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, 2003.
[_] 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 of incorporation (I.R.S. Employer
or organization) Identification No.)
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. [ ] YES [X] NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act. [_]
The aggregate market value of the voting and non-voting equity held by
non-affiliates of the registrant, as of the last business day of the
registrant's most recently completed second fiscal quarter [computed by
reference to the price at which the common equity was last sold] [or the average
bid or asked price of such common equity] was approximately $18,811,345.
The number of shares of common stock outstanding as of June 12, 2003 was
11,872,331.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of our proxy statement for the annual shareholders meeting to be
held in August 2003 are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS.
Since the founding of APA Optics, Inc. ("APA") 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 developed
multiple products including fiber optic components for metro and access
communications networks, a range of GaN based devices, and precision optical
products. We believe that gallium nitride based devices have significant
potential markets and we developed specific expertise and/or patent positions
relevant to them. We have long been a designer and manufacturer of precision
optical components and 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 anticipated to be produced
under such licenses to be just now emerging, including applications for GaN
based transistors for cell phone base stations.
Almost all telecommunications service providers and network equipment
suppliers are experiencing severely reduced demand, which in turn as reduced
demand for their fiber optic components. In this depressed market we have
focused on identifying applications which are most likely to see growth, in
particular, on applications and systems integrators who are addressing key
bandwidth bottlenecks in the communications networks. The networks which are
still underdeveloped are the metro and access networks. The metro and access
networks place value on lower cost components, ease of installation, and remote
configurability.
In this era of excess component manufacturing capacity, APA has chosen to
avoid costly product development and capital expansion activity. Instead, APA is
teaming with highly qualified cost efficient partners with limited market
presence.
In the past year we worked on diversifying our optical fiber product
offering to include new products for access and metro systems. We developed a
line of arrayed waveguide grating (AWG) WDM products based on planar lightwave
circuits. The new products are directed towards lower channel local WDM systems
and FTTH access systems. APA is attracted to the access network construction
due to the observed growth in FTTH and other broadband deployments.
Intense competition from Asian manufacturers has also impacted our optics
manufacturing business due mainly to lower labor rates. Relatively high manual
labor requirements, resulting in relatively higher manufacturing costs, may
force us to limit or eliminate our optical manufacturing business activity.
In March 2003, our wholly owned subsidiary, APA Cables and Networks, Inc.
("APACN"), purchased assets from Computer System Products, Inc. ("CSP"). Founded
in 1982, CSP's first product was a power distribution cable for use in computer
rooms. Data products followed as a natural add-on to these types of projects and
CSP became an early pioneer as a manufacturer and distributor in the data
communications market. Core competencies in copper and fiber optics led the
company into the telecommunications industry and opportunities continued to
drive further product offerings. CSP grew organically from its inception through
2000 at a compound annual rate of 37%, operating profitably for the first 17 out
of 20 years in business. At its peak, sales volume reached over $ 42 million and
the company employed almost 250 people.
During the industry downturn, CSP reorganized to reduce its operating costs
by almost 70 percent by substantial head-count reduction, the sale of its
distribution and power cable business (which accounted for approximately 50% of
CSP's historic sales), consolidations of its manufacturing facilities and
restructuring of its
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unsecured liabilities. APACN acquired the assets and some liabilities of this
remaining business. APACN is a full-line manufacturer of standard and custom
copper and fiber optic cable assemblies for service providers and original
equipment manufacturers ("OEM"). This acquisition diversifies our product
offerings, expands our opportunities for cross-selling our other products to
former CSP customers and enables us to offer a more complete technology solution
to all our customers.
We intend to deploy the assets in the same line of business. This
acquisition diversifies our product offerings, expands our opportunities for
cross-selling our other products to former CSP customers and enables us to offer
a more complete technology solution to all our customers.
Since eliminating our R&D contracts in 2000 to focus on production of our
proprietary products our revenues have decreased and our losses have increased.
We anticipate that there will be opportunities to bid on R&D contracts in the
GaN based transistor area in the coming fiscal year. When these opportunities
coincide with our development plan we shall pursue these contracts. In order to
successfully capture these contracts we anticipate partnering with other
industrial and academic institutions that have skills and resources
complementary to our own. In this way our core competencies and intellectual
property can be leveraged with the most efficient use of our internal resources.
DESCRIPTION OF BUSINESS.
Proprietary Products
We currently offer the products described below.
- Fiber Optic Components. APA Optics provides passive optical components
-----------------------
for FTTP networking based on the Passive Optical Network (PON)
architecture. The product line includes planar lightwave circuit
(wavelength independent) optical splitters for PON FTTP networks, and fiber
optic enclosures for locating passive splitters in the field.
APA has increased its WDM offerings to include thin film filter (TFF)
WDM components for use in low channel count access and metro WDM systems
for data, voice and CATV. The TFF components can also be deployed in field
enclosures. APA also introduced an arrayed waveguide grating (AWG) module
for cost effective, high channel count applications. In early FY 2004, we
had our first AWG sale to a previous bulk grating customer. These products
were introduced at 2003 Optical Fiber Conference.
The bulk grating modules have been put on hold. The price competition
for these products is intense. In addition, it has been difficult for
domestic manufacturing to compete with low cost off shore labor. 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.
APA has increased the diversity of its fiber optics product set. We
now offer planar lightwave circuit optical splitters for fiber to the home
networks; thin film filter WDM components for use in CATV,
telecommunication, and free space optics systems; and arrayed waveguide WDM
components for higher channel count systems with advanced functions. APA
identifies and qualifies low cost international suppliers of fiber optic
components and adds value by characterizing performance, adding advanced
features, and user friendly enclosures. The technical marketing and design
skills at APA bring customized solutions to end users at competitive
prices. Additionally, the MMF bulk grating WDM module supports high
capacity data transmission through embedded multi mode fiber.
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- - Precision Optical Products. We manufacture and sell precision optical
----------------------------
products to third parties; however, we expect a significant portion of our
capacity to be used 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 Company-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 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, 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 two
patents pending. While we currently manufacture and sell UV detectors as
components, our focus in this area is on value-added products built around
the detectors. We introduced two such products in fiscal 2003 and will
continue to actively market these:
- SunUV(R) Personal UV Monitor. The SunUV(R) Personal UV Monitor
--------------------------------
(formerly, SunUVWatch(R)) is a personal ultraviolet radiation (UV)
monitor that also incorporates a time/day/date function. It detects UV
radiation that is hazardous to human health. It keeps track of the
total UV exposure of the user and estimates a maxiumum exposure time
according to government guidelines based on skin type and
widely-accepted research on UV exposure limits. Through fiscal 2003 we
continued to complete development of this product and introduced it at
several trade shows for retailers in the golf and outdoors products
markets. 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). 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,
users of UV-cured inks and paints, and manufacturers of UV-based
sterilization systems.
