 Issues in certain software applications and upgraded such applications with software that recognizes dates beyond December 31, 1999, thus addressing a substantial portion of the Year 2000 Issue that may impact the Company (the Company is currently operating in its fiscal 2000 and, therefore, has proven its reliability). The cost of this project, as it relates to the Year 2000 Issue, did not have a material effect on the operations of the Company. In addition, the Company made inquiries and took inventory of its' "mission critical" suppliers and manufacturing equipment. In most cases, there are alternative vendors and equipment available to meet the "mission critical" needs of the Company in the event of unforeseen circumstances.
FORWARD LOOKING STATEMENTS - --------------------------
This Annual Report 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, 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 (particularly its LAAPD product line), and a decline in the general demand for optoelectronic products.
Item 8.
Item 8. Financial Statements and Supplementary Data - ------- -------------------------------------------
The following consolidated financial statements of Advanced Photonix, Inc. are included in Item 8.
Page Report of Independent Public Accountants 14
Consolidated Statements of Operations for each of the three years in the period ended March 28, 1999 15
Consolidated Balance Sheets at March 28, 1999 and March 29, 1998 16-17
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended March 28, 1999 18
Consolidated Statements of Cash Flows for each of the three years in the period ended March 28, 1999 19
Notes to Consolidated Financial Statements 20-26
All other 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 consolidated financial statements, or are inapplicable and, therefore, have been omitted.
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Advanced Photonix, Inc.:
We have audited the accompanying consolidated balance sheets of Advanced Photonix, Inc. (a Delaware Corporation) and Subsidiary as of March 28, 1999 and March 29, 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended March 28, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Advanced Photonix, Inc. and Subsidiary as of March 28, 1999 and March 29, 1998, and the results of their operations and their cash flows for each of the three years in the period ended March 28, 1999 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California May 5, 1999
ADVANCED PHOTONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For each of the three years 1999 1998 1997 in the period ended March 28, 1999 - -------------------------------------------------------------------------------- REVENUES Net product sales $ 7,310,000 $ 6,662,000 $ 5,792,000 Development contracts - 346,000 583,000 ------------- ------------- ------------- 7,310,000 7,008,000 6,375,000 ------------- ------------- -------------
COST AND EXPENSES Cost of product sales 4,442,000 3,920,000 3,900,000 Research and development 552,000 1,242,000 1,912,000 Marketing and sales 959,000 978,000 997,000 General and administrative 1,053,000 983,000 1,627,000 ------------- ------------- ------------- 7,006,000 7,123,000 8,436,000 ------------- ------------- -------------
NET INCOME (LOSS) FROM OPERATIONS 304,000 (115,000) (2,061,000) ------------- ------------- -------------
OTHER INCOME (EXPENSE) Interest expense - - - Interest income 115,000 123,000 167,000 Other, net (8,000) 2,000 8,000 ------------- ------------- ------------- 107,000 125,000 175,000 ------------- ------------- -------------
NET INCOME (LOSS) -- $.04, $.00, $(.17) per share $ 411,000 $ 10,000 $ (1,886,000) ============= ============= =============
See notes to consolidated financial statements.
ADVANCED PHOTONIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 28, 1999
NOTE 1 - LINE OF BUSINESS AND BUSINESS RISKS
Advanced Photonix, Inc.(R) (with its subsidiary, Silicon Detector Corporation, a California corporation ("SDC"), hereafter referred to together as the "Company"), is engaged in the development and manufacture of optoelectronic semiconductor based components, hybrid assemblies and other proprietary solid state light and radiation detection devices, including proprietary advanced solid state silicon photodetection devices which utilize Avalanche Photodiode ("APD") technology. The Company was incorporated under the laws of the State of Delaware on June 22, 1988. The Company believes that its proprietary APD technology represents a leading-edge advancement in photodetection and imaging, and will become an increasingly important part of its business.
