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, 1999.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from _____________ to _____________.
COMMISSION FILE NUMBER 0-16106
APA OPTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1347235
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2950 N.E. 84TH LANE
BLAINE, MINNESOTA 55449
(612) 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)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months and (2) has been subject to the filing requirements for the
past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of May 18, 1999, was approximately $33,040,581.
The number of shares of Common Stock outstanding as of May 18, 1999 was
8,512,274.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the proxy statement for the annual shareholders meeting to
be held on August 18, 1999 ("Proxy Statement") are incorporated by
reference into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS.
From its founding in 1979, the Company has focused on leading edge
research in sophisticated optoelectronic and optical system areas with the
primary goal of developing advanced products for subsequent marketing and
fabrication. APA Optics, Inc. currently manufactures DWDM optical components,
offers a range of Nitride-based devices and services, and markets custom optics
products.
For the last several years the Company's goal has been to manufacture
and market products/components based on its technology developments. The Company
selected two product areas: dense wavelength division multiplexer (DWDM)
components for fiber optic communications and gallium nitride-based ultraviolet
(UV) detectors (both components and integrated detector/electronic/display
packages). These areas were selected due to significant potential markets and
the Company's expertise and/or patent positions. If the Company is successful in
manufacturing and marketing of these products, the Company expects to
significantly increase its revenues and achieve profitability.
In order to perform product development and production, the Company
needs to fully utilize its personnel and facilities. The Company could only
accomplish this by reducing its emphasis on R&D contracts, realizing that this
shift will significantly reduce revenues and increase losses until the Company
realizes revenues from its products. Although the Company has purchased a
significant amount of equipment in previous fiscal years, it will still need
additional equipment as well as additional personnel to meet its objectives.
(b) DESCRIPTION OF BUSINESS.
PRODUCTS AND SERVICES
(i) Optical Lens Systems. The Company designs and builds multi-element
lens systems and components, including mounting structures, for precision
quality optical needs in many applications, including laser-based systems,
imaging systems, inspection systems, display systems, display optics, focusing
optics for ultraviolet fire alarms, alignment verification optics for dual
magnetic recording heads, and multi-magnification optics systems for optical
comparators.
(ii) Optical Thin Film Coatings. The Company custom designs, develops,
and fabricates optical thin film coatings for optical components of lasers,
laser systems, optical instruments, and optical devices. The Company uses its
optical thin film coating services in two major ways. Antireflective coatings
are deposited onto Company-fabricated lens components. The Company also uses its
thin film coating facility to design, develop and fabricate coating for lens
components supplied by customers.
(iii) Optoelectronics Devices. The Company is focusing its research and
development efforts on several optoelectronic devices. Optoelectronic devices
are vital components of communication systems and optical instruments.
Currently, the Company is developing the following devices:
Dense Wavelength Division Multiplexer (DWDM). Recently, the Company
demonstrated the feasibility of a DWDM capable of transmitting several
channels through a single optical fiber for communication applications.
APA Optics developed the DWDM based on its development of optical
modulator (single channel) technology during the early 1990s for fiber
optic communication. These modulators have the capability of direct
high speed (several billion bits per second) data loading and unloading
on laser beams going through optical fibers, either for short distance
or long distance. The DWDM, a small part of the modulator, utilizes
high frequency halographic gratings. The DWDM developed recently
provides a major break-through in that information can travel on
several different channels within a single fiber (a simple analogy is
the expansion of a single lane highway to multi-lane throughway). As a
result, the DWDM provides higher speed, increased and regulated data
handling
2
<PAGE>
capabilities as compared to a single channel modulator. The Company is
currently performing environmental packaging of the DWDM.
The Company filed the first patent related to the DWDM Optical
Modulator in June 1994, which was allowed on May 8, 1995. Since then,
the Company has filed for four additional patents related to DWD
Multiplexer/Demultiplexer devices. The Company was awarded two of these
patents in March 1997 and February 1998. The other two applications are
still pending.
UV Detector. The UV Detector is a high response solid state detector
based on single-crystal gallium nitride (GaN). The GaN detector is
expected to have applications in spectrometry, solar radiation
measurement, excimer-laser measurement and calibration, biomedical
instrumentation, and flame detection and monitoring. The detector is
visible blind, which allows detection of UV radiation in the presence
of room lights without a filter. The Company believes the GaN detector
has advantages over photomultiplier tubes because of its ruggedness and
chemical inertness, which suit it for application in high-vibration and
harsh environments as well as high-temperature operation. The Company
has been awarded at least four patents in Nitride related technologies.
Other Products
The Company is in the process of introducing several other products by
packaging its UV detectors with electronics and displays for many
applications. Among these are a solar sensing watch to detect potential
cancer causing UV radiation for consumer applications, UV radiation
based flame sensors for industrial applications, and UV radiation
meters for laboratory and industrial applications. All of these
products have significant similarities and, therefore, do not require
significant financial resources for development.
MARKETING AND DISTRIBUTION
The Company has delivered a limited number of alpha units of DWDM to
customers during fiscal 1999 and 2000. The Company has sold several UV detectors
to more than 30 customers as well as a few detector/electronics packages. During
this time, the Company has been aggressively marketing both products by
advertising in relevant professional magazines, showcasing its products in trade
shows, direct mailing, personal visits, distributors in various countries, such
as Japan, Germany, Italy and France. The Company also maintains product
information on its Web Page. The Company has a sales manager who focuses on
sales of DWDM and two persons who work on marketing and sales of Nitride-based
products.
SOURCES OF RAW MATERIALS
Two principal materials used by the Company in its business are optical
glass and optical chips. Optical glass is commercially available through several
distributors. The Company currently uses at least two vendors for optical chips
and continuously looks for additional vendors for these parts. Certain chemicals
and other materials used by the Company are routinely available from several
sources.
ENVIRONMENTAL COMPLIANCE
Because the Company handles a number of chemicals in its operations, it
must comply with federal, state and local laws and regulations regarding the
handling and disposal of such chemicals. The cost of such compliance is not
material.
MAJOR CUSTOMERS
In prior years, the Company provided research and development services
under contracts with various governmental agencies. Currently, the Company has
no material contracts with any of such agencies.
In its efforts to promote sales of new products, the Company has begun
to develop relationships with several potential new customers.
3
<PAGE>
Revenues from the following unrelated customers constituted more than
ten percent of the Company's total operating revenues in the last three fiscal
years:
<TABLE>
<CAPTION>
Year Ended March 31
-------------------
<S> <C> <C> <C>
Name 1999 1998 1997
- ------------------------------------------ ---- ---- ----
Government Agencies* 67% 89% 93%
</TABLE>
*REPRESENTS SERVICES TO SEVERAL OPERATING AGENCIES OF THE U.S. GOVERNMENT, AS
FOLLOWS:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Air Force 23% 20% 42%
Army 0 25 22
Navy 19 38 36
ARPA 58 17 --
---- ---- ----
Total 100% 100% 100%
==== ==== ====
</TABLE>
BACKLOG
The Company's backlog of uncompleted contracts at March 31, 1999, was
approximately $189,000, as compared to $1,300,000 at March 31, 1998, and
$3,200,000 at March 31, 1997. Of the current year's backlog, all contracts will
be completed within the next year. The reduced backlog is a direct result of the
Company's shift from contract R&D to product development and promotion.
COMPETITION
Competition in the optoelectronics and optics fabrication businesses is
significant. Many of the companies engaged in these businesses are well-financed
and have significantly greater research, development, production, and marketing
resources than those of the Company. The Company believes that it has a
competitive advantage due to its patents and the uniqueness of the device
characteristics. In particular, the Company believes its DWDM is the most
efficient (lowest insertion loss) and compact device currently available.
RESEARCH AND DEVELOPMENT
During the fiscal years ended March 31, 1999, 1998, and 1997 the
Company spent approximately $382,000, $339,000, and $375,000, respectively, on
research and development sponsored by the Company, all of which was related to
the DWDM, UV detector and related products. In addition, in each of those years,
the Company spent approximately $837,000, $1,431,000, and $1,610,000,
respectively, on research activities sponsored by customers.
EMPLOYEES
As of March 31, 1999, the Company employed 36 full-time employees
(including its executive officers).
ITEM 2. PROPERTIES.
The Company's corporate offices, manufacturing facilities, and
laboratories are located in an industrial building at 2950 N.E. 84th Lane,
Blaine, Minnesota. The Company currently leases 23,500 square feet of space in
the building under sublease from Jain-Olsen Properties, a partnership consisting
of Anil K. Jain and Kenneth A. Olsen, officers and directors of the Company. See
Note 9 of Notes to Financial Statements included under Item 8 hereof. The
Company owns land directly west of the Blaine facility that may be used for
future expansion.
The Company also has a 24,000 square foot production facility in
Aberdeen, South Dakota, which is used for manufacturing the Company's DWDM
components and UV detectors. The land upon which this facility is located was
granted to the Company as part of a financing package from the City of Aberdeen.
See Note 5 of Notes to Financial
4
<PAGE>
Statements included under Item 8 hereof for further information regarding the
financing of this facility.
The Company believes that these two facilities will be adequate for its
needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently subject to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on The Nasdaq Small Cap Market.
The following table sets forth the quarterly high and low prices for the
Company's Common Stock for each quarter of the past two fiscal years as reported
by Nasdaq.
FISCAL 1999 HIGH LOW
- ----------- ---- ---
Quarter ended June 30, 1998......................... $6-3/4 $5-5/8
Quarter ended September 30, 1998.................... 6 4-1/4
Quarter ended December 31, 1998..................... 5 4
Quarter ended March 31, 1999........................ 10 4-3/4
FISCAL 1998
- -----------
Quarter ended June 30, 1997......................... $6-1/2 $5-1/4
Quarter ended September 30, 1997.................... 6-5/8 5-3/8
Quarter ended December 31, 1997..................... 9-1/4 6-1/8
Quarter ended March 31, 1998........................ 8 5-1/2
There were approximately 358 holders of record of the Company's Common
Stock as of March 31, 1999.
The Company has paid no cash dividends on its Common Stock. The loan
agreement relating to certain bonds issued by the South Dakota Economic
Development Finance Authority restricts the Company's ability to pay dividends
on its capital stock.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statements of Operations Data
Revenues ................................................. $ 722,030 $ 2,190,637 $ 2,769,270 $ 2,485,833 $ 2,028,485
Net loss ................................................. (2,513,798) (967,767) (11,023) (92,474) (468,681)
Net loss per share, basic and diluted .................... (.30) (.12) -- (.01) (.06)
Weighted average number of shares, basic and diluted ..... 8,512,274 8,376,661 8,192,879 7,734,082 7,325,970
Balance Sheet Data
Total assets ............................................. $ 6,804,976 $ 9,629,912 $ 9,419,398 $ 4,756,349 $ 3,063,097
Long-term obligations, including current portion ......... 3,214,712 3,609,652 3,829,004 445,000 540,000
Shareholders' equity ..................................... 3,389,295 5,859,863 5,412,968 4,107,228 2,385,037
</TABLE>
5
<PAGE>
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 hereof.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company is engaged in the business of designing, manufacturing, and
marketing optical components and various optoelectronic products. For several
years, the Company also received significant revenues from providing research
and development services in connection with projects sponsored by various
government agencies. In fiscal 1998, the Company determined to shift its
emphasis from research and development to product development, with the intent
to eventually manufacture and market various products. Accordingly, revenues
from research and development contracts have decreased significantly during the
last two fiscal years.
For the last several years the Company's goal has been to manufacture
and market products/components based on its technology developments. The Company
selected two product areas: dense wavelength division multiplexer (DWDM)
components for fiber optic communications and gallium nitride-based ultraviolet
(UV) detectors (both components and integrated detector/electronic/display
packages). These areas were selected due to significant potential markets and
the Company's expertise and/or patent positions. If the Company is successful in
manufacturing and marketing these products, the Company expects to significantly
increase its revenues and achieve profitability.
