SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003, or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from NA to NA.
Commission File Number 0-16106
APA OPTICS, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1347235
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2950 N.E. 84TH LANE, BLAINE, MINNESOTA 55449
(Address of principal executive offices and zip code)
(763) 784-4995
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to the filing
requirement for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class: Outstanding at September 30, 2003
Common stock, par value $.01 11,872,331
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APA OPTICS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
September 30, March 31,
2003 2003
--------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,653,485 $ 22,235,686
Accounts receivable, net of allowance of
uncollectible accounts of $21,836 at September 30,
2003 and $20,644 at March 31, 2003 1,824,849 468,576
Inventories 2,182,022 1,398,203
Prepaid expenses 182,642 134,045
Bond reserve funds 40,000 75,000
--------------- -------------
Total current assets 20,882,998 24,311,510
Property, plant and equipment, net 4,283,499 3,989,344
Other assets:
Bond reserve funds 383,623 340,629
Bond placement costs, net of accumulated
amortization 7,771 20,013
Patents, net of accumulated amortization 92,737 85,362
Goodwill 2,778,296 2,500,296
Other 576,070 586,542
--------------- -------------
3,838,497 3,532,842
--------------- -------------
Total assets $ 29,004,994 $ 31,833,696
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,545,569 $ 1,846,922
Accounts payable 870,311 454,804
Accrued expenses 565,094 286,267
--------------- -------------
Total current liabilities 2,980,974 2,587,993
Long-term debt 288,085 326,760
Shareholders' equity:
Common Stock 118,723 118,723
Additional paid-in capital 52,031,560 52,001,681
Accumulated deficit (26,414,348) (23,201,461)
--------------- -------------
Total shareholders' equity 25,735,935 28,918,943
--------------- -------------
Total liabilities and shareholders' equity $ 29,004,994 $ 31,833,696
=============== =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
2
APA OPTICS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues $ 3,557,586 $ 38,900 $ 5,124,578 $ 111,351
Costs and expenses:
Cost of sales 3,339,257 718,944 5,207,138 1,476,677
Research and development 210,861 336,680 407,529 689,847
Selling, general and administrative 1,705,663 397,824 2,724,136 717,935
------------ ------------ ------------ ------------
5,255,781 1,453,448 8,338,803 2,884,459
------------ ------------ ------------ ------------
Loss from operations (1,698,195) (1,414,548) (3,214,225) (2,773,108)
Interest income 34,657 122,797 60,108 255,889
Interest expense (3,200) (26,736) (57,770) (54,011)
------------ ------------ ------------ ------------
31,457 96,061 2,338 201,878
------------ ------------ ------------ ------------
Loss before income taxes (1,666,738) (1,318,487) (3,211,887) (2,571,230)
Income taxes 750 250 1,000 500
------------ ------------ ------------ ------------
Net loss $(1,667,488) $(1,318,737) $(3,212,887) $(2,571,730)
============ ============ ============ ============
Net loss per share:
Basic and diluted ($0.14) ($0.11) ($0.27) ($0.22)
Weighted average shares outstanding:
Basic and diluted 11,872,331 11,874,957 11,872,331 11,875,396
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
APA OPTICS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
September 30,
--------------------------
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net loss $(3,212,887) $(2,571,730)
Adjustments to reconcile net loss to net cash used in operating
activities, net of acquisition:
Depreciation and amortization 430,198 342,166
Write-off of patents - 108,660
Stock based compensation expense 29,879 26,804
Changes in operating assets and liabilities:
Accounts receivable (762,273) (687)
Inventories (145,819) 24,484
Prepaid expenses and other (99,956) 62,768
Accounts payable and accrued expenses 694,334 (161,427)
------------ ------------
Net cash used in operating activities (3,066,524) (2,168,962)
INVESTING ACTIVITIES
Purchases of property and equipment (212,522) (65,937)
Cash paid for business acquisition (1,960,000) -
Investment in patents (7,375) (13,851)
------------ ------------
Net cash used in investing activities (2,197,897) (79,788)
FINANCING ACTIVITIES
Repayment of long-term debt (340,028) (429,677)
Repurchase of common stock - (5,991)
Bond reserve funds 4,248 45,406
------------ ------------
Net cash used in financing activities (335,780) (390,262)
------------ ------------
Decrease in cash and cash equivalents (5,582,201) (2,639,012)
Cash and cash equivalents at beginning of period 22,235,686 31,606,403
------------ ------------
Cash and cash equivalents at end of period $16,653,485 $28,967,391
============ ============
Noncash investing and financing activities
Contributed land - $ 67,760
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended March 31, 2003.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Certain reclassifications of previously reported amounts have been
made to conform that presentation to the current period presentation.
