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, 2000.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from
_______________________ to _______________________.
COMMISSION FILE NUMBER 0-16106
APA OPTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1347235
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2950 N.E. 84TH LANE
BLAINE, MINNESOTA 55449
(763) 784-4995
(ADDRESS, INCLUDING ZIP CODE AND
TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICE)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
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. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of May 24, 2000, was approximately $80,938,852.
The number of shares of common stock outstanding as of May 24, 2000 was
9,166,948.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of our proxy statement for the annual shareholders meeting to be
held in August 2000 are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS.
Since the founding of APA Optics, Inc. in 1979, we have focused on
leading edge research in sophisticated optoelectronics and optical systems, with
the primary goal of developing advanced products for subsequent marketing and
fabrication. We currently manufacture dense wavelength division multiplexer
(DWDM) optical components, offer a range of gallium nitride-based devices and
services, and market custom optics products.
For the last several years our goal has been to manufacture and market
products and components based on our technology developments. We have focused
our efforts on DWDM components for fiber optic communications and gallium
nitride-based ultraviolet (UV) detectors (both components and integrated
detector/electronic/display packages) because we believe that these two product
areas have significant potential markets and because we have expertise and/or
patent positions relevant to them. If we are successful in manufacturing and
marketing these products, we expect to significantly increase our revenues and
achieve profitability.
In fiscal 1999 we significantly reduced our R&D contracts (historically
a significant source of revenue for us) to concentrate on development and
production of our own proprietary products. This shift has significantly reduced
our revenues and increased our losses, which will continue until we realize
significant revenues from these products. Until such time, we will need
additional funding to sustain our operations and to acquire additional equipment
and additional personnel to meet our objectives.
(b) DESCRIPTION OF BUSINESS.
PRODUCTS
We currently offer the products described below.
o Optical Lens Systems. We design and build multi-element lens
systems and components, including mounting structures, for
precision quality optical needs in many applications,
including laser-based systems, imaging systems, inspection
systems, display systems, display optics, focusing optics for
ultraviolet fire alarms, collimation and focusing optics for
fiber optics systems.
o Optical Thin Film Coatings. We custom design, develop, and
fabricate optical thin film coatings for optical components of
lasers, laser systems, optical instruments, and optical
devices. Our antireflective coatings are deposited onto
Company-fabricated lens components. We also use our thin film
coating facility to design, develop and fabricate coating for
lens components supplied by customers.
Our research and development efforts are currently focused on the
optoelectronic products described below. Optoelectronic devices are vital
components of communication systems and optical instruments.
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o Dense Wavelength Division Multiplexer (DWDM). We recently
demonstrated the feasibility of a DWDM capable of transmitting
several channels through a single optical fiber for
communication applications. We developed the DWDM based on our
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 holographic gratings. Our DWDM enables
transmission of data on several different channels within a
single fiber (a simple analogy is the expansion of a single
lane highway to a multi-lane throughway) and, as a result,
provides higher speed, increased and regulated data handling
capabilities as compared to a single channel modulator. We are
currently performing environmental packaging of the DWDM. We
filed the first patent related to the DWDM Optical Modulator
in June 1994, which was awarded on September 12, 1995. Since
then, we have filed for six additional patents related to DWD
Multiplexer/Demultiplexer devices. We were awarded two of
these patents in March 1997 and February 1998. The other four
applications are still pending.
o 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. We believe 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. We have been awarded several
patents in GaN related technologies.
OTHER PRODUCTS
We are in the process of introducing several other products by
packaging our 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
We have delivered a limited number of alpha units of the DWDM to
customers during fiscal 1999 and 2000. We have sold several UV detectors to more
than 30 customers as well as a few detector/electronics packages. During this
time, we have been aggressively marketing both products by advertising in
relevant professional magazines, showcasing them in trade shows, direct mailing,
personal visits, by use of distributors in various countries (including Japan,
Germany, Italy and France). We also maintain product information on our Web
page. We have a business manager who focuses on sales of DWDM, along with two
applications engineers, and two persons who work on marketing and sales of
GaN-based products.
