SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 28,1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file no. 1-11056
ADVANCED PHOTONIX, INC.
Incorporated pursuant to the Laws of Delaware
IRS Employer Identification No. 33-0325826
1240 Avenida Acaso, Camarillo, CA 93012
(805) 987-0146
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
On February 8, 1998, 10,838,260 shares of Class A Common Stock, $.001 par value,
and 76,135 shares of Class B Common Stock, $.001 par value, were outstanding.
<PAGE>
ADVANCED PHOTONIX, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3 - 6
Consolidated Statements of Operations for the
three and nine month periods ended December 28,
1997 and December 29, 1996 3
Consolidated Balance Sheets
at December 28, 1997 and March 30, 1997 4 - 5
Consolidated Statements of Cash Flows for the
three and nine month periods ended December 28,
1997 and December 29, 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 7 - 10
PART II OTHER INFORMATION 11
SIGNATURES 11
2
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<TABLE>
ADVANCED PHOTONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------------------- ---------------------------------------------
December 28, 1997 December 29, 1996 December 28, 1997 December 29, 1996
---------------------- ---------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
REVENUES
Net product sales $ 1,873,000 $ 1,380,000 $ 4,647,000 $ 4,433,000
Development contracts 100,000 64,000 311,000 494,000
---------------------- ---------------------- ---------------------- ---------------------
1,973,000 1,444,000 4,958,000 4,927,000
---------------------- ---------------------- ---------------------- ---------------------
COSTS AND EXPENSES
Cost of product sales 995,000 955,000 2,810,000 2,961,000
Research and development 449,000 408,000 959,000 1,496,000
Marketing and sales 220,000 237,000 681,000 686,000
General and administrative 242,000 276,000 698,000 1,216,000
---------------------- ---------------------- ---------------------- ---------------------
1,906,000 1,876,000 5,148,000 6,359,000
---------------------- ---------------------- ---------------------- ---------------------
PROFIT (LOSS) FROM OPERATIONS 67,000 (432,000) (190,000) (1,432,000)
---------------------- ---------------------- ---------------------- ---------------------
OTHER INCOME
Interest income 34,000 45,000 97,000 132,000
Other, net - 1,000 1,000 7,000
---------------------- ---------------------- ---------------------- ---------------------
34,000 46,000 98,000 139,000
---------------------- ---------------------- ---------------------- ---------------------
NET PROFIT (LOSS) $ 101,000 $ (386,000) $ (92,000) $ (1,293,000)
====================== ====================== ====================== =====================
NET PROFIT (LOSS) Per Share $ 0.01 $ (0.04) $ (0.01) $ (0.12)
====================== ====================== ====================== =====================
Weighted Average Number 10,913,000 10,835,000 10,876,000 10,823,000
of Common Shares Outstanding
====================== ====================== ====================== =====================
See notes to consolidated financial statements.
</TABLE>
3
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<TABLE>
ADVANCED PHOTONIX, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 28, 1997 March 30, 1997
(Unaudited) (Audited)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 642,000 $ 1,217,000
Short-term investments 1,629,000 1,459,000
Accounts receivable, less allowance of $83,000 at December 28, 1997 720,000 642,000
and at March 30, 1997
Inventories 1,444,000 1,074,000
Prepaid expenses and other current assets 101,000 61,000
------------- -------------
Total Current Assets 4,536,000 4,453,000
------------- -------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost 3,406,000 3,331,000
Less accumulated depreciation and amortization (2,685,000) (2,364,000)
------------- -------------
721,000 967,000
------------- -------------
OTHER ASSETS
Goodwill, net of accumulated amortization of
$211,000 at December 28, 1997 and $186,000 at March 30, 1997 625,000 650,000
Patents, net of accumulated amortization of
$24,000 at December 28, 1997 and $21,000 at March 30, 1997 41,000 40,000
Other 55,000 55,000
------------- -------------
721,000 745,000
------------- -------------
$ 5,978,000 $ 6,165,000
============= =============
See notes to consolidated financial statements.
</TABLE>
4
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<TABLE>
ADVANCED PHOTONIX, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 28, 1997 March 30, 1997
(Unaudited) (Audited)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 327,000 $ 295,000
Accrued expenses:
Salaries and employee benefits 212,000 451,000
Warranty 95,000 95,000
Other 312,000 278,000
------------- -------------
Total Current Liabilities 946,000 1,119,000
------------- -------------
REDEEMABLE CONVERTIBLE PREFERRED STOCK AT
REDEMPTION VALUE 90,000 98,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Class A Common Stock, par value $.001 per share; authorized
50,000,000 shares;
December 28, 1997--10,827,149 shares issued and outstanding
March 30, 1997 --10,717,493 shares issued and outstanding 11,000 11,000
Class B Common Stock, par value $.001 per share; authorized 4,420,113
shares;
December 28, 1997--87,246 shares issued and - -
outstanding March 30, 1997 --159,225
shares issued and 137,002 outstanding
Additional paid-in capital 22,695,000 22,659,000
Less cost of 22,223 shares of Class B Common Stock in Treasury at
March 30, 1997 - (50,000)
Accumulated deficit (17,764,000) (17,672,000)
------------- -------------
4,942,000 4,948,000
------------- -------------
$ 5,978,000 $ 6,165,000
============= =============
See notes to consolidated financial statements.
