SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended March 31, 2002.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to _________________ .
COMMISSION FILE NUMBER 0-16106
APA OPTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
MINNESOTA 41-1347235
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2950 N.E. 84TH LANE
BLAINE, MINNESOTA 55449
(763) 784-4995
(Address, including ZIP code and telephone number, including area code, of
registrant's principal executive office)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
SERIES B PREFERRED SHARE PURCHASE RIGHTS
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months and (2) has been subject to the filing requirements for the
past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of May 24, 2002, was approximately $22,904,368.
The number of shares of common stock outstanding as of May 24, 2002 was
11,875,881.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of our proxy statement for the annual shareholders meeting to be
held in August 2002 are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF THE BUSINESS.
Since the founding of APA Optics, Inc. in 1979, we have focused on leading
edge research in gallium nitride (GaN), sophisticated optoelectronics, and
optical systems, with the primary goal of developing advanced products for
subsequent fabrication and marketing. Based on this research we have developed
multiple products including dense wavelength division multiplexing (DWDM)
optical components, a range of GaN based devices, and precision optical
products. We believe that our DWDM and GaN product areas have significant
potential markets and we have developed specific expertise and/or patent
positions relevant to them. As a long time designer and manufacturer of
precision optical components, we also have substantial expertise in this area.
In addition to manufacturing and marketing products, we are actively
seeking to license certain portions of our intellectual property portfolio
related to GaN to other companies. While we have had discussions with multiple
companies, we have not entered into any license arrangements as of the date of
this report. We consider the market for products using our GaN technology to be
just now emerging. Such products may include GaN based transistors for cell
phone base stations.
Our DWDM components are designed to enable operators of fiber optic
networks to cost effectively increase the capacity of their networks. Several
factors, including deregulation of the telcom industry and readily available
capital, fueled strong growth in the construction of these networks in recent
years, which has resulted in overcapacity. This overcapacity, coupled with a
recession and significantly tighter capital markets, has lead to a steep decline
in capital expenditures for fiber optic networks and network components,
including DWDMs.
In fiscal 2000, we eliminated our R&D contracts (historically a significant
source of revenue for us) to concentrate on development and production of our
own proprietary products. This shift has significantly reduced our revenues and
increased our losses, which will continue until we realize significant revenues
from these products.
DESCRIPTION OF BUSINESS.
Products
We currently offer the products described below.
- - Dense Wavelength Division Multiplexing (DWDM) Components. We
-------------------------------------------------------------
manufacture and market a family of DWDM components based on patented bulk
diffraction grating technology. These components enable fiber optic
networks to transmit data simultaneously on several wavelengths of light
within each optical fiber of a cable as opposed to a single wavelength of
light in networks not employing DWDM technology. This multiplexing of data
streams using different wavelengths of light significantly increases the
volume of data transmission through an optical network without requiring
the installation of additional fiber optic cable. Our DWDM components offer
leading-edge performance for key parameters, such as insertion loss and
crosstalk, which determine the integrity of the signals combined on the
fiber. These advantages are magnified as more and more individual signals
are multiplexed onto a single fiber, a current trend in the industry. These
components also operate without need for additional temperature control, a
feature that supports the network operator's goal of minimizing power
consumption.
Our design allows us to configure DWDM components to work with
singlemode or multimode optical fiber. Singlemode fiber is typically
associated with transmission over long distances (required for long haul
networks) and metro area rings, while multimode fiber is typically
associated with shorter networks found in campus and local area networks.
Multimode demultiplexers are also an enabling component for multiwavelength
fiber free communications systems.
2
We hold three patents in this field, the earliest of which was issued
in September 1995. In addition, we have two pending patents and numerous
international filings covering key markets in Europe and Asia.
- - Precision Optical Products. We manufacture and sell precision optical
---------------------------
products to third parties; however, we expect a significant portion of our
capacity in this area to be directed at supplying components for our DWDM
components in the future. Custom optical products include:
- Optical Lens Systems. We design and build multi-element lens systems
----------------------
and components, including mounting structures, for precision quality
optical needs in many applications, including laser-based systems,
imaging systems, inspection systems, display systems, display optics,
focusing optics for ultraviolet fire alarms, alignment verification
optics for dual magnetic recording heads, and multi-magnification
optics systems for optical comparators.
- Optical Thin Film Coatings. We custom design, develop, and fabricate
----------------------------
optical thin film coatings for optical components of lasers, laser
systems, optical instruments, and optical devices. Our antireflective
coatings are deposited onto APA-fabricated lens components. We also
use our thin film coating facility to design, develop and fabricate
coatings for lens components supplied by customers.
- Optical Windows and Flats. We manufacture standard, off-the-shelf,
----------------------------
high quality, optical windows and reference flats.
- - Ultraviolet (UV) Detectors. We currently manufacture and sell a wide
---------------------------
range of UV detectors. The UV detectors are high response compound
semiconductor devices based on gallium nitride (GaN) and aluminum gallium
nitride (AlGaN). They are compact and rugged compared to competing
technologies and have applications in spectrometry, UV curing processes, UV
lamp monitors, solar radiation measurement, excimer-laser measurement and
calibration, biomedical instrumentation, and flame detection and
monitoring. We have been awarded seven patents in the area of compound
semiconductor devices and have one pending
While we currently manufacture and sell a wide range of UV detectors as
components, our focus in this area is on value-added products based on our UV
detectors. We plan to actively market two such products in Fiscal 2003:
- - Sun(UV)Watch(R). The Sun(UV)Watch(R) is a personal ultraviolet
----------------
radiation (UV) monitor that also incorporates a time/day/date function. It
detects and monitors UV radiation that is potentially hazardous to human
health, telling the user the safe exposure time according to government
recommendations and sounding an alarm when that time has expired. Through
fiscal 2002 we trial marketed our Sun(UV)Watch(R). Based on the results of
this trial marketing we made several improvements to the product and are
preparing for a full rollout in fiscal 2003. All of our UV sensing
value-added products are built around our production UV detectors. We plan
to market a family of products designed to be worn on the wrist like a
watch or clipped on a personal item such as a backpack or golf bag. We
believe that there are significant international markets for this type of
product in addition to the US market. We expect to commit significant
resources to the rollout of these products and, based on consumer response,
may commit significant resources to expand our product offering in this
area.
- - TRUVMETER(TM) and Software. This product is targeted at industrial and
--------------------------
scientific users interested in measuring UV wavelengths with no sensitivity
to visible or infrared (IR) light. The product consists of a detector on a
cable that is connected to a computer, and software that allows the
computer to operate like a meter and data-logging instrument. Example
target markets are manufacturers of UV lamps and users of UV-cured inks and
paints.
Our research and development efforts are currently focused on the products
described below.
3
- - Compound Semiconductor Electronic Devices: We have been a pioneer in
-------------------------------------------
the research of transistors based on GaN/AlGaN heterojunctions and are
maintaining a R&D capability in this technology while assessing
commercialization opportunities. There are significant markets emerging for
these devices with the rapid growth of cellular phone use and associated
infrastructure, and in other high power/frequency/temperature applications.
Two of our seven awarded patents in this technology are fundamental to the
transistor structure. Significant resources would be required should we
choose to develop a full product line in this area.
- - Components and Modules for Fiber Optics Networks: To build on the
----------------------------------------------------
strength of our DWDM components, the Company is exploring the market
potential for new components and value-added modules for fiber optics
telecommunications networks. We are also exploring other variants of the
DWDM line incorporating passive and active functions. Much of this work is
based on a technology called integrated optics, which creates optical
components on planer waveguide devices with integrated circuit-like
processes. The development of products based on integrated optics
technology will require the commitment of significant resources.
Near the end of fiscal 2001, we formed an alliance with Harris
Corporation to jointly develop and market a product utilizing our DWDMs
which enables 10 Gigabit Ethernet to be transported over existing multimode
fiber installations in short haul applications (distances up to 1,000
meters) such as business and academic campuses. A lack of standards upon
which to base such a device had postponed the further development and
introduction of this product. Industry groups have recently made progress
toward establishment of applicable standards. The current design of our
product would not support these standards. We continue to monitor the
commercial viability of this product for niche applications but do not have
any definitive time frame for its introduction. The 10 Gigabit Ethernet
product is based on our current DWDM technology and would not require
significant resources for further development.
Marketing and Distribution
We market our DWDM and UV detector products through a variety of channels
including advertising in relevant professional magazines, showcasing them in
trade shows, direct mailing, personal visits, and by use of manufacturer's
representatives and distributors domestically and in various countries
(including Japan, Germany, Italy and France). We do not currently maintain a
large internal sales force. We have one sales person dedicated to the
SunUVWatch(R) and we also maintain product information on our website.
