##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-K/A
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the fiscal year endedMarch 31,2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period fromto
 1-11056
 ADVANCED PHOTONIX, INC.®
  Delaware
    
    33-0325826(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 2925 Boardwalk
Ann Arbor, Michigan 48104
 (734) 864-5600
 
  
 þ o
  o þ
 o þ




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##### Table of Contents



Balance Sheet
    
    As Reported
    
    RestatedLong-term debt, less current portion
    
    
    6,132,000
    
    
    
    5,002,000Total liabilities
    
    
    13,668,000
    
    
    
    12,538,000Additional paid-in capital
    
    
    40,478,000
    
    
    
    43,581,000Accumulated deficit
    
    
    (16,196,000
    )
    
    
    (18,169,000
    )Total shareholders equity
    
    
    24,301,000
    
    
    
    25,431,000
 Consolidated Statement of Operations
    
    As Reported
    
    RestatedInterest expense, warrant fair value
    
    
    
    
    
    
    (1,978,000
    )Interest expense related to convertible debt
    
    
    (389,000
    )
    
    
    (208,000
    )Income (loss) before provisions for income
taxes
    
    
    (3,437,000
    )
    
    
    (5,234,000
    )Net Income (Loss)
    
    
    (3,465,000
    )
    
    
    (5,262,000
    )Basic earnings (loss) per share
    
    $
    (0.20
    )
    
    $
    (0.30
    )Diluted earnings (loss) per share
    
    $
    (0.20
    )
    
    $
    (0.30
    )
 2




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##### Table of Contents



Balance Sheet
    
    As Reported
    
    RestatedLong-term debt, less current portion
    
    
    4,861,000
    
    
    
    3,834,000Total liabilities
    
    
    8,046,000
    
    
    
    7,019,000Additional paid-in capital
    
    
    27,995,000
    
    
    
    29,198,000Accumulated deficit
    
    
    (12,731,000
    )
    
    
    (12,907,000
    )Total shareholders equity
    
    
    15,277,000
    
    
    
    16,304,000
 Consolidated Statement of Operations
    
    As Reported
    
    RestatedInterest expense, warrant fair value
    
    
    
    
    
    
    (176,000
    )Income (loss) before provisions for income
taxes
    
    
    520,000
    
    
    
    344,000Net Income (Loss)
    
    
    5,254,000
    
    
    
    5,078,000Basic earnings (loss) per share
    
    $
    0.39
    
    
    $
    0.38Diluted earnings (loss) per share
    
    $
    0.34
    
    
    $
    0.33
 3




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 2 PropertiesItem 3. Legal ProceedingsItem 4 Submission of Matters to a Vote of Security HoldersPART IIItem 5 Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesItem 6 Selected Financial DataItem 7 Managements Discussion and Analysis of Financial Condition and Results of OperationItem 7A Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9 Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A Controls and ProceduresItem 9B Other InformationPART IIIItem 10 Directors and Executive OfficersItem 11 Executive CompensationItem 12 Security Ownership of Certain Beneficial Owners and ManagementItem 13 Certain Relationships and Related TransactionsItem 14 Principal Accounting Fees and ServicesPART IVItem 15 Exhibits, Financial Statement SchedulesSIGNATURESEXHIBIT INDEXCertification by Chief Executive Officer to Section 302Certification by Chief Financial Officer to Section 302Statement of Chief Executive Officer to Section 906Statement of Chief Financial Officer to Section 906    Table of Contents  
 PART I
 
 Item 1. Business
 General
 ®
  Products & Technologies
 Our Business
 ®
 4




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Technology & Manufacturing Capabilities
  
    
    Optoelectronic semiconductor design and micro fabrication of Silicon (Si) and III-V
compound semiconductor devices including photodetectors and terahertz transmitters/receiver
antenna,
    
    MBE growth of high-speed III-V compound semiconductor material including GaAs, InAlAs
and InP,
    
    Opto-electronic hybrid packaging of semiconductor devices combining opto-electronic
devices with high-speed electronics and fiber optics,
    
    Vapor deposition and/or ion implantation for Silicon based PIN & APD photo-detectors,
    
    Terahertz (THz) systems, subsystems, transmitters and receivers
    
    Femtosecond laser pulse control and system integration
 Core Products
  
    
    High Speed Optical Receivers (10Gb/s & 40Gb/s) which are packaged InP, InAlAs, or GaAs
PIN and/or APD photodiodes with amplifiers
    
    Packaged PIN and APD photodiodes in Silicon (Si) and III-V materials (InP, InAlAs, GaAs)
    
    Packaged Si APD components, with and without thermo-electric coolers
    
    Packaged Si Large Area Avalanche Photodiode (LAAPD) components
    
    Packaged Si photodiodes with patented FILTRODE® technology integrating optical filters
directly on photodiode chips
    
    Terahertz Systems & subsystems utilizing III-V materials for THz transmitters &/or
receivers
 Terahertz Technology
  5




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Markets
   
    
    Space
    
    Defense
  
    
    Manufacturing
    
    Instrumentation
    
    Display
  
    
    Diagnostic & Monitoring
    
    Ophthalmic Equipment
    
    Medical Imaging
  
    
    Telecom Equipment
    
    Test and Measurement
    
    Wireless Communications Equipment
  
    
    Baggage/Cargo Scanning
    
    Passenger Screening
 Recent Developments
  6




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Raw Materials
  Research and Development
   
    
    The next generation photodiodes and high-speed optical receivers
for both the 10G and 40G telecommunications market
    
    Terahertz  development of the next generation system for homeland
security/military, aerospace and pharmaceutical industrial QC
markets.
    
    Si APD performance enhancements  designed specifically for
certain military and medical imaging applications
    
    Si PIN photodiodes developments to meet unique customer
requirements, such as higher speeds, lower electrical noise, and
unique multi-element geometries.
 7




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Environmental Regulations
  Backlog and Customers
   Marketing
  Competition
   8




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Proprietary Technology
  Patent #
    
    Title
    
    Issue Date142,195
    
    HIGHLY-DOPED P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE  ILLUMINATED PHOTODIODE
    
    Apr-05765,715
    
    HIGHLY-DOPED P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE  ILLUMINATED PHOTODIODE
    
    Jan-042,345,153
    
    HIGHLY-DOPED P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE
    
    Mar-04Jan 1988 (by4,717,946
    
    THIN LINE JUNCTION PHOTODIODE
    
    predecessor co.)Nov 1988 (by4,782,382
    
    HIGH QUANTUM EFFICIENCY PHOTODIODE DEVICES
    
    predecessor co.)5,021,854
    
    SILICON AVALANCHE PHOTODIODE ARRAY
    
    Jun-915,057,892
    
    LIGHT RESPONSIVE AVALANCHE DIODE
    
    Oct-915,146,296
    
    DEVICES FOR DETECTING AND/OR IMAGING SINGLE PHOTOELECTRON
    
    Sep-925,311,044
    
    AVALANCHE PHOTOMULTIPLIER TUBE
    
    May-945,477,075
    
    SOLID STATE PHOTODETECTOR WITH LIGHT RESPONSIVE REAR FACE
    
    Dec-955,757,057
    
    LARGE AREA AVALANCHE ARRAY
    
    May-985,801,430
    
    SOLID STATE PHOTODETECTOR WITH LIGHT RESPONSIVE REAR FACE
    
    Sep-986,005,276
    
    SOLID STATE PHOTODETECTOR WITH LIGHT RESPONSIVE REAR FACE
    
    Dec-996,111,299
    
    ACTIVE LARGE AREA AVLANCHE PHOTODIODE ARRAY
    
    Aug-006,262,465
    
    HIGHLY-DOPED P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE
    
    Jul-016,320,191
    
    A DISPERSIVE PRECOMPENSATOR FOR USE IN AN  ELECTROMAGNETIC RADIATION GENERATION AND DETECTION SYSTEM
    
    Nov-016,816,647
    
    COMPACT FIBER PIGTAILED TERAHERTZ IMAGING SYSTEM
    
    Nov-046,849,852
    
    SYSTEM AND METHOD FOR MONITORING CHANGES IN STATE OF MATTER WITH TERAHERTZ RADIATION
    
    Feb-056,936,821
    
    AMPLIFIED PHOTOCONDUCTIVE GATE
    
    Aug-05
  9




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Employees
  Risk Factors
 Investing in our Class A common stock involves a high degree of risk and uncertainty. You should
carefully consider the risks and uncertainties described below before investing in our Class A
common stock. Our business, prospects, financial condition and results of operations could be
adversely affected due to any of the following risks. In that case, the value of our Class A common
stock could decline, and you could lose all or part of your investment.
 Risks Relating to Our Business
 We are dependent upon several suppliers for a significant portion of raw materials used in the
manufacturing of our products.
  Customer acceptance of our products is dependent on our ability to meet changing requirements.
  10




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We are subject to market risk through our sales to overseas markets.
  
    
    foreign countries could change regulations or impose currency
restrictions and other restraints;
    
    changes in foreign currency exchange rates and hyperinflation or
deflation in the foreign countries in which we operate;
    
    exchange controls;
    
    in some countries, there is a risk that the government may expropriate assets;
    
    some countries impose burdensome tariffs and quotas;
    
    political changes and economic crises may lead to changes in the
business environment in which we operate;
    
    international conflict, including terrorist acts, could significantly
impact our financial condition and results of operations; and
    
    economic downturns, political instability and war or civil
disturbances may disrupt distribution logistics or limit sales in individual
markets.
  Our future performance is dependent upon finding new customers and retaining our existing
customers.
   Customer orders are subject to cancellation or modification at any time.
  11




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The markets for many of our products are characterized by changing technology.
  We are dependent on key in-house manufacturing equipment or processes to deliver a custom product
(solution) with the highest performance and short time to market.
  Changes in the spending priorities of the federal government can materially adversely affect our
business.
  Our industry is highly competitive and fragmented.
  12




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Our industry is sensitive to changing economic conditions.
  We are subject to environmental regulations.
  If we are unable to protect our intellectual property rights adequately, the value of our products
could be diminished.
   We face strong competition for skilled workers.
  13




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We may not be able to successfully integrate future acquisitions, which could result in our not
achieving the expected benefits of the acquisition, the disruption of our business and an increase
in our costs.
   Risks Relating to Our Class A Common Stock
 Our share price has been volatile in the past and may decline in the future.
  
    
    quarterly variations in our operating results;
    
    operating results that vary from the expectations of securities analysts and investors;
    
    changes in expectations as to our future financial performance, including financial
estimates by securities analysts and investors;
    
    announcements of technological innovations or new products by us or our competitors;
    
    announcements by us or our competitors of significant contracts, acquisitions,
strategic partnerships, joint ventures or capital commitments;
    
    changes in the status of our intellectual property rights;
    
    announcements by third parties of significant claims or proceedings against us;
    
    additions or departures of key personnel;
    
    future sales of our ordinary shares; and
    
    stock market price and volume fluctuations.
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Future sales of our Class A common stock in the public market could lower our stock price, and
conversion of our warrants and any additional capital raised by us may dilute your ownership in us.
  Shares eligible for public sale in the future could decrease the price of our Class A common stock
and reduce our future ability to raise capital.
  We do not intend to pay dividends.
  
