UNITED STATES
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, 2004.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to__________________.
COMMISSION FILE NUMBER 0-16106
APA OPTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
MINNESOTA 41-1347235
(State or other jurisdiction (I.R.S. Employer
of 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.
[ ] YES [X] NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
[ ] YES [X] NO
The aggregate market value of the voting and non-voting equity held by
non-affiliates of the registrant, as of the last business day of the
registrant's most recently completed second fiscal quarter computed by reference
to the price at which the common equity was last sold was approximately
$26,539,734.
1
The number of shares of common stock outstanding as of June 29, 2004 was
11,872,331.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of our proxy statement for the annual shareholders meeting to be
held in August 2004 are incorporated by reference into Part III.
2
APA OPTICS, INC.
ANNUAL REPORT ON FORM 10K
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
SIGNATURES
EXHIBIT INDEX
3
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS.
APA Optics, Inc. ("APA Optics, Inc. or the "Company") is a Minnesota
corporation which was founded in 1979. Our corporate headquarters is located at
2950 N.E. 84th Lane, Blaine, MN and our corporate website is www.apaoptics.com.
Since the founding of the Company, we have focused on leading edge research
in gallium nitride (GaN), sophisticated optoelectronics, and optical systems,
with the primary goal of developing advanced products for subsequent fabrication
and marketing. Based on this research we have developed multiple products
including fiber optic components for metro and access communications networks, a
range of GaN based devices, and precision optical products. We believe that
gallium nitride based devices have significant potential markets and we have
developed specific expertise and/or patent positions relevant to them. During
fiscal year 2004 we ceased the design and manufacturing of precision optical
components due to intense competition from Asian manufacturers primarily based
on lower labor rates.
In addition to manufacturing and marketing products, we are actively
seeking to license certain portions of our intellectual property portfolio
related to GaN to other companies. While we have had discussions with multiple
companies, we have not entered into any license arrangements as of the date of
this Report. We consider the market for products which could be produced under
such licenses to be just now emerging, including applications for GaN based
transistors for cell phone base stations.
Almost all telecommunications service providers and network equipment
suppliers are experiencing severely reduced demand for several applications,
particularly related to long-haul communications, which in turn has reduced
demand for fiber optic components. We have redirected our efforts to metro and
access networks applications, which are most likely to see growth. These
networks place value on lower cost components, ease of installation, and remote
configurability. The Company has chosen to avoid costly product development and
capital expansion activity by teaming with highly qualified, cost efficient
partners with limited market presence. As a result, we have introduced a line
of arrayed waveguide grating (AWG) modules based on planar lightwave circuits,
and thin film filter (TFF) WDM products for these markets.
Our wholly owned subsidiary, APA Cables and Networks, Inc. ("APACN"),
focuses on custom-engineered products for telecommunications customers,
primarily related to cabling management requirements of the Fiber-to-the-Home
(FTTH) marketplace. In June 2003, APACN purchased the assets of Americable,
Inc. These assets have been integrated with assets and operations acquired in
March 2003 from Computer System Products, Inc. ("CSP"). The Americable
acquisition allowed APACN to add its own brand of fiber distribution equipment
to its full-line of standard and custom copper and fiber optic cable assemblies
for broadband service providers and original equipment manufacturers ("OEM's").
The Americable acquisition diversifies our product offerings, expands our
opportunities for cross-selling our products to former CSP and Americable
customers, and enables us to offer a more complete technology solution to all of
our customers.
APACN streamlined operations during 2004 by consolidating the operations of
the former CSP and Americable employees in a single location, resulting in the
elimination of duplicate costs within the organization and reducing property
rental by more than 50%.
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INFORMATION ABOUT INDUSTRY SEGMENTS
The Company divides its businesses into two segments: APA, which
manufactures and markets advanced products for the fiber optic communications
and optoelectronic and laser industries; and APACN, which designs and
manufactures standard and custom fiber and copper cable assemblies, fiber optic
distribution panels and other telecommunications equipment for the
telecommunications and enterprise markets.
Additional information regarding operations in the segments is set forth in
Note N in the Notes to the Consolidated Financial Statements under Item 8
herein.
DESCRIPTION OF BUSINESS - APA
APA develops, manufactures and markets advanced products for the fiber
optic, telecommunications, optoelectronics and laser industries, including Dense
Wavelength Division Multiplexers (DWDM's), products for UV (ultra violet)
detection, nitride epitaxial layers and wide band-gap transistors. These
operations began with the inception of the Company in 1979 and are located
principally in our facilities in Blaine, Minnesota (which focuses upon
fabrication of epitaxial layers and processing of these layers to build devices
on wafers) and in our facility in Aberdeen, South Dakota (which performs
packaging and inspection). Certain products are purchased from contract
manufacturers.
Proprietary Products
Our current proprietary products are described below.
- - Fiber Optic Components APA provides passive optical components for
------------------------
FTTP networking based on the Passive Optical Network (PON) architecture.
The product line includes planar lightwave circuit (wavelength independent)
optical splitters for PON FTTP networks, and fiber optic enclosures for
locating passive splitters in the field.
APA's WDM (Wavelength Division Muliplexer) offerings include thin film
filter (TFF) WDM components for use in low channel count access and metro
WDM systems for data, voice and CATV. TFF components can also be deployed
in field enclosures. APA also offers an arrayed waveguide grating (AWG)
module for cost effective, high channel count applications. In early 2004,
we had our first AWG sale to a previous bulk grating customer. These
products were introduced at the 2003 Optical Fiber Conference.
- - Passive Optical Splitters (wavelength independent) Our passive
------------------------------------------------------
Optical splitter is used in applications in optical access networking,
including Fiber-to-the-Premise and FTTH. Newly adopted standards for
optical access networking have been adopted by an increasing number of
networking equipment companies and telecommunications service providers.
Network upgrades which push fiber closer to the end-user are being
implemented successfully by independent telephone companies in rural
settings and also in green field (new) housing developments. APA is also
marketing optical fiber closures for packaging optical splitters in the
outside network environment. The products are offered together as a
value-added, turnkey solution, making passive splitters ready for
deployment into the outside network. Both new products are being sourced
through offshore manufacturing partners and contracts have been put in
place to supply APA with these products.
- - Thin Film Filter WDM Components and AWG DWDM Components APA has
-------------------------------------------------------------
several low channel count thin film filter product lines. These products
are used in CATV systems and metro telecom systems. APACN is already
supplying cable products to many of the target CATV and
5
metro telecom systems operators. Again using the value added model, we plan
to provide customized products to systems operators at a competitive price.
APA has also introduced a line of arrayed waveguide grating WDM
modules. AWG products are manufactured using cost effective silicon
semiconductor processing techniques. During the second half of fiscal 2003,
we identified a technically strong partner. A relationship was formalized
early in fiscal 2004. The first products will be a 40 channel, 100 GHz
channel spacing module followed by a 50 channel 50GHz module. APA has
joined the international multi-source agreement for thermally stabilized
AWG modules that included NEL, Hitachi, Alcatel, NEC, JDSU and others. The
finalized versions of 40 channel AWG modules will be released in 2004. AWG
technology is especially attractive because multiple functions can be
integrated into a single chip. These advanced functions are attractive for
systems with remote configuration abilities and may be the topic of future
joint development.
We have discontinued bulk grating modules due to the significantly
higher manufacturing costs, as compared to TFF or AWG based modules, and
intense competition, principally based on low-cost off shore labor. We hold
three patents in this field, the earliest of which was issued in September
1995.
Our fiber optics product set continues to include planar lightwave
circuit optical splitters for FTTH networks; thin film filter WDM
components for use in CATV, telecommunication, and free space optics
systems; and arrayed waveguide WDM components for higher channel count
systems with advanced functions. We market and sell these products mainly
through the sales channels of APACN.
- Ultraviolet (UV) Detector-Based Products We currently manufacture
-------------------------------------------
value-added products built around UV detectors fabricated by APA and
procured externally. These products are:
- SunUV(R) Personal UV Monitor The SunUV(R) Personal UV Monitor
----------------------------
(formerly, SunUVWatch(R)) is a personal ultraviolet radiation
(UV) monitor that also incorporates a time/day/date function. It
detects UV radiation that is hazardous to human health. It keeps
track of the total UV exposure of the user and estimates a
maximum exposure time according to government guidelines based on
skin type and widely-accepted research on UV exposure limits. The
product has been introduced and is being sold through retail
channels, catalogs and Internet sites. We are committing
significant resources to the continuing rollout of this product
line and, based on consumer response, may commit significant
resources to expand our product offering in this area.
- Industrial UV Meters This product family goes under the
----------------------
general trade name of TrUVMeterTM. We are currently developing of
the Profiler M model, which specifically targets printing presses
using UV-cured inks and UV "tunnel" curing equipment. These
printing processes are sensitive to the overall exposure provided
by UV sources (mercury or its derivative lamps) and therefore
require periodic monitoring. The Profiler M senses the exposure
using four detectors and stores, analyzes and displays a limited
amount of data. The data can later be downloaded to a computer
for detailed analysis and charting. We believe that the Profiler
M, if the development is successful, will be introduced to the
market during fiscal 2005.
APA's research and development efforts are currently focused on
the products described below.
6
- Compound Semiconductor Electronic Devices We have been a pioneer in
------------------------------------------
the research oftransistors based on GaN/AlGaN (gallium
nitride/aluminum gallium nitride) heterojunctions and are maintaining
a research and development capability in this technology while
assessing commercialization opportunities. We purchased a multiwafer
(6 wafers, 2 inches in diameter) Metal Organic Chemical Vapor
Deposition System (MOCVD) during the later part of fiscal 2004 to
enhance our capabilities in this technology area. Once this MOCVD
system is fully operational, it will be sufficient to take care of all
our MOCVD growth requirements. In June 2004 we signed a lease with
Veeco Compound Semiconductor, Inc. ("Veeco"), a large semiconductor
equipment manufacturing company, to locate and operate our MOCVD
system in its Process Integration Facility in White Bear Lake,
Minnesota (which is near APA's Blaine office). Operating the MOCVD
machine at Veeco's facility will give us central access to significant
electrical, optical, and structural characterization tools, currently
rented from various suppliers, that are used to optimize and control
the growth of our transistors. Once installed, we will initiate our
MOCVD growth in Veeco's facilities using the new machine while phasing
out the growth occurring in the Blaine facilities. These steps will
also eliminate expenses for significant leasehold improvements that
would have been required to locate the machine in our Blaine facility.
The machine will be operated by our employees. Our lease with Veeco
protects our intellectual property while providing improved access to
potential customers and state of the art crystal growth resources. We
believe that this system will be operational during the second quarter
of fiscal 2005. There are significant markets emerging for these
materials and devices with the rapid growth of cellular phone use and
its associated infrastructure, military remote sensing and
communication, and in other high power/frequency/temperature
applications. Two of our seven awarded patents in this technology are
fundamental to the transistor structure and we are continuing to
develop our intellectual property portfolio in this area. A
provisional patent application was converted to a full application in
November 2003, and an additional provisional application was filed in
June 2004. Significant resources would be required should we choose to
internally develop a full product line in this area. Our approach to
developing products in this area will be to fully utilize our internal
capabilities while seeking partners with complementary capabilities.