Sources of Raw Materials
Several purchased materials and components are used in the manufacturing of
our products. Most of these are readily available from multiple suppliers. Some
critical optical components are purchased from a single or a limited number of
suppliers. We are working with other optical manufacturers to develop additional
sources of these components as well as pursuing internal development of this
capability for some of these components. The loss of access to some components
would have a material adverse effect on our ability to deliver products on a
timely basis and on our financial performance.
Patents and Intellectual Property
As of March 31, 2002, we had 12 patents issued in the United States and six
patents applied for inside and outside the United States. We believe our success
heavily depends upon technology we develop internally. The markets for our
products are characterized by rapid change and continual innovation that could
render our technology and patents obsolete before their statutory protection
expires. Several of the companies we compete with have greater research and
development resources than we do and could develop technologies and products
that are similar or even superior to ours without infringing on our intellectual
property.
4
Environmental Compliance
Because we handle a number of chemicals in our operations, we must comply
with federal, state and local laws and regulations regarding the handling and
disposal of such chemicals. To date the cost of such compliance has not been
material.
Major Customers
In prior years, we provided research and development services under
contracts with various governmental agencies. Currently, we have no material
contracts with any such agencies.
During fiscal 2002, revenues from three customers represented 28%, 23% and
14% of our total revenues each. In fiscal 2001, we had three customers whose
sales represented 19%, 16%, and 15% of total revenues each. While significant as
a percentage of revenues, the revenues in total dollars were not as significant
and the loss of any one of these customers would not have a material adverse
effect on the Company. Revenues from U.S. government agencies constituted more
than ten percent of our total operating revenues in fiscal year 2000. During
fiscal year 2000, 35% of our sales were to the U.S. Army and 3% of our sales
were to the U.S. Navy.
Backlog
We had no backlog of orders at March 31, 2002 compared to approximately
$545,000 at March 31, 2001 and none at March 31, 2000.
We had no backlog of uncompleted research contracts at March 31, 2002 or
March 31, 2001, as compared to $28,400 at March 31, 2000. The elimination of the
backlog in uncompleted contracts is the direct result of our shift from contract
R&D to product development and promotion.
Competition
The optoelectronics and compound semiconductor electronic device markets
are evolving rapidly and, therefore, the competitive landscape changes
continually. The opportunities presented by these markets have fostered a highly
competitive environment. Over time, this competition will likely result in price
reductions and lower profit margins for the companies serving this market. Many
of the companies engaged in these businesses are well financed and have
significantly greater research, development, production, and marketing resources
than we do. Some of these companies have long operating histories,
well-established distribution channels, broad product offerings and extensive
customer bases. Our ability to compete with these companies will depend largely
on the performance of our devices, our ability to innovate and develop solutions
for our customers, the extent and strength of our intellectual property, and our
ability to convince customers to adopt our technology early in their design
cycle.
Competitors for our DWDM products include Lightwave Microsystems, Inc.,
NetTest, LightChip, Inc., Wavesplitter Technologies, Inc., Alcaltel Optronics,
Corning Incorporated and JDS Uniphase Corporation. Competitors for our GaN
products include SVT (GaN UV detectors), and various UV detector makers using
silicon or other semiconductor materials that do not perform comparably to GaN,
but are lower-priced. We are not aware of any companies currently marketing a
personal UV monitor in a watch configuration; however, we are aware of
intellectual property for this general type of product. Newport, Melles Griot
and Oriel offer scientific UV meters, some of which include GaN detectors as an
option. A number of firms offer lower-performance, lower-cost UV meters for
industrial applications. Competitors for GaN/AlGaN transistors, which are
currently in the R&D phase at APA Optics, include Cree, Inc., Nitronex
Corporation, RFMD Corporation, and some Japanese and European firms.
Research and Development
During the fiscal years ended March 31, 2002, 2001, and 2000, we spent
approximately $1,114,100, $1,176,000, and $919,000, respectively, on research
and development, all of which was related to the DWDM, compound semiconductor
electronic devices, UV detector and related products. In addition, in fiscal
years 2002 and 2001, we had no research activities sponsored by customers
compared to $978,000 for fiscal year 2000. We operate in highly competitive and
rapidly evolving markets and plan to commit significant resources for research
and development for the foreseeable future. We will consider locating research
and development facilities in locations other than our current facilities in
Minnesota and South Dakota, including locations outside the United States, based
on several factors, including accessibility to qualified personnel and facility
costs.
5
Employees
As of March 31, 2002, we had 51 full-time employees (including executive
officers). Our future performance is dependent on our ability to attract, train,
and retain highly qualified personnel. We have no employment agreements with our
employees. The loss of one or more key employees could negatively impact the
Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Some of the statements contained in this report on Form 10-K that are not
purely historical are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including,
without limitations, statements regarding the Company's expectations, hopes,
beliefs, anticipations, commitments, intentions and strategies regarding the
future. Forward-looking statements include, but are not limited to, statements
contained in "Item 1. Business" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations." Actual results could
differ from those projected in any forward-looking statements for the reasons,
among others, detailed below. We believe that many of the risks detailed here
are part of doing business in the industry in which we compete and will likely
be present in all periods reported. The fact that certain risks are
characteristic to the industry does not lessen the significance of the risk. The
forward-looking statements are made as of the date of this Form 10-K and we
assume no obligation to update the forward-looking statements or to update the
reasons why actual results could differ from those projected in the
forward-looking statements.
Unless we generate significant revenue growth, our increasing expenses and
negative cash flow will significantly harm our financial position.
We have not been profitable since fiscal 1990. As of March 31, 2002, we had
an accumulated deficit of $18.2 million. We expect to incur operating losses for
the foreseeable future, and these losses may be substantial. Further, we may
continue to incur negative operating cash flow in the future. We have funded our
operations primarily through the sale of equity securities and borrowings. We
have significant fixed expenses and we expect to continue to incur significant
and increasing manufacturing, sales and marketing, product development and
administrative expenses. As a result, we will need to generate significantly
higher revenues while containing costs and operating expenses if we are to
achieve profitability.
Declining average selling prices for our DWDM products will require us to reduce
production costs to effectively compete and market these products.
Since the time we first introduced our DWDM components to the marketplace
we have seen the average selling price of this type of component decline. We
expect this trend to continue. To achieve profitability in this environment we
must continually decrease our costs of production. In order to reduce our
production costs, we will continue to pursue one or more of the following:
- Seek lower cost suppliers of raw materials, components, or assemblies
within the United States, or internationally including Asia,
- Work to further automate our assembly process, or
- Develop value-added components.
We will also seek to form strategic alliances with companies that can
supply these services.
Decreases in average selling prices also require that we increase unit
sales to maintain or increase our revenue. Our efforts to increase revenues
could include:
- Expansion of our product offerings, both through internally developed
and externally sourced products, and
6
- Expansion of our international marketing efforts.
There can be no guarantee that we will achieve these objectives or goals.
Our inability to decrease production costs or increase our unit sales could
seriously harm our business, financial condition and results of operations.
We have limited experience in the development, manufacturing, marketing and
distribution of products internationally.
If our efforts to reduce our costs to develop and manufacture our products
and/or seek more international customers leads to the expansion of offshore
subcontracting or the establishment of facilities outside of the United States,
we will be subject to inherent risks, including, without limitation:
- Reduced protection of intellectual property rights in foreign
countries in which we may choose to operate;
- Difficulties in attracting, training and retaining qualified staff;
- Political and economic instability, terrorism or war;
- The burden of complying with foreign laws and tax structures; and
- Risks associated with fluctuations in the value of currencies.
Demand for our products is subject to significant fluctuation. Market conditions
in the telecommunications market in particular may harm our financial condition.
Demand for our products is dependent on several factors including capital
expenditures in the communications industry. Capital expenditures can be
cyclical in nature and there may be protracted periods of reduced demand for
component parts. Similarly, periods of slow economic expansion or recession can
result in periods of reduced demand for our products. The current economic
slowdown has hit the telecommunications market particularly hard, resulting in a
significant reduction in capital expenditures for products such as our DWDMs. It
is impossible to predict how long the slowdown will last. Such periods of
reduced demand harm our business, financial condition and results of operations.
We must increase our manufacturing capacity or we will not be able to deliver
our products to our customers in a timely manner.
Manufacturing of our products is a complex and precision process. We have
limited experience in rapidly increasing our manufacturing capacity or in
manufacturing products at high volumes. We will be required to hire, train and
manage additional manufacturing personnel and improve our production processes
in order to increase our production capacity. There are numerous risks
associated with rapidly increasing capacity, including:
- Difficulties in achieving adequate yields from new manufacturing
lines,
- Difficulty maintaining the precision manufacturing processes required
by our products while increasing capacity,
- The inability to timely procure and install the necessary equipment,
and
- The lack of availability of qualified manufacturing personnel.
Our manufacturing expansion and related capital expenditures are being made
in anticipation of a level of customer orders that may not be realized. If
anticipated levels of customer orders are not received, we will not be able to
generate positive gross margins and profitability.
