e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended December 25, 2005
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-11056
ADVANCED PHOTONIX, INC.
(Exact name of registrant as specified in its charter)
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| Delaware
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33-0325826 |
(State or other jurisdiction of incorporation
or organization)
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(I.R.S. Employer Identification Number) |
1240 Avenida Acaso
Camarillo, California 93012
(Address of principal executive offices)
(805) 987-0146
(Registrant’s telephone number, including area code)
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated filer o Accelerated filer þ Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of February 6, 2005, there were 18,831,315 shares of Class A Common Stock, $.001 par value, and
31,691 shares of Class B Common Stock, $.001 par value outstanding.
1
ADVANCED PHOTONIX, INC.
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ADVANCED PHOTONIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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December 25, 2005 |
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March 27, 2005 |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
1,849,000 |
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$ |
2,757,000 |
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Accounts receivable, net of allowance for
doubtful accounts of $108,000 and $24,000
for December 25, 2005 and March 27, 2005,
respectively |
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4,447,000 |
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2,610,000 |
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Note receivable from Picometrix |
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— |
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4,228,000 |
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Inventory, net |
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4,615,000 |
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3,644,000 |
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Prepaid expenses and other current assets |
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868,000 |
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563,000 |
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Deferred tax asset, current portion |
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644,000 |
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644,000 |
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Total current assets |
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12,423,000 |
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14,446,000 |
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Equipment and leasehold improvements |
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7,732,000 |
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5,118,000 |
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Accumulated depreciation |
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(4,300,000 |
) |
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(3,719,000 |
) |
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Equipment and leasehold improvements, net |
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3,432,000 |
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1,399,000 |
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Goodwill, net of amortization of $353,000
for December 25, 2005 and March 27, 2005 |
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2,421,000 |
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2,421,000 |
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Intangibles, net of amortization of
$1,167,000 and $181,000 for December 25,
2005 and March 27, 2005, respectively |
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13,557,000 |
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481,000 |
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Patents, net of amortization of $53,000
and $13,000 for December 25, 2005 and March
27, 2005, respectively |
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130,000 |
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13,000 |
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Deposits and other assets |
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607,000 |
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490,000 |
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Deferred income taxes |
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4,105,000 |
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4,105,000 |
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Total other assets |
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20,820,000 |
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8,909,000 |
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Total Assets |
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$ |
36,675,000 |
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$ |
23,355,000 |
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3
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December 25, 2005 |
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March 27, 2005 |
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Liabilities and shareholders’ equity |
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Current liabilities |
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Line of credit |
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1,000,000 |
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1,000,000 |
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Accounts payable: |
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1,310,000 |
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1,053,000 |
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Compensation and related withholdings |
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626,000 |
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529,000 |
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Deferred income |
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192,000 |
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271,000 |
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Other accrued expenses |
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685,000 |
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321,000 |
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Current portion of Long-term debt, related party |
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500,000 |
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— |
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Current portion of long-term debt |
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951,000 |
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11,000 |
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Total current liabilities |
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5,264,000 |
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3,185,000 |
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Long-term debt, less current portion |
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3,987,000 |
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4,861,000 |
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Long-term debt, less current portion — related party |
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2,401,000 |
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— |
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Total liabilities |
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11,652,000 |
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8,046,000 |
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Commitments and Contingencies: |
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Class A Redeemable Convertible Preferred Stock,
$.001 par value; 780,000 shares authorized;
2004 and 2005 — 40,000 shares issued and
outstanding; liquidation preference $25,000 |
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32,000 |
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32,000 |
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Shareholders’ equity: |
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Preferred stock, $.001 par value; 10,000,000
shares authorized; 780,000 shares designated
Class A redeemable
convertible; 2005 and 2004 —
no shares issued and outstanding |
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— |
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Class A common stock, $.001 par value,
50,000,000 authorized; December 25, 2005 —
18,793,006 shares issued and outstanding; March
27, 2005 — 13,512,631 shares issued and
outstanding |
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19,000 |
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13,000 |
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Class B common stock, $.001 par value;
4,420,113 shares authorized, 2005 and 2004 —
31,691 issued and outstanding |
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— |
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— |
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Additional paid-in capital |
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38,544,000 |
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27,995,000 |
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Accumulated deficit |
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(13,572,000 |
) |
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(12,731,000 |
) |
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Total shareholders’ equity |
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25,023,000 |
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15,309,000 |
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Total liabilities and shareholders’ equity |
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$ |
36,675,000 |
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$ |
23,355,000 |
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See notes to condensed consolidated financial statements.
4
ADVANCED PHOTONIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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Three month periods ended |
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Nine month periods ended |
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December 25, |
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December 26, |
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December 25, |
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December 26, |
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2005 |
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2004 |
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2005 |
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2004 |
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Sales |
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$ |
6,511,000 |
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$ |
3,852,000 |
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$ |
16,782,000 |
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$ |
10,814,000 |
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Cost of products sold |
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3,513,000 |
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2,832,000 |
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9,512,000 |
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7,239,000 |
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Gross profit |
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2,998,000 |
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1,020,000 |
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7,270,000 |
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3,575,000 |
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Research and development expenses |
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836,000 |
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33,000 |
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2,083,000 |
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112,000 |
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Sales and marketing expenses |
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482,000 |
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278,000 |
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1,311,000 |
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888,000 |
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General and administrative expenses |
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1,420,000 |
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592,000 |
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4,229,000 |
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1,865,000 |
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Total operating expense |
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2,738,000 |
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|
903,000 |
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7,623,000 |
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2,865,000 |
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Income (loss) from operations |
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260,000 |
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|
117,000 |
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(353,000 |
) |
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710,000 |
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|
|
|
|
|
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Other income (expense): |
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Interest income |
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10,000 |
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17,000 |
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24,000 |
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29,000 |
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Interest expense |
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(106,000 |
) |
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(63,000 |
) |
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(368,000 |
) |
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(70,000 |
) |
Interest expense, related party |
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(40,000 |
) |
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— |
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(140,000 |
) |
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— |
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Other |
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3,000 |
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(36,000 |
) |
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(4,000 |
) |
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(27,000 |
) |
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Net income (loss) |
|
$ |
127,000 |
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$ |
35,000 |
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($ |
841,000 |
) |
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$ |
642,000 |
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Basic earnings (loss) per share |
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$ |
0.01 |
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$ |
0.00 |
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($ |
0.05 |
) |
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$ |
0.05 |
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Diluted earnings (loss) per share |
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$ |
0.01 |
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$ |
0.00 |
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anti-dilutive |
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$ |
0.05 |
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Weighted average shares outstanding |
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18,563,000 |
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13,437,000 |
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16,983,000 |
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13,433,000 |
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Weighted average diluted shares outstanding |
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20,559,000 |
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15,018,000 |
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anti-dilutive |
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15,014,000 |
|
See notes to condensed consolidated financial statements.
