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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-16106
APA ENTERPRISES, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1347235
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2950 N.E. 84TH LANE, BLAINE, MINNESOTA 55449
(Address of principal executive offices and zip code)
(763) 784-4995
(Registrant's telephone number, including area code)
FORMER NAME: APA OPTICS, INC.
(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR END)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to the filing
requirement for the past 90 days.
Yes X No
-- --
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class: Outstanding at February 7, 2005
-------------------------------
Common stock, par value $.01 11,872,331
APA ENTERPRISES, INC.
FORM 10Q
TABLE OF CONTENTS
PART I 3
ITEM 1. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . 3
CONSOLIDATED CONDENSED BALANCE SHEETS . . . . . . . . . . . . . . . . 3
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS . . . . . . . . . . . 4
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS . . . . . . . . . . . 5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 9
RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . 21
ITEM 4. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . . 21
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEMS 1 THROUGH 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APA ENTERPRISES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
December 31, March 31,
2004 2004
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,772,849 $ 13,544,910
Accounts receivable, net of allowance for
uncollectible accounts of $44,530 at December 31,
2004 and $49,038 at March 31, 2004 1,230,198 1,787,541
Inventories 1,340,012 1,574,188
Prepaid expenses 148,195 174,503
Bond reserve funds 87,010 133,865
-------------- --------------
Total current assets 14,578,264 17,215,007
Property, plant and equipment, net 3,968,103 4,550,956
Other assets:
Bond reserve funds 335,668 332,433
Goodwill 3,422,511 3,422,511
Other 514,331 562,609
-------------- --------------
4,272,510 4,317,553
-------------- --------------
Total assets $ 22,818,877 $ 26,083,516
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,474,082 $ 1,637,923
Accounts payable 724,749 1,050,690
Accrued compensation 438,931 645,293
Accrued expenses 235,811 212,713
-------------- --------------
Total current liabilities 2,873,573 3,546,619
Long-term debt 118,045 173,836
Shareholders' equity:
Undesignated shares - -
Preferred stock - -
Common stock 118,723 118,723
Additional paid-in capital 51,959,537 51,980,946
Accumulated deficit (32,251,001) (29,736,608)
-------------- --------------
Total shareholders' equity 19,827,259 22,363,061
-------------- --------------
Total liabilities and shareholders' equity $ 22,818,877 $ 26,083,516
============== ==============
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
APA ENTERPRISES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- --------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues $ 3,305,299 $ 3,301,955 $10,661,085 $ 8,430,517
Costs and expenses:
Cost of sales 2,704,159 3,314,468 8,676,806 8,544,502
Research and 314,151 248,128 725,954 657,092
development
Selling, general and 1,268,958 1,380,005 4,094,073 4,134,963
administrative
------------ ------------ ------------ ------------
4,287,268 4,942,601 13,496,833 13,336,557
------------ ------------ ------------ ------------
Loss from operations (981,969) (1,640,646) (2,835,748) (4,906,040)
Gain on sale of operations - - 208,314 -
Other income 84,952 39,781 197,465 146,478
Other expense (30,612) (40,408) (80,843) (93,598)
------------ ------------ ------------ ------------
54,340 (627) 324,936 52,880
------------ ------------ ------------ ------------
Loss before income taxes (927,629) (1,641,273) (2,510,812) (4,853,160)
Income taxes 881 1,163 3,581 2,163
------------ ------------ ------------ ------------
Net loss $ (928,510) $(1,642,436) $(2,514,393) $(4,855,323)
============ ============ ============ ============
Net loss per share:
Basic and diluted ($0.08) ($0.14) ($0.21) ($0.41)
============ ============ ============ ============
Weighted average shares
outstanding:
Basic and diluted 11,872,331 11,872,331 11,872,331 11,872,331
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4
APA ENTERPRISES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
December 31,
--------------------------
2004 2003
------------ ------------
OPERATING ACTIVITIES
Net loss $(2,514,393) $(4,855,323)
Adjustments to reconcile net loss to net cash used in operating
activities, net of acquisition:
Depreciation and amortization 734,563 688,182
Stock based compensation (22,065) (26,336)
Changes in operating assets and liabilities:
Accounts receivable 557,343 (345,002)
Inventories 234,176 (367,478)
Prepaid expenses and other (2,095) (124,441)
Accounts payable and accrued expenses (284,205) 647,999
------------ ------------
Net cash used in operating activities (1,296,676) (4,382,399)
INVESTING ACTIVITIES
Purchases of property and equipment (299,373) (558,545)
Acquisition of business - (1,960,000)
Other - (7,376)
------------ ------------
Net cash used in investing activities (299,373) (2,525,921)
FINANCING ACTIVITIES
Repayment of long-term debt (219,632) (351,702)
Decrease in bond reserve funds 43,620 64,801
------------ ------------
Net cash used in financing activities (176,012) (286,901)
------------ ------------
Decrease in cash and cash equivalents (1,772,061) (7,195,221)
Cash and cash equivalents at beginning of period 13,544,910 22,235,686
------------ ------------
Cash and cash equivalents at end of period $11,772,849 $15,040,465
============ ============
Noncash investing and financing activities
Capital expenditure included in accounts payable $ 225,000 $ -
Net assets held for sale 28,008 57,564
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. For further information,
refer to the financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended March 31, 2004.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Certain reclassifications of previously reported amounts have been
made to conform that presentation to the current period presentation.