NOTE 2. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
Three Months Ended Six Months Ended
September 30, September,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Numerator for basic and diluted net loss $(1,667,488) $(1,318,737) ($3,212,887) $(2,571,730)
------------ ------------ ------------ ------------
Denominator for basic and diluted net loss per share- weighted-
average shares outstanding 11,872,331 11,874,957 11,872,331 11,875,396
============ ============ ============ ============
Basic and diluted net loss per share ($0.14) ($0.11) ($0.27) ($0.22)
============ ============ ============ ============
Common stock options and warrants to purchase 1,014,197 and 785,872 shares of
common stock with a weighted average exercise price of $6.70 and $8.80 were
outstanding at September 30, 2003 and 2002, respectively, but were excluded from
calculating the three months diluted net loss per share because they were
antidilutive.
NOTE 3. LAND
The Company acquired land in Aberdeen, SD as part of a financing package
provided by the Aberdeen Development Corporation to locate a manufacturing
facility in that city. Ownership of the land was contingent upon the Company
remaining in the facility through June 23, 2002. After satisfying the contingent
requirement, the Company added $67,760 (the assessed value of the land for tax
purposes) to its balance sheet and increased additional-paid-in capital by a
like amount.
NOTE 4. STOCK OPTION GRANTS
On August 22, 2002 the Company granted an option to purchase 2,500 shares
of common stock to every current employee with the exception of Anil Jain, the
Chief Executive Officer, and Ken Olsen, the Chief Operating Officer. A total of
122,500 options were granted, all with an exercise price equal to the fair
market value of the stock on the day of grant. The options become exercisable
for 60% of the shares when the Company achieves specified financial objectives
and exercisable as to the remaining 40% when the Company achieves specified
operational objectives set forth in the Short-Term Incentive Plan. Accordingly,
these options are treated as variable
5
awards, and the Company reflects changes in their value in the general and
administrative expense line until the options are exercised or expire. 14,940
shares have been vested related to this program and $13,894 is included in S,G&A
expense for the three and six months ended September 30, 2003.
NOTE 5. ACQUISITION
The Company acquired the assets of Americable, Inc. on June 27, 2003. The
purchase price and assets acquired are as follows:
Accounts receivable $ 594,000
Inventory 638,000
Property, plant and equipment 450,000
---------------
Assets purchased 1,682,000
Goodwill 278,000
---------------
Purchase price $ 1,960,000
===============
NOTE 6. SEGMENT REPORTING
The March 2003 and June 2003 acquisitions of Computer System Products,
Inc. and Americable, Inc, prompted the Company's management to adjust how it
evaluates its business and, as a result, established segments under FASB
131"Disclosures about Segments of an Enterprise and Related Information." This
evaluation is based on the way segments are organized within the Company for
making operating decisions and assessing performance. The Company has identified
two reportable segments based on the internal organizational structure,
management of operations and performance evaluation. These segments are APA
Optics (APA) and APA Cables and Networks (APACN). APA's revenue is generated in
the design, manufacture and marketing of ultraviolet (UV) detection and
measurement devices and optical components. APACN's revenue is derived primarily
from standard and custom fiber optic assemblies, copper cable assemblies, value
added fiber optics frames, panels and modules. Expenses are allocated between
the companies based on detailed information contained in invoices. In addition,
corporate overhead costs for management's time and expenses absorbed at APA in
the amount of $35,600 have been allocated to APACN. Segment detail is
summarized as follows (unaudited, in thousands):
APA Optics APACN Eliminations Consolidated
------------ ------- ------------- --------------
THREE MONTHS ENDED SEPTEMBER 30,
2003
External sales $ 61 $3,497 - $ 3,558
Cost of Sales 680 2,659 - 3,339
Operating loss (1,432) (266) - (1,698)
Depreciation and amortization 185 32 - 217