Our dependence on outside manufacturers may result in product delivery delays.
We purchase components that are incorporated into our products from outside
vendors. If these vendors fail to supply us with components on a timely basis,
we could experience significant delays in shipping our products. Any significant
interruption in the supply or support of any components could seriously harm our
sales and our relationships with our customers.
Our products may have defects that are not detected before delivery to our
customers.
7
Some of our products are designed to be deployed in large and complex
optical networks and must be compatible with other components of the system,
both current and future. In addition, our products may not operate as expected
over long periods of time. Our customers may discover errors or defects in our
products only after they have been fully deployed. If we are unable to fix
errors or other problems, we could lose customers, lose revenues, suffer damage
to our brand and reputation, and lose our ability to attract new customers or
achieve market acceptance. Each of these factors would negatively impact cash
flow and would seriously harm our business, financial condition and results of
operations.
We must introduce new products and product enhancements to increase revenue.
The successful operation of our business depends on our ability to
anticipate market needs and to develop and introduce new products and product
enhancements that respond to technological changes or evolving industry
standards on a timely and cost-effective basis. Our products are complex, and
new products may take longer and/or cost more to develop than originally
anticipated. These products may contain defects or have unacceptable
manufacturing yields when first introduced or as new versions are released. Our
products could quickly become obsolete as new technologies are introduced. We
must continue to develop leading-edge products and introduce them to the
commercial market quickly in order to be successful. Our failure to produce
technologically competitive products in a cost-effective manner and on a timely
basis will seriously harm our business, financial condition and results of
operations.
Our markets are characterized by rapid technological changes and evolving
standards.
The markets we serve are characterized by rapid technological change,
frequent new product introductions, changes in customer requirements and
evolving industry standards. In developing our products, we have made, and will
continue to make, assumptions with respect to which standards will be adopted
within our industry. If the standards that are actually adopted are different
from those that we have chosen to support, our products may not achieve
significant market acceptance.
Our products may infringe on the intellectual property rights of others.
Our products are sophisticated and rely on complicated manufacturing
processes. We have received several patents on certain aspects of our design and
manufacturing processes and we have applied for several more. Third parties may
still assert claims that our products or processes unlawfully utilize their
intellectual property. Defense against these claims, even if they lack merit,
may be time consuming, result in expensive litigation and divert management
attention from operational matters. If such a claim was successful, we could be
prevented from manufacturing or selling our current products, we could be forced
to redesign our products, or we could be required to license the relevant
intellectual property at a significant cost. Any of these actions could harm our
business, financial condition or results of operations.
Acquisitions or investments could have an adverse affect on our business.
As part of our strategy to expand our product offerings, develop internal
sources of components and materials, and acquire new technologies, we
periodically review acquisition and investment prospects. There are inherent
risks associated with making acquisitions and investments, including but not
limited to:
- Challenges associated with integrating the operations, personnel,
etc., of an acquired company,
- Potentially dilutive issuances of equity securities,
- Reduced cash balances and/or increased debt and debt service costs,
- Large one-time write-offs of intangible assets,
- Risks associated with geographic or business markets different than
those we are familiar with, and
- Diversion of management attention from current responsibilities.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of our executive officers, their ages, positions and
offices as of March 31, 2002.
8
NAME AGE POSITION
Dr. Anil K. Jain 56 Chief Executive Officer and President
Kenneth A. Olsen 58 Vice President and Secretary
Robert M. Ringstad 45 Chief Financial Officer
DR. ANIL K. JAIN has been a Director, Chief Executive Officer and President
since March 1979. He also served as Chief Financial Officer until August 2000.
From 1973 until October 15, 1983, when Dr. Jain commenced full time employment
with the Company, he was employed at the Systems and Research Center at
Honeywell Inc. as a Senior Research Fellow, coordinating optics-related
development.
KENNETH A. OLSEN has been a Director since 1980, Secretary since 1983, and
Vice President since 1992. Prior to joining the Company, he had been with 3M
Corp., St. Paul, Minnesota.
ROBERT M. RINGSTAD has been Chief Financial Officer since joining the
Company in August 2000. Prior to joining the Company he was Vice President and
Controller of Echostar Communications Corporation, Englewood, Colorado from
October 1999 to January 2000. From October 1996 until March 1999 Mr. Ringstad
was Chief Financial Officer and Chief Operating Officer for World Satellite
Network, Inc., Minneapolis, Minnesota. Prior to joining World Satellite Network,
Mr. Ringstad was employed with Family Partners, Ltd. of Minneapolis, MN.
ITEM 2. PROPERTIES.
We have corporate offices, manufacturing facilities, and laboratories
located in an industrial building at 2950 N.E. 84th Lane, Blaine, Minnesota. We
currently lease 23,500 square feet of space under a sublease from Jain-Olsen
Properties, a partnership consisting of Anil K. Jain and Kenneth A. Olsen,
officers and directors of the Company. See Note J of Notes to Financial
Statements included under Item 8 of this Report. We own land directly west of
the Blaine facility that may be used for future expansion.
We also own a 24,000 square foot production facility in Aberdeen, South
Dakota, which is used for assembly of our DWDM components and UV detectors. The
land upon which this facility is located was granted to us as part of a
financing package from the City of Aberdeen. See Note D of Notes to Financial
Statements included under Item 8 in this Report for further information
regarding the financing of this facility.
We believe these two facilities will be adequate for our physical needs for
the foreseeable future. However, in order to reduce costs in the face of
continuing downward pressure on component prices, we are evaluating placement of
research and development and/or manufacturing facilities in locations outside
the United States. These facilities could be (a) owned or leased and operated by
us or (b) owned and/or operated by others for us on a contract basis. These
other facilities could be in addition to or replace our existing facilities.
ITEM 3. LEGAL PROCEEDINGS.
We are not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common stock is traded on The Nasdaq National Market under the symbol
"APAT." The following table sets forth the quarterly high and low sales prices
for our common stock for each quarter of the past two fiscal years as reported
by Nasdaq:
FISCAL 2002 HIGH LOW
- ----------- ------ ------
Quarter ended June 30, 2001. . . . . . . . . . . $11.50 $ 7.00
Quarter ended September 30, 2001 . . . . . . . . 9.00 1.90
Quarter ended December 31, 2001. . . . . . . . . 3.44 2.00
Quarter ended March 31, 2002 . . . . . . . . . . 4.83 2.40
FISCAL 2001 HIGH LOW
- ----------- ------ ------
Quarter ended June 30, 2000. . . . . . . . . . . $36.00 $12.25
Quarter ended September 30, 2000 . . . . . . . . 24.38 9.75
Quarter ended December 31, 2000. . . . . . . . . 17.31 5.50
Quarter ended March 31, 2001 . . . . . . . . . . 11.81 6.06
There were approximately 350 holders of record of our common stock as of
March 31, 2002.
We have never paid cash dividends on our common stock. The loan agreement
relating to certain bonds issued by the South Dakota Economic Development
Finance Authority restricts our ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA.
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ -----------
Statements of Operations Data:
Revenues . . . . . . . . . . . $ 595,955 $ 885,740 $ 420,809 $ 722,030 $2,190,637
Net loss applicable to common
shareholder. . . . . . . . . . (4,738,199) (3,261,446) (3,796,296) (2,513,798) (967,767)
Net loss per share, basic and
diluted. . . . . . . . . . . . (0.40) (0.29) (0.43) (0.30) (0.12)
Weighted average number of
shares, basic and diluted. . . 11,896,976 11,180,165 8,744,125 8,512,274 8,376,661
Balance Sheet Data:
Total assets . . . . . . . . . $36,396,410 $41,914,451 $ 9,610,391 $ 6,804,976 $9,629,912
Long-term obligations,
including current portion. . . 2,461,363 2,836,831 3,049,258 3,214,712 3,609,652
Shareholders' equity . . . . . 33,504,917 38,280,299 6,306,049 3,389,295 5,859,863
The above selected financial data should be read in conjunction with the
financial statements and related notes included under Item 8 of this Report and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in Item 7 of this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
10
General
We are engaged in designing, manufacturing, and marketing of various
optoelectronic products, ultraviolet (UV) detectors and related products and
optical components. For several years, we also received significant revenues
from research and development services projects sponsored by various government
agencies. In fiscal 1998, we shifted our emphasis from research and development
to product development, with the intent to eventually manufacture and market our
own proprietary products. Accordingly, revenues from research and development
contracts decreased significantly in fiscal 2000 and we received no revenues
from this source in fiscal years 2001 and 2002.
For the last several years our goal has been to manufacture and market
products/components based on our technology developments. We have focused on
dense wavelength division multiplexer (DWDM) components for fiber optic
communications and gallium nitride-based ultraviolet (UV) detectors (both
components and integrated detector/electronic/display packages) because we
believe that these two product areas have significant potential markets and
because we have expertise and/or patent positions related to them.