Our research and development efforts are currently focused on the products
described below.
- - 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, the associated
infrastructure, military remote sensing and communication, and in other
high power/frequency/temperature applications. Two of our seven awarded
patents in this technology are fundamental to the transistor structure. We
continue to develop our intellectual property
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portfolio, filing a provisional patent application in November of 2002.
Significant resources would be required should we choose to internally
develop a full product line in this area. Our approach to developing
products in this area will be to fully utilize our internal capabilities
while seeking partners with complementary capability. We are currently in
extended discussions with several industrial concerns negotiating licensing
and outsourcing agreements. Outsourcing of processes that require extensive
capital investment and development should allow us to concentrate on
further developing products and intellectual property with more value added
potential. Our ability to capture contracts and develop industrial partners
will depend critically on our ability to grow epitaxial material on larger
diameter substrates. While initial uniformity measurements have been
encouraging, we cannot guarantee that we will be successful in these
efforts.
Value-Added Products
APA identifies and qualifies low cost international suppliers of fiber optic
components and adds value to their products by characterizing performance,
adding advanced features, and user friendly enclosures. This process has the
following advantages: rapid product introduction, reduced development cost, and
reduced production costs. The technical marketing and design skills at APA
bring customized solutions to end users through this partnering process.
Activities involved in the partner selection process include technical product
evaluation, ability to obtain Telcordia qualification, and on-site auditing of
supplier facilities. We have applied this process toward the following products:
- - Passive Optical Splitters (wavelength independent). A new component
------------------------------------------------------
for APA, the passive optical splitter, has application in optical access
networking, including Fiber-to-the-Premise, and Fiber-to-the-Home. Newly
adopted standards for optical access networking have been adopted by an
increasing number of networking equipment companies and telecommunications
service providers. Network upgrades, pushing fiber closer to the end-user
are being implemented successfully by independent telephone companies in
rural settings and also in green field (new) housing developments. APA is
also marketing optical fiber closures, for packaging optical splitters in
the outside network environment. The products are offered together as a
value-added, turnkey solution, making passive splitters ready for
deployment into the outside network. Both new products are being sourced
through offshore manufacturing partners, and contracts have been put in
place to supply APA with these products.
- - Thin Film Filter WDM Components and AWG DWDM Components. APA has also
---------------------------------------------------------
identified several low channel count thin film filter product lines. These
products are used in CATV systems and metro telecom systems. APACN is
already supplying cable products to many of the target CATV and metro
telecom systems operators. Again using the value added model, we plan to
provide customized products to systems operators at a competitive price.
APA has also introduced a line of arrayed waveguide grating WDM
modules. AWG products are manufactured using cost effective silicon
semiconductor processing techniques. During the second half of fiscal 2003,
we identified a technically strong partner. A committed relationship was
formalized early in fiscal 2003. The first products will be a 40 channel,
100 GHz channel spacing module followed by a 50 channel 50GHz module. APA
has joined the international multi source agreement for thermally
stabilized AWG modules that included NEL, Hitachi, Alcatel, NEC, JDSU and
others. The finalized versions of 40 channel AWG modules will be released
in 2004. AWG technology is especially attractive because multiple functions
can be integrated into a single chip. These advanced functions are
attractive for systems with remote configuration abilities and may be the
topic of future joint 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,
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Italy and France). Some of the fiber optic components will also be sold through
APACN. Our DWDM products are sold through APA due to the more involved
technical exchanges and longer sales incubation period. Potential leads are
readily shared between the two organizations. We do not currently maintain a
large internal sales force. We have one sales person dedicated to the SunUV(R)
Personal UV Monitor and we also maintain product information on our website.
Industrial acceptance of GaN based transistor products and our ability to
license our intellectual property will critically depend on proven device
reliability in addition to well documented initial performance. As such, we
have focused our development efforts toward characterization and reliability
investigation.
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, 2003, 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. We have made significant
progress toward improving the active, strategic management of our intellectual
property portfolio. 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.
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. Two major customers accounted for 21% and 15%
of the Company's sales for the year ended March 31, 2003. During fiscal year
2002, revenues from three customers represented 28%, 23% and 14% of our total
revenues each. In fiscal 2001, we had three customers whose dales represented
19%, 16% and 15% of total revenues each. While significant as a percentage of
revenues, the revenues in dollars were not significant and the loss of any one
of these customers would not have a material adverse effect on the Company.
Backlog
We had no backlog of orders at March 31, 2003 or 2002 and approximately
$545,000 at March 31, 2001. APACN had a backlog of $389,000 as of March 31,
2003.
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
6
fostered a highly competitive environment. This competition has resulted 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, our intellectual property, our ability to convince customers
to adopt our technology early in their design cycle, and our ability to control
costs
Competitors for our DWDM products include Lightwave Microsystems, Inc.,
NetTest, LightChip, Inc., Wavesplitter Technologies, Inc., Gould, Avanex, 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 with a
combination of features, style and packaging equivalent to ours, although there
are other manufacturers of this type of product in the US, Japan and Korea, and
we have found several intellectual property for this general type of product.
Newport, Melles Griot and Oriel offer scientific UV meters, some offering 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, would include Cree, Inc.,
Nitronex Corporation, and RFMD Corporation, and some Japanese and European
firms.
Research and Development
During the fiscal years ended March 31, 2003, 2002, and 2001, we spent
approximately $1,212,000, $1,114,000, and $1,176,000, respectively, on research
and development, all of which was related to the DWDM, compound semiconductor
electronic devices, UV detector and related products. We had no research
activities sponsored by customers in fiscal years 2003, 2002 and 2001. We
operate in highly competitive and rapidly evolving markets and plan to commit
significant resources for research and development for the foreseeable future.
We could locate research and development facilities in locations other than our
current facilities in Minnesota and South Dakota based on several factors,
including accessibility to qualified personnel and facility costs.
Employees
As of March 31, 2003, we had 44 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
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.
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Unless we generate significant revenue growth, our expenses and negative cash
flow will significantly harm our financial position.
We have not been profitable since fiscal 1990. As of March 31, 2003, we had
an accumulated deficit of $23.2 million. We may 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 fiber optic products will require us to
reduce production costs to effectively compete and market these products.
Since the time we first introduced our fiber optic components to the
marketplace we have seen the average selling price of fiber optic components
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 or components.
- Work to further automate our assembly process.
- Develop value-added components based on integrated optics.
- Seek offshore sources for assembly services.
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. There can be no
guarantee that we will achieve these objectives. Our inability to decrease
production costs or increase our unit sales could seriously harm our business,
financial condition and results of operations.