</TABLE>
5
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<TABLE>
ADVANCED PHOTONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
For the nine month period ended December 28, 1997 December 29, 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (92,000) $ (1,293,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 321,000 398,000
Amortization 28,000 42,000
Changes in assets and liabilities:
Short-term investments (170,000) -
Accounts receivable (78,000) 87,000
Inventories (370,000) (310,000)
Prepaid expenses and other current assets (44,000) (31,000)
Accounts payable and accrued expenses (173,000) 400,000
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (578,000) (707,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (75,000) (240,000)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (75,000) (240,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options and warrants 78,000 27,000
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 78,000 27,000
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (575,000) (920,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,217,000 4,042,000
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 642,000 $ 3,122,000
============= =============
See notes to consolidated financial statements.
</TABLE>
6
<PAGE>
ADVANCED PHOTONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 1997
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended December
28, 1997, are not necessarily indicative of the results that may be expected for
the fiscal year ending March 29, 1998. For further information, refer to the
consolidated financial statements and notes thereto included in the Advanced
Photonix, Inc. (together with its subsidiary, the "Company") Annual Report on
Form 10-K for the fiscal year ended March 30, 1997.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Profit (Loss) Per Share: Net profit (loss) per share is based on the
weighted average number of common and common equivalent shares outstanding.
Common stock equivalents were not considered in the loss periods, as their
effect would be antidilutive.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
REVENUES
The Company's revenues for the third quarter ("Q3 98") and nine month period
("YTD 98") ended December 28, 1997, were $2.0 million and $5.0 million,
respectively. Revenues for the Q3 98 and YTD 98 period improved by 37% and 1%,
respectively, when compared to $1.4 million and $4.9 million in the comparable
periods of the prior year ("Q3 97" & "YTD 97"). Q3 98 revenues increased
$471,000 from the second quarter of fiscal year 1998 ("the previous quarter"),
and net profit (loss) improved by $91,000.
Net product sales for Q3 98 and YTD 98 were up $493,000 (36%) and $214,000 (5%),
respectively, when compared to the same periods of the prior year. As detailed
below, these increases reflect higher shipments of military aerospace products,
partially offset by lower shipments of commercial products. Volume in military
aerospace products increased by approximately 171% and 48%, respectively, in Q3
98 and YTD 98 compared to the comparable periods in the prior fiscal year, and
are expected to remain at or slightly lower than Q3 98 levels for the remainder
of fiscal 1998 as the
7
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Company continues deliveries under a new military program. The Company was
awarded contracts totaling $1.9 million for this program from a division of
Hughes. The increase in military aerospace products was partially offset by
lower shipments of commercial products which decreased by approximately 24% and
30%, respectively, in Q3 98 and YTD 98 compared to the comparable periods in the
prior fiscal year. 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 fiscal 1997 and YTD 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 which the Company believes should result in
higher commercial sales in future periods.
Q3 98 and YTD 98 net product sales of Large Area Avalanche Photodiode (LAAPD)
products were relatively low and flat to the prior year. While the Company
anticipates increasing volume from sales of LAAPD products, independent studies
indicate that the Company's LAAPD technology might take a number of years from
time of introduction for markets to complete the shift associated with
implementing this "enabling" technology. Available markets and sales in the
first years are projected to be a fraction of future markets and sales. While
the Company continues its efforts to further refine and optimize LAAPD
manufacturing process steps, it believes that it has refined its processes to a
point where it can safely ramp-up production to support current customer
requirements as well as sales and marketing efforts to promote this new
technology.
Development contract revenues increased 56% during Q3 98, from $64,000 in Q3 97
to $100,000 in Q3 98; and decreased 37% during YTD 98, from $494,000 in YTD 97
to $311,000 in YTD 98. The decrease in development contract revenues was
primarily due to the completion of a Department of Energy ("DOE") contract
during the third quarter of fiscal 1997 and delays in funding for the Advanced
Research Projects Agency of the Pentagon and the Aircraft Division of the Naval
Air Warfare Center ("ARPA/NAWC") contract. 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 second half of 1997, revenues from the ARPA/NAWC contract were
impacted by a delay in funding from the customer. While funding has been awarded
to complete the current phase of the ARPA/NAWC contract, the Company has been
informed that there will be no additional funding beyond the $737,000 previously
funded ($326,000 short of the original contract value). The customer indicated
that it had successfully achieved its objective with the reduced funding. The
remaining effort including a final report on this contract should be completed
during Q4 98.