Results of Operations
We recognized operating revenues of $595,955, $885,740, and $420,809 for
the fiscal years ended March 31, 2002, 2001, and 2000, respectively. The
decrease of $289,785 or 33% from fiscal 2001 to 2002 was primarily the result of
lower sales of DWDM components. A reduction in capital spending in the
telecommunications industry in addition to the United States recession
significantly reduced demand for these components. In addition, in August 2001,
one customer cancelled an order in excess of $500,000 when we were unable to
deliver the product according to their requirements. The $464,931 or 111%
increase in revenues from fiscal 2000 to 2001 was due primarily to increased
sales of DWDM components. We had no backlog of orders at the end of fiscal 2002.
Our backlog of DWDM component orders was approximately $545,000 as of March 31,
2001. There were no contract fees in fiscal 2002 or 2001 compared to $160,108 in
fiscal 2000.
As discussed in the General Development of the Business above, capital
expenditures in the telcom industry are down significantly. Because of this we
expect revenues for at least the next few quarters to be consistent with the
fourth quarter of fiscal 2002.
Cost of sales were $3,545,519, $2,663,192, and $1,415,229 for fiscal 2002,
2001 and 2000, respectively. The increase of $882,327 or 33% in the cost of
sales from fiscal 2001 to 2002 was largely the result of inventory obsolescence
costs, increased depreciation related to capital equipment purchases, and costs
associated with implementing a quality assurance program. The increase in the
cost of sales of $1,247,963 or 88% from fiscal 2000 to 2001 was related to the
increase in sales utilizing additional materials and direct labor. Gross margin
for product sales was negative in all three fiscal years as a result of low unit
production and sales levels relative to the capital equipment and personnel
committed to production. We expect further reductions in product pricing and we
expect to continue to experience negative gross margins until there is a
significant increase in sales and production levels. Cost of contract fees in
fiscal 2000 was $978,222 and was eliminated in fiscal 2002 and 2001 as no
contract research was performed in those years.
Research and development expenses were $1,114,051, $1,175,564 and $918,811
for fiscal years 2002, 2001 and 2000, respectively. The decrease of $61,513 or
5% from fiscal 2001 to 2002 reflected a shift in personnel to manufacturing
products from product development. This is in contrast to the increase of
$256,753 or 28% from fiscal 2000 to 2001, reflecting our continued investment in
the development of our DWDM and GaN technologies. The extent of our efforts to
develop variants of the DWDM line incorporating passive and active functions and
to develop transistors based on GaN/AlGaN heterojunctions could result in
increased research and development expenditures in the future.
Selling, general and administrative expenses were $1,733,846, $1,866,766
and $862,170 for fiscal years 2002, 2001 and 2000, respectively. The decrease of
$132,920 or 7% from fiscal 2001 to 2002 reflects our efforts to reduce expenses
in response to the slow economy, including a reduction in staff in the third
quarter of fiscal 2002. The increase of $1,004,596 or 117% from fiscal 2000 to
2001, was the result of compensation costs related to newly-hired key management
personnel, non-cash compensation related to non-qualified stock options granted
to employees, the cost of adopting a shareholder rights plan, and fees
associated with listing our common stock on the Nasdaq National Market. Our
selling, general and administrative expenses could increase significantly with
the planned rollout of our SunUVWatch(R) and our TRUVMETER(TM) in fiscal 2003.
11
We realized $1,193,525, $2,002,713 and $100,989 in interest income in
fiscal years 2002, 2001 and 2000 respectively. The decrease in interest income
of $809,188 or 40% from fiscal 2001 to 2002 reflects the steep decline in
short-term interest rates over the fiscal year and declining cash investments as
we consumed a total of $5.4 million in cash to fund operations, purchase
equipment and retire debt. The increase in interest income of $1,901,724 from
fiscal 2000 to 2001 reflected increased average balances of cash and short-term
investments during the fiscal year. We expect interest income to decline again
in fiscal 2003 as short-term interest rates will likely remain low and cash is
consumed in operations.
Our net losses applicable to common shareholders for fiscal 2002, 2001 and
2000 were $ 4,738,199, $3,261,446 and $3,796,296 respectively.
Liquidity and Capital Resources
As of March 31, 2002, our principal source of liquidity was our cash, cash
equivalents and short-term investments, which totaled $31,606,403 compared to
$36,984,492 at March 31, 2001.
We used $3,753,553 to fund operating activities during fiscal 2002 compared
to $2,230,867 in fiscal 2001, and $3,497,892 in fiscal 2000. In all three years
the largest use of cash in operating activities was the funding of the net
losses. The net loss applicable to common shareholder for fiscal 2002 increased
to $4,738,199 from $3,261,446 in fiscal 2001. The primary factors contributing
to the increased loss were the decline in sales, the increase in the inventory
obsolescence reserve and the decline in interest income. The decrease in the net
loss from fiscal 2000 to 2001 was primarily related to the increase in revenues
and interest income.
Investing activities provided $14,595,028 in fiscal 2002. We generated
$15,759,000 from the sale of short-term investments and invested $1,050,274 in
property and equipment and $113,698 in patents. The majority of the proceeds
from sales of our short-term investments are classified as cash and cash
equivalents on the balance sheet as of March 31, 2002. We used $16,995,645 in
investing activities in fiscal 2001, $15,759,000 of which was invested in
short-term investments. In fiscal 2000 we used $235,394 in investing activities.
We used $460,564 in financing activities in fiscal 2002. Primary uses of
cash in financing activities included the repurchase of common stock for $92,638
and the scheduled retirement of debt used $375,468. We did not repurchase any
shares of our stock during the fourth quarter of fiscal 2002. In fiscal 2001
financing activities provided net cash of $34,510,098. Sales of our common stock
provided $39,557,304, retirement of preferred stock used $5,033,054 and the
scheduled retirement of debt and additions to bond reserve funds used an
additional $299,532. Financing activities provided cash of $6,862,343 in fiscal
2000. Sales of preferred and common stock provided $6,600,125, the scheduled
retirement of debt used $133,350, and a reduction in bond reserve funds provided
$314,747 of cash.
We constructed our manufacturing facility in Aberdeen, South Dakota using
certain economic incentive programs offered by the State of South Dakota and the
City of Aberdeen. At March 31, 2002, the total principal outstanding under bonds
issued by the State of South Dakota was $1,630,000. Interest on the bonds ranges
from 5% to 6.75%, and the bonds are due in various installments between 2003 and
2016. These bonds require compliance with certain financial covenants. We were
out of compliance with some of these covenants during part of fiscal 2001 and
all of fiscal 2002. We are not in default in repayment of the bonds. For further
information regarding these bonds, see Note D of Notes to Financial Statements
included under Item 8 of this Report.
12
Our capital requirements are dependent upon several factors including
market acceptance of our products, the timing and extent of new product
introductions and delivery, and the costs of marketing and supporting our
products on a worldwide basis. See "Item 1. Business."
Although we believe that our current cash and cash equivalents will be
sufficient to fund our operations for more than the next 12 months, we cannot
assure you that we will not seek additional funds through public or private
equity or debt financing or from other sources within this time frame or that
additional funding, if needed, will be available on terms acceptable to us, or
at all. We may also consider the acquisition of, or evaluate investments in,
products and businesses complementary to our business. Any acquisition or
investment may require additional capital.
Application of Critical Accounting Policies
We have reviewed our use of estimates in applying our accounting policies
and determined that significant changes in our various estimates would not have
a material impact on the presentation of our financial condition, changes in
financial condition or results of operations. Accordingly, we do not consider
any of our estimates to be "critical estimates" as defined in the rules of the
Securities and Exchange Commission. See Note A of Notes to Financial Statements
under Item 8 of this Report for descriptions of the use of estimates in our
accounting policies. Our management and the audit committee of our board of
directors have discussed our use of estimates and have approved our disclosure
relating to it in this report.