The Company has an accumulated deficit of $17,252,000 as of March 28, 1999, and has incurred losses since inception until the last two fiscal years. The Company's LAAPD technology is still considered to be a new technology and is subject to risks inherent in the development of products based on new technologies. These risks include getting the invention out of the laboratory and into actual use in the field and stepping up production from the prototype (early) stages of manufacturing. In order to fund these development efforts, the Company historically has relied upon proceeds from equity financings, bank lines-of-credit and loans from stockholders. At March 28, 1999, no amounts were outstanding under any bank line-of-credit and there were no stockholder loans to the Company.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year: The Company's fiscal year ends on the last Sunday in March. Fiscal years in the three-year period ended March 28, 1999, each contain fifty-two weeks.
Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, SDC. All significant intercompany accounts and transactions have been eliminated.
Cash, cash equivalents and short-term investments: The Company considers all highly liquid investments, with an original maturity of three months or less when purchased, to be cash equivalents. Short-term investments are comprised of readily marketable debt securities with remaining maturities of more than 90 days at date of purchase. The short-term investments are all considered trading securities and are bought and held principally for the purpose of selling in the near term. The fair value of such investments approximated the carrying value as of March 28, 1999 and March 29, 1998.
The Company maintains cash balances at a financial institution that are insured by the Federal Deposit Insurance Corporation up to $100,000. The Company places its cash equivalents and short-term investments in investment grade, short-term debt instruments and limits the amount of credit exposure to any one commercial issuer. As of March 28, 1999, the Company had cash and cash equivalents at various financial institutions and in various highly liquid investments which were in excess of federally insured amounts.
Credit risk: 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. Receivables generally are due within 30 days. A significant portion of revenues and accounts receivable are with U.S. Government contractors, including approximately 12%, 26% and 19% of revenues from a major customer for the fiscal years ending 1999, 1998 and 1997, respectively. In fiscal 1999, the Company had export sales of approximately $979,000 to
customers in Australia, Canada, China, Finland, France, Germany, Great Britain, India, Italy, Japan, Mexico, The Netherlands, New Zealand, Portugal, Spain, Sweden, and Switzerland (none of which was individually greater than 10% of total revenues). As of March 28, 1999 and March 29, 1998, one customer comprised 14% of accounts receivable.
Inventories: Inventories, which include material, labor and manufacturing overhead are stated at the lower of cost (first in, first out) or market.
Inventories consist of the following:
March 28, 1999 March 29, 1998 ------------------- -------------------
Raw materials $ 453,000 $ 481,000 Work in progress 926,000 940,000 Finished products 172,000 152,000 -------------------- ------------------- $ 1,551,000 $ 1,573,000 ==================== ===================
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 five years to eleven years. The Company capitalizes expenditures that materially increase asset lives and charges ordinary repairs and maintenance to operations as incurred. When assets are sold or otherwise disposed of, the cost and related depreciation or amortization are removed from the accounts and any resulting gain or loss is included in other income (expense) in the accompanying consolidated statements of operations. Equipment and leasehold improvements consist of the following:
March 28, 1999 March 29, 1998 ------------------ -----------------
Laboratory equipment $ 2,474,000 $ 2,689,000 Furniture, fixtures and office equipment 232,000 300,000 Leasehold improvements 238,000 306,000 Construction in progress 41,000 92,000 ------------------ ----------------- $ 2,985,000 $ 3,387,000 ================== =================
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. Amortization expense was $3,000, $4,000 and $12,000 for the fiscal years 1999, 1998 and 1997, respectively.
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. Amortization expense was $33,000, $33,000 and $34,000 for the fiscal years 1999, 1998 and 1997, respectively. The Company continually evaluates the recoverability of goodwill by assessing whether the recorded value of the goodwill will be recovered through future expected operating results.
Revenue recognition: Development contracts - Revenues from research and development cost reimbursement-type contracts are recorded as costs are incurred based upon the relationship between actual costs incurred, total estimated costs, and the amount of the contract or grant award. Estimation of costs are reviewed periodically and any anticipated losses are recognized in the period in which they first become determinable.
