Back to GetFilings.com
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, 2001.
[ ] 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 (I.R.S. Employer
incorporation 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. [_]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of May 18, 2001, was approximately $90,555,682.
The number of shares of common stock outstanding as of May 18, 2001 was
11,915,165.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of our proxy statement for the annual shareholders meeting to be
held in August 2001 are incorporated by reference into Part III.
1
PART I
ITEM 1. BUSINESS.
(A) GENERAL DEVELOPMENT OF BUSINESS.
Since the founding of APA Optics, Inc. in 1979, we have focused on leading
edge research in sophisticated optoelectronics and optical systems, with the
primary goal of developing advanced products for subsequent marketing and
fabrication. We currently manufacture and market dense wavelength division
multiplexer (DWDM) optical components, a range of gallium nitride-based devices
and services, and custom optics products.
For the last several years our goal has been to manufacture and market
products and components based on our technology developments. We have focused
our efforts on DWDM components for fiber optic communications and gallium
nitride-based ultraviolet (UV) detectors (both components and integrated
detector/electronic/display packages) because we believe that these two product
areas have significant potential markets and because we have expertise and/or
patent positions relevant to them.
In fiscal 2000 we eliminated our R&D contracts (historically a significant
source of revenue for us) to concentrate on development and production of our
own proprietary products. This shift has significantly reduced our revenues and
increased our losses, which will continue until we realize significant revenues
from these products.
(B) DESCRIPTION OF BUSINESS.
Products
We currently offer the products described below.
- - Dense Wavelength Division Multiplexing (DWDM) Components. We manufacture
---------------------------------------------------------
and market a family of DWDM multiplexing/demultiplexing components based on
patented bulk diffraction grating technology. These components enable fiber
optic networks to transmit data simultaneously on several wavelengths of
light within each optical fiber of a cable as opposed to a single
wavelength of light in networks not employing DWDM technology. This
multiplexing of data streams using different wavelengths of light
significantly increases the volume of data transmission through an optical
network without requiring the installation of additional fiber optic cable.
Our DWDM components offer leading-edge performance for key parameters, such
as insertion loss and crosstalk, which determine the integrity of the
signals combined on the fiber. These advantages are magnified as more and
more individual signals are multiplexed onto a single fiber, a current
trend in the industry.
Our design allows us to configure DWDM components to work with singlemode
or multimode optical fiber. Single mode fiber is typically associated with
transmission over long distances (required for long haul networks) and
metro area rings, while multimode fiber is typically associated with
shorter networks found in campus and local area networks. Multimode
demultiplexers are also a enabling component for multiwavelength fiber free
communications systems.
2
We hold three patents in this field, the earliest of which was issued in
September 1995. In addition there are two pending patents and numerous
international filings covering key markets in Europe and Asia.
- - Ultraviolet (UV) Detectors and Related Products. We currently manufacture
------------------------------------------------
and sell a wide range of UV detectors. The UV detectors are high response
compound semiconductor devices based on gallium nitride (GaN) and aluminum
gallium nitride (AlGaN). They are compact and rugged compared to competing
technologies and have applications in spectrometry, UV curing processes, UV
lamp monitors, solar radiation measurement, excimer-laser measurement and
calibration, biomedical instrumentation, and flame detection and
monitoring. We have been awarded seven patents in the area of compound
semiconductor devices and have two pending.
- - Custom Optical Products. We manufacture and sell custom optical products
------------------------
to third parties; however, we expect a significant portion of our capacity
in this area to be directed at supplying components for our DWDM components
in the future. Custom optical products include:
- Optical Lens Systems. We design and build multi-element lens systems
-------------------
and components, including mounting structures, for precision quality
optical needs in many applications, including laser-based systems,
imaging systems, inspection systems, display systems, display optics,
focusing optics for ultraviolet fire alarms, alignment verification
optics for dual magnetic recording heads, and multi-magnification
optics systems for optical comparators.
- Optical Thin Film Coatings. We custom design, develop, and fabricate
---------------------------
optical thin film coatings for optical components of lasers, laser
systems, optical instruments, and optical devices. Our antireflective
coatings are deposited onto Company-fabricated lens components. We
also use our thin film coating facility to design, develop and
fabricate coatings for lens components supplied by customers.
We plan to actively market the following product in Fiscal 2002:
- - Sun(UV)Watch(R). In prior fiscal years we trial marketed our
--------------
Sun(UV)Watch(R). Based on the results of this trial marketing we made
several improvements to the Sun(UV)Watch(R). The Sun(UV)Watch(R) detects
and monitors potential cancer causing UV radiation and sounds an alarm when
the maximum safe exposure time based on government recommendations is
reached. All of our UV sensing value-added products are built around our
production UV detectors and, therefore, do not require significant
additional financial resources for development.
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 high power and high frequency transistors based on GaN and
AlGaN and are pursuing this area for commercialization. There are
significant markets emerging for these devices with the rapid growth of
cellular phone use and the associated infrastructure and in other wireless
applications. Two of our seven awarded patents in this technology are
fundamental to the transistor structure. The development of products in
this area will require the commitment of significant resources.
3
- - Components and Modules for Fiber Optics Networks: Building on the strength
-------------------------------------------------
of our DWDM components, the Company is developing new components and
value-added modules for fiber optics telecommunications networks. An
alliance with Harris Corporation has been formed to jointly develop and
market a product utilizing our DWDMs which enables 10 Gigabit Ethernet to
be easily retrofitted to existing fiber installations in short haul
(distances under 1,000 meters) applications such as business and academic
campuses. We are also exploring other variants of the DWDM line
incorporating passive and active functions. Much of this work is based on a
technology called integrated optics, which creates optical devices on chips
with integrated circuit-like processes. The 10 Gigabit Ethernet product is
based on our current DWDM technology and will not require significant
resources for further development. The development of products based on
integrated optics technology will require the commitment of significant
resources.