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 result in 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 been more profound in the telecommunications market resulting in a
significant reduction in capital expenditures for products such as our DWDMs and
our fiber optic components. It is impossible to predict how long the slowdown
will last. Such periods of reduced demand will harm our business, financial
condition and results of operations. Changes to the regulatory requirements of
the telecommunications industry could also affect market conditions, which could
also reduce demand for our fiber optic components.
We may be required to rapidly increase our manufacturing capacity 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. If demand for our products increases, 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,
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- Difficulty maintaining the precision manufacturing processes required
by our products while increasing capacity,
- The inability to timely procure and install the necessary equipment,
and
- Lack of availability of qualified manufacturing personnel.
If we apply our capital resources to expanding our manufacturing capacity
in anticipation of increased customer orders, we run the risk that the projected
increase in orders will 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. In the case of the SunUV(R) Personal UV Monitor, we supply components
to an outside assembler who delivers the completed product. If these vendors
fail to supply us with components or completed assemblies on a timely basis, or
if the quality of the supplied components or completed assemblies is not
acceptable, we could experience significant delays in shipping our products. Any
significant interruption in the supply or support of any components or completed
assemblies 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. In the case of the SunUV(R)
Personal UV Monitor, a consumer product, customers could encounter a latent
defect not detected in the quality inspection. 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 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 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 or as other firms introduce
lower cost alternatives. 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 multiple patents on aspects of our design and
manufacturing processes and we have applied for several more.
9
Third parties may still assert claims that our products or processes infringe
upon their intellectual property. Defending our interests 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 were
successful, we could be prevented from manufacturing or selling our current
products, be forced to redesign our products, or be forced 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
In March 2003, we completed the acquisition of the assets of CSP as part of
our strategy to expand our product offerings, develop internal sources of
components and materials, and acquire new technologies. We intend to continue
reviewing 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
The following is a list of our executive officers, their ages, positions and
offices as of March 31, 2003.
NAME AGE POSITION
Dr. Anil K. Jain 57 Chief Executive Officer and President
Kenneth A. Olsen 59 Vice President and Secretary
David R. Peters 48 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 was with 3M Corp.,
St. Paul, Minnesota.
DAVID R. PETERS has been Chief Financial Officer since joining the Company
in January 2003. Prior to joining the Company he was President and Senior Vice
President of CSP and related companies, Plymouth, Minnesota, from May 1988 to
December 2002. Prior to CSP, Mr. Peters was an auditor with Ernst & Young, LLP
and McGladrey & Pullen, LLP.
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 K of Notes to Financial
Statements included under Item 8 hereof. We own land directly west of the Blaine
facility that may be used for future expansion.
10
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 E of Notes to Financial
Statements included under Item 8 in this Report for further information
regarding the financing of this facility.
In connection with our acquisition of assets from CSP, we entered into a
month-to-month lease for a portion of a building previously occupied by CSP at a
monthly rent of $16,667. We or the landlord can terminate this lease on thirty
days advance notice. We believe that we can acquire substitute space suitable
for our needs at comparable rent. We currently do not intend to remain in this
facility beyond September 30, 2003.
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.
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 2003 HIGH LOW
- ----------- ------ -----
Quarter ended June 30, 2002 $ 2.02 $1.80
Quarter ended September 30, 2002 1.65 1.15
Quarter ended December 31, 2002 1.62 1.33
Quarter ended March 31, 2003 1.33 1.27
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
There were approximately 356 holders of record of our common stock as of
March 31, 2003.
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.
11
ITEM 6. SELECTED FINANCIAL DATA.
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Statements of Operations Data:
Revenues . . . . . . . . . . . . . . $ 436,157 $ 595,955 $ 885,740 $ 420,809 $ 722,030
Net loss . . . . . . . . . . . . . . (5,009,434) (4,738,199) (3,261,446) (3,796,296) (2,513,798)
Net loss per share,basic and diluted
(.42) (.40) (.29) (.43) (.30)
Weighted average number of shares, . 11,873,914 11,896,976 11,180,165 8,744,125 8,512,274
basic and diluted . . . . . . . . .
Balance Sheet Data:
Total assets . . . . . . . . . . . . $31,833,696 $36,396,410 $41,914,451 $ 9,610,391 $ 6,804,976
Long-term obligations, including
current portion. . . . . . . . . . . 2,173,682 2,461,363 2,836,831 3,049,258 3,214,712
Shareholders' equity . . . . . . . . 28,918,943 33,504,917 38,280,299 6,306,049 3,389,295
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.
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, 2002 or 2003
For the last several years our goal has been to manufacture and market
products/components based on our technology developments. We have focused on
DWDM components for fiber optic communications and GaN 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.
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.
12
In Note A of the Notes to the Financial Statements, 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 46) will not have a material effect on our financial position or results of
operations.
CONTRACTUAL OBLIGATIONS
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 $2,173 $ 1,847 $ 150 $ 36 $ 140
Operating leases 300 162 138 - -
----------------------------------------------------
Total Contractual Cash
Obligations $2,473 $ 2,009 $ 288 $ 36 $ 140
====================================================
RESULTS OF OPERATIONS
We recognized operating revenues of $436,157, $595,955, and $885,740 for
the fiscal years ended March 31, 2003, 2002, and 2001, respectively. The
decrease of $159,798 or 27% from fiscal 2002 to 2003 was primarily the result of
lower sales of DWDM components. The decrease of $289,785 from 2001 to 2002 was
also due to decreasing DWDM component sales. A reduction in capital spending in
the telecommunications industry in addition to the United States recession
significantly reduced demand for these components. APA Optics had no backlog of
orders at the end of fiscal 2003 or 2002. Our backlog of DWDM component orders
was approximately $545,000 as of March 31, 2001. There were no contract fees in
fiscal 2003, 2002 or 2001. APACN, our wholly owned subsidiary, had a backlog of
$389,329 at March 31, 2003. We expect to ship these orders in the first quarter.
APACN's backlog consists of contracts acquired from CSP in March 2003.
As discussed in the General Development of the Business above, capital
expenditures in the telecom industry are down significantly. Because of this, we
expect revenues for at least the next few quarters to be consistent with fiscal
year 2003.
Costs of sales were $2,802,597, $3,545,519, and $2,663,192 for fiscal 2003,
2002 and 2001 respectively. The decrease of $742,922 or 21% in the cost of sales
from fiscal 2002 to 2003 was primarily due to the decrease in sales volume. 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. Gross margin for product sales was negative in all
three fiscal years, reflecting continued increased personnel and manufacturing
costs and relatively low sales. The negative gross margins are influenced by low
unit production and sales levels relative to the capital equipment and personnel
committed to production. We expect to continue to experience negative gross
margins until there is a significant increase in sales and production levels.
Cost of contract fees was eliminated as no contract research was performed in
fiscal 2003, 2002 or 2001.