COSTS AND EXPENSES
Cost of product sales increased by $40,000 (4%) during Q3 98 and decreased by
$151,000 (5%) during YTD 98 compared to Q3 97 and YTD 97. Cost of product sales
as a percent of product sales decreased by 16% in Q3 98 compared to Q3 97 and by
7% on a YTD basis despite higher product shipments. This was 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.
8
<PAGE>
Research and development ("R&D") costs increased by $41,000 (10%) to $449,000 in
Q3 98 compared to Q3 97 and decreased by $537,000 (36%) during YTD 98 compared
to YTD 97. 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 focuses 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 $17,000 (7%) to $220,000 in Q3 98
compared to Q3 97 and was constant at $681,000 for YTD 98 compared to YTD 97.
Marketing and sales expenses are expected to increase as the Company pursues its
plan for growth including commercialization of the LAAPD family of products.
General and administrative expenses decreased by $34,000 (12%) to $242,000 in Q3
98 compared to Q3 97 and by $518,000 (43%) to $698,000 in YTD 98 compared to YTD
97. During the second quarter of fiscal 1997 the Company recorded a one-time
reorganization charge of approximately $288,000 related to management changes
and during Q2 98 reversed approximately $100,000 of this accrual. YTD general
and administrative expenses, before the impact of the one-time reorganization
charge in Q2 97 and the reversal in the previous quarter, decreased by $130,000
(14%) to $798,000 in YTD 98. These decreases were primarily the result of lower
compensation, training, management systems and consulting costs.
Other income decreased by $12,000 (26%) in Q3 98 compared to Q3 97 and by
$41,000 (30%) in YTD 98 compared to YTD 97 due to lower interest income
associated with lower average cash balances. (See Liquidity and Capital
Resources.)
LIQUIDITY AND CAPITAL RESOURCES
At December 28, 1997, the Company had cash, cash equivalents and short-term
investments of $2.3 million, working capital of $3.6 million and an accumulated
deficit of $17.8 million. The Company's cash, cash equivalents and short-term
investments increased by $321,000 during the three months ended December 28,
1997 and decreased by $405,000 during the nine months ended December 28, 1997.
Cash expenditures were primarily impacted by $370,000 used to finance inventory
growth related to higher levels of LAAPD inventory as the Company begins to
commercialize the product line and higher material requirements associated with
a change in the Company's product mix.
To enable the Company to meet its capital commitment needs, the Company
historically has supplemented cash provided by operations with proceeds from
private placement equity financing, bank lines of credit and loans from
stockholders. On August 15, 1995, the Company completed a $3,000,000 private
placement in which it issued 2,400,000 shares of Class A Common Stock.
9
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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 was renewed on July 15, 1997, expires in one year
and provides for interest to be paid monthly at prime plus 1.25 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
December 28, 1997, no amounts were outstanding under any bank line of credit and
there were no stockholder loans to the Company.
The Company has used the proceeds of its 1995 private placement to implement its
strategic business plan, which focuses on growing the core business, bringing
initial LAAPD products to market and developing proof-of-concept demonstration
LAAPD Arrays which are expected to prove helpful in securing future financing
and strategic partners. Development of LAAPD Arrays beyond the proof-of-concept
phase may require additional funds.
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.
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, 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), the availability of other
competing technologies and a decline in the general demand for optoelectronic
products.
10
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PART II. OTHER INFORMATION
Items 1 - 4 None
Item 5
On January 21, 1998, Mr. Robert G. Allison and Mr. Harry Melkonian were elected
to serve on the Board of Directors. Mr. Melkonian also serves as the Company's
President and Chief Executive Officer.
Item 6
(a) Exhibits
Exhibit No. Description
- -----------------------------
10.14 Amendment No. 1 to 1997 Employee Stock Option Plan
of Advanced Photonix, Inc.
10.15 Form of Indemnification Agreement provided to Directors
and Principal Officers of Advanced Photonix, Inc.
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.
Advanced Photonix, Inc.
(Registrant)
Date: February 13, 1998 /s/ Patrick J. Holmes
----------------- ---------------------
Patrick J. Holmes
Executive Vice President, Chief Financial
Officer and Secretary/Treasurer
11
EXHIBIT 10.14
AMENDMENT NO. 1 TO
1997 EMPLOYEE STOCK OPTION PLAN
OF
ADVANCED PHOTONIX, INC.
(As adopted by the Board of Directors
as of January 21, 1998)
Amendment No. 1 made as of this 21st day of January, 1998 to
the 1997 Employee Stock Option Plan, adopted by the Board of Directors on
January 14, 1997 and approved by the Stockholders of the Company at its annual
meeting held on August 21, 1997 (the "Plan").