Product Sales - The Company uses the unit of delivery method for recognizing sales and cost of sales under production contracts. Provision for estimated losses, if any, is made in the period in which such losses are determined.
Warranties: The Company typically warrants its products against defects in material and workmanship for a period of 90 days from the date of shipment. A provision for estimated future warranty costs is recorded when products are shipped. To date, warranty costs have not been material.
Net Income (Loss) Per Share: Net income (loss) per share calculations are in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" (SFAS 128). Accordingly, "basic" net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding for the year. "Diluted" net income (loss) per share has not been presented as the impact is not material. Net income (loss) per share amount for 1997 has been restated to reflect the adoption of SFAS No. 128. Such weighted average shares were approximately 10,916,000 in 1999, 10,886,000 in 1998, and 10,831,000 in 1997. The affect of common stock options in 1999, 1998 and 1997, respectively, have been excluded from the determination of weighted average shares outstanding as their affect would be anti-dilutive or not material.
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.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles 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.
Accounting for Stock Option Based Compensation: SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"), 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, "Accounting for Stock Issued to Employees" (APB 25) and complies with the pro forma disclosure requirements of the new standard (see Note 6).
Business Segment: The Company develops and manufactures optoelectronic semiconductor based components, hybrid assemblies and other proprietary solid state light and radiation detection devices for sale to original equipment manufacturers (OEMs), primarily in North America and Europe, on an integrated one segment basis.
Reclassifications: Certain prior years' amounts have been reclassified to conform to the current year's presentation.
NOTE 3 - 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 $.001 per share. The number
of shares of Class A Preferred Stock issued and outstanding was 80,000 at March 28, 1999 and 90,000 at March 29, 1998, respectively. The Class A Preferred Stock has a liquidation preference equal to its issue price ($.80 per share).The Class A Preferred Stock is convertible at any time, at the option of the holder, into .3 share of Class B Common Stock for each share of Preferred Stock converted. As of March 28, 1999, there were 24,000 shares of Class B Common Stock reserved for the potential conversion of the Class A Preferred Stock. 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 $64,000 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 exceeds $.072. The Class A Preferred stockholders do not have voting rights except as required by applicable law.
NOTE 4 - LINE OF CREDIT
The Company has a revolving line of credit agreement with a bank for the lesser of $1,000,000 or 75 percent of eligible trade accounts receivable, as defined by the agreement. The agreement expires in July 1999 and provides for interest to be paid monthly at prime plus .50 percent (8.25 percent at March 28, 1999). The Company must adhere to certain requirements and provisions to be in compliance with the terms of the agreement. The Company was in compliance with all such covenants as of March 28, 1999. Borrowings under the line of credit are secured by accounts receivable, inventory, equipment and general intangibles. There was no outstanding balance under the line of credit agreement as of March 28, 1999.
NOTE 5 - INCOME TAXES
At March 28, 1999, the Company had net operating loss carry forwards of approximately $15.0 million for federal tax purposes that expire at various dates through fiscal year 2012. The tax laws related to the utilization of loss carryforwards 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 resulting from changes in the ownership of the Company's common stock. The Company also has approximately $531,000 in research and development credit carryovers available for federal tax purposes that expire in the fiscal years 2004 through 2014.
Under SFAS No. 109, "Accounting for Income Taxes", deferred tax assets may be recognized for temporary differences that will result in deductible amounts in future periods and for loss carryforwards. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. A detail of the Company's net deferred tax asset as of March 28, 1999 and March 29, 1998 follows:
March 28, 1999 March 29, 1998 --------------------- ---------------------- NOL Carryforwards $ 5,812,000 $ 6,074,000 Inventory obsolescence 640,000 549,000 Warranty 37,000 37,000 Depreciation - (54,000) Vacation 40,000 44,000 Other 62,000 62,000 --------------------- ---------------------- 6,591,000 6,712,000 Less valuation allowance (6,591,000) (6,712,000) --------------------- ----------------------
Net deferred tax asset $ -0- $ -0- ===================== ======================
Due to the uncertainty surrounding the realization of the favorable tax attributes of such net operating loss carry forwards in future tax returns, the Company has recorded a valuation allowance against its otherwise recognizable deferred tax assets. Accordingly, no deferred tax asset has been reported in the accompanying consolidated balance sheets.