NOTE 2. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- ----------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Numerator for basic and diluted net
loss $ (928,510) $(1,642,436) $(2,514,393) $(4,855,323)
============ ============ ============ ============
Denominator for basic and diluted
net loss per share- weighted-
average shares outstanding 11,872,331 11,872,331 11,872,331 11,872,331
============ ============ ============ ============
Basic and diluted net loss per share ($0.08) ($0.14) ($0.21) ($0.41)
============ ============ ============ ============
Common stock options and warrants to purchase 879,327 and 1,008,697 shares of
common stock with a weighted average exercise price of $6.62 and $6.67 were
outstanding at December 31, 2004 and 2003, respectively, but were excluded from
calculating diluted net loss per share because they were antidilutive.
NOTE 3. ACQUISITION
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. 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
6
in goodwill. 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 Revised
Purchase Price Price Purchase 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 is expected to be fully deductible for tax purposes.
NOTE 4. SEGMENT REPORTING
The Company has identified two reportable segments based on its
internal organizational structure, management of operations, and performance
evaluation. These segments are Optronics (historically referred to as the APA
Optics, Inc. segment) and Cables and Networks (historically referred to as the
APACN segment). Optronic's revenue is generated in the design, manufacture and
marketing of ultraviolet (UV) detection and measurement devices and optical
components. Cables & Network'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 are allocated. Segment
detail is summarized as follows (unaudited, in thousands):
Cables &
Optronics Networks Eliminations Consolidated
-------------- -------------- -------------- --------------
THREE MONTHS ENDED DECEMBER 31, 2004
External sales $ 97 $ 3,301 $ (93) $ 3,305
Cost of sales 339 2,458 (93) 2,704
Operating income (loss) (996) 14 - (982)
Depreciation and amortization 199 64 - 263
Capital expenditures 5 5 - 10
Total assets 23,092 7,106 (7,379) 22,819
THREE MONTHS ENDED DECEMBER 31, 2003
External sales $ 99 $ 3,239 (36) $ 3,302
Cost of sales 790 2,561 (36) 3,315
Operating loss (1,307) (334) - (1,641)
Depreciation and amortization 182 54 - 236
Capital expenditures 309 15 - 324
Total assets 27,029 7,456 (7,186) 27,299
7
NINE MONTHS ENDED DECEMBER 31, 2004
External sales $ 389 $ 10,595 $ (323) $ 10,661
Cost of sales 1,299 7,701 (323) 8,677
Operating income (loss) (3,058) 222 - (2,836)
Depreciation and amortization 563 172 - 735
Capital expenditures 241 58 - 299
Total assets 23,092 7,106 (7,379) 22,819
NINE MONTHS ENDED DECEMBER 31, 2003
External sales $ 222 $ 8,253 (44) $ 8,431
Cost of sales 2,150 6,439 (44) 8,545
Operating loss (4,104) (802) - (4,906)
Depreciation and amortization 551 137 - 688
Capital expenditures 410 149 - 559
Total assets 27,029 7,456 (7,186) 27,299
NOTE 5. SALE OF OPTICS MANUFACTURING OPERATIONS
In January, 2004 the Company announced the discontinuance of optics
manufacturing at its Blaine, Minnesota facility. The closure was the result of
aggressive off-shore pricing and continued lower demand for this product line.
This resulted in a charge of $171,000 taken in the 4th quarter ended March 31,
2004. 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, South Dakota, which included an upfront loan payment of
$89,305 and payment of the remaining $140,000 loan amount in seven annual
installments of $20,000 each beginning June 30, 2004.