W I T N E S S E T H:
WHEREAS, pursuant to Section 19 of the Plan, the Board has complete power
and authority to modify or amend the Plan (except for certain actions stated
therein which require majority shareholder approval) from time to time in such
respects as it deems advisable;
WHEREAS, the Board desires to effectuate certain amendments to the Plan as
hereinafter set forth;
NOW, THEREFORE, the Board hereby adopts the following amendments:
1. The first sentence of Section 4 of the Plan is hereby deleted in its
entirety and the following substituted in lieu thereof:
"All employees of and consultants and advisors to, the Corporation shall be
eligible for Options, except that only employees of the Corporation shall be
eligible for ISOs."
-1-
<PAGE>
2. The second sentence of Section 10 of the Plan is hereby deleted in its
entirety and the following substituted in lieu thereof:
"Options which do not qualify as ISOs will be transferable to members of an
Optionee's immediate family, including trusts for the benefit of such family
members and partnerships in which such family members are the only partners
("Permitted Transferees")."
3. Subparagraph (b) of Section 12 of the Plan should be deleted in its
entirety and the following substituted in lieu thereof:
"b. (i) In the case of a non-ISO, six months following the date the
Optionee ceases to be an employee of the Company for any reason, or (ii) in the
case of an ISO, six months following the date the Optionee ceases to be an
employee of the Company due to the Optionee's disability (within the meaning of
Section 22(e)(3) of the Code) or death or three months following the date the
Optionee ceases to be an employee of the Company for any reason other than
disability or death."
4. The reference to "Paragraph 9" on line 5 of Section 14 of the Plan is
hereby amended to read "Paragraph 14".
5. Except as set forth or amended herein, the Plan shall remain in full
force and effect.
-2-
EXHIBIT 10.15
INDEMNIFICATION AGREEMENT
This Agreement, made and entered into as of the 21st day of January,
1998 ("Agreement"), by and between Advanced Photonix, Inc., a Delaware
corporation ("Company"), and _________________ ("Indemnitee").
WHEREAS, highly competent persons are becoming more reluctant to serve
publicly-held corporations as directors or in other capacities unless they are
provided with adequate protection through insurance or adequate indemnification
against inordinate risks of claims and actions against them arising out of their
service to, and activities on behalf of, the corporation; and
WHEREAS, the current impracticability of obtaining adequate insurance
and the uncertainties relating to indemnification have increased the difficulty
of attracting and retaining such persons; and
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that the inability to attract and retain such persons is detrimental
to the best interests of the Company's stockholders and that the Company should
act to assure such persons that there will be increased certainty of such
protection in the future; and
WHEREAS, it is reasonable, prudent and necessary for the Company
contractually to obligate itself to indemnify such persons to the fullest extent
permitted by applicable law so that they will serve or continue to serve the
Company free from undue concern that they will not be so indemnified; and
WHEREAS, Indemnitee is willing to continue to serve as director or
executive officer of the Company on the condition that he be so indemnified;
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Company and Indemnitee do hereby covenant and agree as
follows:
Section 1. Indemnification - General. The Company shall indemnify
Indemnitee and hold Indemnitee harmless to the fullest extent permitted by
applicable law in effect on the date hereof and to such greater extent as
applicable law may thereafter from time to time permit, and shall advance
Expenses (as hereinafter defined) to Indemnitee as provided in this Agreement.
The rights of Indemnitee provided under the preceding sentence shall include,
but shall not be limited to, the rights set forth in the other Sections of this
Agreement.
Section 2. Proceedings Other Than Proceedings by or in the Right of the
Company.
Indemnitee shall be entitled to the rights of indemnification provided in this
Section 2 if, by reason of his Corporate Status (as hereinafter defined), he is,
or is threatened to be made, a party
1
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to any threatened, pending, or completed Proceeding (as hereinafter defined),
other than a Proceeding by or in the right of the Company. Pursuant to this
Section 2, Indemnitee shall be indemnified against Expenses, judgments,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by him or on his behalf in connection with such Proceeding or any claim, issue
or matter therein, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect any criminal Proceeding, had no reasonable cause to believe his conduct
was unlawful.
Section 3. Proceedings by or in the Right of the Company.
Indemnitee shall be entitled to the rights of indemnification provided in this
Section 3 if, by reason of his Corporate Status, he is, or is threatened to be
made, a party to any threatened, pending or completed Proceeding brought by or
in the right of the Company to procure a judgment in its favor. Pursuant to this
Section, Indemnitee shall be indemnified against Expenses actually and
reasonably incurred by him or on his behalf in connection with such Proceeding
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company. Notwithstanding the foregoing, no
indemnification against such Expenses shall be made in respect of any claim,
issue or matter in such Proceeding as to which Indemnitee shall have been
adjudged to be liable to the Company if applicable law prohibits such
indemnification; provided, however, that, if applicable law so permits,
indemnification against Expenses shall nevertheless be made by the Company in
such event if and only to the extent that the Court of Chancery of the State of
Delaware, or the Court in which such Proceeding shall have been brought or is
pending, shall determine.