In order to perform product development and production, the Company
needs to fully utilize its personnel and facilities. The Company could only
accomplish this by reducing its emphasis on R&D contracts, realizing that this
shift will significantly reduce revenues and increase losses until the Company
realizes revenues from its products. Although the Company has purchased a
significant amount of equipment in recent fiscal years, it will still need
additional equipment as well as additional personnel to meet its objectives.
RESULTS OF OPERATIONS
Fiscal 1999 Compared to Fiscal 1998. Operating revenues for fiscal 1999
were $722,030, a decrease of 67% from operating revenues of $2,190,637 in fiscal
1998. The decrease in revenues reflects the Company's decision to focus on
product development rather than contract research and development. Contract fees
decreased from $1,950,844 in fiscal 1998 to $484,329 in fiscal 1999, and the
Company's backlog of uncompleted contracts at March 31, 1999 was $189,000 as
compared to $1,200,000 at March 31, 1998. Revenues from sales of products
decreased by approximately 1% as compared to fiscal 1998. Sales of new products
in fiscal 1999 were minimal; however, the Company believes it has made
significant progress in developing its new products and the related
manufacturing processes and that there will be revenues from sales of such
products in fiscal 2000.
Cost of sales increased by approximately 52%, to $1,366,105, in fiscal
1999 from $901,538 in fiscal 1998. Cost of contract fees decreased by 41% in
fiscal 1999, reflecting the decreased revenues from contract research and
development. Gross margin for product sales was negative in both fiscal 1999 and
fiscal 1998, reflecting continued personnel and product development costs. Gross
margin for contract fees was negative in fiscal 1999 and 27% in fiscal 1998.
This deterioration is the result of decreased contract revenues. Research and
development expenses increased by approximately 13% in fiscal 1999, to $382,445
from $338,615, and selling, general and administrative expenses increased by 18%
to $727,988 in fiscal 1999 compared to $616,532 in fiscal 1998. The increase in
costs of sales, research and development and selling, general and administrative
expenses reflects the Company's focus on product development, including the
hiring of additional personnel for production, marketing, and sales.
The Company reported a loss from operations in fiscal 1999 of
$2,591,750, a substantial increase over the loss from operations of $1,096,626
in fiscal 1998. This loss results from the combination of significantly
decreased revenues without a corresponding decrease in costs and expenses.
The Company realized $228,195 in interest income in fiscal 1999, down
27% from $310,925 in fiscal 1998, reflecting lower average cash balances during
the year. Interest expense in fiscal 1999 totaled $149,243, down 18% from
$181,066 in fiscal 1998, reflecting reduced balances on outstanding obligations.
6
<PAGE>
The Company's net loss in fiscal 1999 was $2,513,798 compared to
$967,767 in fiscal 1998. As noted above, this loss was primarily a result of
significantly decreased revenues and significantly higher cost of sales and
other operating expenses. Further losses can be expected until revenues from
production increase, or operating costs decrease, sufficiently to produce
positive cash flow.
Fiscal 1998 Compared to Fiscal 1997. Operating revenues for fiscal 1998
were $2,190,637, a decrease of 21% from operating revenues of $2,769,270 for
fiscal 1997. This decrease was primarily the result of decreased fees from
government contracts in fiscal 1998 ($1,950,844) as compared to fiscal 1997
($2,581,005). The Company had record contract fees during fiscal 1997 as
compared to prior years. Contract revenues were down for two reasons. First, the
Company decided to emphasize the product development, manufacturing and
marketing of its technology based products. This product emphasis also affected
the Company's backlog of research contracts, which was down to $1,200,000 at
March 31, 1998, as compared to $3,200,000 at March 31, 1997. APA's product
development efforts resulted in the start of operations at its Aberdeen, South
Dakota, facility, with the manufacture of GaN-based UV detectors. The second
reason for the decrease in contract revenues was the unilateral termination of
one contract by the contracting agency.
Cost of sales in fiscal 1998 increased by 182% to $901,538 as compared
to $319,626 in fiscal 1997. The greatest portion of these costs were associated
with the new production facility in Aberdeen. Cost of contract fees decreased by
approximately 11% in fiscal 1998 to $1,430,578 from $1,609,574, reflecting in
part reduced contract revenues. The decrease in gross margin for contract fees
(from 38% in fiscal 1997 to 27% in fiscal 1998) also results from decreased
contract revenues. Research and development and selling general and
administrative expenses both decreased in fiscal 1998 as compared to fiscal
1997.
The Company's loss from operations in fiscal 1998 was $1,096,626 as
compared to a loss of $128,768 in fiscal 1997. This significantly increased loss
reflected both the decrease in revenues and the increased expenses associated
with the production facility in Aberdeen.
In fiscal 1998 interest income increased by approximately 13%, to
$310,925 from $274,976 in fiscal 1997, and interest expense increased by
approximately 16%, to $181,066 in fiscal 1998 from $156,231 in fiscal 1997.
These increases reflected higher cash and cash equivalent balances and higher
balances on outstanding debt.
The Company's net loss in fiscal 1998 of $967,767, or $.12 per share,
as compared to the net loss in fiscal 1997 of $11,023, or $.00 per share,
results from the factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents balance at March 31, 1999, is
$2,812,849 as compared to $5,184,215 at March 31, 1998. This reduction primarily
results from the use of $1,974,790 net cash in operating activities, of which
the most significant cause was the Company's net loss of $2,513,798. The Company
used $236,891 net cash in investing activities in fiscal 1999, all for the
purchase of property and equipment. This compares to use of net cash of $925,494
and $1,347,358 in fiscal 1998 and fiscal 1997. In all three years, such property
and equipment was purchased primarily for the Aberdeen facility. During fiscal
1999, the Company used $159,685 net cash in financing activities. The Company
paid the $240,000 balance on a loan from the Minnesota Agricultural and Economic
Development Board. This loan had been funded in 1989 for the purchase of
equipment for the Company's manufacturing facility in Blaine. A portion of this
repayment was made with $125,000 held in a bond reserve account.
In connection with the construction of the manufacturing facility in
Aberdeen, the Company took advantage of certain economic incentive programs
offered by the State of South Dakota and the City of Aberdeen. At March 31,
1999, the total principal outstanding on the several loans obtained in
connection with these financing packages was $3,214,712. Interest on the loans
ranges from 0% to 6.75%, and the loans are due between 2003 and 2016. For
further information regarding these loans, see Note 5 of Notes to Financial
Statements included under Item 8 of this Report. These loans require that the
Company maintain certain minimum levels of net worth and income to outstanding
debt ratios. The Company was out of compliance with these covenants in fiscal
1999. Such noncompliance does not constitute an event of default but triggers
further covenants under the loan agreement, with which the Company was in
compliance at March 31, 1999.
The Company anticipates approximately $250,000 in capital expenditures
in fiscal 2000, primarily for equipment. The funds for these purchases will come
from funds available under the financing packages with the State of South Dakota
and the City of Aberdeen.
7
<PAGE>
The Company's use of net cash in operating activities during fiscal
1999 and the related decrease in its cash balance emphasizes the Company's need
to increase sales in order to maintain its operations. The auditor's report on
the fiscal 1999 financial statements contain a qualification as to the
Company's ability to continue as a going concern in light of its low sales and
high costs. For the past several years, the Company has been working on the
design and development of new optoelectronic products, in particular a dense
wavelength division multiplexer and products based on Gallium Nitride
technology. In order to focus on these efforts, beginning in fiscal 1998 the
Company reduced its emphasis on contract research and development, resulting in
significantly reduced revenues. This shift in emphasis was necessary to utilize
the Company's personnel and facilities in the product development effort. The
Company believes that design of the new products and the manufacturing process
is now essentially complete, and it has stepped up its efforts to market these
products. A newly hired marketing team has identified several potential markets
and customers. The Company believes that it can generate sufficient revenues
from sales of these products to sustain its operations through the next fiscal
year. If the Company does not adequately increase revenues, it plans to decrease
expenses by reducing inventory and personnel and to discontinue one or more
products. In addition, the Company will investigate sources of additional
capital. There can be no assurance, however, that the Company will be successful
in achieving its plans or obtaining additional financing, if needed.
YEAR 2000 READINESS
The Company's year 2000 plan has been primarily directed toward
ensuring that the Company will be able to perform critical functions, such as
manufacturing, handling of all financial transactions, and maintaining integrity
of other business operations, controls, financial reporting, security and other
matters. The Company has engaged in an assessment of year 2000 readiness both
internally and with its various business partners, including vendors and service
providers. The Company has determined that substantially all software, operating
systems, and accounting systems have been corrected or are year 2000 compliant.
Its security system and telephone systems are year 2000 compliant. The Company
has contacted its various business partners to receive assurances that such
entities are year 2000 compliant. The cost associated with the Company's year
2000 readiness program has not been material to date and the Company expects
that any future costs will also not be material and will have no adverse effect
on the Company's earnings or financial position.
FORWARD LOOKING STATEMENTS
Statements in this Report with respect to future sales prospects and
other matters to occur in the future are forward looking statements and are
subject to uncertainties from factors, many of which are beyond the Company's
control. These factors include, but are not limited to, the continued
development of the Company's products, acceptance of those products by potential
customers, the Company's ability to sell such products at a profitable price,
the Company's readiness for year 2000, and the Company's ability to fund its
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's operations are not currently subject to market risks for
interest rates, foreign currency exchange rates, commodity prices or other
market price risks of a material nature.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
APA OPTICS, INC.
Financial Statements
Years ended March 31, 1999, 1998 and 1997
Page
----
Report of Independent Auditors............................................... 9
Audited Financial Statements
Balance Sheets......................................................... 10
Statements of Operations............................................... 12
Statement of Shareholders' Equity...................................... 13
Statements of Cash Flows............................................... 14
Notes to Financial Statements.......................................... 15
8
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
APA Optics, Inc.
We have audited the accompanying balance sheets of APA Optics, Inc. as of March
31, 1999 and 1998, and the related statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended March 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of APA Optics, Inc. at March 31,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 1999, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company's accumulated
deficit and recurring losses from operations raise substantial doubt about its
ability to continue as a going concern. The financial statements do not include
any adjustments that may result from the outcome of this uncertainty.
May 14, 1999
9
<PAGE>
APA Optics, Inc.
Balance Sheets
<TABLE>
<CAPTION>
MARCH 31
1999 1998
------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,812,849 $ 5,184,215
Accounts receivable 85,091 236,284
Inventories:
Raw materials 54,208 11,965
Work-in-process 167,659 145,156
Prepaid expenses 18,911 22,975
Bond reserve funds 60,000 131,667
------------------------------
Total current assets 3,198,718 5,732,262
Property, plant and equipment 2,592,503 2,702,887
Other assets:
Bond reserve funds 533,100 653,458
Bond placement costs 212,012 260,012
Other 268,643 281,293
------------------------------
1,013,755 1,194,763
------------------------------
Total assets $ 6,804,976 $ 9,629,912
==============================
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
MARCH 31
1999 1998
-------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 53,416 $ 36,960
Accrued expenses 147,553 123,437
Current maturities of long-term debt 133,200 226,385
-------------------------------
Total current liabilities 334,169 386,782
Long-term debt 3,081,512 3,383,267
Shareholders' equity
Undesignated shares; 5,000,000 shares authorized,
none issued
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 8,512,274 85,123 85,123
Additional paid-in capital 9,700,258 9,657,028
Accumulated deficit (6,396,086) (3,882,288)
-------------------------------
Total shareholders' equity 3,389,295 5,859,863
-------------------------------
Total liabilities and shareholders' equity $ 6,804,976 $ 9,629,912
===============================
</TABLE>
SEE ACCOMPANYING NOTES.