NOTE 6. NET ASSETS HELD FOR SALE
In conjunction with the startup of the Company's new MOCVD
semi-conductor machine in the third quarter of fiscal 2005, the Company shut
down its former MOCVD systems. The Company identified certain assets related to
its former systems and effective December 31, 2004, listed their book value as
of that date as held for sale. The book value amount, which has been determined
to be approximately $28,000, was reclassified and moved from Property, Plant and
Equipment and is included within Other Assets on the Balance Sheet. The Company
has a total of approximately $73,000 in net book value of assets held for sale
classified in Other Assets.
NOTE 7. 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. 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 unvested expensed options. The Company
recognized compensation expense of $6,843 for the three months ended December
31, 2004 and compensation income of $22,065 for the nine months ended December
31, 2004, versus income of $56,215 and $26,336 for the three and nine months
ended December 31, 2003. 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.
8
The following table illustrates the effect on net loss and net loss per share if
the Company had applied the fair value method, to stock-based employee
compensation for the following three and nine months ended:
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- --------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net loss to common
shareholders - as reported $ (928,510) $(1,642,436) $(2,514,393) $(4,855,323)
Less: Total stock-based
employee compensation
expense determined under
fair value based method for (38,539) (50,318) (124,861) (150,952)
all awards, net of related tax
effects
------------ ------------ ------------ ------------
Net loss - pro forma $ (967,049) $(1,692,754) $(2,639,254) $(5,006,275)
============ ============ ============ ============
Basic and diluted net loss
per common share - as
reported ($0.08) ($0.14) ($0.21) ($0.41)
Basic and diluted net loss
per common share - pro
forma ($0.08) ($0.14) ($0.22) ($0.42)
NOTE 8. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
In December 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), Share-Based Payment. This statement
requires the compensation cost relating to share-based payment transactions to
be recognized in a company's financial statements. That cost will be measured
based on the fair value of the equity or liability instruments issued.
Statement 123(R) covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. The Company will be
required to apply Statement 123(R) effective July 1, 2005. Management believes
it will have a significant impact due to the Company's use of options as
employee incentives, but has not yet determined the impacts.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this Report about future sales prospects and other matters to
occur in the future are forward looking statements and are subject to
uncertainties due to many factors, many of which are beyond our control. These
factors include, but are not limited to, the continued development of our
products, acceptance of those products by potential customers, our ability to
sell such products at a profitable price, and our ability to fund our
operations. For further discussion regarding these factors, see "Factors That
May Influence Future Results."
9
OVERVIEW
APA Enterprises, Inc., (formerly known as APA Optics, Inc.) consisting of
the Optronics group and the Cables & Networks group, develops, designs,
manufactures and markets fiber optics, copper and gallium nitride (GaN) based
components and devices for industrial, commercial, consumer and scientific
applications. Optronics is active in the development, design, manufacture and
marketing of ultraviolet (UV) measurement instruments for consumers and
industrial customers, and gallium nitride (GaN) based transistors for power
amplifiers and other commercial applications. Cables & Networks designs,
manufactures and markets a variety of fiber optic and copper components to the
data communication and telecommunication industries. Both groups also source
from third parties components and devices for direct and value-added sales to
our customers in all these technology areas.
Cables & Networks' internally manufactured products primarily include a
broad line of standard and custom fiber optic cable assemblies, copper cable
assemblies, optical components, value added fiber optic distribution frames,
panels and modules. These products are manufactured at the Cables & Networks
plant in Plymouth, Minnesota and Optronics' facility in Aberdeen, South Dakota,
and marketed to broadband service providers, commercial data networks, and
original equipment manufacturers. Cables & Networks acquired certain assets of
Computer System Products, Inc. ("CSP") on March 14, 2003 and certain assets of
Americable, Inc. ("Americable") on June 27, 2003. Several of the items discussed
under "Results of Operations" show significant changes from the comparable
periods in the preceding fiscal year as a result of these acquisitions.
In January 2004 Optronics terminated its optics manufacturing in Blaine,
Minnesota as described in Note 5. Additionally in January 2004 Optronics
consolidated its fiber optics operations within Blaine. Optronics plans to
continue to market and sell fiber optic products using mainly Cables & Network's
sales team and channels. We outsource several components from third parties
including passive optical splitters, arrayed waveguides (AWGs) and wavelength
division multiplexers (WDMs) based on Thin Film Filter (TFF) technology, which
we combine with our internally manufactured products to create value added
components for our customers. The majority of our outsourced product providers
are located offshore.
Most companies in the communications industry have been affected by the
slowdown in telecommunications equipment spending over the past several years.
Decreased demand and competition have continued to put downward pressure on
margins. This downward pressure is likely to continue and we will need to reduce
operating costs and improve efficiencies to remain competitive in the
marketplace.