Section 4. Indemnification for Expenses of a Party Who is Wholly or
Partly Successful.
Notwithstanding any other provision of this Agreement, to the extent that
Indemnitee is, by reason of his Corporate Status, a party to and is successful,
on the merits or otherwise, in any Proceeding, he shall be indemnified against
all Expenses actually and reasonably incurred by him or on his behalf in
connection therewith. If Indemnitee is not wholly successful in such Proceeding
but is successful, on the merits or otherwise, as to one or more but less than
all claims, issues or matters in such Proceeding, the Company shall indemnify
Indemnitee against all Expenses actually and reasonably incurred by him or on
his behalf in connection with each successfully resolved claim, issue or matter.
For purposes of this Section and without limitation, the termination of any
claim, issue or matter in such a Proceeding by dismissal, with or without
prejudice, shall be deemed to be a successful result as to such claim, issue or
matter. Nothing in this Section 4 is intended or shall be construed to reduce or
limit the rights of the Indemnitee to indemnification in connection with any
Proceeding (or any claims, issues, or matters therein) as to which the
Indemnitee is not successful whether such rights arise under any other provision
of this Agreement (including, but not limited to Sections 2 and 3 above) or
otherwise.
Section 5. Indemnification for Expenses of a Witness.
Notwithstanding any other provision of this Agreement, to the extent that
Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding,
he shall be indemnified against all Expenses actually and reasonably incurred by
him or on his behalf in connection therewith.
2
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Section 6. Advancement of Expenses.
The Company shall advance all reasonable Expenses incurred by or on behalf of
Indemnitee in connection with any Proceeding within twenty days after the
receipt by the Company of a statement or statements from Indemnitee requesting
such advance or advances from time to time, whether prior to or after final
disposition of such Proceeding. Such statement or statements shall reasonably
evidence the Expenses incurred by Indemnitee, identify the Proceeding or
Proceedings in connection with which such expenses have been incurred, and shall
include or be preceded or accompanied by an undertaking by or on behalf of
Indemnitee to repay any Expenses advanced if it shall ultimately be determined
that Indemnitee was not entitled to be indemnified against such Expenses.
Section 7. Procedure for Determination of Entitlement to
Indemnification.
(a) Except as otherwise expressly provided in Section 6 with
respect to the advancement of Expenses, to obtain indemnification under this
Agreement, Indemnitee shall submit to the Company a written request, including
therein or therewith such documentation and information as is reasonably
available to Indemnitee and is reasonably necessary to determine whether and to
what extent Indemnitee is entitled to indemnification. The Secretary of the
Company shall, promptly upon receipt of such a request for indemnification,
advise the Board of Directors in writing that Indemnitee has requested
indemnification.
(b) Upon written request by Indemnitee for indemnification
pursuant to the first sentence of Section 7(a) hereof, a determination, if
required by applicable law, with respect to Indemnitee's entitlement thereto
shall be made in the specific case: (i) if a Change in Control (as hereinafter
defined) shall have occurred, by Independent Counsel (as hereinafter defined)
(unless Indemnitee shall request that such determination be made by the Board of
Directors or the stockholders, in which case by the person or persons or in the
manner provided for in clauses (ii) or (iii) of this Section 7(b)) in a written
opinion to the Board of Directors, a copy of which shall be delivered to
Indemnitee; (ii) if a Change of Control shall not have occurred, (A) by the
Board of Directors by a majority vote of a quorum consisting of Disinterested
Directors (as hereinafter defined), or (B) if a quorum of the Board of Directors
consisting of Disinterested Directors is not obtainable or, even if obtainable,
such quorum of Disinterested Directors so directs, by Independent Counsel in a
written opinion to the Board of Directors, a copy of which shall be delivered to
Indemnitee or (C) by the stockholders of the Company; or (iii) as provided in
Section 8(b) of this Agreement; and, if it is so determined that Indemnitee is
entitled to indemnification, payment to Indemnitee shall be made within ten (10)
days after such determination. Indemnitee shall cooperate with the person,
persons or entity making such determination with respect to Indemnitee's
entitlement to indemnification, including providing to such person or persons or
entity upon reasonable advance request any documentation or information which is
not privileged or otherwise protected from disclosure and which is reasonably
available to Indemnitee and reasonably necessary to such determination. Any
costs or expenses (including attorneys' fees and disbursements) incurred by
Indemnitee in so cooperating with the person, persons or entity making such
determination shall be borne by the Company (irrespective of the determination
as to Indemnitee's entitlement to indemnification) and the Company hereby
indemnifies and agrees to hold Indemnitee harmless therefrom.