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 distributors in
various countries (including Japan, Germany, Italy and France). While we do not
currently maintain an internal sales force, we do have individual sales managers
who focus on the sales of DWDM components and UV detection devices. We also
maintain product information on our Web site.
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, 2001, we had 16 patents issued or applied for in the U.S.
and three issued or applied for outside the U.S. We believe our success heavily
depends upon technology we develop internally. The markets for our products are
characterized by rapid change and continual innovation that could render our
technology and patents obsolete before their statutory protection expires.
Several of the companies we compete with have greater research and development
resources than we do and could develop technologies and products that are
similar or even superior to ours without infringing on our intellectual
property. Similarly, we cannot make assurances that others will not claim
infringement by us with respect to our products and technology.
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.
4
Major Customers
In prior years, we provided research and development services under
contracts with various governmental agencies. Currently, we have no material
contracts with any such agencies.
During Fiscal 2001, revenues from three customers represented 19%, 16% and
15% of our total revenues each. While significant as a percentage of revenues,
the revenues in real dollars were not as significant and the loss of any one of
these customers would not have a material adverse effect on the Company. In
addition to the customers referred to above, revenues from government agencies
constituted more than ten percent of our total operating revenues in fiscal
years 2000 and 1999:
Year Ended March 31
-------------------
Name 2001 2000 1999
---- ---- ---- ----
Government Agencies* 0% 38% 67%
*Represents services to several operating agencies of the U.S.
Government, as follows:
2001 2000 1999
----- ----- -----
Air Force -- -- 15%
Army -- 35% 0
Navy -- 3 12
ARPA -- -- 40
----- ----- -----
Total 0% 38% 67%
===== ===== =====
Backlog
Our backlog of orders for DWDM components was approximately $545,000 at
March 31, 2001 compared to zero at March 31, 2000 and 1999. We expect the entire
backlog to be shipped in the current fiscal year.
We had no backlog of uncompleted research contracts at March 31, 2001, as
compared to $28,400 at March 31, 2000, and $189,000 at March 31, 1999. The
elimination of the backlog in uncompleted contracts is the direct result of our
shift from contract R&D to product development and promotion.
5
Competition
The optoelectronics and compound semiconductor electronic device markets
are evolving rapidly and, therefore, the competitive landscape changes
continually. The opportunities presented by these markets have fostered a highly
competitive environment. This competition will likely result in price reductions
and lower profit margins for the companies serving this market. Many of the
companies engaged in these businesses are well financed and have significantly
greater research, development, production, and marketing resources than we do.
Some of these companies have long operating histories, well-established
distribution channels, broad product offerings and extensive customer bases. Our
ability to compete with these companies will depend largely on the performance
of our devices, our ability to innovate and develop solutions for our customers,
our intellectual property and our ability to convince customers to adopt our
technology early in their design cycle. Competitors for our DWDM products would
include Lightwave Microsystems, Inc., Photonetics, Inc., and JDS Uniphase
Corporation. Competitors for our GaN products would include Cree, Inc., Nitronex
Corporation, and Emcore Corporation.
6
Research and Development
During the fiscal years ended March 31, 2001, 2000, and 1999, we spent
approximately $1,176,000, $919,000, and $682,000, respectively, on research and
development, all of which was related to the DWDM, UV detector and related
products. In addition, in fiscal year 2001, we had no research activities
sponsored by customers compared to $978,000 and $837,000 for fiscal years 2000
and 1999. We operate in highly competitive and rapidly evolving markets and plan
to commit significant resources for research and development for the foreseeable
future. We will consider locating research and development facilities in
locations other than our current facilities in Minnesota and South Dakota based
on several factors, including accessibility to qualified personnel and facility
costs.
Employees
As of March 31, 2001, we had 58 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 and Section 21E of the Securities
Exchange Act of 1934, including, without limitations, statements regarding the
Company's expectations, hopes, beliefs, anticipations, commitments, intentions
and strategies regarding the future. Forward-looking statements include, but are
not limited to, statements contained in "Item 1. Business" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations." Actual results could differ from those projected in any
forward-looking statements for the reasons, among others, detailed below. We
believe that many of the risks detailed here are part of doing business in the
industry in which we compete and will likely be present in all periods reported.
The fact that certain risks are characteristic to the industry does not lessen
the significance of the risk. The forward-looking statements are made as of the
date of this Form 10-K and we assume no obligation to update the forward-looking
statements or to update the reasons why actual results could differ from those
projected in the forward-looking statements.
Unless We Generate Significant Revenue Growth, Our Increasing Expenses And
Negative Cash Flow Will Significantly Harm Our Financial Position.
We have not been profitable since fiscal 1990. As of March 31, 2001, we had
an accumulated deficit of $13.5 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 higher revenues
while containing costs and operating expenses if we are to achieve
profitability.
7
We Must Increase Our Manufacturing Capacity Or We Will Not Be Able To Deliver
Our Products To Our Customers In A Timely Manner.
Manufacturing of our products is a complex and precision process. We have
limited experience in rapidly increasing our manufacturing capacity or in
manufacturing products at high volumes. We will be required to hire, train and
manage additional manufacturing personnel and improve our production processes
in order to increase our production capacity. There are numerous risks
associated with rapidly increasing capacity, including:
(i) Difficulties in achieving adequate yields from new manufacturing
lines,
(ii) Difficulty maintaining the precision manufacturing processes required
by our products while increasing capacity,
(iii) The inability to timely procure and install the necessary equipment,
and
(iv) Lack of availability of qualified manufacturing personnel.
Our manufacturing expansion and related capital expenditures are being made
in anticipation of a level of customer orders that may not be realized. If
anticipated levels of customer orders are not received, we will not be able to
generate positive gross margins and profitability.
Our Dependence On Outside Manufacturers May Result In Product Delivery Delays.