Optronics' consumer UV detection product, the SunUVTM Personal UV Monitor
(PUVM, formerly SunWatch) continues in production with a major focus on
qualifying a second offshore manufacturer. A second manufacturer has been
engaged and is currently determining how to resolve the cosmetic and mechanical
quality issues that have impacted product deliveries from our current supplier.
We anticipate production samples from the second supplier will be available for
qualification during the first quarter of fiscal 2006. The present manufacturer
is supplying sufficient quantities for low volume sales activities. APA has also
obtained the "CE" designation which is necessary for the product to be sold in
Europe.
APA's new 4-band "Profiler M" radiometer for the printing and UV curing
industries was introduced to the market at the Specialty Graphics and Imaging
trade show held in Minneapolis in October 2004. The major product design and
development tasks are complete. A first phase of field tests with prospective
customers has also been completed and feedback from the tests are being
incorporated in the design. Marketing and sales activities have focused on
industrial sales prospects, setting up domestic and international distributors,
and identifying new sales opportunities with suppliers and manufacturers of UV
coating products. We anticipate units will be available for sale during the
fourth quarter of fiscal 2005.
Optronics continues to develop transistors based on GaN/AlGaN (gallium
nitride/aluminum gallium nitride) for commercial opportunities including base
transceiver station power amplifiers. With assistance from outside foundries we
are processing, packaging and testing transistors built from our material. Our
plan is to continue developing demonstration power amplifiers using AlGaN/GaN
based transistors while qualifying the long term reliability of these devices.
10
Installation of our multi-wafer metal organic chemical vapor deposition
(MOCVD) system was completed in the latter part of the third quarter of fiscal
2005. We are currently working with potential epi-wafer customers to qualify
our material. We expect to work toward wafer supply agreements with these
potential customers, leveraging our cutting edge material and fundamental patent
position. We are also processing wafers grown in the newly installed system to
continue our power amplifier development efforts. Whereas this epi-layer
capability will result in epi-wafer sales, we anticipate that this will also
help in establishing a team for joint development, manufacturing and marketing
of power amplifiers for cell phone base station application.
The Company continues to seek and expand its supplier base in Asia, mainly
due to significantly lower manufacturing costs. Additionally, the Company has
taken preliminary steps to establish an off-shore manufacturing and sales entity
in India to take advantage of lower manufacturing costs and evolving fiber optic
communication markets in Asia.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED DECEMBER 31, 2004 VS. THREE MONTHS ENDED DECEMBER 31, 2003
Consolidated revenues for the three months ended December 31, 2004 were
$3,305,299 as compared to $3,301,955 in 2003, relatively unchanged between
periods.
Revenues at Cables & Networks were $3,300,965, compared to sales of
$3,239,275 reported in the same quarter a year ago, an increase of 2%. Sales
were affected by seasonality in the third quarter. Sales for the current quarter
to broadband service provider and commercial data networks were $2,186,000
versus $2,035,000 in the prior year quarter. The increase was primarily due to
an increase in revenue from customers in the Fiber-to-the-Home market. Sales to
OEM's were $1,115,000 versus $1,204,000 in the year ago period. The decrease is
due to a focus away from lower margin products as well as lower demand from some
OEM's. We expect that future sales of Cables & Networks products will continue
to account for a substantial portion of our revenue. We anticipate revenues will
remain consistent in the fourth quarter of this year due to further anticipated
decline in demand from OEM's principally serving the semi-conductor industry
along with seasonality typically experienced within the telecom industry in the
winter months.
Gross revenues at Optronics decreased $2,075, or 2%, to $97,031 from
$99,106 in the same quarter a year ago. Gross revenues for the third quarter
ended reflect approximately $93,000 of sales to Cables & Networks for fiber
optics products and subcontracted labor versus approximately $36,000 in the
comparable period last year. These sales are eliminated as intercompany sales
in the consolidated financials in each quarter. The net decrease in revenues for
the quarter was due primarily to lower sales of consumer GaN and optics
products.
COST OF SALES AND GROSS PROFIT
Cables & Network's gross profit increased $164,824, or 24%, to $843,193
from $678,369. Gross margins as a percent of revenues increased from 21% to 26%.
The increase in margins reflects lower production costs in the current quarter
for personnel reduced over the past several quarters to accommodate demand and
outsourcing efforts, as well as an increased focus on selling higher margin
products.
Gross cost of sales at Optronics decreased $450,904, or 57%, to $339,084
from $789,988. Gross cost of sales reflects approximately $93,000 related to
cost of sales to Cables & Networks for fiber optics products and subcontracted
labor versus approximately $36,000 in the last year period. These costs are
eliminated as intercompany cost of sales in the consolidated financials in each
quarter. The net decrease in cost of sales is due to lower material and
production expenses related to the closure of the optics manufacturing line,
lower personnel costs associated with cost reduction efforts, and lower
obsolescence charges due to a large write-off of fiber optic equipment in the
prior year period.