11
<PAGE>
APA Optics, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net sales $ 237,701 $ 239,793 $ 188,265
Contract fees 484,329 1,950,844 2,581,005
------------------------------------------------
722,030 2,190,637 2,769,270
Costs and expenses:
Cost of sales 1,366,105 901,538 319,626
Cost of contract fees 837,242 1,430,578 1,609,574
Research and development 382,445 338,615 374,604
Selling, general and administrative 727,988 616,532 594,234
------------------------------------------------
3,313,780 3,287,263 2,898,038
------------------------------------------------
Loss from operations (2,591,750) (1,096,626) (128,768)
Interest income 228,195 310,925 274,976
Interest expense (149,243) (181,066) (156,231)
------------------------------------------------
Loss before income taxes (2,512,798) (966,767) (10,023)
Income taxes 1,000 1,000 1,000
------------------------------------------------
Net loss $(2,513,798) $ (967,767) $ (11,023)
================================================
Net loss per share:
Basic and diluted $ (.30) $ (.12) $ --
================================================
Weighted average shares outstanding:
Basic and diluted 8,512,274 8,376,661 8,192,879
================================================
</TABLE>
SEE ACCOMPANYING NOTES.
12
<PAGE>
APA Optics, Inc.
Statement of Shareholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance March 31, 1996 7,990,007 $ 79,900 $ 6,930,826 $(2,903,498)
Stock options exercised, net 2,000 20 3,605 --
Warrants exercised 24,625 246 81,017 --
Shares issued under private stock offering to
Aberdeen Group, net of issuance costs 289,992 2,900 1,197,100 --
Warrants issued for services in connection with bond
financing -- -- 31,875 --
Net loss -- -- -- (11,023)
------------------------------------------------------------
Balance March 31, 1997 8,306,624 83,066 8,244,423 (2,914,521)
Stock options exercised, net 3,500 35 7,871 --
Warrants exercised 202,150 2,022 1,343,861 --
Warrants issued in lieu of debt service payments -- -- 60,873 --
Net loss -- -- -- (967,767)
------------------------------------------------------------
Balance March 31, 1998 8,512,274 85,123 9,657,028 (3,882,288)
Warrants issued in lieu of debt service payments -- -- 43,230 --
Net loss -- -- -- (2,513,798)
------------------------------------------------------------
Balance March 31, 1999 8,512,274 $ 85,123 $ 9,700,258 $(6,396,086)
============================================================
</TABLE>
SEE ACCOMPANYING NOTES.
13
<PAGE>
APA Optics, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,513,798) $ (967,767) $ (11,023)
Adjustments to reconcile net loss to net cash (used
in) provided by operating activities:
Depreciation and amortization 443,275 426,362 457,173
Changes in operating assets and liabilities:
Accounts receivable 151,193 119,697 50,871
Inventories (64,746) (8,758) (17,564)
Costs in excess of billings on research contracts -- -- 210,658
Prepaid expenses and other assets (31,286) (31,548) (26,921)
Accounts payable and accrued expenses 40,572 (17,029) (26,695)
------------------------------------------------
Net cash (used in) provided by operating activities (1,974,790) (479,043) 636,499
INVESTING ACTIVITIES
Purchases of property and equipment (236,891) (925,494) (1,347,358)
------------------------------------------------
Net cash used in investing activities (236,891) (925,494) (1,347,358)
FINANCING ACTIVITIES
Proceeds from sales of common stock -- 1,353,789 1,284,888
Long-term debt proceeds -- -- 3,520,000
Repayment of long-term debt (351,710) (158,479) (135,996)
Bond placement costs -- -- (253,720)
Bond reserve funds 192,025 1,518,237 (2,085,417)
------------------------------------------------
Net cash (used in) provided by financing activities (159,685) 2,713,547 2,329,755
------------------------------------------------
(Decrease) increase in cash and cash equivalents (2,371,366) 1,309,010 1,618,896
Cash and cash equivalents at beginning of year 5,184,215 3,875,205 2,256,309
------------------------------------------------
Cash and cash equivalents at end of year $ 2,812,849 $ 5,184,215 $ 3,875,205
================================================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Warrants issued in lieu of debt service payments $ 43,230 $ 60,873 $ --
Warrants issued for services in connection with
bond financing -- -- 31,875
</TABLE>
SEE ACCOMPANYING NOTES.
14
<PAGE>
APA Optics, Inc.
Notes to Financial Statements
March 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
APA Optics, Inc. (the "Company") is engaged in the business of developing,
designing and fabricating optical components and optical systems for laser and
other industrial applications.
REVENUE RECOGNITION
Sales are recorded upon shipment of product.
Revenue on contract fees is recorded on the percentage of completion method of
accounting for long-term government contracts. A portion of the total contract
price is recognized on the basis of contract costs incurred to date as compared
to the expected total cost of the contract. Contract costs include direct
materials, labor and manufacturing overhead. Estimated losses on uncompleted
contracts are recorded in their entirety in the period in which they are
determined.
During 1999, the Company received a $75,000 grant from the State of South Dakota
when the Company hired its tenth employee at its Aberdeen, South Dakota
production facility. The grant was designed to offset the costs of training new
employees.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a majority of three
months or less when purchased to be cash equivalents. Investments classified as
cash equivalents consist primarily of certificates of deposit. The fair value of
investments approximates cost.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) method for raw materials, actual cost for direct
labor and average cost for factory overhead in work-in-process.
15
<PAGE>
APA Optics, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on the
straight-line method over the following estimated useful lives of the assets:
YEARS
---------
Building 20
Manufacturing equipment 7 - 10
Tools 3 - 7
Office equipment 5 - 10
Leasehold improvements 15
BOND PLACEMENT COSTS
Bond placement costs are amortized over 5 - 8 years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimates.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of assets and liabilities and their respective tax basis.
16
<PAGE>
APA Optics, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Basic and diluted earnings per share are calculated in accordance with Financial
Accounting Standards Board (FASB) Statement No. 128, EARNINGS PER SHARE. Basic
and diluted earnings per share are the same as the effect of outstanding stock
options and warrants is antidilutive.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records losses on long-lived assets in operations when events and
circumstances indicate that the estimate of undiscounted future cash flows
expected to be generated by those assets are less than the assets' carrying
amount.
2. GOING CONCERN
The accompanying financial statements have been prepared on the basis that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has an accumulated deficit of $6,396,086 at March 31, 1999. In order to
focus on the design and development of new optoelectronic products, the Company
has reduced its emphasis on contract research and development, resulting in
significantly reduced revenues over the last two fiscal years. The Company
believes that design of the new products and the manufacturing process is
essentially complete and has stepped up its efforts to market these products.
The Company believes that it can generate sufficient revenues from sales of
these products to sustain its operations through the next fiscal year. If the
Company does not adequately increase revenues, it plans to decrease expenses by
reducing inventory and personnel and to discontinue one or more products. In
addition, the Company will investigate sources of additional capital. There can
be no assurance, however, that the Company will be successful in achieving its
plans or obtaining additional financing.
Due to the uncertainty regarding the achievability of management's plans, no
assurance can be given as to the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amount and classification of liabilities that may result from the possible
inability of the Company to continue as a going concern.
3. ACCOUNTS RECEIVABLE
Accounts receivable includes $21,032 billed under retainage provisions of
government contracts in 1999 ($34,907 in 1998).
17
<PAGE>
APA Optics, Inc.
Notes to Financial Statements (continued)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
MARCH 31
1999 1998
--------------------------
Land $ 60,000 $ 60,000
Building 1,679,424 1,679,424
Manufacturing equipment 3,899,744 3,665,116
Tools 88,092 88,092
Office equipment 188,884 186,621
Leasehold improvements 536,447 536,447
--------------------------
6,452,591 6,215,700
Less accumulated depreciation 3,860,088 3,512,813
--------------------------
$2,592,503 $2,702,887
=========================
5. LONG-TERM DEBT
Long-term debt consists of the following:
MARCH 31
1999 1998
--------------------------
7% Minnesota Agricultural and Economic
Development Board Bond, due in increasing serial
maturities through fiscal year ending March 31, 2000,
secured by manufacturing equipment. Fully redeemed
August 1998 $ -- $ 240,000
Debt associated with the production facility in
Aberdeen, South Dakota, secured by land and
buildings 3,214,712 3,369,652
--------------------------
3,214,712 3,609,652
Less current maturities 133,200 226,385
--------------------------
$3,081,512 $3,383,267
==========================
18
<PAGE>
APA Optics, Inc.
Notes to Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
In December 1989, the Company entered into a loan agreement with the Minnesota
Agricultural and Economic Development Board to provide bond financing for the
expansion of manufacturing facilities. These bonds were fully redeemed August 1,
1998. At March 31, 1998, the Company had on deposit with trustees $211,417 in
reserve for future payments on these bonds of which $76,667 was held in escrow
for the payment of current bond maturities.
In June 1996, the Company began construction of its new production facility in
Aberdeen, South Dakota to fabricate wavelength division multiplexed modulators.
As part of its financing of the facility, the Company has received economic
assistance from the State of South Dakota Governor's Office of Economic
Development and the Aberdeen Development Corporation (the parties) as follows:
Proceeds:
Bond financing for building construction and equipment $1,895,000
Low interest loans 875,000
Forgivable loans 750,000
Equity investment - purchase of 288,992 shares of common stock 1,200,000
-------------
$4,720,000
=============
The following is a summary of the outstanding debt at March 31 related to the
Aberdeen facility:
1999 1998
----------------------------
South Dakota Governor's Office of Economic
Development and the Aberdeen Development
Corporation Bond, 5% to 6.75% due in various
installments through 2016 $1,840,000 $1,895,000
Low interest loans, 0% to 3% due in various
installments through 2016 586,107 601,573
Forgivable loans, 3% due in various installments
through 2003 788,605 873,079
----------------------------
$3,214,712 $3,369,652
============================
19
<PAGE>
APA Optics, Inc.
Notes to Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
The forgivable loans are contingent upon employment levels at the facility
meeting preset criteria. In exchange for any loans forgiven, the Company will
grant warrants to purchase common stock of the Company based on the number of
job credits earned by the Company in the preceding 12 months divided by the
exercise price. As of March 31, 1999, 23,864 warrants have been issued for loans
forgiven totaling $104,103. The carrying value of the low interest loans and
forgivable loans, based on similar instruments, approximates market at March 31,
1999 and 1998.
At March 31, 1999 and 1998, the Company had on deposit with trustees $593,100
and $573,708 in reserve funds for current bond maturities of which $60,000 and
$55,000 are held in escrow. These funds are included in bond reserve funds in
the accompanying balance sheets. The loan agreement requires the Company to
maintain certain minimum levels of net worth and to maintain certain income to
outstanding debt ratios. The Company was out of compliance with these covenants
in fiscal 1999. Such noncompliance does not constitute an event of default, but
triggers further covenants under the loan agreement with which the Company is in
compliance at March 31, 1999. The carrying value of the bonds approximates
market value at March 31, 1999 and 1998.
In addition, the Company has available $300,000 in promissory notes, available
until July 1, 1999, to be used for the purchase of equipment in the new
facility. There were no outstanding borrowings under this arrangement at March
31, 1999 and 1998.
As partial payment of expenses related to the Aberdeen financing, the Company
issued warrants to purchase 31,875 shares of the Company's common stock at an
exercise price of $4.00 per share. The warrants expire in March 2002. The value
assigned to the warrants of $31,875 has been capitalized as bond placement costs
and is amortized over the life of the loan agreement.