We worked with several partners during fiscal 2004 to complement our
device fabrication capabilities and we are continuing discussions with
several other potential industrial partners for manufacturing and
marketing. Our ability to capture contracts and develop additional
industry partners will depend critically on our ability to grow
epitaxial material on larger diameter substrates using our newly
procured MOCVD system. During fiscal 2004, we made significant
progress in these areas. Industrial acceptance of GaN based transistor
products and our ability to license our intellectual property will
critically depend on proven device reliability in addition to well
documented initial performance. As such, we have focused our
development efforts toward characterization and reliability
investigation.
Marketing and Distribution
APA markets DWDM products through our APACN sales channels.
Additionally, we use manufacturer's representatives and distributors
domestically and in various countries (including Japan, Germany, Italy and
France). We do not currently maintain a large internal sales force. We have
one sales person dedicated to the SunUV(R) Personal UV Monitor and we also
maintain product information on our website.
Competition
The optoelectronics and compound semiconductor electronic device
markets are evolving rapidly and, therefore, the competitive landscape
changes continually. The opportunities presented by these
7
markets have fostered a highly competitive environment. This competition
has resulted in price reductions and lower profit margins for the companies
serving this market. Many of the companies engaged in these businesses are
well financed and have significantly greater research, development,
production, and marketing resources than we do. Some of these companies
have long operating histories, well-established distribution channels,
broad product offerings and extensive customer bases. Our ability to
compete with these companies will depend largely on the performance of our
devices, our ability to innovate and develop solutions for our customers,
our intellectual property, our ability to convince customers to adopt our
technology early in their design cycle, and our ability to control costs.
Competitors for our DWDM products include Scientific Atlanta, C-Cor,
Harmonic, and Motorola.
We are not aware of any companies currently marketing a personal UV
monitor with a combination of features, style and packaging equivalent to
ours, although there are other manufacturers of this type of product in the
United States, Japan and Korea.
EIT, Apprise Technologies and International Light offer UV curing
control instruments that perform similar functions to the Profiler M,
although we believe that our product will offer a superior combination of
features and price. Newport, Melles-Griot and Oriel offer scientific UV
meters, some offering GaN detectors as an option. A number of firms offer
lower-performance, lower-cost UV meters for industrial applications.
Competitors for GaN/AlGaN transistors, which are currently in the R&D
phase at APA Optics, would include Cree, Inc., Nitronex Corporation, Emcore
Corporation, RFMD Corporation, and some Japanese and European firms.
DESCRIPTION OF BUSINESS - APACN
APACN offers a broad range of telecommunications equipment and
products developed from over 20 years of product expertise acquired in the
CSP and Americable acquisitions. Its broad range of product offerings
include the design and manufacture of standard and custom connectivity
products such as fiber distribution systems, optical components, and fiber
and copper cable assemblies that serve the communication service provider
including Fiber-to-the-Home, large enterprise, and OEM markets. Most
products are produced at the Company's plant in Plymouth, MN with support
from APA's facility in Aberdeen, South Dakota. Certain products are
purchased from contract manufacturers or other sources.
Products
- - Fiber Distribution Systems Americable fiber distribution systems
----------------------------
are high density, easy access fiber distribution panels and cable
management systems that are designed to reduce installation time, guarantee
bend radius protection and improve traceability. The product line fully
supports a wide range of panel configurations, densities, connectors, and
adapters that can be utilized on a stand-alone basis or integrated into the
panel system. The unique interchangeable building block design delivers
feature rich solutions which are able to meet the needs of a broad range of
network deployments.
- - Optical components APACN packages optical components for signal
------------------
coupling, splitting, termination, multiplexing, demultiplexing and
attenuation to seamlessly integrate with the Americable Fiber Distribution
System. This value-added packaging allows the customer to source from a
Single
8
supplier and reduces space requirements. The products are built and tested
to meet GR-326 and GR-1209 standards for trouble-free performance in
extreme outside plant environments.
- - Cable Assemblies APACN manufactures high quality fiber and copper
-----------------
assemblies with an industry-standard or customer-specified configuration.
Assemblies built include but are not limited to: single mode fiber,
multimode fiber, multi-fiber, CATV node assembly, DS1 Telco, DS 3 (734/735)
coax, Category 5e and 6, SCSI, Token Ring, and V.35.
Marketing and Distribution
APACN markets its products in the United States through a network of
manufacturer representative organizations and an internal sales team. APACN
works closely with its target customers to adapt the company's product platform
to the client's unique requirements. APACN offers a high level of customer
service and principally brings new products to markets based upon the specific
requests of its customers.
Competition
Competitors for the Americable Fiber Distribution system include but
are not limited to ADC Telecommunications, Inc., Corning Cabling Systems, Inc.,
OFS (Furukawa Electric North America, Inc.), Telect Inc., Alcatel, Inc., and
Tyco Electronics, Inc. These firms are substantially larger than APACN and as a
result may be able to procure pricing for necessary components at much lower
prices. Competition for the custom fiber and copper termination services for
cable assemblies is intense. Competitors range from small, family-run businesses
to very large contract manufacturing facilities.
SOURCES OF RAW MATERIALS AND OUTSOURCED LABOR
Numerous purchased materials and components, and labor, are used in
the manufacturing of the Company's products. Most of these are readily available
from multiple suppliers. Some critical components and outsourced labor are
purchased from a single or a limited number of suppliers. The loss of access to
some components and outsourced labor 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, 2004, APA had 12 patents issued in the United States
and seven pending patent applications inside and outside the United States. We
believe our success heavily depends upon technology we develop internally. We
have made significant progress toward improving the active, strategic management
of our intellectual property portfolio. The markets for our products are
characterized by rapid change and continual innovation that could render our
technology and patents obsolete before their statutory protection expires.
Several of the companies we compete with have greater research and development
resources than we do and could develop technologies and products that are
similar or even superior to ours without infringing on our intellectual
property.
9
ENVIRONMENTAL COMPLIANCE
Because we handle a number of chemicals in our operations, we must comply
with federal, state and local laws and regulations regarding the handling and
disposal of such chemicals. To date the cost of such compliance has not been
material.
MAJOR CUSTOMERS
No single customer accounted for more than 10% of the Company's sales in
fiscal 2004. Two major customers accounted for 21% and 15% of the Company's
sales for the year ended March 31, 2003. Three major customers accounted for
28%, 23% and 14% of the Company's sales for the year ended March 31, 2002. These
customers also accounted for approximately 6% of the outstanding trade
receivable balance at March 31, 2003.
BACKLOG
APA had $6,490 in backlog of orders at March 31, 2004, and had no backlog
as of March 31, 2003. APACN has a backlog of $856,700 as of March 31, 2004
compared to $389,000 as of March 31, 2003.
RESEARCH AND DEVELOPMENT
During the fiscal years ended March 31, 2004, 2003, and 2002, APA spent
approximately $949,000, $1,212,000 and $1,114,000, respectively, on research and
development, all of which was related to the DWDM, compound semiconductor
electronic devices, UV detector and related products. APA had no research
activities sponsored by customers in fiscal years 2004, 2003 and 2002. We
operate in highly competitive and rapidly evolving markets and plan to commit
significant resources for research and development for the foreseeable future.
We could locate research and development facilities in locations other than our
current facilities in Minnesota and South Dakota based on several factors,
including accessibility to qualified personnel and facility costs. APACN made no
significant expenditures for research and development form its inception through
March 31, 2004.
EMPLOYEES
As of March 31, 2004, APA had 52 full-time employees (including executive
officers). As of March 31, 2004, APACN had 95 full-time employees. Our future
performance is dependent on our ability to attract, train, and retain highly
qualified personnel. We have no employment agreements with our employees. The
loss of one or more key employees could negatively impact the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The statements contained in this report on Form 10-K that are not purely
historical are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934, including, without
limitations, statements regarding the Company's expectations, hopes, beliefs,
anticipations, commitments, intentions and strategies regarding the future.
Forward-looking statements include, but are
10
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 expenses and negative cash
flow will significantly harm our financial position.
We have not been profitable since fiscal 1990. As of March 31, 2004, we had
an accumulated deficit of $29.7 million. We may incur operating losses for the
foreseeable future, and these losses may be substantial. Further, we may
continue to incur negative operating cash flow in the future. We have funded our
operations primarily through the sale of equity securities and borrowings. We
have significant fixed expenses and we expect to continue to incur significant
and increasing manufacturing, sales and marketing, product development and
administrative expenses. As a result, we will need to generate significantly
higher revenues while containing costs and operating expenses if we are to
achieve profitability.
Declining average selling prices for our fiber optic products will require us to
reduce production costs to effectively compete and market these products.
Since the time we first introduced our fiber optic components to the
marketplace we have seen the average selling price of fiber optic components
decline. We expect this trend to continue. To achieve profitability in this
environment we must continually decrease our costs of production. In order to
reduce our production costs, we will continue to pursue one or more of the
following:
- Seek lower cost suppliers of raw materials or components.
- Work to further automate our assembly process.
- Develop value-added components based on integrated optics.
- Seek offshore sources for assembly services.
We will also seek to form strategic alliances with companies that can
supply these services. Decreases in average selling prices also require that we
increase unit sales to maintain or increase our revenue. There can be no
guarantee that we will achieve these objectives. Our inability to decrease
production costs or increase our unit sales could seriously harm our business,
financial condition and results of operations.
Demand for our products is subject to significant fluctuation. Adverse market
conditions in the communications equipment industry and any slowdown in the
United States economy 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 U.S. economic
slowdown has been more profound in the telecommunications market, resulting in a
significant reduction in capital expenditures for the Company's products. 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
11
conditions, which could also reduce demand for our products. Moreover, some of
our customers have experienced serious financial difficulties, which in certain
cases have resulted in bankruptcy filings or cessation of operations.
Our industry is highly competitive and subject to pricing pressure.
Competition in the communications equipment market is intense. We have
experienced and anticipate experiencing increasing pricing pressures from
current and future competitors as well as general pricing pressure from our
customers as part of their cost containment efforts. Many of our competitors
have more extensive engineering, manufacturing, marketing, financial and
personnel resources than we do. As a result, these competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements or to offer more aggressive price reductions.
Our sales could be negatively impacted if one or more of our key customers
substantially reduce orders for our products.
If we lose a significant customer, our sales and gross margins would be
negatively impacted. In addition, the loss of sales may require us to record
impairment, restructuring charges or exit a particular business or product line.