We anticipate comparable gross margins for Cables & Networks and cost of
sales for Optronics for the fourth quarter.
11
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist of the research and development
expense at Optronics. There have been no research and development expenses at
Cables & Networks. Expenses increased $66,023 to $314,151, from $248,128 in the
prior year period. The increase is due mainly to rent and depreciation expenses
associated with the installation and startup of a new semiconductor machine
purchased in 2003 which is being housed at an outside facility.
SELLING, GENERAL, AND ADMINISTRATIVE
Consolidated S, G, & A expenses decreased $111,047, or 8%, to $1,268,958
from $1,380,005 in 2003.
Selling, general, and administrative expenses at Cables & Networks
decreased $183,257, or 18%, to $828,809 from $1,012,066. The majority of the
decrease is attributable to lower personnel costs within selling expenses due to
reduced staff levels from last year's period, offset by slightly higher
administration and professional costs.
Selling, general and administrative expenses at Optronics increased
$72,210, or 20%, to $440,149 from $367,939. The increase is due to additional
facility expenses reclassed to S, G, & A this year which were absorbed in cost
of sales in the prior year period along with slightly higher expenses associated
with India development expenses.
INCOME (LOSS) FROM OPERATIONS
Consolidated losses from operations decreased $658,677, or 40%, to $981,969
from $1,640,646 in 2003.
The income from operations at Cables & Networks was $14,384 versus a loss
of $333,697 in the fiscal 2004 quarter. The increased income in the quarter was
mainly the result of a combination of increased gross margins achieved through
higher margin sales and reduced production costs as well as lower personnel
costs within S, G&A in the current period.
The loss from operations at Optronics was $996,353, a decrease of $310,596,
or 24%. The decrease in the loss is primarily the result of the cost reductions
implemented over the prior fiscal year, mainly for personnel reductions and the
elimination of the optics line of business. We expect to incur losses at
Optronics until we realize significant revenues from the sales of our PUVM and
GaN related products.
OTHER INCOME AND EXPENSE
Consolidated other income and expense increased $54,967 to $54,340 from a
loss of $627 in 2003.
Other expense at Cables & Networks increased $14,912, primarily for
interest expense due to a larger outstanding debt balance in the current period.
Other income at Optronics increased $69,879 to $133,226. Interest income
increased approximately $47,000 due to a higher outstanding debt balance due
from Cables & Networks and higher amount earned on short term investments, while
other income increased approximately $9,000 from facility rental.
NET LOSS
Consolidated net loss for the quarter decreased $713,926, or 43%, to
$928,510, or $.08 cents per share, from $1,642,436, or $.14 cents per share in
the year ago period.
Cables & Networks had a net loss of $65,133 in the quarter, compared to a
loss of $398,275 in the year ago quarter. The increase reflects improved gross
margins through reduced production costs and reduced S, G, & A expenses
attributable to lower personnel staffing levels than the year ago period.
12
Optronics recorded a net loss of $863,377, a decrease of $380,784, or 31%,
from the loss of $1,244,161 reported in the same period of fiscal 2004. The
decrease is due mainly to cost reductions implemented over the past year. While
cost reductions implemented so far at Optronics will help lower the overall
losses for the Company, achieving profitability in the future will strongly
depend upon Optronic's ability to manufacture and market gallium-nitride
products.
NINE MONTHS ENDED DECEMBER 31, 2004 VS. NINE MONTHS ENDED DECEMBER 31, 2003
Consolidated revenues for the nine months ended December 31, 2004 increased
$2,230,568, or 26%, to $10,661,085 from $8,430,517 in 2003.
Revenues at Cables & Networks increased $2,342,697, or 28% to $10,595,512
from $8,252,815. The increase is attributable to higher revenues in the first
quarter of fiscal 2005 generated by the acquisition from Americable, Inc., which
occurred at the end of the first quarter of fiscal 2004. The Americable assets
contributed no corresponding revenues for the first quarter of fiscal 2004.
Sales to broadband service provider and commercial data networks were $7,147,000
or 67% of revenue, and sales to OEM's were $3,449,000, or 33% of revenue. This
compares to 61% for broadband and commercial data networks and 39% for OEM's in
the prior period. The change reflects an increased acceptance of the Company's
products within the Fiber-to-the-Home market, offset by lower demand from some
OEM customers.