Capital expenditures 31 105 - 136
Assets 28,428 7,652 (7,075) 29,005
THREE MONTHS ENDED SEPTEMBER 30,
2002
External sales 39 - - 39
Cost of Sales 719 - - 719
Operating loss (1,415) - - (1,415)
Depreciation and amortization 186 - - 186
Capital expenditures 10 - - 10
Assets 33,332 - - 33,332
SIX MONTHS ENDED SEPTEMBER 30,
2003
External sales 122 5,010 (7) 5,125
6
Cost of Sales 1,359 3,855 (7) 5,207
Operating loss (2,746) (469) - (3,214)
Depreciation and amortization 368 62 - 430
Capital expenditures 100 112 - 212
Assets 28,428 7,652 (7,075) 29,005
SIX MONTHS ENDED SEPTEMBER 30,
2002
External sales 111 - - 111
Cost of Sales 1,477 - - 1,477
Operating loss (2,773) - - (2,773)
Depreciation and amortization 342 - - 342
Capital expenditures 66 - - 66
Assets 33,322 - - 33,322
NOTE 7. STOCK REPURCHASE PLAN
On October 1, 2002, the Board of Directors extended its plan authorizing
the repurchase of up to the greater of $2,000,000 or 500,000 shares of the
Company's common stock. For the six months ended September 30, 2002, the Company
repurchased a total of 3,550 shares for $5,991 at an average price of $1.69 per
share.
NOTE 8. WRITE-OFF OF PATENT COSTS
As a result of the slow down in the sale of fiber optic components and
uncertainty regarding if and when demand for such components will recover, the
Company expensed the unamortized balance of patents related to its dense
wavelength multiplexer / demultiplexers or "DWDM" technology. As a result,
expenses related to patents increased $108,660 for the quarter and six months
ended September 30, 2002.
NOTE 9. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In September 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement supercedes SFAS 121
and was effective April 1, 2002 for the Company. This statement did not have a
material effect on the financial statements of the Company, but could have a
future effect in the event that an asset impairment occurs.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
The Company believes the adoption of SFAS No. 145 will not have a material
effect on the Company's financial position or results of operations.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires the recognition of a
liability for a cost associated with an exit or disposal activity when the
liability is incurred versus the date the Company commits to an exit plan. In
addition, SFAS No. 146 states the liability should be initially measured at fair
value. The requirements of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company believes the
adoption of SFAS No. 146 will not have a material effect on the Company's
financial position or results or operations.
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This statement amends FASB Statement
No. 123, "Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. It also amends the disclosure
requirements to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation. The transition provisions of this statement are effective for
fiscal years ending after December 15,
7
2002 and the disclosure provisions are effective for annual financial statements
for fiscal years ending after December 15, 2002 and the first interim period
beginning after December 15, 2002. The Company believes the adoption of SFAS
No. 148 will not have a material effect on the Company's financial position or
results of operations.
In November 2002, FASB issued Interpretation 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This statement clarifies the initial
accounting and disclosure requirements of SFAS 5 for certain guarantees. The
initial recognition and measurement provisions are effective for guarantees
issued or modified after December 31, 2002 and the disclosure requirements are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company believes the adoption of FIN 45 will not have a
material effect on the Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities" (VIE), which requires
consolidation of variable interest entities by holders of variable interests
that meet certain conditions. FIN 46 establishes accounting for variable
interests in a VIE created after January 31, 2003. FIN 46 clarifies how an
enterprise should determine if it should consolidate a VIE. The adoption of FIN
46 has not had a material affect on the Company's consolidated financial
position or results of operation.