Research and development expenses were $1,212,219, $1,114,051, and
$1,175,564 for fiscal years 2003, 2002 and 2001 respectively. The increase of
$98,168 or 9% from fiscal 2002 to 2003 is due primarily to an increase in
personnel and equipment costs for development of GaN based transistor products.
We plan to expand our research and development and expect to incur increased
expenses related to these activities in the future. The decrease of $61,513 or
5% from fiscal 2001 to 2002 reflects a shift in personnel to manufacturing
products from product development.
13
Selling, general and administrative expenses were $1,750,807, $1,733,846,
and $1,866,766 for fiscal years 2003, 2002 and 2001, respectively. The decrease
of $132,920 or 7% from fiscal 2001 to 2002 and $18,458 or 1% from fiscal 2002 to
2003 reflects our efforts to reduce expenses in response to the slow economy,
including a reduction in staff in the third quarter of fiscal 2002. Our selling,
general and administrative expenses could increase significantly with the
planned rollout of our SunUV(R) Personal UV Monitor and our TRUVMETER(TM) in
fiscal 2004.
We realized $436,925, $1,193,525, and $2,002,713 in interest income in
fiscal years 2003, 2002 and 2001, respectively. The decrease in interest income
of $809,188 or 40% from fiscal 2001 to 2002 and $756,600 or 63% from fiscal 2002
to 2003 reflects the steep decline in short-term interest rates over the fiscal
year and declining cash investments. We consumed a total of $5.2 million and
$9.3 million in cash in fiscal 2002 and 2003, respectively, to fund operations,
purchase equipment, retire debt and acquire CSP. We expect interest income to
decline again in fiscal 2004 because short-term interest rates will likely
remain low and we will consume cash in operations.
Our net losses for fiscal 2003, 2002 and 2001 were $ 5,009,434, $4,738,199
and $2,953,392, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, our principal source of liquidity was our cash, cash
equivalents and short-term investments, which totaled $22,235,686 compared to
$31,606,403 at March 31, 2002.
We used $4,659,154 to fund operating activities during fiscal 2003 compared
to $3,753,553 in fiscal 2002, and $2,230,867 in fiscal 2001. In all three years
the largest use of cash in operating activities was the funding of the net
losses. The net loss for fiscal 2003 expanded to $4,974,015 from $4,738,199 in
fiscal 2002. The primary factors contributing to the increased loss from fiscal
2002 to 2003 were the decline in sales, the increase in research and development
costs and the decline in interest income. The significant factors contributing
to the increased loss from fiscal 2001 to 2002 were declining sales, lower
interest income and higher inventory obsolescence.
In fiscal 2003 we used $4,271,605 in investing activities. including
$3,828,000 used to purchase the assets of CSP. In fiscal 2002 we generated
$15,759,000 through the sale of short-term investments, and. we invested
$1,050,274 in property and equipment and $113,698 in patents, for a net increase
in cash from investment activities of $14,595,028. The majority of the proceeds
from the sale of short-term securities 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 2003, we used $439,958 in financing activities primarily to pay
down long-term debt of $437,467. We used $460,564 in financing activities in
fiscal 2002. Primary uses of cash included the repurchase of common stock for
$92,638 and the scheduled retirement of debt in the amount of $375,478. In
fiscal 2001 financing activities provided net cash of $34,510,098. Sales of our
common stock provided $39,842,684, 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.
In connection with the construction of the manufacturing facility in
Aberdeen, we took advantage of certain economic incentive programs offered by
the State of South Dakota and the City of Aberdeen. At March 31, 2003, the total
principal outstanding under bonds issued by the State of South Dakota was
$1,560,000. Interest on the bonds ranges from 5% to 6.75%, and the bonds are due
in various installments between 2004 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 and 2003. For
further information regarding these bonds, see Note E of Notes to Financial
Statements included under Item 8 of this Report. Our capital requirements are
dependent upon several factors including market acceptance of our products, the
timing and
14
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, cash equivalents, and short-term investments
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.
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" under Note 1. of the Audited
Financial Statements.
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, 2003:
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. . . . . . . . . . . (654,062) (1,364,499) (1,422,002) (1,306,636)
Net loss per share. . . . . . $ (0.05) $ (0.11) $ (0.12) $ (0.11)
Quarter Ended
-------------------------------------------------------------
June 30, September 30, December 31, March 31,
2002 2002 2002 2003
---- ---- ---- ----
Statement of Operations Data
Net revenue . . . . . . . . . $ 72,451 $ 38,900 $ 40,674 $ 284,132
Gross profit (loss) . . . . . (681,269) (680,044) (513,379) (491,746)
Net loss. . . . . . . . . . . (1,252,994) (1,318,737) (1,151,494) (1,286,209)
Net loss per share. . . . . . $ (0.11) $ (0.11) $ (0.10) $ (0.11)
<FN>
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.
On March 8, 2002, we terminated Ernst & Young LLP (E&Y) as auditor.
The replacement of E&Y was recommended by our Audit Committee and adopted by our
Board of Directors.
15
E&Y's reports on our financial statements for the previous two fiscal years
ended March 31, 2000 and March 31, 2001, did not contain any adverse opinion or
disclaimer of opinion and were not qualified as to uncertainty, audit scope or
accounting principles. During our two most recent fiscal years ended March 31,
2001 and the interim period through March 2, 2002, (i) there were no
disagreements between us and E&Y on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure which,
if not resolved to the satisfaction of E&Y, would have caused E&Y to make
reference to the subject matter of the disagreement in connection with its
reports and (ii) there were no "reportable events," as defined in Item
304(a)(1)(v) of Regulation S-K of the Securities and Exchange Commission (SEC).
The decision to replace E&Y was not the result of any disagreement between us
and E&Y on any matter of accounting principle or practice, financial statement
disclosure or audit procedure.
Concurrently, on March 8, 2002, our Audit Committee recommended, and our
Board of Directors approved, the appointment of Grant Thornton LLP (Grant) as
our new independent accountant and auditor. Grant audited our financial
statements to be included in the Form 10-K for the fiscal year ending March 31,
2003 and we intend to have Grant continue to serve as our independent accounting
and audit firm for the fiscal year ending March 31, 2004. We did not consult
with Grant on any matters related to accounting principles or practice,
financial statement disclosures or audit procedures prior to selecting and
appointing Grant as our auditor.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding executive officers is included in Part I of this
Report and is incorporated in this Item 10 by reference.
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 2003).
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 2003).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Certain information required by Item 12 is incorporated in this Report by
reference to the proxy statement for annual meeting of shareholders.
16
- --------------------------------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 408,375 $4.27 1,065,888
- --------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by
security holders 590,822 $13.52 Not applicable*
- --------------------------------------------------------------------------------------------------------
Total 999,197 $9.91 1,065,888
- --------------------------------------------------------------------------------------------------------
<FN>
* These securities are comprised solely of warrants that were not issued pursuant to any formal plan
with an authorized number of securities 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 2003).