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 precise 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 precise 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 and labor that are incorporated into our products
from outside vendors. In the case of the SunUV(R) Personal UV Monitor, we supply
components to an outside assembler who delivers the completed product. If these
vendors fail to supply us with components or completed assemblies on a timely
basis, or if the quality of the supplied components or completed assemblies is
not acceptable, we could experience significant delays in shipping our products.
Any significant interruption in the supply or support of any components or
completed assemblies could seriously harm our sales and our relationships with
our customers. In addition, we have increased our reliance on the use of
contract manufacturers to make our products. If these contract
12
manufacturers do not fulfill their obligations, or if we do not properly manage
these relationships, our existing customer relationships may suffer.
Our products may have defects that are not detected before delivery to our
customers.
Some of the Company's products are designed to be deployed in large and
complex networks and must be compatible with other components of the system,
both current and future. Our customers may discover errors or defects in our
products only after they have been fully deployed. In addition, our products may
not operate as expected over long periods of time. In the case of the SunUV(R)
Personal UV Monitor, a consumer product, customers could encounter a latent
defect not detected in the quality inspection. If we are unable to fix errors or
other problems, we could lose customers, lose revenues, suffer damage to our
brand and reputation, and lose our ability to attract new customers or achieve
market acceptance. Each of these factors would negatively impact cash flow and
would seriously harm our business, financial condition and results of
operations.
Consolidation among our customers could result in our losing a customer or
experiencing a slowdown as integration takes place.
It is likely that there will be increased consolidation among our customers
in order for them to increase market share and achieve greater economies of
scale. Consolidation is likely to impact our business as our customers focus on
integrating their operations and choosing their equipment vendors. After a
consolidation occurs, there can be no assurance that we will continue to supply
the surviving entity.
We must introduce new products and product enhancements to increase revenue.
The successful operation of our business depends on our ability to
anticipate market needs and develop and introduce new products and product
enhancements that respond to technological changes or evolving industry
standards on a timely and cost-effective basis. Our products are complex, and
new products may take longer to develop than originally anticipated. These
products may contain defects or have unacceptable manufacturing yields when
first introduced or as new versions are released. Our products could quickly
become obsolete as new technologies are introduced or as other firms introduce
lower cost alternatives. We must continue to develop leading-edge products and
introduce them to the commercial market quickly in order to be successful. Our
failure to produce technologically competitive products in a cost-effective
manner and on a timely basis will seriously harm our business, financial
condition and results of operations.
Our markets are characterized by rapid technological changes and evolving
standards.
The markets we serve are characterized by rapid technological change,
frequent new product introductions, changes in customer requirements and
evolving industry standards. In developing our products, we have made, and will
continue to make, assumptions with respect to which standards will be adopted
within our industry. If the standards that are actually adopted are different
from those that we have chosen to support, our products may not achieve
significant market acceptance.
Customer payment defaults could have an adverse effect on our financial
condition and results of operations.
As a result of adverse conditions in the telecommunications market, some of
our customers have and may continue to experience financial difficulties. In the
future, if customers experiencing financial problems default and fail to pay
amounts owed to the Company, we may not be able to collect these amounts or
recognize expected revenue. In the current environment in the telecommunications
industry
13
and in the United States and global economies, it is possible that customers
from whom we expect to derive substantial revenue will default or that the level
of defaults will increase. Any material payment defaults by our customers would
have an adverse effect on our results of operations and financial condition.
Our products may infringe on the intellectual property rights of others.
Our products are sophisticated and rely on complicated manufacturing
processes. We have received multiple patents on aspects of our design and
manufacturing processes and we have applied for several more. Third parties may
still assert claims that our products or processes infringe upon their
intellectual property. Defending our interests against these claims, even if
they lack merit, may be time consuming, result in expensive litigation and
divert management attention from operational matters. If such a claim were
successful, we could be prevented from manufacturing or selling our current
products, be forced to redesign our products, or be forced to license the
relevant intellectual property at a significant cost. Any of these actions could
harm our business, financial condition or results of operations.
Acquisitions or investments could have an adverse affect on our business.
In March 2003, we completed the acquisition of the assets of CSP as part of
our strategy to expand our product offerings, develop internal sources of
components and materials, and acquire new technologies. We acquired the assets
of Americable, Inc. in June 2003 and integrated them with the assets of CSP. We
intend to continue reviewing acquisition and investment prospects. There are
inherent risks associated with making acquisitions and investments including but
not limited to:
- Challenges associated with integrating the operations, personnel,
etc., of an acquired company;
- Potentially dilutive issuances of equity securities;
- Reduced cash balances and or increased debt and debt service costs;
- Large one-time write-offs of intangible assets;
- Risks associated with geographic or business markets different than
those we are familiar with; and
- Diversion of management attention from current responsibilities.
EXECUTIVE OFFICERS
The following is a list of our executive officers, their ages, positions and
offices as of March 31, 2004.
NAME AGE POSITION
Dr. Anil K. Jain 58 Chief Executive Officer/President/Chief
Financial Officer of APA Optics, Inc.
Cheri Beranek Podzimek 41 President, APACN
DR. ANIL K. JAIN has been a Director, Chief Executive Officer and President
since March 1979. He also currently serves as Chief Financial Officer. 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.
CHERI BERANEK PODZIMEK joined APACN in July 2003 as President. Ms. Podzimek
was previously President of Americable, which was acquired by APACN in June
2003. She served as President of Americable from 2002 to 2003. From 2001 to 2002
Ms. Podzimek was Chief Operating
14
Officer of Americable. Previously, Ms. Podzimek held a variety of lead marketing
positions with emerging high-growth technology companies. She served as Vice
President of Marketing from 1996-2001 at Transition Networks, a manufacturer of
network connectivity products, Director of Marketing from 1992 to 1996 at
Tricord Systems, an early stage multi-processor based super server manufacturer,
and Director of Marketing from 1988 to 1992 at Digi International, a designer
and manufacturer of connectivity products. Earlier in her career Ms. Podzimek
held marketing positions for non-profit organizations, including the City of
Fargo, the Metropolitan Planning Commission of Fargo/Moorhead and North Dakota
State University.
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 lease from Jain-Olsen
Properties, a partnership consisting of Anil K. Jain and Kenneth A. Olsen,
officers and directors of the Company. See Note K of Notes to Financial
Statements included under Item 8 hereof. We own land directly west of the Blaine
facility that may be used for future expansion.
We own a 24,000 square foot production facility in Aberdeen, South Dakota,
which is used mainly for assembly of products for APACN customers and to a
lesser extent for assembly of our DWDM components and UV detectors. The land
upon which this facility is located was granted to us as part of a financing
package from the city of Aberdeen. See Note E of Notes to Financial Statements
included under Item 8 in this Report for further information regarding the
financing of this facility.
APA has signed a lease agreement in June of 2004 with Veeco Compound
Semiconductor, Inc. to locate APA's multi-wafer MOCVD unit purchased in fiscal
2004 in Veeco's facilities in White Bear Lake, Minnesota, which is near APA's
Blaine facility. The facility will have all the necessary installation
requirements in place for the operation of the unit. The lease agreement is for
three years and officially begins when Veeco's required leasehold improvements
are completed. We expect this to occur in the second quarter of fiscal 2005.
APACN subleases a 37,000 square foot facility in Plymouth, MN consisting of
office, manufacturing and warehouse space. This lease runs through June, 2006.
See Note K of the Notes to the Financial Statements included under Item 8
hereof.
ITEM 3. LEGAL PROCEEDINGS.
We are not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common stock is traded on The Nasdaq National Market under the symbol
"APAT." The following table sets forth the quarterly high and low sales prices
for our common stock for each quarter of the past two fiscal years as reported
by Nasdaq.
15
FISCAL 2004 HIGH LOW
- -------------------------------- ----- -----
Quarter ended June 30, 2003 $2.70 $1.23
Quarter ended September 30, 2003 3.04 2.07
Quarter ended December 31, 2003 2.99 2.00
Quarter ended March 31, 2004 3.27 2.19
FISCAL 2003 HIGH LOW
- -------------------------------- ----- -----
Quarter ended June 30, 2002 $2.83 $1.75
Quarter ended September 30, 2002 2.50 1.44
Quarter ended December 31, 2002 1.87 1.27
Quarter ended March 31, 2003 1.30 1.78
There were approximately 351 holders of record of our common stock as of
March 31, 2004.
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.
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Statements of Operations Data:
Revenues . . . . . . . . . . . . . . . . . . . . . . $11,909,465 $ 436,157 $ 595,955 $ 885,740 $ 420,809
Net loss . . . . . . . . . . . . . . . . . . . . . . (6,535,147) (5,009,434) (4,738,199) (3,261,446) (3,796,296)
Net loss per share, basic and diluted. . . . . . . . (.55) (.42) (.40) (.29) (.43)
Weighted average number of shares, basic
and diluted. . . . . . . . . . . . . . . . . . . . . 11,872,331 11,873,914 11,896,976 11,180,165 8,744,125
Balance Sheet Data:
Total assets . . . . . . . . . . . . . . . . . . . . $25,844,991 $31,884,526 $36,396,410 $41,914,451 $ 9,610,391
Long-term obligations, including current
portion. . . . . . . . . . . . . . . . . . . . . . . 1,811,759 2,173,682 2,461,363 2,836,831 3,049,258
Shareholders' equity . . . . . . . . . . . . . . . . 22,363,061 28,918,943 33,504,917 38,280,299 6,306,049
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
APA is engaged in designing, manufacturing, and marketing of various
optoelectronic products, ultraviolet (UV) detectors and related products and
optical components. For the last several years our goal has been to manufacture
and market products/components based on our technology developments. We have
focused on DWDM components for fiber optic communications and GaN based
ultraviolet (UV) detectors (both components and integrated
detector/electronic/display packages) because we believe that these two product
areas have significant potential markets and because we have expertise and/or
patent positions related to them.
16
APACN, which is a wholly owned subsidiary of APA Optics, Inc., is engaged
in the design, manufacture, distribution, and marketing of a variety of fiber
optics and copper components to the data communication and telecommunication
industries. APACN's primary manufactured products include standard and custom
fiber optic cable assemblies, copper cable assemblies, value-added fiber optics
frames, panels and modules. APACN acquired certain assets of CSP on March 14,
2003 and certain assets of Americable on June 27, 2003. Several items discussed
under the "Results of Operations" show significant changes from the comparable
periods in the preceding fiscal year as a result of the acquisitions of CSP and
Americable.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
In preparing our consolidated financial statements, we make estimates,
assumptions and judgments that can have a significant impact on our revenues,
loss from operations and net loss, as well as on the value of certain assets and
liabilities on our consolidated balance sheet. We believe that there are several
accounting policies that are critical to an understanding of our historical and
future performance, as these policies affect the reported amounts of revenues,
expenses and significant estimates and judgments applied by management. While
there are a number of accounting policies, methods and estimates affecting our
consolidated financial statements, areas that are particularly significant
include:
- Revenue recognition;
- Accounting for income taxes; and
- Valuation and evaluating impairment of long-lived assets and goodwill
Revenue Recognition
- --------------------
Revenue is recognized when the product has been shipped, acceptance by the
customer is reasonably certain and collection is probable.
