SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from NA to NA.
Commission File Number 0-16106
APA OPTICS, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1347235
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2950 N.E. 84TH LANE, BLAINE, MINNESOTA 55449
(Address of principal executive offices and zip code)
(763) 784-4995
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to the filing
requirement for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class: Outstanding at December 31, 2002
Common stock, par value $.01 11,872,331
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APA OPTICS, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
December 31, March 31,
2002 2002
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 27,721,495 $ 31,606,403
Accounts receivable 33,502 20,613
Inventories:
Raw materials 95,298 21,448
Work-in-process 11,029 18,627
Prepaid expenses 120,033 103,588
Bond reserve funds 50,000 70,000
-------------- -------------
Total current assets 28,031,357 31,840,679
Property, plant and equipment, net 3,565,919 3,748,004
Other assets 619,336 807,727
-------------- -------------
Total assets $ 32,216,612 $ 36,396,410
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,795,026 $ 1,996,345
Accounts payable 131,641 127,926
Accrued expenses 261,908 302,204
-------------- -------------
Total current liabilities 2,188,575 2,426,475
Long-term debt 229,305 465,018
Shareholders' equity:
Common stock 118,723 118,759
Additional paid-in capital 51,595,262 51,578,185
Accumulated deficit (21,915,253) (18,192,027)
-------------- -------------
Total shareholders' equity 29,798,732 33,504,917
-------------- -------------
Total liabilities and shareholders' equity $ 32,216,612 $ 36,396,410
============== =============
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
2
APA OPTICS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues $ 40,674 $ 49,089 $ 152,025 $ 570,997
Costs and expenses:
Cost of sales 554,053 1,026,341 2,030,730 2,926,509
Research and development 360,178 342,224 1,050,025 761,116
Selling, general and administrative 296,638 315,842 1,014,573 1,262,674
------------ ------------ ------------ ------------
1,210,869 1,684,407 4,095,328 4,950,299
------------ ------------ ------------ ------------
Loss from operations (1,170,195) (1,635,318) (3,943,303) (4,379,302)
Interest income 44,906 244,499 300,795 1,046,760
Interest expense (25,705) (30,933) (79,716) (97,385)
------------ ------------ ------------ ------------
19,201 213,566 221,079 949,375
------------ ------------ ------------ ------------
Loss before income taxes (1,150,994) (1,421,752) (3,722,224) (3,429,927)
Income taxes 500 250 1,000 1,637
------------ ------------ ------------ ------------
Net loss $(1,151,494) $(1,422,002) $(3,723,224) $(3,431,564)
============ ============ ============ ============
Net loss per share:
Basic and diluted ($0.10) ($0.12) ($0.31) ($0.29)
============ ============ ============ ============
Weighted average shares
outstanding:
Basic and diluted 11,872,331 11,875,881 11,874,371 11,903,496
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
3
APA OPTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
December 31,
--------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net loss $(3,723,224) $(3,431,564)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 512,638 470,886
Write-off of patents 108,660 -
Deferred compensation expense (44,729) 27,389
Changes in operating assets and liabilities:
Accounts receivable (12,889) 294,134
Inventories and prepaid expenses (82,697) 323,298
Accounts payable and accrued expenses (36,581) (426,820)
------------ ------------
Net cash used in operating activities (3,278,822) (2,742,677)
INVESTING ACTIVITIES
Purchases of property and equipment (181,793) (938,722)
Investment in patents (14,176) (64,521)
------------ ------------
Net cash used in investing activities (195,969) (1,003,243)
FINANCING ACTIVITIES
Proceeds from the sale of short-term investments - 15,759,000
Bond reserve funds 32,906 20,180
Proceeds from the sale of common stock - 10,041
Repurchase of common stock (5,991) (92,639)
Repayment of long-term debt (437,032) (363,140)
------------ ------------
Net cash provided by (used in) financing activities (410,117) 15,333,442
------------ ------------
Increase (decrease) in cash and cash equivalents (3,884,908) 11,587,522
Cash and cash equivalents at beginning of period 31,606,403 21,225,492
------------ ------------
Cash and cash equivalents at end of period $27,721,495 $32,813,014
============ ============
NON-CASH FINANCING AND INVESTING TRANSACTIONS
Addition of land and additional paid in capital $ 67,760 -
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
For further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended March
31, 2002.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Certain reclassifications of previously reported amounts have been
made to conform that presentation to the current period presentation.