 Item 2 Properties
  
 Item 3. Legal Proceedings
  
 Item 4 Submission of Matters to a Vote of Security Holders
  15




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PART II
 
 Item 5
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    Quarterly Stock Market Data1st Quarter
    
    
    2nd Quarter
    
    
    3rd Quarter
    
    
    4th Quarter2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Common Stock1High
    
    
    3.09
    
    
    
    3.21
    
    
    
    3.56
    
    
    
    2.57
    
    
    
    3.24
    
    
    
    1.85
    
    
    
    2.97
    
    
    
    2.17Low
    
    
    2.04
    
    
    
    2.02
    
    
    
    2.62
    
    
    
    1.65
    
    
    
    2.39
    
    
    
    1.57
    
    
    
    2.59
    
    
    
    1.64
 
 1
    
    Price ranges on the American Stock Exchange  16




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Item 6 Selected Financial Data
  (in thousands, except per share data)2006
    
    2005Restated
    
    Restated
    
    2004
    
    2003
    
    2002Net Sales
    
    $
    23,585
    
    
    $
    14,803
    
    
    $
    12,401
    
    
    $
    9,147
    
    
    $
    6,931Gross Profit
    
    $
    9,183
    
    
    $
    4,732
    
    
    $
    4,297
    
    
    $
    2,699
    
    
    $
    2,761as a percentage of Sales
    
    
    39
    %
    
    
    32
    %
    
    
    35
    %
    
    
    30
    %
    
    
    40
    %Net Income (Loss)
    
    $
    (5,262
    )
    
    $
    5,078
    
    
    $
    794
    
    
    $
    (803
    )
    
    $
    (284
    )Earnings (Loss) per common
share-Basic
    
    $
    (0.30
    )
    
    $
    0.38
    
    
    $
    0.06
    
    
    $
    (0.06
    )
    
    $
    (0.02
    )Earnings (Loss) per common
share-Diluted
    
    $
    (0.30
    )
    
    $
    0.33
    
    
    $
    0.06
    
    
    $
    (0.06
    )
    
    $
    (0.02
    )Weighted average common shares
outstanding
    
    
    17,477
    
    
    
    13,461
    
    
    
    13,400
    
    
    
    12,356
    
    
    
    12,209Total Assets
    
    $
    38,001
    
    
    $
    23,355
    
    
    $
    12,574
    
    
    $
    11,552
    
    
    $
    9,255Current Liabilities
    
    $
    5,135
    
    
    $
    3,185
    
    
    $
    2,858
    
    
    $
    2,640
    
    
    $
    612Long Term Liabilities
    
    $
    7,403
    
    
    $
    3,834
    
    
    $
    11
    
    
    $
    22
    
    
    $
    Class A redeemable convertible
preferred stock
    
    $
    32
    
    
    $
    32
    
    
    $
    32
    
    
    $
    32
    
    
    $
    32Shareholders Equity
    
    $
    25,431
    
    
    $
    16,304
    
    
    $
    9,673
    
    
    $
    8,858
    
    
    $
    8,611Working Capital
    
    $
    9,330
    
    
    $
    11,261
    
    
    $
    5,802
    
    
    $
    4,811
    
    
    $
    7,461Dividends declared on Capital Stock
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 17




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Item 7 Managements Discussion and Analysis of Financial Condition and Results of
Operation
 Application of Critical Accounting Policies
 Revenue Recognition
 Impairment of Long-Lived Assets
 Deferred Tax Asset Valuation Allowance
 Inventories
 18




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Accounts Receivable and Allowance for Doubtful Accounts
 TABLE OF CONTRACTUAL OBLIGATIONS
  CONTRACTUAL OBLIGATIONS
    
    PAYMENTS DUE BY PERIODTotal
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    More thanRestated
    
    
    
    Within 1 year
    
    
    1  3 years
    
    
    3  5 years
    
    
    5 yearsLong-term debt
    
    
    9,825,000
    
    
    
    
    1,900,000
    
    
    
    6,801,000
    
    
    
    776,000
    
    
    
    348,000Discount on
convertible notes
    
    
    (2,923,000
    )
    
    
    
    (1,560,000
    )
    
    
    (1,363,000
    )Capital lease
obligations
    
    
    27,000
    
    
    
    
    27,000
    
    
    
    
    
    
    
    
    
    
    
    Debt to related
parties
    
    
    2,901,000
    
    
    
    
    500,000
    
    
    
    1,851,000
    
    
    
    550,000
    
    
    
    Subtotal  Balance
Sheet
    
    
    9,830,000
    
    
    
    
    867,000
    
    
    
    7,289,000
    
    
    
    1,326,000
    
    
    
    348,000Operating lease
obligations
    
    
    4,201,000
    
    
    
    
    1,171,000
    
    
    
    2,854,000
    
    
    
    176,000
    
    
    
    Purchase Obligations
    
    
    1,312,000
    
    
    
    
    1,312,000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    15,343,000
    
    
    
    
    3,350,000
    
    
    
    10,143,000
    
    
    
    1,502,000
    
    
    
    348,000
 19




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RESULTS OF OPERATIONS
 Fiscal year 2006 compared to fiscal year 2005
 REVENUES
  Twelve months endedMarch 31,2006
    
    
    March 27, 2005Telecommunications
    
    $
    3,129,000
    
    
    
    13
    %
    
    $
    86,000
    
    
    
    1
    %Industrial Sensing/NDT
    
    
    10,359,000
    
    
    
    44
    %
    
    
    7,360,000
    
    
    
    49
    %Military/Aerospace
    
    
    5,860,000
    
    
    
    25
    %
    
    
    4,875,000
    
    
    
    33
    %Medical
    
    
    2,228,000
    
    
    
    9
    %
    
    
    2,482,000
    
    
    
    17
    %Home Land Security
    
    
    2,009,000
    
    
    
    9
    %
    
    
    
    
    
    
    0
    %Total Revenues
    
    $
    23,585,000
    
    
    
    100
    %
    
    $
    14,803,000
    
    
    
    100
    %
     COSTS AND EXPENSES
  20




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21




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Inventory
  Fiscal year 2005 compared to fiscal year 2004
 REVENUES
   COSTS AND EXPENSES
  22




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LIQUIDITY AND CAPITAL RESOURCES
  23




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1 2
  Debt & Notes Payable
 nd
 nd nd
   ConvertibleConvertible
    
    
    
    
    
    notes notes  Face
    
    Notes
    
    Balance
    
    Conversion
    
    Outstanding
    
    Exercisevalue
    
    Converted
    
    3/31/06
    
    Price
    
    Warrants
    
    PriceRound 1 financing
    
    $
    5,000,000
    
    
    $
    3,475,000
    
    
    $
    1,525,000
    
    
    $
    1.9393
    
    
    
    680,658
    
    
    $
    1.78Round 2 Financing
    
    
    5,000,000
    
    
    
    1,000,000
    
    
    
    4,000,000
    
    
    $
    2.1156
    
    
    
    765,740
    
    
    $
    1.78Total
    
    $
    10,000,000
    
    
    $
    4,475,000
    
    
    $
    5,525,000
    
    
    
    
    
    
    
    1,446,398
 24




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Operating Activities
    Investing Activities
 
 
 
 Financing Activities
  25




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Item 7A Quantitative and Qualitative Disclosures about Market Risk
  FORWARD LOOKING STATEMENTS
  26




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Item 8. Financial Statements and Supplementary Data
  PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    28FINANCIAL STATEMENTS:Consolidated Balance Sheets,As of March 31, 2006 and March 27, 2005
    
    
    29-30Consolidated Statements of Operations for the years ended March 31, 2006, March 27, 2005 and March 28, 2004
    
    
    31Consolidated Statements of Shareholders Equity for the years ended March 31, 2006, March 27, 2005 and March 28, 2004
    
    
    32Consolidated Statements of Cash Flows for the years ended March 31, 2006, March 27, 2005 and March 28, 2004
    
    
    33-35Notes to Consolidated Financial Statements
    
    
    36-59
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    
 28




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ADVANCED PHOTONIX, INC.
CONSOLIDATED BALANCE SHEETS
 March 31, 2006
    
    
    March 27, 2005As of:
    
    Restated
    
    
    RestatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    5,933,000
    
    
    $
    1,503,000Restricted cash
    
    
    
    
    
    
    1,254,000Accounts receivable, net of allowance for
doubtful accounts of $46,000 and $24,000
for March 31, 2006 and March 27, 2005,
respectively.
    
    
    4,387,000
    
    
    
    2,610,000Note receivable from Picometrix
    
    
    
    
    
    
    4,228,000Inventory , less allowance of $2,181,000 in
2006 and $1,032,000 in 2005
    
    
    3,434,000
    
    
    
    3,644,000Prepaid expenses and other current assets
    
    
    711,000
    
    
    
    563,000Deferred tax asset, current portion
    
    
    
    
    
    
    644,000Total current assets
    
    
    14,465,000
    
    
    
    14,446,000Equipment and leasehold improvementsEquipment and leasehold improvements
    
    
    7,923,000
    
    
    
    5,118,000Accumulated depreciation
    
    
    (4,548,000
    )
    
    
    (3,719,000
    )Equipment and leasehold improvements, net
    
    
    3,375,000
    
    
    
    1,399,000Other assetsGoodwill, net of accumulated amortization
of $353,000 for March 31, 2006 and March
27, 2005.
    
    
    4,719,000
    
    
    
    2,421,000Intangibles, net of accumulated
amortization of $1,399,000 and $181,000 for
March 31, 2006 and March 27, 2005,
respectively
    
    
    14,155,000
    
    
    
    481,000Patents, net of accumulated amortization of
$55,000 and $51,000 for March 31, 2006 and
March 27, 2005, respectively
    
    
    16,000
    
    
    
    13,000Patents pending
    
    
    184,000
    
    
    
    Prepaid capital finance expenses, net of
current portion and accumulated
amortization in 2006 and 2005 of $181,000
and $83,000, respectively
    
    
    84,000
    
    
    
    315,000Certificates of deposit
    
    
    275,000
    
    
    
    Security deposits and other assets
    
    
    105,000
    
    
    
    175,000Deferred income taxes
    
    
    623,000
    
    
    
    4,105,000Total other assets
    
    
    20,161,000
    
    
    
    7,510,000Total assets
    
    $
    38,001,000
    
    
    $
    23,355,000
  29




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ADVANCED PHOTONIX, INC.
CONSOLIDATED BALANCE SHEETS  Continued
 March 31, 2006
    
    
    March 27, 2005Restated
    
    
    RestatedLiabilities and shareholders equityCurrent liabilitiesLine of credit
    
    $
    1,000,000
    
    
    $
    1,000,000Accounts payable
    
    
    982,000
    
    
    
    1,053,000Compensation and related withholdings
    
    
    697,000
    
    
    
    529,000Customer deposits
    
    
    1,000
    
    
    
    Deferred income
    
    
    76,000
    
    
    
    271,000Other accrued expenses
    
    
    952,000
    
    
    
    321,000Current portion of long-term debt, related party
    
    
    500,000
    
    
    
    Current portion of long-term debt
    
    
    927,000
    
    
    
    11,000Total current liabilities
    
    
    5,135,000
    
    
    
    3,185,000Long-term debt, less current portion
    
    
    5,002,000
    
    
    
    3,834,000Long-term debt, less current portion  related party
    
    
    2,401,000
    
    
    
    Total liabilities
    
    
    12,538,000
    
    
    
    7,019,000Commitments and contingencies:Class Aredeemable convertible preferred stock,
$.001 par value; 780,000 shares authorized;
2006 and 2005 - 40,000 shares issued and
outstanding; liquidation preference $32,000
    
    
    32,000
    
    
    
    32,000Shareholders equity:Preferredstock, $.001 par value; 10,000,000
shares authorized; 780,000 shares designated
Class A redeemable convertible; 2006 and 2005 -
no shares issued and outstanding
    
    
    
    
    
    
    Class Acommon stock, $.001 par value,
50,000,000 authorized; 2006 - 18,885,006 shares
issued and outstanding, 2005 - 13,512,631
shares issued and outstanding.
    
    
    19,000
    
    
    
    13,000Class Bcommon stock, $.001 par value;
4,420,113 shares authorized, 2006 and 2005 -
31,691 issued and outstanding.
    
    
    
    
    
    
    Additional paid-in capital
    
    
    43,581,000
    
    
    
    29,198,000Accumulated deficit
    
    
    (18,169,000
    )
    
    
    (12,907,000
    )Total shareholders equity
    
    
    25,431,000
    
    
    
    16,304,000Total liabilities and shareholders equity
    
    $
    38,001,000
    
    
    $
    23,355,000
  30




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ADVANCED PHOTONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 For the years ended March 31, 2006, March 27, 2005
    
    2006
    
    2005and March 28, 2004
    
    Restated
    
    Restated
    
    2004Sales, net
    
    $
    23,585,000
    
    
    $
    14,803,000
    
    
    $
    12,401,000Cost of products sold
    
    
    14,402,000
    
    
    
    10,071,000
    
    
    
    8,104,000Gross profit
    
    
    9,183,000
    
    
    
    4,732,000
    
    
    
    4,297,000Research and development expenses
    
    
    3,019,000
    
    
    
    146,000
    
    
    
    280,000Sales and marketing expenses
    
    
    1,930,000
    
    
    
    1,214,000
    
    
    
    1,009,000General and administrative expenses
    
    
    4,157,000
    
    
    
    2,508,000
    
    
    
    2,087,000Amortization expense
    
    
    1,403,000
    
    
    
    117,000
    
    
    
    78,000Amortization Capital finance expense
    
    
    387,000
    
    
    
    81,000
    
    
    
    Goodwill impairment expense
    
    
    814,000
    
    
    
    
    
    
    
    Total operating expenses
    
    
    11,710,000
    
    
    
    4,066,000
    
    
    
    3,454,000Income (loss) from operations
    
    
    (2,527,000
    )
    
    
    666,000
    
    
    
    843,000Other income (expense):Interest income
    
    
    43,000
    
    
    
    43,000
    
    
    
    20,000Interest expense
    
    
    (322,000
    )
    
    
    (13,000
    )
    
    
    (30,000
    )Interest expense related to convertible notes
    
    
    (208,000
    )
    
    
    (141,000
    )
    
    
    Interest expense, warrant discount
    
    
    (1,978,000
    )
    
    
    (176,000
    )
    
    
    Interest expense, related party
    
    
    (206,000
    )
    
    
    
    
    
    
    Other income (expense)
    
    
    (36,000
    )
    
    
    (35,000
    )
    
    
    (34,000
    )Income (Loss) before provision (benefit) for income taxes
    
    
    (5,234,000
    )
    
    
    344,000
    
    
    
    799,000Provision (benefit) for income taxes
Provision (benefit) for income taxes  current
    