5
ADVANCED PHOTONIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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| For the nine month periods ended |
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December 25, 2005 |
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December 26, 2004 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income (loss) |
|
$ |
(841,000 |
) |
|
$ |
642,000 |
|
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |
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Depreciation |
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581,000 |
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|
269,000 |
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Amortization — intangibles/patents |
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|
945,000 |
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89,000 |
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Amortization — prepaid finance expense |
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177,000 |
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|
— |
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Disposal of assets |
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— |
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|
53,000 |
|
Changes in operating assets and liabilities: |
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Accounts receivable |
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(772,000 |
) |
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(165,000 |
) |
Inventories |
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(223,000 |
) |
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|
(680,000 |
) |
Prepaid expenses & other current assets |
|
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(239,000 |
) |
|
|
(240,000 |
) |
Other assets |
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|
74,000 |
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|
|
(400,000 |
) |
Accounts payable |
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(8,000 |
) |
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|
(69,000 |
) |
Accrued expenses and other |
|
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(844,000 |
) |
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|
335,000 |
|
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Net cash (used in) operating activities |
|
|
(1,150,000 |
) |
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(166,000 |
) |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Capital expenditures |
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(155,000 |
) |
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(150,000 |
) |
Patent expenditures |
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(118,000 |
) |
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— |
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Cash acquired thru acquisition of Photonic
Detectors, Inc |
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— |
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|
44,000 |
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Restricted cash |
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1,254,000 |
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(2,500,000 |
) |
Short Term Investments |
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— |
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|
1,700,000 |
|
Cash paid for Picotronix, Inc. acquisition |
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(3,500,000 |
) |
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|
— |
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Purchase of outstanding shares of Photonix
Detectors, Inc. common stock |
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— |
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(1,094,000 |
) |
Cash acquired through acquisition of Picotronix, Inc. |
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|
678,000 |
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|
— |
|
Cash paid for acquisition related costs |
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(936,000 |
) |
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|
— |
|
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|
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Net cash (used in) investing activities |
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|
(2,777,000 |
) |
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|
(2,000,000 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Repayment of line of credit |
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|
— |
|
|
|
(900,000 |
) |
Proceeds from bank term loan |
|
|
2,700,000 |
|
|
|
— |
|
Payment of notes payable |
|
|
(653,000 |
) |
|
|
— |
|
Proceeds from private placement of convertible note |
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|
1,000,000 |
|
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|
5,000,000 |
|
Proceeds from MEDC term loan |
|
|
600,000 |
|
|
|
— |
|
Proceeds from exercise of warrants |
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|
455,000 |
|
|
|
— |
|
Proceeds from exercise of stock options |
|
|
171,000 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
4,273,000 |
|
|
|
4,101,000 |
|
|
|
|
|
|
|
|
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|
Net increase (decrease) in cash |
|
|
346,000 |
|
|
|
1,935,000 |
|
|
|
|
|
|
|
|
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Cash at beginning of year |
|
|
1,503,000 |
|
|
|
1,299,000 |
|
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|
|
|
|
|
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Cash at end of quarter |
|
$ |
1,849,000 |
|
|
$ |
3,234,000 |
|
|
|
|
|
|
|
|
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|
Supplemental disclosure of cash flow information |
|
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|
|
|
|
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Cash refunded for income taxes |
|
$ |
— |
|
|
$ |
19,000 |
|
Cash paid for interest |
|
$ |
347,000 |
|
|
$ |
70,000 |
|
6
Supplemental disclosure of non cash operating, investing and financing
activities:
| |
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|
| |
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May 2, 2005 |
|
Picometrix acquisition |
|
|
|
|
Assets acquired |
|
$ |
19,404,000 |
|
Liabilities assumed |
|
|
(2,406,000 |
) |
|
|
|
|
Net assets acquired |
|
|
16,998,000 |
|
Cash paid |
|
|
(3,500,000 |
) |
Broker fees & other direct costs |
|
|
(936,000 |
) |
|
|
|
|
|
|
|
12,562,000 |
|
|
|
|
|
|
Non-cash investing activities
|
|
|
|
|
Common stock issued |
|
|
(5,433,000 |
) |
Note payable
— related party |
|
|
(2,901,000 |
) |
Picometrix note retired |
|
|
(4,228,000 |
) |
|
|
|
|
|
|
|
|
|
Net balance |
|
$ |
— |
|
See notes to condensed consolidated financial statements
ADVANCED PHOTONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 25, 2005
Basis of Presentation
General
— Advanced Photonix, Inc. (the “Company”), 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.
The accompanying condensed consolidated financial statements include the accounts of Advanced
Photonix, Inc. (“the Company”) and the Company’s wholly owned subsidiaries, Silicon Sensors Inc.