As part of the Company's plan to construct this production facility, the city of
Aberdeen, South Dakota gave the Company land with an approximate fair market
value of $250,000. The gift was contingent upon the Company staying in the new
building through June 23, 2002.
Interest paid during fiscal year 1999, 1998 and 1997 was $149,243, $181,066 and
$156,231, respectively.
20
<PAGE>
APA Optics, Inc.
Notes to Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows (assuming no debt is forgiven): 2000
- - $133,200; 2001 - $139,890; 2002 - $372,907; 2003 - $523,701; 2004 - $310,709;
thereafter - $1,734,305.
6. INCOME TAXES
As of March 31, 1999, the Company has net operating loss carryovers for federal
income tax purposes of approximately $6,616,000 expiring in fiscal years 2001 to
2018 and $43,000 in research and development credits expiring in fiscal
2001which can be used to offset federal income taxes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts used for financial reporting purposes and the
amounts used for income tax purposes. Significant components of the Company's
deferred taxes are as follows:
MARCH 31
1999 1998
-------------------------------
Net operating losses $ 2,113,000 $ 1,405,000
Depreciation 6,000 11,000
Research and development credits 43,000 43,000
Other 71,000 24,000
-------------------------------
Total deferred tax asset 2,233,000 1,483,000
Less valuation allowance (2,233,000) (1,483,000)
-------------------------------
Net deferred taxes $ -- $ --
===============================
Income tax expense consists of state taxes in 1999, 1998 and 1997.
7. SHAREHOLDERS' EQUITY
The Board of Directors may by resolution establish from the undesignated shares
different classes or series of shares and may fix the relative rights and
preferences of shares in any class or series.
21
<PAGE>
APA Optics, Inc.
Notes to Financial Statements (continued)
8. STOCK OPTIONS AND WARRANTS
In fiscal 1998 and 1997, certain shareholders tendered 2,500 and 2,000 shares,
respectively, of common stock as substantial payment for 6,000 and 4,000 shares,
respectively, purchased upon exercise of their stock options.
Option activity is summarized as follows:
WEIGHTED
SHARES AVERAGE
AVAILABLE OPTIONS EXERCISE PRICE
FOR GRANT OUTSTANDING PER SHARE
----------------------------------------------
Balance March 31, 1996 236,338 10,000 $ 3.94
Additional shares reserved 500,000 -- --
Granted (75,000) 75,000 5.19
Exercised -- (4,000) 3.50
---------------------------
Balance March 31, 1997 661,338 81,000 5.20
Additional shares reserved 500,000 -- --
Granted (25,000) 25,000 6.19
Exercised -- (6,000) 4.22
Canceled 70,000 (70,000) 5.19
---------------------------
Balance March 31, 1998 1,206,338 30,000 6.10
Granted (252,500) 252,500 4.09
Canceled 20,000 (20,000) 6.24
---------------------------
Balance March 31, 1999 973,838 262,500 $ 4.18
===========================
The Company has various incentive and non-qualified stock option plans which are
used as an incentive for directors, officers and other employees, consultants
and technical advisors. Options are granted at fair market values determined on
the date of grant and vesting normally occurs over a four-year period.
The number of shares exercisable at March 31, 1999, 1998 and 1997 was 15,000,
5,000 and 6,000, respectively, at a weighted average exercise price of $5.70,
$5.65 and $4.88 per share, respectively.
22
<PAGE>
APA Optics, Inc.
Notes to Financial Statements (continued)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
The weighted average fair value of options granted in 1999, 1998 and 1997 was
$2.05, $2.83 and $2.99 per share, respectively. The exercise price of options
outstanding at March 31, 1999 ranged from $3.77 to $5.73 per share.
Pro forma information regarding net loss and net loss per share is required by
FASB Statement No. 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of Statement 123. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of
4.55%, 5.61% and 6.54%, volatility factor of the expected market price of the
Company's common stock of .48, .44 and .60 and a weighted-average expected life
of the options of 5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value statement, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
1999 1998 1997
----------------------------------------
Pro forma net loss $(2,626,002) $(991,568) $(16,249)
Pro forma net loss per common share -
basic and diluted $(.31) $(.12) $ --
These pro forma amounts may not be indicative of future years' amounts.
23
<PAGE>
APA Optics, Inc.
Notes to Financial Statements (continued)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following is a table of the warrants to purchase shares of the Company's
common stock:
WARRANTS EXERCISE PRICE EXPIRATION
OUTSTANDING PER SHARE DATE
-----------------------------------------------
Balance at March 31, 1996 415,000 $3.30 - $6.75 1996 - 2001
Granted 31,875 4.00 2000
Exercised (24,625) 3.30 2001
Expired (20,375) 3.30 1996
------------
Balance at March 31, 1997 401,875 3.30 - 6.75 1997 - 2002
Granted 15,218 4.00 2003
Exercised (202,150) 3.30 - 6.75 1997 - 1999
Expired (103,250) 6.75 1997
------------
Balance at March 31, 1998 111,693 3.30 - 4.00 1999 - 2003
Granted 8,646 5.00 2004
------------
Balance at March 31, 1999 120,339 $3.30 - $5.00 1999 - 2004
============
9. COMMITMENTS
The Company leases office and manufacturing facilities from a partnership whose
two partners are major shareholders and officers of the Company. The lease
agreement, classified as an operating lease, expires November 30, 1999 and
provides for periodic increases of the rental rate based on increases in the
consumer price index. Future minimum lease obligations under the lease as of
March 31, 1999 are as follows:
Year ending March 31:
2000 $77,000
=============
Rental expense, all of which was paid to the partnership, was $116,000 in fiscal
1999, $118,000 in fiscal 1998 and $118,000 in fiscal 1997.
24
<PAGE>
APA Optics, Inc.
Notes to Financial Statements (continued)
10. MAJOR CUSTOMER
Several operating agencies of the U.S. Government account for more than 10% of
the Company's net sales and contract fees. Total revenues from the agencies were
$484,329 in 1999, $1,950,844 in 1998 and $2,581,005 in 1997 as follows:
1999 1998 1997
----------------------------------
Air Force 23% 20% 42%
Army - 25 22
Navy 18 38 36
ARPA 59 17 -
----------------------------------
Total 100% 100% 100%
==================================
25
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of APA Optics, Inc. executive officers, their ages,
positions and offices as of March 31, 1999.
NAME AGE POSITION
Dr. Anil K. Jain 53 Chief Executive Officer, President,
Chief Financial Officer and Treasurer
Kenneth A. Olsen 55 Vice President and Secretary
Randal J. Becker 46 Principal Accounting Officer
DR. ANIL K. JAIN has been a Director and Chief Executive Officer,
President, Chief Financial Officer and Treasurer since March 1979. From 1973
until October 15, 1983, when Dr. Jain commenced full time employment with the
Company, he was employed at the Systems and Research Center at Honeywell Inc. as
a Senior Research Fellow, coordinating optics-related development.
KENNETH A. OLSEN has been a Director since 1980, Secretary since 1983,
and Vice President since 1992. Prior to joining the Company, he had been with 3M
Corp., St. Paul, Minnesota.
RANDAL BECKER has been Principal Accounting Officer since joining the
Company in 1987. Prior to joining the Company he was with Apache Corporation,
Minneapolis, Minnesota.
Information regarding Directors is incorporated herein by reference
from the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information requested by the above Items 11, 12, and 13 is included
in the Proxy Statement, which is incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) The following financial statements are filed herewith
under Item 8.
(i) Balance Sheets as of March 31, 1998 and 1999
(ii) Statements of Operations for the years ended March
31, 1999, 1998 and 1997
(iii) Statement of Shareholders' Equity for the years ended
March 31, 1999, 1998 and 1997
(iv) Statements of Cash Flows for the years ended March
31, 1999, 1998 and 1997
(v) Notes to Financial Statements at March 31, 1999
(2) Financial Statement Schedules: None
(b) Reports filed on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of
the fiscal year ended March 31, 1999.
(c) Exhibits
See Exhibit Index on page 28 of this Report.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
APA Optics, Inc.
Date: June 25, 1999 By /s/ Anil K. Jain
--------------------------------------
Anil K. Jain
PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Anil K. Jain President, Chief Executive Officer, June 25, 1999
- ------------------------ Treasurer, Chief Financial Officer,
Anil K. Jain and Director
/s/ Kenneth A. Olsen Secretary, Vice President, and June 25, 1999
- ------------------------ Director
Kenneth A. Olsen
/s/ Randal J. Becker Principal Accounting Officer June 25, 1999
- ------------------------
Randal J. Becker
/s/ Gregory Von Wald Director June 25, 1999
- ------------------------
Gregory Von Wald
/s/ William R. Franta Director June 25, 1999
- ------------------------
William R. Franta
/s/ Larry Pressler Director June 25, 1999
- ------------------------
Larry Pressler
27
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
PAGE NUMBER OR INCORPORATED
NUMBER DESCRIPTION BY REFERENCE TO
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Restated Articles of Incorporation, as Exhibit 3.1 to Registrant's Report on
amended to date, and Statement regarding Form 10-KSB for the fiscal year ended
establishment of class of shares March 31, 1995
3.2 Bylaws, as amended and restated to date
4.1(a) State of South Dakota Board of Economic Exhibit 4.1(a) to the Report on 10-QSB
Development $300,000 Promissory Note, for the quarter ended June 30, 1996 (the
REDI Loan: 95-13-A "June 1996 10-QSB")
4.1(b) State of South Dakota Board of Economic Exhibit 4.1(b) to the June 1996 10-QSB
Development Security Agreement REDI Loan
No: 95-13-A dated May 28, 1996
4.2(a) $700,000 Loan Agreement dated June 24, Exhibit 4.2(a) to the June 1996 10-QSB
1996 by and between Aberdeen Development
Corporation and APA Optics, Inc.
4.2(b) $300,000 Loan Agreement dated June 24, Exhibit 4.2(b) to the June 1996 10-QSB
1996 between Aberdeen Development
Corporation and APA Optics, Inc.
4.2(c) $250,000 Loan Agreement dated June 24, Exhibit 4.2(c) to the June 1996 10-QSB
1996 by and between Aberdeen Development
Corporation and APA Optics, Inc.
4.2(d) $300,000 Loan Agreement dated June 24, Exhibit 4.2(d) to the June 1996 10-QSB
1996 by and between Aberdeen Development
Corporation and APA Optics, Inc.
4.3(a) Loan Agreement between South Dakota Exhibit 4.3(a) to the June 1996 10-QSB
Economic Development Finance and APA
Optics, Inc.
4.3(b) Mortgage and Security Agreement - One Exhibit 4.3(b) to the June 1996 10-QSB
Hundred Day Redemption from APA Optics,
Inc. to South Dakota Economic Development
Finance Authority dated as of June 24,
1996
4.4(a) Subscription and Investment Exhibit 4.4(a) to the June 1996 10-QSB
Representation Agreement of NE Venture,
Inc.
4.4(b) Form of Common Stock Purchase Warrant for Exhibit 4.4(b) to the June 1996 10-QSB
NE Venture, Inc.