    
    28,000
    
    
    
    18,000
    
    
    
    12,000Provision (benefit) for income taxes  deferred
    
    
    
    
    
    
    (4,752,000
    )
    
    
    (7,000
    )Total provision (benefits) for income taxes
    
    
    28,000
    
    
    
    (4,734,000
    )
    
    
    5,000Net income (loss)
    
    $
    (5,262,000
    )
    
    $
    5,078,000
    
    
    $
    794,000Basic earnings (loss) per share
    
    $
    (0.30
    )
    
    $
    0.38
    
    
    $
    0.06Diluted earnings (loss) per share
    
    $
    (0.30
    )
    
    $
    0.33
    
    
    $
    0.06Weighted average common shares outstanding
    
    
    17,477,000
    
    
    
    13,461,000
    
    
    
    13,400,000
  31




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ADVANCED PHOTONIX, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 Class A
    
    Class BFor the years ended March 31,
    
    Common Stock
    
    Common Stock
    
    Additional Paid-
    
    Accumulated2006, March 27, 2005 and March 28,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    in Capital
    
    Deficit2004
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Restated
    
    Restated
    
    TotalBALANCE AT MARCH 30, 2003
    
    
    13,369,258
    
    
    $
    13,000
    
    
    
    31,691
    
    
    $
    
    
    
    $
    27,625,000
    
    
    $
    (18,780,000
    )
    
    $
    8,858,000Exercise of Options
    
    
    77,801
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,000
    
    
    
    
    
    
    
    67,000Shares issued to acquire TOI assets
    
    
    (50,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46,000
    )
    
    
    
    
    
    
    (46,000
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    794,000
    
    
    
    794,000BALANCE AT MARCH 28, 2004
    
    
    13,397,059
    
    
    
    13,000
    
    
    
    31,691
    
    
    
    
    
    
    
    27,646,000
    
    
    
    (17,986,000
    )
    
    
    9,673,000Exercise of Options
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    1,000Shares issued to acquire PDI
    
    
    113,572
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    207,000
    
    
    
    
    
    
    
    207,000Discount on note payable (fair
value of detachable warrants
issued)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,344,000
    
    
    
    
    
    
    
    1,344,000Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,078,000
    
    
    
    5,078,000BALANCE AT MARCH 27, 2005
    
    
    13,512,631
    
    
    
    13,000
    
    
    
    31,691
    
    
    
    
    
    
    
    29,198,000
    
    
    
    (12,907,000
    )
    
    
    16,304,000Exercise of Options
    
    
    266,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    272,000
    
    
    
    
    
    
    
    272,000Notes Conversions
    
    
    2,264,560
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    4,473,000
    
    
    
    
    
    
    
    4,476,000Shares issued for interest
    
    
    11,069
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,000
    
    
    
    
    
    
    
    21,000Discount on note payable (fair
value of detachable warrants
issued)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,732,000
    
    
    
    
    
    
    
    3,732,000Warrants exercised
    
    
    255,246
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    454,000
    
    
    
    
    
    
    
    454,000Shares issued to acquire Picometrix
    
    
    2,575,000
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    5,431,000
    
    
    
    
    
    
    
    5,434,000Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,262,000
    )
    
    
    (5,262,000
    )BALANCE AT MARCH 31, 2006
    
    
    18,885,006
    
    
    $
    19,000
    
    
    
    31,691
    
    
    $
    
    
    
    $
    43,581,000
    
    
    $
    (18,169,000
    )
    
    $
    25,431,000
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ADVANCED PHOTONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the years ended March 31, 2006, March 27, 2005 and March 28,
    
    2006
    
    20052004
    
    Restated
    
    Restated
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
    
    $
    (5,262,000
    )
    
    $
    5,078000
    
    
    $
    794,000Adjustment to reconcile net income (loss) to net cash provided by
(used in) operating activitiesDepreciation
    
    
    829,000
    
    
    
    369,000
    
    
    
    328,000Amortization
    
    
    1,790,000
    
    
    
    198,000
    
    
    
    78,000Disposal of fixed assets
    
    
    
    
    
    
    56,000
    
    
    
    39,000Goodwill impairment charges
    
    
    814,000
    
    
    
    
    
    
    
    Amortization, convertible note discount
    
    
    1978,000
    
    
    
    176,000
    
    
    
    Provision for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    (36,000
    )Provision for obsolete inventory
    
    
    821,000
    
    
    
    
    
    
    
    70,000Provision for warranty expense
    
    
    
    
    
    
    15,000
    
    
    
    Increase (decrease) in deferred tax valuation allowance
    
    
    
    
    
    
    (4,749,000
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (712,000
    )
    
    
    71,000
    
    
    
    (176,000
    )Inventories
    
    
    137,000
    
    
    
    (291,000
    )
    
    
    307,000Prepaid expenses and other current assets
    
    
    (355,000
    )
    
    
    (193,000
    )
    
    
    27,000Prepaid acquisition costs
    
    
    
    
    
    
    (134,000
    )
    
    
    (17,000
    )Prepaid capital finance expenses
    
    
    
    
    
    
    (398,000
    )
    
    
    Other assets
    
    
    158,000
    
    
    
    
    
    
    
    Accounts payable
    
    
    (336,000
    )
    
    
    428,000
    
    
    
    (73,000
    )Customer deposit liability
    
    
    
    
    
    
    (477,000
    )
    
    
    Accrued expenses
    
    
    (645,000
    )
    
    
    79,000
    
    
    
    (125,000
    )Net cash provided by (used in) operating activities
    
    
    (783,000
    )
    
    
    228,000
    
    
    
    1,216,000CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures
    
    
    (263,000
    )
    
    
    (193,000
    )
    
    
    (298,000
    )Patent expenditures
    
    
    (191,000
    )
    
    
    
    
    
    
    Short term investments
    
    
    
    
    
    
    1,700,000
    
    
    
    (300,000
    )Change in restricted cash
    
    
    1,254,000
    
    
    
    (1,254,000
    )
    
    
    Cash acquired through acquisition of Photonic Detectors, Inc.
    
    
    
    
    
    
    44,000
    
    
    
    Cash acquired through acquisition of Picotronix, Inc.
    
    
    678,000
    
    
    
    
    
    
    
    Cash paid for Picotronix, Inc acquisition
    
    
    (3,500,000
    )
    
    
    
    
    
    
    Cash paid for acquisition related costs
    
    
    (936,000
    )
    
    
    
    
    
    
    Purchase of outstanding shares of Photonic Detectors, Inc.
common stock
    
    
    
    
    
    
    (1,117,000
    )
    
    
    Loan to Picometrix, Inc.
    
    
    
    
    
    
    (4,228,000
    )
    
    
    Intangible assets acquired
    
    
    
    
    
    
    
    
    
    
    (10,000
    )Purchase of selected net assets of Silicon Sensors, LLC
    
    
    
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (2,958,000
    )
    
    
    (5,048,000
    )
    
    
    (608,000
    )
  33




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ADVANCED PHOTONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS  Continued
 For the years ended March 31, 2006, March 27, 2005 and
    
    2006
    
    2005March 28, 2004
    
    Restated
    
    Restated
    
    2004CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Photonic Detectors, Inc. line of credit
    
    
    
    
    
    
    (78,000
    )
    
    
    Advanced Photonix, Inc. secured term loan
    
    
    1,950,000
    
    
    
    (900,000
    )
    
    
    (300,000
    )Advanced Photonix, Inc. revolving line of credit (asset-based)
    
    
    
    
    
    
    1,000,000
    
    
    
    Payments on notes payable
    
    
    119,000
    
    
    
    
    
    
    
    Proceeds from private placement of convertible note
    
    
    5,000,000
    
    
    
    5,000,000
    
    
    
    Proceeds from sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    23,000Proceeds from MEDC term loan
    
    
    600,000
    
    
    
    
    
    
    
    Proceeds from exercise of warrants
    
    
    455,000
    
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    47,000
    
    
    
    2,000
    
    
    
    66,000Net cash provided by (used in) financing activities
    
    
    8,171,000
    
    
    
    5,024,000
    
    
    
    (211,000
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    4,430,000
    
    
    
    204,000
    
    
    
    397,000CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    1,503,000
    
    
    
    1,299,000
    
    
    
    902,000CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    5,933,000
    
    
    $
    1,503,000
    
    
    $
    1,299,000
  Supplemental disclosure of cash flow information:
 2006
    
    2005
    
    2004Cash paid for interest
    
    $
    623,000
    
    
    $
    153,000
    
    
    $
    30,000Cash paid for income taxes
    
    $
    17,000
    
    
    $
    19,000
    
    
    $
    5,000
 Supplemental disclosure of non-cash operating, investing and financing activities:
 Picometrix acquisition in FY 2006Assets acquired
    
    $
    19,404,000Liabilities assumed
    
    
    (2,406,000
    )Net assets acquired
    
    
    16,998,000Cash Paid
    
    
    (3,500,000
    )Broker fees and other direct costs
    
    
    (936,000
    )12,562,000Non-cash investing activities:Common stock issued
    
    
    (5,433,000
    )Note payable  related
    
    
    (2,901,000
    )Picometrix note retired
    
    
    (4,228,000
    )Net balance
    
    $
    
  34




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35




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##### Table of Contents



ADVANCED PHOTONIX, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    Summary of the Company and Significant Accounting PoliciesBusiness Description Advanced Photonix, Inc. (the Company or API), is a leading
supplier of custom opto-electronic solutions, high-speed optical receivers and Terahertz
sensors and instrumentation, serving a variety of global Original Equipment Manufacturer
(OEM) markets including telecommunications, military/aerospace, industrial sensing/NDT,
medical and homeland security. Our optoelectronic solutions are based on our silicon Large
Area Avalanche Photodiode (LAAPD), PIN photodiode and FILTRODE® detectors. Our patented
high-speed optical receivers include Avalanche Photodiode technology (APD) and PIN
(positive-intrinsic-negative) photodiode technology based upon III-V materials, including
InP, InAlAs, and GaAs. Our newly emerging Terahertz sensor product line is targeted to the
industrial non-destructive testing (NDT), quality control, homeland security and military
markets. Using our patented fiber coupled technology and high speed Terahertz generation
and detection sensors, we are engaged in transferring Terahertz technology from the
application development laboratory to the factory floor. We have three manufacturing
facilities, one in Camarillo, CA, one in Dodgeville, WI and one in Ann Arbor, MI.The Companys wholly owned subsidiary, Silicon Sensor, Inc. (SSI) (see Note 9 
Acquisitions), manufactures silicon photodiodes and optoelectronic devices in a
manufacturing facility in Dodgeville, Wisconsin.The Companys wholly owned subsidiary, Texas Optoelectronics, Inc. (TOI) (see Note 9 
Acquisitions), manufactured optoelectronic devices in a facility in Garland, Texas. The
Company shut down the Garland facility in May 2003 and relocated the TOI assets to the
Companys facilities in Dodgeville, Wisconsin and Camarillo, California.In December 2004 the Company acquired all of the outstanding shares of Photonic Detectors,
Inc. (PDI) (see Note 9  Acquisitions), PDI manufactured optoelectronic devices in a
facility in Simi Valley, California. The acquired facility was shut down in March 2005 and
all assets were merged into the operations in Dodgeville, Wisconsin and Camarillo,
California.In May 2005 the Company acquired all the outstanding shares of Picotronix, Inc. through the
merger of Picotronix, Inc. (doing business as and referred to herein as Picometrix), a
Michigan corporation, with and into Michigan Acquisition Sub, LLC (Newco), a Delaware
limited liability company and a wholly-owned subsidiary of the Company, pursuant to an
Agreement and Plan of Merger dated March 8, 2005 by and among the Company, Newco, Picometrix
and Robin Risser and Steven Williamson, the stockholders of Picometrix. Immediately
following the effective time of the merger, the name of Newco was changed to Picometrix, LLC
and continues its operations in Ann Arbor, Michigan.Principles of Consolidation- The consolidated financial statements include the financial
statements of the Company and its wholly owned subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.ReclassificationsCertain prior year balances have been reclassified in the consolidated
financial statements to conform to the current year presentation. Sales in the automotive
market, which were $698,000 and $838,000 in FY 2006 and FY 2005, respectively, are now
classified with Industrial/NDT market.
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##### Table of Contents