(“SSI”), Texas Optoelectronics, Inc. (“TOI”), Photonic Detectors, Inc. (“PDI”) and Picometrix, LLC
(“Picometrix). The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange Commission. All material
inter-company accounts and transactions have been eliminated in consolidation. Certain information
and footnote disclosures normally included in annual financial statements prepared in accordance
with accounting principles generally accepted in the United States of America have been condensed
or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments,
consisting of normal and recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for the periods presented have been included. Operating
results for the three month period and the nine month period ended December 25, 2005 are not
necessarily indicative of the results that may be expected for the fiscal year ending March 26,
2006. For further information, refer to the financial statements and notes thereto included in the
Advanced Photonix, Inc. Annual Report on Form 10-K for the fiscal year ended March 27, 2005.
7
Summary of Significant Accounting Policies
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.
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 places its temporary cash investments in certificates of deposit in excess
of FDIC insurance limits, principally at a regional bank. At December 25, 2005 substantially all
cash and cash equivalents were on deposit at five financial institutions, with these institutions
having FDIC or SIPC insurance less than the amounts on deposit, which total uninsured cash of
$841,000.
At December 25, 2005, no single customer accounted for more than 10 % of our total accounts
receivable. For the nine months ended December 25, 2005, no single customer accounted for more
than 10 % of Consolidated Revenue.
The Company performs ongoing credit evaluations of its customers and normally does not require
collateral to support accounts receivable.
The Company does not apply interest charges to past due accounts receivable.
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 Consolidated Statement of Operations.
Net Income (Loss) Per Share: Net income (loss) per share is calculated 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 period. Such weighted average shares were
approximately 16,983,000 at December 25, 2005 and 13,433,000 at December 26, 2004. The pro-forma
impact of Statement 128 on the calculation of earnings per share is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
Nine Months Ended |
| BASIC |
|
December 25, 2005 |
|
December 26, 2004 |
Weighted average shares outstanding |
|
|
16,983,000 |
|
|
|
13,433,000 |
|
Net income (loss) |
|
|
(841,000 |
) |
|
|
642,000 |
|
Basic income per share |
|
|
($0.05 |
) |
|
$ |
0.05 |
|
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
Nine Months Ended |
| DILUTED |
|
December 25, 2005 |
|
December 26, 2004 |
Weighted average shares outstanding |
|
|
16,983,000 |
|
|
|
13,433,000 |
|
Net effect of dilutive stock options
and warrants based on the treasury stock
method using average market price |
|
|
1,221,000 |
|
|
|
873,000 |
|
Net effect of shares issuable pursuant
to terms of convertible note, based on
the “if converted” method |
|
|
775,000 |
|
|
|
708,000 |
|
|
|
|
|
|
|
|
|
|
Total shares |
|
|
18,979,000 |
|
|
|
15,014,000 |
|
Net income (Loss) adjusted for interest
expense on convertible note |
|
|
(658,000 |
) |
|
|
683,000 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
anti-dilutive |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
Average market price of common stock |
|
$ |
2.78 |
|
|
$ |
2.27 |
|
Ending Market price of common stock |
|
$ |
2.64 |
|
|
$ |
1.76 |
|
8
The following stock options granted to Company employees, directors, and former owners were
excluded from the calculation of diluted earnings per share in the financial statements because
they were anti-dilutive for the periods reported:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended December 25, 2005 |
|
Nine Months Ended December 26, 2004 |
| No. of Shares |
|
Exercise Price Per |
|
No. of Shares Underlying |
|
Exercise Price Per |
| Underlying Options |
|
Share |
|
Options |
|
Share |
| |
|
|
| |
10,000 |
|
|
|
2.8900 |
|
|
|
27,700 |
|
|
|
2.5000 |
|
| |
1,000 |
|
|
|
3.0940 |
|
|
|
1,000 |
|
|
|
3.0940 |
|
| |
350,000 |
|
|
|
3.1875 |
|
|
|
350,000 |
|
|
|
3.1875 |
|
| |
50,000 |
|
|
|
5.3440 |
|
|
|
50,000 |
|
|
|
5.3440 |
|
| |
|
|
| |
411,000 |
|
|
|
|
|
|
|
428,700 |
|
|
|
|
|
Inventory
Inventories, which include material, labor and manufacturing overhead, are stated at
standard cost (which approximates the first-in, first-out method) or market.
Inventories
consisted of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 25, 2005 |
|
March 27, 2005 |
| |
|
|
Raw Material |
|
$ |
4,486,000 |
|
|
$ |
3,129,000 |
|
|
|
|
|
|
|
|
|
|
Work-in-process |
|
|
1,018,000 |
|
|
|
1,245,000 |
|
|
|
|
|
|
|
|
|
|
Finished Goods |
|
|
320,000 |
|
|
|
302,000 |
|
|
|
|
|
|
|
|
|
|
Total inventories |
|
|
5,824,000 |
|
|
|
4,676,000 |
|
|
|
|
|
|
|
|
|
|
Less inventory reserves |
|
|
(1,209,000 |
) |
|
|
(1,032,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Inventories, net |
|
$ |
4,615,000 |
|
|
$ |
3,644,000 |
|
| |
|
|
Accounts Receivable
Accounts receivable consisted of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 25, 2005 |
|
|
March 27, 2005 |
|
| |
|
|
Trade receivables, net |
|
$ |
4,439,000 |
|
|
$ |
2,555,000 |
|
|
|
|
|
|
|
|
|
|
Unbilled receivables (represents
certain contracts that are not
invoiced until calendar month end) |
|
|
8,000 |
|
|
|
55,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,447,000 |
|
|
$ |
2,610,000 |
|
| |
|
|
9
Application of Critical Accounting Policies
Application of our accounting policies requires management to make 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,
restructuring costs, impairment costs, depreciation and amortization, Sales discounts and returns,
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. One
of the subsidiaries will accrue for revenues (progress billings) to government agencies for those
months when the required billing date falls after the financial closing date. An unbilled
receivable is recorded and then reversed when the actual charges are invoiced. Historically, sales
returns have amounted to less than 1% of net income and all Revenues are recorded net of returns
and discounts.
Impairment of Long-Lived Assets
We continually review 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.” We also review 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
We record a deferred tax asset in jurisdictions where we generate a loss for income tax purposes.