In April 2002, SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" became effective for our company. SFAS 144 clarifies the
guidance used to measure impairment and clarifies the accounting for disposals
of long-lived assets. We are reviewing the effect of this Statement on our
financial statements and do not believe our adoption of the Statement will have
a significant impact on our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We invest in short-term securities of high credit
issuers with maturities ranging from overnight up to 24 months. The average
maturity of the portfolio does not exceed 12 months. The portfolio includes only
marketable securities with active secondary or resale markets to ensure
liquidity. We have no investments denominated in foreign country currencies and,
therefore, our investments are not subject to foreign exchange risk. See "Cash
and Equivalents" and "Short-term Investments" in Note A of Notes to Financial
Statements included under Item 8 of this Report.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Quarterly Results of Operations. The following tables present our unaudited
quarterly operating results for the eight quarters ended March 31, 2002:
Quarter Ended
--------------------------------------------------------
June 30, September 30, December 31, March 31,
2000 2000 2000 2001
---------- --------------- -------------- -----------
Statement of Operations Data
Net revenue . . . . . . . . . $ 51,517 $ 123,462 $ 280,945 $ 429,816
Gross profit (loss) . . . . . (354,555) (486,258) (456,119) (480,520)
Net loss. . . . . . . . . . . (909,675) (596,999) (636,837) (809,880)
Net loss per share. . . . . . $ (0.12)* $ (0.05) $ (0.05) $ (0.07)
Quarter Ended
---------------------------------------------------------
June 30, September 30, December 31, March 31,
2001 2001 2001 2002
---------- --------------- -------------- ------------
Statement of Operations Data
Net revenue . . . . . . . . . $ 434,335 $ 87,574 $ 49,089 $ 24,957
Gross profit (loss) . . . . . (508,518) (869,742) (977,252) (594,052)
Net loss. . . . . . . . . . . (645,062) (1,364,499) (1,422,002) (1,306,636)
Net loss per share. . . . . . $ (0.05) $ (0.11) $ (0.12) $ (0.11)
<FN>
* Reflects a loss of $(0.02) per share related to the redemption of preferred
stock.
See Item 14(a)(1) for financial statements filed with this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Information regarding changes in accountants is incorporated in this Report
by reference to the Current Report on Form 8-K filed on March 11, 2002. There
are no disagreements with our accountants on accounting or financial disclosure
matters.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding executive officers is included in Part I of this
Report
Information regarding directors and the information required by Items 11,
and 13, below, is incorporated in this Report by reference to the proxy
statement for our annual meeting of shareholders (anticipated to be held in
August 2002).
ITEM 11. EXECUTIVE COMPENSATION.
Information required by Item 11, is incorporated in this Report by
reference to the proxy statement for our annual meeting of shareholders
(anticipated to be held in August 2002).
14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- --------------------- ------------------------ ---------------------- -------------------------------
(a) (b) (c)
- --------------------- ------------------------ ---------------------- -------------------------------
Plan category Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance
of options, warrants or outstanding options, under equity compensation
rights warrants and rights plans (excluding securities
reflected in column (a))
- --------------------- ------------------------ ---------------------- -------------------------------
Equity compensation
plans approved by
security holders 369,550(1) $ 7.40 1,104,713(1)
- --------------------- ------------------------ ---------------------- -------------------------------
Equity compensation
plans not approved by
security holders 286,322(2) $ 13.70 Not applicable(2)
- --------------------- ------------------------ ---------------------- -------------------------------
Total 655,872 $ 10.15 1,104,713
- --------------------- ------------------------ ---------------------- -------------------------------
<FN>
(1) These securities consist of options granted or available for grant
under the 1997 Stock Compensation Plan and the Stock Option Plan for
Nonemployee Directors.
(2) These securities consist of warrants. These warrants were not issued
pursuant to any formal plan and there is no authorized number of
warrants available for issuance.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by Item 13, is incorporated in this Report by
reference to the proxy statement for our annual meeting of shareholders
(anticipated to be held in August 2002).
15
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) The following financial statements are filed herewith under Item 8.
Page
(i) Report of Independent Auditors as and for the year ended March
31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(ii) Report of Independent Auditors as of March 31, 2001 and as and
for the periods ended March 31, 2001 and 2000. . . . . . . . . . . 19
Balance Sheets as of March 31, 2002 and 2001 . . . . . . . . . . . 20-21
(iii) Statements of Operations for the years ended
March 31, 2002, 2001 and 2000 . . . . . . . . . . . . . . . . 22
(iv) Statement of Shareholders' Equity for the years ended March 31,
2002, 2001 and 2000. . . . . . . . . . . . . . . . . . . . . . . . 23
(v) Statements of Cash Flows for the years ended March 31, 2002, 2001
and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(vi) Notes to the Financial Statements. . . . . . . . . . . . . . . . . 25
(2) Financial Statement Schedules: None
(b) Reports filed on Form 8-K:
On March 11, 2002 we filed a Current Report on Form 8-K reporting the
hiring of Grant Thornton LLP to audit our financial statements for the year
ended March 31, 2002, replacing Ernst & Young LLP.
(c) Exhibits. See Exhibit Index on pages 37-38.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
APA Optics, Inc.
Date: June 14, 2002 By /s/ Anil K. Jain
----------------------------
Anil K. Jain
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Anil K. Jain President, Chief Executive Officer, and June 14, 2002
- --------------------------- Director
Anil K. Jain
/s/ Kenneth A. Olsen Secretary, Vice President, and Director June 14, 2002
- ---------------------------
Kenneth A. Olsen
/s/ Robert M. Ringstad Chief Financial Officer June 14, 2002
- ---------------------------
Robert M. Ringstad
/s/ Gregory Von Wald Director June 14, 2002
- ---------------------------
Gregory Von Wald
/s/ Ronald G. Roth Director June 14, 2002
- ---------------------------
Ronald G. Roth
/s/ Stephen A. Zuckerman MD Director June 14, 2002
- ---------------------------
Stephen Zuckerman
17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors and Shareholders
APA Optics, Inc.
We have audited the accompanying balance sheet of APA Optics, Inc.
(the Company) as of March 31, 2002, and the related statement of operations,
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of the Company as of March 31, 2001 and for
the two years in the period ended March 31, 2001, were audited by other auditors
whose report dated May 11, 2001 expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for our opinion.
In our opinion, based on our audit, the financial statements referred
to above present fairly, in all material respects, the financial position of APA
Optics, Inc. as of March 31, 2002, and the results of its operations and its
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
Minneapolis, Minnesota
May 7, 2002
18
Report of Independent Auditors
The Board of Directors and Shareholders
APA Optics, Inc.
We have audited the accompanying balance sheet of APA Optics, Inc. as of March
31, 2001, and the related statements of operations, shareholders' equity, and
cash flows for each of the two years in the period ended March 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of APA Optics, Inc. as of March
31, 2001, and the results of its operations and its cash flows for each of the
two years in the period ended March 31, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
May 11, 2001
19
APA OPTICS, INC.
BALANCE SHEETS
MARCH 31,
ASSETS 2002 2001
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 31,606,403 $ 21,225,492
Short-term investments - 15,759,000
Accounts receivable 20,613 370,859
Inventories, net 40,075 415,316
Prepaid expenses 103,588 30,064
Bond reserve funds 70,000 65,000
------------- -------------
Total current assets 31,840,679 37,865,731
PROPERTY, PLANT AND EQUIPMENT, net 3,748,004 3,248,191
OTHER ASSETS
Bond reserve funds 349,129 351,630
Bond placement costs, net of accumulated amortization
of $252,000 and $204,000 at March 31, 2002 and 2001 68,013 116,012
Patents, net of accumulated amortization of $347,998
nd $291,998 at March 31, 2002 and 2001 169,890 112,192
Other 220,695 220,695
------------- -------------
807,727 800,529
------------- -------------
$ 36,396,410 $ 41,914,451
============= =============
The accompanying notes are an integral part of these financial statements.
20
LIABILITIES AND
SHAREHOLDERS' EQUITY 2002 2001
------------- -------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,996,345 $ 2,337,221
Accounts payable 127,926 495,410
Accrued expenses 302,204 301,911
------------- -------------
Total current liabilities 2,426,475 3,134,542
LONG-TERM DEBT 465,018 499,610
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Undesignated shares, 4,999,500 authorized shares;
no shares issued and outstanding - -
Preferred stock, $.01 par value; 500 authorized shares;
no shares issued and outstanding - -
Common stock, $.01 par value; 50,000,000
authorized shares; 11,875,881 and 11,915,456 shares issued
and outstanding at March 31, 2002 and 2001 118,759 119,155
Additional paid-in capital 51,578,185 51,614,972
Accumulated deficit (18,192,027) (13,453,828)
------------- -------------
33,504,917 38,280,299
------------- -------------
$ 36,396,410 $ 41,914,451
============= =============
The accompanying notes are an integral part of these financial statements.
21
APA OPTICS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31,
2002 2001 2000
------------ ------------- ------------
Revenues
Net sales $ 595,955 $ 885,740 $ 260,701
Contract fees - - 160,108
------------ ------------- ------------
595,955 885,740 420,809
Costs and expenses
Cost of sales 3,545,519 2,663,192 1,415,229
Cost of contract fees - - 978,222
Research and development 1,114,051 1,175,564 918,811
Selling, general and administrative 1,733,846 1,866,766 862,170
------------ ------------- ------------
6,393,416 5,705,522 4,174,432
------------ ------------- ------------
Loss from operations (5,797,461) (4,819,782) (3,753,623)
Interest income 1,193,525 2,002,713 100,989
Interest expense (132,263) (135,323) (142,662)
------------ ------------- ------------
1,061,262 1,867,390 (41,673)
------------ ------------- ------------
Loss before income taxes (4,736,199) (2,952,392) (3,795,296)
Income taxes 2,000 1,000 1,000
------------ ------------- ------------
Net loss (4,738,199) (2,953,392) (3,796,296)
Preferred stock dividend - (33,054) -
Excess of preferred stock redemption over carrying
value - (275,000) -
------------ ------------- ------------
Net loss applicable to common shareholders
$(4,738,199) $ (3,261,446) $(3,796,296)
============ ============= ============
Net loss per share
Basic and diluted $ (0.40) $ (0.29) $ (0.43)
============ ============= ============
Weighted average shares outstanding
Basic and diluted 11,896,976 11,180,615 8,744,125
============ ============= ============
The accompanying notes are an integral part of these financial statements.