Fiscal Year-End With the fiscal 2006 year-end, the Companys fiscal year ends on the last
calendar day in
March. Prior fiscal years ended on the last Sunday of March. As a result of this change,
fiscal year ended March 31, 2006 contains fifty-three weeks. The prior two fiscal years
ending March 27, 2005 and March 28, 2004 contain fifty-two weeks each.Operating Segment Information The Company predominantly operates in one industry segment,
light and radiation detection devices.Significant Accounting PoliciesPervasiveness of Estimates- The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.Revenue Recognition The Company recognizes revenues upon shipment. Provision for
estimated losses, if any, is made in the period in which such losses are determined.Revenues from research and development cost reimbursement-type contracts are recorded as
costs are incurred based upon the relationship between actual incurred costs, total
estimated costs and the amount of the contract or grant award. Estimation of cost is
reviewed periodically and any anticipated losses are recognized in the period in which they
first become determinable.Warranties The Company typically warrants its products against defects in material and
workmanship. Custom opto products shipped from the California and Wisconsin facilities are
warranted for a period of 90 days from the date of shipment. Optical receiver and Terahertz
products shipped from the Michigan facility are warranted for a period of 1 year from the
date of shipment.Fair Value of Financial Instruments The carrying value of all financial instruments
potentially subject to valuation risk (principally consisting of cash equivalents, accounts
receivable, accounts payable, notes receivable and notes payable) approximates fair value
based upon prevailing interest rates available to the Company.Cash and Cash Equivalents The Company considers all highly liquid investments, with an
original maturity of three months or less when purchased, to be cash equivalents.As of March 31, 2006, the Company held $4.0 million in a short-term Master Hold-in-Custody
Repurchase agreement with a major California bank. Repurchase agreements are not considered
a bank deposit, and are therefore not insured by the FDIC. These funds are backed by
securities owned by Pacific Capital Bank, N.A. and are held in a safekeeping account.
Current interest earned on this short-term investment range from 4-5 %. The investment
period ranges from 7-30 days.Restricted Cash- As a condition of the Senior Convertible Note (see note 14), the Company
established a cash collateral account with a bank and a control agreement with a collateral
agent. The agreement grants the holder of the note a first priority-perfected interest in
the account. Conditioned upon certain defined events and permitted acquisitions; the
collateral agent may release the funds to the Company. In May 2005 (see note 9) the Company
concluded a permitted acquisition allowing for the release of the restricted funds.Accounts Receivable.Receivables are stated at amounts estimated by management to be the net
realizable value. The allowance is based on specific identification. Accounts receivable are
charged off when it becomes apparent based upon age or customer circumstances that such
amounts will not be collected.
Collateral is not typically required, nor is interest charged on accounts receivable
balances.
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Accounts receivable are unsecured and the Company is at risk to the extent such amount
becomes uncollectible. The Company performs periodic credit evaluations of its customers
financial condition and generally does not require collateral. As of March 31, 2006, one
customer comprised 14% of accounts receivable. As of March 27, 2005, one customer comprised
22% of accounts receivable. As of March 28, 2004, two customers comprised 14% and 13%,
respectively, of accounts receivable. As of March 31, 2006, the Company had 18 customers
with balances over 90 days.Inventories Inventories, which include material, labor and manufacturing overhead, are
stated at standard cost (which approximates the first in, first out method) or market. Slow
moving and obsolete inventories are reviewed throughout the year. To calculate a reserve for
obsolescence, we begin with a review of our slow moving inventory. Any inventory, which has
been slow moving within the past 12 months, is evaluated and reserved if deemed appropriate.
In addition, any residual inventory, which is customer specific and remaining on hand at
the time of contract completion, is reserved for at the standard unit cost. The complete
list of slow moving and obsolete inventory is then reviewed by the production, engineering
and/or purchasing departments to identify items that can be utilized in the near future.
These items are then excluded from the analysis and the remaining amount of slow-moving and
obsolete inventory is then reserved for. Additionally, non-cancelable open purchase orders
for parts we are obligated to purchase where demand has been reduced may be reserved.
Reserves for open purchase orders where the market price is lower than the purchase order
price are also established. If a product that had previously been reserved for is
subsequently sold, the amount of reserve specific to that item is then reversed.Concentration of CreditRisk Financial instruments, which potentially subject the Company
to concentrations of credit risk, consist principally of cash equivalents and trade accounts
receivable. The Company maintains cash balances at five financial institutions that are
insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. As of March 31,
2006, the Company had cash at three financial institutions in excess of federally insured
amounts. As excess cash is available, the Company invests in short-term and long-term
investments, primarily consisting of Government Securities Money Market instruments, and
Repurchase agreements. For fiscal years 2006, 2005 and 2004, cash deposits held at
financial institutions in excess of FDIC insured amounts were as follows:
 2006
    
    
    2005
    
    
    2004$
    1,433,000
    
    
    $
    2,421,000
    
    
    $
    1,013,000
 Significant Customer
 Shipping and Handling Costs 
 Equipment and Leasehold Improvements
 Intangible Assets
 Intangible Assets
 38




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##### Table of Contents



Patents
 Impairment of Long-Lived Assets Goodwill and Intangible Assets
 Research and Development Costs
 Accounting for Stock Option Based Compensation
 2.
    
    Restatement for changes in Accounting for Convertible Securities with a Beneficial
Conversion FeatureIn accordance with guidance issued by the Financial Accounting Standards Board and the
Emerging Issues Task Force regarding Accounting for Convertible Securities with a Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios, the Company recognized an
embedded beneficial conversion feature present in the Convertible Note. In its original
calculation, the debt discount calculated by the valuation of the beneficial conversion
feature and the attached warrants was less than the revised calculations. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature to
additional paid-in capital. The Company recognized and measured an aggregate of $3,165,000
of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion
feature, to additional paid-in capital and a discount against the Convertible Notes.In connection with the placement of the Convertible Notes in October 2004, September 2005
and March 2006, the Company issued detachable warrants granting the holders the right to
acquire 1,446,398 shares of the Companys common stock at $1.78 per share. The warrants
expire five years from the date of registration. In accordance with Emerging Issues Task
Force Issue 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments (EITF
-0027), the Company recognized the value attributable to the warrants in the amount of
$1,881,000 to additional paid-in capital and a discount against the Convertible
 39




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##### Table of Contents



Notes. The
Company valued the warrants in accordance with EITF 00-27 using the Black-Scholes pricing
model and the following assumptions: contractual terms of 5 years, an average risk free
interest rate of 4.9%, a dividend yield of 0%, and volatility of 72%, 52% and 52%,
respectively.The debt discount attributed to the beneficial conversion feature and value of the warrants
issued is amortized over the Convertible Notes maturity period (three year) as interest
expense. In Q2 & Q3 of FY 2006, $3,475,000 and $1,000,000, respectively of the Convertible
Notes were converted to the Companys common stock, and accordingly, that portion of the
un-amortized debt discount was charged to interest expense. Additionally, in FY 2006, the
un-amortized debt discount of $331,000 on the warrants associated with the convertible notes
was charged to interest expense.The Company recorded non-cash interest expense in the amount of $1,978,000 during
fiscal year 2006 as compared to $176,000 recorded in fiscal year 2005.The changes to the Balance Sheet and Statement of Operations as of and for the year
ended March 31, 2006 are as follows:
 Balance Sheet
    
    As Reported
    
    
    RestatedLong-term debt, less current
portion
    
    
    6,132,000
    
    
    
    5,002,000Total liabilities
    
    
    13,668,000
    
    
    
    12,538,000Additional paid-in capital
    
    
    40,478,000
    
    
    
    43,581,000Accumulated deficit
    
    
    (16,196,000
    )
    
    
    (18,169,000
    )Total shareholders equity
    
    
    24,301,000
    
    
    
    25,431,000
 Consolidated Statement of Operations
    
    As Reported
    
    
    RestatedInterest expense, warrant fair value
    
    
    
    
    
    
    (1,978,000
    )Interest expense related to convertible debt
    
    
    (389,000
    )
    
    
    (208,000
    )Income (loss) before provisions for income taxes
    
    
    (3,437,000
    )
    
    
    (5,234,000
    )Net Income (Loss)
    
    
    (3,465,000
    )
    
    
    (5,262,000
    )Basic earnings (loss) per share
    
    $
    (0.20
    )
    
    $
    (0.30
    )Diluted earnings (loss) per share
    
    $
    (0.20
    )
    
    $
    (0.30
    )
  AsBalance Sheet
    
    Reported
    
    
    RestatedLong-term debt, less current portion
    
    
    4,861,000
    
    
    
    3,834,000Total liabilities
    
    
    8,046,000
    
    
    
    7,019,000Additional paid-in capital
    
    
    27,995,000
    
    
    
    29,198,000Accumulated deficit
    
    
    (12,731,000
    )
    
    
    (12,907,000
    )Total shareholders equity
    
    
    15,277,000
    
    
    
    16,304,000
 40




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##### Table of Contents



AsConsolidated Statement of Operations
    
    Reported
    
    
    RestatedInterest expense, warrant fair value
    
    
    
    
    
    
    (176,000
    )Income (loss) before provisions for income taxes
    
    
    520,000
    
    
    
    344,000Net Income (Loss)
    
    
    5,254,000
    
    
    
    5,078,000Basic earnings (loss) per share
    
    $
    0.39
    
    
    $
    0.38Diluted earnings (loss) per share
    
    $
    0.34
    
    
    $
    0.33
 3.
    
    InventoriesInventories consist of the following at March 31, 2006 and March 27, 2005
 2006
    
    
    2005Raw material
    
    $
    4,288,000
    
    
    $
    3,129,000Work-in-process
    
    
    937,000
    
    
    
    1,245,000Finished products
    
    
    390,000
    
    
    
    302,000Total inventories
    
    
    5,615,000
    
    
    
    4,676,000Less reserve
    
    
    (2,181,000
    )
    
    
    (1,032,000
    )Inventories, net
    
    $
    3,434,000
    
    
    $
    3,644,000
 Inventory Adjustments  FY 2006
  FY 2006 Inventory Adjustments
 Increase in provision for slow moving/excess/obsolete inventory
    
    $
    698,000Write-off obsolete-slow moving inventory from acquisitions
(PDI/TOI)
    
    
    123,000Subtotal  obsolete inventory
    
    
    821,000Scrap inventory
    
    
    159,000Reduction in material standards
    
    
    118,000Inventory shrinkage
    
    
    53,000Subtotal  Other
    
    
    330,000Total inventory reduction
    
    $
    1,151,000
 4.
    
    Equipment and Leasehold ImprovementsEquipment and leasehold improvements consist of the following at March 31, 2006 and March
27, 2005:
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##### Table of Contents



2006
    
    
    2005Machinery and equipment
    
    $
    6,133,000
    
    
    $
    3,795,000Furniture and fixtures
    
    
    516,000
    
    
    
    154,000Leasehold improvements
    
    
    394,000
    
    
    
    294,000Data processing equipment
    
    
    439,000
    
    
    
    322,000Vehicles
    
    
    26,000
    
    
    
    26,000Capitalized software
    
    
    401,000
    
    
    
    382,000Construction-in-process
    
    
    14,000
    
    
    
    68,000Assets held for sale or disposal
    
    
    0
    
    
    
    77,000Total assets
    
    
    7,923,000
    
    
    
    5,118,000Accumulated depreciation
    
    
    (4,548,000
    )
    
    
    (3,719,000
    )Net plant, property & equipment
    
    
    
    
    
    
    $
    3,375,000
    
    
    $
    1,399,000
  5.
    
    Intangible Assets and GoodwillIntangible Assets-In October 2004 the Company entered into a definitive agreement for
$5,000,000 of senior convertible notes, (see note 14). In connection with the agreement
costs of approximately $646,000 were incurred which are being amortized over the 36-month
term of the agreement or expensed when the notes are converted. In March 2006, the
amortization of prepaid capital finance expense was accelerated to reflect the portion of
the convertible notes that were converted during the year. The remaining balance of
$217,000 will be amortized at approximately $11,400 per month over the remaining life of the
notes.In December 2004 the Company acquired Photonic Detectors, Inc. (see note 10). The Company
recorded an intangible asset of $635,000, which represents the excess of cost over fair
value of net assets. This intangible asset is associated with the value of the acquired
customer list. The intangible asset is being amortized over a period of 60 months beginning
January 2005. Monthly amortization is $10,000 per month. Each year the Company evaluates the
present value of future cash flows associated with the list. Any impairment would be
recognized when the expected future operating cash flows from such intangible assets is less
than their carrying value.In May 2005 the Company completed the acquisition of Picotronix, Inc., dba Picometrix, Inc.
The Company recorded intangible assets of $14,920,000, which represents the excess of cost
over fair value of net assets. These intangible assets are associated with the value of the
acquired non-compete agreement, customer list, trademarks, R&D contacts, and
technology/patents. These intangible assets are being amortized over their various
estimated useful lives up to 15 years. Amortization is $116,200 per month.Intangible assets that have definite lives consist of the following (in thousands):
 Weighted
    
    
    March 31, 2006

    
    
    
    
    
    March 27, 2005Average
    
    
    Carrying
    
    
    Accumulated
    
    
    Intangibles
    
    
    Carrying
    
    
    Accumulated
    
    
    IntangiblesLives
    
    
    Value
    
    
    Amortization
    
    
    Net
    
    
    Value
    
    
    Amortization
    
    
    NetNon-Compete
agreement
    
    
    15
    
    
    $
    130
    
    
    $
    38
    
    
    $
    92
    
    
    $
    225
    
    
    $
    194
    
    
    $
    31Customer list
    
    
    3
    
    
    
    825
    
    
    
    170
    
    
    
    655
    
    
    
    635
    
    
    