Gross revenues at Optronics increased $167,421, or 76%, to $388,719 from
$221,298 in the same period a year ago. Gross revenues reflect approximately
$323,000 of sales to Cables & Networks for fiber optics products and
subcontracted labor versus approximately $44,000 last year. These sales are
eliminated as intercompany sales in the consolidated financials in each quarter.
The net decrease in revenues is due primarily to lower sales of fiber optics
combined with no sales of optics products, due to this product line being sold
in April 2004.
COST OF SALES AND GROSS PROFIT
Cables & Network's gross profit increased $1,080,645, or 60%, to $2,894,816
from $1,814,171. The increase is due mainly to higher margins generated in the
first quarter of fiscal 2005 generated by the acquisition from Americable, Inc.
Gross margins as a percent of revenues increased from 22% to 27%. The increase
in margin percentage reflects reduced production costs for overhead and
personnel costs absorbed in the prior year while operating and combining
multiple facilities and continued focus on selling higher margin products.
Gross cost of sales at Optronics decreased $850,198, or 40%, to $1,299,256
from $2,149,454. Gross cost of sales reflects approximately $323,000 related to
cost of sales to Cables & Networks for fiber optics products and subcontracted
labor versus approximately $44,000 last year. These costs are eliminated as
intercompany cost of sales in the consolidated financials in each quarter. The
net decrease in cost of sales is due to lower material and production expenses
related to the closure of the optics manufacturing line, lower personnel costs
associated with cost reduction efforts in other product lines, and lower
obsolescence charges.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist of the research and development
expense at Optronics. There have been no research and development expenses at
Cables & Networks. Expenses increased $68,862 to $725,954 from $657,092 in the
prior year period. The increase reflects rental and depreciation costs absorbed
beginning in the third quarter associated with the start up costs of operating a
new semiconductor machine acquired in late 2003.
SELLING, GENERAL, AND ADMINISTRATIVE
Consolidated S, G, & A expenses decreased $40,890 to $4,094,073 from
$4,134,963 in 2003.
Selling, general, and administrative expenses at Cables & Networks
increased $56,453, or 2%, to $2,673,096 from $2,616,643. The majority of the
increase is attributable to expenses generated by the acquisition
13
from Americable, Inc. which occurred at the end of the first quarter of fiscal
2004 and had no expenses in the fiscal 2004 first quarter.
Selling, general, and administrative expenses at Optronics decreased
$97,343, or 6%, to $1,420,977 from $1,518,320. The decrease is due to lower
personnel and related costs associated with cost reductions implemented over
fiscal year 2004.
INCOME (LOSS) FROM OPERATIONS
Consolidated losses from operations decreased $2,070,292, or 42%, to
$2,835,748 from $4,906,040 in 2003.
The income from operations at Cables & Networks was $221,720 versus a loss
of $802,472 in the year ago period. The increased income was mainly the result
of a combination of increased revenues and gross margins as well as reductions
in production and S, G, & A expenses relating to multiple facilities absorbed in
the prior year.
The loss from operations at Optronics was $3,057,468, a decrease of
$1,046,100, or 26%. The decrease in the loss is primarily the result of the
cost reductions implemented over the prior fiscal year, mainly for personnel
reductions, and the elimination of the optics line of business.
OTHER INCOME AND EXPENSE
Consolidated other income and expense increased $272,056 to $324,936 from
$52,880.
Higher income at Cables & Networks in fiscal 2004 was due to management
fee income earned in relation to the acquisition from CSP. Interest expense at
Cables & Networks increased $57,244. The increase is due to a larger outstanding
debt balance mainly related to the acquisition of Americable late in the second
quarter in fiscal 2004.
Other income at Optronics increased $323,427, or 114%, to $607,091 from
$283,664. The sale of the optics manufacturing operations in April 2004 and
related facility income accounted for $240,000 of the increase. Interest income
increased approximately $85,000 due to a higher outstanding debt balance due
from Cables & Networks and increased earnings on cash investments. Interest
expense decreased approximately $6,000 to $68,000.
NET INCOME (LOSS)
Consolidated net loss decreased $2,340,930, or 48%, to $2,514,393, or $.21
cents per share, from $4,855,323, or $.41 cents per share in the year ago
period.
Cables & Networks had net income of $5,226 versus a loss of $946,757 in the
year ago period. The increase reflects additional revenue, improved gross
margins mainly through reduced production costs, reduced S, G, & A expenses
attributable to operating multiple facilities in the prior year, along with
reduced staffing levels.