10.1 Sublease Agreement between the Registrant Exhibit 10.1 to the Registration
and Jain-Olsen Properties and Sublease Statement on Form S-18 filed with the
Agreement and Option Agreement between Chicago Regional Office of the
the Registrant and Jain-Olsen Properties Securities and Exchange Commission on
June 26, 1986
*10.2a Stock Option Plan for Nonemployee Exhibit 10.3a to Registrant's Report on
Directors Form 10-KSB for the fiscal year ended
March 31, 1994 (the "1994 10-KSB")
*10.2b Form of option agreement issued under the Exhibit 10.3b to 1994 10-KSB
plan
*10.3 1997 Stock Compensation Plan Exhibit 10.3 Registrant's Report on Form
10-KSB for the fiscal year ended March
31, 1997
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
PAGE NUMBER OR INCORPORATED
NUMBER DESCRIPTION BY REFERENCE TO
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
*10.4 Insurance agreement by and between the Exhibit 10.5 to Registrant's Report on
Registrant and Anil K. Jain Form 10-K for the fiscal year ended
March 31, 1990
*10.5 Form of Agreement regarding Repurchase of Exhibit 10.1 to Registrant's Report on
Stock upon Change in Control Event with Form 10-QSB for the quarter ended
Anil K. Jain and Kenneth A. Olsen September 30, 1997 ("September 1997
10-QSB")
*10.6 Form of Agreement regarding Exhibit 10.2 to the September 1997
Employment/Compensation upon Change in 10-QSB
Control with Messrs. Jain and Olsen
27 Financial data schedule
</TABLE>
*Indicates management contract or compensation plan or arrangements required to
be filed as an exhibit to this form.
29
EXHIBIT 3.2
APA OPTICS, INC.
BYLAWS
(AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 17, 1999)
TABLE OF CONTENTS
ARTICLE I: OFFICES
Section 1.01. Registered Office.............................................1
Section 1.02. Other Offices.................................................1
ARTICLE II: MEETINGS OF SHAREHOLDERS
Section 2.01. Place of Meetings.............................................1
Section 2.02. Time of Meetings..............................................1
Section 2.03. Regular Meetings..............................................1
Section 2.04. Special Meetings..............................................1
Section 2.05. Notice of Meetings............................................2
Section 2.06. Waiver of Notice..............................................2
Section 2.07. Purpose of Special Meetings...................................2
Section 2.08. Quorum; Adjournment...........................................2
Section 2.09. Vote Required.................................................3
Section 2.10. Voting Rights.................................................3
Section 2.11. Proxies.......................................................3
Section 2.12. Action in Writing.............................................3
Section 2.13. Closing of Books; Record Date.................................3
Section 2.14. Advance Notice Requirements...................................4
ARTICLE III: DIRECTORS
Section 3.01. General Powers................................................5
Section 3.02. Number; Qualifications........................................6
Section 3.03. Vacancies.....................................................6
Section 3.04. Meetings......................................................6
Section 3.05. Committees....................................................8
Section 3.06. Telephone Conference Meetings.................................8
Section 3.07. Compensation..................................................8
Section 3.08. Limitation of Directors' Liabilities..........................9
Section 3.09. Resignation and Removal.......................................9
ARTICLE IV: OFFICERS
Section 4.01. Selection and Qualification...................................9
Section 4.02. Salaries......................................................9
Section 4.03. Term of Office................................................9
Section 4.04. Chairman of the Board of Directors...........................10
Section 4.05. Chief Executive Officer......................................10
Section 4.06. Vice President...............................................10
Section 4.07. Secretary....................................................10
Section 4.08. Chief Financial Officer......................................10
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ARTICLE V: CERTIFICATES FOR STOCK
Section 5.01. Issuance of Shares and Fractional Shares.....................11
Section 5.02. Form of Certificate..........................................11
Section 5.03. Facsimile....................................................11
Section 5.04. Lost, Stolen, or Destroyed Certificates......................12
Section 5.05. Transfer of Stock............................................12
Section 5.06. Closing of Transfer Books; Record Date.......................12
Section 5.07. Registered Shareholders......................................13
Section 5.08. Stock Options and Agreements.................................13
ARTICLE VI: DIVIDENDS
Section 6.01. Source.......................................................13
Section 6.02. Closing of Books; Record Date................................13
Section 6.03. Reserves.....................................................13
Section 6.04. Determining Fair Market Value................................13
ARTICLE VII: CHECKS
Section 7.01. Checks.......................................................14
ARTICLE VIII: CORPORATE SEAL
Section 8.01. Corporate Seal...............................................14
ARTICLE IX: FISCAL YEAR
Section 9.01. Fiscal Year..................................................14
ARTICLE X: AMENDMENTS
Section 10.01. Amendments..................................................14
ARTICLE XI: BOOKS AND RECORDS
Section 11.01. Books and Records...........................................14
Section 11.02. Documents Kept at Principal Executive or Registered
Office......................................................14
Section 11.03. Financial Statements........................................15
Section 11.04. Computerized Records........................................15
ARTICLE XII: INSPECTION OF BOOKS
Section 12.01. Examination and Copying by Shareholders.....................16
Section 12.02. Information to Shareholders.................................16
ARTICLE XIII: LOANS AND ADVANCES
Section 13.01. Loans, Guarantees, and Suretyship...........................16
Section 13.02. Advances to Officers, Directors, and Employees..............16
ARTICLE XIV: INDEMNIFICATION
Section 14.01. Indemnification.............................................17
ARTICLE XV: DEFINITIONS AND USAGE
Section 15.01. Singular, Plural; Masculine, Feminine, and Neuter...........17
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AMENDED AND RESTATED
BYLAWS
OF
APA OPTICS, INC.
ARTICLE I: OFFICES
Section 1.01. Registered Office. The registered office of the
Company in Minnesota shall be that set forth in the Articles of Incorporation or
in the most recent amendment of the Articles of Incorporation or in a
certificate prepared by the Board of Directors and filed with the Secretary of
State of Minnesota changing the registered office.
Section 1.02. Other Offices. The Company may also have offices and
places of business at such other places both within and without the State of
Minnesota as the Board of Directors may from time to time determine or the
business of the Company may require.
ARTICLE II: MEETINGS OF SHAREHOLDERS
Section 2.01. Place of Meetings. All meetings of the shareholders of
the Company shall be held at its registered office or at such other place within
or without the State of Minnesota as shall be stated by the Board of Directors
in the notice of the meeting. In the absence of designation otherwise, meetings
shall be held at the registered office of the Company in the State of Minnesota.
Section 2.02. Time of Meetings. The Board of Directors shall
designate the time and day for each meeting. In the absence of such designation,
every meeting of the shareholders shall be held at ten o'clock A.M.
Section 2.03. Regular Meetings.
Section 2.03-a. Annual Meetings. Each annual meeting shall be held
on a date to be selected by the Board of Directors, subject to the power of the
Board of Directors to change the date, or if that day shall fall upon a legal
holiday, on the next succeeding business day; except that the Board of Directors
may, in its discretion and solely for convenience, determine in any year an
annual meeting date falling not earlier than ten (10) days before or later than
four (4) days after such designated annual meeting date, or may, for reasonable
cause, postpone such annual meeting date to a subsequent date within the same
calendar year as designated by the Board of Directors.
Section 2.03-b. Election of Directors. At the annual meeting the
shareholders, voting as provided in the Articles of Incorporation or in these
Bylaws, may designate any change in the number of Directors to constitute the
Board of Directors, shall elect a Board of Directors, and shall transact such
other business as may properly come before the meeting.
Section 2.04. Special Meetings. Special meetings of the shareholders
may be held at any time and for any purpose and may be called by the Chief
Executive Officer, Chief Financial
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Officer, any two Directors, or by a shareholder or shareholders holding ten
percent (10%) or more of the shares entitled to vote (except that a special
meeting for the purpose of considering any action to directly or indirectly
effect a business combination, including any action to change or otherwise
affect the composition of the Board of Directors for that purpose, must be
called by shareholders holding not less than twenty-five percent (25%) of all
shares of the Company entitled to vote), who shall demand such special meeting
by written notice given to the Chief Executive Officer or the Chief Financial
Officer of the Company specifying the purposes of such meeting.
Section 2.05. Notice of Meetings. Notice of meetings shall be in
writing and signed by the Chief Executive Officer or any Vice President or the
Secretary or any Assistant Secretary, or by such other person or persons as the
Board shall designate. Such notice shall state the place, date, and time of the
meeting and, in the case of a special meeting, the purpose or purposes for which
the meeting is called. A copy of such notice shall be either delivered
personally or mailed, postage prepaid, to each shareholder of record entitled to
vote at such meeting pursuant to Section 2.13 hereof not less than ten (10) nor
more than sixty (60) days before such meeting. If mailed, it shall be directed
to each shareholder at his address as it appears upon the records of the
Company, and upon such mailing of any such notice, the service thereof shall be
complete, and the time of the notice shall begin to run from the date that such
notice is deposited in the mail for transmission to such shareholder. Personal
delivery of any such notice to a corporation, an association, or a partnership
shall be accomplished by personal delivery of such notice to any officer of a
corporation or an association or to any member of a partnership.
Section 2.06. Waiver of Notice. Notice of any meeting of the
shareholders may be waived before, at, or after such meeting in a writing signed
by the shareholder or representative thereof entitled to vote the shares so
represented. Such waiver shall be filed with the Secretary or entered upon the
records of the meeting.
Section 2.07. Purpose of Special Meetings. Business transacted at
any special meeting of the shareholders shall be limited to the matters stated
in the notice, or other matters necessarily incidental thereto.
Section 2.08. Quorum; Adjournment. The holders of a majority of the
stock issued and outstanding and entitled to vote, present in person or
represented by proxy, shall constitute a quorum for the transaction of business
at all meetings of the shareholders, except as may be otherwise provided by
statute or by the Articles of Incorporation. If, however, such quorum shall not
be present or represented at any meeting of the shareholders, the shareholders
entitled to vote thereat, present in person or represented by proxy, shall have
the power to adjourn the meeting from time to time, without notice other than
announcement at such meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the original
meeting in accordance with the notice thereof. If a quorum is present when a
duly called or held meeting is convened, the shareholders present in person or
represented by proxy may continue to transact business until adjournment
notwithstanding the withdrawal of enough shareholders originally present in
person or by proxy to leave less than a quorum.
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Section 2.09. Vote Required. When a quorum is present or represented
at any meeting, the vote of the holders of a majority of the stock having voting
power present in person or represented by proxy shall decide any question
brought before such meeting, unless the question is one that by express
provision of statute or of the Articles of Incorporation or of these Bylaws
requires a different vote, in which case such express provision shall govern the
vote required.
Section 2.10. Voting Rights. Except as may be otherwise required by
statute or the Articles of Incorporation or these Bylaws, every shareholder of
record of the Company shall be entitled at each meeting of the shareholders to
one vote for each share of stock standing in his name on the books of the
Company.
Section 2.11. Proxies. At any meeting of the shareholders, any
shareholder may be represented and vote by a proxy or proxies appointed by an
instrument in writing and filed with the Secretary at or before the meeting. An
appointment of a proxy or proxies for shares held jointly by two or more
shareholders is valid if signed by any one of them, unless and until the Company
receives from any one of those shareholders written notice denying the authority
of such other person or persons to appoint a proxy or proxies or appointing a
different proxy or proxies. In the event that any instrument shall designate two
or more persons to act as proxies, a majority of such persons present at the
meeting, or if only one shall be present then that one, shall have and may
exercise all of the proxies so designated unless the instrument shall otherwise
provide. If the proxies present at the meeting are equally divided on an issue,
the shares represented by such proxies shall not be voted on such issue. No
proxy shall be valid after the expiration of eleven (11) months from the date of
its execution unless coupled with an interest or unless the person executing it
specifies therein the length of time for which it is to continue in force, which
in no case shall exceed three (3) years from the date of its execution. Subject
to the above, any duly executed proxy shall continue in full force and effect
and shall not be revoked unless written notice of its revocation or a duly
executed proxy bearing a later date is filed with the Secretary of the Company.
Section 2.12. Action in Writing. Except as may be otherwise required
by statute or the Articles of Incorporation, any action required or permitted to
be taken at any meeting of the shareholders of the Company may be taken without
a meeting, without prior notice, and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by all of the holders of the
shares of outstanding stock that would be entitled to vote thereon at a meeting
of the shareholders.