As the Company utilized tax loss carryforwards in fiscal years 1999 and 1998 and incurred losses in fiscal 1997, the Company has recorded $6,400 in minimum federal taxes in other expense during fiscal 1999 and minimum state taxes of $1,600 in other expense each year in the accompanying consolidated statements of operations.
NOTE 6 - STOCK OPTIONS
The Company has three stock option plans: the 1990 Incentive Stock Option and Non-Qualified Stock Option Plan, the 1991 Directors' Stock Option Plan ("The Directors' Plan") and the 1997 Employee Stock Option Plan. The Company measures compensation for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation expense for these plans been determined consistent with SFAS No. 123, the Company's net loss and net loss per share would have increased to the following pro forma amounts:
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 1999, 1998 and 1997, respectively: risk free interest rates of 5.68, 5.82 and 6.53 percent, expected volatility of 69.00, 48.57 and 63.33 percent 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 2,200,000 shares of common stock for periods not to exceed 10 years. As of March 28, 1999, there were 884,500 shares available for future grant under such plans. Options typically vest at the rate of 25 percent per year over four years, except for options granted under The Directors' Plan, which typically vest at the rate of 50 percent 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 1999, 1998 and 1997 are summarized as follows:
The following table summarizes information about fixed-price stock options outstanding at March 28, 1999:
NOTE 7 - COMMITMENTS
The Company leases its manufacturing and office facility under a noncancellable operating lease. Approximate minimum future lease payments under all noncancellable operating leases expiring at various dates through fiscal 2004, are as follows:
Fiscal year ending: 2000 $ 377,000 2001 382,000 2002 381,000 2003 391,000 2004 361,000 Thereafter - ------------- $ 1,892,000 =============
Rent expense for the fiscal years ending 1999, 1998 and 1997 was approximately $279,000, $353,000 and $346,000, respectively.
The Company has employment and termination agreements with certain employees under which the employees may receive severance pay through the greater of the end of the term of the contract or up to twelve months. Total compensation under these agreements in the event of employment through the full term would be approximately $275,000 and $244,000 for fiscal years ending 2000 and 2001, respectively.
NOTE 8 - 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.
NOTE 9 - 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 are matched by the Company at the rate of $.50 for every $1.00 of employee contribution, subject to certain limitations. The Company contributions recognized as expense were approximately $62,000, $60,000, and $69,000 for the fiscal years ending 1999, 1998 and 1997, respectively.
NOTE 10 - SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION
NOTE 11 - VALUATION AND QUALIFYING ACCOUNTS
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - -------------------------------------------------------------------------------- None
PART III
Item 10.
Item 10. Directors and Executive Officers
Set forth below is certain information relating to the directors and officers of the Company.
Name Age Position
Harry Melkonian 49 Chairman of the Board, President and Chief Executive Officer
Robert G. Allison 42 Director
Harold A. Blomquist 47 Director
M. Scott Farese 42 Director
Hayden Leason 68 Director
Jon B. Victor 46 Director
Patrick J. Holmes 53 Executive Vice President, Chief Financial Officer, Secretary & Treasurer
Brock Koren 35 Vice President, Sales & Marketing
Harry Melkonian, Chairman of the Board, President & Chief Executive Officer - --------------------------------------------------------------------------- Mr. Melkonian joined the Company in June 1992. He has been President since November 1996, was elected Chief Executive Officer in October 1997 and Chairman of the Board in April 1998. He served as General Manager of the Company's PIN photodiode business from 1993 until November 1996. From 1989 until joining the Company, Mr. Melkonian operated Melkonian Associates, a consulting firm that assisted the Company in the acquisition of its subsidiary, Silicon Detector Corporation. From 1987 until 1989, he was Director of Operations at Simulaser Corporation; and for six years previously, he held various operations level positions at Sensor Technology, Inc. Mr. Melkonian holds a Bachelor of Science degree in Business Administration from Northeastern University.