In May 2003, the FASB issued Statement 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
statement changes the classification of certain common financial instruments
from either equity or mezzanine presentation to liabilities in the balance sheet
and requires an issuer of those financial instruments to recognize changes in
fair value or redemption amount, as applicable, in earnings. This statement is
effective for financial instruments entered into or modified after May 31, 2003
and, with one exception, is effective for the quarter beginning July 1, 2003 for
public companies. As the Company has not issued any financial instruments
addressed by this new pronouncement, its adoption is not anticipated to have a
material effect on the Company's consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this Report about future sales prospects and other matters to
occur in the future are forward looking statements and are subject to
uncertainties due to many factors, many of which are beyond our control. These
factors include, but are not limited to, the continued development of our
products, acceptance of those products by potential customers, our ability to
sell such products at a profitable price, and our ability to fund our
operations. For further discussion regarding these factors, see "Factors That
May Affect Future Results."
OVERVIEW
- --------
We design, manufacture, source from third parties, and market a variety of
fiber optic and copper components to the data communication and
telecommunication industries. We are also active in the design, manufacture and
marketing of ultraviolet (UV) detection and measurement devices, optical
components and in research and development in the area of Gallium Nitride (GaN)
based transistors.
Our primary internally manufactured products include standard and custom
fiber optic assemblies, copper cable assemblies, value added fiber optics
frames, panels and modules. These products are manufactured by our wholly owned
subsidiary APA Cables and Networks, Inc. (APACN) who acquired certain assets of
Computer System Products, Inc. ("CSP") on March 14, 2003 and certain assets of
Americable, Inc. ("Americable") on June 27, 2003. Several of the items discussed
under "Results of Operations" show significant changes from the comparable
periods in the preceding fiscal year as a result from the acquisitions of CSP
and Americable.
8
We outsource from third parties passive optical splitters, arrayed
waveguides (AWGs) and wavelength division multiplexers (WDMs) based on Thin Film
Filter (TFF) technology, which we combine with our internally manufactured
products to create value added components for our customers. The majority of our
outsourced product providers are located offshore.
Most companies in the communications industry have been affected by the
slowdown in telecommunications equipment spending. Decreased demand and
competition have put downward pressure on margins. This downward pressure is
likely to continue and we will need to reduce operating costs and improve
efficiencies to remain competitive in the marketplace.
Our consumer GaN based product, the SunUVPersonal UV Monitor (formerly
SunWatch) is now ready for production. As of September 30, 2003, and currently,
we are working with our manufacturing facility in China to address yield and
production capacity issues. Our goal is to start sending samples of our products
to several retailers and distributors and fulfill small volume orders during the
3rd quarter of FY 2004. Our ability to meet this objective is dependent upon
our ability to solve production related issues.
As of September 30, 2003, our industrial GaN based product, the
TrUVMeterTM, has required additional engineering to meet accuracy and
reliability specifications for key markets in sterilization, curing and
scientific measurement. Our primary focus at present is to introduce the
SunUVPersonal UV Monitor to the market and, subsequently, to introduce the
TrUVMeterTM .
RESULTS OF OPERATIONS
- -----------------------
REVENUES
Revenues for the quarter ended September 30, 2003, were $3,557,586,
reflecting over a ninety-fold increase from the comparable period in the
preceding fiscal year. The increase is attributable to revenues generated by our
wholly owned subsidiary, APACN, which produced $3,497,188 in revenues for the
quarter. This includes sales for a full quarter from the acquisition of
Americable, which occurred on June 27, 2003. Sales for the six months ended
September 30, 2003 were $5,124,578, reflecting a 45-fold increase from the
comparable period in the preceding year. The increase is attributable to
revenues generated by APACN, which recorded revenue of $5,009,556 for the six
month period ended September 30, 2003. There are no corresponding revenues from
APACN in the comparable period in the preceding fiscal year. We expect that
future sales of APACN products will continue to account for a substantial
portion of our revenue. We anticipate that revenues may be mildly adversely
affected by seasonality in the third quarter of fiscal 2004, primarily
attributable to the number of holidays and customer budget cycles within APACN's
marketplace.