For all years prior to fiscal 2005, due to our history of operating losses, we had recorded a full
valuation allowance against these deferred tax assets in accordance with SFAS 109, “Accounting for
Income Taxes,” because, in management’s judgment, the deferred tax assets would not be realized in
the foreseeable future. In fiscal years 2004 and 2005, the Company returned to a position of
profitability Based on our profit history in FY 2005 and on anticipated future profits resulting
from the Company’s acquisition and merger with Picometrix, Inc. in May 2005, we reversed a portion
of the valuation allowance for the year ended March 27, 2005, because, in our estimation, we
believe that at least 50% of the deferred tax assets will be realized. 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, and no assurance can be given that the Company
will, in fact, generate future taxable income in amounts sufficient to fully realize the asset. We
have considered the scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making our assessment. The deferred tax assets are evaluated
annually and the valuation allowance may be adjusted again in the future years if it is determined
that any additional portion of the assets will or will not be realized.
10
Inventories
Our inventories are stated at standard cost (which approximates the first-in, first-out method) or
market. Slow moving and obsolete inventories are analyzed quarterly. To calculate a reserve for
obsolescence, we begin with a review of our slow moving inventory. Any inventory which has not
moved within the past 24 months is reserved for at 100% of book value; inventory which has not
moved within the past 12 months is reserved for at 40%. The percentages applied to the reserve
calculation are based on historical usage analyses. 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 which 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. The
percentage of this reserve to the 90-days-past-due total is then established as a guideline and
applied to the rest of the non-current accounts receivable balance where appropriate. 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.
Goodwill and Other Intangible Assets
In accordance with SFAS No. 142, “Goodwill and other Intangible Assets” (SFAS 142), goodwill and
intangibles with indefinite lives are subject to periodic impairment testing but are not amortized,
and intangibles with definite lives are separately classified and are amortized. SFAS 142 requires
testing goodwill for impairment on an annual basis and on an interim basis if an event occurs or
circumstance change that may reduce the fair value of a reporting unit below its carrying value.
We performed our most recent impairment testing at the end of fiscal 2005, and concluded that there
was no impairment losses related to goodwill.
Intangible assets that have definite lives consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
December 25, 2005 |
|
|
|
|
|
|
March 27, 2005 |
|
|
|
|
| |
|
Weighted |
|
|
Carrying |
|
|
Accumulated |
|
|
Intangibles |
|
|
Carrying |
|
|
Accumulated |
|
|
Intangibles |
|
| |
|
Average |
|
|
Value |
|
|
Amortization |
|
|
Net |
|
|
Value |
|
|
Amortization |
|
|
Net |
|
| |
|
Lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Compete
agreement |
|
|
15 |
|
|
$ |
347 |
|
|
$ |
230 |
|
|
$ |
117 |
|
|
$ |
150 |
|
|
$ |
150 |
|
|
|
— |
|
Customer list |
|
|
15 |
|
|
|
813 |
|
|
|
135 |
|
|
|
678 |
|
|
|
512 |
|
|
|
31 |
|
|
|
481 |
|
Trademarks |
|
|
15 |
|
|
|
2,128 |
|
|
|
91 |
|
|
|
2,037 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
R&D contracts |
|
|
15 |
|
|
|
1,294 |
|
|
|
55 |
|
|
|
1,239 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Technology |
|
|
10 |
|
|
|
10,448 |
|
|
|
710 |
|
|
|
9,738 |
|
|
|
64 |
|
|
|
51 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangibles |
|
|
|
|
|
$ |
15,030 |
|
|
$ |
1,221 |
|
|
$ |
13,809 |
|
|
$ |
726 |
|
|
$ |
232 |
|
|
$ |
694 |
|
11
Amortization expense for the nine months ended December 25, 2005 was approximately $945,000.
Balances for December 25, 2005 reflect the reclassification of intangibles from current asset
account to intangible accounts for non-compete agreements of $75K and customer lists of $122K.
At December 25, 2005, estimated future amortization expense is as follows (in thousands):
| |
|
|
|
|
| Fiscal Year |
|
Amortization |
|
| |
|
Expense |
|
Balance of 2006 |
|
$ |
351 |
|
2007 |
|
|
1,404 |
|
2008 |
|
|
1,404 |
|
2009 |
|
|
1,404 |
|
2010 |
|
|
1,374 |
|
2011 |
|
|
1,275 |
|
2012 & thereafter |
|
|
6,597 |
|
|
|
|
|
Total |
|
$ |
13,809 |
|
|
|
|
|
Stock Based Compensation
The Company has four stock option plans: The 1990 Incentive Stock Option and Non-Qualified Stock
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 greater than fair market value 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:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
Dec. 25, 2005 |
|
|
Dec. 26, 2004 |
|
|
Dec. 25, 2005 |
|
|
Dec. 26, 2004 |
|
Net (loss) earnings as reported |
|
$ |
127,000 |
|
|
$ |
35,000 |
|
|
$ |
(841,000 |
) |
|
$ |
642,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: Stock based employee
compensation expense determined
under the fair value-based
method for all award, net of
related tax effects |
|
|
(6,000 |
) |
|
|
|
|
|
|
(159,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net (loss) earnings |
|
$ |
121,000 |
|
|
$ |
35,000 |
|
|
$ |
(1,000,000 |
) |
|
$ |
642,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
(0.05 |
) |
|
$ |
0.05 |
|
Pro forma |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
(0.06 |
) |
|
$ |
0.05 |
|
Diluted (loss) earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
(0.05 |
) |
|
$ |
0.04 |
|
Pro forma |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
(0.06 |
) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares—Basic |
|
|
18,563,000 |
|
|
|
13,437,000 |
|
|
|
16,983,000 |
|
|
|
13,433,000 |
|
Shares—Diluted |
|
|
20,559,000 |
|
|
|
15,018,000 |
|
|
anti-dilutive |
|
|
15,014,000 |
|
12
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 2005, 2004
and 2003, respectively: risk-free interest rates of, 4%, 5% and 9%, expected volatility of 1% and
5% 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.