Section 2.13. Closing of Books; Record Date. The Board of Directors
may fix a date, not exceeding sixty (60) days preceding the date of any meeting
of the shareholders of the Company, as a record date for the determination of
the shareholders entitled to notice of and to vote at such meeting, and in such
case only shareholders of record on the date so fixed or their legal
representatives shall be entitled to notice of and to vote at such meeting,
notwithstanding any transfer of shares on the books of the Company after any
record date so fixed. The Board of Directors may close the books of the Company
against the transfer of shares during the whole or any part of such period. If
the Board of Directors fails to fix such a record date, the record date shall be
the twentieth (20th) day preceding the date of such meeting.
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Section 2.14. Advance Notice Requirements.
Section 2.14-a. Notice of Nomination of Directors. Only persons who
are nominated in accordance with the procedures set forth in this Section 2.14-a
shall be eligible for election as Directors. Nominations of persons for election
to the Board of Directors of the Company may be made at a meeting of
shareholders (a) by or at the direction of the Board of Directors or (b) by any
shareholder of the Company entitled to vote for the election of Directors at the
meeting who complies with the notice procedures set forth in this Section
2.14-a. Nominations by shareholders shall be made pursuant to timely notice in
writing to the Secretary of the Company. To be timely, a shareholder's notice
must be delivered to the Secretary of the Company, or mailed and received at the
principal executive office of the Company, not less than 90 days prior to the
first anniversary date of the prior year's annual meeting. If, however, the date
of the annual meeting of shareholders is more than 30 days before or after such
anniversary date, notice by a shareholder shall be timely only if so delivered,
or so mailed and received, not less than 90 days before such annual meeting or,
if later, within 10 days after the first public announcement of the date of such
annual meeting. If a special meeting of shareholders of the Company is called in
accordance with Section 2.04 of these Bylaws for the purpose of electing one or
more Directors to the Board of Directors or if a regular meeting other than an
annual meeting is held, for a shareholder's notice of nominations to be timely
it must be delivered to the Secretary of the Company, or mailed and received at
the principal executive office of the Company, not less than 90 days before such
special meeting or such regular meeting or, if later, within 10 days after the
first public announcement of the date of such special meeting or such regular
meeting. Except to the extent otherwise required by law, the adjournment of a
regular or special meeting of shareholders shall not commence a new time period
for the giving of a shareholder's notice as described above. Such shareholder's
notice shall set forth (x) as to each person whom the shareholder proposes to
nominate for election or re-election as a Director, (i) such person's name and
(ii) all information relating to such person that is required to be disclosed in
solicitations of proxies for election of Directors, or is otherwise required,
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a Director if elected); and (y) as to the
shareholder giving the notice, (i) the name and address, as they appear on the
Company's books, of such shareholder and (ii) the class and number of shares of
the Company which are beneficially owned by such shareholder. At the request of
the Board of Directors, any person nominated by the Board of Directors for
election as a Director shall furnish to the Secretary of the Company that
information required to be set forth in a shareholder's notice of nomination
which pertains to a nominee. Notwithstanding anything in these Bylaws to the
contrary, no person shall be eligible for election as a Director of the Company
unless nominated in accordance with the procedures set forth in this Section
2.14-a. The Chairman of the meeting shall, if the facts warrant, determine that
a nomination was not made in accordance with the procedures prescribed in this
Section 2.14-a and, if the Chairman should so determine, the Chairman shall so
declare to the meeting and the defective nomination shall be disregarded.
Section 2.14-b. Advance Notice of Business to be Conducted. At any
regular or special meeting of shareholders, only such business shall be
conducted as shall have been brought before the meeting (a) by or at the
direction of the Board of Directors or (b) by any shareholder of the Company who
complies with the notice procedures set forth in this Section 2.14-b. For
business
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to be properly brought before any regular or special meeting by a shareholder,
the shareholder must have given timely notice thereof in writing to the
Secretary of the Company. To be timely, a shareholder's notice of any such
business to be conducted at an annual meeting must be delivered to the Secretary
of the Company, or mailed and received at the principal executive office of the
Company, not less than 90 days prior to the first anniversary date of the prior
year's annual meeting. If, however, the date of the annual meeting of
shareholders is more than 30 days before or after such anniversary date, notice
by a shareholder shall be timely only if so delivered, or so mailed and
received, not less than 90 days before such annual meeting or, if later, within
10 days after the first public announcement of the date of such annual meeting.
If a special meeting of shareholders of the Company is called in accordance with
Section 2.04 for any purpose other than electing Directors to the Board of
Directors or if a regular meeting other than an annual meeting is held, for a
shareholder's notice of any such business to be timely it must be delivered to
the Secretary of the Company, or mailed and received at the principal executive
office of the Company, not less than 90 days before such special meeting or such
regular meeting, or, if later, within 10 days after the first public
announcement of the date of such special meeting or such regular meeting. Except
to the extent otherwise required by law, the adjournment of a regular or special
meeting of shareholders shall not commence a new time period for the giving of a
shareholder's notice as required above. A shareholder's notice to the Secretary
shall set forth as to each matter the shareholder proposes to bring before the
regular or special meeting (w) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting, (x) the name and address, as they appear on the Company's books, of the
shareholder proposing such business, (y) the class and number of shares of the
Company which are beneficially owned by the shareholder and (z) any material
interest of the shareholder in such business. Notwithstanding anything in these
Bylaws to the contrary, no business shall be conducted at any regular or special
meeting except in accordance with the procedures set forth in this Section
2.14-b and, as an additional limitation, the business transacted at any special
meeting shall be limited to the purposes stated in the notice of the special
meeting. The Chairman of the meeting shall, if the facts warrant, determine that
business was not properly brought before the meeting in accordance with the
provisions of this Section 2.14-b and, if the Chairman should so determine, the
Chairman shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted.
Section 2.14-c. Public Announcement. For purposes of this Section
2.14, "public announcement" means disclosure (i) when made in a press release
reported by the Dow Jones News Service, Associated Press, or comparable national
news service, (ii) when filed in a document publicly filed by the Company with
the Securities and Exchange Commission pursuant to Section 13, 14 or 15 (d) of
the Securities Exchange Act of 1934, as amended, or (iii) when mailed as the
notice of the meeting pursuant to Section 2.05 of these Bylaws.
ARTICLE III: DIRECTORS
Section 3.01. General Powers. The business of the Company shall be
managed by its Board of Directors, which may exercise all such powers of the
Company and do all such lawful acts and things as are not by statute or by the
Articles of Incorporation or by these Bylaws directed or required to be
exercised or done by the shareholders.
5
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Section 3.02. Number; Qualifications. Until the first meeting of the
shareholders, the number of Directors which shall constitute the whole Board
shall be the number named in the Articles of Incorporation or otherwise
appointed by the Incorporator of the Company prior to the issuance of shares of
the Company. Thereafter, the number of Directors that shall constitute the whole
Board shall be at least one (1). In the absence of a resolution of the
shareholders or the Directors, the number of Directors shall be the number last
fixed by the shareholders or the Directors; provided, however, that the Board of
Directors may not decrease the number of Directors. Directors need not be
shareholders. Each of the Directors shall hold office until the next succeeding
annual meeting of shareholders and until his successor shall have been duly
elected and qualified, or until his earlier resignation or removal from office
as hereinafter provided.
Section 3.03. Vacancies. In the event that any member of the Board
of Directors shall resign, die, be removed from office, become disqualified, or
refuse to act during his term of office, or any vacancy or vacancies in the
Board of Directors shall occur for any other reason, such vacancy or vacancies
shall be filled by a majority vote of the remaining members of the Board of
Directors, although less than a quorum, the provisions of Section 3.04-e hereof
notwithstanding. However, in the event that there are no duly elected and
qualified Directors remaining in office, then the shareholders shall elect by
majority vote a new Director or new Directors to fill such vacancy or vacancies.
The voting by the shareholders to fill such vacancy or vacancies shall be
conducted as provided in the Articles of Incorporation and these Bylaws. When
one or more Directors shall give notice of his or their resignation to the
Board, effective at a future date, the Board shall have power to fill such
vacancy or vacancies to take effect when such resignation or resignations shall
become effective. Each Director elected to hold office as provided in this
Section 3.03 shall hold office until the next succeeding annual meeting of the
shareholders and until his successor shall have been elected and qualified, or
until his earlier resignation or removal from office as hereinafter provided.
Section 3.04. Meetings.
Section 3.04-a. Place of Meetings. The Board of Directors of the
Company may hold meetings, both regular and special, either within or without
the State of Minnesota.
Section 3.04-b. Regular Meetings. As soon as practicable after each
annual election of Directors, the Board of Directors shall meet at the
registered office of the Company, or at such other place within or without the
State of Minnesota as may be designated by the Board of Directors, for the
purpose of electing the officers of the Company and for the transaction of such
other business as shall come before the meeting. Other regular meetings of the
Board of Directors may be held without notice at such time and place within or
without the State of Minnesota as shall from time to time be determined by
resolution of the Board of Directors.
Section 3.04-c. Special Meetings. Special meetings of the Board of
Directors may be called by the Chief Executive Officer or Secretary or by one or
more Directors and shall be held at such time and place as shall be designated
in the notice of such meeting.
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Section 3.04-d. Notice. Notice of a special meeting shall be given
to each Director at least 24 hours before the time of the meeting, or at the
earliest time possible thereafter, but prior to such meeting, if it is
impractical to give such notice 24 hours in advance. Notice may be given by any
means calculated to apprise the Directors of the special meeting. Notice by mail
shall be deemed to be given at the time when the same shall be mailed. Whenever
any provision of law, the Articles of Incorporation, or the Bylaws require
notice to be given, any Director may, in writing, either before or after the
meeting, waive notice thereof. Without notice, any Director, by his attendance
at and participation in the action taken at any meeting, shall be deemed to have
waived notice thereof.
Section 3.04-e. Quorum; Voting Requirements; Adjournment. A majority
of the Board of Directors then in office shall be necessary to constitute a
quorum for the transaction of business, and the act of a majority of the
Directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors, except as may be otherwise specifically provided by
statute or by the Articles of Incorporation or these Bylaws.
If a quorum shall not be present at any meeting of the Board of
Directors, the Directors present thereat may adjourn the meeting to another time
or place, and no notice as to such adjourned meeting need be given other than by
announcement at the meeting at which such adjournment is taken. If a quorum is
present at the call of a meeting, the Directors may continue to transact
business until adjournment notwithstanding the withdrawal of enough Directors to
leave less than a quorum.
Section 3.04-f. Organization of Meetings. At all meetings of the
Board of Directors the Chairman of the Board, if appointed, or in his absence,
the Chief Executive Officer, or in his absence, any Director appointed by the
Chief Executive Officer, shall preside, and the Secretary, or in his absence,
any person appointed by the Chief Executive Officer, shall act as Secretary.
Section 3.04-g. Action in Writing. Except as may be otherwise
required by statute or the Articles of Incorporation, any action required or
permitted to be taken at any meeting of the Board of Directors of the Company
may be taken without a meeting, without prior notice, and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
number of Directors that would be necessary to authorize or take such action at
a meeting at which all Directors entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those Directors who have
not consented in writing.
Section 3.04-h. Absent Directors. A Director may give advance
written consent or opposition to a proposal to be acted on at a meeting of the
Board of Directors. Such advance written consent or opposition shall be
ineffective unless the writing is delivered to the Chief Executive Officer or
Secretary of the Company prior to the meeting at which such proposal is to be
considered. If the Director is not present at the meeting, consent or opposition
to a proposal does not constitute presence for purposes of determining the
existence of a quorum, but such consent or opposition shall be counted as a vote
in favor of or against the proposal and shall be entered in the minutes or other
record of action at the meeting, if the proposal acted on at the
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meeting is substantially the same or has substantially the same effect as the
proposal to which the Director has consented or objected.