Robert G. Allison, Director - --------------------------- Mr. Allison became a director in January 1998. He previously served as a director from October 1996 to June 1997. Mr. Allison is the Managing Partner of Innovate Partners, Inc., a private capital and consulting firm serving the technology market. Mr. Allison is a partner of Edgewater Private Equity Fund, LP and Edgewater Private Equity Fund II, LP, limited partnerships formed for investment purposes. Prior to forming Allison Venture Partners, Mr. Allison served as the Executive Vice President, Chief Operating Officer and Director of Aurora Electronics Group, Inc. (AUR-AMEX). Mr. Allison served as Vice President, Semiconductor Marketing and Assets at Arrow Electronics, Inc. (NASDQ-ARW) and was the founder, President and CEO of Insight Electronics, Inc., a specialized semiconductor distributor which was acquired by MEMEC Group, PLC.
Harold A. Blomquist, Director - ----------------------------- Mr. Blomquist became a director of the Company in August 1998. He is currently the President of American Microsystems, Inc. (AMI) Japan, Ltd., in Tokyo Japan, Senior Managing Director and Chairman of the Board of AMI GmbH in Dresden, Germany; Senior Vice President of Business Operations Worldwide; and, a member of the Board of Directors for both AMI and AMI Holding Company. AMI is an electronic component manufacturer with 1997 sales of more than $250 million. Mr. Blomquist joined AMI in 1990 and previously held senior management positions with General Semiconductor, Inmos and Texas Instruments. He holds a bachelor's degree in electrical engineering from the University of Utah.
M. Scott Farese, Director - ------------------------- Mr. Farese became a director of the Company in August 1998. He is currently a Regional Sales Manager for Filtertek Inc. Mr. Farese joined Filtertek in 1991. Filtertek is the largest worldwide producer of custom filtration products and fluid control devices and the world's largest manufacturer of custom molded filter elements. Filtertek is a subsidiary of ESCO Electronics Corporation. Mr. Hayden Leason, a Director and greater than 20% owner of Advanced Photonix, Inc., founded Filtertek which he sold in 1992 to Schawk Inc. Mr. Farese is the son-in-law of Mr. Leason.
Hayden Leason, Director - ----------------------- Mr. Leason became a director of the Company in July 1995. He served as Chairman of the Board from October 1996 until October 1997 and as Chief Executive Officer from November 1996 until October 1997. In 1965, Mr. Leason founded Filtertek Inc., a designer and manufacturer of specialty filtration elements, which subsequently became a New York Stock Exchange listed company. He served as Chairman and Chief Executive Officer until 1992 when he sold his interest to Schawk Inc. Since 1992, Mr. Leason has managed various private investments. Mr. Leason is a 1954 graduate of Northwestern University where he received his Bachelor of Science degree in Business Administration.
Jon B. Victor, Director - ----------------------- Mr. Victor became a director of the Company in June 1995. He served as Chairman of the Board from October 1997 until April 1998. Mr. Victor is the Manager of Greenwich Ventures, LLC, which is the general partner of Greenwich Ventures, LP and Vantage Ventures, CV, Investment Partnerships, which he organized in 1996. He began his career in the equity research and trust departments of the Bank of New York. From 1978 through 1982 he worked for J. & W. Seligman & Co., where he was responsible for offshore advisory relationships, and was President of the firm's broker/dealer subsidiary. Mr. Victor founded Security Capital Management, Inc., an investment advisory firm, in 1983, and served as its President or Co-President until 1996. In 1992, Mr. Victor co-founded Gordon Management, Inc., the general partner of Edgewater Private Equity Fund, LP, and Edgewater Private Equity Fund II, LP. Mr. Victor is a 1973 magna cum laude graduate of Washington University and a 1977 graduate of the George Washington University School of Law where he earned his J.D. cum laude and completed his M.B.A. course work. Mr. Victor serves on the Board of Directors of several private investment firms and acts as an independent arbitrator for the National Futures Association.