3
<PAGE>
(c) In the event the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to Section 7(b)
hereof, the Independent Counsel shall be selected as provided in this Section
7(c). If a Change of Control shall not have occurred, the Independent Counsel
shall be selected by the Board of Directors, and the Company shall give written
notice to Indemnitee advising him of the identity of the Independent Counsel so
selected. If a Change of Control shall have occurred, the Independent Counsel
shall be selected by Indemnitee (unless Indemnitee shall request that such
selection be made by the Board of Directors, in which event the preceding
sentence shall apply), and Indemnitee shall give written notice to the Company
advising it of the identity of the Independent Counsel so selected. In either
event, Indemnitee or the Company, as the case may be, may, within seven (7) days
after such written notice of selection shall have been given, deliver to the
Company or to Indemnitee, as the case may be, a written objection to such
selection. Such objection may be asserted only on the ground that the
Independent Counsel so selected does not meet the requirements of "Independent
Counsel" as defined in Section 16 of this Agreement, and the objection shall set
forth with particularity the factual basis of such assertion. If such written
objection is made, the Independent Counsel so selected may not serve as
Independent Counsel unless and until a court has determined that such objection
is without merit. If, within 20 days after submission by Indemnitee of a written
request for indemnification pursuant to Section 7(a) hereof, no Independent
Counsel shall have been selected and not objected to, either the Company or
Indemnitee may petition the Court of Chancery of the State of Delaware or other
court of competent jurisdiction for resolution of any objection which shall have
been made by the Company or Indemnitee to the other's selection of Independent
Counsel and/or for the appointment as Independent Counsel of a person selected
by the Court or by such person as the Court shall designate, and the person with
respect to whom an objection is so resolved or the person so appointed shall act
as Independent Counsel under Section 7(b) hereof. The Company shall pay any and
all reasonable fees and expenses of Independent Counsel incurred by such
Independent Counsel in connection with acting pursuant to Section 7(b) hereof,
and the Company shall pay all reasonable fees and expenses incident to the
procedures of this Section 7(c), regardless of the manner in which such
Independent Counsel was selected or appointed. Upon the due commencement of any
judicial proceeding or arbitration pursuant to Section 9(a) of this Agreement,
Independent Counsel shall be discharged and relieved of any further
responsibility in such capacity (subject to the applicable standards of
professional conduct then prevailing).
Section 8. Presumptions and Effect of Certain Proceedings.
(a) If a Change of Control shall have occurred, in making a
determination with respect to entitlement to indemnification hereunder, the
person or persons or entity making such determination shall presume that
Indemnitee is entitled to indemnification under this Agreement if Indemnitee has
submitted a request for indemnification in accordance with Section 7(a) of this
Agreement, and the Company shall have the burden of proof to overcome that
presumption in connection with the making by any person, persons or entity of
any determination contrary to that presumption.
4
<PAGE>
(b) If the person, persons or entity empowered or selected
under Section 7 of this Agreement to determine whether Indemnitee is entitled to
indemnification shall not have made a determination within 60 days after receipt
by the Company of the request therefor, the requisite determination of
entitlement to indemnification shall be deemed to have been made and Indemnitee
shall be entitled to such indemnification, absent (i) a misstatement by
Indemnitee of a material fact, or an omission of a material fact necessary to
make Indemnitee's statement not materially misleading, in connection with the
request for indemnification, or (ii) a prohibition of such indemnification under
applicable law; provided, however, that such 60-day period may be extended for a
reasonable time, not to exceed an additional 30 days, if the person, persons or
entity making the determination with respect to entitlement to indemnification
in good faith requires such additional time for the obtaining or evaluating of
documentation and/or information relating thereto; and provided, further, that
the foregoing provisions of this Section 8(b) shall not apply (i) if the
determination of entitlement to indemnification is to be made by the
stockholders pursuant to Section 7(b) of this Agreement and if (A) within 15
days after receipt by the Company of the request for such determination the
Board of Directors has resolved to submit such determination to the stockholders
for their consideration at an annual meeting thereof to be held within 75 days
after such receipt and such determination is made thereat; or (B) a special
meeting of stockholders is called within 15 days after such receipt for the
purpose of making such determination, such meeting is held for such purpose
within 60 days after having been so called and such determination is made
thereat, or (ii) if the determination of entitlement to indemnification is to be
made by Independent Counsel pursuant to Section 7(b) of this Agreement.
(c) The termination of any Proceeding or of any claim, issue
or matter therein, by judgment, order, settlement or conviction, or upon a plea
of nolo contendere or its equivalent, shall not (except as otherwise expressly
provided in this Agreement) of itself adversely affect the right of Indemnitee
to indemnification or create a presumption that Indemnitee did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Company or, with respect to any criminal Proceeding,
that Indemnitee had reasonable cause to believe that his conduct was unlawful.