ITEM 14. 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.
17
PART IV
ITEM 15. 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 Certified Public Accountants
for the years ended March 31, 2003, 2002 and 2001 . . . F1
(ii) Report of Independent Certified Public Accountants for F2
the year ended March 31, 2001 . . . . . . . . . . . . .
(iii) Balance Sheets as of March 31, 2003 and 2002. . . . . . F3
(iv) Statements of Operations for the years ended
March 31, 2003, 2002 and 2001 . . . . . . . . . . . . . F4
(v) Statement of Shareholders' Equity for the years ended
March 31, 2003, 2002 and 2001 . . . . . . . . . . . . . F5
(vi) Statements of Cash Flows for the years ended
March 31, 2003, 2002 and 2001 . . . . . . . . . . . . . F7
(vii) Notes to the Financial Statements at March 31, 2003 . . F8
(2) Financial Statement Schedules: None
(b) Reports filed on Form 8-K:
In the last quarter of our fiscal year ended March 31, 2003, we filed the following
reports on Form 8-K
- -----------------------------------------------------------------------------------
Financial Statements
Date of Report Date of Filing Event Reported Filed
- -----------------------------------------------------------------------------------
February 14 February 14 Earnings Release for 3rd None
Quarter
- -----------------------------------------------------------------------------------
March 5 March 5 Execution of agreement to None
acquire assets from Computer
System Products, Inc.
- -----------------------------------------------------------------------------------
March 28 March 28 Closing of purchase of assets None
of CSP
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
(c) Exhibits. See Exhibit Index.
18
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 27, 2003 By /s/ Anil K. Jain
------------------------------------------
Anil K. Jain
President and Chief Executive Officer
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 27, 2003
- ---------------------------
Anil K. Jain Director (principal executive officer)
/s/ Kenneth A. Olsen Secretary, Vice President, and Director June 27, 2003
- ---------------------------
Kenneth A. Olsen
/s/ David R. Peters Chief Financial Officer (principal June 27, 2003
- ---------------------------
David R. Peters financial and accounting officer)
/s/ John G. Reddan Director June 27, 2003
- ---------------------------
John G. Reddan
/s/ Ronald G. Roth Director June 27, 2003
- ---------------------------
Ronald G. Roth
/s/ Stephen A. Zuckerman MD Director June 27, 2003
- ---------------------------
Stephen Zuckerman
19
CERTIFICATION
I, Anil K. Jain, certify that:
1. I have reviewed this annual report on Form 10-K of APA Optics, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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
annual 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 annual 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 annual report (the "Evaluation Date"); and
c) Presented in this annual 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
annual 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.
June 27, 2003
Signature: /s/ Anil K. Jain
-------------------
Print Name: Anil K. Jain
--------------
Print Title: Chief Executive Officer
-------------------------
20
CERTIFICATION
I, David R. Peters, certify that:
1. I have reviewed this annual report on Form 10-K of APA Optics, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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
annual 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 annual 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 annual 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
annual 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.
June 27, 2003
Signature: /s/ David R. Peters
-------------------
Print Name: David R. Peters
---------------
Print Title: Chief Financial Officer
-----------------------
21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors and Shareholders
APA Optics, Inc.
We have audited the accompanying consolidated balance sheets of APA
Optics, Inc. (the Company) as of March 31, 2003 and 2002, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years 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 audits.
We conducted our audits 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 audits
provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of APA
Optics, Inc. as of March 31, 2003 and 2002, and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note A to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," ("SFAS") on April 1, 2002.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
May 5, 2003
22
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
23
APA OPTICS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31,
ASSETS 2003 2002
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $22,235,686 $31,606,403
Accounts receivable, net of allowance for
uncollectible at March 31, 2003 and 2002 468,576 20,613
Inventories, net 1,398,203 40,075
Prepaid expenses 134,045 103,588
Bond reserve fund 75,000 70,000
----------- -----------
Total current assets 24,311,510 31,840,679
PROPERTY, PLANT AND EQUIPMENT, net 3,989,344 3,748,004
OTHER ASSETS
Bond reserve funds 340,629 349,129
Bond placement costs, net of accumulated amortization
of $300,000 and $252,000 at March 31, 2003 and 2002 20,013 68,013
Patents, net of accumulated amortization of $516,657
and $347,998 at March 31, 2003 and 2002 85,362 169,890
Goodwill 2,500,296 -
Other 586,542 220,695
----------- -----------
3,532,842 807,727
----------- -----------
$31,833,696 $36,396,410
=========== ===========
The accompanying notes are an integral part of these financial statements.
LIABILITIES AND
SHAREHOLDERS' EQUITY 2003 2002
------------- -------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,846,922 $ 1,996,345
Accounts payable 454,804 127,926
Accrued expenses 286,267 302,204
------------- -------------
Total current liabilities 2,587,993 2,426,475
LONG-TERM DEBT, net of current maturities 326,760 465,018
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; 11,872,331 and 11,875,881 shares
issued and outstanding at March 31, 2003 and 2002 118,723 118,759
Additional paid-in capital 52,001,681 51,578,185
Accumulated deficit (23,201,461) (18,192,027)
------------- -------------
28,918,943 33,504,917
------------- -------------
$ 31,833,696 $ 36,396,410
============= =============
APA OPTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31,
2003 2002 2001
------------ ------------ ------------
Revenues $ 436,157 $ 595,955 $ 885,740
Costs and expenses
Cost of sales 2,802,597 3,545,519 2,663,192
Research and development 1,212,219 1,114,051 1,175,564
Selling, general and administrative 1,750,807 1,733,846 1,866,766
------------ ------------ ------------
5,765,623 6,393,416 5,705,522
------------ ------------ ------------
Loss from operations (5,329,466) (5,797,461) (4,819,782)
Interest income 436,925 1,193,525 2,002,713
Interest expense (115,893) (132,263) (135,323)
------------ ------------ ------------
321,032 1,061,262 1,867,390
------------ ------------ ------------
Loss before income taxes (5,008,434) (4,736,199) (2,952,392)
Income taxes 1,000 2,000 1,000
------------ ------------ ------------
Net loss (5,009,434) (4,738,199) (2,953,392)
Preferred stock dividend - - (33,054)
Excess of preferred stock redemption over
carrying value - - (275,000)
------------ ------------ ------------
Net loss applicable to common shareholders $(5,009,434) $(4,738,199) $(3,261,446)
============ ============ ============
Net loss per share
Basic and diluted $ (0.42) $ (0.40) $ (0.26)
============ ============ ============
Net loss per share attributable to common
shareholders
Basic and diluted $ (0.42) $ (0.40) $ (0.29)
============ ============ ============
Weighted average shares outstanding
Basic and diluted 11,873,914 11,896,976 11,180,615
============ ============ ============
APA OPTICS, INC.