Section 3.05. Committees.
Section 3.05-a. Committees. The Board of Directors may, by
resolution approved by the affirmative vote of the majority of its members,
establish one or more committees, including an executive committee, which shall
have the authority of the Board of Directors in the management of the business
and affairs of the Company to the extent provided in the resolution, as amended
from time to time. Any such committee shall consist of one or more natural
persons, who need not be Directors, appointed by the affirmative vote of the
majority of the Directors present.
Section 3.05-b. Limitations on Authority. No committees of the
Company shall have authority as to any of the following matters:
(a) The submission to shareholders of any action as to which
shareholders' authorization is required by law;
(b) The filling of vacancies in the Board of Directors or on any
committee;
(c) The fixing of compensation of any Director for serving on the
Board or on any committee;
(d) The amendment or repeal of these Bylaws or the adoption of new
Bylaws;
(e) The amendment or repeal of any resolution of the Board, which
by its terms shall not be so amendable or repealable.
Section 3.05-c. Minutes of Committee Meetings. The committees shall
keep regular minutes of their proceedings and report the same to the Board when
required.
Section 3.06. Telephone Conference Meetings. Any Director or any
member of a duly constituted committee of the Board of Directors may participate
in any meeting of the Board of Directors or of any duly constituted committee
thereof by means of a conference telephone or other comparable communication
technique whereby all persons participating in such a meeting can hear and
communicate with each other. For the purpose of establishing a quorum and taking
any action at such a meeting, the members participating in such a meeting
pursuant to this Section 3.06 shall be deemed present in person at such meeting.
Section 3.07. Compensation. Directors may be paid their expenses, if
any, of attendance at each meeting of the Board of Directors. Directors who are
not also salaried officers may be paid a fixed sum for attendance at each
meeting of the Board of Directors. Nothing herein contained shall preclude any
Director from serving the Company in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
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Section 3.08. Limitation of Directors' Liabilities. A Director shall
not be liable to the Company or its shareholders for dividends illegally
declared, distributions illegally made to shareholders, or any other actions
taken in good faith reliance upon financial statements of the Company
represented to him to be correct by the Chief Executive Officer of the Company
or the officer having charge of its books of account or certified by an
independent or certified public accountant to fairly reflect the financial
condition of the Company; nor shall he be liable if in good faith in determining
the amount available for dividends or distribution the Board values the assets
in a manner allowable under the applicable law.
Section 3.09. Resignation and Removal. Any Director may resign at
any time by giving written notice to the Secretary. Such resignation shall take
effect on the date of the Secretary's receipt of such notice or at such later
date as specified therein. Except as otherwise provided by law, the entire Board
of Directors or any individual Director may be removed from office with or
without cause by a vote of the shareholders holding a majority of the shares
entitled to vote at an election of the Directors.
ARTICLE IV: OFFICERS
Section 4.01. Selection and Qualification.
Section 4.01-a. Required Officers. The Company shall have one or
more natural persons exercising the functions of the offices, however
designated, of Chief Executive Officer and Chief Financial Officer.
Section 4.01-b. Additional Officers. In addition to appointing a
Chief Executive Officer and a Chief Financial Officer, the Board of Directors
may appoint, in a resolution approved by the affirmative vote of the majority of
the Directors present, any other officers, assistant officers or agents the
Board of Directors deems necessary or appropriate for the operation and
management of the Company, each of whom shall have the powers, rights, duties,
responsibilities and terms in office determined by the Board of Directors from
time to time.
Section 4.01-c. Election. At its first regular meeting after the
annual meeting of the shareholders each year, the Board of Directors shall
appoint a Chief Executive Officer and a Chief Financial Officer and such other
officers as the Board of Directors deems necessary.
Section 4.02. Salaries. The salaries of all officers of the Company
shall be fixed by the Board of Directors.
Section 4.03. Term of Office. The officers of the Company shall hold
office until their successors are chosen and qualified. Any officer elected or
appointed by the Board of Directors may be removed at any time with or without
cause by the affirmative vote of a majority of the Board of Directors. Any
officer may resign at any time by giving written notice to the Chief Executive
Officer or the Secretary of the Company. Any vacancy occurring in any office of
the Company by death, resignation, removal, or otherwise shall be filled by the
Board of Directors. However, in the event that there should be no duly elected
and qualified Directors remaining in
9
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office, then the shareholders shall elect a new Director or new Directors to
fill such vacancy or vacancies.
Section 4.04. Chairman of the Board of Directors. If the Board shall
appoint a Chairman of the Board of Directors, such Chairman shall preside at all
meetings of the Board of Directors and of the shareholders and shall perform
such other duties as he may be directed to perform by the Board of Directors.
Section 4.05. Chief Executive Officer. The Chief Executive Officer
shall have general supervision over the affairs of the Company and over the
other officers. Unless the Board has appointed a Chairman of the Board of
Directors, the Chief Executive Officer shall preside at all meetings of the
Board of Directors and of the shareholders. The Chief Executive Officer shall,
subject to approval of or review by the Board of Directors, appoint and
discharge employees and agents of the Company and fix their compensation and
make and sign contracts and agreements in the name and on behalf of the Company.
The Chief Executive Officer shall put into operation such business policies of
the Company as shall be decided upon by the Board. The Chief Executive Officer
shall perform such other duties as may be prescribed by the Board of Directors
or the Minnesota Business Corporation Act.
Section 4.06. Vice President. Unless otherwise determined by the
Board of Directors, the Vice Presidents shall, in the absence or disability of
the Chief Executive Officer, perform the duties and exercise the powers of the
Chief Executive Officer. They shall also generally assist the Chief Executive
Officer and exercise such other powers and perform such other duties as are
delegated to them by the Chief Executive Officer as the Board of Directors shall
prescribe.
Section 4.07. Secretary. The Secretary shall attend all meetings of
the shareholders and of the Board of Directors and shall record all the
proceedings of the meetings of the shareholders and of the Board of Directors in
a book to be kept for that purpose and shall perform like duties for the
standing committees when required, and shall give, or cause to be given, notice
of all meetings of the shareholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or the Chief Executive Officer, under whose supervision he shall
be.
Section 4.08. Chief Financial Officer. The Chief Financial Officer
shall have the following duties in addition to any duties that might be imposed
by the Board of Directors or by the Minnesota Business Corporation Act.
Section 4.08-a. Custody of Funds and Accounting. The Chief Financial
Officer shall have the custody of the corporate funds and securities and shall
keep full and accurate accounts of receipts and disbursements in books belonging
to the Company and shall deposit all moneys and other valuable effects in the
name and to the credit of the Company in such depositories as may be designated
by the Board of Directors.
Section 4.08-b. Disbursements and Reports. The Chief Financial
Officer shall disburse the funds of the Company as may be ordered by the Board
of Directors, taking proper vouchers for such disbursements, and shall render to
the Chief Executive Officer and the Board of
10
<PAGE>
Directors at the regular meetings of the Board, or when the Board of Directors
so requires, an account of all his transactions as Chief Financial Officer and
of the financial condition of the Company.
Section 4.08-c. Bond. If required by the Board of Directors, the
Chief Financial Officer shall give the Company a bond in such sum and with such
surety or sureties as shall be satisfactory to the Board of Directors for the
faithful performance of the duties of his office and for the restoration, upon
the expiration of his term of office or his resignation, retirement, or removal
from office, of all books, papers, vouchers, money, and other property of
whatever kind in his possession or under his control belonging to the Company.
ARTICLE V: CERTIFICATES FOR STOCK
Section 5.01. Issuance of Shares and Fractional Shares. The Board of
Directors is authorized to issue shares and fractional shares of stock of the
Company up to the full amount authorized by the Articles of Incorporation in
such amounts as may be determined by the Board of Directors and as permitted by
law. No shares shall be allotted except in consideration of cash or other
property, tangible or intangible, received or to be received under a written
agreement by the Company, or services rendered or to be rendered under a written
agreement to the Company, or an amount transferred from surplus to stated
capital upon a share dividend. At the time of each such allotment of shares, the
Board of Directors shall state by resolution its determination of the fair
market value to the Company in monetary terms of any consideration other than
cash for which shares are allotted. The amount of consideration to be received
in cash or otherwise shall not be less than the par value of the shares so
allotted nor less than the stated capital to be represented by shares without
par value so allotted.
Section 5.02. Form of Certificate. Every shareholder shall be
entitled to have a certificate, signed by the Chief Executive Officer, a Vice
President, the Chief Financial Officer or a Treasurer or an Assistant Treasurer,
or the Secretary or an Assistant Secretary, of the Company, certifying the
number of shares of capital stock owned by him in the Company. If the Company
shall be authorized to issue more than one class of stock or more than one
series of any class, the designations, preferences, and relative, participating,
optional, or other special rights of the various classes of stock or series
thereof and the qualifications, limitations, or restrictions of such rights,
together with a statement of the authority of the Board of Directors to
determine the relative rights and preferences of subsequent classes or series,
shall be set forth in full on the face or back of the certificate which the
Company shall issue to represent such stock, or, in lieu thereof, such
certificate shall contain a statement that the stock is, or may be, subject to
certain rights, preferences, or restrictions and that a statement of the same
will be furnished without charge by the Company upon request by any shareholder.
Certificates representing the shares of the capital stock of the Company shall
be in such form not inconsistent with law or the Articles of Incorporation or
these Bylaws as shall be determined by the Board of Directors.
Section 5.03. Facsimile. Whenever any certificate is countersigned
or otherwise authenticated by a transfer agent, transfer clerk, or registrar,
then a facsimile of the signatures of the officers or agents of the Company may
be printed or lithographed upon such certificate in lieu of the actual
signatures. In case any officer or officers who shall have signed, or whose
11
<PAGE>
facsimile signature shall have been used on, any such certificate or
certificates shall cease to be such officer or officers of the Company, whether
because of death, resignation, or otherwise, before such certificate or
certificates shall have been delivered by the Company, such certificate or
certificates may nevertheless be adopted by the Company and be signed and
delivered as though the person or persons who signed such certificate or
certificates, or whose facsimile signature or signatures shall have been used
thereon, had not ceased to be the officer or officers of the Company.
Section 5.04. Lost, Stolen, or Destroyed Certificates. The Board of
Directors may direct a new certificate or new certificates to be issued in place
of a certificate or certificates previously issued by the Company alleged to
have been lost, stolen, or destroyed, upon the making of an affidavit of the
fact by the person claiming the certificate of stock to be lost, stolen, or
destroyed. When authorizing such issue of a new certificate or new certificates,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen, or destroyed
certificate or certificates, or his legal representative, to advertise the same
in such manner as it shall require and/or give the Company a bond in such sum as
it may direct as indemnity against any claim that may be made against the
Company with respect to the certificate or certificates alleged to have been
lost, stolen, or destroyed.
Section 5.05. Transfer of Stock. Upon surrender to the Company or
any transfer agent of the Company of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment, or authority to
transfer, it shall be the duty of the Company to issue a new certificate to the
person entitled thereto, cancel the old certificate, and record the transaction
upon its books; except that the Board of Directors may, by resolution duly
adopted, establish conditions upon the transfer of shares of stock to be issued
by the Company, and the purchasers of such shares shall be deemed to have
accepted such conditions on transfer upon the receipt of the certificate
representing such shares, provided that the restrictions shall be referred to on
the certificates or the purchaser shall have otherwise been notified thereof.