    32
    
    
    
    603Trademarks
    
    
    15
    
    
    
    2,270
    
    
    
    135
    
    
    
    2,135
    
    
    
    
    
    
    
    
    
    
    
    
 42




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##### Table of Contents



March 31, 2006
    
    
    
    
    
    
    March 27, 2005WeightedAverage
    
    
    Carrying
    
    
    Accumulated
    
    
    Intangibles
    
    
    Carrying
    
    
    Accumulated
    
    
    IntangiblesLives
    
    
    Value
    
    
    Amortization
    
    
    Net
    
    
    Value
    
    
    Amortization
    
    
    NetR&D contracts
    
    
    15
    
    
    
    1,380
    
    
    
    82
    
    
    
    1,298
    
    
    
    
    
    
    
    
    
    
    
    Patents
    
    
    
    
    
    
    70
    
    
    
    54
    
    
    
    16
    
    
    
    63
    
    
    
    50
    
    
    
    13Patents pending
    
    
    
    
    
    
    184
    
    
    
    
    
    
    
    184Technology
    
    
    10
    
    
    
    10,950
    
    
    
    975
    
    
    
    9,975
    
    
    
    
    
    
    
    
    
    
    
    Total Intangibles
    
    
    11.4
    
    
    $
    15,809
    
    
    $
    1,454
    
    
    $
    14,355
    
    
    $
    923
    
    
    $
    276
    
    
    $
    647
    Intangible Assets
    
    
    Patents2007
    
    $
    1,522,000
    
    
    2007
    
    $
    4,1002008
    
    
    1,521,000
    
    
    2008
    
    
    2,4002009
    
    
    1,486,000
    
    
    2009
    
    
    1,4002010
    
    
    1,453,000
    
    
    2010
    
    
    9002011
    
    
    1,361,000
    
    
    2011
    
    
    9002012 & after
    
    
    6,812,000
    
    
    2012 & after
    
    
    6,100Total
    
    $
    14,155,000
    
    
    Total
    
    $
    15,800
  Impairment of Goodwill Goodwill and other Intangible Assets,
 6.
    
    Foreign SalesIn fiscal 2006, 2005 and 2004, the Company had export sales of approximately $2.1 million,
$2.5 million and $1.2 million, respectively, made primarily to customers in North America,
Asia and Europe.All foreign sales are denominated in U.S. dollars. Sales to specific
countries, stated as a percentage of total sales, consist of the following:
 2006
    
    2005
    
    2004Australia
    
    
    1
    %
    
    
    
    
    
    
    Canada
    
    
    
    
    
    
    2
    %
    
    
    Japan
    
    
    
    
    
    
    2
    %
    
    
    Spain
    
    
    
    
    
    
    5
    %
    
    
    United Kingdom
    
    
    4
    %
    
    
    2
    %
    
    
    4
    %All other countries
    
    
    4
    %
    
    
    6
    %
    
    
    6
    %Total export sales
    
    
    9
    %
    
    
    17
    %
    
    
    10
    %
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##### Table of Contents



7.
    
    Advertising Expense Advertising costs are expensed as incurred. Advertising expense was
approximately $133,000, $84,000 and $57,000 in fiscal 2006, 2005 and 2004, respectively.
 8.
    
    WarrantiesWarranty costs were approximately $23,000, $15,000 and $0 in fiscal 2006, 2005
and 2004, respectively.
 9.
    
    Net Income (Loss) Per Share Net income (loss) per share calculations are in accordance with
SFAS No. 128, Earnings per Share. Accordingly, basic earnings (loss) per share are computed
by dividing net income (loss) by the weighted average number of shares outstanding for each
year. . The impact of Statement 128 on the calculation of earnings per share is as follows:
 2006
    
    2005Restated
    
    Restated
    
    2004BASICAverage Shares Outstanding
    
    
    17,477,000
    
    
    
    13,461,000
    
    
    
    13,400,000Net Income (Loss)
    
    $
    (5,262,000
    )
    
    $
    5,078,000
    
    
    $
    794,000Basic Income (Loss) Per Share
    
    $
    (0.30
    )
    
    $
    0.38
    
    
    $
    0.06DILUTEDAverage Shares Outstanding
    
    
    17,477,000
    
    
    
    13,461,000
    
    
    
    13.400.000Net Effect of Shares Issuable
pursuant to terms of convertible
note, based on a weighted average
    
    
    1,476,000
    
    
    
    1,176,000
    
    
    
    Net Effect of Dilutive Stock
Options and Warrants based on the
treasury stock method using average
market price
    
    
    2,666,000
    
    
    
    962,000
    
    
    
    562,000Total Shares
    
    
    21,619,000
    
    
    
    15,599,000
    
    
    
    13,962,000Net Income (Loss), adjusted for
interest expense on convertible
note (net of tax)
    
    $
    (4,873,000
    )
    
    $
    5,128,000
    
    
    $
    794,000Diluted Earnings Per Share
    
    anti dilutive
    
    $
    0.33
    
    
    $
    0.06Average Market Price of Common Stock
    
    $
    2.82
    
    
    $
    2.18
    
    
    $
    1.57Ending Market Price of Common Stock
    
    $
    2.71
    
    
    $
    2.11
    
    
    $
    2.05
  2006
    
    2005
    
    2004No. Shares
    
    
    
    
    
    No. Shares
    
    
    
    
    
    No. SharesExercise Price
    
    Underlying
    
    Exercise Price
    
    Underlying
    
    Exercise Price per
    
    Underlyingper Share
    
    Options
    
    per Share
    
    Options
    
    Share
    
    Options2.8700
    
    
    
    3,750
    
    
    
    2.2500
    
    
    
    35,400
    
    
    
    1.8750
    
    
    
    64,0002.8900
    
    
    
    10,000
    
    
    
    2.5000
    
    
    
    27,700
    
    
    
    2.5000
    
    
    
    27,7003.0940
    
    
    
    1,000
    
    
    
    3.0940
    
    
    
    1,000
    
    
    
    3.0940
    
    
    
    1,0003.1875
    
    
    
    350,000
    
    
    
    3.1875
    
    
    
    350,000
    
    
    
    3.1875
    
    
    
    350,0005.3440
    
    
    
    50,000
    
    
    
    5.3440
    
    
    
    50,000
    
    
    
    5.3440
    
    
    
    50,000Total
    
    
    414,750
    
    
    Total
    
    
    464,100
    
    
    Total
    
    
    492,700
 44




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##### Table of Contents



10.
    
    AcquisitionsIn August 2002, SSI, a newly formed wholly-owned subsidiary of the Company, purchased
substantially all of the assets and selected liabilities of Silicon Sensors LLC, a
closely-held manufacturer of opto-electronic semiconductor based components located in
Dodgeville, Wisconsin. The financial purchase price was $1.7 million in cash, plus the
assumption of the Sellers trade accounts payable and accrued liabilities, amounting to
approximately $282,000.In January 2003, the Company purchased all of the issued and outstanding shares of common
stock of TOI, a privately owned custom manufacturer of opto-electronic components and
assemblies. The purchase price was 1,009,110 shares of API Class A Common Stock (issued at
$0.92 per share) and repayment of a debt of TOI in the amount of $1.2 million representing
principal and interest.In December 2004, the Company purchased all of the issued and outstanding shares of common
stock of PDI, a privately owned manufacturer of opto-electronic components and assemblies
located in Simi Valley, California. The purchase price was 113,572 shares of API Class A
Common Stock (issued at $1.82 per share) plus $1.1 million in cash and the assumption of the
sellers trade accounts payable, accrued liabilities, and bank line of credit amounting to
approximately $259,000. In addition, the purchase agreement contains a contingent purchase
price during the five year contract period following the closing date upon which the Company
shall pay the seller an amount equal to 20% of incremental sales as defined, subject to
specific sales targets being met. The Company incurred $42,000 of expenses in connection
with this acquisition. The Company has closed the Simi Valley location and integrated its
business into the Camarillo, California and Dodgeville, Wisconsin facilities. In connection
with the transaction, the Company recorded a $635,000 intangible asset (Customer List)
which it will amortize over a 5 year period, beginning January 2005. A summary of the
assets and liabilities acquired at fair market value is as follows:
 Assets AcquiredCash
    
    $
    44,000Accounts receivable
    
    
    239,000Inventories
    
    
    423,000Prepaid & other assets
    
    
    3,000Furniture and equipment
    
    
    239,000Customer list
    
    
    635,000Total Assets Acquired
    
    $
    1,583,000Liabilities Assumed
Accounts payable
    
    
    ($159,000
    )Accrued salaries
    
    
    (22,000
    )Bank line of credit
    
    
    (78,000
    )Total Liabilities
    
    $
    (259,000
    )Total Purchase price
    
    $
    1,324,000
  45




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##### Table of Contents



Business Combinations
    FY2006
    
    Adjusted FY2006Assets acquiredCash and cash equivalents
    
    $
    678,000
    
    
    
    678,000Accounts receivable
    
    
    1,065,000
    
    
    
    1,065,000Inventories
    
    
    748,000
    
    
    
    748,000Prepaid expenses and other current assets
    
    
    98,000
    
    
    
    98,000
 46




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##### Table of Contents



FY2006
    
    Adjusted FY2006Net fixed assets
    
    
    2,458,000
    
    
    
    2,541,000Goodwill
    
    
    
    
    
    
    3,111,000Customer list
    
    
    178,000
    
    
    
    190,000Non-compete agreement
    
    
    122,000
    
    
    
    130,000Trademarks
    
    
    2,128,000
    
    
    
    2,270,000R&D contracts
    
    
    1,294,000
    
    
    
    1,380,000Technology/patents
    
    
    10,265,000
    
    
    
    10,950,000Deposits and other assets
    
    
    370,000
    
    
    
    370,000Total assets acquired
    
    $
    19,404,000
    
    
    
    23,531,000Liabilities assumedAccounts payable
    
    $
    (265,000
    )
    
    $
    (265,000
    )Capital lease payable
    
    
    (89,000
    )
    
    
    (89,000
    )Other accrued expenses
    
    
    (874,000
    )
    
    
    (874,000
    )Notes payable
    
    
    (877,000
    )
    
    
    (877,000
    )Deferred revenue and deposits
    
    
    (301,000
    )
    
    
    (301,000
    )Deferred tax liability
    
    
    
    
    
    
    (4,127,000
    )Total liabilities assumed
    
    $
    (2,406,000
    )
    
    $
    (6,533,000
    )Net assets acquired
    
    $
    16,998,000
    
    
    $
    16,998,000
 11.
    
    CapitalizationThe Companys Certificate of Incorporation provides for two classes of common stock, a Class A
for which 50,000,000 shares are authorized for issuance and a Class B for which 4,420,113
shares are authorized for issuance. The par value of each class is $.001. Subject to certain
limited exceptions, shares of Class B Common Stock are automatically converted into an
equivalent number of Class A shares upon the sale or transfer of the Class B Common Stock by
the original holder. The holder of each share of Class A and Class B Common Stock is entitled
to one vote per share.The Company has authorized 10,000,000 shares of Preferred Stock, of which 780,000 shares have
been designated Class A Redeemable Convertible Preferred Stock with a par value of $.001 per
share. 40,000 shares of Class A Redeemable Convertible Preferred Stock (Class A Preferred)
were issued and outstanding at March 31, 2006. The Class A Preferred Stock has a liquidation
preference equal to its issue price ($.80 per share) and is convertible at any time, at the
option of the holder, into .3 shares of Class B Common Stock for each share of Class A
Preferred Stock converted. The Class A Preferred Stock is subject to redemption at the
Companys option for $.80 per share at any time. The Company would be required to pay
approximately $25,000 to redeem these shares. The holders of the Class A Preferred Stock are
entitled to an annual non-cumulative dividend preference of $.072 per share when the Companys
net earnings per share of Class A Preferred Stock equals or exceed $.072. The Class A
Preferred stockholders do not have voting rights except as required by applicable law.12.
    