We purchase components that are incorporated into our products from outside
vendors. If these vendors fail to supply us with components on a timely basis,
we could experience significant delays in shipping our products. Any significant
interruption in the supply or support of any components could seriously harm our
sales and our relationships with our customers.
Our Products May Have Defects That Are Not Detected Before Delivery to Our
Customers.
Some of our products are designed to be deployed in large and complex
optical networks and must be compatible with other components of the system,
both current and future. In addition, our products may not operate as expected
over long periods of time. Our customers may discover errors or defects in our
products only after they have been fully deployed. If we are unable to fix
errors or other problems, we could lose customers, lose revenues, suffer damage
to our brand and reputation, and lose our ability to attract new customers or
achieve market acceptance. Each of these factors would negatively impact cash
flow and would seriously harm our business, financial condition and results of
operations.
We Will Need To Introduce New Products And Product Enhancements to Increase
Revenue.
The successful operation of our business depends on our ability to
anticipate market needs and to develop and introduce new products and product
enhancements that respond to technological changes or evolving industry
standards on a timely and cost-effective basis. Our products are complex, and
new products may take longer to develop than originally anticipated. These
products may contain defects or have unacceptable manufacturing yields when
first introduced or as new versions are released. Our products could quickly
become obsolete as new technologies are introduced. We must continue to develop
leading-edge products and introduce them to the commercial market quickly in
order to be successful. Our failure to produce technologically competitive
products in a cost-effective manner and on a timely basis will seriously harm
our business, financial condition and results of operations.
8
Our Markets Are New And 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.
Demand for Our Products is Subject To Significant Fluctuation.
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. Such periods of reduced
demand will harm our business, financial condition and results of operations.
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 10 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.
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 5 of Notes to Financial
Statements included under Item 8 in this Report for further information
regarding the financing of this facility.
We believe that these two facilities will be adequate for our needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
We are not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
9
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of our executive officers, their ages, positions and
offices as of March 31, 2001.
NAME AGE POSITION
Dr. Anil K. Jain 55 Chief Executive Officer and
President
Kenneth A. Olsen 57 Vice President and Secretary
Robert M. Ringstad 44 Chief Financial Officer
DR. ANIL K. JAIN has been a Director, Chief Executive Officer and President
since March 1979. He also served as Chief Financial Officer until August 2000.
From 1973 until October 15, 1983, when Dr. Jain commenced full time employment
with the Company, he was employed at the Systems and Research Center at
Honeywell Inc. as a Senior Research Fellow, coordinating optics-related
development.
KENNETH A. OLSEN has been a Director since 1980, Secretary since 1983, and
Vice President since 1992. Prior to joining the Company, he had been with 3M
Corp., St. Paul, Minnesota.
ROBERT M. RINGSTAD has been Chief Financial Officer since joining the
Company in August 2000. Prior to joining the Company he was Vice President and
Controller of Echostar Communications Corporation, Englewood, Colorado from
October 1999 to January 2000. From October 1997 until March 2000 Mr. Ringstad
was Chief Financial Officer and Chief Operating Officer for World Satellite
Network, Inc., Minneapolis, Minnesota. Prior to joining World Satellite Network,
Mr. Ringstad was employed with Family Partners, Ltd. of Minneapolis, MN.
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 2001 HIGH LOW
- ----------- ---- ---
Quarter ended June 30, 2000. . . . . $36.00 $12.25
Quarter ended September 30, 2000 . . 24.38 9.75
Quarter ended December 31, 2000. . . 17.31 5.50
Quarter ended March 31, 2001 . . . . 11.81 6.06
FISCAL 2000 HIGH LOW
- ----------- ---- ---
Quarter ended June 30, 1999. . . . . $ 8.50 $ 5.25
Quarter ended September 30, 1999 . . 7.93 3.50
Quarter ended December 31, 1999. . . 19.50 3.88
Quarter ended March 31, 2000 . . . . 64.00 11.31
There were approximately 350 holders of record of our common stock as of
March 31, 2001.
10
We have never paid cash dividends on our common stock. The loan agreement
relating to certain bonds issued by the South Dakota Economic Development
Finance Authority restricts our ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA.
2001 2000 1999 1998 1997
------------ ------------ ------------ ----------- -----------
Statements of Operations Data
Revenues . . . . . . . . . . . . . . . . $ 885,740 $ 420,809 $ 722,030 $2,190,637 $2,769,270
Net loss . . . . . . . . . . . . . . . . (2,986,446) (3,796,296) (2,513,798) (967,767) (11,023)
Net loss per share, basic and diluted . (.29) (.43) (.30) (.12) --
Weighted average number of shares, basic 11,180,165 8,744,125 8,512,274 8,376,661 8,192,879
and diluted
Balance Sheet Data
Total assets . . . . . . . . . . . . . . $41,914,451 $ 9,610,391 $ 6,804,976 $9,629,912 $9,419,398
Long-term obligations, including current 2,836,831 3,049,258 3,214,712 3,609,652 3,829,004
portion
Shareholders' equity . . . . . . . . . . 38,280,299 6,306,049 3,389,295 5,859,863 5,412,968
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 2001.
For the last several years our goal has been to manufacture and market
products/components based on our technology developments. We have focused on
dense wavelength division multiplexer (DWDM) components for fiber optic
communications and gallium nitride-based ultraviolet (UV) detectors (both
components and integrated detector/electronic/display packages) because we
believe that these two product areas have significant potential markets and
because we have expertise and/or patent positions related to them.
Results of Operations
Fiscal 2001 Compared to Fiscal 2000. Operating revenues for fiscal 2001
---------------------------------------
were $885,740, an increase of 110% from operating revenues of $420,809 in fiscal
2000. The increase in revenues came primarily from sales of DWDM components,
which totaled $733,590 in Fiscal 2001. Our backlog of DWDM component orders was
11
approximately $545,000 as of March 31, 2001. There were no contract fees in
fiscal 2001 compared to $160,108 in fiscal 2000 and we had no backlog of
uncompleted contracts at March 31, 2001. We believe we have made significant
progress in marketing our new products and that revenues from sales of such
products will continue to increase in fiscal 2002.