NOTE 2. NET LOSS PER SHARE
Basic and diluted net loss per share has been computed by dividing the net
loss by the weighted average number of shares outstanding during the period.
Common stock options and warrants to purchase 548,697 and 655,872 shares of
common stock with a weighted average exercise price of $9.51 and $10.15 were
outstanding at December 31, 2002 and 2001, respectively, but were excluded from
calculating the three months diluted net loss per share because they were
antidilutive.
Common stock options and warrants to purchase 548,697 and 400,485 shares of
common stock with a weighted average exercise price of $9.51 and $13.76 were
outstanding at December 31, 2002 and 2001, respectively, but were excluded from
calculating the nine months diluted net loss per share because they were
antidilutive.
NOTE 3. STOCK REPURCHASE PLAN
On October 1, 2002, the Board of Directors extended its plan authorizing
the repurchase of up to the greater of $2,000,000 or 500,000 shares of our
common stock. For the nine months ended December 31, 2002, we repurchased a
total of 3,550 shares for $5,991 at an average price of $1.69 per share.
NOTE 4. LAND
The Company acquired land in Aberdeen, SD as part of a financing package
provided by the Aberdeen Development Corporation to locate a manufacturing
facility in that city. Ownership of the land was contingent upon the Company
remaining in the facility through June 23, 2002. After satisfying the contingent
requirement, the Company added $67,760 (the assessed value of the land for tax
purposes) to its balance sheet and increased additional-paid-in capital by a
like amount.
NOTE 5. STOCK OPTION GRANT
On August 22, 2002 the Company granted 2,500 options to every current
employee with the exception of Anil Jain, the Chief Executive Officer and Ken
Olsen, the Chief Operating Officer. A total of 122,500 options were granted at
the fair market value of the stock on the day of grant. The options are 60%
exercisable when the Company achieves certain financial objectives and 40%
exercisable when the Company achieves certain operational objectives set forth
in the Company's Short-Term Incentive Plan. Accordingly, these options are
treated as variable awards, and changes in their value will be reflected in
sales, general and administrative expense until the options are exercised or
expire.
5
NOTE 6. WRITE-OFF OF PATENT COSTS
As a result of the slowdown in the sale of fiber optic components and
uncertainty regarding if and when demand for such components will recover, the
Company expensed the unamortized balance of patents related to its dense
wavelength multiplexer / demultiplexers or "DWDM" technology. As a result,
expenses related to patents included in sales, general and administrative
expenses increased $108,660 for the nine months ended December 31, 2002.
NOTE 7. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In September 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement supercedes SFAS 121
and was effective April 1, 2002 for the Company. This statement did not have a
material effect on the financial statements of the Company, but could have a
future effect in the event that an asset impairment occurs.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
The Company believes the adoption of SFAS No. 145 will not have a material
effect on the Company's financial position or results of operations.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires the recognition of a
liability for a cost associated with an exit or disposal activity when the
liability is incurred versus the date the Company commits to an exit plan. In
addition, SFAS No. 146 states the liability should be initially measured at fair
value. The requirements of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company believes the
adoption of SFAS No. 146 will not have a material effect on the Company's
financial position or results or operations. In December 2002, FASB issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
This statement amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure requirements to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation. The transition provisions of
this statement are effective for fiscal years ending after December 15, 2002 and
the disclosure provisions are effective for annual financial statements for
fiscal years ending after December 15, 2002 and the first interim period
beginning after December 15, 2002. The Company believes the adoption of SFAS
No. 148 will not have a material effect on the Company's financial position or
results of operations.