COST OF SALES
Cost of sales for the quarter ended September 30, 2003 was $3,339,257 and
$5,207,138 for the six months ended September 30, 2003, respectively. Cost of
sales for the three and six months ended September 30, 2002 was $718,944 and
$1,476,677, respectively. The increases over the comparable periods in the
preceding fiscal year are due primarily to the volume increase attributable to
APACN. Gross margins for APACN for the current quarter were $838,150 or 24%, and
$1,154,714, or 23%, for the six months ended September 30, 2003. Gross margins
for the quarter ended September 30, 2003 at APACN were negatively affected by
duplicate expenses related to operating multiple facilities and higher personnel
costs related to moving to a new facility. We expect gross margins for APACN to
gradually improve over the balance of fiscal 2004 as we continue to consolidate
the operations of APACN and eliminate duplicate expenses.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased by $125,819, to $210,861, for
the quarter ended September 30, 2003 compared to the same period for the
preceding fiscal year. This represents a decrease of 37%. For the six months
ended September 30, 2003, research and development expenses decreased by
$282,318, from $689,847 to
9
$407,529. Both the three and six month ending decreases are due primarily to
decreased research activity related to our fiber optic products. The majority of
the decrease is due to a reduction in salaries and other related expenses. We
expect research and development expenses to remain stable for the balance of
fiscal 2004.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $1,307,839 to
$1,705,663 for the quarter ended September 30, 2003 versus $397,824 for the
comparable period in the preceding fiscal year, reflecting an increase of 329%.
The increase is due primarily to the addition of APACN, which had $1,104,028 in
SG&A expenses for the quarter. APACN incurred approximately $161,000 in one
time fees and expenses within the quarter associated with expenses related to
operating multiple facilities and for moving costs related to its move to a new
facility. We expect we will not incur any more significant costs associated with
this move going forward. Expenses at APA Optics increased $203,810, due
primarily to higher professional fees and higher depreciation and amortization
expenses. For the six months ended September 30, 2003, SG&A increased
$2,006,201, or 279%, to $2,724,136. The increase was primarily due to the
acquired operations of APACN, which had $1,623,443 in expenses for the six
months ended September 30, 2003, approximately 65% of which is employee related.
Expenses at APA Optics increased $382,757, primarily due to higher professional
fees related to the acquisition of APACN and higher personnel expenses. For the
six months ended September 30, 2003, approximately $230,000 of APA Optics SG&A
expenses have been related to non-recurring uncapitalized transaction costs for
the acquisitions of CSP and Americable. We expect expenses to decrease next
quarter as cost savings and the elimination of duplicate costs related to the
consolidation of the operations of APACN are achieved.
LOSS FROM OPERATIONS
The loss from operations was $1,698,195, an increase of $283,647, or 20%
for the quarter ended September 30, 2003 over the comparable period in fiscal
2003. The increased loss in the quarter was the result of operating losses at
APACN, which totaled $265,879 for the period. The loss from operations for the
six months ended September 30, 2003 was $3,214,225, an increase of $441,117, or
16%, from $2,773,108 in the comparable period in the preceding year. The
increased loss is primarily the result of the operating losses at APACN. We
expect the losses to decrease over the balance of fiscal 2004 as we realize cost
savings and efficiencies related to the consolidation of the operations of
APACN.
OTHER INCOME AND EXPENSE
Other income decreased $88,140 or 72% for the three months ended September
30, 2003 from the comparable period in fiscal 2003. For the six months ended
September 30, 2003, other income decreased $195,781, or 77% from the comparable
period in the preceding fiscal year. Other expenses decreased $23,536 or 88%
for the three months ended September 30, 2003 from the comparable period in
fiscal 2003 due to the retirement in May 2003 of an interest bearing bond debt.
For the six-month period ended September 30, 2003, other expenses increased
$3,759, or 7%, due to additional interest expense on operating leases at APACN.
Interest income decreased $78,264, or 66% and $156,871, or 61% for the three and
six months ended September 30, 2003, respectively, from the comparable periods
in the preceding fiscal year, The decreases in interest income were due to the
combination of a decline in the rate of interest earned on short-term
investments and a lower average cash balance, as cash was consumed to fund
operations, capital investment, debt service and acquisitions. Unless short-term
interest rates increase, we anticipate continuing decreases in interest income
as a result of the use of cash in operations, for capital expansion and for debt
service.