Accounting for Income Taxes
- ------------------------------
As part of the process of preparing our consolidated financial statements,
we are required to estimate our income tax liability in each of the
jurisdictions in which we do business. This process involves estimating our
actual current tax expense together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities. We must then
assess the likelihood that these deferred tax assets will be recovered from
future taxable income and, to the extent we believe that recovery is not more
likely than not or unknown, we must establish a valuation allowance.
Significant management judgment is required in determining our provision
for income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our deferred tax assets. At March 31, 2004, we have
recorded a full valuation allowance of $11,075,084 against our deferred tax
assets, due to uncertainties related to our ability to utilize our deferred tax
assets, consisting principally of certain net operating losses carried forward.
The valuation allowance is based on our estimates of taxable income by
jurisdiction and the period over which our deferred tax assets will be
recoverable. The Company had U.S. net operating loss (NOL) carry forwards of
approximately $27,899,000 which expire in fiscal years 2004 to 2024.
Realization of the NOL carry forwards and other deferred tax temporary
differences are contingent on future taxable earnings. The deferred tax asset
was reviewed for expected utilization using
17
a "more likely than not" approach as required by SFAS No. 109, "Accounting for
Income Taxes," by assessing the available positive and negative evidence
surrounding its recoverability.
We will continue to assess and evaluate strategies that will enable the
deferred tax asset, or portion thereof, to be utilized, and will reduce the
valuation allowance appropriately at such time when it is determined that the
"more likely than not" approach is satisfied.
Valuation and evaluating impairment of long-lived assets and goodwill
- ---------------------------------------------------------------------
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired. Effective April 1, 2002, we adopted Statement of Financial
Accounting Standards (SFAS) 142, Goodwill and Other Intangible Assets, which
provides that goodwill should not be amortized but reviewed for impairment
annually or whenever conditions exist that indicate an impairment could exist.
The Company performed the annual impairment test in fiscal years 2004 and 2003
and concluded that no impairment had occurred.
The Company evaluates the recoverability of its long-lived assets in
accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS 144 requires recognition of impairment of long-lived
assets in the event that events or circumstances indicate an impairment may have
occurred and when the net book value of such assets exceeds the future
undiscounted cash flows attributed to such assets. We assess the impairment of
long-lived assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. No impairment of long-lived assets has
occurred through the year ended March 31, 2004.
In Note A of the Notes to the Financial Statements, the effect of recent
promulgations of the Financial Accounting Standards Board (FASB) on the Company
is described. Management believes the adoption of Interpretation 46 (FIN 46)
will not have a material effect on our financial position or results of
operations.
CONTRACTUAL OBLIGATIONS
Our contractual obligations and commitments are summarized in the table
below (in 000's):
Less than After
Total 1 Year 1-3 years 4-5 years 5 years
----------------------------------------------------
Long-term debt $1,812 $ 1,638 $ 94 $ 40 $ 40
Operating leases 670 359 311 - -
----------------------------------------------------
Total Contractual Cash
Obligations $2,482 $ 1,997 $ 405 $ 40 $ 40
====================================================
RESULTS OF OPERATIONS
2004 COMPARED TO 2003
---------------------
REVENUES
Consolidated revenues for the year ended 2004 increased 27-fold to
$11,909,465 from sales of $436,157 in 2003. Consolidated cost of sales increased
to $11,914,050 in 2004 from $2,802,597 in 2003. Consolidated operating losses
increased to $6,558,499 in 2004 compared to $5,329,466 in 2003.
18
Consolidated net losses increased to $6,535,147 in 2004 or $.55 per diluted
share compared to $5,009,434 or $.42 in 2003.
APA's revenues for the year ended 2004 were $218,187 as compared to
$202,137 in 2003. Sales of its optics products were $91,778 versus $102,592 in
2003. This product line was discontinued in January 2004 and subsequently sold
in April 2004. Sales of fiber optics products were $85,341 in 2004 compared to
$77,028 in 2003. Sales of GaN related products were $23,519 in 2004 versus
$12,742 in 2003. The majority of the GaN sales were to one customer for the
SunUV(R) Personal UV Monitor. Other revenue was $17,549 in 2004 compared to
$9,775 in 2003. APA's revenue growth is dependent upon our ability to
successfully complete its manufacturing reliability with its GaN products and
sell into its targeted market segments.
APACN's revenues for the year ended 2004 were $11,691,278 versus $234,020
in the year ended 2003. Sales from the preceding year consisted only of revenue
generated by the CSP acquisition from March 14, 2003 until March 31, 2003. Sales
for fiscal 2004 reflect a full year of revenue from the CSP acquisition and
three quarters of revenue from the Americable acquisition which was completed
June 27, 2003. For the year ended March 31, 2004, sales to broadband service
provider and commercial data networks, which include APACN custom fiber
distribution systems, associated cable assemblies and optical components, were
$7,023,700, or 60% of total sales. Sales to OEM's, consisting primarily of fiber
optic and copper cable assemblies produced to customer design specifications,
were $4,667,600, or 40% of total sales. APACN's revenue growth is dependent upon
capital expenditures in the communications equipment industry, our ability to
develop and introduce new products, and our ability to acquire and retain
business in a competitive industry. We expect sales at APACN in fiscal 2005 to
increase slightly over the next year.
COST OF SALES AND GROSS PROFIT
APA's cost of sales for the year ended 2004 were $2,883,054 as compared to
$2,626,685 in 2003. Product development and materials cost increased
approximately $280,000, while amortization expenses decreased approximately
$181,000, mainly due to additional patent amortization taken in 2003.
APACN's gross profit for the year ended 2004 was $2,660,282 as compared to
$58,109 in 2003. Gross profit from the preceding year consisted of only gross
profit generated by the CSP acquisition from March 14, 2003 until March 31,
2003. Gross profit for fiscal 2004 reflects a full year of gross profit from the
CSP acquisition and three quarters of gross profit from the Americable
acquisition which was completed June 27, 2003. Gross profit percent for APACN
for the period ending March 31, 2004 was 22.8%. Gross profit was negatively
affected by production variances resulting from combining the two acquired
companies into one operation. We expect gross margins for APACN to gradually
improve in fiscal 2005.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist of the research and development
expense at APA (there have been no research and development expenses at APACN).
Expenses decreased by $263,482, to $948,737 for the year ended 2004 as compared
to $1,212,219 for the year ended 2003. This represents a decrease of 22% from
2003. The decrease is primarily due to decreased research activity related to
fiber optics products. The majority of the decreases are due to the reduction in
salaries and other related
19
personnel expenses. We expect fiscal 2005 research and development expenses at
APA to remain constant with 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administration (S, G & A) expenses at APA increased
approximately $357,635 to $1,989,969 in 2004 from $1,632,334 in 2003. The
increase is due primarily to higher depreciation and amortization as well as
higher professional fees related to the acquisition costs for CSP and
Americable. We expect S, G &A to decrease slightly over the balance of the 2005
fiscal year as a result of cost reductions implemented throughout fiscal 2004.
Selling, general and administration expenses at APACN were $3,615,208 for
the year ending March 31, 2004 as compared to $118,473 in 2003. S, G & A from
the preceding year consisted of expenses generated by the CSP acquisition from
March 14, 2003 until March 31, 2003. S, G & A for fiscal 2004 reflects a full
year of S, G & A from the CSP acquisition and three quarters worth of S, G & A
from the Americable acquisition which was completed June 27, 2003. S, G & A for
fiscal 2004 was negatively affected by duplicate expenses related to the
consolidation of operations and facilities. We expect S, G & A to decrease
slightly in fiscal 2005 from fiscal 2004 in relation to current sales levels.
OTHER INCOME AND EXPENSE
Other income at APA decreased $231,035 to $202,837 in fiscal 2004 from
$433,872 in 2003. The decrease is due mainly to lower interest income resulting
from a combination of a decline in the rate of interest earned on investments
and a lower average cash balance. Other expenses increased $1,829 to $115,010
from $113,181 in 2003.
Other income at APACN increased $19,829 to $22,882 in fiscal 2004 as
compared to $3,053 in fiscal 2003. The increase was due to management fee income
for the first quarter of 2004 for personnel related to the CSP acquisition.
Other expense at APACN increased $82,592 to $85,304 for the year ending 2004.
The increase is due primarily to the disposal of assets related to the
consolidation of CSP and Americable into a single facility.
NET LOSS
Consolidated net loss for the Company increased $1,525,713 to $6,535,147,
or $.55 cents per share, as compared to a net loss of $5,009,434, or $.42 cents
per share, in fiscal 2003. The increase in losses is due primarily to the
additional net losses as APACN.
Net loss for APA for the year ending 2004 was $5,537,390, an increase of
$587,980, or 12%, from $4,949,410 in 2003. The increased losses are primarily
the result of a combination of higher cost of sales and S. G, & A expenses.
Net loss for APACN for the year ending 2004 was $997,757 versus $60,024 in
fiscal 2003. The increase is due mainly to 2003 expenses only representing
several days of expense from the CSP acquisition in March, 2003. The increase in
net loss was partly attributable to the expenses related to integrate the two
acquisitions.
2003 COMPARED TO 2002
---------------------
20
REVENUES
APA recognized operating revenues of $436,157 and $595,955 for the fiscal
years ended March 31, 2003 and 2002, respectively. The decrease of $159,798 or
27% from fiscal 2002 to 2003 was primarily the result of lower sales of DWDM
components. A reduction in capital spending in the telecommunications industry
in addition to the United States recession significantly reduced demand for
these components. APA Optics had no backlog of orders at the end of fiscal 2003
or 2002.
COST OF SALES AND GROSS PROFIT
Costs of sales were $2,802,597 and $3,545,519 for fiscal 2003 and 2002,
respectively. The decrease of $742,922 or 21% in the cost of sales from fiscal
2002 to 2003 was primarily due to the decrease in sales volume. Gross margin for
product sales was negative in both fiscal years, reflecting continued increased
personnel and manufacturing costs and relatively low sales. The negative gross
margins are influenced by low unit production and sales levels relative to the
capital equipment and personnel committed to production.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $1,212,219 and $1,114,051 for fiscal
years 2003 and 2002, respectively. The increase of $98,168 or 9% from fiscal
2002 to 2003 is due primarily to an increase in personnel and equipment costs
for development of GaN based transistor products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $1,750,807 and $1,733,846
for fiscal years 2003 and 2002, respectively. The decrease of $16,961 or 1% from
fiscal 2002 to 2003 reflects our efforts to reduce expenses in response to the
slow economy, including a reduction in staff in the third quarter of fiscal
2002.