CONSOLIDATED 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, 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
Common stock repurchased - - (3,550) (36) (5,955) - (5,991)
Aberdeen land grant 67,760 67,760
Options issued as compensation - - - - (9,309) - (9,309)
Warrants issued - - - - 371,000 - 371,000
Net loss - - - - - (5,009,434) (5,009,434)
------- -------- ----------- --------- ------------ ------------- ------------
Balance at March 31, 2003 - $ - 11,872,331 $118,723 $52,001,681 $(23,201,461) $28,918,943
The accompanying notes are an integral part of these financial statements.
APA OPTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
2003 2002 2001
------------ ------------ -------------
Cash flows from operating activities:
Net loss $(5,009,434) $(4,738,199) $ (2,953,392)
Adjustments to reconcile net loss to net cash used
in operating activities, net of acquisition:
Depreciation and amortization 810,505 654,460 424,022
Deferred compensation expense (9,309) 45,414 66,840
Changes in operating assets and liabilities,
net of acquisition:
Accounts receivable (63,392) 350,246 (161,522)
Inventories (130,889) 375,241 (138,791)
Prepaid expenses and other assets (30,457) (73,524) (10,261)
Accounts payable and accrued expenses (226,178) (367,191) 542,237
------------ ------------ -------------
Net cash used in operating activities (4,659,154) (3,753,553) (2,230,867)
Cash flows from investing activities:
Purchases of property and equipment (359,474) (1,050,274) (1,128,453)
Purchases of short-term investments - - (15,759,000)
Sale of short-term investments - 15,759,000 -
Cash paid for business acquisition (3,828,000) - -
Acquisition of patents (84,131) (113,698) (108,192)
------------ ------------ -------------
Cash paid for business acquisition (3,828,000) - -
------------ ------------ -------------
Net cash provided by (used in) investing
activities (4,271,605) 14,595,028 (16,995,645)
Cash flows from financing activities:
Payments for redemption of preferred stock - - (5,033,054)
Proceeds from sales of common stock - - 39,557,304
Repurchase of common stock (5,991) (92,638) -
Proceeds from exercise of warrants and options - 10,041 285,380
Payment of long-term debt (437,467) (375,468) (161,255)
Bond reserve funds 3,500 (2,499) (138,277)
------------ ------------ -------------
Net cash provided by (used in) financing
activities (439,958) (460,564) 34,510,098
------------ ------------ -------------
Increase (decrease) in cash and cash equivalents (9,370,717) 10,380,911 15,283,586
Cash and cash equivalents at beginning of year 31,606,403 21,225,492 5,941,906
------------ ------------ -------------
Cash and cash equivalents at end of year $22,235,686 $31,606,403 $ 21,225,492
============ ============ =============
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 115,893 $ 132,263 $ 135,323
Income taxes 1,000 2,000 1,000
Noncash investing and financing transactions:
Warrants issued in lieu of debt service payments - - 51,172
============ ============ =============
Contributed land $ 67,760 - -
============ ============ =============
Issuance of warrants 371,000 - -
============ ============ =============
APA OPTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
--------------------
APA Optics, Inc. (the Company) manufactures and markets dense wavelength
division multiplexer (DWDM) optical components, offers a range of gallium
nitride-based devices, and manufacturers custom optics products.
The Company owns 100% of the stock of APA Cables and Networks, Inc.
(APACN). APACN is a manufacturer of custom cable assemblies and supplier of
premise cabling components and networking products to customers throughout
the United States with a concentration in Minnesota.
Principles of Consolidation
-----------------------------
The consolidated financial statements include the accounts of APA Optics,
Inc. and its wholly-owned subsidiary, APA Cables and Networks, Inc.
("APACN") All significant inter-company accounts and transactions have been
eliminated in consolidation.
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, 2003 and 2002 consist entirely
of short-term money market accounts. Cash equivalents are stated at cost,
which approximates fair value.
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 expectation.
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.
Goodwill
--------
Goodwill represents the excess of the purchase price over net assets
acquired. In accordance with the adoption of Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Intangible Assets,
effective April 1, 2002, the Company reviewed the goodwill recorded during
its acquisition (see Note B) and determined it to have an indefinite life.
Accordingly, the Company did not record any amortization during fiscal
2003.
1
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Stock-Based Compensation
-------------------------
The Company has various incentive and non-qualified stock option plans
which are used as an incentive for directors, officers, and other
employees, as described more fully in Note J. The Company uses the
intrinsic value method to value stock options issued to employees, and the
Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees,
and related Interpretations. 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 (income) of $(9,309), $45,414 and $66,840
for the years ended March 31, 2003, 2002 and 2001. For those stock options
granted where the exercise price was equal to the market value of the
underlying common stock on the date of grant, no stock-based employee
compensation cost is reflected in the net loss. Had the fair value method
been applied, our compensation expense would have been different. The
following table illustrates the effect on net loss and net loss per share
if the Company had applied the fair value recognition provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation for the following fiscal years:
----------------------------------------------------------------------------------
March 31, March 31, March 31,
------------------------------------------- ----------- ----------- -----------
2003 2002 2001
------------------------------------------- ----------- ----------- -----------
------------------------------------------- ----------- ----------- -----------
Net loss to common shareholders - as
reported $5,009,434 $4,738,199 $3,261,446
------------------------------------------- ----------- ----------- -----------
Less: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects 153,266 273,516 339,852
------------------------------------------- ----------- ----------- -----------
Net loss - pro forma $5,162,700 $5,011,715 $3,601,298
------------------------------------------- ----------- ----------- -----------
------------------------------------------- ----------- ----------- -----------
Basic and diluted net loss per common share
- as reported $ (.42) $ (.40) $ (.29)
------------------------------------------- ----------- ----------- -----------
------------------------------------------- ----------- ----------- -----------
Basic and diluted net loss per common share
- pro forma $ (.43) $ (.42) $ (.32)
------------------------------------------- ----------- ----------- -----------
The weighted average fair value of options granted in 2003, 2002 and 2001
was $1.20, $9.30, and $11.30. 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 2003,
2002 and 2001; zero dividend yield, risk-free interest rate of 3.2%, 4.5%
and 6.0%; volatility of 77%, 132% and 93%, and a weighted-average expected
term of the options of five years.