Patrick J. Holmes, Executive Vice President, Chief Financial Officer, Corporate Secretary and Treasurer - -------------------------------------------------------------------------------- Mr. Holmes joined the Company in August 1993 and was named Executive Vice President in November 1996. From 1989 until joining the Company, Mr. Holmes was a Division Controller for Textron, Inc. From 1985 until 1989, he was Chief Accountant and Financial Operations Manager for two start-up companies of Lockheed Corporation in Sunnyvale, CA. Previously, Mr. Holmes held senior financial posts with General Dynamics and Datapoint Corporation. Mr. Holmes, who is a Certified Public Accountant, received his degree in accounting, magna cum laude, from the University of Missouri in St. Louis and is a past recipient of the Missouri Society of CPAs Silver Medal.
Brock Koren, Vice President, Sales & Marketing - ---------------------------------------------- Mr. Koren joined the Company in July 1998. From 1992 until 1998, he was a regional sales engineer responsible for technical sales in So. California of all Hamamatsu photonic products including Photomultiplier Tubes. Hamamatsu is a leading manufacturer of devices for generation and measurement of infrared, visible, and ultraviolet light, including the largest manufacturer of PMTs in the world. From 1989 until 1992, he was a sales engineer/account manager for Tektronix, Inc., a $2.1 billion global high-technology company based on a portfolio of measurement, color printing and video and networking businesses. Mr Koren received his Bachelor of Science Degree in Electrical Engineering from California State University, Long Beach, California.
Directors serve annual terms until the next annual meeting of stockholders and until their successors are elected and qualified. Officers serve at the pleasure of the Board of Directors.
Compliance with Section 16(a) of the Securities Exchange Act of 1934 - --------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and Directors and persons who own more than ten percent of a registered class of the Company's equity securities (collectively the "Reporting Persons") to file reports of beneficial ownership and changes in beneficial ownership of the Company's equity securities with the Securities and Exchange Commission and to furnish the Company with copies of these reports. Based solely on its review of the copies of the forms received by it, the Company believes that all of its officers and directors complied with all filing requirements applicable to them, except with respect to the late filing of Form 5's to report January 4, 1999 option grants for 1,000 shares each of the Company's Class A Common Stock by Robert G. Allison, Harold A. Blomquist, M. Scott Farese, Hayden Leason and Jon B. Victor, which Form 5's were filed in June 1999; the late filing of a Form 5 by Harry Melkonian to report an April 22, 1999 option grant for 200,000 shares of the Company's Class A Common Stock, which Form 5 was filed in May 1999; the late filing of a Form 5 by Patrick J. Holmes to report an April 22, 1999 option grant for 50,000 shares of the Company's Class A Common Stock, which Form 5 was filed in May 1999; and the late filing of a Form 5 by Brock Koren to report a June 14, 1999 option grant for 100,000 shares of the Company's Class A Common Stock, which Form 5 was filed in May 1999.
Item 11.
Item 11. Executive Compensation - -------- ---------------------- The following table sets forth compensation paid or accrued by the Company for services rendered to the Company's Chief Executive Officer and to each of the other executive officers of the Company whose cash compensation exceeded $100,000 for services rendered during the last three fiscal years.
Employment Agreements - ---------------------
The Company has employment and termination agreements with certain employees, including Messrs. Melkonian and Holmes under which the employees may receive severance pay through the end of the term of the contract or up to twelve months. See Notes to Consolidated Financial Statements - Note 7.
Stock Options - -------------
The following table sets forth certain information concerning stock options granted to the persons named in the Summary Compensation Table during the last fiscal year and unexercised stock options held by such persons at the end of such fiscal year. No options were exercised during the last fiscal year.