Notes Payable
The Company maintains a revolving line of credit with a regional bank which provides for borrowings
up to $3,000,000, 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
December 25, 2005, the outstanding balance on the line was $1,000,000. The line is secured by all
business assets of the Company. As most recently amended, repayment is interest only monthly, with
principal due at maturity date on November 3, 2006. Interest is computed at the Wall Street Journal
Prime plus 1/2% with a floor of 6.5%. The prime interest rate was 6.75% at December 25, 2005
In May 2005, the Company borrowed $2,700,000 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 Wall Street Journal Prime plus 1% with a
ceiling of 7.75% and a floor of 6%. The prime interest rate was 6.75% at December 25, 2005
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. The notes pay interest at an annual rate of prime plus 1% and shall not be less
than 6.5% at any time and will mature on October 12, 2007. In addition, the investors in the
private placement subordinated their 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
connection with the transaction, the Company 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 $1.78 per share,
subject to adjustment. The Company has registered 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 (April 6, 2005) 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 to
purchase an additional 850,822 shares of Company’s Class A Common Stock at $1.78 per share.
13
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 September 2005, one of the institutional investors elected to exercise their option to
acquire an additional $1,000,000 of the senior convertible notes. In November 2005, these notes
were converted into 472,678 shares of the Company’s Class A Common Stock at $2.1156 per share.
During November 2005, warrants on the above $1,000,000 senior convertible notes were converted into
85,082 shares of Class A Common Stock at $1.78 per share; the company received $151,446 in cash
from this conversion. The investors have warrants remaining to purchase 85,082 shares of Class A
Common Stock at $1.78 per share. At December 25, 2005, the outstanding senior convertible notes
totaled $1,503,503 that can be converted into 775,298 shares of Class A Common Stock and there were
outstanding detachable warrants to purchase 765,740 shares of Class A Common Stock at $1.78 per
share.
Notes payable to Related Parties
In May 2005, the Company issued its four-year promissory notes in the aggregate principal amount of
approximately $2.9 million (the “API Notes”) to the former stockholders of Picometrix. Both of the
former stockholders of Picometrix are now Company employees. One former owner is now the Company’s
Chief Financial Officer. 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. The Company has the
option of prepaying the API Notes without penalty.
SCHEDULE OF NOTES PAYABLE
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Schedule of remaining payments |
|
| |
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY 2011 |
|
| |
|
12/25/05 |
|
|
FY 2006 |
|
|
FY 2007 |
|
|
FY 2008 |
|
|
FY 2009 |
|
|
FY 2010 |
|
|
& Beyond |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving loan |
|
|
1,000,000 |
|
|
|
|
|
|
|
1,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable
obligations-related
party |
|
|
500,000 |
|
|
|
— |
|
|
|
500,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion — long
term debt |
|
|
951,000 |
|
|
|
241,000 |
|
|
|
710,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current |
|
|
2,451,000 |
|
|
|
241,000 |
|
|
|
2,210,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable obligations |
|
|
1,350,000 |
|
|
|
|
|
|
|
|
|
|
|
250,000 |
|
|
|
250,000 |
|
|
|
250,000 |
|
|
|
600,000 |
|
| |
Term loan |
|
|
1,275,000 |
|
|
|
|
|
|
|
225,000 |
|
|
|
900,000 |
|
|
|
150,000 |
|
|
|
|
|
|
|
|
|
| |
Convertible notes |
|
|
1,362,000 |
|
|
|
|
|
|
|
|
|
|
|
362,000 |
|
|
|
1,000,000 |
|
|
|
|
|
|
|
|
|
| |
Long-term debt less
current portion |
|
|
3,987,000 |
|
|
|
|
|
|
|
225,000 |
|
|
|
1,512,000 |
|
|
|
1,400,000 |
|
|
|
250,000 |
|
|
|
600,000 |
|
Long-term debt, less
current portion —
related party |
|
|
2,401,000 |
|
|
|
— |
|
|
|
— |
|
|
|
550,000 |
|
|
|
900,000 |
|
|
|
951,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term |
|
|
6,388,000 |
|
|
|
— |
|
|
|
225,000 |
|
|
|
2,062,000 |
|
|
|
2,300,000 |
|
|
|
1,201,000 |
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
8,839,000 |
|
|
|
241,000 |
|
|
|
2,435,000 |
|
|
|
2,062,000 |
|
|
|
2,300,000 |
|
|
|
1,201,000 |
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Segment Information
The Company operates in a single business segment, which is to provide optoelectronic solutions to
the OEM manufacturers in the telecommunication, military/aerospace, medical, industrial and
homeland security markets.
Shareholders Equity Transactions
During the third quarter of fiscal 2006 a convertible note holder converted $1,000,000, aggregate
principal amount of the convertible notes outstanding for 472,678 shares of the Company’s Class A
Common Stock valued at $2.1156 per share. This note holder converted warrants into 85,082 shares
of the Company’s Class A Common Stock valued at $1.78 per share. The Company received $151,446 in
cash as a result of the warrant conversion. An API stock option holder exercised rights to
purchase 9,000 shares of Class A Common Stock at approximately $.79 per share resulting in cash to
the Company of approximately $7,100. The company issued 2,575,000 shares of Class A Common Stock
valued at $2.11 per share or approximately $5,433,000 to the Picometrix shareholders as part of the
payment for the acquisition of Picometrix in the first quarter of fiscal 2006.