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SOURCES OF RAW MATERIALS
Optical glass and optical chips are two principal materials used in our
operations. Optical glass is commercially available through several
distributors. We currently use at least two vendors for optical chips and
continuously look for additional vendors for these parts. Certain chemicals and
other materials used by us are routinely available from several sources.
ENVIRONMENTAL COMPLIANCE
Because we handle a number of chemicals in our operations, we must
comply with federal, state and local laws and regulations regarding the handling
and disposal of such chemicals. The cost of such compliance is not material.
MAJOR CUSTOMERS
In prior years, we provided research and development services under
contracts with various governmental agencies. Currently, we have no material
contracts with any such agencies.
In our efforts to promote sales of new products, we have developed
relationships with several potential new customers.
Revenues from the following unrelated customers constituted more than
ten percent of our total operating revenues in fiscal years 2000, 1999 and 1998:
<TABLE>
<CAPTION>
Year Ended March 31
-------------------
Name 2000 1999 1998
---- ---- ---- ----
<S> <C> <C> <C>
Government Agencies* 38% 67% 89%
</TABLE>
*REPRESENTS SERVICES TO SEVERAL OPERATING AGENCIES OF THE U.S.
GOVERNMENT, AS FOLLOWS:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Air Force -- 15% 18%
Army 35% -- 22
Navy 3 12 34
ARPA -- 40 15
--- --- ---
Total 38% 67% 89%
=== === ===
</TABLE>
BACKLOG
Our backlog of uncompleted contracts at March 31, 2000, was
approximately $28,400, as compared to $189,000 at March 31, 1999, and $1,300,000
at March 31, 1998. Of the current year's backlog, all contracts will be
completed within the next year. The reduced backlog is a direct result of our
shift from contract R&D to product development and production.
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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 we do. However, we believe that we have a competitive advantage
due to our patents and the uniqueness of our devices. In particular, we believe
our DWDM is the most efficient (lowest insertion loss) and compact device
currently available.
RESEARCH AND DEVELOPMENT
During the fiscal years ended March 31, 2000, 1999, and 1998, we spent
approximately $327,000, $382,000, and $339,000, respectively, on research and
development, all of which was related to the DWDM, UV detector and related
products. In addition, in each of those years, we spent approximately $978,000,
$837,000, and $1,431,000, respectively, on research activities sponsored by
customers. As we shift our focus to development of our proprietary products, we
expect that customer-sponsored R&D will continue to decline.
EMPLOYEES
As of March 31, 2000, we had 43 full-time employees (including
executive officers).
ITEM 2. PROPERTIES.
We have corporate offices, manufacturing facilities, and laboratories
located in an industrial building at 2950 N.E. 84th Lane, Blaine, Minnesota. We
currently lease 23,500 square feet of space under a sublease from Jain-Olsen
Properties, a partnership consisting of Anil K. Jain and Kenneth A. Olsen,
officers and directors of the Company. See Note 8 of Notes to Financial
Statements included herein. We own land directly west of the Blaine facility
that may be used for future expansion.
We also have a 24,000 square foot production facility in Aberdeen,
South Dakota, which is used for manufacturing our DWDM components and UV
detectors. The land upon which this facility is located was granted to us as
part of a financing package from the city of Aberdeen. See Note 4 of Notes to
Financial Statements included herein for further information regarding the
financing of this facility.
We believe that these two facilities will be adequate for our needs for
the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
We are not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded on The Nasdaq SmallCap Market under the
symbol "APAT." The following table sets forth the quarterly high and low sales
prices for our common stock for each quarter of the past two fiscal years as
reported by Nasdaq.
<TABLE>
<CAPTION>
FISCAL 2000 HIGH LOW
----------- ---- ---
<S> <C> <C>
Quarter ended June 30, 1999......................................... $8.50 $5.25
Quarter ended September 30, 1999.................................... 7.93 3.50
Quarter ended December 31, 1999..................................... 19.50 3.88
Quarter ended March 31, 2000........................................ 64.00 11.31
FISCAL 1999 HIGH LOW
----------- ---- ---
Quarter ended June 30, 1998......................................... $6.75 $5.62
Quarter ended September 30, 1998.................................... 6.00 4.25
Quarter ended December 31, 1998..................................... 5.00 4.00
Quarter ended March 31, 1999........................................ 10.00 4.75
</TABLE>
There were approximately 338 holders of record of our common stock as
of May 24, 2000.