Cost of sales increased by 88%, to $2,663,192, in fiscal 2001 from
$1,415,229 in fiscal 2000. Gross margin for product sales was negative in both
fiscal 2001 and fiscal 2000, reflecting continued increased personnel and
manufacturing costs and relatively low sales. The negative gross margins are
influenced by the low unit production and sales levels relative to the capital
equipment and personnel committed to production in the early phases of market
penetration of our products. 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 2001.
Selling, general and administrative expenses increased by 117% to
$1,866,766 from $862,170 in fiscal 2000. The increase reflects additional
compensation costs, non-cash compensation related to non-qualified stock options
granted to employees, the cost of adopting a shareholder rights plan, and fees
associated with moving to the Nasdaq National Market.
Research and development expenses increased by approximately 28% in fiscal
2001, to $1,175,564 from $918,811 in fiscal 2000. The increase results from the
Company's continued investment in the development of its DWDM and GaN
technologies. The Company plans to expand its research and product development
activities in the future and will incur increased expenses related to these
activities.
We reported a loss from operations in fiscal 2001 of $4,819,782, a
substantial increase over the loss from operations of $3,753,623 in fiscal 2000.
The increase in the loss results primarily from increased expenditures for
selling, general and administrative and additional expenditures for research and
development.
We realized $2,002,713 in interest income in fiscal 2001, up 1882% from
$100,989 in fiscal 2000, reflecting increased average balances of cash and
short-term investments during the year. Interest expense in fiscal 2001 totaled
$135,323, down 5% from $142,662 in fiscal 2000, reflecting reduced balances on
outstanding obligations.
Our net loss in fiscal 2001 was $2,953,392 compared to $3,796,296 in fiscal
2000. The decrease in the loss was primarily a result of increased revenues and
significantly higher interest income from the investment of cash raised during
the fiscal year. Further losses can be expected until revenues from production
increase, or operating costs decrease, sufficiently to produce positive cash
flow.
Fiscal 2000 Compared to Fiscal 1999. Operating revenues for fiscal 2000
---------------------------------------
were $420,809, a decrease of 42% from operating revenues of $722,030 in fiscal
1999. The decrease in revenues reflects the decision to focus on product
development rather than contract research and development. Contract fees
decreased from $484,329 in fiscal 1999 to $160,108 in fiscal 2000, and our
backlog of uncompleted contracts at March 31, 2000 was $28,400 as compared to
$189,000 at March 31, 1999. Revenues from sales of products increased by
approximately 10% as compared to fiscal 1999.
12
Cost of sales increased by approximately 33%, to $1,415,229 in fiscal 2000
from $1,066,820 in fiscal 1999. Cost of contract fees increased by 17% from
$837,242 to $978,222 in fiscal 2000. Gross margin for product sales was negative
reflecting continued personnel and product development costs. Research and
development expenses increased by approximately 35% in fiscal 2000, to $918,811
from $681,730 in fiscal 1999, and selling, general and administrative expenses
increased by 18% to $862,169 from $727,988 in fiscal 1999. The increase in costs
of sales, research and development and selling, general and administrative
expenses resulted from our focus on product development, including the hiring of
additional personnel for production, marketing, and sales.
The loss from operations in fiscal 2000 was $3,753,623, a substantial
increase over the loss from operations of $2,591,750 in fiscal 1999. This loss
resulted from the combination of significantly decreased revenues without a
corresponding decrease in costs and expenses.
We realized $100,989 in interest income in fiscal 2000, down 56% from
$228,195 in fiscal 1999, reflecting lower average cash balances during the year.
Interest expense in fiscal 2000 totaled $142,662, down 4% from $149,243 in
fiscal 1999, reflecting reduced balances on outstanding obligations.
Our net loss in fiscal 2000 was $3,796,296, compared to $2,513,798 in
fiscal 1999. As noted above, this loss was primarily a result of significantly
decreased revenues and significantly higher cost of sales and other operating
expenses.
Liquidity and Capital Resources
Our cash, cash equivalents and short-term investments at March 31, 2001,
totaled $36,984,492 as compared to $5,941,906 at March 31, 2000.
Cash used in operating activities was $2,230,867 in fiscal 2001, $3,497,892
in fiscal 2000 and $1,939,439 in fiscal 1999. The change in the use of net cash
in operating activities in fiscal 2000 was primarily related to the increase in
the Company's net loss to $3,796,296 from $2,513,798 in fiscal 1999. The change
in the use of net cash in operating activities in fiscal 2001 was primarily
related to the decrease in the net loss in fiscal 2001 to $2,953,392 and an
increase in the amount of accounts payable as a result of increased purchasing
for operations at the end of fiscal 2001.
The Company used net cash of $16,995,645 in investing activities in fiscal
2001, $15,759,000 of which was invested in short-term investments. During fiscal
2001 we received net cash of $34,510,098 from financing activities that included
proceeds of $39,557,304 from the sale of common stock and the use of $5,033,054
to retire preferred stock issued in fiscal 2000. During fiscal 2000, we received
$6,862,343 net cash from financing activities, primarily from sales of our
common and preferred stock. The Company invested $1,128,453, $195,342 and
$236,891 in plant and equipment in fiscal 2001, fiscal 2000 and fiscal 1999,
respectively. In all three years, such property and equipment was purchased
primarily for the Aberdeen facility.
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, 2001, the total
principal outstanding on the several loans obtained in connection with these
financing packages was $2,836,831. Interest on the loans ranges from 0% to
6.75%, and the loans are due between 2003 and 2016. These loans require
compliance with certain financial covenants. We were out of compliance with some
of these covenants with respect to one of the loans in fiscal 2001. For further
information regarding these loans, see Note 5 of Notes to Financial Statements
included under Item 8 of this Report.