    Income TaxesAt March 31, 2006, the Company had net operating loss carry forwards (NOLs) of approximately
$23 million for Federal income tax purposes and $4 million for state income tax purposes that
expire at various dates
 47




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##### Table of Contents



through fiscal year 2026. The tax laws related to the utilization of
loss carry forwards are complex and the amount of the Companys loss carry forward that will
ultimately be available to offset future taxable income may be subject to annual limitations
under IRC Section 382 resulting from changes in the ownership of the Companys common
stock.The tax effects of temporary differences that gave rise to significant portions of the
deferred tax assets at March 27, 2005 were substantially composed of the Companys net
operating loss carry forwards for which the Company had made a deferred tax asset valuation
allowance of $4.7 million based upon the acquisition of both Photonic Detectors Inc. in
December 2004 and Picometrix, Inc. in May 2005. Based upon the FY 2006 results, the Company
management has projected that the Company will generate sufficient future taxable income to
utilize some of the carry-forwards that expire by 2009.Realization of the deferred tax asset is dependent upon generating sufficient taxable income
prior to expiration of any NOLs. Although realization is not assured, management believes it
is more likely than not that the recorded deferred asset will be realized. Accordingly the
Company has increased the deferred tax asset valuation allowance to $5.7 million at March 31,
2006. In addition, the Company has reduced the deferred tax asset by the deferred tax
liability of $ 3.5 million from the Picometrix acquisition.The ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment.The tax provision for the year ended March 31, 2006 is composed of the Wisconsin state income
tax. The tax provision for the year ended March 27, 2005 was composed of Wisconsin state
income tax and the minimum California franchise tax and reversal of the deferred tax asset
valuation allowance. The tax provision for the year ended March 28, 2004 was composed of
Wisconsin state income tax and the minimum California franchise tax.Below are reconciliations between the provisions for income taxes compared with the amounts at
the United States federal statutory rate:
 Years Ended
    
    March 31, 2006
    
    March 27, 2005
    
    March 28, 2004Federal income tax at statutory rates
    
    
    (1,173,000
    )
    
    
    177,000
    
    
    
    272,000State income taxes, net of federal benefit
    
    
    (194,000
    )
    
    
    39,000
    
    
    
    45,000Amortization of Goodwill
    
    
    
    
    
    
    
    
    
    
    (1,400
    )Utilization of NOL Carryforwards
    
    
    307,000
    
    
    
    (211,000
    )
    
    
    (161,000
    )Change in valuation allowance
    
    
    967,000
    
    
    
    (4,749,000
    )
    
    
    (150,000
    )Other
    
    
    121,000
    
    
    
    10,000
    
    
    
    1,000Effective federal income tax
    
    
    28,000
    
    
    
    (4,734,000
    )
    
    
    5,000
  Federal
    
    StateCurrent
    
    
    
    
    
    
    Long Term
    
    
    623,000
    
    
    
    623,000
    
    
    
    
 48




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##### Table of Contents



2006
    
    2005Sec. 263A adjustment
    
    
    36,000
    
    
    
    59,000Accrued bonus
    
    
    
    
    
    
    63,000Inventory reserve
    
    
    719,000
    
    
    
    409,000Utility accruals
    
    
    7,000
    
    
    
    7,000Warranty reserve
    
    
    25,000
    
    
    
    13,000Accounts receivable allowance
    
    
    16,000
    
    
    
    9,000Accrued vacation
    
    
    90,000
    
    
    
    77,000Charitable contributions
    
    
    4,000
    
    
    
    NOL Carryforwards
    
    
    7,865,000
    
    
    
    8,217,000Accumulated amortization
    
    
    163,000
    
    
    
    32,000Accumulated depreciation
    
    
    (50,000
    )
    
    
    (149,000
    )R&D credits
    
    
    675,000
    
    
    
    721,000Goodwill amortization
    
    
    322,000
    
    
    
    California Mfg. credit
    
    
    39,000
    
    
    
    40,000Other
    
    
    2,000
    
    
    
    Total
    
    
    9,913,000
    
    
    
    9,498,000Valuation allowance
    
    
    (5,717,000
    )
    
    
    (4,749,000
    )Deferred tax liability  Picometrix acquisition
    
    
    (3,573,000
    )
    
    
    Net deferred tax asset
    
    
    623,000
    
    
    
    4,749,000
  Federal
    
    
    CaliforniaAmount
    
    
    Expiration
    
    
    Amount
    
    
    Expiration$
    3,171,670
    
    
    March 21, 2007
    
    $
    2,071,225
    
    
    March 31, 20072,226,072
    
    
    March 31, 2008
    
    
    82,141
    
    
    March 31, 20133,816,200
    
    
    March 31, 2009
    
    
    973,927
    
    
    March 31, 20141,947,320
    
    
    March 31, 2010
    
    
    471,220
    
    
    March 31, 201530,267
    
    
    March 31, 2011
    
    
    287,371
    
    
    March 31, 20161,548,581
    
    
    March 31, 2012599,421
    
    
    March 31, 2013250,133
    
    
    March 31, 20196,096,005
    
    
    March 31, 202082,471
    
    
    March 31, 20211,868,504
    
    
    March 31, 202250
    
    
    March 31, 2022846,957
    
    
    March 31, 2023753,118
    
    
    March 31, 20231,500
    
    
    March 31, 20241,500
    
    
    March 31, 20258,368
    
    
    March 31, 2026$
    23,248,137
    
    
    
    
    
    
    $
    3,885,884
 49




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##### Table of Contents



Amount
    
    
    Expiration$
    111,773
    
    
    March 31, 200640,963
    
    
    March 31, 200780,385
    
    
    March 31, 200866,489
    
    
    March 31, 200917,847
    
    
    March 31, 201063,832
    
    
    March 31, 201134,245
    
    
    March 31, 201216,737
    
    
    March 31, 2018168,399
    
    
    March 31, 20199,217
    
    
    March 31, 2020100,338
    
    
    March 31, 202187,020
    
    
    March 31, 202299,925
    
    
    March 31, 202382,575
    
    
    March 31, 2024143,990
    
    
    March 31, 2025140,000
    
    
    March 31, 2026$
    1,263,735
 13.
    
    Stock Options & WarrantsThe 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 the greater of the
underlying stock at the date of grant. Had compensation expense for these plans been
determined consistent with SFAS No. 123, the Companys net income (loss) and net income
(loss) per share would be as follows:
 2006
    
    2005Restated
    
    Restated
    
    2004Net Income (loss) , as reported
    
    $
    (5,262,000
    )
    
    $
    5,078,000
    
    
    $
    794,000Net income (loss), proforma
    
    $
    (5,409,000
    )
    
    $
    5,032,000
    
    
    $
    723,000Basic income (loss) per share, as reported
    
    $
    (0.30
    )
    
    $
    0.38
    
    
    $
    0.06Basic income (loss) per share, proforma
    
    $
    (0.30
    )
    
    $
    0.38
    
    
    $
    0.05
   50




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##### Table of Contents



Weight Average ExerciseShares (000)
    
    
    PriceOutstanding, March 28, 2004
    
    
    1,961
    
    
    $
    1.39Granted
    
    
    401
    
    
    $
    1.88Exercised
    
    
    (2
    )
    
    $
    0.65Expired
    
    
    (5
    )
    
    $
    1.86Outstanding, March 27, 2005
    
    
    2,355
    
    
    $
    1.47Exercisable, March 27, 2005
    
    
    1,776
    
    
    $
    1.48Outstanding, March 27, 2005
    
    
    2,355
    
    
    $
    1.47Granted
    
    
    871
    
    
    $
    2.23Exercised
    
    
    (267
    )
    
    $
    1.08Expired
    
    
    
    
    
    
    Outstanding, March 31, 2006
    
    
    2,959
    
    
    $
    1.74Exercisable, March 31, 2006
    
    
    2,025
    
    
    $
    1.64
  Options Outstanding(in 000s)
    
    Weighted Average
    
    Weighted AveragePrice Range
    
    Shares
    
    Exercise Price
    
    Remaining Life$0.50 - $1.25
    
    
    1,769
    
    
    $
    0.77
    
    
    
    3.62$1.50 - $2.50
    
    
    741
    
    
    $
    2.09
    
    
    
    6.75$2.87 - $5.34
    
    
    449
    
    
    $
    3.39
    
    
    
    6.49
 Options Exercisable(in 000s)
    
    Weighted Average
    
    Weighted AveragePrice Range Shares
    
    Shares
    
    Exercise Price
    
    Remaining Life$0.50 - $1.25
    
    
    1,096
    
    
    $
    0.76
    
    
    
    3.38$1.50 - $2.50
    
    
    514
    
    
    $
    2.05
    
    
    
    5.22$2.87 - $5.34
    
    
    415
    
    
    $
    3.44
    
    
    
    5.00
  (in 000s)
    
    
    
    
    
    Remaining LifeShares
    
    Exercise Price
    
    (in yrs)681
    
    $
    1.78
    
    
    
    4.7766
    
    $
    1.78
    
    
    
    5.5
 14.
    
    Line of Credit/Short Term DebtThe Company has a revolving line of credit from a regional bank, which provides for
borrowings up to $3.0 million. The line allows for borrowings on 80% of eligible accounts
receivable and 40% on eligible inventory, as defined, limited to $1.5 million. All business
assets of the Company secure the line. Repayment is interest only, monthly, with principal
due at maturity, November 3, 2006. Interest is computed at the Wall Street Journal Prime
plus 1/2% with a floor rate of 6.5%. The prime interest rate was 7.75% at March 31, 2006.
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15.
    
    Debt & Notes PayableIn October 2004, the Company entered into a definitive agreement for the private placement
to four institutional investors of $5 million aggregate principal amount of its senior
convertible notes. The original Securities
Purchase Agreement was filed with the Securities and Exchange Commission on October 12,
2004. The notes are convertible at the option of the holder under
certain circumstances into shares of the Companys
 Class A Common Stock at an initial conversion price of $1.9393 per
share, subject to adjustment. The notes pay interest at an annual rate of prime plus 1% and
will mature on October 12, 2007. At the time of the closing of the private placement, $2.5
million of the purchase price for the notes was being held in a cash collateral account
subject to release upon satisfaction of certain conditions specified in the purchase
agreement. The original conditions of release provided for $1.25 million to be eligible for
release if the Company had entered into a definitive agreement for a permitted acquisition
on or before January 31, 2005. Subsequently, any balance remaining in the cash collateral
account, up to the full $2.5 million, would be released upon the Companys consummation of a
permitted acquisition on or before March 31, 2005. Letters of agreement between API and the
investors dated March 9, 2005 modified the original terms. The modified terms provide for
$1.25 million to be released upon entry into a definitive agreement for a permitted
acquisition on or before March 11, 2005 and for the remaining funds to be released upon the
consummation of that acquisition on or before May 1, 2005. A permitted acquisition is
defined in the Securities Purchase Agreement as the purchase by the Company of an entity
with (1) EBITDA of not less than $750,000 during the twelve months immediately preceding the
acquisition and (2) revenues of not less than $4.0 million during the twelve months
immediately preceding the acquisition. Since Photonic Detectors, Inc. did not qualify as a
permitted acquisition no funds were released as a result of completing that transaction.
However, $1.25 million was released in March 2005, upon signing an Agreement and Plan of
Merger with Picometrix, Inc. and $1.25 million remained as restricted cash in the cash
collateral account at March 27, 2005. The remaining amount of restricted cash was released
to the Company in May 2005, upon the completion of the acquisition of Picometrix, Inc.In connection with the transaction, the Company had issued to the investors five-year
warrants to purchase 850,822 shares of the Companys Class A Common Stock at an exercise
price of $2.1156 per share, subject to adjustment. The Company has
agreed to register the shares of common stock issuable upon conversion of the notes and upon exercise of the
warrants for resale under the Securities Act of 1933. The investors have the option for a
period of one year following effectiveness of the registration statement to acquire an
additional $5 million aggregate principal amount of the notes with an initial conversion
price of $2.1156 per share and five-year warrants purchasing an additional 850,822 shares of
common stock. The original terms of the warrants issued and, the additional warrants to
be issued, in the private placement to the investors were also modified on March 9, 2005 to
reduce the exercise price from $2.1156 per share of Class A Common Stock of API to $1.78 per
share (see Note 20 Subsequent Events). Similarly, on March 9, 2005, the terms of the
notes issued in connection with the private placement (the Notes) were modified to (i)
provide that the interest rate shall not be less than 6.5% at any time and (ii) increase the
amount of Permitted Indebtedness (as such term is defined in the Notes) from $3 million to
$6 million and (iii) decrease the amount of Permitted Acquisition Indebtedness (as such
term is defined in the Notes) from $6 million to $3 million. In addition, the investors in
the private placement agreed to subordinate, pursuant to a form of subordination agreement
in form and substance reasonable satisfactory to them, (i) the principal and interest
payments on the Notes to the Permitted Bank Debt (as such term is defined in the letters
of agreement) and (ii) their liens on the Companys assets to any lien granted by the
Company as security for the Permitted Bank Debt.In accordance with APB 14, the Company has recorded a discount to the note of $1,344,000
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
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##### Table of Contents