2
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 per common
shareholder 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 999,197, 655,872 and 715,372
shares of common stock with a weighted average exercise price of $6.50,
$10.15 and $9.44 were outstanding during the years ended March 31, 2003,
2002 and 2001, 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
-------------------------------------
On April 1, 2002, the Company adopted SFAS No. 141, Business Combinations
and SFAS No. 142, Goodwill and Intangible Assets. As a result of the
adoption of SFAS No. 142, the Company will not amortize its goodwill. The
Company reviewed goodwill for impairment in accordance with SFAS No. 142
and no impairment was identified. As of March 31, 2003, the Company has
goodwill of $2,500,296. The adoption of SFAS No. 141 and SFAS No. 142 did
not have a material effect on the Company's consolidated financial
statements or reporting of financial information.
In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
SFAS No. 146 addresses accounting and processing 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 a 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
theconsolidated financial position or results of operations.
3
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45 addresses
the disclosure requirements of a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it
has issued. FIN 45 also requires a guarantor to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken
in issuing the guarantee. The disclosure requirements of FIN 45 are
effective for the Company for the year ended March 31, 2003. The liability
recognition requirements will be applicable prospectively to all guarantees
issued or modified after December 31, 2002. This pronouncement is not
anticipated to have a material effect on the Company's consolidated
financial position or results of operations.
In December 2002 the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. SFAS No. 148 amends the disclosure
and certain transition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. Its disclosure provisions, which apply to all
entities with employee stock-based compensation, are effective for fiscal
years ending after December 15, 2002. New interim period disclosures are
also required in financial statements for interim periods beginning after
December 15, 2002. Other than the additional disclosure requirements, this
pronouncement is not anticipated to have a material effect on the Company's
consolidated financial position or results of operations.
In January 2003, the FASB issued FIN No. 46 (FIN 46), Consolidation of
Variable Interest Entities. FIN 46 is an interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, and addresses
consolidation of business enterprises of variable interest entities. FIN 46
applies immediately to variable interest entities created or obtained after
January 31, 2003 and it applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1,
2003. This pronouncement is not anticipated to have a material effect on
the Company's consolidated financial position or results of operations
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (the "Act"), which immediately impacts Securities and Exchange
Commission registrants, public accounting firms, lawyers and securities
analysts. This legislation is the most comprehensive since the passage of
the Securities Act of 1933 and Securities Exchange Act of 1934. It has far
reaching effects on the standards of integrity for corporate management,
board of directors, and executive management. Additional disclosures,
certifications and procedures will be required of the Company. The Company
does not expect any material adverse effect as a result of the passage of
this legislation; however, the full scope of the Act has not yet been
determined.
NOTE B - ACQUISITION
On March 14, 2003, the Company acquired certain assets and assumed certain
liabilities of Computer System Products, Inc. The acquisition was accounted
for as a purchase and, accordingly, results of operations relating to the
purchased assets have been included in the statement of operations from the
date of acquisition. The impact on operations was not material. There are
no contingent payments related to the acquisition. This acquisition
diversifies the Company's product offerings, expands its opportunities for
cross-selling other products to former CSP customers and enables it to
offer a more complete technology solution to all its customers.
4
NOTE B - ACQUISITION- CONTINUED
The purchase price, assets acquired and liabilities assumed are as follows:
--------------------------------------------------------- -----------
Accounts receivable $ 384,571
--------------------------------------------------------- -----------
Inventory 1,227,239
--------------------------------------------------------- -----------
Property, plant and equipment 402,799
--------------------------------------------------------- -----------
Assets purchased 2,014,609
--------------------------------------------------------- -----------
Trade accounts payable 239,187
--------------------------------------------------------- -----------
Capitalized leases 149,786
--------------------------------------------------------- -----------
Vendor restructuring payable 263,818
--------------------------------------------------------- -----------
Accrued expenses 34,114
--------------------------------------------------------- -----------
Less: Liabilities assumed 686,905
--------------------------------------------------------- -----------
Net Assets 1,327,704
--------------------------------------------------------- -----------
Goodwill 2,500,296
--------------------------------------------------------- -----------
Purchase price $3,828,000
--------------------------------------------------------- -----------
NOTE C - INVENTORIES
Inventories consist of the following at March 31:
2003 2002
---------- -------
Raw materials $702,233 $21,448
Work-in-process 155,138 18,627
Finished goods 540,832 -
---------- -------
1,398,203 $ 40,075
========== =======
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at March 31:
2003 2002
---------- ----------
Land $ 127,760 $ 60,000
Buildings 1,679,424 1,679,424
Manufacturing equipment 5,251,458 4,690,130
Tools 461,408 423,748
Office equipment 543,407 477,694
Leasehold improvements 1,065,645 968,073
---------- ----------
9,129,102 8,299,069
Less accumulated depreciation and amortization 5,139,758 4,551,065
---------- ----------
3,989,344 $3,748,004
========== ==========
5
NOTE E - LONG-TERM DEBT
The following is a summary of the outstanding debt at March 31:
2003 2002
----------- -----------
South Dakota Governor's Office of Economic Development
and the Aberdeen Development Corporation Bond, 5% to 6.75%
due in various installments through 2016 $ 1,560,000 $ 1,630,000
Low interest economic development loans, 0% to 3%,
due in various installments through 2016 246,944 264,583
Forgivable economic development loans, 3%, due in
various installments through 2003 216,951 566,780
Other 149,787 -
----------- -----------
2,173,682 2,461,363
Less current maturities 1,846,922 1,996,345
----------- -----------
$ 326,760 $ 465,018
=========== ===========
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 2003.
As of March 31, 2003, 36,511 warrants have been issued for loans forgiven
totaling $187,289.
At March 31, 2003 and 2002, the Company had on deposit with trustees
$415,629 and $419,129 in reserve funds for current bond maturities, of
which $75,000 and $70,000 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
2003. All debt, except for the long-term portion of the low interest loans,
the forgivable loans, and the capital lease obligations, to which the
covenant violation does not apply, has been classified as current due to
the Company's covenant violation.
As part of the Company's plan to construct their production facility, the
city of Aberdeen, South Dakota gave the Company land, contingent upon the
Company staying in the new building through June 23, 2002. The Company
satisfied this requirement in fiscal 2003 and recorded the contributed land
with an assessed value of $67,760 on the books as of March 31, 2003.
All of the above debt is secured by land, buildings, and certain equipment
of the Company.
6
NOTE E - LONG-TERM DEBT - CONTINUED
Scheduled maturities of the Company's long-term debt are as follows:
Years ending March 31,
2004 $1,846,922
2005 61,258
2006 63,675
2007 25,439
2008 17,639
Thereafter 158,749
----------
$2,173,682
==========
NOTE F - 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
$51,000,$53,000, and $34,000 for the years ended March 31, 2003, 2002 and
2001.
NOTE G - INCOME TAXES
As of March 31, 2002, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $22,265,000 which expire in
fiscal years 2004 through 2023.