13
Our capital requirements are dependent upon several factors including
market acceptance of our products, the timing and extent of new product
introductions and delivery, and the costs of marketing and supporting our
products on a worldwide basis. See "Item 1. Business."
Although we believe that our current cash, cash equivalents, and short-term
investments will be sufficient to fund our operations for at least 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.
Forward Looking Statements
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" in "Item 1. Business" in this Report.
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.
14
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, 2001:
Quarter Ended
--------------------------------------------------------
June 30, September 30, December 31, March 31,
1999 1999 1999 2000
---------- --------------- -------------- -----------
Statement of Operations Data
Net revenue . . . . . . . . . $ 66,597 $ 36,029 $ 136,516 $ 181,666
Gross profit (loss) . . . . . (431,180)* (495,742) (576,227) (469,493)
Net loss. . . . . . . . . . . (916,590) (955,512) (988,740) (935,454)
Net loss per share. . . . . . $ (0.11) $ (0.11) $ (0.11) $ (0.10)
Quarter Ended
--------------------------------------------------------
June 30, September 30, December 31, March 31,
2000 2000 2000 2001
---------- --------------- -------------- -----------
Statement of Operations Data
Net revenue . . . . . . . . . $ 51,517 $ 123,462 $ 280,945 $ 429,816
Gross profit (loss) . . . . . (354,555) (486,258) (456,119) (480,520)
Net loss. . . . . . . . . . . (909,675) (596,999) (636,837) (809,880)
Net loss per share. . . . . . $ (0.12)** $ (0.05) $ (0.05) $ (0.07)
* The statement of operations data reflects a reclass of previously reported numbers.
** Reflects a loss of $(0.02) per share related to the redemption of preferred
stock.
See Item 14(a)(1) for financial statements filed with this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding executive officers is included in Part I of this
Report
Information regarding directors and the information required by Items 11,
12, 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 2001).
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
15
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) The following financial statements are filed herewith under Item 8.
Page
(i) Report of Independent Auditors. . . . . . . . . . . . . 18
(ii) Balance Sheets as of March 31, 2000 and 2001. . . . . . 19
(iii) Statements of Operations for the years ended
March 31, 2001, 2000 and 1999 . . . . . . . . . . . . . 20
(iv) Statement of Shareholders' Equity for the years ended
March 31, 2001, 2000 and 1999 . . . . . . . . . . . . . 21
(v) Statements of Cash Flows for the years ended
March 31, 2001, 2000 and 1999 . . . . . . . . . . . . . 22
(vi) Notes to the Financial Statements at March 31, 2001 . . 23-33
(2) Financial Statement Schedules: None
(a) Reports filed on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of
the fiscal year ended March 31, 2001.
(c) Exhibits. See Exhibit Index on pages 34-35.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
APA Optics, Inc.
Date: June 29, 2001 By /s/ Anil K. Jain
---------------------------------
Anil K. Jain
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ---------------------- ---------------------------------------- -------------
/s/ Anil K. Jain President, Chief Executive Officer, and June 29, 2001
- ---------------------- Director
Anil K. Jain
/s/ Kenneth A. Olsen Secretary, Vice President, and Director June 29, 2001
- ----------------------
Kenneth A. Olsen
/s/ Robert M. Ringstad Chief Financial Officer June 29, 2001
- ----------------------
Robert M. Ringstad
/s/ Gregory Von Wald Director June 29, 2001
- ----------------------
Gregory Von Wald
/s/ William R. Franta Director June 29, 2001
- ----------------------
William R. Franta
/s/ Michael A. Gort Director June 29, 2001
- ----------------------
Michael A. Gort
17
Report of Independent Auditors
The Board of Directors and Shareholders
APA Optics, Inc.
We have audited the accompanying balance sheets of APA Optics, Inc. as of March
31, 2001 and 2000, and the related statements of operations, shareholders'
equity, and cash flows for each of the three 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 2000, and the results of its operations and its cash flows for each
of the three 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
18
APA Optics, Inc.
Balance Sheets
MARCH 31
2001 2000
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 21,225,492 $ 5,941,906
Short-term investments 15,759,000 -
Accounts receivable 370,859 209,337
Inventories:
Raw materials 405,238 146,841
Work-in-process 10,078 129,684
Prepaid expenses 30,064 19,803
Bond reserve funds 65,000 65,000
------------- -------------
Total current assets 37,865,731 6,512,571
Property, plant, and equipment, net 3,248,191 2,459,760
Other assets:
Bond reserve funds 351,630 213,353
Bond placement costs, net of accumulated amortization of
$204,000 in 2001 and $156,000 in 2000 116,012 164,012
Patents, net of accumulated amortization of $291,998 in 2001 and
$255,998 in 2000 112,192 40,000
Cash surrender value of life insurance 220,695 220,695
------------- -------------
Total other assets 800,529 638,060
------------- -------------
Total assets $ 41,914,451 $ 9,610,391
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 495,410 $ 82,412
Accrued expenses 301,911 172,672
Current maturities of long-term debt 2,337,221 140,871
------------- -------------
Total current liabilities 3,134,542 395,955
Long-term debt 499,610 2,908,387
Shareholders' equity:
Undesignated shares:
Authorized shares - 4,999,500
Issued and outstanding shares - -0- - -
Preferred stock, $.01 par value:
Authorized shares - 500
Issued and outstanding shares - -0- - 5
Common stock, $.01 par value:
Authorized shares - 50,000,000
Issued and outstanding shares - 11,915,456 in 2001,
8,997,992 in 2000 119,155 89,980
Additional paid-in capital 51,614,972 16,408,446
Accumulated deficit (13,453,828) (10,192,382)
------------- -------------
Total shareholders' equity 38,280,299 6,306,049
------------- -------------
Total liabilities and shareholders' equity $ 41,914,451 $ 9,610,391
============= =============
See accompanying notes.