related documents were filed with the Securities and
Exchange Commission on October 12, 2004 on Form 8-K, and the foregoing summary is qualified
in its entirety by reference thereto.During FY2006 $3.475 million of the $5 million Convertible debt (Convertible Debt 1st
Tranche) was converted into 1,792,000 shares leaving a Convertible Debt 1st Tranche balance
of $1,296,000 (net of discount) at March 31, 2006. In addition, 170,164 of the warrants were
converted and the Company received $299,490 in cash. At March 31, 2006 the balance of
unexercised warrants was 680,658.In September 2005, the Company issued $1.0 million of convertible debt with warrants to
purchase 170,164 shares of common stock (Convertible Debt 2nd Tranche). The
Company originally valued the warrants and recorded an increase to additional
paid-in-capital amounting to $27,000. Subsequently the Company determined that the
beneficial conversion option and the warrants should have been valued
using the Intrinsic Value approach. Accordingly, the
Company recognized a $1.0 million debt discount on the
$1.0 million principal value of the convertible note payable and
the debt discount is amortized over the life of the note. The note was converted in November 2005 into 472,678
shares of Class A common stock. In addition, 85,082 of the warrants were converted and the
Company received $151,446 in cash. At March 31, 2006 the balance of unexercised warrants was
85,082.In March 2006, the Company issued $4.0 million of convertible debt (Convertible Debt
2nd
Tranche) with warrants to purchase 680,658 shares of common stock.
The Company originally valued the warrants and recorded an increase
to additional-paid-in-capital mounting to $1.8 million. subsequently, the
Company determined that the beneficial conversion options and
warrants should have been valued using the Intrinsic
Value approach. Accordingly, the Company
recognized a $2.7 million debt discount on the $4.0 million principal value of the
convertible note payable and is amortizing the debt discount to interest expense over the
life of the note. At March 31, 2006 the Convertible Debt 2nd Tranche was
$1.3 million (net of the debt discount).In May 2005, the Company borrowed $2.7 million from a regional bank (term loan). The loan
is guaranteed by all of the Companys, and its subsidiaries, assets excluding Picometrix LLC
intellectual property. Repayment is principal of $75,000 per month, plus interest, until
maturity on May 2, 2008. Interest is computed at the Wall Street Journal Prime plus 1% with
a ceiling of 7.75% and a floor of 6%. The prime interest rate was 7.75% as of March 31,
2006.The Michigan Economic Development Corporation (MEDC) entered into two loan agreements with
Picometrix LLC, one in 2004 (MEDC-loan 1) and one in 2005 (MEDC-loan 2). Both loans are
unsecured. MEDC-loan 1 is for an amount up to $1,024,000 with an interest rate of 7% and is
fully amortized by the end of an eight (8) year period (ending on September 15, 2012).
Interest is accrued during the first four years, but not paid, after which time principle
plus accrued interest is paid over the remaining four years. On September 15, 2004 the
Company borrowed $750,000 against the $1.0 million.MEDC-loan 2 is for an amount up to $1.2 million with an interest rate of 7% and is fully
amortized by the end of a six (6) year period (ending on September 15, 2011). Interest is
accrued during the first two years and paid ratably over the third year. Beginning in the
fourth year principle and accrued interest is paid over the remaining three years. On
September 15, 2005 the Company borrowed $600,000 against the $1.2 million.As a result of the acquisition of Picotronix, Inc. (dba Picometrix), the stockholders of
Picometrix received four-year API promissory notes in the aggregate principal amount of $2.9
million (Debt to Related Parties). The notes are payable in four annual installments with
the first being a payment of $500,000 due May 2006, the second being a payment of $550,000,
the third being a payment of $900,000 and the fourth being a payment of $950,500. The notes
bear an interest rate of prime plus 1.0% and are secured by all of the intellectual property
of Picometrix. API has the option of prepaying the API Notes without penalty.
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Debt Maturity Table (in 000s)
 Balance3/31/06
    
    
    FY2007
    
    
    FY2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    FY2012Restated
    
    
    Restated
    
    
    Restated
    
    
    FY2009
    
    
    FY2010
    
    
    FY2011
    
    
    & BeyondBank Term Loan
SBB&T
    
    $
    1,950
    
    
    $
    900
    
    
    $
    900
    
    
    $
    150Credit Line SBB&T
    
    
    1,000
    
    
    
    1,000MEDC- loan 1
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    109
    
    
    
    188
    
    
    
    188
    
    
    
    265MEDC  loan 2
    
    
    600
    
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    200
    
    
    
    200
    
    
    
    83Convertible Debt
1st
Tranche
    
    
    1,525
    
    
    
    
    
    
    
    1,525Discount on
convertible note
1st
    
    
    (229
    )
    
    
    (144
    )
    
    
    (85
    )Convertible Debt
2nd
Tranche
    
    
    4,000
    
    
    
    
    
    
    
    4,000Discount on
convertible notes
2nd
    
    
    (2,694
    )
    
    
    (1,416
    )
    
    
    (1,278
    )Debt to Related
Parties
    
    
    2,901
    
    
    
    500
    
    
    
    550
    
    
    
    900
    
    
    
    951Capital leases
    
    
    27
    
    
    
    27TOTAL
    
    $
    9,830
    
    
    $
    867
    
    
    $
    5,612
    
    
    $
    1,276
    
    
    $
    1,339
    
    
    $
    388
    
    
    $
    348
 16.
    
    Related Party TransactionsAs a result of the acquisition of Picotronix, Inc. (dba Picometrix), the stockholders of
Picometrix received four-year API promissory notes in the aggregate principal amount of $2.9
million (Debt to Related Parties). The notes are payable in four annual installments with
the first being a payment of $500,000 due May 2006, the second being a payment of $550,000,
the third being a payment of $900,000 and the fourth being a payment of $950,500. The notes
bear an interest rate of prime plus 1.0% and are secured by all of the intellectual property
of Picometrix. API has the option of prepaying the API Notes without penalty. On March 31,
2006 the remaining balance on the notes was $2.9 million and paid $206,000 to the note
holders in FY2006. Note holders include Robin Risser and Steve Williamson, the Companys CFO
and CTO respectively.17.
    
    Capitalized Lease obligationsThe Company has a capitalized lease obligation, which provides for monthly payments of $889.
The lease matures October 2007 and is collateralized by certain equipment with a net book
amount of approximately $27,000. Future payments on the lease obligations are as follows:
 2007
    
    $
    27,000Less interest
    
    
    (2,300
    )Present value of net minimum lease payments
    
    
    24,700
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##### Table of Contents



18.
    
    Commitments & contingenciesThe Company leases its manufacturing and office facilities and certain office equipment
under non-cancelable operating leases. Minimum future lease payments under all
non-cancelable operating leases expiring at various dates through fiscal 2011 are as
follows:
 2007
    
    $
    1,171,0002008
    
    
    1,115,0002009
    
    
    1,035,0002010
    
    
    704,0002011
    
    
    176,000Total
    
    $
    4,201,000
   19.
    
    LegalThe Company is, from time to time, subject to legal and other matters in the normal course
of its business. While the results of such matters cannot be predicted with certainty,
management does not believe that the final outcome of any pending matters will have a
material effect on the financial position and results of operations of the Company.20.
    
    Employees Retirement PlanThe Company maintains a 401(k) Plan which is qualified under the Internal Revenue Code. All
full-time employees are eligible to participate in the Plan. Employees may make voluntary
contributions to the Plan, which is matched by the Company at the rate of $1.00 for every
$1.00 of employee contribution up to 3% of wages, and $.50 for every $1.00 of employee
contributions on the next 2% of wages, subject to certain limitations. Employer
contributions are fully vested when earned. The Company contributions and administration
costs recognized as expense were approximately $181,000, $62,000 and $71,000 in fiscal 2006,
2005 and 2004, respectively.21.
    
    Subsequent EventsOn June 2, 2006 the Company announced the resignation of Paul Ludwig as a member of the
Board of Directors and President of Advanced Photonix, Inc. Richard Kurtz CEO and Chairman
of the Board assumed the responsibility of President.22.
    
    New Accounting PronouncementsIn December 2004, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), Share-Based
Payment (SFAS No. 123R) which replaces SFAS No. 123, supersedes Accounting
Principles Board (APB) No. 25 and related
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interpretations and amends SFAS No. 95,
Statement of Cash Flows. The provisions of SFAS No. 123R are similar to those of SFAS
No. 123; however, SFAS No. 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial statement
as compensation cost based on their fair value on the date of the grant. The fair value
of the share-based awards will be determined using an option-pricing model on the grant
date. SFAS No. 123R is effective at the beginning of the first fiscal year beginning
after June 15, 2005. The Company will adopt SFAS No. 123R in the first quarter of
fiscal 2007. The adoption of SFAS No. 123R in the first quarter of 2007 is not
expected to have a material impact on the Companys
financial statements, although the future impact of the adoption of SFAS No. 123R is
dependent upon the future issuance of stock option grants that will be determined by the
Companys Compensation Committee.In November 2004, the FASB issued SFAS No. 151, Inventory CostsAn Amendment of Accounting
Research Bulletin No. 43, Chapter 4 (SFAS No. 151). SFAS No. 151 clarifies that abnormal
amounts of idle facility expense, freight, handling costs and spoilage should be expensed as
incurred and not included in overhead. The provisions in SFAS No. 151 must be applied
prospectively to the Companys inventory costs incurred after January 1, 2006. The adoption
of SFAS No. 151 is not expected to have an impact on the Companys financial statements.In March 2005, the FASB issued FASB Interpretation No. (FIN) 47, Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143.
This Interpretation clarifies that the term conditional asset retirement activity in which
the timing and (or) method of settlement are conditional on a future event that may or may
not be within the control of the entity. The obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing and (or) method of
settlement. Accordingly, an entity is required to recognize a liability for the fair value
of a conditional asset retirement obligation if the fair value of the liability can be
reasonably estimated. The adoption of FIN 47 in fiscal 2006 did not have a material effect
on the Companys financial statements.In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Correctionsa
Replacement of APB No. 20 and SFAS No. 3. SFAS No. 154 changes the requirements for the
accounting for, and reporting of, a change in accounting principle. Previously, voluntary
changes in accounting principles were generally recognized by way of a cumulative effect
adjustment within net earnings during the period of change. SFAS No. 154 requires
retrospective application to prior period financial statements, unless it is impracticable
to determine either the period-special effects or the cumulative effect of the change. SFAS
No. 154 is effective for accounting changes made in fiscal years beginning after December
15, 2005; however, the statement does not change the transition provisions of any existing
accounting pronouncements. The Company does not believe the adoption of SFAS No. 154 will
have a material effect on its financial statements.In October 2005, the FASB issued FSP FAS 13-1, Accounting for Rental Costs Incurred during
a Construction Period, which addresses the accounting for rental costs associated with
operating leases that are incurred during a construction period. This FSP requires that
rental costs associated with ground or building operating leases incurred during a
construction period be recognized as rental expense and included in income from continuing
operations. The guidance in this FSP shall be applied to the first reporting period
beginning after December 15, 2005, with early adoption permitted. The Company does not
believe the adoption of SFAS No. 154 will have a material effect on its financial
statements.23.
    
    Quarterly Financial DataThe table below lists financial information (unaudited) by quarter for each of the three
fiscal years ending March 31, 2006, March 27, 2005, and March 28, 2004.
 56




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##### Table of Contents



First
    
    Second
    
    Third
    
    Fourth
    
    Total Year2006 (Restated)Net Sales
    
    $
    5,077,000
    
    
    $
    5,194,000
    
    
    $
    6,511,000
    
    
    $
    6,803,000
    
    
    $
    23,585,000Cost of Sales
    
    
    2,929,000
    
    
    
    3,070,000
    
    
    
    3,513,000
    
    
    
    4,890,000
    
    
    
    14,402,000Gross Profit
    
    
    2,148,000
    
    
    
    2,124,000
    
    
    
    2,998,000
    
    
    
    1,913,000
    
    
    
    9,183,000Research &
Development
Expenses
    
    
    452,000
    
    
    
    795,000
    
    
    
    836,000
    
    
    
    936,000
    
    
    
    3,019,000Selling, General &
Administrative
Expenses
    
    
    1,669,000
    
    
    
    1,969,000
    
    
    
    1,902,000
    
    
    
    3,151,000
    
    
    
    8,691,000Net Income (Loss)
    
    $
    (236,000
    )
    
    $
    (1,624,000
    )
    
    $
    (886,000
    )
    
    $
    (2,516,000
    )
    
    $
    (5,262,000
    )Basic Income (Loss)
per Common Share
    
    $
    (0.02
    )
    
    $
    (0.09
    )
    
    $
    (0.05
    )
    
    $
    (0.13
    )
    
    $
    (0.30
    )Diluted Income
(Loss) per Common
Share
    
    anti-dilutive
    
    anti-dilutive
    
    anti-dilutive
    
    anti-dilutive
    
    anti-dilutiveWeighted Average
Common Shares
Outstanding
    
    
    15,133,000
    
    
    
    17,252,000
    
    
    
    18,563,000
    
    
    
    18,882,000
    
    
    
    17,477,0002005 (Restated)Net Sales
    
    $
    3,253,000
    
    
    $
    3,709,000
    
    
    $
    3,852,000
    
    
    $
    3,989,000
    
    
    $
    14,803,000Cost of Sales
    
    
    1,956,000
    
    
    
    2,451,000
    
    
    
    2,832,000
    
    
    
    2,832,000
    
    
    
    10,071,000Gross Profit
    
    
    1,297,000
    
    
    
    1,258,000
    
    
    
    1,020,000
    
    
    
    1,157,000
    
    
    
    4,732,000Research &
Development
Expenses
    
    
    42,000
    
    
    
    37,000
    
    
    
    33,000
    
    
    
    34,000
    
    
    
    146,000Selling, General &
Administrative
Expenses
    
    
    902,000
    
    
    