Optronics recorded a net loss of $2,519,619, a decrease of $1,388,947, or
36%, from the loss of $3,908,566 reported in the same period of fiscal 2004. The
decrease is due mainly to cost reductions relating to personnel implemented over
the past year as well as the gain on sale of the optics manufacturing business
and the elimination of its related expenses.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash and cash equivalents consist primarily of money market
funds, U.S. Government instruments or other government instruments with original
maturities of less than three months.
Cash used in operating activities was $1,296,676 for the nine month period
ending December 31, 2004 compared to $4,382,399 used in the same period in
fiscal 2004. The decrease in the cash used between the two
14
periods reflects a decrease in loss from operations of $2,340,930, achieved by a
combination of increased revenue and profitable operations at Cables & Networks
and decreased costs at Optronics due to cost reduction efforts and a gain on the
sale of the optics manufacturing business at Optronics in April 2004.
We used net cash of $299,373 in investing activities for the nine months
ended December 31, 2004 compared to $2,525,921 used in the same period of the
preceding fiscal year. The use of cash in the nine months ended December 31,
2004 reflects capital expenditures mainly for production equipment at Optronics.
For the nine months ended December 31, 2003, $1,960,000 was used to purchase the
assets of Americable, Inc. We anticipate a total of approximately $400,000 to
$600,000 in capital expenditures in fiscal 2005.
Net cash used in financing activities for the nine months ended December
31, 2004 totaled $176,012. We used $219,632 for the scheduled reduction of debt
and generated $43,620 from the reduction of bond reserve funds. During the same
period in fiscal 2004 we used $286,901 in financing activities, of which
$351,702 was used for the scheduled reduction of debt and $64,801 was generated
from the reduction of bond reserve funds.
We believe we have sufficient funds for operations for at least the next
twelve months.
Our contractual obligations and commitments are summarized in the table
below (in 000's):
Less than After
Total 1 Year 1-3 years 4-5 years 5 years
---------------------------------------------------------
Long-term debt $ 1,592 $ 1,474 $ 58 $ 40 $ 20
Leases 1,320 494 570 231 25
--------------------------------------------------------
Total Contractual Cash
Obligations $ 2,912 $ 1,968 $ 628 $ 271 $ 45
========================================================
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 persuasive evidence of an arrangement exists,
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
15
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
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) carryforwards of
approximately $27,899,000 which expire in fiscal years 2004 to 2024.
Realization of the NOL carryforwards and other deferred tax temporary
differences are contingent on future taxable earnings. The deferred tax asset
was reviewed for expected utilization using a "more likely than not" approach 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. Goodwill should not be amortized but reviewed for
impairment at the fiscal year end 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 and
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 December
31, 2004.
FACTORS THAT MAY INFLUENCE FUTURE RESULTS
- -----------------------------------------
The statements contained in this report on Form 10-Q that are not purely
historical are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934, including, without
limitation, statements regarding the Company's expectations, hopes, beliefs,
anticipations, commitments, intentions and strategies regarding the future.
Forward-looking statements include, but are not limited to, statements contained
in "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations." Actual results could differ from those projected in any
forward-looking statements for the reasons, among others, detailed below. We
believe that many of the risks detailed here are part of doing business in the
industry in which we compete and will likely be present in all periods reported.
The fact that certain risks are characteristic to the industry does not lessen
the significance of the risk. The forward-looking statements are made as of the
date of this Form 10-Q and we assume no obligation to update the forward-looking
statements or to update the reasons why actual results could differ from those
projected in the forward-looking statements.
Unless we generate significant revenue growth, our expenses and negative cash
flow will significantly harm our financial position.
We have not been profitable since fiscal 1990. As of December 31, 2004, we
had an accumulated deficit of $32.3 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
16
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 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.
17
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 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
18
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 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.
If we are unable to adequately protect our intellectual property, third parties
may be able to use our technology, which could adversely affect our ability to
compete in the market.
Our success will depend in part on our ability to obtain patents and
maintain adequate protection of the intellectual property related to our
technologies and products. The patent positions of technology companies,
including our patent position, are generally uncertain and involve complex legal
and factual questions. We will be able to protect our intellectual property
rights from unauthorized use by third parties only to the extent that our
technologies are covered by valid and enforceable patents or are effectively
maintained as trade secrets. The laws of some foreign countries do not protect
intellectual property rights to the same extent as the laws of the U.S., and
many companies have encountered significant problems in protecting and defending
such rights in foreign jurisdictions. We will apply for patents covering our
technologies and products as and when we deem appropriate. However, these
applications may be challenged or may fail to result in issued patents. Our
existing patents and any future patents we obtain may not be sufficiently broad
to prevent others from practicing our technologies or from developing competing
products. Furthermore, others may independently develop similar or alternative
technologies or design around our patents. In addition, our patents may be
challenged, invalidated or fail to provide us with any competitive advantages.