19
APA Optics, Inc.
Statements of Operations
YEAR ENDED MARCH 31
2001 2000 1999
------------ ------------ ------------
Revenues:
Net sales $ 885,740 $ 260,701 $ 237,701
Contract fees - 160,108 484,329
------------ ------------ ------------
885,740 420,809 722,030
Cost and expenses:
Cost of sales 2,663,192 1,415,229 1,066,820
Cost of contract fees - 978,222 837,242
Research and development 1,175,564 918,811 681,730
Selling, general, and administrative 1,866,766 862,170 727,988
------------ ------------ ------------
5,705,522 4,174,432 3,313,780
Loss from operations (4,819,782) (3,753,623) (2,591,750)
Interest income 2,002,713 100,989 228,195
Interest expense (135,323) (142,662) (149,243)
------------ ------------ ------------
Loss before income taxes (2,952,392) (3,795,296) (2,512,798)
Income taxes 1,000 1,000 1,000
------------ ------------ ------------
Net loss (2,953,392) (3,796,296) (2,513,798)
Preferred stock dividend (33,054) - -
Excess of preferred stock redemption over
carrying value (275,000) - -
------------ ------------ ------------
Net loss applicable to common shareholders $(3,261,446) $(3,796,296) $(2,513,798)
============ ============ ============
Net loss per share:
Basic and diluted $ (.29) $ (.43) $ (.30)
============ ============ ============
Weighted average shares outstanding:
Basic and diluted 11,180,615 8,744,125 8,512,274
============ ============ ============
See accompanying notes.
20
APA Optics, Inc.
Statement of Shareholders' Equity
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
----------------- --------------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------- -------- ---------- -------- ------------ ------------- ------------
Balance at March 31, 1998 - $ - 8,512,274 $ 85,123 $ 9,657,028 $ (3,882,288) $ 5,859,863
Warrants issued in lieu of debt
service payments - - - - 43,230 - 43,230
Net loss - - - - - (2,513,798) (2,513,798)
------- -------- ---------- -------- ------------ ------------- ------------
Balance at March 31, 1999 - - 8,512,274 85,123 9,700,258 (6,396,086) 3,389,295
Issuance of common stock - - 465,000 4,650 1,870,475 - 1,875,125
Warrants exercised - - 20,718 207 80,614 - 80,821
Issuance of preferred stock 500 5 - - 4,724,995 - 4,725,000
Warrants issued in lieu of debt
service payments - - - - 32,104 - 32,104
Net loss - - - - - (3,796,296) (3,796,296)
------- -------- ---------- -------- ------------ ------------- ------------
Balance at March 31, 2000 500 5 8,997,992 89,980 16,408,446 (10,192,382) 6,306,049
Issuance of common stock - - 2,845,868 28,459 39,528,845 - 39,557,304
Warrants exercised - - 64,646 646 252,584 - 253,230
Redemption of preferred stock (500) (5) - - (4,724,995) (308,054) (5,033,054)
Warrants issued in lieu of debt
service payments - - - - 51,172 - 51,172
Options exercised - - 6,950 70 32,080 - 32,150
Options issued as compensation - - - - 66,840 - 66,840
Net loss - - - - - (2,953,392) (2,953,392)
------- -------- ---------- -------- ------------ ------------- ------------
Balance at March 31, 2001 - $ - 11,915,456 $119,155 $51,614,972 $(13,453,828) $38,280,299
======= ======== ========== ======== ============ ============= ============
See accompanying notes.
21
APA Optics, Inc.
Statements of Cash Flows
YEAR ENDED MARCH 31
2001 2000 1999
-----------------------------------------
OPERATING ACTIVITIES
Net loss $ (2,953,392) $(3,796,296) $(2,513,798)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 424,022 424,085 491,275
Deferred compensation expense 66,840 - -
Changes in operating assets and liabilities:
Accounts receivable (161,522) (124,246) 151,193
Inventories (138,791) (54,658) (64,746)
Prepaid expenses and other assets (10,261) (892) (43,935)
Accounts payable and accrued expenses 542,237 54,115 40,572
------------- ------------ ------------
Net cash used in operating activities (2,230,867) (3,497,892) (1,939,439)
INVESTING ACTIVITIES
Purchases of property and equipment (1,128,453) (195,342) (236,891)
Purchase of short-term investments (15,759,000) - -
Purchase of patents (108,192) (40,052) (35,351)
------------- ------------ ------------
Net cash used in investing activities (16,995,645) (235,394) (272,242)
FINANCING ACTIVITIES
Proceeds from sales of preferred stock - 4,725,000 -
Payments for redemption of preferred stock (5,033,054) - -
Proceeds from sales of common stock 39,557,304 1,875,125 -
Proceeds from exercise of warrants and options 285,380 80,821 -
Repayment of long-term debt (161,255) (133,350) (351,710)
Bond reserve funds (138,277) 314,747 192,025
------------- ------------ ------------
Net cash provided by (used in) financing activities 34,510,098 6,862,343 (159,685)
------------- ------------ ------------
Increase (decrease) in cash and cash equivalents 15,283,586 3,129,057 (2,371,366)
Cash and cash equivalents at beginning of year 5,941,906 2,812,849 5,184,215
------------- ------------ ------------
Cash and cash equivalents at end of year $ 21,225,492 $ 5,941,906 $ 2,812,849
============= ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Warrants issued in lieu of debt service payments $ 51,172 $ 32,104 $ 43,230
============= ============ ============
See accompanying notes.
22
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
APA Optics, Inc. (the Company) currently manufactures and markets dense
wavelength division multiplexer (DWDM) optical components, offers a range of
gallium nitride-based devices and services, and manufacturers custom optics
products.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
REVENUE RECOGNITION
Sales are recorded upon shipment of product, at which point title transfers.