In November 2002, FASB issued Interpretation 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This statement clarifies the initial
accounting and disclosure requirements of SFAS 5 for certain guarantees. The
initial recognition and measurement provisions are effective for guarantees
issued or modified after December 31, 2002 and the disclosure requirements are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company believes the adoption of FIN 45 will not have a
material effect on the Company's financial position or results of operations.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this Report about future sales prospects and other matters to
occur in the future are forward looking statements and are subject to
uncertainties due to many factors, many of which are beyond our control. These
factors include, but are not limited to, the continued development of our
products, acceptance of those products by potential customers, our ability to
sell such products at a profitable price, and our ability to fund our
operations. For further discussion regarding these factors, see "Factors That
May Affect Future Results."
OVERVIEW
- --------
We are engaged in designing, manufacturing, and marketing various optical
components (including dense wavelength multiplexer / demultiplexers or "DWDMs"
and splitters), ultraviolet (UV) detection and measurement devices, and optical
components. For several years, we also received significant revenues from
research and development services projects sponsored by various government
agencies. Since fiscal 1998, we focused on product development, with the intent
to manufacture and market both our own proprietary products and externally
sourced products.
We received no revenues from government sponsored research in fiscal 2001
or 2002 and do not expect any revenues from this source in fiscal 2003. However,
one of our research and development areas, Gallium Nitride (GaN) based
transistors, has drawn significant attention from various government agencies
over the past few years. Although we may seek future involvement in government
sponsored research projects that are closely related to our internal development
efforts, our primary focus will remain the commercialization of products based
on this research.
Two of our GaN based products, the TRUVMETERTM and the SunUV Personal UV
Monitor (SunWatch(R))), have required extended engineering and prototyping
phases that have resulted in delays in their full rollout to the market. We have
made significant progress towards resolving development issues on both products
and initiated the marketing of these products. In particular, both of these
products have been provided to our marketing representatives to initiate the
marketing and sales activities. Additionally, we plan to showcase the SunUV
Personal UV Monitor (SunWatch(R))) in various trade shows during the fourth
quarter of fiscal year 2003. Production ramp up will also start in the fourth
quarter as well.
Most companies in the communications equipment industry have been affected
by the slowdown in telecommunications equipment spending. Continued weakness in
the general economy, and the telecom sector in particular, have resulted in
downward pressure on average selling prices of DWDMs and other optical
components, leading to declining margins and profits. We do not know if or when
demand will return to levels allowing profitable production of these components.
In response to these market conditions, we are expanding our optical
components product offering, primarily through externally sourced products. We
have been broadening our markets to include fiber to the home and CATV systems
integrators and service providers. New products have been added to our portfolio
to address these applications. One of these product lines includes components
for the broadband optical access network, a market with near term growth
potential. Our goal is to offer products that reduce inefficiencies in network
deployment. We have identified key sources for lower cost components, primarily
from overseas, in pursuit of this goal. Our experience in optical fiber
components is used to identify the best vendors and products. We are also
assisting in complex testing and qualification processes. APA is also using its
customer relationships and understanding of optical communication systems to
place products in the hands of the appropriate customers.
RESULTS OF OPERATIONS
- -----------------------
REVENUES
Revenues for the quarter ended December 31, 2002, were $40,674, reflecting
a 17% decrease from the comparable period in the preceding fiscal year. Revenues
were $ 152,025 for the nine months ended December 31, 2002, a decrease of 73%
from the revenues for the comparable period in the preceding fiscal year. Lack
of demand for DWDM components was the primary factor contributing to the decline
in revenues for the three and nine month periods ended December 31, 2002.
7
COST OF SALES
Cost of sales decreased $472,288 to $557,053 for the quarter ended December
31, 2002, reflecting a 46% decrease from the comparable period in the preceding
fiscal year. For the nine months ended December 31, 2002, cost of sales
decreased $895,779 or 31% over the comparable period in the preceding fiscal
year. The decreases in the cost of sales for both periods were the result of
reduced production due to the lack of orders, a reduced production staff and the
transfer of production staff to research and development activities. Gross
margins for sales were negative in both periods. We expect to continue
experiencing negative gross margins until there is a significant increase in
sales and production levels.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased by $17,954 for the quarter
ended December 31, 2002. This represents an increase of 5% from research and
development expenses in the comparable period of the preceding fiscal year. For
the nine months ended December 31, 2002, research and development expenses
increased $288,909 or 38% from the comparable period in the preceding fiscal
year. These increases are the result of increased research activity related to
our GaN HFET effort and shifting of production personnel to research activities
due to the lack of demand for our existing products. We expect research and
development expenses to increase gradually for the foreseeable future.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses decreased $19,204 for the
quarter ended December 31, 2002, reflecting a 6% decrease compared to the
comparable period in the preceding fiscal year. For the nine months ended
December 31, 2002, selling, general and administrative expenses decreased
$248,101 or 20% from the comparable period in the preceding fiscal year. The
decreases were primarily due to the absence of any incentive compensation to
employees, a decrease in personnel and savings from cost containment measures
implemented in response to the lack of demand for our products.