The following tables set forth certain information concerning stock options granted to and exercised by the persons named in the Summary Compensation Table during the last fiscal year and unexercised stock options held by such persons at the end of such fiscal year. No options were exercised during the last fiscal year.
On January 18, 1995 the Board of Directors canceled outstanding options to purchase an aggregate of 365,000 shares of the Company's Class A Common Stock and granted to the holders of such options new options to purchase an equivalent number of shares. These options were the only options of the Company which have been issued coincident with the cancellation of outstanding options or otherwise repriced since the Company's inception through March 29, 1998. The Board of Directors concluded that the subsequent decrease in the market price for the Company's Class A Common Stock below the exercise price for the canceled options was due to factors which were principally not all within the realm of responsibility of the option holders and that the options no longer provided the incentive to such option holders to perform on behalf of the Company in the manner contemplated by the Board when the canceled options were initially granted. On the date of the issuance of the new options and the cancellation of the outstanding options, the closing sale price for the Company's Class A Common Stock as reported on the American Stock Exchange
was $1.56. The following table sets forth certain information regarding the aforementioned canceled and new options:
Compensation of Directors - -------------------------
Prior to October 1995, each director who is not an employee of the Company or an affiliate received an annual fee of $10,000, payable in quarterly increments, and a fee of $1,000 for each meeting attended. Each of the directors who is not an employee of the Company is eligible for grants of stock options upon their appointment to the Board of Directors under the 1991 Special Directors Stock Option Plan and on an annual basis so long as they remain on the Board. Directors who are also officers of the Company or its affiliates do not receive cash compensation in consideration for their services as directors. All directors, however, including employee directors, are reimbursed for reasonable travel expenses incurred in connection with their attending meetings of the Board of Directors and committees. In October 1995, the Board of Directors eliminated the accrual or payment of all fees including all annual fees, meeting fees and any payment for services as the Chairman or Member of any Committee of the Board of Directors except for reasonable travel expenses. In addition, participation in the 1991 Special Directors Stock Option Plan, other than initial grants for new directors, was suspended. In January 1998, the Board reinstated participation in the 1991 Special Directors Stock Option Plan and approved an annual stock option grant in lieu of an annual cash fee. This grant would be the approximate equivalent of $10,000 calculated using the Black-Scholes option pricing model.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 28, 1999, certain information concerning the holdings of each person who was known by the Company to be the beneficial owner of more than five percent (5%) of the outstanding shares of Class A or Class B Common Stock of the Company, by each director and executive officers and by all directors and officers as a group. The outstanding Class B Common Stock represents only 0.6% of the total outstanding shares.
Class A Common Stock ---------------------------------------- Shares Shares Under Percent Owned Exercisable Voting(2) Options/Warrants(1) ---------------------------------------- Hayden Leason(3) 2,304,100 35,000 21.2
M. Scott Farese(8) 2,304,100 35,000 21.2
The Townsend Group(9) 851,900 - 7.7
Advanced Detectors, - 750,000 6.4 Inc.(4)
Edgewater Private Equity Fund(6) 593,640 22,500 5.6
Robert G. Allison(7) 593,640 22,500 5.6
Jon Victor(5) 237,400 35,000 2.5
Patrick J. Holmes(5) 62,600 132,000 1.7
Harry Melkonian(5) 10,000 164,000 1.6
Harold A. Blomquist(5) - 5,000 -
Directors & Officers as 3,601,240 393,500 31.6 a Group
1 Includes shares under options exercisable on March 28, 1999 and options which become exercisable within 60 days thereafter.
2 Represents combined voting power of both Class A and Class B Common Stock, assuming beneficial owner exercises all exercisable options and warrants. None of the named beneficial owners owned Class B Common Stock and there are no Class B derivatives outstanding
3 The address of this shareholder is Palmas Del Mar, 10 Monte Sol, Humacao, Puerto Rico 00791. Includes 5,000 options granted to Mr. Farese (see footnote 8). Mr Farese is the son-in-law of Mr. Leason.