During 1999, the Company received a $75,000 grant from the State of South Dakota
when the Company hired its tenth employee at its Aberdeen, South Dakota
production facility. The grant was designed to offset the costs of training new
employees.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Investments classified as
cash equivalents consist primarily of certificates of deposit. The fair value of
investments approximates cost.
SHORT-TERM INVESTMENTS
Short-term investments consist of certificates of deposit and are stated at cost
plus accrued interest, which approximates market. The Company classifies its
short-term investments as "held-to-maturity."
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) method for raw materials, actual cost for direct
labor, and average cost for factory overhead in work-in-process.
23
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT, AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on the
straight-line method over the following estimated useful lives of the assets:
YEARS
=======
Building 20
Equipment 3 - 10
Leasehold improvements 15
BOND PLACEMENT COSTS
Bond placement costs are amortized over five to eight years.
PATENTS
Costs of obtaining and successfully defending patents are capitalized and
amortized over three to five years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimates.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of assets and liabilities and their respective tax bases.
24
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records losses on long-lived assets in operations when events and
circumstances indicate that the estimate of undiscounted future cash flows
expected to be generated by those assets is less than the assets' carrying
amount. If impairment is determined to exist, it is recorded as the excess of
carrying value over estimated fair value.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
common share for the years ended March 31:
2001 2000 1999
------------ ------------ ------------
Numerator:
Net loss $(2,953,392) $(3,796,296) $(2,513,798)
Preferred stock dividend and redemption
premium (308,054) - -
------------ ------------ ------------
Numerator for basic and diluted earnings
per share - loss available to common
shareholders $(3,261,446) $(3,796,296) $(2,513,798)
============ ============ ============
Denominator for basic and diluted
earnings per share - weighted-average
shares 11,180,615 8,744,125 8,512,274
============ ============ ============
Basic and diluted earnings per share $ (0.29) $ (0.43) $ (0.30)
============ ============ ============
3. ACCOUNTS RECEIVABLE
Accounts receivable includes $24,339 billed under retainage provisions of
government contracts in 2001 ($60,495 in 2000).
25
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following:
MARCH 31
2001 2000
---------- ----------
Land $ 60,000 $ 60,000
Buildings 1,679,424 1,679,424
Manufacturing equipment 4,830,531 4,083,453
Tools 127,612 88,092
Office equipment 184,568 193,952
Leasehold improvements 806,219 536,447
---------- ----------
7,688,354 6,641,368
Less accumulated depreciation 4,440,163 4,181,608
---------- ----------
$3,248,191 $2,459,760
========== ==========
5. LONG-TERM DEBT
In June 1996, the Company began construction of its new production facility in
Aberdeen, South Dakota to fabricate wavelength division multiplexed modulators.
As part of its financing of the facility, the Company has received economic
assistance from the State of South Dakota Governor's Office of Economic
Development and the Aberdeen Development Corporation (the parties) as follows:
Proceeds:
Bond financing for building construction and equipment $1,895,000
Low interest loans 875,000
Forgivable loans 750,000
Equity investment - purchase of 288,992 shares of common stock 1,200,000
----------
$4,720,000
==========
26
5. LONG-TERM DEBT (CONTINUED)
The following is a summary of the outstanding debt at March 31 related to the
Aberdeen facility:
2001 2000
---------- ----------
South Dakota Governor's Office of Economic
Development and the Aberdeen Development
Corporation Bond, 5% to 6.75%, due in various
installments through 2016 $1,695,000 $1,780,000
Low interest loans, 0% to 3%, due in various installments
through 2016 526,317 556,396
Forgivable loans, 3%, due in various installments through
2003 615,514 712,862
---------- ----------
$2,836,831 $3,049,258
========== ==========
The forgivable loans are contingent upon employment levels at the facility
meeting preset criteria. In exchange 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. As of March 31, 2001, 36,511 warrants have been issued for loans
forgiven totaling $187,289. The carrying value of the low interest loans and
forgivable loans, based on similar instruments, approximates market at March 31,
2001 and 2000.
At March 31, 2001 and 2000, the Company had on deposit with trustees $416,630
and $343,353 in reserve funds for current bond maturities, of which $65,000 and
$65,000 are held in escrow. These funds are included in bond reserve funds in
the accompanying balance sheets. The loan agreement requires the Company to
maintain compliance with certain covenants. The Company was out of compliance
with certain of these covenants in fiscal 2001. All debt, except for the
long-term portion of the low interest loans, to which the covenant violation
does not apply, has been classified as current because of the Company's
violation of one of the debt covenants contained in the agreement. The carrying
value of the bonds approximates market value at March 31, 2001 and 2000.
27
5. LONG-TERM DEBT (CONTINUED)
As partial payment of expenses related to the Aberdeen financing, the Company
issued warrants to purchase 31,875 shares of the Company's common stock at an
exercise price of $4.00 per share. The warrants expire in March 2002. The value
assigned to the warrants of $31,875 has been capitalized as bond placement costs
and is amortized over the life of the loan agreement.
As part of the Company's plan to construct this production facility, the city of
Aberdeen, South Dakota gave the Company land with an approximate fair market
value of $250,000. The gift was contingent upon the Company staying in the new
building through June 23, 2002.
All of the above debt is secured by land, buildings, and certain equipment of
the Company.
Interest paid during fiscal years 2001, 2000, and 1999 was $135,323, $142,662,
and $149,243, respectively.
Scheduled maturities of long-term debt are as follows (assuming no debt is
forgiven and the parties do not call the bonds early): 2002 - $377,908; 2003 -
$443,909; 2004 - $315,708; 2005 - $102,639; 2006 - $97,639; and thereafter -
$1,420,138.