Deferred income taxes resulting from differences in accounting for items
between financial statements and increase tax returns, along with net
operating loss carryforwards, have been fully reserved. Significant
components of the Company's deferred taxes at March 31 are as follows:
Income tax expense consists entirely of state taxes in 2003, 2002 and 2001.
NOTE H - 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.
In fiscal year 2003, 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, 2003 and 2002, a total of 46,750 and 43,200 shares for $98,629 and
$92,638 at an average price of $2.11 and $2.14 per share, respectively, had
been repurchased.
7
NOTE H - SHAREHOLDERS' EQUITY - CONTINUED
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.
NOTE I - 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 J - 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 1,065,888 shares of common stock available for issue at March
31, 2003.
8
NOTE J - STOCK OPTIONS AND WARRANTS - CONTINUED
Option transactions under these plans during the three years ended March
31, 2003 are summarized as follows:
Weighted average
Number of shares exercise price
------------------ -----------------
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
Granted 167,500 1.88
Canceled (128,675) 8.16
------------------ -----------------
Outstanding at March 31, 2003 408,375 4.27
==================
The number of shares exercisable at March 31, 2003, 2002 and 2001 was
165,325, 108,674 and 191,898, respectively, at a weighted average exercise
price of $5.42, $4.68 and $5.77 per share, respectively.
The following table summarizes information concerning currently outstanding
and exercisable stock options at March 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------ ----------------------
Weighted
average Weighted Weighted
Range of remaining Average Average
exercise Number contractual exercise Number exercise
prices outstanding life price outstanding price
------------ ----------- ----------- --------- ----------- ---------
1.48-$2.00 137,500 4.50 years $ 1.86 3,700 $ 1.98
3.77-5.53 176,375 1.64 years 4.34 125,875 4.26
5.73-7.22 35,000 3.06 years 6.71 19,875 6.70
8.50-11.90 29,500 3.44 years 9.29 6,125 11.10
14.00-17.15 30,000 2.32 years 15.58 9,750 15.58
----------- -----------
408,375 2.90 years 4.27 165,325 $ 5.42
=========== ===========
The Company's 2003, 2002 and 2001 pro forma net loss and net loss per share
would have been $(5,162,700), $(5,011,715) and $(3,601,298) or $(0.43),
$(0.42) and $(0.32) loss per share had the fair value method been used for
valuing options granted during 2003, 2002 and 2001. These effects may not
be representative of the future effects of applying the fair value method.
9
NOTE J - STOCK OPTIONS AND WARRANTS - CONTINUED
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, 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
Issued 350,000 3.00 2008
Expired (45,500) 3.75 - 5.00 2002
------------
Balance at March 31, 2003 590,822 3.00 - 17.84 2003 - 2008
============
All warrants are exercisable upon date of grant.
In fiscal year 2003, warrants totaling 350,000 at a value of $371,000 were
issued in connection with the acquisition of the assets of Computer System
Products, Inc. These warrants were valued by an independent firm and are
exercisable at $3.00.
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 E).
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 K - 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.
The Company leases certain equipment under capital lease arrangements with
interest ranging from 0% to 10.62% and terms through July 2006. The
equipment has a net book value of $157,029 at March 31, 2003.
10
NOTE K - COMMITMENTS - CONTINUED
The Company also leases warehouse space on month-to-month terms with 30
days written notice from either party needed to terminate the lease. The
leases require payment of all operating expenses and real estate taxes over
the life of the lease.
The following is a schedule of approximate minimum payments required under
the capital and operating leases:
Capital Operating
Year ending March 31 leases leases
-------------------- ---------- --------
2004 $ 64,613 $162,291
2005 51,668 108,280
2006 49,321 29,429
2007 7,963 294
---------- --------
Total minimum lease payments 173,565 $300,294
========
Less: Amounts representing interest 23,778
----------
Present value of future minimum lease
payments 149,787
Less: Current portion 52,332
----------
Capital lease obligations, net of current portion $97,455
==========
Rental expense was $149,000, $138,000 and $135,000 for the years ended
March 31, 2003, 2002 and 2001, of which $139,000, $138,000 and $135,000 was
paid to the partnership, respectively.
NOTE L - CONCENTRATIONS
Major Customers
----------------
Two major customers accounted for 21% and 15% of the Company's sales for
the year ended March 31, 2003. 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. These customers also accounted for
approximately 6% and 52% of the outstanding trade receivable balance at
March 31, 2003 and 2002.
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, 2003, 2002 or 2001.
11
NOTE M - SUBSEQUENT EVENT (UNAUDITED)
The Company announced that its subsidiary APACN completed an acquisition of
assets from Americable, Inc. (Bloomington, MN) on June 27, 2003.
The assets will be integrated with assets acquired by APACN in March 2003
from Computer System Products, Inc. APACN manufactures standard and custom
copper and fiber cable assemblies for service providers and original
equipment manufacturers.
12
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
95-13-A 30, 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 Exhibit 4.2(a) to the June 1996 10-
and 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 Exhibit 4.2(c) to the June 1996 10-
and between Aberdeen Development Corporation and QSB
APA Optics, Inc.
4.2(d) 300,000 Loan Agreement dated June 24, 1996 by Exhibit 4.2(d) to the June 1996 10-
and 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 Exhibit 4.5(a) filed as a part of
Convertible Preferred Stock Registration Statement on Form S-
3 (Commission File No. 333-33968)
13
=============================================================================================================
PAGE NUMBER OR INCORPORATED
NUMBER DESCRIPTION BY REFERENCE TO
- -------------------------------------------------------------------------------------------------------------
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 Exhibit 4.6 to Registrant's Report
Ladenburg Thalmann & Co. Inc. to purchase 84,083 on Form 10-K for fiscal year
shares 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
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
Agreement between the Registrant and Jain-Olsen the 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
and Anil K. Jain on 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
upon Change in Control Event with Anil K. Jain and on Form 10-QSB for the quarter
Kenneth A. Olsen ended September 30, 1997
("September 1997 10-QSB")
*10.6 Form of Agreement regarding Exhibit 10.2 to the September
Employment/Compensation upon Change in Control 1997 10-QSB
with Messrs. Jain and Olsen
10.7 Form of Agreement regarding Indemnification of Exhibit 10.7 to Registrant's Report
Directors and Officers with Messrs. Jain, Olsen, on From 10-K for the fiscal year
Ringstad, Roth, Von Wald and Zuckerman ended March 31, 2002.
21 List of Subsidiaries
23.1 Consent of Grant Thornton LLP
14
=============================================================================================================
PAGE NUMBER OR INCORPORATED
NUMBER DESCRIPTION BY REFERENCE TO
- -------------------------------------------------------------------------------------------------------------
23.2 Consent of Ernst & Young LLP
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
*Indicates management contract or compensation plan or arrangements required to
be filed as an exhibit to this form.
15