4 Formerly Xsirius, Inc., the last known address of this beneficial owner was 1220 Avenida Acaso, Camarillo, CA 93012.
5 The address of this shareholder is c/o Advanced Photonix, Inc. 1240 Avenida Acaso, Camarillo, CA 93012.
6 The address of this shareholder is c/o Edgewater Private Equity Fund, 900 N. Michigan Ave., Suite 1400, Chicago, IL 60611. Includes 22,500 options granted to Mr. Allison (see footnote 7).
7 The address of this shareholder is c/o Innovate Partners, Inc., 660 Newport Center Drive, Suite 340, Newport Beach, CA 92660. Includes 593,640 shares owned by Edgewater (see footnote 6). Mr. Allison is a partner in Edgewater. Mr. Allison disclaims beneficial ownership of the shares held by Edgewater.
8 The address of this shareholder is c/o Advanced Photonix, Inc. 1240 Avenida Acaso, Camarillo, CA 93012. Includes 2,304,100 shares and 30,000 options owned by Mr.Leason (see footnote 3). Mr. Farese is the son-in-law of Mr. Leason.
9 The address of this shareholder is Townsend Group Investments, 22601 Pacific Coast Highway, Malibu CA 90265.
Item 13.
Item 13. Certain Relationships and Related Transactions - -------- ----------------------------------------------
See Item 11. Executive Compensation.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------- ----------------------------------------------------------------
(a) The following is a list of the financial statement 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
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 the Registrant's March 31, 1996 Annual Report on Form 10-K
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
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 Employment Agreement dated June 1, 1998, between Advanced Photonix, Inc. and Patrick J. Holmes - incorporated by reference to Exhibit 10.5 to the Registrant's March 29, 1998 Annual Report on Form 10-K
10.6 Employment Agreement dated June 1, 1998, between Advanced Photonix, Inc. and Harry Melkonian - incorporated by reference to Exhibit 10.6 to the Registrant's March 29, 1998 Annual Report on Form 10-K
10.7 Form of Non-Qualified Stock Option granted to Advanced Detectors, Inc., formerly Xsirius, Inc. - incorporated by reference to Exhibit 10.13 to Amendment No. 3 to the Registrant's Registration Statement on Form S-1, filed with the Securities and Exchange Commission on February 11,
10.8 Loan and Security Agreement dated September 6, 1995, between Silicon Valley Bank and Registrant - incorporated by reference to Exhibit 10.12 to the Registrant's March 31, 1996 Annual Report on Form 10-K
10.8.1 Amended Loan and Security Agreement dated July 16, 1998 between Silicon Valley Bank and Registrant - incorporated by reference to Exhibit 10.15 to the Registrant's September 27, 1998 Quarterly Report on Form 10-Q
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
21 List of Subsidiaries of Registrant - incorporated by reference to Exhibit 22 to the Registrant's March 31, 1993 Annual Report on Form 10-K
23.1 Consent of Arthur Andersen LLP, independent public accountants
*Constitutes a compensation plan or arrangement required to be filed as part of this report.
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/Harry Melkonian --------------------- Harry Melkonian, President & Date: June 25, 1999 Chief Executive Officer -------------
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/Harry Melkonian Chairman of the Board, President & June 25, 1999 - --------------------- Chief Executive Officer Harry Melkonian (Principal Executive Officer)
/s/Robert G. Allison - --------------------- Director June 25, 1999 Robert G. Allison
/s/Harold A. Blomquist - --------------------- Director June 25, 1999 Harold A. Blomquist
/s/Scott Farese - -------------------- Director June 25, 1999 M. Scott Farese
/s/Hayden Leason - --------------------- Director June 25, 1999 Hayden Leason
/s/Jon B. Victor - --------------------- Director June 25, 1999 Jon B. Victor
/s/Patrick J. Holmes - --------------------- Executive Vice President, Chief June 25, 1999 Patrick J. Holmes Financial Officer, Corporate Secretary/Treasurer, (Principal Financial and Accounting Officer)