NET LOSS
The net loss for the quarter ended September 30, 2003, was $1,667,488 (or
$0.14 per basic and diluted share), an increase of $348,751 or 26% from the net
loss reported for the same period in fiscal 2003. For the six months ended
September 30, 2003, the net loss was $3,212,887, (or $.27 per basic and diluted
share), an increase of $641,157 or 25% from the net loss reported for the same
period in fiscal 2003. The increased net losses were primarily due to losses at
APACN, which was negatively affected by duplicate expenses related to operating
multiple
10
facilities and higher personnel costs related to moving to a new facility, while
the increase in loss at APA Optics is attributable to lower interest income
earned in the six months ending September 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
APA's cash and cash equivalents consist primarily of money market funds,
U.S. Government instruments or other government instruments with original
maturities of less than three months. The balance of cash and cash equivalents
at September 30, 2003 is $16,653,485 compared to $22,235,686 at March 31, 2003.
The decrease in cash was primarily the result of the acquisition of the assets
of Americable, Inc. and the use of cash to fund operations.
We used net cash of $2,197,897 in investing activities for the six months
ended September 30, 2003 compared to $79,788 used in the same period of the
preceding fiscal year. Of this amount, $1,960,000 was used to purchase the
assets of Americable, Inc. We also invested $212,522 for the six months ended
September 30, 2003 for computer and production equipment. We anticipate a total
of approximately $1,250,000 in capital expenditures in fiscal 2004, primarily
for equipment in HFET research at APA Optics. We expect to invest in equipment
to support the HFET research and development activities over the next several
quarters.
Net cash used in financing activities for the six months ended September
30, 2003 totaled $335,780. We used $340,028 for the scheduled reduction of debt
and a reduction in bond reserve funds generated $4,248. During the same period
in fiscal 2003 we used $390,262 in financing activities, of which $429,677 was
used for the scheduled reduction of debt, $45,406 was generated from the
reduction of bond reserve funds and $5,991 was used to repurchase common stock
of the Company.
We believe we have sufficient funds for operations for at least the next
twelve months.
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 1,833 1,546 111 35 141
Operating leases 764 361 403 - -
-----------------------------------------------
Total Contractual Cash
Obligations 2,597 1,907 514 35 141
===============================================
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 our fiscal year ended March 31, 2003
for descriptions of the use of estimates in our accounting policies. Our
management and the audit committee of our board of directors have discussed our
use of estimates and have approved our disclosure relating to it in this report.
In Note 9 of this report, the effect of recent promulgations of the
Financial Accounting Standards Board (FASB) on the Company is described. We
believe the adoption of these Statements and Interpretations will not have a
material effect on the Company's financial position or results of operations.
11
FACTORS THAT MAY INFLUENCE FUTURE RESULTS
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The statements contained in this report on Form 10-Q 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
limitation, 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 2. 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-Q and we assume no obligation to update the forward-looking
statements or to update the reasons why actual results could differ from those
projected in the forward-looking statements.
Unless we generate significant revenue growth, our expenses and negative cash
flow will significantly harm our financial position.
We have not been profitable since fiscal 1990. As of September 30, 2003, we
had an accumulated deficit of $26.4 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.
We believe our success in competing with other manufacturers of fiber optic
and copper components and assemblies will depend primarily on our manufacturing
and marketing skills, the price, quality and reliability of our products, our
delivery capabilities and our control of operating expenses. We have experienced
and anticipate experiencing increasing pricing pressures from our current and
future competitors as well as general pricing pressure from our customers as
part of their cost reduction efforts. Competition may also be affected by
consolidation among suppliers in this industry, which may increase their
resources. As a result, other competitors may be able to respond more quickly
than we can to new or emerging technologies and changes in customer
requirements.
We cannot predict whether we will be able to compete against current and
future competitors with our existing and new products. We believe that
technological change, the convergence of Internet, data, video and voice on a
single broadband network, the possibility of regulatory changes and industry
consolidation or new entrants will continue to cause rapid evolution in the
competitive environment. The full scope and nature of changes are difficult
12
to predict at this time. Increased competition could lead to price cuts, reduced
profit margins and loss of market share, which may seriously harm our business,
operating results and financial condition.