OTHER INCOME AND EXPENSE
We realized $436,925 and $1,193,525 in interest income in fiscal years 2003
and 2002, respectively. The decrease in interest income of $756,600 or 63% from
fiscal 2002 to 2003 reflects the steep decline in short-term interest rates over
the fiscal year and declining cash investments. We consumed a total of $5.2
million and $9.3 million in cash in fiscal 2002 and 2003, respectively, to fund
operations, purchase equipment, retire debt and acquire CSP.
NET LOSS
Our net losses for fiscal 2003 and 2002 were $5,009,434 and $4,738,199,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2004, our principal source of liquidity was our cash, cash
equivalents and short-term investments, which totaled $13,544,910 compared to
$22,235,686 at March 31, 2003.
We used $5,595,781 to fund operating activities during fiscal 2004 compared
to $4,659,154 in fiscal 2003, and $3,753,553 in fiscal 2002. In all three years
the largest use of cash in operating activities was the funding of the net
losses. The net loss for fiscal 2004 expanded to $6,535,147 from $5,009,434 in
fiscal 2003. The primary factors contributing to the increased loss from fiscal
2003 to 2004 were the
21
increased losses at APACN. The significant factors contributing to the increased
loss from fiscal 2002 to 2003 were the decline in sales, the increase in
research and development costs and the decline in interest income.
In fiscal 2004 we used $2,753,246 in investing activities including
$1,960,000 used to purchase the assets of Americable. We also invested $785,870
to purchase property and equipment, mainly for the purchase of the MOCVD. In
fiscal 2003 we used $3,828,000 in investing activities to purchase CSP. We
invested $359,474 in property and equipment and $84,131 in patents, for a net
decrease in cash from investment activities of $4,271,605. In fiscal 2002 we
generated $15,759,000 through the sale of short-term investments, and we
invested $1,050,274 in property and equipment and $113,698 in patents, for a net
increase in cash from investment activities of $14,595,028.
In fiscal 2004, we used $341,749 in financing activities primarily to pay
down long-term debt relating to our facility in Aberdeen, South Dakota. In
fiscal 2003, we used $439,958 in financing activities primarily to pay down
long-term debt also related to the Aberdeen facility. We used $460,564 in
financing activities in fiscal 2002. Primary uses of cash in 2002 included the
repurchase of common stock for $92,638 and the scheduled retirement of debt in
the amount of $375,468.
Construction of our manufacturing facility in Aberdeen utilized certain
economic incentive programs offered by the State of South Dakota and the City of
Aberdeen. At March 31, 2004, the total principal outstanding under bonds issued
by the State of South Dakota was $1,485,000. Interest on the bonds ranges from
5% to 6.75%, and the bonds are due in various installments between 2004 and
2016. These bonds require compliance with certain financial covenants. We were
out of compliance with these covenants during all of fiscal 2002, 2003 and 2004.
For further information regarding these bonds, see Note E of Notes to Financial
Statements included under Item 8 of this Report. On April 14, 2004 the Company
sold its Optics manufacturing operations discussed in Note M to the Financial
Statements included under Item 8 of this report, to PNE, Inc. dba IRD. The terms
of the sale required the Company to prepay $89,000 of a loan with the City of
Aberdeen, South Dakota and to accelerate the loan payment schedule over the next
several years, ending in 2010.
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 more than the next 12 months, we cannot
assure you that we will not seek additional funds through public or private
equity or debt financing or from other sources within this time frame, or that
additional funding, if needed, will be available on terms acceptable to us, or
at all. We may also consider the acquisition of, or evaluate investments in,
products and businesses complementary to our business. Any acquisition or
investment may require additional capital.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We invest in short-term securities of high credit
issuers with maturities ranging from overnight up to 24 months. The average
maturity of the portfolio does not exceed 12 months. The portfolio includes only
marketable securities with active secondary or resale markets to ensure
liquidity. We have no investments denominated in foreign country currencies and,
therefore, our investments are not subject to
22
foreign exchange risk. See "Cash and Equivalents" under Note A of the
Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Quarterly Results of Operations. The following tables present our unaudited
quarterly operating results for the eight quarters ended March 31, 2004:
Quarter Ended
-----------------------------------------------------------
June 30, September 30, December 31, March 31,
2002 2002 2002 2003
------------ --------------- -------------- ------------
Statement of Operations Data
Net revenue . . . . . . . . . $ 72,451 $ 38,900 $ 40,674 $ 284,132
Gross profit (loss) . . . . . (681,269) (680,044) (513,379) (491,748)
Net loss. . . . . . . . . . . (1,252,994) (1,318,737) (1,151,494) (1,286,209)
Net loss per share. . . . . . $ (0.11) $ (0.11) $ (0.10) $ (0.11)
Quarter Ended
-----------------------------------------------------------
June 30, September 30, December 31, March 31,
2003 2003 2003 2004
------------ --------------- -------------- ------------
Statement of Operations Data
Net revenue . . . . . . . . . $ 1,566,992 $ 3,557,586 $ 3,301,955 3,482,932
Gross profit (loss) . . . . . (300,889) 218,329 (12,513) 90,488
Net loss. . . . . . . . . . . (1,545,399) (1,667,488) (1,642,436) (1,679,824)
Net loss per share. . . . . . $ (0.13) $ (0.14) $ (0.14) $ (0.14)
23
REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM
------------------------------------------------------
Board of Directors and Shareholders
APA Optics, Inc.
We have audited the accompanying consolidated balance sheets of APA
Optics, Inc. (the Company) as of March 31, 2004 and 2003, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended March 31, 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of APA Optics, Inc. as of March 31, 2004 and 2003 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note A to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets, on April 1, 2002.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
June 15, 2004
24
APA OPTICS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31,
ASSETS 2004 2003
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $13,544,910 $22,235,686
Accounts receivable, net of allowance for uncollectible
accounts of $49,038 and $20,644 at
March 31, 2004 and 2003 1,549,016 468,576
Inventories 1,574,188 1,398,203
Prepaid expenses 174,503 134,045
Bond reserve funds 133,865 125,830
----------- -----------
Total current assets 16,976,482 24,362,340
PROPERTY, PLANT AND EQUIPMENT, net 4,550,956 3,989,344
OTHER ASSETS
Bond reserve funds 332,433 340,629
Goodwill 3,422,511 2,500,296
Other 562,609 691,917
----------- -----------
4,317,553 3,532,842
----------- -----------
$25,844,991 $31,884,526
=========== ===========
The accompanying notes are an integral part of these financial statements.
25
LIABILITIES AND
SHAREHOLDERS' EQUITY 2004 2003
------------- -------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,637,923 $ 1,846,922
Accounts payable 812,165 454,804
Accrued compensation 645,293 255,403
Accrued expenses 212,713 81,694
------------- -------------
Total current liabilities 3,308,094 2,638,823
LONG-TERM DEBT, net of current maturities 173,836 326,760
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Undesignated shares, 4,999,500 authorized shares;
no shares issued and outstanding - -
Preferred stock, $.01 par value; 500 authorized shares;
no shares issued and outstanding - -
Common stock, $.01 par value; 50,000,000
authorized shares; 11,872,331 shares
issued and outstanding at March 31, 2004 and 2003 118,723 118,723
Additional paid-in capital 51,980,946 52,001,681
Accumulated deficit (29,736,608) (23,201,461)
------------- -------------
22,363,061 28,918,943
------------- -------------
$ 25,844,991 $ 31,884,526
============= =============
The accompanying notes are an integral part of these financial statements.
26
APA OPTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31,
2004 2003 2002
------------ ------------ ------------
Revenues $11,909,465 $ 436,157 $ 595,955
Costs and expenses
Cost of sales 11,914,050 2,802,597 3,545,519
Research and development 948,737 1,212,219 1,114,051
Selling, general and administrative 5,605,177 1,750,807 1,733,846
------------ ------------ ------------
18,467,964 5,765,623 6,393,416
------------ ------------ ------------
Loss from operations (6,558,499) (5,329,466) (5,797,461)
Other income 225,719 436,925 1,193,525
Other expense (200,314) (115,893) (132,263)
------------ ------------ ------------
25,405 321,032 1,061,262
------------ ------------ ------------
Loss before income taxes (6,533,094) (5,008,434) (4,736,199)
Income taxes 2,053 1,000 2,000
------------ ------------ ------------
Net loss $(6,535,147) $(5,009,434) $(4,738,199)
============ ============ ============
Net loss per share
Basic and diluted $ (0.55) $ (0.42) $ (0.40)
============ ============ ============
Weighted average shares outstanding
Basic and diluted 11,872,331 11,873,914 11,896,976
============ ============ ============
The accompanying notes are an integral part of these financial statements.
27
APA OPTICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31,
Undesignated
shares Preferred stock Common stock Additional Total
------------ ------------------ ---------------------- paid-in Accumulated shareholders'
Shares Amount Shares Amount capital deficit equity
------------ ------------- ---------------
Balance at March 31, 2001 - - $ - 11,915,456 $119,155 $51,614,972 $(13,453,828) $ 38,280,299
Options exercised - - - 5,125 51 25,245 - 25,296
Common stock repurchased - - - (43,200) (432) (92,206) - (92,638)
Options issued as
compensation - - - - - 45,414 - 45,414
Other - - - (1,500) (15) (15,240) - (15,255)
Net loss - - - - - - (4,738,199) (4,738,199)
------------ -------- -------- ----------- --------- ------------ ------------- ---------------
Balance at March 31, 2002 - - - 11,875,881 118,759 51,578,185 (18,192,027) 33,504,917
Common stock repurchased - - - (3,550) (36) (5,955) - (5,991)
Aberdeen land grant - - - - - 67,760 - 67,760
Options issued as
compensation - - - - - (9,309) - (9,309)
Warrants issued - - - - - 371,000 - 371,000
Net loss - - - - - - (5,009,434) (5,009,434)
------------ -------- -------- ----------- --------- ------------ ------------- ---------------
Balance at March 31, 2003 - - - 11,872,331 118,723 52,001,681 (23,201,461) 28,918,943
Options issued as
compensation - - - - - (20,735) - (20,735)
Net loss - - - - - - (6,535,147) (6,535,147)
------------ -------- -------- ----------- --------- ------------ ------------- ---------------
Balance at March 31, 2004 - - $ - 11,872,331 $118,723 $51,980,946 $(29,736,608) $ 22,363,061
============ ======== ======== =========== ========= ============ ============= ===============
The accompanying notes are an integral part of these financial statements.