Section 9. Remedies of Indemnitee.
(a) In the event that: (i) a determination is made pursuant to
Section 7 of this Agreement that Indemnitee is not entitled to indemnification
under this Agreement, (ii) advancement of Expenses is not timely made pursuant
to Section 6 of this Agreement, (iii) the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to Section 7(b) of
this Agreement and such determination shall not have been made and delivered in
a written opinion within 90 days after receipt by the Company of the request for
indemnification, or (iv) payment of indemnification is not made pursuant to
Section 5 of this Agreement within ten (10) days after receipt by the Company of
a written request therefor, or (v) payment of indemnification is not made within
ten (10) days after a determination has been made that Indemnitee is entitled to
indemnification or such determination is deemed to have been
5
<PAGE>
made pursuant to Section 7 or 8 of this Agreement, Indemnitee shall be entitled
to an adjudication in an appropriate court of the State of Delaware, or in any
other court of competent jurisdiction of his entitlement to such indemnification
or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek
an award in arbitration to be conducted by a single arbitrator pursuant to the
rules of the American Arbitration Association. Indemnitee shall commence such
proceeding seeking an adjudication or an award in arbitration within 180 days
following the date on which Indemnitee first has the right to commence such
proceeding pursuant to this Section 9(a). The Company shall not oppose
Indemnitee's right to seek any such adjudication or award in arbitration.
(b) In the event that a determination shall have been made
pursuant to Section 7 of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Section 9 shall be conducted in all respects as a de novo trial, or
arbitration, on the merits and Indemnitee shall not be prejudiced by reason of
that adverse determination. If a Change of Control shall have occurred, in any
judicial proceeding or arbitration commenced pursuant to this Section 9 the
Company shall have the burden of proving that Indemnitee is not entitled to
indemnification or advancement of Expenses, as the case may be.
(c) If a determination shall have been made or deemed to have
been made pursuant to Section 7 or 8 of this Agreement that Indemnitee is
entitled to indemnification, the Company shall be bound by such determination in
any judicial proceeding or arbitration commenced pursuant to this Section 9,
absent (i) a misstatement by Indemnitee of a material fact, or an omission of a
material fact necessary to make Indemnitee's statement not materially
misleading, in connection with the request for indemnification, or (ii) a
prohibition of such indemnification under applicable law.
(d) The Company shall be precluded from asserting in any
judicial proceeding or arbitration commenced pursuant to this Section 9 that the
procedures and presumptions of this Agreement are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Company is bound by all the provisions of this Agreement.
(e) In the event that Indemnitee, pursuant to this Section 9,
seeks a judicial adjudication of or an award in arbitration to enforce his
rights under, or to recover damages for breach of, this Agreement, Indemnitee
shall be entitled to recover from the Company, and shall be indemnified by the
Company against, any and all expenses (of the types described in the definition
of Expenses in Section 16 of this Agreement) actually and reasonably incurred by
him in such judicial adjudication or arbitration, but only if he prevails
therein. If it shall be determined in said judicial adjudication or arbitration
that Indemnitee is entitled to receive part but not all of the indemnification
or advancement or expenses sought, the expenses incurred by Indemnitee in
connection with such judicial adjudication or arbitration shall be appropriately
prorated.
6
<PAGE>
Section 10. Non-Exclusivity; Survival of Rights; Insurance; Subrogation.
(a) The rights of indemnification and to receive advancement
of Expenses as provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may at any time be entitled under applicable
law, the Certificate of Incorporation, the By-Laws, any agreement, a vote of
stockholders or a resolution of directors, or otherwise. No amendment,
alteration or termination of this Agreement or any provision hereof shall be
effective as to any Indemnitee with respect to any action taken or omitted by
such Indemnitee in his Corporate Status prior to such amendment, alteration or
termination.
(b) To the extent that the Company maintains an insurance
policy or policies providing liability insurance for directors, officers,
employees, agents or fiduciaries of the Company or of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
which such person serves at the request of the Company, Indemnitee shall be
covered by such policy or policies in accordance with its or their terms to the
maximum extent of the coverage available for any such director, officer,
employee or agent under such policy or policies.
(c) In the event of any payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to
make any payment of amounts otherwise indemnifiable hereunder if and to the
extent that Indemnitee has otherwise actually received such payment under any
insurance policy, contract, agreement or otherwise.
Section 11. Duration of Agreement.
This Agreement shall continue until and terminate upon the later of: (a) 10
years after the date that Indemnitee shall have ceased to serve as a director or
executive officer of the Company (the "Scheduled Termination Date") or (b) the
final termination of all Proceedings pending as of the Scheduled Termination
Date which are brought under Section 9 or in respect of which Indemnitee is
granted rights of indemnification or advancement of Expenses hereunder. This
Agreement shall be binding upon the Company and its successors and assigns and
shall inure to the benefit of Indemnitee and his heirs, executors and
administrators.