We rely on trade secret protection for our confidential and proprietary
information. We have taken security measures to protect our proprietary
information and trade secrets, but these measures may not provide adequate
protection. While we seek to protect our proprietary information by entering
into confidentiality agreements with employees, collaborators and consultants,
we cannot assure you that our proprietary information will not be
19
disclosed, or that we can meaningfully protect our trade secrets. In addition,
our competitors may independently develop substantially equivalent proprietary
information or may otherwise gain access to our trade secrets.
Our business will suffer if we are unable to protect our patents or our
proprietary rights.
Our success depends to a significant degree upon our ability to develop
proprietary products. However, patents may not be granted on any of our pending
patent applications in the United States or in other countries. In addition,
the scope of any of our issued patents may not be sufficiently broad to offer
meaningful protection. Furthermore, our issued patents or patents licensed to
us could potentially be successfully challenged, invalidated or circumvented so
that our patent rights would not create an effective competitive barrier.
Intellectual property litigation could harm our business.
It is possible that we may have to defend our intellectual property rights
in the future. In the event of an intellectual property dispute, we may be
forced to litigate or otherwise defend our intellectual property assets.
Disputes could involve litigation or proceedings declared by the United States
Patent and Trademark Office or the International Trade Commission. Intellectual
property litigation can be extremely expensive, and this expense, as well as the
consequences should we not prevail, could seriously harm our business.
If a third party claimed an intellectual property right to technology we
use, we might be forced to discontinue an important product or product line,
alter our products and processes, pay license fees or cease certain activities.
We may not be able to obtain a license to such intellectual property on
favorable terms, if at all.
Litigation or third party claims of intellectual property infringement could
require us to spend substantial time and money and adversely affect our ability
to develop and commercialize products.
Our commercial success depends in part on our ability to avoid infringing
patents and proprietary rights of third parties, and not breaching any licenses
that we have entered into with regard to our technologies. Other parties have
filed, and in the future are likely to file, patent applications covering genes
and gene fragments, techniques and methodologies relating to model systems, and
products and technologies that we have developed or intend to develop. If
patents covering technologies required by our operations are issued to others,
we may have to rely on licenses from third parties, which may not be available
on commercially reasonable terms, or at all.
Third parties may accuse us of employing their proprietary technology
without authorization. In addition, third parties may obtain patents that relate
to our technologies and claim that use of such technologies infringes these
patents. Regardless of their merit, such claims could require us to incur
substantial costs, including the diversion of management and technical
personnel, in defending ourselves against any such claims or enforcing our
patents. In the event that a successful claim of infringement is brought against
us, we may be required to pay damages and obtain one or more licenses from third
parties. We may not be able to obtain these licenses at a reasonable cost, or at
all. Defense of any lawsuit or failure to obtain any of these licenses could
adversely affect our ability to develop and commercialize products.
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.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We invest in short-term securities of high credit
issuers with maturities ranging from overnight up to 24 months. The average
maturity of the portfolio does not exceed 12 months. The portfolio includes only
marketable securities with active secondary or resale markets to ensure
liquidity. We have no investments denominated in foreign country currencies and,
therefore, our investments are not subject to foreign exchange risk.
ITEM 4. CONTROLS AND PROCEDURES.
a. Evaluation of disclosure controls and procedures. The Company's chief
executive officer and chief financial officer have concluded that as
of the end of the fiscal period covered by this report the Company's
disclosure controls and procedures (as defined in Exchange Act Rule
13a-14(c)) were sufficiently effective to ensure that the information
required to be disclosed by the Company in the report was gathered,
analyzed and disclosed with adequate timeliness, accuracy and
completeness.
b. Changes in internal controls. There were no changes in the Company's
internal controls over financial reporting during the fiscal period
covered by this report that materially affected, or are likely to
materially affect, the Company's control over financial reporting.
PART II
ITEMS 1 THROUGH 5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 31.1 - Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.1 - Certification required of Chief Executive Officer
and Chief Financial Officer by Section 906 of the Sarbanes Oxley
Act of 2002
(b) Reports on Form 8-K.
None.
21
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APA ENTERPRISES, INC.
2/10/05 /s/ Anil K. Jain
- -------- ----------------
Date Anil K. Jain
President,
Chief Executive Officer
and Chief Financial
Officer (Principal
Executive and Principal
Financial Officer)
2/10/05 /s/ Daniel Herzog
- ------- -----------------
Date Comptroller
(Principal Accounting
Officer)
22