    982,000
    
    
    
    870,000
    
    
    
    1,166,000
    
    
    
    3,920,000Net Income (Loss)
    
    $
    347,000
    
    
    $
    260,000
    
    
    $
    (43,000
    )
    
    $
    4,514,000
    
    
    $
    5,078,000Basic Income (Loss)
per Common Share
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.33
    
    
    $
    0.38Diluted Income
(Loss) per Common
Share
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.30
    
    
    $
    0.33Weighted Average
Common Shares
Outstanding
    
    
    13,431,000
    
    
    
    13,431,000
    
    
    
    13,437,000
    
    
    
    13,544,000
    
    
    
    13,461,0002004Net Sales
    
    $
    2,647,000
    
    
    $
    3,256,000
    
    
    $
    2,933,000
    
    
    $
    3,565,000
    
    
    $
    12,401,000Cost of Sales
    
    
    1,774,000
    
    
    
    2,131,000
    
    
    
    1,895,000
    
    
    
    2,304,000
    
    
    
    8,104,000Gross Profit
    
    
    873,000
    
    
    
    1,125,000
    
    
    
    1,038,000
    
    
    
    1,261,000
    
    
    
    4,297,000Research &
Development
Expenses
    
    
    78,000
    
    
    
    80,000
    
    
    
    32,000
    
    
    
    90,000
    
    
    
    280,000Selling, General &
Administrative
Expenses
    
    
    684,000
    
    
    
    819,000
    
    
    
    756,000
    
    
    
    915,000
    
    
    
    3,174,000Net Income (Loss)
    
    $
    113,000
    
    
    $
    225,000
    
    
    $
    255,000
    
    
    $
    201,000
    
    
    $
    794,000Basic & Diluted
Income (Loss) per
Common Share
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.06Weighted Average
Common Shares
Outstanding
    
    
    12,247,000
    
    
    
    13,449,000
    
    
    
    13,458,000
    
    
    
    13,479,000
    
    
    
    13,400,000
 57




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##### Table of Contents



Footnote 1: Restatement reconciliation for convertible note discount:
 1st
    
    
    2nd
    
    
    3rd
    
    
    4thFY 2006
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Total YearNet Income (Loss) (As Reported)
    
    
    (134,000
    )
    
    
    (834,000
    )
    
    
    127,000
    
    
    
    (2,624,000
    )
    
    
    (3,465,000
    )RestatementAmortization  convertible note
discount
    
    
    (101,000
    )
    
    
    (41,000
    )
    
    
    (33,000
    )
    
    
    (40,000
    )
    
    
    (215,000
    )Reverse initial amortization adj.  1st
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,000
    
    
    
    120,000Amortization  conversion  1st
    
    
    
    
    
    
    (738,000
    )
    
    
    
    
    
    
    
    
    
    
    (738,000
    )Amortization  conversion  2nd
    
    
    
    
    
    
    
    
    
    
    (964,000
    )
    
    
    
    
    
    
    (964,000
    )Net Income (Loss) Restated
    
    
    (235,000
    )
    
    
    (1,613,000
    )
    
    
    (870,000
    )
    
    
    (2,544,000
    )
    
    
    (5,262,000
    )
 1st
    
    2nd
    
    3rd
    
    4thYear 2006
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Total YearBasic Income
(Loss) per Common
Share As ReportedAs Reported
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.01
    )
    
    $
    (0.14
    )
    
    $
    (0.20
    )Adjusted
    
    $
    (0.02
    )
    
    $
    (0.09
    )
    
    $
    (0.05
    )
    
    $
    (0.13
    )
    
    $
    (0.30
    )
 1st
    
    2nd
    
    3rd
    
    4thYear 2006
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Total YearDiluted Income
(Loss) per Common
Share As ReportedAs Reported
    
    anti-dilutive
    
    anti-dilutive
    
    $
    0.01
    
    
    anti-dilutive
    
    anti-dilutiveAdjusted
    
    anti-dilutive
    
    anti-dilutive
    
    anti-dilutive
    
    anti-dilutive
    
    anti-dilutive
 1st
    
    2nd
    
    3rd
    
    4thYear 2005
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Total YearBasic Income
(Loss) per Common
Share As ReportedAs Reported
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.34
    
    
    $
    0.39Adjusted
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.33
    
    
    $
    0.38
 1st
    
    2nd
    
    3rd
    
    4thYear 2005
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Total YearDiluted Income
(Loss) per Common
Share As ReportedAs Reported
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.31
    
    
    $
    0.34Adjusted
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.30
    
    
    $
    0.33
 58




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##### Table of Contents



Item 9
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A Controls and Procedures
   Disclosure Controls
  Changes in Internal Controls
  
 Item 9B Other Information
  59




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##### Table of Contents



PART III
  
 Item 10 Directors and Executive Officers
 Code of Ethics
  
 Item 11 Executive Compensation
  
 Item 12 Security Ownership of Certain Beneficial Owners and Management
  Number ofSecurities to beissued upon
    
    Weighted-averageexercise of
    
    exercise price of
    
    Number ofoutstanding
    
    outstanding
    
    securitiesoptions, warrants
    
    options, warrants
    
    remaining availablePlan Category
    
    and rights
    
    and rights
    
    for future issuanceEquity compensation
plans approved by
shareholders
    
    
    2,025,400
    
    
    $
    1.64
    
    
    
    218,222Equity compensation
plans not approved
by shareholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    2,025,400
    
    
    $
    1.64
    
    
    
    218,2222
 
 Item 13 Certain Relationships and Related Transactions
  
 Item 14 Principal Accounting Fees and Services
  60




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##### Table of Contents



PART IV
 
 Item 15 Exhibits, Financial Statement Schedules
  (1)
    
    Financial Statements: No financial statements have been filed with this Form 10-K
other than those listed in Item 8.(2)
    
    Financial Statement Schedules: Schedules for which provisions are made in the
applicable accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, or are disclosed in the accompanying consolidated
financial statements, or are inapplicable and, therefore, have been omitted.(3)
    
    Exhibits:
 ExhibitNo.
    
    Description2.1
    
    Stock Purchase Agreement dated December 21, 2004 between Advanced Photonix, Inc. and
Photonic Detectors, Inc.  incorporated by reference to Exhibit 2.1 to the Registrants
Form 8-K, as filed with the Securities and Exchange Commission on December 23, 20042.2
    
    Agreement and Plan of Merger between Advanced Photonix, Inc. and Michigan
Acquisition Sub, LLC, Picotronix, Inc., Robin Risser and Steven Williamson, dated March
8, 2005  incorporated by reference to Exhibit 2.1 to the Registrants Form 8-K, as filed
with the Securities and Exchange Commission on March 14, 20053.1
    
    Certificate of Incorporation of the Registrant, as amended  incorporated by
reference to Exhibit 3.1 to the Registrants Registration Statement on Form S-1, filed
with the Securities and Exchange Commission on November 23, 19903.1.1
    
    Amendment to Certificate of Incorporation of the Registrant, dated October 29,
1992-incorporated by reference to the Registrants March 31, 1996 Annual Report on Form
10-K3.1.2
    
    Amendment to Certificate of Incorporation of the Registrant, dated September 9,
1992-incorporated by reference to the Registrants March 31, 1996 Annual Report on Form
10-K3.2
    
    By-laws of the Registrant, as amended  incorporated by reference to Exhibit 3.(ii)
to the Registrants Form 8-K as filed with the Securities and Exchange Commission on June
8, 20054.1
    
    Rights Agreement, by and between the Company and Continental Stock Transfer and
Trust Company, as amended  incorporated by reference to Exhibit 4.1 to the Registrants
Form 8-K filed with the Securities and Exchange Commission on February 9, 200510.1
    
    Advanced Photonix, Inc. 1991 Special Directors Stock Option Plan  incorporated by
reference to Exhibit 10.9 to the Registrants March 31, 1991 Annual Report on Form 10-K
 61




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##### Table of Contents



ExhibitNo.
    
    Description10.2
    
    Advanced Photonix, Inc. 1990 Incentive Stock Option and Non-Qualified Stock Option
Plan  incorporated by reference to Exhibit No. 10.11 to the Registrants Registration
Statement on Form S-1, filed with the Securities and Exchange Commission on November 23,
199010.3
    
    Advanced Photonix, Inc. 1997 Employee Stock Option Plan  incorporated by reference
to Exhibit 10.13 to the Registrants March 30, 1997 Annual Report on Form 10-K10.4
    
    Amendment No. 1 to 1997 Employee Stock Option Plan of Advanced Photonix, Inc. 
incorporated by reference to Exhibit 10.14 to the Registrants December 28, 1997
Quarterly report on Form 10-Q10.5
    
    Advanced Photonix, Inc. 2000 Stock Option Plan, as amended  incorporated by
reference to Exhibit 99.1 to the Registrants Form 8-K, as filed with the Securities and
Exchange Commission on November 19, 200410.9
    
    Lease Agreement dated February 23, 1998 between Advanced Photonix, Inc. and High Tech
No. 1, Ltd.  incorporated by reference to Exhibit 10.9 to the Registrants March 29, 1998
Annual Report on Form 10-K10.10
    
    Form of Indemnification Agreement provided to Directors and Principal Officers of
Advanced Photonix, Inc.  incorporated by reference to Exhibit 10.15 to the Registrants
December 28, 1997 Quarterly report on Form 10-Q10.11
    
    Employment Agreement dated August 21, 2002 between Advanced Photonix, Inc. and Paul
D. Ludwig  incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K as
filed with the Securities and Exchange Commission on September 5, 200210.12
    
    Employment Agreement dated February 10, 2003 between Advanced Photonix, Inc. and
Richard D. Kurtz  incorporated by reference to Exhibit 10.12 to the Registrants March
30, 2003 Annual Report on Form 10-KSB10.20
    
    Securities Purchase Agreement, Registration Rights Agreement, Senior Subordinated
Convertible Note, Warrant to Purchase Class A Common Stock, and Additional Investment
Right dated October 12, 2004 between Advanced Photonix, Inc. and private investors 
incorporated by reference to Exhibits 10.13 through 10.13.4 to the Registrants Form 8-K,
as filed with the Securities and Exchange Commission on October 12, 200410.20.1
    
    Letters of Agreement amending the Securities Purchase Agreement and Warrant to
Purchase Class A Common Stock, dated March 9, 2005, between Advanced Photonix, Inc. and
private investors  incorporated by reference to Exhibits 10.2 through 10.5 to the
Registrants Form 8-K, as filed with the Securities and Exchange Commission on March 14,
200510.26.1
    
    Promissory Note between Picotronix, Inc. and Advanced Photonix, Inc., dated March 10,
2005  incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K, as filed
with the Securities and Exchange Commission on March 14, 200510.26.2
    
    Secured Promissory Note between Advanced Photonix, Inc. and Robin Risser, dated May 2,
2005  incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K, as filed
with the Securities and Exchange Commission on May 6, 2005
 62




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##### Table of Contents



ExhibitNo.
    
    Description10.26.3
    
    Secured Promissory Note between Advanced Photonix, Inc. and Steven Williamson, dated
May 2, 2005  incorporated by reference to Exhibit 10.2 to the Registrants Form 8-K, as
filed with the Securities and Exchange Commission on May 6, 200510.26.4
    
    Employment Agreement between Advanced Photonix, Inc. and Robin Risser, dated May 2,
2005  incorporated by reference to Exhibit 10.3 to the Registrants Form 8-K, as filed
with the Securities and Exchange Commission on May 6, 200510.26.5
    
    Employment Agreement between Advanced Photonix, Inc. and Steven Williamson, dated May
2, 2005  incorporated by reference to Exhibit 10.4 to the Registrants Form 8-K, as
filed with the Securities and Exchange Commission on May 6, 200521.1
    
    List of Subsidiaries of Registrant  incorporated by reference to Exhibit 21.1 to the
Registrants March 30, 2003 Annual Report on Form 10-KSB31.1
    
    Certification of the Registrants Chairman, Chief Executive Officer and Director
pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of the Registrants Chairman, Chief Financial Officer and Director
pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
 63




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##### Table of Contents



SIGNATURES
   By:
    /s/ Richard KurtzCEO & President November 10, 2006
  Signature
    
    Title
    
    Date/s/ Richard D. Kurtz
    
    Chairman of the Board,
    
    November 10, 2006Richard D. Kurtzs/ Robin Risser
    
    Chief Financial Office and Director
    
    November 10, 2006Robin Risser/s/ M. Scott Farese
    
    Director
    
    November 10, 2006M. Scott Farese/s/ Lance Brewer
    
    Director
    
    November 10, 2006Lance Brewer/s/ Donald Pastor
    
    Director
    
    November 10, 2006Donald Pastor/s/ Stephen P. Soltwedel
    
    Director
    
    November 10, 2006Stephen P. Soltwedel
 64




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description31.1
    
    Certification of the Registrants Chairman, Chief Executive Officer and Director
pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of the Registrants Chairman, Chief Financial Officer and Director
pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002