Section 12. Severability.
If any provision or provisions of this Agreement shall be held to be invalid,
illegal or unenforceable for any reason whatsoever: (a) the validity, legality
and enforceability of the remaining provisions of this Agreement (including,
without limitation, each portion of any Section of this Agreement containing any
such provision held to be invalid, illegal or unenforceable, that is not itself
invalid, illegal or unenforceable) shall not in any way be affected or impaired
thereby; and (b) to the fullest extent possible, the provisions of this
7
<PAGE>
Agreement (including, without limitation, each portion of any Section of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall be
construed so as to give effect to the intent manifested by the provision held
invalid, illegal or unenforceable.
Section 13. Exception to Right of Indemnification or Advancement of
Expenses.
Notwithstanding any other provision of this Agreement, Indemnitee
shall not be entitled to indemnification or advancement of Expenses under this
Agreement with respect to any Proceeding, or any claim therein, brought or made
by him against the Company.
Section 14. Identical Counterparts.
This Agreement may be executed in one or more counterparts, each of which shall
for all purposes be deemed to be an original but all of which together shall
constitute one and the same Agreement. Only one such counterpart signed by the
party against whom enforceability is sought needs to be produced to evidence the
existence of this Agreement.
Section 15. Headings.
The headings of the paragraphs of this Agreement are inserted for convenience
only and shall not be deemed to constitute part of this Agreement or to affect
the construction thereof.
Section 16. Definitions. For purposes of this Agreement:
(a) "Change in Control" shall be deemed to have occurred after
the date hereof if (i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934 (the "Act")) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Act), directly or
indirectly, of securities of the Company representing 20% or more of the
combined voting power of the Company's then outstanding securities without the
prior approval of at least two-thirds of the members of the Board of Directors
in office immediately prior to such person attaining such persons attaining such
percentage interest; (ii) the Company is a party to a merger, consolidation,
sale of assets or other reorganization, or a proxy contest, as a consequence of
which members of the Board of Directors in office immediately prior to such
transaction or event constitute less than a majority of the Board thereafter; or
(iii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (including for this
purpose any new director whose election or nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the beginning of such
period) cease for any reason to constitute at least a majority of the Board of
Directors.
(b) "Corporate Status" describes the status of a person who is
or was a director, officer, employee, agent or fiduciary of the Company or of
any other corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise which such person is or was serving at the request of the
Company.
(c) "Disinterested Director" means a director of the Company
who is not and
8
<PAGE>
was not a party to the Proceeding in respect of which indemnification is sought
by Indemnitee.
(d) "Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, or being or preparing to be a witness in
a Proceeding.
(e) "Independent Counsel" means a law firm, or a member of a
law firm, that is experienced in matters of corporation law and neither
presently is, nor in the past five (5) years has been, retained to represent:
(i) the Company or Indemnitee in any matter material to either such party, or
(ii) any other party to the Proceeding giving rise to a claim for
indemnification hereunder. Notwithstanding the foregoing, the term "Independent
Counsel" shall not include any person who, under the applicable standards of
professional conduct then prevailing, would have a conflict of interest in
representing either the Company or Indemnitee in an action to determine
Indemnitee's rights under this Agreement.
(f) "Proceeding" includes any action, suit, arbitration,
alternate dispute resolution mechanism, investigation, administrative hearing or
any other proceeding whether civil, criminal, administrative or investigative,
except one initiated by an Indemnitee pursuant to Section 9 of this Agreement to
enforce his rights under this Agreement.
Section 17. Modification and Waiver. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by both
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall waiver constitute a continuing waiver.
Section 18. Notice by Indemnitee. Indemnitee agrees promptly to notify
the Company in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification or advancement of Expenses
covered hereunder.
Section 19. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom said
notice or other communication shall have been directed, or (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:
(a) If to Indemnitee, to:
(Indemnitee)
Advanced Photonix, Inc.
1240 Avenida Acaso
Camarillo, CA 93012
9
<PAGE>
(b) If to the Company, to:
Advanced Photonix, Inc.
1240 Avenida Acaso
Camarillo, CA 93012
Attention: Office of the Secretary
or such other address as may have been furnished to Indemnitee by the Company or
to the Company by Indemnitee, as the case may be.
Section 20. Governing Law. The parties agree that this Agreement
shall be governed by, and construed and enforced in accordance with, the laws of
the State of Delaware.
Section 21. Miscellaneous. Use of the masculine pronoun shall be
deemed to include usage of the feminine pronoun where appropriate.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
ATTEST: ADVANCED PHOTONIX, INC.
By:______________________ By:___________________________
INDEMNITEE
------------------------------
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