Recent
Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, “Share Based
Payment”. This Statement is a revision of FASB Statement No. 123, “Accounting for Stock-Based
Compensation”. This Statement supersedes APB Opinion No. 25, “Accounting for Stock Issued to
Employees” and its related implementation guidance. This Statement establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity’s equity instruments or that may
be settled by the issuance of those equity instruments. The Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in share-based payment
transactions. This Statement does not change the accounting guidance for share-based payment
transactions with parties other than employees provided in Statement 123 as originally issued and
EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services.” This Statement does not address
the accounting for employee share ownership plans, which are subject to AICPA Statement of Position
93-6, “Employers’ Accounting for Employee Stock Ownership Plans”. The Securities and Exchange
Commission has delayed the adoption requirement of SFAS No. 123-R until January 1, 2006. We expect
to adopt SFAS No. 123-R on March 27, 2006 as required. We anticipate that adoption of this Standard
may have a material effect on our consolidated financial statements as the Company has utilized and
plans to continue to utilize stock options to compensate employees and members of the Board of
Directors.
Subsequent Events
On January 17, 2006, the Company announced that it will consolidate its California and Wisconsin
semiconductor micro-fabrication operations into the Ann Arbor, MI facility leased by its wholly
owned subsidiary, Picometrix, LLC. As part of the decision to relocate the semiconductor
micro-fabrication into Ann Arbor, the Company will relocate its corporate offices to the Ann Arbor,
MI facility from Camarillo, CA.
This consolidation and corporate relocation is dependent on receiving tax credits and abatements
from the state of Michigan and the city of Ann Arbor, MI. The state of Michigan has approved these
credits and abatements subject to the city of Ann Arbor approving personal
15
property tax abatements for the above relocation, consolidation and expansion. If approved, the
relocation and consolidation are expected to be completed in 14 months. If approved, the Company
will benefit from a Michigan Single Business Tax credit and personal property tax abatements valued
at more than $1.2 million over ten years. The Company will continue to perform packaging and
assembly operations from its California and Wisconsin facilities.
16
Item 2. Management Discussion and Analysis of Financial Condition and Results of
Operations
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based on our
consolidated financial statements, which have been prepared in conformity with accounting
principles generally accepted in the United States of America. Our preparation of these
consolidated financial statements requires us to make judgments and estimates that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statement and the reported amount of revenues and expenses during the
reporting period. We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. Actual results may differ from such
estimates under different assumptions or conditions.
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
We continually review 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.” We also review 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
We record a deferred tax asset in jurisdictions where we generate a loss for income tax purposes.
For all years prior to fiscal 2005, due to our history of operating losses, we had recorded a full
valuation allowance against these deferred tax assets in accordance with SFAS 109, “Accounting for
Income Taxes,” because, in management’s judgment, the deferred tax assets would not be realized in
the foreseeable future. In fiscal years 2004 and 2005, the Company returned to a position of
continued profitability. Based on recent profit history and on
17
anticipated future profits resulting from the Company’s acquisition and merger with Picometrix,
Inc. in May 2005, we reversed a portion of the valuation allowance for the year ended March 27,
2005, because, in our estimation, we believe that at least 50% of the deferred tax assets will be
realized. 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,
and no assurance can be given that the Company will, in fact, generate future taxable income in
amounts sufficient to fully realize the asset. We have considered the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning strategies in making our
assessment. The deferred tax assets are evaluated annually and the valuation allowance may be
adjusted again in the future years if it is determined that any additional portion of the assets
will or will not be realized.
Inventories
Our inventories are stated at standard cost (which approximates the first-in, first-out method) or
market. Slow moving and obsolete inventories are analyzed quarterly. To calculate a reserve for
obsolescence, we begin with a review of our slow moving inventory. Any inventory which has not
moved within the past 24 months is reserved for at 100% of book value; inventory which has not
moved within the past 12 months is reserved for at 40%. The percentages applied to the reserve
calculation are based on historical usage analyses. 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 which 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. The
percentage of this reserve to the 90-days-past-due total is then established as a guideline and
applied to the rest of the non-current accounts receivable balance where appropriate. 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.
Results of Operations
Revenues by market consisted of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
|
|
|
|
Nine months ended |
|
|
|
|
| Revenues |
|
Dec. 25, 2005 |
|
|
% |
|
Dec. 26, 2004 |
|
|
% |
|
Dec. 25, 2005 |
|
|
% |
|
|
Dec. 26, 2004 |
|
|
% |
|
Telecommunications |
|
$ |
844,000 |
|
|
|
13 |
% |
|
$ |
39,000 |
|
|
|
1 |
% |
|
$ |
2,269,000 |
|
|
|
14 |
% |
|
$ |
72,000 |
|
|
|
1 |
% |
Industrial Sensing/NDT |
|
|
2,739,000 |
|
|
|
42 |
% |
|
|
2,040,000 |
|
|
|
53 |
% |
|
|
6,952,000 |
|
|
|
41 |
% |
|
|
5,216,000 |
|
|
|
48 |
% |
Military/Aerospace |
|
|
1,696,000 |
|
|
|
26 |
% |
|
|
1,154,000 |
|
|
|
30 |
% |
|
|
4,135,000 |
|
|
|
25 |
% |
|
|
3,818,000 |
|
|
|
35 |
% |
Medical |
|
|
518,000 |
|
|
|
8 |
% |
|
|
619,000 |
|
|
|
16 |
% |
|
|
1,661,000 |
|
|
|
10 |
% |
|
|
1,708,000 |
|
|
|
16 |
% |
Home Land Security |
|
|
714,000 |
|
|
|
11 |
% |
|
|
— |
|
|
|
0 |
% |
|
|
1,765,000 |
|
|
|
11 |
% |
|
|
— |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,511,000 |
|
|
|
100 |
% |
|
$ |
3,852,000 |
|
|
|
100 |
% |
|
$ |
16,782,000 |
|
|
|
100 |
% |
|
$ |
10,814,000 |
|
|
|
100 |
% |
18
Revenues
— Revenue for the third quarter of fiscal year 2006 (“Q3 06”) and the nine month
period (“YTD 06”) ended December 25, 2005 were $6,511,000 and $16,782,000, respectively. The third
quarter revenue increased by $2,659,000 or 69% over revenue of $3,852,000 for the third quarter of
fiscal year 2005 (“Q3 05”). The Company recorded increases in four of its principal markets during
Q3 06 (and four during YTD 06) with the most significant revenue increases coming from the
telecommunications, industrial sensing and homeland security markets. Revenue for the third
quarter to the industrial sensing markets rose to $2,739,000 in Q3 06, an increase of $699,000 or
34% over the prior year due to the additional revenue from the recent acquisitions and organic
growth. 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. Revenue to the homeland security and
telecommunication markets rose to $714,000 and $844,000 in Q3 06, respectively, as compared to an
aggregate of zero and $39,000, respectively, in the comparable prior year period. Revenue in the
medical market was $518,000 in Q3 06, a decrease of $101,000 or 16% over the prior year period due
primarily to customer price pressures. Military/Aerospace revenues increased $542,000 or 47% in Q3
06 compared to the same period in the prior year due to defense contracts at Picometrix. The
Company continues to expect consolidated revenue to increase in fiscal 2006 as compared to fiscal
2005; however our shipment schedules and thus recognition of revenue are primarily dependent on
customer defined delivery schedules. As such, our quarter to quarter comparisons often vary for
revenue and revenues by market, due to fluctuations in customer delivery schedules which are beyond
our control. Management believes that the decreases in revenue to the Medical market in Q3 06 were
primarily attributable to the above factors and do not reflect a general decline in the level of
demand for the Company’s products.