LOSS FROM OPERATIONS
The loss from operations was $1,170,195, a decrease of $465,123 or 28% for
the quarter ended December 31, 2002 over the comparable period in fiscal 2002.
For the nine months ended December 31, 2002, the loss from operations decreased
$435,999 or 10% over the comparable period in the preceding fiscal year. The
decreased loss in the quarter and the nine months ended December 31, 2002, was
the result of the cost containment measures, which more than offset the drop in
revenues.
Lack of demand for DWDM components was the major factor contributing to the
decline in sales. We do not see demand for these components returning in the
near future. In addition, declining average selling prices for these components
will require demand to exceed prior levels for us to achieve unit sales
sufficient to generate revenues consistent with prior periods.
OTHER INCOME AND EXPENSE
Other income decreased $194,365 or 91% for the quarter ended December 31,
2002, from the comparable period in fiscal 2002. For the nine months ended
December 31, 2002, other income decreased $728,296 or 77% from the comparable
period in the preceding fiscal year. The decreases were due to the combination
of a decline in the rate of interest earned on short-term investments and a
lower average cash balance, as cash was consumed to fund operations, capital
investment and debt service. Unless short-term interest rates increase, we
anticipate continuing decreases in interest income as a result of the use of
cash in operations, for capital expansion and for debt service.
8
NET LOSS
The net loss for the quarter ended December 31, 2002, was $1,151,494 (or
$0.10 per basic and diluted share), a decrease of $267,355 or 19% from the net
loss reported for the same period in fiscal 2002. For the nine months ended
December 31, 2002, the net loss was $3,723,224 (or $0.31 per basic and diluted
share), an 11% increase over the net loss for the comparable period in the
preceding fiscal year. For the quarter, the decreased net loss was attributable
to the cost containment measures implemented by the Company that more than
offset the decline in interest income. For the nine months ended December 31,
2002, the increased net loss was primarily attributable to the decline in
interest income.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
APA's cash and cash equivalents consists primarily of certificates of
deposits, U.S. Government instruments or commercial paper with original
maturities of less than three months. The balance of cash and cash equivalents
at December 31, 2002 is $27,721,495 compared to $31,606,403 at March 31, 2002.
The decrease in cash was primarily the result of using cash to fund operations.
Cash used in operating activities was $3,278,822 for the nine months ended
December 31, 2002, compared to $2,742,677 for the comparable period in the
preceding fiscal year. The increase reflects the lack of revenues and decreased
interest income.
We used net cash of $195,969 in investing activities in the nine months
ended December 31, 2002, compared to $1,003,243 used in the same period of the
preceding fiscal year. The funds were used for limited purchases of equipment,
facility repairs and leasehold improvements. The decrease in the amount used for
investing activities reflects our efforts to conserve cash by deferring the
purchase of capital equipment for production until we experience an increase in
the demand for our products. We do anticipate investing in equipment to support
the HFET research and development activities over the next several quarters.
Net cash used in financing activities in the nine months ended December 31,
2002 totaled $410,117. We used a net of $437,032 for the scheduled reduction of
debt and $5,991 to redeem common stock. We repurchased a total of 3,550 shares
at an average cost of $1.69 per share. We generated $32,906 from the reduction
of bond reserve funds. For the nine months ended December 31, 2001, net cash
provided by financing activities totaled $15,333,442. We raised $15,759,000 from
the sale of short-term investments, generated $10,041 from the sale of common
stock, generated $20,180 from the reduction of bond reserve funds, used $363,140
for the scheduled reduction of debt, and used $92,639 to redeem common stock.