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,
- 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. 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 network,
both current and future. Our products may not be compatible or operate as
expected over long periods of time. Our customers may discover errors or defects
in our products only after they have been fully deployed. If we are unable to
fix such 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.
13
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. We continue to acquire these
products from off shore partners, qualify the products, and integrate (if
necessary) the products into our platforms and systems. These products may not
meet our target specification, which may delay their introduction into our sales
channels. Outsourcing products also brings potential risks such as the general
financial strength of our outsourcing partners and the economic and political
stability in our partner's nation. 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 and sourcing our products, we have
made, and will continue to make, assumptions with respect to which standards
will be adopted within our industry. If the standards that are actually adopted
are different from those that we have chosen to support, our products may not
achieve significant market acceptance.
Our products may infringe on the intellectual property rights of others
Some of 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. 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
We completed acquisitions of the assets of Computer System Products, Inc.
and Americable, Inc. in March 2003 and June 2003 respectively, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We invest in short-term securities of high credit
issuers with maturities ranging from overnight up to 24 months. The average
maturity of the portfolio does not exceed 12 months. The portfolio includes only
marketable securities with active secondary or resale markets to ensure
liquidity. We have no investments denominated in foreign country currencies and,
therefore, our investments are not subject to foreign exchange risk.
14
ITEM 4. CONTROLS AND PROCEDURES.
a. Evaluation of disclosure controls and procedures. The Company's chief
executive officer and chief financial officer have concluded that the
Company's disclosure controls and procedures (as defined in Exchange
Act Rule 13a-14(c)) are sufficiently effective to ensure that the
information required to be disclosed by the Company in the reports it
files under the Exchange Act is gathered, analyzed and disclosed with
adequate timeliness, accuracy and completeness, based on an evaluation
of such controls and procedures conducted within 90 days prior to the
date hereof.
b. Changes in internal controls. There have been no significant changes
in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the
evaluation referred to above.
PART II
ITEMS 1 THROUGH 3. NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of shareholders of the Company was held on August
21, 2003. As of the record date, July 7, 2003, there were 11,872,331
shares of Common Stock issued and outstanding. There were present and
voting at the meeting, in person or by proxy, 10,265,560 shares of
Common Stock (approximately 86% of the total issued and outstanding).
(b) (1) The election of 5 directors to serve for one-year terms was
approved. The individual results are as follows. There were no broker
non-votes.
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Voting Authority
Name Affirmative Votes Withheld Abstain
- ----------------------------------------------------------------------------
Anil K. Jain 9,346,664 918,896 -
- ----------------------------------------------------------------------------
Kenneth A. Olsen 9,342,264 923,296 -
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John G. Reddan 10,211,255 54,305 -
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Ronald G. Roth 10,225,155 40,405 -
- ----------------------------------------------------------------------------
Stephen L. Zuckerman, MD 10,225,155 40,405 -
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ITEM 5. NOT APPLICABLE
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 31.1 - Chief Executive Officer's certification pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Chief Financial Officer's certification pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 - Certification required of Chief Executive Officer
by Section 906 of the Sarbanes Oxley Act of 2002
Exhibit 32.2 - Certification required of Chief Financial Officer
by Section 906 of the Sarbanes Oxley Act of 2002
(b) Reports on Form 8-K.
A report on Form 8-K dated July 2, 2003, reported the acquisition
of the assets of Americable, Inc.
A report on Form 8-K dated July 23, 2003, reported the
resignation of the Chief Financial Officer David R. Peters.
A report on Form 8-K/A dated August 8, 2003, amended the report
on Form 8-K filed on July 2, 2003 providing the required
financial statements and pro forma financial information within
the time allowed under the requirement of Form 8-K.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APA OPTICS, INC.
/s/ Anil K. Jain
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Date Anil K. Jain
President,
Chief Executive Officer and Chief
Financial Officer (Principal Executive
and Principal Financial Officer)
/s/ Daniel Herzog
- ---------- -----------------
Date Comptroller
(Principal Accounting Officer)
16