Revenues for the nine month YTD period to the industrial sensing markets are $6,952,000, an
increase of $1,736,000 or 33% over the prior year period due to the additional revenue from recent
Picometrix acquisition. Year to date revenue in the homeland security and telecommunication
segments are $1,765,000 and $2,269,000, respectively, as compared to an aggregate of zero and
$72,000, respectively, in the comparable prior year period, due to the Picometrix acquisition. Year
to date revenue in the medical market is $1,661,000, a decrease of $47,000 or 3% over the prior
year period. Military/Aerospace revenues increased $317,000 YTD 06 compared to the same period in
the prior year due to increased contract activity at Picometrix offset partially by decreases in
custom products. Management projects revenue growth of approximately 65% for fiscal year 2006 over
consolidated revenue for fiscal 2005. Inventories for the period increased $971,000 or 27%
primarily as a result of the Picometrix acquisition and a planned increase in inventory for
expected future business.
Gross
Profit — Gross profit increased by $1,978,000 or 194%, to $2,998,000 in Q3 06, from
$1,020,000 for the comparable prior-year period. The increase was attributable to the acquisition
of Picometrix. Gross profit, expressed as a percentage of revenues, increased in Q3 06, to 46%
from 26% in the comparable prior-year period. The increase in gross profit as a percentage of
revenues, or gross margin, in Q3 06, over the prior-year period, was primarily attributable to the
acquisition of Picometrix, whose products carry higher gross margins. The California facility
gross margin was negatively impacted by $152,000 due to the write-off of scrap and rework of
product amounting to $ 52,000 and an increase in the reserve for obsolete inventory of $100,000
which was acquired in the of Texas Optoelectronic Inc. acquisition, in FY2004. This reduced the
Gross Profit by 2% in Q3 06 and 1% YTD 06. Gross profit for the first nine months was $7,270,000
or 43% of revenue, as compared to $3,575,000 or 33% for the prior year, an increase of $3,695,000.
The increase is attributable to the same reasons listed above for the fluctuations in gross profit
for the three months ended December 25, 2005.
19
Research
and Development — Research and development (R&D) expenses include research related to new
product development and product enhancement expenditures. R&D expenses increased by $803,000, to
$836,000 in Q3 06, as compared to Q3 05. The increase in R&D costs is the result of the Company’s
Picometrix acquisition and other new non-Picometrix product R&D initiatives which amounted to
$96,000. R&D expenses for any given quarter are directly reflective of the specific projects
currently underway and the costs incurred during that period. During the remainder of the fiscal
year, we expect to see R&D spending increase over Q3 06 ($836,000) but remain approximately the
same as a percentage of Q3 06 revenue based on projected revenue and project trends. However, R&D
costs can vary, depending on the level of activity associated with customer-requested development
contracts or new product development projects, much of which is out of the Company’s control. Year
to date R&D expenses were $2,083,000, an increase of $1,971,000 from the same prior year period as
a direct result of the Company’s acquisitions.
Sales
and Marketing expenses — Sales and marketing expenses increased by $204,000, or 73% to
$482,000 in Q3 06 as compared to Q3 05. The Company believes that marketing and sales expenses will
increase for the last quarter of the fiscal year due to a significant number of trade shows in
which the company is scheduled to exhibit. Year to date revenue and marketing expenses were
$1,311,000 or 8% of revenue, an increase of $423,000 over the comparable prior year period due
primarily to the sales and marketing expenses associated with the acquisition of Picometrix. The
company estimates that this will continue for
Q4 06.
General
and Administrative — General and administrative (G&A) expenses increased by $828,000 to
$1,420,000 in Q3 06, as compared to Q3 05 primarily as a result of the added administrative
expenses of the Picometrix acquisition. Expressed as a percentage of net revenue, general and
administrative expenses represented 22% in Q3 06 as compared to 15% in Q3 05. The majority of
general and administrative expenses are fixed rather than variable, including the amortization of
patents/intangibles and financing expenses relating to the Picometrix acquisition of $ 319,000. We
expect that G&A expenditures will remain relatively stable for the remainder of the current fiscal
year and, as revenues increase, G&A expenses will decline as a percentage of revenue. The
Sarbanes-Oxley Act section 404, internal controls, requires the Company to be compliant by fiscal
year ending March 2008, based upon current market capitalization. The requirements for small
publicly held companies are currently under review, however the Company initiated the process of
complying with Sarbanes-Oxley Act, section 404, internal controls audit requirements in Q3 06 due
to the long implementation process required to comply by March 2008. The Company incurred
approximately $60,000 of external cost in Q3 06 and anticipates that these costs will materially
increase over the next two years. G&A expenses were $4,229,000 for the nine month period ended
December 25, 2005, an increase of $2,364,000 over the same prior year period, primarily as a result
of the Picometrix acquisition. The G&A expense increase for the first nine months included
amortization expense of $1,122,000 primarily related to the Picometrix acquisition comprised of
patent/intangible amortization of $945,000 and prepaid finance expense of $177,000 relating to the
convertible notes.