22
APA OPTICS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31,
Preferred stock Common stock Additional Total
----------------- ---------------------- paid-in Accumulated shareholders'
Shares Amount Shares Amount capital deficit equity
------- -------- ----------- --------- ------------ ------------- ------------
Balance at March 31, 1999 - $ - 8,512,274 $ 85,123 $ 9,700,258 $ (6,396,086) $ 3,389,295
Issuance of common stock - - 465,000 4,650 1,870,475 - 1,875,125
Warrants exercised - - 20,718 207 80,614 - 80,821
Issuance of preferred stock 500 5 - - 4,724,995 - 4,725,000
Warrants issued in lieu of debt
service payments - - - - 32,104 - 32,104
Net loss - - - - - (3,796,296) (3,796,296)
------- -------- ----------- --------- ------------ ------------- ------------
Balance at March 31, 2000 500 5 8,997,992 89,980 16,408,446 (10,192,382) 6,306,049
Issuance of common stock - - 2,845,868 28,459 39,528,845 - 39,557,304
Warrants exercised - - 64,646 646 252,584 - 253,230
Redemption of preferred stock (500) (5) - - (4,724,995) (308,054) (5,033,054)
Warrants issued in lieu of debt
service payments - - - - 51,172 - 51,172
Options exercised - - 6,950 70 32,080 - 32,150
Options issued as compensation - - - - 66,840 - 66,840
Net loss - - - - - (2,953,392) (2,953,392)
------- -------- ----------- --------- ------------ ------------- ------------
Balance at March 31, 2001 - - 11,915,456 119,155 51,614,972 (13,453,828) 38,280,299
Options exercised - - 5,125 51 25,245 - 25,296
Common stock repurchased - - (43,200) (432) (92,206) - (92,638)
Options issued as compensation - - - - 45,414 - 45,414
Other - - (1,500) (15) (15,240) - (15,255)
Net loss - - - - - (4,738,199) (4,738,199)
------- -------- ----------- --------- ------------ ------------- ------------
Balance at March 31, 2002 - $ - 11,875,881 $118,759 $51,578,185 $(18,192,027) $33,504,917
======= ======== =========== ========= ============ ============= ============
The accompanying notes are an integral part of these financial statements.
23
APA OPTICS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
2002 2001 2000
------------ ------------- ------------
Cash flows from operating activities:
Net loss $(4,738,199) $ (2,953,392) $(3,796,296)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 654,460 424,022 424,085
Deferred compensation expense 45,414 66,840 -
Changes in operating assets and liabilities:
Accounts receivable 350,246 (161,522) (124,246)
Inventories 375,241 (138,791) (54,658)
Prepaid expenses and other assets (73,524) (10,261) (892)
Accounts payable and accrued expenses (367,191) 542,237 54,115
------------ ------------- ------------
Net cash used in operating activities (3,753,553) (2,230,867) (3,497,892)
Cash flows from investing activities:
Purchases of property and equipment (1,050,274) (1,128,453) (195,342)
Purchases of short-term investments - (15,759,000) -
Sale of short-term investments 15,759,000 - -
Acquisition of patents (113,698) (108,192) (40,052)
------------ ------------- ------------
Net cash provided by (used in) investing
activities 14,595,028 (16,995,645) (235,394)
Cash flows from financing activities:
Proceeds from sales of preferred stock - - 4,725,000
Payments for redemption of preferred stock - (5,033,054) -
Proceeds from sales of common stock - 39,557,304 1,875,125
Repurchase of common stock (92,638) - -
Proceeds from exercise of warrants and options 10,041 285,380 80,821
Payment of long-term debt (375,468) (161,255) (133,350)
Bond reserve funds (2,499) (138,277) 314,747
------------ ------------- ------------
Net cash provided by (used in)
financing activities (460,564) 34,510,098 6,862,343
------------ ------------- ------------
Increase in cash and cash equivalents 10,380,911 15,283,586 3,129,057
Cash and cash equivalents at beginning of year 21,225,492 5,941,906 2,812,849
------------ ------------- ------------
Cash and cash equivalents at end of year $31,606,403 $ 21,225,492 $ 5,941,906
============ ============= ============
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 132,263 $ 135,323 $ 142,662
Income taxes 2,000 1,000 1,000
Noncash financing transactions:
Warrants issued in lieu of debt service payments - 51,172 32,104
============ ============= ============
The accompanying notes are an integral part of these financial statements.
24
APA OPTICS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2002, 2001 AND 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
------------------
APA Optics, Inc. (the Company) currently manufactures and markets dense
wavelength division multiplexer (DWDM) optical components, offers a range
of gallium nitride-based devices, and manufacturers custom optics products.
Revenue Recognition
-------------------
Revenue is recognized when the product has been shipped and accepted by the
customer and collection is probable.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Investments
classified as cash equivalents at March 31, 2002 consist entirely of
short-term money market accounts. Investments classified as cash
equivalents at March 31, 2001 consisted primarily of certificates of
deposit. Cash equivalents are stated at cost, which approximates fair
value.
Short-Term Investments
----------------------
Short-term investments at March 31, 2001 consisted of certificates of
deposit and were stated at cost plus accrued interest, which approximated
market. At March 31, 2002, the Company had no short-term investments.
Accounts Receivable
-------------------
The Company grants credit to customers in the normal course of business,
but generally does not require collateral or any other security to support
amounts due. Management performs on-going credit evaluation of customers.
The Company maintains allowances for potential credit losses when needed
and, when realized, have been within management's expectations. As of March
31, 2002 and 2001, accounts receivable includes $9,122 and $24,339 billed
under the retainage provision of government contracts.
25
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method for raw material, actual cost
for direct labor, and average cost for factory overhead in work-in-process.
Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are provided
on the straight-line method over the following estimated useful lives of
the assets:
Years
-------
Building 20
Equipment 3 - 10
Leasehold improvements 7 - 10
Bond Placement Costs
--------------------
Bond placement costs relate to the issuance of bonds and are amortized over
the life of the related bonds, or five to eight years.
Patents
-------
Costs of obtaining and successfully defending patents are capitalized and
amortized over three to five years.
Stock-Based Compensation
------------------------
The Company utilizes the intrinsic value method for stock-based
compensation. Under this method, compensation expense is recognized for the
amount by which the market price of the common stock on the date of grant
exceeds the exercise price of an option. The Company recognized
compensation expense of $45,414 and $66,840 for the years ended March 31,
2002 and 2001. There was no compensation expense recognized in the year
ended March 31, 2000.
26
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Fair Value of Financial Instruments
-----------------------------------
Due to their short-term nature, the carrying value of current financial
assets and liabilities approximates their fair values. The fair value of
long-term obligations, if recalculated based on current interest rates,
would not significantly differ from the recorded amounts.
Net Loss Per Share
------------------
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding. Diluted net loss per share is
computed by dividing net loss by the weighted average number of common
shares outstanding and common share equivalents related to stock options
and warrants, when dilutive.
Common stock options and warrants to purchase 440,822, 283,175 and 72,500
shares of common stock with a weighted average exercise price of $13.02,
$15.31 and $31.95 were out-standing during the years ended March 31, 2002,
2001 and 2000, but were excluded because they were antidilutive.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, related revenues and expenses and
disclosure about contingent assets and liabilities at the date of the
financial statements. Actual results may differ from those estimates used
by management.
Newly Adopted Accounting Standards
----------------------------------
In September 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS 144 clarifies the guidance used to
measure impairment and clarifies the accounting for disposals of long-lived
assets. This Statement became effective for the Company in April 2002. The
Company is currently reviewing the effect of this Statement on its
financial statements and does not believe the Statement will have a
significant impact on the Company.
27
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Impairment of Long-Lived Assets
-------------------------------
The Company reviews long-lived assets and certain identifiable
intangibles for impairment when-ever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying account of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Reclassifications
-----------------
Certain 2001 and 2000 amounts have been reclassified to conform
with the presentation in the 2002 financial statements.