28
APA OPTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
2004 2003 2002
------------ ------------ ------------
Cash flows from operating activities:
Net loss $(6,535,147) $(5,009,434) $(4,738,199)
Adjustments to reconcile net loss to net cash
used in operating activities, net of acquisitions:
Depreciation and amortization 971,194 810,505 654,460
Deferred compensation expense (20,735) (9,309) 45,414
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable (440,161) (63,392) 350,246
Inventories (179,293) (130,889) 375,241
Prepaid expenses and other assets (44,909) (30,457) (73,524)
Accounts payable and accrued expenses 653,270 (226,178) (367,191)
------------ ------------ ------------
Net cash used in operating activities (5,595,781) (4,659,154) (3,753,553)
Cash flows from investing activities:
Purchases of property and equipment (785,870) (359,474) (1,050,274)
Sale of short-term investments - - 15,759,000
Cash paid for business acquisition (1,960,000) (3,828,000) -
Other (7,376) (84,131) (113,698)
------------ ------------ ------------
Net cash provided by (used in) investing
activities (2,753,246) (4,271,605) 14,595,028
Cash flows from financing activities:
Repurchase of common stock - (5,991) (92,638)
Proceeds from exercise of warrants and options - - 10,041
Payment of long-term debt (361,923) (437,467) (375,468)
Bond reserve funds 20,174 3,500 (2,499)
------------ ------------ ------------
Net cash used in financing activities (341,749) (439,958) (460,564)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (8,690,776) (9,370,717) 10,380,911
Cash and cash equivalents at beginning of year 22,235,686 31,606,403 21,225,492
------------ ------------ ------------
Cash and cash equivalents at end of year $13,544,910 $22,235,686 $31,606,403
============ ============ ============
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 109,251 $ 115,893 $ 132,263
Income taxes 2,053 1,000 2,000
Noncash investing and financing transactions:
Contributed land $ - $ 67,760 $ -
============ ============ ============
Issuance of warrants $ - $ 371,000 $ -
============ ============ ============
Capital expenditure included in accounts payable $ 225,000 $ - $ -
============ ============ ============
The accompanying notes are an integral part of these financial statements.
29
APA OPTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
- --------------------
APA Optics, Inc. (the Company) is a manufacturer of custom cable assemblies and
supplier of premise cabling components and networking products to customers
throughout the United States with a concentration in Minnesota. The Company
also manufactures and markets dense wavelength division multiplexer (DWDM)
optical components and offers a range of gallium nitride-based devices.
Principles of Consolidation
- -----------------------------
The consolidated financial statements include the accounts of APA Optics, Inc.
and its wholly-owned subsidiary. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Revenue Recognition
- --------------------
Revenue is recognized when the product has been shipped, acceptance by the
customer is reasonably certain and collection is probable.
Cash and Cash Equivalents
- ----------------------------
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Investments classified as cash
equivalents at March 31, 2004 and 2003 consist entirely of short-term money
market accounts. Cash equivalents are stated at cost, which approximates fair
value.
Accounts Receivable
- --------------------
Accounts receivable are presented net of allowances. Credit is extended based
on the evaluation of a customer's financial condition and, generally, collateral
is not required. Accounts outstanding longer than the contractual payment terms
are considered past due. The Company determines its allowance by considering a
number of factors, including the length of time trade receivables are past due,
the Company's previous loss history, the customer's current ability to pay its
obligation to the Company, and the condition of the general economy and the
industry as whole. The Company writes off accounts receivable when they become
uncollectible; payments subsequently received on such receivables are credited
to the allowance for doubtful accounts.
30
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Inventories
- -----------
Inventories consist of finished goods, raw materials and work in process and are
stated at the lower of average cost (which approximates the first-in, first-out
method) or market. Cost is determined using material costs, internal and
external labor charges, and allocated factory overhead charges.
Property, Plant and Equipment
- --------------------------------
Property, plant and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are provided on the
straight-line method for book and tax purposes over the following estimated
useful lives of the assets:
Years
------
Building 20
Equipment 3 - 10
Leasehold improvements 7 - 10
Goodwill and Long Lived Assets
- ----------------------------------
Goodwill represents the excess of the purchase price over net assets acquired.
Effective April 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) 142, Goodwill and other Intangible Assets, which provides that
goodwill should not be amortized but reviewed for impairment annually or
whenever conditions exist that indicate an impairment could exist. The Company
performed the annual impairment test in fiscal years 2004 and 2003 and concluded
that no impairment had occurred.
Stock-Based Compensation
- -------------------------
The Company has various incentive and non-qualified stock option plans which are
used as an incentive for directors, officers, and other employees, as described
more fully in Note J. The Company uses the intrinsic value method to value
stock options issued to employees. Under this method, compensation expense is
recognized for the amount by which the market price of the common stock on the
date of grant exceeds the exercise price. The Company's stock based compensation
expense also reflects the benefit of the cancellation of previously expensed
options. The Company recognized compensation expense (income) of $(20,735),
$(9,309) and $45,414 for the years ended March 31, 2004, 2003 and 2002. For
those stock options granted where the exercise price was equal to the market
value of the underlying common stock on the date of grant, no stock-based
employee compensation cost is reflected in the net loss. Had the fair value
method been applied, our compensation expense would have been different. The
following table illustrates the effect on net loss and net loss per share if the
Company had
31
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
applied the fair value method, to stock-based employee compensation for the
following fiscal years:
March 31, March 31, March 31,
2004 2003 2002
------------ ----------- -----------
$ 6,535,147 $5,009,434 $4,738,199
Net loss to common shareholders - as reported
Less: Total stock-based employee
compensation expense determined under fair
value method for all awards, net of related
tax effects 158,936 153,266 273,516
Net loss - pro forma $ 6,694,083 $5,162,700 $5,011,715
============ =========== ===========
Basic and diluted net loss per common share
- - as reported $ (.55) $ (.42) $ (.40)
============ =========== ===========
Basic and diluted net loss per common share
- - pro forma $ (.55) $ (.43) $ (.42)
============ =========== ===========
The weighted average fair value of options granted in 2004, 2003 and 2002 was
$2.62, $1.20, and $9.30. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 2004, 2003 and 2002;
zero dividend yield, risk-free interest rate of 3.3%, 3.2% and 4.5%; volatility
of 75%, 77% and 132%, and a weighted-average expected term of the options of
five years.
Fair Value of Financial Instruments
- ---------------------------------------
Due to their short-term nature, the carrying value of current financial assets
and liabilities approximates their fair values. The fair value of long-term
obligations, if recalculated based on current interest rates, would not
significantly differ from the recorded amounts.
Net Loss Per Share
- ---------------------
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding. Diluted net loss per share is
computed by dividing net loss by the weighted average number of common shares
outstanding and common share equivalents related to stock options and warrants,
when dilutive.
Common stock options and warrants to purchase 975,937, 999,197 and 655,872
shares of common stock with a weighted average exercise price of $6.35, $6.50
and $10.15 were outstanding during the years ended March 31, 2004, 2003 and
2002, but were excluded because they were antidilutive. Had we not incurred a
net loss during the year ended March 31, 2004, we would have assumed conversion
of stock options into 18,031 common shares. We would not have assumed any
conversions of stock options for fiscal year 2003 and 2002.
Use of Estimates
- ------------------
32
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, related revenues and expenses and disclosure
about contingent assets and liabilities at the date of the financial statements.
Actual results may differ from those estimates used by management.
Impairment of Long-Lived Assets
- ----------------------------------
The Company evaluates the recoverability of its long-lived assets and requires
recognition of impairment of long-lived assets if events or circumstances
indicate an impairment may have occurred and when the net book value of such
assets exceeds the future undiscounted cash flows attributed to such assets.
The Company assesses the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. No impairment of long-lived assets has occurred through the year
ended March 31, 2004.
Reclassifications
- -----------------
Certain reclassifications have been made to the 2003 financial statements to
conform with the presentation used in 2004. These reclassifications had no
effect on net loss or shareholders' equity as previously reported.
Newly Adopted Accounting Standards
- -------------------------------------
The Financial Accounting Standards Board issued FIN 46 (R), Consolidation of
Variable Interest Entities, in December 2003 to provide guidance on when an
investor should consolidate another entity from which they receive benefits or
are exposed to risks when those other entities are not controlled based on
traditional voting interest or they are thinly capitalized. FIN 46 (R) refers
to those entities as variable interest entities (VIEs). A variable interest is a
contractual, ownership, guarantee of debt, or other financial interest in an
entity that changes with changes in the entity's asset value. An entity would
be considered a VIE if the amount of equity at risk in the entity is not
sufficient to allow it to finance its activities without additional subordinated
financial support from the Company. The provisions of FIN 46 (R) were effective
at the end of the first reporting period after March 15, 2004. The adoption of
FIN 46 (R) will not have a material effect on the Company's consolidated
financial position or results of operations.
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002
(the "Act"), which immediately impacts Securities and Exchange Commission
registrants, public accounting firms, lawyers and securities analysts. This
legislation is the most comprehensive since the passage of the Securities Act of
1933 and Securities Exchange Act of 1934. It has far reaching effects on the
standards of integrity for corporate management, board of directors, and
executive management. Additional disclosures, certifications and procedures will
be required of the Company. The Company does not expect any material adverse
effect as a result of the passage of this legislation; however, the full scope
of the Act has not yet been determined.
NOTE B - ACQUISITIONS
On March 14, 2003, the Company acquired certain assets and assumed certain
liabilities of CSP. The acquisition was accounted for as a purchase and,
accordingly, results of operations relating to the purchased assets were
included in the statement of operations from the date of acquisition. The impact
on operations for year ended March 31, 2003 was not material. There were no
contingent payments related to the acquisition.
33
NOTE B - ACQUISITIONS - CONTINUED
In accordance with SFAS 141, the Company reclassified certain balances from the
original CSP purchase price allocation as part of an asset valuation adjustment.
The adjustment was made after determining the fair value of the assets
purchased. The result of the change was a decrease in inventory and an increase
in goodwill recorded. This did not change the purchase price of the transaction.
The purchase price, assets acquired and liabilities assumed with purchase price
adjustments are as follows:
Original Purchase Net Purchase
Purchase Price Price Price
Allocation Adjustment Allocation
Accounts receivable $ 384,571 $ - $ 384,571
Inventory 1,227,239 (627,364) 599,875
Property, plant and equipment 402,799 - 402,799
--------------- ------------ -------------
Assets purchased 2,014,609 (627,364) 1,387,245
Trade accounts payable 239,187 - 239,187
Capitalized leases 149,786 - 149,786
Vendor restructuring payable 263,818 - 263,818
Accrued expenses 34,114 - 34,114
--------------- ------------ -------------
Less: Liabilities assumed 686,905 - 686,905
Net assets 1,327,704 (627,364) 700,340
Goodwill 2,500,296 627,364 3,127,660
--------------- ------------ -------------
Purchase price $ 3,828,000 $ - $ 3,828,000
=============== ============ =============
On June 27, 2003, the Company acquired certain assets of Americable, Inc. The
acquisition was accounted for as a purchase and, accordingly, results of
operations relating to the purchased assets have been included in the statement
of operations from the date of acquisition. There are no contingent payments
related to the acquisition.