We anticipate a total of approximately $500,000 in capital expenditures in
fiscal 2003, primarily for equipment. The majority of the capital expenditures
relate to the expansion of our research and development facilities. We believe
we have sufficient funds for operations for the remainder of fiscal 2003 and
beyond.
Our contractual obligations and commitments are summarized in the table
below (in 000's):
Less than After
Total 1 Year 1-3 years 4-5 years 5 years
-------------------------------------------------
Long-term debt $2,024 $ 1,795 $ 53 $ 36 $ 140
Operating leases 229 116 112 1 -
-------------------------------------------------
Total Contractual Cash
Obligations $2,253 $ 1,911 $ 165 $ 37 $ 140
=================================================
9
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 our Report on Form 10-K 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 Note 7 of this report, the effect of recent promulgations of the
Financial Accounting Standards Board (FASB) on the Company are described.
Management believes the adoption of Statements of Financial Accounting Standards
(SFAS) Nos. 144, 145, 146 and 148, and Interpretation 45 (FIN 45) will not have
a material effect on the Company's financial position or results of operations.
FACTORS THAT MAY INFLUENCE FUTURE RESULTS
- ----------------------------------------------
Unless we generate significant revenues, our expenses and negative cash flow
will significantly harm our financial position.
We have not been profitable since fiscal 1990. As of December 31, 2002, we
had an accumulated deficit of $21.9 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
manufacturing, sales and marketing, product development and administrative
expenses. As a result, we will need to generate significant revenues while
containing costs and operating expenses if we are to achieve profitability.
Declining demand and average selling prices for our DWDM products will require
us to reduce production costs to effectively compete and market these products
and could force us to discontinue domestic manufacturing of these products
altogether.
Since the time we first introduced our DWDM components to the marketplace,
we have seen the demand and the average selling price for this type of component
decline. We expect the trend of declining average prices to continue. We cannot
assure you that demand for these components will recover to prior levels. 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 seek lower cost suppliers of raw materials, components, or assemblies within
the United States, or internationally.
We will also seek to form strategic alliances with companies that can
supply these components or 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
- Expansion of both domestic and international marketing efforts.
There can be no guarantee that we will achieve these objectives or goals.
Our inability to significantly decrease production costs or increase our sales
could seriously harm our business, financial condition and results of
operations.
Our Sun(UV) Watch(R) personal ultraviolet monitor is a relatively new consumer
product concept that may be adopted more slowly than projected.
10
The Sun(UV) Watch(R) is an innovative product that helps consumers monitor
and plan their exposure to the UV radiation in sunlight. Personal UV monitoring
is a relatively new concept for consumers. Adoption and widespread use of the
product by consumers could take a substantial period of time and may not ever
achieve levels of acceptance necessary to make commercial production viable. In
addition, creation of brand identity and consumer awareness requires the
commitment of substantial capital and could divert resources from our
development efforts. Even if we are successful in developing a market for the
Sun(UV) Watch(R), large consumer product manufacturers with strong name brand
identity could develop competing devices resulting in declining average selling
prices and increased marketing costs for this type of product. Moreover, we have
limited experience in designing for, and marketing to, the retail consumer
market.
We have limited experience in the development, manufacturing, marketing and
distribution of products internationally.
If our effort to reduce the development and manufacturing costs of our
products and/or seek more international customers requires 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 increased burden of complying with foreign laws and tax structures;
- Risks associated with fluctuations in the value of foreign currencies; and
- Risk associated with trade barriers such as high duty placed on components
imported from our partner countries.
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 optical components is dependent on several factors including
capital expenditures in the telecommunications 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 may be unable to increase our manufacturing capacity and will not be able to
deliver our products to our customers in a timely manner if demand for our
products increases.
Manufacturing of our products is a complex and precise process. Should our
products achieve broad based market acceptance, we will need to either ramp
internal production rapidly or secure manufacturing services from third parties.
We have limited experience in rapidly increasing our manufacturing capacity or
in manufacturing products at high volumes. We or a contract manufacturer would
be required to hire, train and manage additional manufacturing personnel and
improve production processes in order to increase 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;
- The lack of availability of qualified manufacturing personnel; and
- The inabilities to timely procure outsourced components.