NOTE B - INVENTORIES
Inventories consist of the following at March 31:
2002 2001
-------- --------
Raw materials $ 21,448 $405,238
Work-in-process 18,627 10,078
-------- --------
40,075 $415,316
======== ========
28
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at March 31:
2002 2001
---------- ----------
Land $ 60,000 $ 60,000
Buildings 1,679,424 1,679,424
Manufacturing equipment 4,690,130 4,400,101
Tools 423,748 418,573
Office equipment 477,694 324,036
Leasehold improvements 968,073 806,219
---------- ----------
8,299,069 7,688,353
Less accumulated depreciation and amortization 4,551,065 4,440,162
---------- ----------
$3,748,004 $3,248,191
========== ==========
NOTE D - LONG-TERM DEBT
The following is a summary of the outstanding debt at March 31 related to
the Aberdeen facility:
2002 2001
----------- -----------
South Dakota Governor's Office of Economic Development and the
Aberdeen Development Corporation Bond, 5% to 6.75%,
due in various installments through 2016 $1,630,000 $1,695,000
Low interest economic development loans, 0% to 3%, due in
various installments through 2016 264,583 526,317
Forgivable economic development loans, 3%, due in various
installments through 2003 566,780 615,514
----------- -----------
2,461,363 2,836,831
Less current maturities 1,996,345 2,337,221
----------- -----------
$ 465,018 $ 499,610
=========== ===========
29
NOTE D - LONG-TERM DEBT - Continued
The forgivable loans are contingent upon employment levels at the facility
meeting preset criteria. As partial consideration for any loans forgiven,
the Company will grant warrants to purchase common stock of the Company
based on the number of job credits earned by the Company in the preceding
12 months divided by the exercise price. The exercise price of the warrants
was set at $4.00 for year one of the debt and the yearly grant exercise
price increases one dollar each year until the debt matures in fiscal 2003.
No loans were forgiven and no new warrants were issued in fiscal year 2002.
As of March 31, 2002, 36,511 warrants have been issued for loans forgiven
totaling $187,289.
At March 31, 2002 and 2001, the Company had on deposit with trustees
$419,129 and $416,630 in reserve funds for current bond maturities, of
which $70,000 and $65,000 are held in escrow. These funds are included in
bond reserve funds in the accompanying balance sheets. The loan agreement
requires the Company to maintain compliance with certain covenants. The
Company was out of compliance with certain of these covenants in fiscal
2002. All debt, except for the long-term portion of the low interest loans
and the forgivable loans, to which the covenant violation does not apply,
has been classified as current because of the Company's violation of one of
the debt covenants contained in the agreement.
As part of the Company's plan to construct their production facility, the
city of Aberdeen, South Dakota gave the Company land with an approximate
fair market value of $250,000. The gift was contingent upon the Company
staying in the new building through June 23, 2002.
All of the above debt is secured by land, buildings, and certain equipment
of the Company.
Scheduled maturities of the Company's long-term debt are as follows:
Years ending March 31,
2003 $1,996,345
2004 235,713
2005 17,639
2006 17,639
2007 17,639
Thereafter 176,388
----------
$2,461,363
==========
30
NOTE E - EMPLOYEE BENEFIT PLAN
The Company maintains a contributory 401(k) profit sharing benefit plan
covering all employees. During fiscal year 2001, the Company started
matching 50% of employee contributions up to 6% of a participant's
compensation. The Company's contributions under this plan were $53,000 and
$34,000 for the years ended March 31, 2002 and 2001.
NOTE F - INCOME TAXES
As of March 31, 2002, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $12,762,000 which expire in
fiscal years 2002 to 2021.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts used for financial reporting purposes and the
amounts used for income tax purposes. Significant components of the
Company's deferred taxes at March 31 are as follows:
2002 2001
----------------- -----------------
Net operating losses $ 4,339,000 $ 4,204,000
Depreciation 25,000 6,000
Other 157,000 132,000
----------------- -----------------
Total deferred tax asset 4,521,000 4,342,000
Less valuation allowance (4,521,000) (4,342,000)
----------------- -----------------
$ - $ -
================= =================
Income tax expense consists entirely of state taxes in 2002, 2001 and 2000.
NOTE G - SHAREHOLDERS' EQUITY
The Board of Directors may, by resolution, establish from the undesignated
shares different classes or series of shares and may fix the relative
rights and preferences of shares in any class or series.
31
NOTE G - SHAREHOLDERS' EQUITY - Continued
In fiscal year 2002, the Board of Directors authorized the repurchase of up
to the greater of $2,000,000 or 500,000 shares of common stock. As of March
31, 2002, a total of 43,200 shares for $92,638 at an average price of $2.14
per share had been repurchased.
In fiscal year 2001, the Company redeemed all 500 shares of its preferred
stock in exchange for a $5,033,054 cash payment. Also, the Company sold
2,845,868 shares of its common stock in a registered offering, resulting in
net proceeds of $39,557,304. The proceeds were used to fund operations.
In fiscal year 2000, the Company sold in a private placement 500 shares of
its preferred stock, resulting in net proceeds of $4,725,000. The proceeds
were used to fund operations. Also in September 1999, the Company sold
465,000 shares of its common stock in a private placement, resulting in net
proceeds of $1,875,125. These proceeds were used to fund operations.
NOTE H - SHAREHOLDER RIGHTS PLAN
Pursuant to the Shareholder Rights Plan adopted by the Company in 2001,
each share of common stock has attached to it a right, and each share of
common stock issued in the future will have a right attached until the
rights expire or are redeemed. Upon the occurrence of certain change in
control events, each right entitles the holder to purchase one
one-hundredth of a share of Series B Junior Preferred Participating Share,
at an exercise price of $80 per share, subject to adjustment. The rights
expire on November 10, 2010 and may be redeemed by the Company at a price
of $.001 per right prior to the time they become exercisable.
NOTE I - STOCK OPTIONS AND WARRANTS
Stock Options
-------------
The Company has various incentive and non-qualified stock option plans
which are used as an incentive for directors, officers, and other
employees. Options are generally granted at fair market values determined
on the date of grant and vesting normally occurs over a six-year period.
The plans had 1,104,713 shares of common stock available for issue at March
31, 2002.
32
NOTE I - STOCK OPTIONS AND WARRANTS - Continued
Option transactions under these plans during the three years ended March
31, 2002 are summarized as follows:
Weighted
average
Number exercise
of shares price
---------- ---------
Outstanding at March 31, 1999 262,500 $ 4.18
Granted 65,000 5.84
Canceled (35,000) 4.67
----------
Outstanding at March 31, 2000 292,500 4.49
Granted 160,000 10.06
Canceled (48,375) 4.12
Exercised (6,950) 4.64
----------
Outstanding at March 31, 2001 397,175 6.81
Granted 90,000 10.33
Canceled (112,500) 7.79
Exercised (5,125) 4.94
----------
Outstanding at March 31, 2002 369,550 7.40
==========
The number of shares exercisable at March 31, 2002, 2001 and 2000 was
108,674, 191,898 and 106,563, respectively, at a weighted average exercise
price of $4.68, $5.77 and $4.67 per share, respectively.
The following table summarizes information concerning currently outstanding
and exercisable stock options at March 31, 2002:
Options Outstanding Options exercisable
- ----------------------------------------------------------- ------------------------------
Weighted average
Range of Number remaining Weighted average Number Weighted average
exercise prices outstanding contractual life exercise price outstanding exercise price
- ---------------- ----------- ---------------- ----------------- ----------- -----------------
3.77 - $5.53 194,550 2.87 years $ 4.30 87,049 $ 4.19
5.73 - 7.22 50,000 3.40 years 6.50 20,000 6.14
8.50 - 12.54 85,000 4.57 years 10.86 - -
13.18 - 17.15 35,000 3.38 years 15.23 1,625 13.18
23.00 5,000 4.01 years 23.00 - -
----------- -----------
369,550 3.40 years $ 7.40 108,674 4.68
=========== ===========
33
NOTE I - STOCK OPTIONS AND WARRANTS - Continued
The weighted average fair value of options granted in 2002, 2001 and 2000
was $9.30, $11.30 and $5.30. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in 2002,
2001 and 2000; zero dividend yield, risk-free interest rate of 4.5%, 6.0%
and 5.5%; volatility of 132%, 93% and 44%, and a weighted-average expected
term of the options of five years. The Company's 2002, 2001 and 2000 pro
forma net loss and net loss per share would have been $(5,011,715),
$(3,601,298) and $(4,083,136) or $(0.42), $(0.32) and $(0.47) loss per
share had the fair value method been used for valuing options granted
during 2002, 2001 and 2000. These effects may not be representative of the
future effects of applying the fair value method.