Income
from Operations — For the Q3 06, income from operations was $260,000 as compared to
income from operations of $117,000 for the comparable prior-year period, an increase of $143,000.
The increase is attributable to the factors mentioned above, increase of $1,978,000 in gross
margin, offset by an increase in R&D spending of $803,000 and the increase in SG&A spending of
$1,032,000, which is primarily attributable to the recent acquisition, including amortization of
$319,000. Year to date Income from operations was a loss of ($353,000) compared to a profit of
$710,000 for the same prior year period, a decrease of $1,063,000. The decrease is attributable to
higher operating expenses offset partially by higher gross profit, both attributable to the
Picometrix acquisition.
20
Interest
Income — For Q3 06, interest income earned was $10,000, compared to $17,000 for comparable
prior year period. The decrease in Interest Income was derived from lower income earning deposits.
December year-to-date interest income was $24,000 compared to $29,000 for the same nine month
prior year period. The Company earns interest income on various investment vehicles, including
money market accounts. The interest rate earned on these accounts amounted to approximately 3.25%
on interest earning deposits.
Interest
Expense — For Q3 06, interest expense was $146,000 compared to $63,000 for the comparable
prior-year period. The increase is due to expenses associated with the Company’s business
acquisitions, the outstanding convertible notes, the new term loan and the Company’s secured line
of credit. Year to date interest was $508,000 as compared to $70,000 for the same nine month prior
year period. The Company’s short term and long term debt interest rate is primarily tied to the
prime rate. The secured line of credit interest rate is prime plus 1/2 %, the term loan interest
rate is prime plus 1% with a with a ceiling of 7 3/4 %, the convertible notes and the API Note to
related parties is prime plus 1%. The prime interest rate at the end of Q3 06 was 6.75%.
Net
Income (Loss) — For the reasons outlined above, The Company reported net income of $127,000 or
$0.01 per share for Q3 06 as compared to net income of $ 35,000 or $0.003 per share in Q3 05. Net
loss for the year is ($841,000) or ($.05) per share as compared to net income of $ 642,000 or $.05
per share for the first nine months of FY 2005.
Liquidity and Capital Resources
At December 25, 2005, the Company had cash and cash equivalents of $1,849,000, a decrease of
$159,000 from $2,008,000 as of September 25, 2005. The Company believes that current cash levels
combined with our revolving line of credit will be sufficient for our 2006 fiscal year.
The Company maintains a revolving line of credit with a regional bank which provides for borrowings
up to $3,000,000, 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
December, 2005, the outstanding balance on the line was $1,000,000. The line is secured by all
business assets of the Company. As most recently amended, repayment is interest only monthly,
with principal due at maturity date on November 3, 2006. Interest is computed at the Wall Street
Journal Prime plus 1/2% with a floor of 6.5%. The prime interest rate was 6.75% at December 25,
2005.
In May 2005, the Company borrowed $2,700,000 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 Wall Street Journal Prime plus 1% with a
ceiling of 7.75% and a floor of 6%.
During Q3 06, $1,000,000 of the senior convertible notes was 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. At the end of Q3 06, the outstanding senior convertible notes
totaled $1,503,503 that can be converted into 775,298 shares of Class A Common Stock and their were
outstanding detachable warrants to purchase 765,740 shares of Class A Common Stock at $1.78 per
share.
Net cash used in operating activities was $1,150,000 for the nine months ended December 25, 2005.
The decrease in cash from operating activities was primarily attributable to increases in accounts
receivable, inventory and prepaid and other current assets offset by a decrease in the Company’s
accrued expenses and deferred income.
21
Net cash used in investing activities was $2,777,000 for the nine months ended December 25, 2005.
The amount primarily consisted of cash paid for the acquisition of Picometrix and related expenses,
net of cash acquired. Capital expenditure activity for the year accounted for $155,000 of the cash
used, and patent expenditures were $118,000 for the year.
Net cash provided by financing activities was $4,273,000 for the nine months ended December 25,
2005. This primarily reflects the $2,700,000 cash proceeds from the term loan relating to the
Picometrix acquisition reduced by eight months of loan repayment of $600,000, $1,000,000 of cash
proceeds from convertible notes, $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 $140,000 were made during the first nine months to equipment vendors to
adhere to unsecured financing arrangements. One of the convertible note holders converted
$1,000,000 of notes into 472,678 shares of the Company’s Class A common stock. An employee
exercised stock options for approximately $7,100.
22
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At December 25, 2005, all of our interest rate exposure is linked to the prime rate, subject to
certain limitations. 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. The interest rate risk is hedged by an interest rate cap of 7.75% on the
term loan of $2,700,000 relating to the purchase of Picometrix.
Item 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officers (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 eight 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. It is management opinion that this will reduce costs and strengthen controls and
procedures upon completion.
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.
23
Part II — OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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| Exhibit |
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| No. |
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31.1
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Certificate of the Registrant’s Chairman, Chief Executive Officer, and Director
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certificate of the Registrant’s Chief Financial Officer, and Secretary pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1
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Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
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32.2
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Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Advanced Photonix, Inc. |
(Registrant) |
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Date:
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February 8, 2006
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/s/ Richard Kurtz |
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Richard Kurtz |
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Chairman, Chief Executive Officer |
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and Director |
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/s/ Robin Risser |
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Robin Risser
Chief Financial Officer |
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25
Exhibit Index
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|
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| Exhibit No. |
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Description |
| |
31.1
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|
Certificate of the Registrant’s Chairman, Chief Executive Officer, and Director
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certificate of the Registrant’s Chief Financial Officer, and Secretary pursuant to
Section 302 of the
Sarbanes-Oxley Act of 2002 |
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32.1
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Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
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32.2
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Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |