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, 2005.
[_] 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 ENTERPRISES, 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
$19,114,453.
The number of shares of common stock outstanding as of June 17, 2005 was
11,872,331.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of our proxy statement for the annual shareholders meeting to be
held in August 2005 are incorporated by reference into Part III.
1
APA ENTERPRISES, INC.
ANNUAL REPORT ON FORM 10K
TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . 18
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES . . . . . 18
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . 47
ITEM 9A. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . 48
ITEM 9B. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . 48
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . 48
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . 48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS . . . . . . . . . 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . 49
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . . 49
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES . . . . . . . . . 50
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS. . . . . . . . . . . . . 52
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM ON
SCHEDULE . . . . . . . . . . . . . . . . . . . . . . . . . . 53
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
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PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS.
APA Enterprises, Inc. ("APA" or the "Company"), formerly APA Optics, Inc.,
is a Minnesota corporation which was founded in 1979. Our corporate headquarters
is located at 2950 84th Lane N.E., Blaine, MN and our corporate website is
www.apaenterprises.com. The information available on our website is not part of
----------------------
this Report.
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 and sold this product line in April 2004 (see Note C to the
Consolidated Financial Statements included in Item 8 of this Report). The
Company acquired the assets of two companies in calendar 2004 and has deployed
them in a wholly owned subsidiary of the Company known as APA Cables and
Networks, Inc. ("APACN"). APACN is a manufacturer and seller of
telecommunications equipment.
In fiscal year 2005 we formed a wholly-owned subsidiary in India, APA
Optronics (India) Private Limited ("APA India"), to take advantage of lower
manufacturing costs in India. While the prime focus of the subsidiary will be
support of manufacturing activities across the Company's products, it will also
support other business activities, including software development. The Company
will be constructing a larger facility in India in order to accommodate current
and future needs of APA India.
In addition to manufacturing and marketing products, we are actively
seeking to license certain portions of our intellectual property portfolio
related to GaN. While we have had discussions with multiple companies, we have
not entered into any license arrangements as of the date of this Report. Markets
for electronic devices made from these materials are evolving rapidly and we
expect several companies to release prototype and qualified devices this
calendar year, including applications for GaN based transistors for cell phone
base stations.
The Company reports its operations activities in two segments, Optronics
(comprising the activities in Blaine, Minnesota, Aberdeen, South Dakota and
India) and APACN (comprising the activities in Plymouth, Minnesota).
APACN focuses on custom-engineered products for telecommunications
customers, primarily related to cabling management requirements of the
Fiber-to-the-Home ("FTTH") marketplace and in designing and terminating custom
cable assemblies for commercial and industrial original equipment manufacturers
("OEM's"). 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 OEM's. The Americable acquisition diversified our product
offerings, expanded our opportunities for cross-selling our products to former
CSP and Americable customers, and enabled us to offer a more complete technology
solution to all of our customers. To date, APACN has
3
been able to successfully establish itself as a value-added supplier to its
target market of independent telephone companies and cable television operators
as well as OEM's who value a high level of engineering services as part of their
procurement process. APACN has expanded its product offerings and broadened its
customer base since its inception two years ago.
APACN attained profitability in fiscal 2005 through a combination of
increased focus on higher margin products, improved component costs, and
continued consolidation of the acquisitions which resulted in lower personnel
costs and more efficient operations.
Optronics continues to focus upon Gallium Nitride (GaN) related activities.
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 - OPTRONICS SEGMENT
Optronics develops, manufactures and markets advanced products for UV
(ultraviolet) 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 facility in Blaine, Minnesota. The Aberdeen facility provides
manufacturing support for APACN operations. Certain products are purchased from
contract manufacturers.
Products
Our current products are described below.
- Fiber Optics Components - Our fiber optics activities are limited to
-------------------------
specification, procurement and testing of various fiber optics
components including planar waveguide lightwave circuit optical
splitters for FTTH networks; thin film wavelength division multiplexer
("WDM") components for use in Cable TV, telecommunications and free
space optics systems. We market and sell most of these components
mainly through the sales channels of APACN.
- Ultraviolet (UV) Detector-Based Products We currently manufacture
-------------------------------------------
value-added products built around UV detectors fabricated by Optronics
and procured externally. These products are:
- SunUV(R) Personal UV Monitor The SunUV(R) Personal UV Monitor
-------------------------------
(formerly, SunUVWatch(R)) is a personal ultraviolet (UV)
radiation 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 in the
USA and Europe.
Sales have been limited due mainly to manufacturing issues. We
have now resolved the manufacturing issues with the plastic
models and will be focusing upon the sales of these models. The
metal units remain in low volume production while we continue to
work with our current vendor as well as seek alternate suppliers.
In order to serve the market needs, we are developing an
additional clip-on plastic model without changing the
functionality of the key components, based upon the core
competencies of our current supplier. We anticipate introduction
of this model during the second quarter of fiscal year 2006.
4
In addition to the Personal UV Monitor, we continue to explore
developing additional UV detection products for the consumer
market to enhance our product offerings in this area. The
personal monitor is a watch-sized device designed to be carried
and used by an individual. An instrument designed to provide the
UV Index to multiple persons in a larger area is one of the
concepts being pursued.
- Industrial UV Meter Optronics' new 4-band "Profiler M"
---------------------
radiometer, created for the printing and coating industries that
use UV curing, was announced to the market in October 2004 and is
now in production. Production units became available shortly
after the end of the 4th quarter of fiscal 2005. This instrument
measures the intensity and distribution of four UV bands inside
curing chambers. This information is important to the setup and
monitoring of the curing process. Data from the instrument can be
transferred to a computer for analysis using special software
supplied as part of the purchase. A series of field tests
performed in the last quarter of fiscal year 2005 by UV curing
equipment makers and others working in this field produced very
positive feedback. Marketing and sales activities for the
Profiler M are now focused on setting up domestic and
international distributors, and we anticipate that an initial
group of distributors will be in place by the end of the first
quarter of fiscal 2006. Supporting marketing activities include
exhibiting at trade shows for the industry and participation in
technical conferences and journals that can showcase the
advantages of the Profiler M.
Research and development efforts at Optronics are currently focused on
the products described below.
Compound Semiconductor Electronic Devices In the 3rd quarter of fiscal year
-----------------------------------------
2005 we completed the installation and startup of our multiwafer (6 wafers,
2 inches in diameter) Metal Organic Chemical Vapor Deposition System
(MOCVD). This system is located in a leased facility that provides
state-of-the-art electrical, optical, and structural characterization
capability. The commissioning of the system has enabled us to phase out the
crystal growth work in the Blaine facility, satisfying our internal wafer
demand, while providing additional capability for external epi foundry
work. This approach eliminated potential leasehold improvement costs and
characterization equipment acquisition expenses which would have been
required to locate the system in our Blaine plant. Currently, our new MOCVD
system is providing us with state-of-the-art epitaxial layers on 2-inch
substrates. We have also made modifications in the system to grow epitaxial
layers on 3-inch substrates.
We are currently sampling epi wafers to several potential customers
and are actively discussing opportunities to leverage our intellectual
property position through joint development work and licensing. We are
working to use our core capability and continue to build our intellectual
property position in order to align ourselves with those having
complementary capability in this area. This should allow us to apply our
core expertise in return for products that enable our development of high
performance, high power amplifiers. Transistors made from the materials
that we are growing have the potential to simplify amplifier architecture,
dramatically improve amplifier efficiency, and increase bandwidth and power
of cellular base station and military system power amplifiers while
decreasing overall cost.
We continue to develop products in this area by fully utilizing our
internal capabilities while working with other interested companies for
development, manufacturing and marketing. These interested companies have
provided vital feedback showing Optronic's epi material quality in line
with our expectations and among the industry's best. We have continued to
work with others to
5
better characterize requirements for reliable transistor build.
Opportunities to team with other companies in submission of government
contract proposals are being evaluated based on relevance to our long term
strategic interests.
Marketing and Distribution
We market dense wavelength division multiplexer ("DWDM") products through
our APACN sales channels. Additionally, we use manufacturer's representatives
and distributors domestically. 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 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 across our product lines will depend
largely on the performance of our devices, our ability to innovate and develop
competitive 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.
Electronic Instrumentation and Technology, Inc. ("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 Optronics, 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 each of 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 FTTH, large
enterprise, and OEM markets. APACN maintains
6
a range of engineering and technical knowledge in-house that works closely with
customers to develop, customize and enhance products from design through
production. Most products are produced at APACN's plant in Plymouth, Minnesota
with support from our facility in Aberdeen, South Dakota. Certain products are
purchased from contract manufacturers or other sources. APACN produces these
products on both a quick-turn and scheduled delivery basis.
Products
- Fiber Distribution Central Office Frame Systems APACN Fiber Distribution
--------------------------------------------------
Systems ("FDS") 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. In the 144-port
count configuration, APACN is the industry leader for density, saving the
customer expensive real estate in the central office. 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.
- Fiber Distribution Outside Plant Cabinets APACN's Fiber Scalability Center
------------------------------------------
("FSC") is a modular and scalable fiber distribution platform designed for
"grow-as-you-go cost containment" as fiber goes beyond the control of a
central office and closer to the user. This allows rollout of FTTH services
by communication service providers without a large initial expense. Each
outside plant cabinet stores feeder and distribution splices, splitters,
connectors and slack cable neatly and compactly, utilizing field-tested
designs to maximize bend radius protection, connector access, ease of cable
routing and physical protection, thereby minimizing the risk of fiber
damage. The FSC product has been designed to scale with the application
environment as demand requires and to reduce service turn-up time for the
end-user.
- Optical Components APACN packages optical components for signal coupling,
-------------------
splitting, termination, multiplexing, demultiplexing and attenuation to
seamlessly integrate with the APACN FDS. This value-added packaging allows
the customer to source from a single supplier and reduce space
requirements. The products are built and tested to meet the strictest
industry standards ensuring customers 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.
Industry-standard 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. In
addition, APACN's engineering services team works alongside the engineering
design departments of our OEM customers to design and manufacturer custom
solutions for both in-the-box as well as network connectivity assemblies
specific to that customer's product line.
Marketing and Distribution
APACN markets its products in the United States through a network of
manufacturer representative organizations and a direct 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
7
customer service and principally brings new products to markets based upon the
specific requests of its customers.
Competition
Competitors for the APACN FDS and FSC include but are not limited to ADC
Telecommunications, Inc., Corning Cabling Systems, Inc., OFS (Furukawa Electric
North America, Inc.), Telect Inc., Fiber Optic Network Solutions (FONS)
Corporation, Alcatel, Inc., and Tyco Electronics, Inc. Nearly all of these
firms are substantially larger than APACN and as a result may be able to procure
pricing for necessary components and labor 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 MATERIALS AND OUTSOURCED LABOR
Numerous purchased materials, components, and labor, are used in the
manufacturing of the Company's products. Most of these are readily available
from multiple suppliers. However, 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, 2005, we had 14 patents issued in the United States and two
pending patent applications inside and outside the United States. All of our
patents relate to the business of our Optronics segment. We believe our success
heavily depends upon technology we develop internally. We have made significant
progress toward improving the active, strategic management of our intellectual
property portfolio. The markets for our products are characterized by rapid
change and continual innovation that could render our technology and patents
obsolete before their statutory protection expires. Several of the companies we
compete with have greater research and development resources than we do and
could develop technologies and products that are similar or even superior to
ours without infringing on our intellectual property.
ENVIRONMENTAL COMPLIANCE
Because we handle a number of chemicals in our operations, we must comply
with federal, state and local laws and regulations regarding the handling and
disposal of such chemicals. To date the cost of such compliance has not been
material.
MAJOR CUSTOMERS
No single customer accounted for more than 10% of the Company's sales in
fiscal 2005 or 2004. Two major customers accounted for 21% and 15% of the
Company's sales for the year ended March 31, 2003.
8
BACKLOG
Backlog reflects purchase order commitments for our products received from
customers that have yet to be fulfilled. Backlog orders are generally shipped
within three months. Optronics had a backlog of $7,200 as of March 31, 2005,
$6,490 as of March 31, 2004 and had no backlog at March 31, 2003. APACN had a
backlog of $429,180 as of March 31, 2005, $856,700 as of March 31, 2004, and
$389,000 as of March 31, 2003.
RESEARCH AND DEVELOPMENT
During the fiscal years ended March 31, 2005, 2004, and 2003, Optronics
spent approximately $1,104,000, $949,000, and $1,212,000, respectively, on
research and development, mainly for the development of compound semiconductor
electronic devices. This segment had no research activities sponsored by
customers in fiscal years 2005, 2004 or 2003. 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 has made no significant
expenditures for research and development from its inception through March 31,
2005.
EMPLOYEES
As of March 31, 2005, Optronics had 44 full-time employees in the combined
locations of Blaine, MN, Aberdeen, SD, and India. As of March 31, 2005, APACN
had 83 full-time employees, mainly in Plymouth, MN. Our future performance is
dependent on our ability to attract, train, and retain highly qualified
personnel. We have no employment agreements with our employees. The loss of one
or more key employees could negatively impact the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The statements contained in this Report on Form 10-K that are not purely
historical are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934, including, without
limitations, statements regarding the Company's expectations, hopes, beliefs,
anticipations, commitments, intentions and strategies regarding the future.
Forward-looking statements include, but are not limited to, statements contained
in "Item 1. Business" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations." Actual results could differ from
those projected in any forward-looking statements for the reasons, among others,
detailed below. We believe that many of the risks detailed here are part of
doing business in the industry in which we compete and will likely be present in
all periods reported. The fact that certain risks are characteristic to the
industry does not lessen the significance of the risk. The forward-looking
statements are made as of the date of this Report as 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.
9
OUR RESULTS OF OPERATIONS
----------------------------
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, 2005, we had
an accumulated deficit of $33.2 million. We may incur operating losses for the
foreseeable future, and these losses may be substantial. Further, we may
continue to incur negative operating cash flow in the future. We have funded our
operations primarily through the sale of equity securities and borrowings. We
have significant fixed expenses and we expect to continue to incur significant
and increasing manufacturing, sales and marketing, product development and
administrative expenses. As a result, we will need to generate significantly
higher revenues while containing costs and operating expenses if we are to
achieve profitability.
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 in June 2003 and integrated them with the assets of CSP. We
acquired assets in India in March 2005 as part of a strategy to take advantage
of lower manufacturing costs in India. 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.
OUR PRODUCTS AND INTRODUCTION OF NEW PRODUCTS
---------------------------------------------------
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 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
10
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.
We may make additional strategic changes in our product portfolio, but our
strategic changes and restructuring programs may not yield the benefits that we
expect.
In connection with the downturn in the communications industry we have
divested or closed product lines and businesses that either were not profitable
or did not match our new strategic focus. As necessary, we may make further
divestitures or closures of product lines and businesses. We may also make
strategic acquisitions.
The impact of potential changes to our product portfolio and the effect of
such changes on our business, operating results and financial condition, are
unknown at this time. If we acquire other businesses in our areas of strategic
focus, we may have difficulty assimilating these businesses and their products,
services, technologies and personnel into our operations. These difficulties
could disrupt our ongoing business, distract our management and workforce,
increase our expenses and adversely affect our operating results and financial
condition. In addition to these integration risks, if we acquire new
businesses, we may not realize all of the anticipated benefits of these
acquisitions, and we may not be able to retain key management, technical and
sales personnel after an acquisition. Divestitures or elimination of existing
businesses or product lines could also have disruptive effects and may cause us
to incur material expenses.
MANUFACTURING AND OPERATIONS
------------------------------
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.
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,
11
- 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.
We are dependent upon skilled employees; if we lose the services of our key
personnel our ability to execute our operating plan, and our operating results,
may suffer.
Our future performance depends in part upon the continued service and
contributions of key management, engineering, sales and marketing personnel,
many of whom would be difficult to replace quickly. If we lose any of these key
personnel, our business, operating results and financial condition could be
materially adversely affected or delay the development or marketing of existing
or future products. Competition for these personnel is intense and we may not
be able to retain or attract such personnel. Our success will depend in part
upon our ability to attract and retain additional personnel with the highly
specialized expertise necessary to generate revenue and to engineer, design and
support our products and services.
MARKETS AND MARKET CONDITIONS
--------------------------------
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. 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.
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.
Declining average selling prices for our fiber optic products will require us to
reduce production costs to effectively compete and market these products.
12
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 manufacturing and 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.
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.
Conditions in global markets could affect our operations.
We have acquired facilities in India which will support design and
production of our products. We also source products and labor from off shore
suppliers. We expect that our foreign operations and reliance on off shore
sourcing will increase in the future. As such we are subject to the risks of
conducting business internationally. Those risks include but are not limited to:
- local economic and market conditions;
- political and economic instability;
- fluctuations in foreign currency exchange rates;
- tariffs and other barriers and restrictions;
- geopolitical and environmental risks; and
- changes in diplomatic or trade relationships and natural disasters.
We cannot predict whether our business operations and reliance in these
markets will be affected adversely by these conditions.
OUR CUSTOMERS
--------------
13
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.
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.
Customer payment defaults could have an adverse effect on our financial
condition and results of operations.
As a result of competitive conditions in the telecommunications market,
some of our customers may experience financial difficulties. 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.
PERFORMANCE REQUIREMENTS AND PERFORMANCE OF OUR PRODUCTS
--------------------------------------------------------
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.
Product defects could cause us to lose customers and revenue or to incur
unexpected expenses.
If our products do not meet our customers' performance requirements, our
customer relationships may suffer. Also, our products may contain defects. Any
failure or poor performance of our products could result in:
- delayed market acceptance of our products;
- delays in product shipments;
- unexpected expenses and diversion of resources to replace defective
products or identify the source of errors and correct them;
14
- damage to our reputation and our customer relationships;
- delayed recognition of sales or reduced sales; and
- product liability claims or other claims for damages that may be
caused by any product defects or performance failures.
INTELLECTUAL PROPERTY
----------------------
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 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.
15
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.
EXECUTIVE OFFICERS
The following is a list of our executive officers, their ages, positions and
offices as of March 31, 2005.
NAME AGE POSITION
Dr. Anil K. Jain 59 Chief Executive Officer/President/Chief
Financial Officer of APA Enterprises, Inc.
Cheri Beranek Podzimek 42 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.
16
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 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 L of Notes to the Consolidated
Financial Statements included under Item 8 of this Report. 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 F of Notes to the Consolidated
Financial Statements included under Item 8 in this Report for further
information regarding the financing of this facility.
APA 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 lease term commenced on December 1, 2004 and ends on
November 30, 2007.
APA India currently leases, on a month to month basis, a 500 square meter
facility in a special export zone near New Delhi, India. The Company is
planning to construct a 1,000 square meter facility at the same location.
Construction is to begin and to be completed in fiscal 2006.
APACN subleases a 37,000 square foot facility in Plymouth, Minnesota
consisting of office, manufacturing and warehouse space. This lease runs through
June, 2006.
ITEM 3. LEGAL PROCEEDINGS.
On May 23, 2005 APA Enterprises, Inc. was served with a complaint filed in
U.S. District Court, District of Virginia by Electronic Instrumentation and
Technology, Inc. ("EIT"). EIT alleges that we obtained certain confidential
information from EIT and have used such information for unauthorized purposes.
EIT is requesting money damages of unspecified amount and equitable relief. We
believe that EIT's claims are without merit and intend to vigorously defend
ourselves.
17
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, RELATED STOCKHOLDER MATTERS,
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on The Nasdaq National Market under the symbol
"APAT." The following table sets forth the quarterly high and low sales prices
for our common stock for each quarter of the past two fiscal years as reported
by Nasdaq.
FISCAL 2005 HIGH LOW
----------- ----- -----
Quarter ended June 30, 2004 $3.75 $2.22
Quarter ended September 30, 2004 2.28 1.37
Quarter ended December 31, 2004 2.48 1.37
Quarter ended March 31, 2005 2.21 1.36
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
There were approximately 348 holders of record of our common stock as of
March 31, 2005.
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.
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
Statements of Operations Data:
Revenues . . . . . . . . . . . . . . . . $13,886,486 $11,909,465 $ 436,157 $ 595,955 $ 885,740
Net loss . . . . . . . . . . . . . . . . (3,420,038) (6,535,147) (5,009,434) (4,738,199) (3,261,446)
Net loss per share, basic and diluted. . (.29) (.55) (.42) (.40) (.29)
Weighted average number of shares, basic
and diluted. . . . . . . . . . . . . . . 11,872,331 11,872,331 11,873,914 11,896,976 11,180,165
Balance Sheet Data:
Total assets . . . . . . . . . . . . . . $22,074,014 $26,083,516 $31,884,526 $36,396,410 $41,914,451
Long-term obligations, including current
portion. . . . . . . . . . . . . . . . . 1,578,836 1,811,759 2,173,682 2,461,363 2,836,831
Shareholders' equity . . . . . . . . . . 18,922,161 22,363,061 28,918,943 33,504,917 38,280,299
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.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Optronics 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 "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.
APACN, which is a wholly owned subsidiary of APA Enterprises, 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 persuasive evidence of an arrangement exists,
the product has been delivered, the fee is fixed, 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
19
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, 2005, we have
recorded a full valuation allowance of $12,167,207 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 $31,531,000 which expire in fiscal years 2006 to 2025.
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 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. Goodwill is not 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 2005 and 2004
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, 2005.
New Accounting Pronouncement
------------------------------
In December 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123 (revised 2004)(SFAS 123R), 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 April 1, 2006. Management has not
yet determined the impact.
20
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) $1,582 $ 1,474 $ 48 $ 40 $ 20
Operating leases 1,234 495 507 207 25
----------------------------------------------------
Total Contractual Cash
Obligations $2,816 $ 1,969 $ 555 $ 247 $ 45
====================================================
(1) Includes fixed interest ranging from 10.00 to 10.62%.
RESULTS OF OPERATIONS
2005 COMPARED TO 2004
---------------------
REVENUES
Consolidated revenues for the fiscal year ended 2005 increased 17% to
$13,886,000 from sales of $11,909,000 in 2004. Consolidated cost of sales
decreased to $11,198,000 in 2005 from $11,914,000 in 2004. Consolidated
operating losses decreased to $3,795,000 in 2005 compared to $6,558,000 in 2004.
Consolidated net losses decreased to $3,420,000 in 2005 or $.29 per diluted
share compared to $6,535,000 or $.55 in 2004.
APACN's revenues for the year ended 2005 were $13,801,000 versus
$11,691,000 in the year ended 2004, an increase of 18%. The increase is
primarily attributable to higher revenues in the first quarter of fiscal 2005
generated by the acquisition of 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 providers and commercial data networks, which include APACN custom fiber
distribution systems, associated cable assemblies and optical components, were
$9,483,000 or 69% of revenue. Sales to OEM's, consisting primarily of fiber
optic and copper cable assemblies produced to customer design specifications,
were $4,317,000, or 31% of revenue. This compares to 60% for broadband and
commercial data networks and 40% for OEM's in the prior year. The change in mix
is partially a result of an increased acceptance of the Company's products
within the FTTH market, offset by lower demand from some OEM customers. 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 2006 to increase slightly compared to fiscal 2005.
Gross revenues at Optronics for the year ended 2005 were $490,000, compared
to $409,000 in 2004, an increase of 20%. Gross revenues reflect approximately
$404,000 of sales to APACN for fiber optics products and subcontracted labor
versus $191,000 last year. These sales are eliminated as intercompany sales in
the consolidated financial statements. The Company had no sales of its optics
products in 2005 versus $92,000 in the prior year due to the sale of that
product line in April 2004. Sales of UV monitors were $28,000 versus $23,000 in
the prior year period, and sales of foundry services were $41,000 in 2005.
Optronics' revenue growth is dependent upon our ability to successfully
establish manufacturing reliability for our GaN products and successful selling
into our targeted market segments.
21
COST OF SALES AND GROSS PROFIT
APACN's gross profit for the year ended in 2005 was $3,821,000 as compared
to $2,660,000 in 2004. The increase is due mainly to higher margins generated in
the first quarter of fiscal 2005 generated by the acquisition of Americable
assets. Gross profit percent for APACN for the year ended March 31, 2005 was 28%
versus 23% in the prior year. The increase in margin percentage reflects reduced
production costs, resulting from consolidating multiple facilities, and a focus
on selling higher margin products. We expect gross margin percentage for APACN
in fiscal 2006 to be about the same as in fiscal 2005.
Optronic's net cost of sales for the year ended 2005 were $1,218,000 as
compared to $2,883,000 in 2004. Personnel related costs decreased approximately
$780,000 due to staff reductions in response to demand and the sale of the
optics product line in April 2004. In addition, inventory writeoffs decreased
approximately $125,000 and other production expenses decreased approximately
$140,000 due to cost reductions implemented in fiscal 2004 and 2005 in the
optics and GaN product lines.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses consist solely of the research
and development expense at Optronics. There have been no research and
development expenses at APACN. R&D expenses increased by approximately $155,000,
to $1,104,000 for the year ended March 31, 2005 as compared to $949,000 for the
year ended March 31, 2004. This represents an increase of 16% from 2004. The
majority of the increase reflects additional rental and depreciation costs
associated with operating a semiconductor machine, beginning in the third
quarter of fiscal 2005, as well as personnel costs associated with this start up
and HFET development. We expect fiscal 2006 R&D expenses at Optronics to
increase slightly from fiscal 2005, and we expect no significant R&D expense at
APACN.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administration ("S, G & A") expenses
decreased approximately $226,000, or 4%, to $5,379,000 in 2005 from $5,605,000
in 2004.
S, G & A expenses at APACN were $3,487,000 for the year ending March 31,
2005 as compared to $3,615,000 in 2004. The majority of the difference is
attributable to expenses generated by the assets acquired from Americable which
occurred at the end of the first quarter of fiscal 2004. Consolidation of
facilities beginning in fiscal 2004 also contributed to lower costs in fiscal
2005. We expect S, G & A to increase in fiscal 2006 from fiscal 2005 as we
grow our sales activities in order to increase revenue.
S, G & A expenses at Optronics decreased $97,000 to $1,893,000 for the year
ending March 31, 2005, from $1,990,000 in the prior period. The decrease is
attributable to a reduction in personnel expense of $260,000 in 2005, which was
offset in part by higher outside services in 2005 related to India development
expenses, along with higher facility expenses in 2005 (which consists of
facility expenses included in cost of sales in 2004 but reclassed as S, G, & A
in 2005) as this portion of the facility is no longer used for manufacturing
operations. We expect S, G, & A in fiscal 2006 to remain about the same as S, G
& A in fiscal 2005.
22
OTHER INCOME AND EXPENSE
Other income at APACN decreased approximately $15,000 to $8,000 in fiscal
2005 as compared to $23,000 in fiscal 2004. The difference is due mainly to
higher income for management fees earned in fiscal 2004 related to the CSP
acquisition. Other expense at APACN decreased $9,000 to $303,000 for the year
ending March 31, 2005 versus $312,000 in the prior year period. Interest expense
increased $64,000 due to a higher debt balance outstanding over the year. That
was offset by a reduction of $77,000 in asset disposal charges absorbed in the
prior year.
Other income at Optronics increased approximately $335,000 to $765,000 in
fiscal 2005 from $430,000 in 2004. Interest income increased approximately
$100,000 due mainly to higher interest income earned on cash equivalents. A gain
of approximately $196,000 was recognized on the sale of the optics product line
in April 2004, and $39,000 in facility related rental was also generated due to
this sale. Other expenses decreased approximately $24,000 to $91,000 from
$115,000 in 2004, due mainly to the absence of expenses related to assets
disposed of in the prior year.
NET LOSS
Consolidated net loss decreased $3,115,000 to $3,420,000, or $.29 cents per
share, as compared to a net loss of $6,535,000, or $.55 cents per share, in
fiscal 2004.
Net income for APACN for the year ending 2005 was $36,000 versus a loss of
$1,245,000 in fiscal 2004. The income is due mainly to increased revenue,
reduced duplicate and one time expenses, lower personnel costs and more
efficient operations achieved in the consolidation of the CSP and Americable
assets.
Net loss for Optronics for the year ending 2005 was $3,456,000, a decrease
of $1,834,000, or 35%, from $5,290,000 in 2004. The decreased losses are
primarily the result of lower personnel and production expenses from cost
reduction efforts implemented in fiscal 2004 and 2005, combined with the gain on
sale of the optics business and the related savings of expense related to that
product line.
2004 COMPARED TO 2003
---------------------
REVENUES
Consolidated revenues for the year ended 2004 increased 27-fold to
$11,909,000 from sales of $436,000 in 2003. Consolidated cost of sales increased
to $11,914,000 in 2004 from $2,803,000 in 2003. Consolidated operating losses
increased to $6,558,000 in 2004 compared to $5,329,000 in 2003. Consolidated net
losses increased to $6,535,000 in 2004 or $.55 per diluted share compared to
$5,009,000 or $.42 in 2003.
Optronics' gross revenues for the year ended 2004 were $409,000 as compared
to $202,000 in 2003. This includes $191,000 of sales to APACN for fiber optics
products and subcontracted labor. These sales are eliminated as intercompany
sales in the consolidated financial statements. Sales of its optics products
were $92,000 versus $103,000 in 2003. This product line was discontinued in
January 2004 and subsequently sold in April 2004. Sales of fiber optics products
were $85,000 in 2004 compared to $77,000 in 2003. Sales of GaN related products
were $24,000 in 2004 versus $13,000 in 2003. The
23
majority of the GaN sales were to one customer for the SunUV(R) Personal UV
Monitor. Other revenue was $18,000 in 2004 compared to $10,000 in 2003.
APACN's revenues for the year ended 2004 were $11,691,000 versus $234,000
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
$7,024,000, or 60% of total sales. Sales to OEM's, consisting primarily of fiber
optic and copper cable assemblies produced to customer design specifications,
were $4,668,000, 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.
COST OF SALES AND GROSS PROFIT
Optronics cost of sales for the year ended 2004 were $2,883,000 as compared
to $2,627,000 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 $2,660,000 as compared to
$58,000 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 assets acquired
from CSP and Americable into one operation.
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
APACN). Expenses decreased by $263,000, to $949,000 for the year ended 2004 as
compared to $1,212,000 for the year ended 2003. This represents a decrease of
22% from 2003. The decrease is primarily due to decreased research activity
(resulting in reduction in salaries and related personnel expenses) related to
fiber optics products. The majority of the decreases are due to the reduction in
salaries and other related personnel expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
S, G & A expenses at Optronics increased approximately $358,000 to
$1,990,000 in 2004 from $1,632,000 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 assets.
24
S, G & A expenses at APACN were $3,615,000 for the year ended March 31,
2004 as compared to $118,000 in 2003. S, G & A in 2004 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.
OTHER INCOME AND EXPENSE
Other income at Optronics decreased $4,000 to $430,000 in fiscal 2004 from
$434,000 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 $2,000 to $115,000
from $113,000 in 2003.
Other income at APACN increased $20,000 to $23,000 in fiscal 2004 as
compared to $3,000 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 $83,000 to $85,000 for the year
ended 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 $1,526,000 to $6,535,000,
or $.55 cents per share, as compared to a net loss of $5,009,000, or $.42 cents
per share, in fiscal 2003. The increase in losses is due primarily to the net
loss contributed by APACN.
Net loss for Optronics for the year ended 2004 was $5,290,000 an increase
of $341,000 or 7%, from $4,949,000 in 2003. The increased loss is primarily the
result of a combination of higher cost of sales and S, G, & A expenses.
Net loss for APACN for the year ended 2004, including interest expense due
to APA (the parent), was $1,245,000, versus $60,000 in fiscal 2003. The
difference is due mainly to the fact that 2003 expenses include only several
days of expense from the CSP acquisition in March, 2003. The increase in net
loss is partly attributable to the expenses related to integrate the
acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2005, our principal source of liquidity was our cash, cash
equivalents and short-term investments, which totaled $10,813,000 compared to
$13,545,000 at March 31, 2004.
We used $2,026,000 to fund operating activities during fiscal 2005 compared
to $5,596,000 in fiscal 2004, and $4,659,000 in fiscal 2003. In all three years
the largest use of cash in operating activities was the funding of the net
losses. The net loss for fiscal 2005 decreased to $3,420,000 from $6,535,000 in
fiscal 2004. The primary factors contributing to the decreased loss from fiscal
2004 to 2005 were the profitable operations at APACN and reduced expenses at
Optronics. The significant factors contributing to the increased loss from
fiscal 2003 to 2004 were the losses incurred at APACN.
In fiscal 2005 we used $470,000 in investing activities, including $49,000
used to purchase assets through APA Optronics (India) Private Limited (See Note
B of Notes to the Consolidated Financial Statements included under Item 8 of
this Report). We also invested $421,000 to purchase property and equipment,
mainly for production equipment at Optronics. In fiscal 2004 we used
25
$2,753,000 in investing activities including $1,960,000 used to purchase the
assets of Americable. We also invested $786,000 to purchase property and
equipment, mainly for the purchase of the MOCVD system. In fiscal 2003 we used
$3,828,000 in investing activities to purchase CSP. We invested $359,000 in
property and equipment and $84,000 in patents, for a net decrease in cash from
investment activities of $4,272,000.
In fiscal 2005, we used $235,000 in financing activities, primarily to pay
down long-term debt relating to our facility in Aberdeen, South Dakota. In
fiscal 2004, we used $342,000 in financing activities primarily to pay down
long-term debt relating to our facility in Aberdeen, South Dakota. In fiscal
2003, we used $440,000 in financing activities primarily to pay down long-term
debt also related to the Aberdeen facility.
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, 2005, the total principal outstanding under bonds issued
by the State of South Dakota was $1,405,000. Interest on the bonds ranges from
5.8% to 6.75%, and the bonds are due in various installments between 2005 and
2016. These bonds require compliance with certain financial covenants. We were
out of compliance with these covenants during all of fiscal 2003, 2004 and 2005.
For further information regarding these bonds, see Note F of Notes to the
Consolidated Financial Statements included under Item 8 of this Report. On April
14, 2004 the Company sold its optics manufacturing operations, as discussed in
Note C to the Consolidated 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 Aberdeen Development Corporation ("ADC") in
South Dakota and to accelerate the loan payment schedule to maturity in fiscal
2011 from 2016. In June 2005, the Company sold a portion of the land in Aberdeen
acquired from ADC back to ADC in consideration of cancellation of the remaining
$120,000 due on the loan. Accordingly, the loan from ADC is fully satisfied. See
Note O to the Consolidated Financial Statements included under Item 8 of this
Report.
Our capital requirements are dependent upon several factors, including
market acceptance of our products, the timing and 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 cash equivalents. The portfolio includes only marketable securities with
active secondary or resale markets to ensure
26
liquidity. We have no investments denominated in foreign country currencies and,
therefore, our investments are not subject to foreign exchange risk. See "Cash
and Equivalents" 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, 2005:
Quarter Ended
--------------------------------------------------------------
June 30, September 30, December 31, March 31,
2003 2003 2003 2004
--------------- --------------- -------------- ------------
Statement of Operations Data
Net revenue . . . . . . . . . $ 1,570,976 $ 3,557,586 $ 3,301,955 $ 3,478,948
Gross profit (loss) . . . . . (300,889) 199,417 (12,513) 109,400
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)
Quarter Ended
--------------------------------------------------------------
June 30, September 30, December 31, March 31,
2004 2004 2004 2005
--------------- --------------- -------------- ------------
Statement of Operations Data
Net revenue . . . . . . . . . $ 3,687,718 $ 3,668,068 $ 3,305,299 $ 3,225,401
Gross profit. . . . . . . . . 600,875 782,264 601,140 704,031
Net loss. . . . . . . . . . . (702,836) (883,047) (928,510) (905,645)
Net loss per share. . . . . . $ (0.06) $ (0.07) $ (0.08) $ (0.08)
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors and Shareholders
APA Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of APA
Enterprises, Inc. and subsidiaries as of March 31, 2005 and 2004, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended March 31, 2005. 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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
controls over financial reporting. Our audit included consideration of internal
controls over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion of the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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
pre-sent fairly, in all material respects, the consolidated financial position
of APA Enterprises, Inc. and subsidiaries as of March 31, 2005 and 2004 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
April 25, 2005
28
APA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31,
ASSETS 2005 2004
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $10,813,492 $13,544,910
Accounts receivable, net of allowance for uncollectible
accounts of $57,107 and $49,038 at
March 31, 2005 and 2004 1,446,248 1,787,541
Inventories 1,270,653 1,574,188
Prepaid expenses 264,372 174,503
Bond reserve funds 131,548 133,865
----------- -----------
Total current assets 13,926,313 17,215,007
PROPERTY, PLANT AND EQUIPMENT, net 3,946,998 4,550,956
OTHER ASSETS
Bond reserve funds 337,091 332,433
Goodwill 3,422,511 3,422,511
Other 441,101 562,609
----------- -----------
4,200,703 4,317,553
----------- -----------
$22,074,014 $26,083,516
=========== ===========
The accompanying notes are an integral part of these financial statements.
29
APA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
MARCH 31,
LIABILITIES AND
SHAREHOLDERS' EQUITY 2005 2004
------------- -------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,471,036 $ 1,637,923
Accounts payable 814,005 1,050,690
Accrued compensation 568,950 645,293
Accrued expenses 190,062 212,713
------------- -------------
Total current liabilities 3,044,053 3,546,619
LONG-TERM DEBT, net of current maturities 107,800 173,836
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, 2005 and 2004 118,723 118,723
Additional paid-in capital 51,960,084 51,980,946
Accumulated deficit (33,156,646) (29,736,608)
------------- -------------
Total shareholders equity 18,922,161 22,363,061
------------- -------------
$ 2,074,014 $ 26,083,516
============= =============
The accompanying notes are an integral part of these financial statements.
30
APA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31,
2005 2004 2003
------------ ------------ ------------
Revenues $13,886,486 $11,909,465 $ 436,157
Cost of sales 11,198,176 11,914,050 2,802,597
------------ ------------ ------------
Gross profit (loss) 2,688,310 (4,585) (2,366,440)
Operating expenses
Research and development 1,103,972 948,737 1,212,219
Selling, general and administrative 5,379,483 5,605,177 1,750,807
------------ ------------ ------------
6,483,455 6,553,914 2,963,026
------------ ------------ ------------
Loss from operations (3,795,145) (6,558,499) (5,329,466)
Other income 484,498 225,719 436,925
Other expense (105,253) (200,314) (115,893)
------------ ------------ ------------
379,245 25,405 321,032
------------ ------------ ------------
Loss before income taxes (3,415,900) (6,533,094) (5,008,434)
Income taxes 4,138 2,053 1,000
------------ ------------ ------------
Net loss $(3,420,038) $(6,535,147) $(5,009,434)
============ ============ ============
Net loss per share
Basic and diluted $ (0.29) $ (0.55) $ (0.42)
============ ============ ============
Weighted average shares outstanding
Basic and diluted 11,872,331 11,872,331 11,873,914
============ ============ ============
The accompanying notes are an integral part of these financial statements.
31
APA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31,
Undesignated
shares Preferred stock Common stock Additional
------------ --------------------------- ----------------------------- paid-in
Shares Amount Shares Amount capital
------------
Balance at March 31, 2002 - - $ - 11,875,881 $ 118,759 $51,578,185
Common stock repurchased - - - (3,550) (36) (5,955)
Aberdeen land grant - - - - - 67,760
Options issued as compensation - - - - - (9,309)
Warrants issued - - - - - 371,000
Net loss - - - - - -
------------ ------------ ------------- ------------- -------------- ------------
Balance at March 31, 2003 - - - 11,872,331 118,723 52,001,681
Options issued as compensation - - - - - (20,735)
Net loss - - - - - -
------------ ------------ ------------- ------------- -------------- ------------
Balance at March 31, 2004 - - - 11,872,331 118,723 51,980,946
Options issued as compensation - - - - - (20,862)
Net loss - - - - - -
------------ ------------ ------------- ------------- -------------- ------------
Balance at March 31, 2005 - - - 11,872,331 $ 118,723 $51,960,084
============ ============ ============= ============= ============== ============
Total
Accumulated shareholders'
deficit equity
------------- ---------------
Balance at March 31, 2002 $(18,192,027) $ 33,504,917
Common stock repurchased - (5,991)
Aberdeen land grant - 67,760
Options issued as compensation - (9,309)
Warrants issued - 371,000
Net loss (5,009,434) (5,009,434)
------------- ---------------
Balance at March 31, 2003 (23,201,461) 28,918,943
Options issued as compensation - (20,735)
Net loss (6,535,147) (6,535,147)
------------- ---------------
Balance at March 31, 2004 (29,736,608) 22,363,061
Options issued as compensation - (20,862)
Net loss (3,420,038) (3,420,038)
------------- ---------------
Balance at March 31, 2005 $(33,156,646) $ 18,922,161
============= ===============
The accompanying notes are an integral part of these financial statements.
32
APA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
2005 2004 2003
------------ ------------ ------------
Cash flows from operating activities:
Net loss $(3,420,038) $(6,535,147) $(5,009,434)
Adjustments to reconcile net loss to net cash used
in operating activities, net of acquisitions:
Depreciation and amortization 1,003,573 971,194 810,505
Compensation expense (20,862) (20,735) (9,309)
Changes in operating assets and liabilities, net
of acquisitions:
Accounts receivable 341,293 (678,686) (63,392)
Inventories 303,535 (179,293) (130,889)
Prepaid expenses and other assets (123,224) (44,909) (30,457)
Accounts payable and accrued expenses (110,679) 891,795 (226,178)
------------ ------------ ------------
Net cash used in operating activities (2,026,402) (5,595,781) (4,659,154)
Cash flows from investing activities:
Purchases of property and equipment (420,980) (785,870) (359,474)
Cash paid for business acquisitions (48,772) (1,960,000) (3,828,000)
Other - (7,376) (84,131)
------------ ------------ ------------
Net cash used in investing activities (469,752) (2,753,246) (4,271,605)
Cash flows from financing activities:
Repurchase of common stock - - (5,991)
Payment of long-term debt (232,923) (361,923) (437,467)
Bond reserve funds (2,341) 20,174 3,500
------------ ------------ ------------
Net cash used in financing activities (235,264) (341,749) (439,958)
------------ ------------ ------------
Decrease in cash and cash equivalents (2,731,418) (8,690,776) (9,370,717)
Cash and cash equivalents at beginning of year 13,544,910 22,235,686 31,606,403
------------ ------------ ------------
Cash and cash equivalents at end of year $10,813,492 $13,544,910 $22,235,686
============ ============ ============
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 99,337 $ 109,251 $ 115,893
Income taxes 4,138 2,053 1,000
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.
33
APA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
--------------------
APA Enterprises, Inc., formerly 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
Enterprises, Inc. and its wholly-owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in
consolidation.
Foreign Currency Translation
------------------------------
The Company uses the United States dollar as its functional currency for
its subsidiary in India. India's financial statements were translated into
U.S. Dollars at the year end exchange rate, while income and expenses are
translated at the average exchange rates during the year. There was no
significant foreign exchange translation gain or losses during fiscal year
ended March 31, 2005. There were no foreign currency operations in the
prior fiscal years.
Revenue Recognition
--------------------
Revenue is recognized when persuasive evidence of an arrangement exists,
the product has been delivered, the fee is fixed, 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, 2005 and 2004 consist entirely
of short-term money market accounts. Cash equivalents are stated at cost,
which approximates fair value.
Cash of approximately $145,000 was on deposit in foreign financial
institutions at March 31, 2005. There was no cash in foreign financial
institutions at March 31, 2004. The Company maintains cash balances at
several financial institutions, and at times, such balances exceed insured
limits. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash.
34
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Accounts Receivable
--------------------
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.
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, 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
--------
Goodwill represents the excess of the purchase price over net assets
acquired. Goodwill and any other intangible assets determined to have
indefinite useful lives are not amortized. Goodwill and other intangible
assets with indefinite lives are tested for impairment annually or whenever
conditions exist that indicate an impairment could exist. The Company
performed the annual impairment test in fiscal years 2005 and 2004 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 K. 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 income of $20,862, $20,735 and $9,309 for
the years ended March 31, 2005, 2004 and 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. The
following table illustrates the effect on net loss and net
35
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
loss per share if the Company had applied the fair value method, to
stock-based employee compensation for the following fiscal years:
March 31, March 31, March 31,
2005 2004 2003
------------ ------------ ------------
Net loss to common shareholders - as
reported $(3,420,038) $(6,535,147) $(5,009,434)
Less: Total stock-based employee
compensation expense determined under fair
value method for all awards, net of related
tax effects 129,914 158,936 153,266
Net loss - pro forma $(3,549,952) $(6,694,083) $(5,162,700)
============ ============ ============
Basic and diluted net loss per common share
- as reported $ (.29) $ (.55) $ (.42)
============ ============ ============
Basic and diluted net loss per common share
- pro forma $ (.30) $ (.56) $ (.43)
============ ============ ============
The weighted average fair value of options granted in 2005, 2004 and 2003
was $1.79, $2.62, and $1.20. 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 2005,
2004 and 2003; zero dividend yield, risk-free interest rate of 3.4%, 3.3%
and 3.2%; volatility of 75%, 75% and 77%, and a weighted-average expected
term of the options of five years. No adjustment was made to the Black
Scholes calculation to reflect that the options are not freely traded.
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 683,361, 975,937 and 999,197
shares of common stock with a weighted average exercise price of $4.99,
$6.35 and $6.50 were outstanding during the years ended March 31, 2005,
2004 and 2003, but were excluded because they were antidilutive. Had we not
incurred net losses during the fiscal years ended March 31, 2005, 2004 and
2003, we would not have assumed any conversion of stock options in fiscal
2005 and 2003, and we would have assumed conversion of stock options into
18,031 common shares in fiscal 2004.
36
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Use of Estimates
------------------
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, 2005.
Income Taxes
-------------
The Company records income taxes in accordance with the liability method of
accounting. Deferred taxes are recognized for the estimated taxes
ultimately payable or recoverable based on enacted tax law. The Company
establishes a valuation allowance to reduce the deferred tax asset to an
amount that is more likely than not to be realizable. Changes in tax rates
are reflected in the tax provision as they occur.
Reclassifications
-----------------
Certain reclassifications have been made to the 2004 financial statements
to conform with the presentation used in 2005. These reclassifications had
no effect on net loss or shareholders' equity as previously reported.
Newly Adopted Accounting Standards
-------------------------------------
In December 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004) (SFAS 123R), 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 April 1, 2006. Management has not yet determined
the impact.
NOTE B - ACQUISITIONS
Software Moguls India Private Limited and S M Infoexpert Private Limited
---------------------------------------------------------------------------
On March 31, 2005, the Company acquired certain assets of Software Moguls
India Private Limited and SM Infoexpert Private Limited near New Dehli,
India. The acquisition was accounted for as a purchase. The impact on the
operations for year ended March 31, 2005 was not material.
37
NOTE B - ACQUISITIONS - CONTINUED
The following table summarizes the allocation of the purchase price at the
date of the acquisition:
Purchase Price
Allocation
Property, plant and equipment $ 46,303
Other assets 2,469
---------------
Total Purchase Price $ 48,772
===============
There are no contingent payments related to the India acquisition.
Computer System Products, Inc.
---------------------------------
On March 14, 2003, the Company acquired certain assets and assumed certain
liabilities of Computer Systems Products, Inc. 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.
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
=============== ============ =============
Goodwill is expected to be fully deductible for tax purposes.
38
NOTE B - ACQUISITIONS - CONTINUED
Americable, Inc.
-----------------
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 is expected to be fully deductible for tax purposes.
NOTE C - 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. The Company recorded a gain of approximately $208,000 on the sale in
the first quarter of fiscal 2005.
NOTE D - INVENTORIES
Inventories consist of the following at March 31:
2005 2004
---------- ----------
Raw materials $ 266,051 $ 371,536
Work-in-process 9,661 46,222
Finished goods 994,941 1,156,430
---------- ----------
$1,270,653 $1,574,188
========== ==========
39
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at March 31:
2005 2004
---------- ----------
Land $ 127,760 $ 127,760
Buildings 1,682,205 1,679,424
Manufacturing equipment 5,895,170 6,037,670
Office equipment 699,839 619,026
Leasehold improvements 1,132,651 1,119,616
---------- ----------
9,537,625 9,583,496
Less accumulated depreciation and amortization 5,590,627 5,032,540
---------- ----------
$3,946,998 $4,550,956
========== ==========
NOTE F - LONG-TERM DEBT
The following is a summary of the outstanding debt at March 31:
2005 2004
---------- ----------
South Dakota Governor's Office of Economic Development
and the Aberdeen Development Corporation Bond, 5.8% to 6.75%,
due in various installments through 2016 $1,405,000 $1,485,000
Low interest economic development loans, 0%, due in various
installments through fiscal 2011 120,000 229,305
Capital lease obligations 53,836 97,454
---------- ----------
1,578,836 1,811,759
Less current maturities 1,471,036 1,637,923
---------- ----------
$ 107,800 $ 173,836
========== ==========
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 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, 2005, 36,511 warrants have
been issued for loans forgiven totaling $187,289.
At March 31, 2005 and 2004, the Company had on deposit with trustees
$468,639 and $466,298 in reserve funds for current bond maturities, of
which $131,548 and $133,865 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 2005. 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.
40
NOTE F - LONG-TERM DEBT - CONTINUED
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.
Scheduled maturities of the Company's long-term debt are as follows:
Years ending March 31,
2006 $1,471,036
2007 27,800
2008 20,000
2009 20,000
2010 20,000
Thereafter 20,000
----------
$1,578,836
==========
NOTE G - 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 $97,000, $72,000, and $51,000 for the years ended March 31,
2005, 2004 and 2003.
NOTE H - 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 surrounding its recoverability.
Accordingly, the Company has recorded a full valuation allowance at March
31, 2005 and 2004.
41
NOTE H - INCOME TAXES - CONTINUED
Significant components of deferred income tax assets and liabilities are as
follows at March 31, 2005:
2005 2004
------------- -------------
Current deferred income tax assets:
Inventories $ 116,156 $ 64,350
Accrued expenses 163,338 33,930
------------- -------------
279,494 98,280
Long-term deferred income tax asset:
Intangibles 33,130 17,940
Net operating loss carryforward 12,296,918 10,880,432
------------- -------------
12,330,048 10,898,372
------------- -------------
Total deferred income tax assets 12,609,542 10,996,652
Long-term deferred income tax liabilities:
Property and equipment depreciation 288,639 (172,770)
Goodwill 153,696 94,338
------------- -------------
442,335 (78,432)
------------- -------------
Total net deferred income taxes 12,167,207 11,075,084
Valuation allowance (12,167,207) (11,075,084)
------------- -------------
Total $ - $ -
============= =============
As of March 31, 2005, the Company has net operating loss carry forwards for
federal income tax purposes of approximately $31,531,000 which expire in
fiscal years 2006 to 2025.
The following is a reconciliation of the federal statutory income tax rate
to the consolidated effective tax rate for March 31:
Percent of Pre-tax Income
----------------------------------------------
2005 2004 2003
-------------- -------------- --------------
Federal statutory rate (34%) (34%) (34%)
State income taxes (5%) (5%) (5%)
Permanent differences 1% 0% 0%
Change in valuation allowance 38% 39% 39%
-------------- -------------- --------------
Tax Rate 0% 0% 0%
============== ============== ==============
Components of the (benefit) provision for income taxes are as follows for
the years ended March 31:
2005 2004 2003
---------- ------------ ------------
Current:
Federal $ - $ - $ -
State 4,138 2,053 1,000
---------- ------------ ------------
Deferred:
Federal 869,866 2,106,637 3,689,424
State 127,921 309,799 542,562
---------- ------------ ------------
Valuation allowance (997,787) (2,416,436) (4,231,986)
---------- ------------ ------------
Income tax expense $ 4,138 $ 2,053 $ 1,000
========== ============ ============
42
Income tax expense consists primarily of state taxes in 2005, 2004, 2003.
NOTE I - 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. The Company is
authorized to issue 500 shares of preferred stock and 50,000,000 shares of
common stock at $.01 par value. The Company has not issued any shares of
preferred stock.
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 2005. As of March 31, 2005 and 2004, a total of
46,750 shares for $98,629 at an average price of $2.11 per share had been
repurchased and retired before the repurchase program expired in fiscal
year 2004.
NOTE J - 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.
43
NOTE K - 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 713,370 shares of common stock available for issue at March
31, 2005.
Option transactions under these plans during the three years ended March
31, 2005 are summarized as follows:
Weighted average
Number of shares exercise price
----------------- -----------------
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
Granted 72,000 1.79
Canceled (220,485) 3.60
-----------------
Outstanding at March 31, 2005 236,630 3.28
=================
The number of shares exercisable at March 31, 2005, 2004 and 2003 was
72,255, 176,815 and 165,325, respectively, at a weighted average exercise
price of $4.47, $4.21 and $5.42 per share, respectively.
The following table summarizes information concerning currently outstanding
and exercisable stock options at March 31, 2005:
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-$2.91 186,630 4.50 years $ 2.19 39,130 $ 2.29
3.77-5.53 15,000 1.34 years 5.23 12,500 5.17
5.73-7.22 10,000 1.88 years 6.86 6,375 6.80
8.50-11.90 25,000 2.05 years 8.82 14,250 8.83
---------------- -----------
236,630 3.93 years 3.28 72,255 4.47
================ ===========
44
NOTE K - 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, 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
Issued - - -
Expired (144,091) 14.72 2005
------------
Balance at March 31, 2005 446,731 3.00 - 17.84 2006 - 2008
============
All warrants are exercisable upon date of grant.
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 L - COMMITMENTS
The Company leases office and manufacturing facilities from a partnership
whose two partners are major shareholders, officers and directors of the
Company. The Company has determined FIN 46 (R), Consolidation of Variable
Interest Entities (VIE's), does not require the consolidation of the
partnership with APA's financial statements. The lease agreement,
classified as an operating lease, expires November 30, 2009 and provides
for periodic increases of the rental rate based on increases in the
consumer price index. The Company leases other office and manufacturing
facilities space that expires June 30, 2006. Rental expense was $478,000,
$485,000 and $149,000 for the years ended March 31, 2005, 2004 and 2003, of
which $155,000, $149,000 and $139,000 was paid to the partnership,
respectively.
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 $78,421 and 104,561 at March 31, 2005 and
2004.
45
NOTE L - 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
-------------------- -------- ----------
2006 $ 49,320 $ 494,712
2007 7,964 302,026
2008 - 204,474
2009 - 123,894
2010 - 83,438
Thereafter - 25,260
-------- ----------
Total minimum lease payments 57,284 $1,233,804
==========
Less: Amounts representing interest 3,448
--------
Present value of future minimum lease
payments 53,836
Less: Current portion 46,036
--------
Capital lease obligations, net of current portion $ 7,800
========
NOTE M - CONCENTRATIONS
Major Customers
----------------
No single customer accounted for more than 10% of the Company's sales in
fiscal 2005 and fiscal 2004. Two major customers accounted for 21% and 15%
of the Company's sales for the year ended 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, 2005,
2004 or 2003.
NOTE N - SEGMENTS OF BUSINESS
The Company has identified two reportable segments based on its internal
organizational structure, management of operations, and performance
evaluation. These segments are Optronics and Cables and Networks (APACN).
Optronic'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
46
NOTE N - SEGMENTS OF BUSINESS - CONTINUED
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 to
each segment. Segment detail is summarized as follows (unaudited, in
thousands):
Optronics Cables & Networks Eliminations Consolidated
----------- ------------------- -------------- --------------
YEAR ENDED MARCH 31, 2005
External sales $ 489 $ 13,801 $ (404) $ 13,886
Cost of sales 1,622 9,980 (404) 11,198
Operating loss (4,129) 334 - (3,795)
Depreciation and amortization 774 230 - 1,004
Capital expenditures, net 342 79 - 421
Assets 22,253 7,188 (7,367) 22,074
YEAR 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 amortization 797 174 - 971
Capital expenditures 695 91 - 786
Assets 26,187 7,310 (7,413) 26,084
YEAR 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 amortization 811 - - 811
Capital expenditures 309 50 - 359
Assets 31,458 5,275 (4,848) 31,885
NOTE O - SUBSEQUENT EVENT (UNAUDITED)
In June 2005 the Company sold approximately 2 acres of its land in
Aberdeen, South Dakota to the Aberdeen Development Corporation (ADC) in
exchange for the retirement of its remaining debt on its loan with ADC. The
land was granted to APA in conjunction with building a facility in Aberdeen
and is part of a single parcel of approximately 12 acres on which the
Company has constructed and operates its manufacturing facility. The
Company will recognize a gain on the sale of the land in the first quarter
of fiscal 2006. The gain is not expected to be material to the financial
statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
47
None.
ITEM 9A. CONTROLS AND PROCEDURES.
The Company's chief executive officer and chief financial officer (the
same person) has evaluated the Company's disclosure controls and procedures (as
defined in Exchange Act Rule 13a-15(e) as of the end of the period covered by
this report, and based on such evaluation has concluded that they are 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.
During the fiscal quarter ended March 31, 2005, there was no change in the
Company's internal controls over financial reporting that materially affected,
or is reasonably likely to materially affect, the Company's controls over
financial reporting.
ITEM 9B. OTHER INFORMATION
There were no events during the quarter ended March 31, 2005 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 2005.
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 2005.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
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 2005.
48
The following table provides information about the Company's equity
compensation plans (including individual compensation arrangements) as of March
31, 2005.
-----------------------------------------------------------------------------------------------------
(a) (b) (c)
--------------------- ------------------------ ---------------------- ----------------------------
Plan category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of options, warrants or outstanding options, future issuance under
rights warrants and rights equity compensation
plans (excluding securities
reflected in column (a))
--------------------- ------------------------ ---------------------- ----------------------------
Equity compensation
plans approved by
security holders 236,630 $ 3.28 713,370
--------------------- ------------------------ ---------------------- ----------------------------
Equity compensation
plans not approved by
security holders 446,731 $ 5.89 Not applicable*
--------------------- ------------------------ ---------------------- ----------------------------
Total 683,361 $ 4.99 713,370
-----------------------------------------------------------------------------------------------------
* 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 2005.
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 2005.
49
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) (1) The following financial statements are filed herewith under
Item 8.
(i) Report of Independent Registered Public Accounting
Firm for the years ended March 31, 2005, 2004 and
2003. . . . . . . . . . . . . . . . . . . . . . . . . . . F1
(ii) Consolidated Balance Sheets as of March 31, 2005.
and 2004. . . . . . . . . . . . . . . . . . . . . . . . . F2
(iii) Consolidated Statements of Operations for the
years ended March 31, 2005, 2004 and 2003. . . . . . . . F3
(iv) Consolidated Statement of Shareholders' Equity for
the years ended March 31, 2005, 2004 and 2003 . . . . . . F4
(v) Consolidated Statements of Cash Flows for the years
ended March 31, 2005, 2004 and 2003 . . . . . . . . . . . F6
(vi) Notes to the Consolidated Financial Statements for
the years ended March 31, 2005, 2004 and 2003 . . . . . . F7
(2) Financial Statement Schedules: See Schedule II on
page following signatures.
(b) Exhibits. See Exhibit Index.
50
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 Enterprises, Inc.
Date: June 28, 2005 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, June 28 , 2005
--------------------------- Chief Financial Officer and
Anil K. Jain Director (principal executive officer
and principal financial officer)
/s/ Kenneth A. Olsen Secretary, Vice President, and Director June 28, 2005
---------------------------
Kenneth A. Olsen
/s/ Daniel Herzog Comptroller (principal accounting officer) June 28 , 2005
---------------------------
Daniel Herzog
/s/ John G. Reddan Director June 28 , 2005
---------------------------
John G. Reddan
/s/ Ronald G. Roth Director June 28, 2005
---------------------------
Ronald G. Roth
/s/ Stephen A. Zuckerman MD Director June 28, 2005
---------------------------
Stephen Zuckerman
51
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
-------------------------------
Balance at Charged to: Charged to:
Beginning Cost and Other Balance at
Description of Period Expenses Accounts Deductions End of Period
----------- ------------- ---------------- ---------------- --------------
Allowance for doubtful accounts
March 31, 2005 $ 49,038 $ 33,000 $ 10,692 (2) $ 35,623 (3) $ 57,107
March 31, 2004 20,644 31,500 2,562 (2) 5,668 (3) 49,038
March 31, 2003 - - 20,644 (1) - 20,644
Inventory Reserves
March 31, 2005 110,463 158,007 - 79,381 (5) 189,089
March 31, 2004 1,184,760 200,040 (936,537) (4) 337,800 (5) 110,463
March 31, 2003 350,000 (89,044) 1,000,000 (1) 76,196 (5) 1,184,760
(1) From purchase entry related to acquisition of Computer System Products, Inc
(CSP).
(2) Represents recovery of bad debt and other adjustments.
(3) Represents writeoffs of bad debt.
(4) Represents purchase price adjustment activities relating to acquisitions of
CSP and Americable, Inc.
(5) Represents inventory adjustments
52
REPORT OF INDEPENDENT REGISTERED CERTIFIED
------------------------------------------
PUBLIC ACCOUNTING FIRM ON SCHEDULE
----------------------------------
To the Board of Directors and Shareholders
APA Enterprises, Inc.
We have audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States) the consolidated financial statements
of APA Enterprises, Inc. and subsidiaries referred to in our report dated April
25, 2005, which is included in the annual report to security holders and
incorporated by reference in Part II of this form. Our audit was conducted for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The Schedule II is presented for purposes of additional analysis and is
not a required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
April 25, 2005
53
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
2.3 Asset Purchase Agreement between APA Enterprises, **
Inc. and Software Moguls India Private Limited and S
M Infoexpert Private Limited
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
3.1 (a) Restated Articles of Incorporation, as amended to date Exhibit 3.1 to Registrant's Report
thru August 25, 2004 on Form 10-Q for the quarter
ended September 30, 2004
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 Enterprises, 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 Enterprises, 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 Enterprises, Inc.
54
=======================================================================================================
PAGE NUMBER OR INCORPORATED
NUMBER DESCRIPTION BY REFERENCE TO
-------- ------------------------------------------------------- ------------------------------------
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 Enterprises, Inc.
4.2(e) Amended Loan Agreement with Aberdeen Exhibit 4.2(e) to Registrants
Development Corporation and APA Enterprises, Inc. Report on Form 10-K for fiscal
year ended March 31, 2004
4.2(f) Purchase Agreement for land with Aberdeen **
Development Corporation and APA Enterprises, Inc.
4.3(a) Loan Agreement between South Dakota Economic Exhibit 4.3(a) to the June 1996 10-
Development Finance and APA Enterprises, Inc. QSB
4.3(b) Mortgage and Security Agreement - One Hundred Exhibit 4.3(b) to the June 1996
Day Redemption from APA Enterprises, 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 Exhibit 10.1(b) to 2000 10-K
dated August 31, 1999
55
=======================================================================================================
PAGE NUMBER OR INCORPORATED
NUMBER DESCRIPTION BY REFERENCE TO
-------- ------------------------------------------------------- ------------------------------------
10.1(c) Lease Agreement between Registrant and Jain-Olsen Exhibit 10.1(c) to Registrant's
Properties Form 10Q-SB for quarter ended
September 30, 2004
*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 Exhibit 10.3b to 1994 10-KSB
Nonemployee Directors Plan
*10.3 1997 Stock Compensation Plan Exhibit 10.3 to Registrant's Report
on Form 10-KSB for the fiscal
year ended March 31, 1997
*10.4 Insurance agreement by and between the Registrant Exhibit 10.5 to Registrant's Report
and Anil K. Jain on Form 10-K for the fiscal year
ended March 31, 1990
*10.5 Form of Agreement regarding Repurchase of Stock Exhibit 10.1 to Registrant's Report
upon Change in Control Event with Anil K. Jain and on Form 10-QSB for the quarter
Kenneth A. Olsen ended September 30, 1997
("September 1997 10-QSB")
*10.6 Form of Agreement regarding Exhibit 10.2 to the September
Employment/Compensation upon Change in Control 1997 10-QSB
with Messrs. Jain and Olsen
*10.7 Form of Agreement regarding Indemnification of Exhibit 10.7 to Registrant's Report
Directors and Officers with Messrs. Jain, Olsen, on From 10-K for the fiscal year
Ringstad, Roth, Von Wald and Zuckerman ended March 31, 2002.
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 Report
Semiconductor and APA Enterprises, Inc. of Form 10-K for the fiscal year
ended March 31, 2004
10.9(b) Amendment to sublease between Veeco Compound Exhibit 10.9 (b) to Registrant's
Semiconductor and APA Enterprises, Inc. Report on Form 10-QSB for the
quarter ended September 30, 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
*10.11 Stock option agreement with Cheri Podzimek, **
President of APACN
14 Code of Ethics Exhibit 14 to Registrant's Report
on Form 10-K for the fiscal year
ended March 31, 2004
56
=======================================================================================================
PAGE NUMBER OR INCORPORATED
NUMBER DESCRIPTION BY REFERENCE TO
-------- ------------------------------------------------------- ------------------------------------
21 List of Subsidiaries **
23.1 Consent of Grant Thornton LLP **
31.1 Certification of Chief Executive Officer Pursuant to **
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Principal **
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
*Indicates management contract or compensation plan or arrangements required to
be filed as an exhibit to this form.
** Filed with this Report.
57