Section 5.06. Closing of Transfer Books; Record Date. The Board of
Directors may close the stock transfer books of the Company for a period not
exceeding sixty (60) days preceding the date of any meeting of shareholders as
provided in Section 2.13 hereof or the date for payment of any dividend as
provided in Section 6.02 hereof or the date for the allotment of rights or the
date when any change or conversion or exchange of capital stock shall go into
effect. In lieu of closing the stock transfer books as aforesaid, the Board of
Directors may fix in advance a date, not exceeding sixty (60) days preceding the
date for payment of any dividend, or the date for the allotment of rights, or
the date when any change or conversion or exchange of capital stock shall go
into effect, as a record date for the determination of the shareholders entitled
to receive payment of any such dividend, or to any such allotment of rights, or
to exercise the rights in respect of any such change, conversion, or exchange of
capital stock, and in such case such shareholders and only such shareholders
shall be shareholders of record on the date so fixed and shall he entitled to
receive payment of such dividend, or to receive such allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
stock on the books of the Company after any such record date fixed as aforesaid.
If the Board of Directors fails to fix such a record date the record date shall
be the twentieth (20th) day preceding the date of payment or allotment.
12
<PAGE>
Section 5.07. Registered Shareholders. The Company shall be entitled
to recognize the exclusive right of the persons registered on its books as the
owners of shares to receive dividends and to vote as such owners and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person, whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of Minnesota.
Section 5.08. Stock Options and Agreements. In addition to any stock
options, plans, or agreements into which the Company may enter, any shareholder
of this Company may enter into an agreement giving to any other shareholder or
shareholders or any third party an option to purchase any of his stock in the
Company, and such shares of stock shall thereupon be subject to such agreement
and transferable only upon proof of compliance therewith; provided, however,
that a copy of such agreement shall be filed with the Company and reference
thereto placed upon the certificates representing said shares of stock.
ARTICLE VI: DIVIDENDS
Section 6.01. Source. Dividends upon the capital stock of the
Company may be declared by the Board of Directors at any regular or special
meeting pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the Articles of
Incorporation.
Section 6.02. Closing of Books; Record Date. The Board of Directors
may fix a date not exceeding sixty (60) days preceding the date fixed for the
payment of any dividend as the record date for the determination of the
shareholders entitled to receive payment of the dividend and, in such case, only
shareholders of record on the date so fixed shall be entitled to receive payment
of such dividend notwithstanding any transfer of shares on the books of the
Company after the record date. The Board of Directors may close the books of the
Company against the transfer of shares during the whole or any part of such
period. If the Board of Directors fails to fix such a record date, the record
date shall be the twentieth (20th) day preceding the date of such payment.
Section 6.03. Reserves. Before payment of any dividend, there may be
set aside out of the funds of the Company available for dividends such sum or
sums as the Board of Directors from time to time, in its absolute discretion,
deems proper as a reserve or reserves for meeting contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
Company or for such other purpose as the Board shall think conducive to the
interest of the Company, and the Board may modify or abolish any such reserve in
the manner in which it was created.
Section 6.04. Determining Fair Market Value. The Board of Directors
in computing the fair market value of the assets of the Company to determine
whether the Company may pay a dividend or purchase its shares shall not include
unrealized appreciation of assets, except that readily marketable securities of
other issuers may be valued at not more than market value.
13
<PAGE>
ARTICLE VII: CHECKS
Section 7.01. Checks. All checks or demands for money or notes of
the Company shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
ARTICLE VIII: CORPORATE SEAL
Section 8.01. Corporate Seal. The Company shall have no corporate
seal.
ARTICLE IX: FISCAL YEAR
Section 9.01. Fiscal Year. The fiscal year of the Company shall be
fixed by resolution of the Board of Directors.
ARTICLE X: AMENDMENTS
Section 10.01. Amendments. These Bylaws may be altered or repealed
at any regular meeting of the shareholders or any special meeting of the
shareholders if notice of such alteration or repeal shall be contained in the
notice of such special meeting. These Bylaws may be altered or amended by action
of the Board of Directors at any regular or special meeting, provided that such
alterations and/or amendments shall be subject to the power of the holders of a
majority of the outstanding stock to change or repeal such Bylaws, and, provided
further, that the Board of Directors shall not make, alter, or repeal any Bylaws
fixing a quorum for meetings of shareholders, prescribing procedures for
removing Directors or filling vacancies on the Board of Directors, or fixing the
number of Directors or their classifications, qualifications, or terms of
office, except that the Board of Directors may adopt or amend a Bylaw to
increase the number of Directors.
ARTICLE XI: BOOKS AND RECORDS
Section 11.01. Books and Records. The Board of Directors of the
Company shall cause to be kept:
(a) a share register not more than one year old, giving the names
and addresses of the shareholders, the number and classes held
by each, and the dates on which the certificates therefor were
issued;
(b) records of all proceedings of shareholders and Directors; and
(c) such other records and books of account as shall be necessary
and appropriate to the conduct of the corporate business.
Section 11.02. Documents Kept at Principal Executive or Registered
Office. The Board of Directors shall cause to be kept at the principal executive
or registered office of the Company originals or copies of:
14
<PAGE>
(a) records of all proceedings of shareholders and Directors for
the past three (3) years;
(b) Articles and Bylaws of the Company and all amendments thereto;
(c) reports made to any or all shareholders within the immediately
preceding three (3) years;
(d) a statement of the names and usual business addresses of the
Directors and principal officers of the Company;
(e) voting trust agreements;
(f) shareholder control agreements;
(g) financial statements as described in Section 11.03 hereof.
Section 11.03. Financial Statements.
Section 11.03-a. Required Financial Statements. The financial
statements required to be kept by the Board of Directors at the principal
executive or registered office of the Company pursuant to Section 11.02(g)
hereof are as follows:
(1) Annual Financial Statements. The Company shall keep annual
financial statements for the Company, including at least a
balance sheet as of the end of, and a statement of income for,
each fiscal year.
(2) Interim Financial Statements. The Company shall keep financial
statements for the most recent interim period prepared in the
course of the operations of the Company for distribution to
the shareholders or to a governmental agency as a matter of
public record.
Section 11.03-b. Preparation of Annual Financial Statements. The
annual financial statements required by Section 11.03-a(l) hereof shall be
prepared on the basis of accounting methods reasonable in the circumstances and
may be consolidated statements of the Company and one or more of its
subsidiaries. In the case of statements audited by a public accountant, each
copy shall be accompanied by a report setting forth the opinion of the
accountant on the statements. In other cases, each copy shall be accompanied by
a statement of the Chief Financial Officer of the Company stating the reasonable
belief of such person that the financial statements were prepared in accordance
with accounting methods reasonable in the circumstances, describing the basis of
presentation, and describing any respects in which the financial statements were
not prepared on a basis consistent with those prepared for the previous year.
Section 11.04. Computerized Records. The records maintained by the
Company, including its share register, financial records, and minute books, may
utilize any information
15
<PAGE>
storage technique, including, for example, punched holes, printed or magnetized
spots or micro-images, even though that makes them illegible visually, if the
records can be converted, by machine and within a reasonable time, into a form
that is legible visually and whose contents are assembled by related subject
matter to permit convenient use by persons in the normal course of business. The
Company shall convert any such records to legible form upon the request of a
person entitled to inspect them under Section 12.01 hereof, and the expense of
the conversion shall be borne by the person who bears the expense of copying
pursuant to Section 12.01.
ARTICLE XII: INSPECTION OF BOOKS
Section 12.01. Examination and Copying by Shareholders. Every
shareholder of the Company and every holder of a voting trust certificate shall
have a right to examine, in person or by agent or attorney, at any reasonable
time or times, and at the place or places where usually kept, the share register
and all documents identified in Section 11.02 hereof. Other documents may be
examined and copied (at the expense of the examining party) only upon the
showing of a proper purpose. The expense of copying all documents identified in
Section 11.02 hereof shall be borne by the Company. The Company shall bear the
expense of copying the share register only if the shareholder shows a proper
purpose.
Section 12.02. Information to Shareholders. Upon the written request
by a shareholder of the Company, the Board of Directors shall furnish to him the
most recent annual financial statement of the Company pursuant to Section
11.03-a(l) hereof.
ARTICLE XIII: LOANS AND ADVANCES
Section 13.01. Loans, Guarantees, and Suretyship. The Company may
lend money to, guarantee an obligation of, become a surety for, or otherwise
financially assist a person if the transaction, or a class of transactions to
which the transaction belongs, is approved by the affirmative vote of a majority
of the Directors present at a lawfully convened meeting and such action (a) is
in the usual and regular course of business of the Company, (b) is with, or for
the benefit of, a related corporation or organization in which the Company has a
financial interest, an organization with which the Company has a business
relationship, or an organization to which the Company has the power to make
donations, (c) is with, or for the benefit of, an officer or other employee of
the Company or a subsidiary, including an officer or employee who is a Director
of the Company or a subsidiary, and may reasonably be expected, in the judgment
of the Board of Directors, to benefit the Company, or (d) has been approved by
the affirmative vote of the holders of two-thirds (2/3) of the outstanding
shares of the Company. The loan, guarantee, or other assistance may be with or
without interest and may be unsecured or may be secured in any manner that a
majority of the Board of Directors approves, including, without limitation, a
pledge of or other security interest in shares of the Company.
Section 13.02. Advances to Officers, Directors, and Employees. The
Company may, without a vote of the Directors, advance money to its Directors,
officers, or employees to cover expenses that can reasonably be anticipated to
be incurred by them in the performance of their duties and for which they would
be entitled to reimbursement in the absence of an advance.
16
<PAGE>
ARTICLE XIV: INDEMNIFICATION
Section 14.01. Indemnification. The Company shall indemnify any
person made or threatened to be made a party to a proceeding by reason of such
person's being or having been a director, officer, member of a committee,
employee, or agent of the Company against judgments, penalties, fines,
including, without limitation, excise taxes assessed against the person with
respect to an employee benefit plan, settlements, and reasonable expenses,
including attorneys' fees and disbursements, incurred by the person in
connection with the proceeding. The indemnification provided hereby and the
eligibility of any person therefor shall be subject to the applicable provisions
of the Minnesota Business Corporation Act, as in effect from time to time.
ARTICLE XV: DEFINITIONS AND USAGE
Section 15.01. Singular, Plural; Masculine, Feminine, and Neuter.
Whenever the context of these Bylaws requires, the plural shall be read to
include the singular, and vice versa; and words of the masculine gender shall
refer to the feminine gender, and vice versa; and words of the neuter gender
shall refer to any gender.
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Secretary of
this Company, does hereby certify that the foregoing Bylaws constituting pages
numbered one through seventeen were duly adopted as the amended and restated
Bylaws of this Company in accordance with law.
-----------------------------------------
Secretary
Dated: February 17, 1999
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED MARCH 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,812,849
<SECURITIES> 0
<RECEIVABLES> 85,091
<ALLOWANCES> 0
<INVENTORY> 221,867
<CURRENT-ASSETS> 3,198,718
<PP&E> 6,452,591
<DEPRECIATION> 3,860,088
<TOTAL-ASSETS> 6,804,976
<CURRENT-LIABILITIES> 334,169
<BONDS> 0
0
0
<COMMON> 85,123
<OTHER-SE> 3,304,172
<TOTAL-LIABILITY-AND-EQUITY> 6,804,976
<SALES> 722,030
<TOTAL-REVENUES> 722,030
<CGS> 2,203,347
<TOTAL-COSTS> 2,203,347
<OTHER-EXPENSES> 1,110,433
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (149,243)
<INCOME-PRETAX> (2,512,798)
<INCOME-TAX> 1,000
<INCOME-CONTINUING> (2,513,798)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,513,798)
<EPS-BASIC> (.30)
<EPS-DILUTED> (.30)
</TABLE>