Stock Warrants
--------------
The following is a table of the warrants to purchase shares of the
Company's common stock:
Warrants Exercise price Expiration
outstanding per share date
------------ ---------------- -----------
Balance at March 31, 1999 120,339 $ 3.30 - $5.00 1999 - 2004
Issued 108,337 4.88 - 49.47 2001 - 2005
Exercised (20,718) 3.30 - 4.00 1999 - 2003
Expired (3,100) 3.30 1999
------------
Balance at March 31, 2000 204,858 3.75 - 49.47 2000 - 2005
Issued 177,985 7.00 - 17.84 2005 - 2006
Exercised (64,646) 3.75 - 5.00 2000 - 2004
------------
Balance at March 31, 2001 318,197 4.00 - 17.84 2002 - 2006
Expired (31,875) 4.00 2002
------------
Balance at March 31, 2002 286,322 4.79 - 17.84 2002 - 2006
============
All warrants are exercisable upon date of grant.
In fiscal year 2000, warrants totaling 45,500 at a value of $217,945 were
issued to individuals assisting with the Company's capital raising efforts.
Additionally, warrants totaling 57,500 at a value of $2,106,025 were issued
in connection with the issuance of preferred stock as a cost of financing.
Both sets of warrants were valued based upon the Company's stock price at
the time of the transaction. An additional 5,337 warrants were issued in
fiscal year 2000 related to the forgiveness of debt (see note D).
34
NOTE I - STOCK OPTIONS AND WARRANTS - Continued
In fiscal year 2001, warrants totaling 84,084 at a value of $1,500,059 were
issued in connection with the issuance of common stock as a cost of
financing. These warrants were valued based upon the Company's stock price
at the time of the transaction. An additional 7,310 warrants were issued in
fiscal year 2001 related to the forgiveness of debt (see note D).
Additionally, in fiscal year 2001, 57,500 warrants were repriced at $14.72
per share. In connection with the repricing, these individuals were issued
86,591 additional warrants also at $14.72. The price of the warrants was
based upon the value of the Company's stock price on the day of the
transaction.
NOTE J - COMMITMENTS
The Company leases office and manufacturing facilities from a
partnership whose two partners are major shareholders and officers of the
Company. The lease agreement, classified as an operating lease, expires
November 30, 2004 and provides for periodic increase of the rental rate
based on increases in the consumer price index. Future minimum lease
obligations under the lease as of March 31, 2002 are as follows:
Year ending March 31:
2003 $107,000
2004 107,000
2005 72,000
Rental expense, all of which was paid to the partnership, was $138,000,
$135,000 and $121,000 for the years ended March 31, 2002, 2001 and 2000.
NOTE K - CONCENTRATIONS
Major Customers
---------------
Three major customers accounted for 28%, 23% and 14% of the Company's sales
for the year ended March 31, 2002. Three different customers accounted for
19%, 16% and 15% of the Company's sales for the year ended March 31, 2001.
One customer accounted for 35% of the Company's sales for the year ended
March 31, 2000. These customers also accounted for approximately 52% and
69% of the outstanding trade receivable balance at March 31, 2002 and 2001.
35
NOTE K - CONCENTRATIONS - Continued
Suppliers
---------
Although the Company buys specific components from a limited number of
suppliers, management believes that other suppliers could provide a similar
component on comparable terms. A change in suppliers, however, could cause
a delay in manufacturing and a possible loss of sales, which would affect
short-term operating results adversely. There were no suppliers that
provided more than 10% of the Company's total purchases in the years ended
March 31, 2002, 2001 or 2000.
36
EXHIBIT INDEX
================================================================================================================
PAGE NUMBER OR INCORPORATED
NUMBER DESCRIPTION BY REFERENCE TO
- -------------- ------------------------------------------------------- ---------------------------------------
3.1 Restated Articles of Incorporation, as amended to date Exhibit 3.1 to Registrant's Report on
Form 10-Q for the quarter ended
September 30, 2000
3.2 Bylaws, as amended and restated to date Exhibit 3.2 to Registrant's Report on
Form 10-KSB for the fiscal year
ended March 31, 1999
4.1(a) State of South Dakota Board of Economic Exhibit 4.1(a) to the Report on 10-
Development $300,000 Promissory Note, REDI Loan: QSB for the quarter ended June 30,
95-13-A 1996 (the "June 1996 10-QSB")
4.1(b) State of South Dakota Board of Economic Exhibit 4.1(b) to the June 1996 10-
Development Security Agreement REDI Loan No: 95- QSB
13-A dated May 28, 1996
4.2(a) 700,000 Loan Agreement dated June 24, 1996 by and Exhibit 4.2(a) to the June 1996 10-
between Aberdeen Development Corporation and QSB
APA Optics, Inc.
4.2(b) 300,000 Loan Agreement dated June 24, 1996 Exhibit 4.2(b) to the June 1996 10-
between Aberdeen Development Corporation and QSB
APA Optics, Inc.
4.2(c) 250,000 Loan Agreement dated June 24, 1996 by and Exhibit 4.2(c) to the June 1996 10-
between Aberdeen Development Corporation and QSB
APA Optics, Inc.
4.2(d) 300,000 Loan Agreement dated June 24, 1996 by and Exhibit 4.2(d) to the June 1996 10-
between Aberdeen Development Corporation and QSB
APA Optics, Inc.
4.3(a) Loan Agreement between South Dakota Economic Exhibit 4.3(a) to the June 1996 10-
Development Finance and APA Optics, Inc. QSB
4.3(b) Mortgage and Security Agreement - One Hundred Exhibit 4.3(b) to the June 1996 10-
Day Redemption from APA Optics, Inc. to South QSB
Dakota Economic Development Finance Authority
dated as of June 24, 1996
4.4(a) Subscription and Investment Representation Exhibit 4.4(a) to the June 1996 10-
Agreement of NE Venture, Inc. QSB
4.4(b) Form of Common Stock Purchase Warrant for NE Exhibit 4.4(b) to the June 1996 10-
Venture, Inc. QSB
4.5(a) Certificate of Designation for 2% Series A Convertible Exhibit 4.5(a) filed as a part of
Preferred Stock Registration Statement on Form S-3
(Commission File No. 333-33968)
4.5(b) Form of common stock warrant issued in connection Exhibit 4.5(b) filed as a part of
with 2% Series A Convertible Preferred Stock Registration Statement on Form S-3
(Commission File No. 333-33968)
4.6 Common Stock Purchase Warrant issued to Ladenburg Exhibit 4.6 to Registrant's Report on
Thalmann & Co. Inc. to purchase 84,083 shares Form 10-K for fiscal year ended
March 31, 2000 ("2000 10-K")
4.7 Share Rights Agreement dated October 23, 2000 by Exhibit 1 to the Registration
and between the Registrant and Wells Fargo Bank Statement on Form 8-A filed
Minnesota NA as Rights Agent November 8, 2000
37
================================================================================================================
PAGE NUMBER OR INCORPORATED
NUMBER DESCRIPTION BY REFERENCE TO
- -------------- ------------------------------------------------------- ---------------------------------------
10.1(a) Sublease Agreement between the Registrant and Jain- Exhibit 10.1 to the Registration
Olsen Properties and Sublease Agreement and Option Statement on Form S-18 filed with the
Agreement between the Registrant and Jain-Olsen Chicago Regional Office of the
Properties Securities and Exchange Commission
on June 26, 1986
10.1(b) Amendment and Extension of Sublease Agreement Exhibit 10.1(b) to 2000 10-K
dated August 31, 1999
*10.2(a) Stock Option Plan for Nonemployee Directors Exhibit 10.3a to Registrant's Report
on Form 10-KSB for the fiscal year
ended March 31, 1994 (the "1994 10-
KSB")
*10.2(b) Form of option agreement issued under the plan Exhibit 10.3b to 1994 10-KSB
*10.3 1997 Stock Compensation Plan Exhibit 10.3 to Registrant's Report on
Form 10-KSB for the fiscal year
ended March 31, 1997
*10.4 Insurance agreement by and between the Registrant Exhibit 10.5 to Registrant's Report on
and Anil K. Jain Form 10-K for the fiscal year ended
March 31, 1990
*10.5 Form of Agreement regarding Repurchase of Stock Exhibit 10.1 to Registrant's Report on
upon Change in Control Event with Anil K. Jain and Form 10-QSB for the quarter ended
Kenneth A. Olsen September 30, 1997 ("September
1997 10-QSB")
*10.6 Form of Agreement regarding Exhibit 10.2 to the September 1997
Employment/Compensation upon Change in Control 10-QSB
with Messrs. Jain and Olsen
10.7 Form of Agreement regarding Indemnification of Exhibit 10.7 to Registrant's Report on
Directors and Officers with Messrs. Jain, Olsen, From 10-K for the fiscal year ended
Ringstad, Roth, Von Wald and Zuckerman March 31, 2002.
23.1 Consent of Grant Thornton LLP
23.2 Consent of Ernst & Young LLP
<FN>
* Indicates management contract or compensation plan or arrangements required
to be filed as an exhibit to this form.
38