In accordance with SFAS 141, the Company reclassified certain balances from the
original Americable purchase price allocation as part of an asset valuation
adjustment. The adjustment was made after determining the fair value of the
assets purchased. The result of the change was a decrease in inventory and
property, an increase in accounts receivable, and an increase in goodwill
recorded. This did not change the purchase price of the transaction. The
purchase price and assets acquired with purchase price adjustments are as
follows:
Original Purchase Net Purchase
Purchase Price Price Price
Allocation Adjustment Allocation
Accounts receivable $ 594,000 $ 46,279 $ 640,279
Inventory 638,000 (13,944) 624,056
Property, plant and equipment 450,000 (49,186) 400,814
--------------- ------------ -------------
Assets purchased 1,682,000 (16,851) 1,665,149
Goodwill 278,000 16,851 294,851
--------------- ------------ -------------
Purchase price $ 1,960,000 $ - $ 1,960,000
=============== ============ =============
Goodwill for both acquisitions is expected to be fully deductible for tax
purposes.
34
NOTE C - INVENTORIES
Inventories consist of the following at March 31:
2004 2003
---------- ----------
Raw materials $ 371,536 $ 702,233
Work-in-process 46,222 155,138
Finished goods 1,156,430 540,832
---------- ----------
$1,574,188 $1,398,203
========== ==========
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at March 31:
2004 2003
---------- ----------
Land $ 127,760 $ 127,760
Buildings 1,679,424 1,679,424
Manufacturing equipment 6,037,670 5,731,507
Office equipment 619,026 507,872
Leasehold improvements 1,119,616 1,082,538
---------- ----------
9,583,496 9,129,101
Less accumulated depreciation and amortization 5,032,540 5,139,757
---------- ----------
$4,550,956 $3,989,344
========== ==========
NOTE E - LONG-TERM DEBT
The following is a summary of the outstanding debt at March 31:
2004 2003
----------- -----------
South Dakota Governor's Office of Economic Development
and the Aberdeen Development Corporation Bond, 5% to 6.75%,
due in various installments through 2016 $ 1,485,000 $ 1,560,000
Low interest economic development loans, 0%, due in various
Installments through 2010 229,305 246,944
Forgivable economic development loans, 3%, paid in full in fiscal - 216,951
2004
Capital lease obligations 97,454 149,787
----------- -----------
1,811,759 2,173,682
Less current maturities 1,637,923 1,846,922
----------- -----------
$ 173,836 $ 326,760
=========== ===========
35
The forgivable economic development loans are contingent upon employment levels
at the facility meeting preset criteria. As partial consideration for any loans
forgiven, the Company will grant warrants to purchase
36
NOTE E - LONG-TERM DEBT - CONTINUED
common stock of the Company based on the number of job credits earned by the
Company in the preceding 12 months divided by the exercise price. The exercise
price of the warrants was set at $4.00 for year one of the debt and the yearly
grant exercise price increases one dollar each year until the debt matured in
fiscal 2004. As of March 31, 2004, 36,511 warrants have been issued for loans
forgiven totaling $187,289.
At March 31, 2004 and 2003, the Company had on deposit with trustees $466,298
and $415,629 in reserve funds for current bond maturities, of which $133,865 and
$125,830 are for current bond maturities. 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 2004. All debt, except
for the long-term portion of the low interest loans, and the capital lease
obligations, to which the covenant violation does not apply, has been classified
as current due to the Company's covenant violation.
As part of the Company's plan to construct a production facility, the city of
Aberdeen, South Dakota gave the Company land, contingent upon the Company
staying in the new building through June 23, 2002. The Company satisfied this
requirement in fiscal 2003 and recorded the contributed land with an assessed
value of $67,760 on the books as of March 31, 2003.
All of the above debt is secured by land, buildings, and certain equipment of
the Company. In April 2004, the Company was required to restructure one of its
loans with the City of Aberdeen in conjunction with the sale of its Optics
manufacturing operations to include an advance payment and an accelerated
payment stream. The restructuring had no effect on the amount or classification
of the overall loan balance at March 31, 2004.
Scheduled maturities of the Company's long-term debt are as follows:
Years ending March 31,
2005 $1,637,923
2006 65,873
2007 27,963
2008 20,000
2009 20,000
Thereafter 40,000
----------
$1,811,759
==========
NOTE F - EMPLOYEE BENEFIT PLAN
The Company maintains a contributory 401(k) profit sharing benefit plan
covering all employees. The Company matches 50% of employee contributions up to
6% of a participant's compensation. The Company's contributions under this plan
were $72,000, $51,000, and $53,000 for the years ended March 31, 2004, 2003 and
2002.
NOTE G - INCOME TAXES
Deferred taxes recognize the impact of temporary differences between the amounts
of the assets and liabilities recorded for financial statement purposes and such
amount measured in accordance with tax laws. Realization of net operating loss
carry forward and other deferred tax temporary differences are contingent upon
future taxable earnings. The Company's deferred tax asset was reviewed for
expected utilization using a "more likely than not" approach as required by SFAS
109 by assessing the available positive and negative factors
37
NOTE G - INCOME TAXES - CONTINUED
surrounding its recoverability. Accordingly, the Company has recorded a full
valuation allowance at March 31, 2004 and 2003.
Significant components of deferred income tax assets and liabilities are as
follows at March 31, 2004:
2004 2003
------------- ------------
Current deferred income tax assets:
Inventories $ 64,350 $ 73,710
Accrued expenses 33,930 -
------------- ------------
98,280 73,710
Long-term deferred income tax assets:
Property and equipment depreciation 172,770 -
Intangibles 17,940 -
Net operating loss carryforward 10,880,432 8,679,276
------------- ------------
11,071,142 8,679,276
------------- ------------
Total deferred income tax assets 11,169,422 8,752,986
Long-term deferred income tax liabilities:
Goodwill 94,338 5,418
------------- ------------
Total net deferred income taxes 11,075,084 8,747,568
Valuation allowance (11,075,084) (8,747,568)
------------- ------------
Total $ - $ -
============= ============
As of March 31, 2004, the Company has net operating loss carry forwards for
federal income tax purposes of approximately $27,899,000 which expire in fiscal
years 2005 to 2024.
Income tax expense consists entirely of state taxes in 2004, 2003, 2002.
NOTE H - SHAREHOLDERS' EQUITY
The Board of Directors may, by resolution, establish from the undesignated
shares different classes or series of shares and may fix the relative rights and
preferences of shares in any class or series.
In fiscal year 2003, the Board of Directors authorized the repurchase of up to
the greater of $2,000,000 or 500,000 shares of common stock. There were no
purchases in fiscal 2004. As of March 31, 2004 and 2003, a total of 46,750
shares for $98,629 at an average price of $2.11 per share had been repurchased
and retired.
NOTE I - SHAREHOLDER RIGHTS PLAN
Pursuant to the Shareholder Rights Plan each share of common stock has attached
to it a right, and each share of common stock issued in the future will have a
right attached until the rights expire or are redeemed. Upon the occurrence of
certain change in control events, each right entitles the holder to purchase one
one-hundredth of a share of Series B Junior Preferred Participating Share, at an
exercise price of $80 per share, subject to adjustment. The rights expire on
November 10, 2010 and may be redeemed by the Company at a price of $.001 per
right prior to the time they become exercisable.
38
NOTE J - STOCK OPTIONS AND WARRANTS
Stock Options
- --------------
The Company has various incentive and non-qualified stock option plans which are
used as an incentive for directors, officers, and other employees. Options are
generally granted at fair market values determined on the date of grant and
vesting normally occurs over a six-year period. The plans had 1,089,148 shares
of common stock available for issue at March 31, 2004.
Option transactions under these plans during the three years ended March 31,
2004 are summarized as follows:
Weighted average
Number of shares exercise price
---------------- -----------------
Outstanding at March 31, 2001 397,175 $ 6.81
Granted 90,000 10.33
Canceled (112,500) 7.79
Exercised (5,125) 4.94
----------------
Outstanding at March 31, 2002 369,550 7.40
Granted 167,500 1.88
Canceled (128,675) 8.16
----------------
Outstanding at March 31, 2003 408,375 4.27
Granted 140,000 2.62
Canceled (163,260) 5.65
----------------
Outstanding at March 31, 2004 385,115 3.74
================
The number of shares exercisable at March 31, 2004, 2003 and 2002 was 176,815,
165,325 and 108,674, respectively, at a weighted average exercise price of
$4.21, $5.42 and $4.68 per share, respectively.
The following table summarizes information concerning currently outstanding and
exercisable stock options at March 31, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Weighted average Weighted Weighted
Range of Number remaining average Number Average
exercise prices outstanding contractual life exercise price outstanding exercise price
- ---------------- ----------- ---------------- --------------- ----------- ---------------
1.48-$2.91 194,740 4.32 years $ 2.31 29,940 $ 1.91
3.77-5.53 140,375 .67 years 4.31 128,250 4.24
5.73-7.22 25,000 2.33 years 6.65 9,500 6.62
8.50-11.90 25,000 3.05 years 8.82 9,125 8.83
----------- -----------
385,115 2.84 years 3.74 176,815 4.21
=========== ===========
39
NOTE J - STOCK OPTIONS AND WARRANTS - CONTINUED
Stock Warrants
- ---------------
The following is a table of the warrants to purchase shares of the Company's
common stock:
Warrants Exercise price Expiration
outstanding per share date
------------ --------------- -----------
Balance at March 31, 2001 318,197 $ 4.00 - $17.84 2002 - 2006
Expired (31,875) 4.00 2002
------------
Balance at March 31, 2002 286,322 4.79 - 17.84 2002 - 2006
Issued 350,000 3.00 2008
Expired (45,500) 3.75 - 5.00 2002
------------
Balance at March 31, 2003 590,822 3.00 - 17.84 2005 - 2008
------------
Issued - - -
Expired - - -
------------
Balance at March 31, 2004 590,822 3.00 - $17.84 2005 - 2008
============
All warrants are exercisable upon date of grant.
There were no warrants issued in fiscal year 2004.
In fiscal year 2003, 350,000 warrants at a value of $371,000 were issued in
connection with the acquisition of the assets of Computer System Products, Inc.
These warrants were valued by an independent firm and are exercisable at $3.00.
NOTE K - COMMITMENTS
The Company leases office and manufacturing facilities from a partnership whose
two partners are major shareholders and officers of the Company. The lease
agreement, classified as an operating lease, expires November 30, 2004 and
provides for periodic increases of the rental rate based on increases in the
consumer price index. As of the date of this report, the Company intends to
extend that lease. The Company leases other office and manufacturing facilities
space that expires June 30, 2006.
The Company leases certain equipment under capital lease arrangements with
interest ranging from 10% to 10.62% and terms through July 2006. The equipment
has a net book value of $104,561 at March 31, 2004.