6. INCOME TAXES
As of March 31, 2001, the Company has net operating loss carryovers for federal
income tax purposes of approximately $12,365,000 which expire in fiscal years
2001 to 2020. During the year, $43,000 in research and development credits
expired.
28
6. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts used for financial reporting purposes and the
amounts used for income tax purposes. Significant components of the Company's
deferred taxes are as follows:
YEAR ENDED MARCH 31
2001 2000
------------ ------------
Net operating losses $ 4,204,000 $ 3,395,000
Depreciation 6,000 9,000
Research and development credits - 43,000
Other 132,000 100,000
------------ ------------
Total deferred tax asset 4,342,000 3,547,000
Less valuation allowance (4,342,000) (3,547,000)
------------ ------------
Net deferred taxes $ - $ -
============ ============
Income tax expense consists entirely of state taxes in 2001, 2000, and 1999.
7. 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 2001, the Company redeemed all 500 shares of its preferred stock
in exchange for $5,033,054 of cash payment. Also, the Company sold 2,910,514
shares of its common stock in a registered offering, resulting in net proceeds
of $39,810,534. These funds will be used to fund operations.
In fiscal year 2000, the Company sold in a private placement 500 shares of its
preferred stock, resulting in net proceeds of $4,725,000. The proceeds were used
to fund operations. Also in September 1999, the Company sold 465,000 shares of
its common stock in a private placement, resulting in net proceeds of
$1,870,475. These funds were used to fund operations.
29
8. SHAREHOLDER RIGHTS PLAN
Pursuant to the Shareholder Rights Plan adopted by the Company in the current
year, 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, 2001 and may be
redeemed by the Company at a price of $.001 per right prior to the time they
become exercisable.
9. STOCK OPTIONS AND WARRANTS
Option activity is summarized as follows:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
AVAILABLE FOR OPTIONS PER SHARE
GRANT OUTSTANDING
-------------- ------------ ---------------
Balance at March 31, 1998 1,206,338 30,000 $ 6.10
Granted (252,500) 252,500 4.09
Canceled 20,000 (20,000) 6.24
Balance at March 31, 1999 973,838 262,500 4.18
-------------- ------------
Granted (65,000) 65,000 5.84
Canceled 35,000 (35,000) 4.67
Balance at March 31, 2000 943,838 292,500 4.49
-------------- ------------
Granted (160,000) 160,000 10.06
Canceled 48,375 (48,375) 4.12
Exercised - (6,950) 4.64
-------------- ------------
Balance at March 31, 2001 832,213 397,175 $ 6.81
============== ============
The Company has various incentive and non-qualified stock option plans which are
used as an incentive for directors, officers, and other employees, consultants,
and technical advisors. Options are granted at fair market values determined on
the date of grant and vesting normally occurs over a four-year period.
30
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
The number of shares exercisable at March 31, 2001, 2000, and 1999 was 191,898,
106,563, and 15,000, respectively, at a weighted average exercise price of
$5.77, $4.67, and $5.70 per share, respectively.
The weighted average fair value of options granted in 2001, 2000, and 1999 was
$11.30, $5.30, and $2.05 per share, respectively. The exercise price of options
outstanding at March 31, 2001 ranged from $3.77 to $14.00 per share.
Pro forma information regarding net loss and net loss per share is required by
FASB Statement No. 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of Statement 123. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 2001, 2000, and 1999, respectively: risk-free interest rates of
6.0%, 5.50%, and 4.55%; volatility factor of the expected market price of the
Company's common stock of .93, .44, and .48; and a weighted-average expected
life of the options of five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value statement, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
2001 2000 1999
------------ ------------ ------------
Pro forma net loss $(3,601,298) $(4,083,136) $(2,626,002)
Pro forma net loss per common share -
basic and diluted $ (.32) $ (.47) $ (.31)
These pro forma amounts may not be indicative of future years' amounts.
31
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
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, 1998 111,693 $ 3.30 - $4.00 1999 - 2003
Granted 8,646 5.00 2004
------------
Balance at March 31, 1999 120,339 3.30 - 5.00 1999 - 2004
Granted 108,337 4.88 - 49.47 2001 - 2005
Exercised (20,718) 3.30 - 4.00 1999 - 2003
Expired (3,100) 3.30 1999
------------
Balance at March 31, 2000 204,858 3.75 - 49.47 2000 - 2005
Granted 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
============
10. 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 increases of the rental rate based on increases in the
consumer price index. Future minimum lease obligations under the lease as of
March 31, 2001 are as follows:
Year Ending March 31:
2002 $107,280
2003 107,280
2004 107,280
2005 71,520
Rental expense, all of which was paid to the partnership, was $135,000 in fiscal
2001, $121,000 in fiscal 2000, and $116,000 in fiscal 1999.
32
11. MAJOR CUSTOMERS
In fiscal 2001, three different customers accounted for 19%, 16%, and 15% of net
sales each. At March 31, 2001, 69% of the Company's trade receivables were due
from the aforementioned customers. In fiscal 2000 and 1999, U.S. government
agencies were the Company's major customers. Sales to government agencies in
these years accounted for 38% and 67%, respectively, of net sales.
33
EXHIBIT INDEX
======================================================================================================
NUMBER DESCRIPTION PAGE NUMBER OR INCORPORATED
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
Development Security Agreement REDI Loan No: 95- 10-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
between Aberdeen Development Corporation and 10-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
and between Aberdeen Development Corporation and 10-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
Day Redemption from APA Optics, Inc. to South 10-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
Venture, Inc. 10-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)
34
======================================================================================================
NUMBER DESCRIPTION PAGE NUMBER OR INCORPORATED
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
Properties the 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
and Anil K. Jain Report 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
upon Change in Control Event with Anil K. Jain and Report on Form 10-QSB for the
Kenneth A. Olsen quarter 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
23 Consent of Ernst & Young LLP
*Indicates management contract or compensation plan or arrangements required to
be filed as an exhibit to this form.
35