In addition, competitive third party manufacturers may be located outside
the United States. Some of the risks associated with doing business
internationally are discussed under "We have limited experience in the
development, manufacturing, marketing and distribution of products
internationally," above.
11
Our dependence on outside manufacturers may result in product delivery delays.
We purchase components that are incorporated into our products and
components for resale 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. If components that are purchased for resale are not
delivered on a timely basis or do not meet customer specifications, our sales
and profitability could be adversely affected. 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.
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 new products and introduce them to the commercial
market quickly in order to be successful. Our addition of externally sourced
components to our product offering reduces our ability to control this process
increasing our dependency on our suppliers for product development activities.
Our failure to produce or source technologically and economically 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 and sourcing 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. Our decision to market externally sourced components
forces us to rely on our suppliers' representations that their products do not
infringe the intellectual property rights of others. Defense against such
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.
12
We may be required to litigate to enforce and protect our intellectual property
rights.
Litigation against persons who infringe our intellectual property rights
could be expensive and may divert management resources from operating the
Company. Even if we prevail in such litigation, the costs incurred may adversely
affect us.
Acquisitions or investments could have an adverse effect 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.
ITEM 3. 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.
ITEM 4. CONTROLS AND PROCEDURES.
a. Evaluation of disclosure controls and procedures. The Company's
chief executive officer and chief financial officer have concluded
that the Company's disclosure controls and procedures (as defined in
Exchange Act Rule 13a-14(c)) are sufficiently effective to ensure
that the information required to be disclosed by the Company in the
reports it files under the Exchange Act is gathered, analyzed and
disclosed with adequate timeliness, accuracy and completeness, based
on an evaluation of such controls and procedures conducted within 90
days prior to the date hereof.
b. Changes in internal controls. There have been no significant changes
in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the
evaluation referred to above.
PART II
ITEMS 1 THROUGH 5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 99.1 - Chief Executive Officer's certification pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
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Exhibit 99.2 - Chief Financial Officer's certification pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
A report on Form 8-K dated October 1, 2002, reported the
resignation of Director Gregory Von Wald
A report on Form 8-K dated October 30, 2002, reported our results
of operation for the quarter ended September 30, 2002
A report on Form 8-K dated December 4, 2002, reported the
resignation of Chief Financial Officer Robert Ringstad
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APA OPTICS, INC.
2/14/03 /s/ Anil K. Jain
- ------- ----------------
Date Anil K. Jain
President and
Chief Executive Officer
2/14/03 /s/ David R. Peters
- ------- -------------------
Date David R. Peters
Chief Financial Officer
14
CERTIFICATION
I, Anil K. Jain, certify that:
1. I have reviewed this quarterly report on Form 10-Q of APA Optics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. APA Optics, Inc.'s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for APA Optics, Inc. and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to APA Optics, Inc., including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the our disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. APA Optics, Inc.'s other certifying officers and I have disclosed, based on
our most recent evaluation, to our auditors and the audit committee of our
board of directors:
a) There are no known deficiencies in the design or operation of internal
controls which could adversely affect APA Optics, Inc.'s ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) There has been no known fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. APA Optics, Inc.'s other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
February 14, 2003
Signature: /s/ Anil K. Jain
----------------
Print Name: Anil K. Jain
------------
Print Title: Chief Executive Officer
-----------------------
15
CERTIFICATION
I, David R. Peters, certify that:
1. I have reviewed this quarterly report on Form 10-Q of APA Optics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. APA Optics, Inc.'s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for APA Optics, Inc. and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to APA Optics, Inc., including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the our disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. APA Optics, Inc.'s other certifying officers and I have disclosed, based on
our most recent evaluation, to our auditors and the audit committee of our
board of directors:
a) There are no known deficiencies in the design or operation of internal
controls which could adversely affect APA Optics, Inc.'s ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) There has been no known fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. APA Optics, Inc.'s other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
February 14, 2003
Signature: /s/ David R. Peters
-------------------
Print Name: David R. Peters
---------------
Print Title: Chief Financial Officer
-----------------------
16