40
NOTE K - COMMITMENTS - CONTINUED
The following is a schedule of approximate minimum payments required under the
capital and operating leases:
Capital Operating
Year ending March 31 leases leases
- ------------------------------------------------- -------- ----------
2005 $ 51,633 $ 359,011
2006 49,321 251,850
2007 7,963 59,164
2008 - 240
-------- ----------
Total minimum lease payments 108,917 $ 670,265
==========
Less: Amounts representing interest 11,463
--------
Present value of future minimum lease
payments 97,454
Less: Current portion 52,332
--------
Capital lease obligations, net of current portion $ 45,122
========
Rental expense was $485,000, $149,000 and $138,000 for the years ended March 31,
2004, 2003 and 2002, of which $149,000, $139,000 and $138,000 was paid to the
partnership, respectively.
NOTE L - CONCENTRATIONS
Major Customers
- ----------------
No single customer accounted for more than 10% of the Company's sales in fiscal
2004. Two major customers accounted for 21% and 15% of the Company's sales for
the year ended March 31, 2003. Three major customers accounted for 28%, 23% and
14% of the Company's sales for the year ended March 31, 2002. These customers
also accounted for approximately 6% of the outstanding trade receivable balance
at March 31, 2003.
Suppliers
- ---------
The Company purchases raw materials, component parts and outsourced labor from
many suppliers. Although many of these items are single-sourced, the Company
has experienced no significant difficulties to date in obtaining adequate
quantities. These circumstances could change, however, and the Company cannot
guarantee that sufficient quantities or quality of raw materials, component
parts and outsourced labor will be as readily available in the future or, if
available, that we will be able to obtain them at favorable prices. There were
no suppliers that provided more than 10% of the Company's total purchases in the
years ended March 31, 2004, 2003 or 2002.
NOTE M - SUBSEQUENT EVENT (UNAUDITED)
The Company sold its Optics manufacturing operations on April 14, 2004 for
$220,000. The terms of the sale required the Company to restructure a loan
with the City of Aberdeen which amounted to an upfront payment
41
NOTE M - SUBSEQUENT EVENT (UNAUDITED) - CONTINUED
and an acceleration of the loan balance over the next several years. Results of
these manufacturing operations were not material to the consolidated financial
statements for fiscal years 2004, 2003 and 2002.
NOTE N - SEGMENTS OF BUSINESS
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. As a result the Company 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 its 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 cable 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 other expenses
absorbed at APA are allocated to APACN on an ongoing basis. Such allocated
expenses were $152,452 for the twelve months ended March 31, 2004. There were
no allocated expenses in fiscal 2003. Segment detail is summarized as follows
(unaudited, in thousands):
APA Optics APACN Eliminations Consolidated
----------- -------- -------------- --------------
TWELVE MONTHS ENDED MARCH
31, 2004
External sales $ 409 $11,691 $ (191) $ 11,909
Cost of sales 3,074 9,031 (191) 11,914
Operating loss (5,604) (955) - (6,559)
Depreciation and 797 174 - 971
amortization
Capital expenditures, net 695 91 - 786
Assets 26,187 7,310 (7,652) 25,845
TWELVE MONTHS ENDED MARCH
31, 2003
External sales $ 202 234 - $ 436
Cost of sales 2,627 176 - 2,803
Operating loss (5,269) (60) - (5,329)
Depreciation and 811 - - 811
amortization
Capital expenditures 309 50 - 359
Assets 31,406 5,275 (4,848) 31,885
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
42
The Company's chief executive officer and chief financial officer (the
same) has concluded that the Company's disclosure controls and procedures (as
defined in Exchange Act Rule 13a-15(e) 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 as of the end of the period covered by this Report.
There were no significant changes in the Company's internal controls over
financial reporting or in other factors that could significantly affect these
during the fiscal quarter ended March 31, 2004.
ITEM 9B. OTHER INFORMATION
There were no events during the quarter ended March 31, 2004 required to be
disclosed on Form 8-K which were not so disclosed.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding executive officers is included in Part I of this
Report and is incorporated in this Item 10 by reference.
Information regarding directors and the information required by Items 11,
and 13, below, is incorporated in this Report by reference to the proxy
statement for our annual meeting of shareholders to be held in August 2004.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by Item 11 is incorporated in this Report by reference
to the proxy statement for our annual meeting of shareholders to be held in
August 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Certain information required by Item 12 is incorporated in this Report by
reference to the proxy statement for annual meeting of shareholders to be held
in August 2004.
43
- ------------------------------------- ------------------------ ---------------------- -------------------------------
(a) (b) (c)
- ------------------------------------- ------------------------ ---------------------- -------------------------------
Plan category Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance
of options, warrants or outstanding options, under equity compensation
rights warrants and rights plans (excluding securities
reflected in column (a))
- ------------------------------------- ------------------------ ---------------------- -------------------------------
Equity compensation plans approved by
security holders 385,115 $ 3.74 1,042,628
- ------------------------------------- ------------------------ ---------------------- -------------------------------
Equity compensation
plans not approved by
security holders 590,822 $ 8.05 Not applicable*
- ------------------------------------- ------------------------ ---------------------- -------------------------------
Total 975,937 $ 6.35 1,042,628
- ------------------------------------- ------------------------ ---------------------- -------------------------------
* These securities are comprised solely of warrants that were not issued pursuant to any formal plan with an authorized
number of securities available for issuance.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by Item 13 is incorporated in this Report by reference
to the proxy statement for our annual meeting of shareholders to be held in
August 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by Item 14 is incorporated in this Report by reference
to the proxy statement for our annual meeting of shareholders to be held in
August 2004.
44
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) The following financial statements are filed herewith under Item 8.
Page
----
(i) Report of Independent Registered Public Accounting Firm for. . . . . . . F1
the years ended March 31, 2004, 2003 and
2002
(ii) Consolidated Balance Sheets as of March 31, 2004 and 2003. . . . . . . . F2
(iii) Consolidated Statements of Operations for the years ended
March 31, 2004, 2003 and 2002. . . . . . . . . . . . . . . . . . . . . . F3
(iv) Consolidated Statement of Shareholders' Equity for the years ended
March 31, 2004, 2003 and 2002. . . . . . . . . . . . . . . . . . . . . . F4
(v) Consolidated Statements of Cash Flows for the years ended
March 31, 2004, 2003 and 2002. . . . . . . . . . . . . . . . . . . . . . F6
(vi) Notes to the Consolidated Financial Statements for the years ended
March 31, 2004, 2003 and 2002. . . . . . . . . . . . . . . . . . . . . . F7
(2) Financial Statement Schedules: None
(b) Reports filed on Form 8-K:
In the last quarter of our fiscal year ended March 31, 2004, we filed the
following reports on Form 8-K
- -------------- -------------- -------------------------- --------------------
Date of Report Date of Filing Event Reported Financial Statements
Filed
- -------------- -------------- -------------------------- --------------------
January 15 January 15 Press release announcing None
organizational changes
- -------------- -------------- -------------------------- --------------------
(c) Exhibits. See Exhibit Index.
45
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, 2004 By /s/ Anil K. Jain
----------------------------------------
Anil K. Jain
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------------------------- ------------------------------------------ -------------
/s/ Anil K. Jain President, Chief Executive Officer, Chief June 29, 2004
- --------------------------- Financial Officer and Director (principal
Anil K. Jain executive officer and principal financial
officer)
/s/ Kenneth A. Olsen Secretary, Vice President, and Director June 29, 2004
- ---------------------------
Kenneth A. Olsen
/s/Daniel Herzog Comptroller (principal accounting officer) June 29, 2004
- ---------------------------
Daniel Herzog
/s/ John G. Reddan Director June 29, 2004
- ---------------------------
John G. Reddan
/s/ Ronald G. Roth Director June 29, 2004
- ---------------------------
Ronald G. Roth
/s/ Stephen A. Zuckerman MD Director June 29, 2004
- ---------------------------
Stephen Zuckerman
46
EXHIBIT INDEX
=======================================================================================================
PAGE NUMBER OR INCORPORATED
NUMBER DESCRIPTION BY REFERENCE TO
- -------------------------------------------------------------------------------------------------------
2.1 Asset Purchase Agreement between APACN and Exhibit 2.1 to Form 8-K filed
CSP, Inc. March 31, 2003
2.1 Asset Purchase Agreement between APACN and Exhibit 2.1 to Form 8-K filed July
Americable, Inc. 2, 2003
2.2 Agreement Not to Compete with Peter Lee as part of Exhibit 2.2 to Form 8-K filed
CSP asset purchase March 31, 2003
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.
4.2(e) Amended Loan Agreement with Aberdeen Exhibit 4.2(e) to Registrants
Development Corporation and APA Optics, Inc. Report on Form 10-K for fiscal
year ended March 31, 2004
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
48
=======================================================================================================
PAGE NUMBER OR INCORPORATED
NUMBER DESCRIPTION BY REFERENCE TO
- -------------------------------------------------------------------------------------------------------
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)
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
4.8 Common Stock Warrant Purchase Agreement with Exhibit 4.8 to Form 8-K filed
Peter Lee as part of CSP asset purchase March 31, 2003
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
dated August 31, 1999 Exhibit 10.1(b) to 2000 10-K
*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
49
=======================================================================================================
PAGE NUMBER OR INCORPORATED
NUMBER DESCRIPTION BY REFERENCE TO
- -------------------------------------------------------------------------------------------------------
*10.4 Insurance agreement by and between the Registrant Exhibit 10.5 to Registrant's Report
and Anil K. Jain on Form 10-K for the fiscal year
ended March 31, 1990
*10.5 Form of Agreement regarding Repurchase of Stock Exhibit 10.1 to Registrant's Report
upon Change in Control Event with Anil K. Jain and on Form 10-QSB for the quarter
Kenneth A. Olsen ended September 30, 1997
("September 1997 10-QSB")
*10.6 Form of Agreement regarding Exhibit 10.2 to the September
Employment/Compensation upon Change in Control 1997 10-QSB
with Messrs. Jain and Olsen
10.7 Form of Agreement regarding Indemnification of Exhibit 10.7 to Registrant's Report
Directors and Officers with Messrs. Jain, Olsen, on From 10-K for the fiscal year
Ringstad, Roth, Von Wald and Zuckerman ended March 31, 2002.
10.8 Sublease agreement between Newport and APACN Exhibit 10.8 to Registrant's Report
of Form 10-QSB for the quarter
ended June 30, 2003
10.9 Sublease agreement between Veeco Compound Exhibit 10.9 to Registrant's
Semiconductor and APA Optics, Inc. Report of Form 10-K for the fiscal
year ended March 31, 2004
10.10 Ken Olsen Separation Agreement Exhibit 10.10 to Registrant's
Report on Form 10-K for the fiscal
year ended March 31, 2004
14 Code of Ethics Exhibit 14 to Registrant's Report
on Form 10-K for the fiscal year
ended March 31, 2004
21 List of Subsidiaries
23.1 Consent of Grant Thornton LLP
Certification of Chief Executive Officer Pursuant to
31.1 Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Principal
Financial Officer Pursuant to Section 906 of the
32.1 Sarbanes-Oxley Act of 2002
*Indicates management contract or compensation plan or arrangements required to be filed as an exhibit
to this form.
50