We have never paid cash dividends on our common stock. The loan
agreement relating to certain bonds issued by the South Dakota Economic
Development Finance Authority restricts our ability to pay dividends.
During fiscal 2000, the Company issued an aggregate of 20,718 shares to
three investors upon the exercise of outstanding warrants. Two of these
warrants, for 5,500 shares, had been issued to the placement agent as
consideration for services in a private placement of the Company's securities
and the third, for 15,218 shares, had been issued to NE Venture, Inc. as
consideration for the partial forgiveness of a loan made to the Company as part
of the financing of its Aberdeen facility. The Company received net proceeds of
$80,822. No underwriter was involved in these sales. The Company relied upon the
exemptions provided by Section 4(2) and 4(6) of the Securities Act of 1933 in
connection with these sales.
On March 15, 2000, we sold 500 shares of 2% Series A Convertible
Preferred Stock (which is convertible to common stock) and related warrants for
purchase of an aggregate of 50,000 shares of common stock to three institutional
investors for aggregate gross proceeds of $5 million. The placement was made
through an agent who received a cash commission of $275,000 and warrants for
purchase of 7,500 shares of our common stock. The sale was not registered under
the Securities Act of 1933 in reliance upon Sections 4(2) and 4(6) of that Act.
Pursuant to our agreement with the investors, we have filed a registration
statement on Form S-3 (Commission File No. 333-33968) registering for resale the
common stock issuable upon exercise of the warrants and conversion of the
preferred stock.
The preferred stock carries a 2% cumulative dividend payable upon
conversion in cash or common stock. The preferred stock (plus any unpaid
accreted dividends) is convertible to common stock at the option of the holder
and is automatically converted on March 15, 2003 or, if earlier, on the date
that the common stock has sustained a market value of $50 per share for 20
consecutive trading days. The initial conversion price of $35 per share is
subject to adjustment pursuant to the antidilution provisions of the Certificate
of Designation of Voting Power, Preferences and Relative, Participating,
Optional and Other Special Rights and Qualifications, Limitations and
Restrictions of 2% Series A Convertible Preferred Stock (the "Certificate"). In
addition, beginning September 14, 2000, and each monthly period thereafter while
shares of the preferred stock are outstanding, the conversion price is reset in
accordance with the formula set forth in the Certificate. As of June 23, 2000,
the conversion price had been reset to $33.78 per share pursuant to the
antidilution provisions. A holder of the preferred stock may not convert into
shares of common stock if after the conversion the holder, together with its
affiliates, would
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beneficially own over 9.999% of the outstanding shares of our common stock. This
restriction may be waived by a holder on not less than 61 days' notice to us. In
addition, as long as our common stock is listed for trading on Nasdaq, we may
not issue common stock on conversion of the preferred stock in an amount which
exceeds 19.999% of the outstanding common stock immediately prior to the sale of
the preferred stock without obtaining prior shareholder approval. The preferred
stock is non-voting (except in specified circumstances) and is subject to
redemption at our option on 30 days' notice (subject to certain restrictions if
the effective conversion price at the time of notice of redemption is $30 or
more). We are required to redeem the preferred stock upon certain default
events. The preferred stock is redeemable under certain circumstances as stated
in the Certificate.
The common stock warrants issued to the investors and to the placement
agent are exercisable until March 15, 2005, at an initial exercise price of $35
per share with respect to the investors' warrants and at an initial exercise
price of $49.47 per share with respect to the agent's warrants (in each case
subject to anti-dilution adjustments).
On June 21, 2000, we issued a three-year warrant to Ladenburg-Thalmann
& Co., Inc. for the purchase of 84,083 shares of Common Stock at $17.8395 per
share. This warrant was issued in consideration of Ladenburg's services as
placement agent of our common stock in the $100 million public offering
described in Item 7 below. This warrant was issued without registration under
the Securities Act of 1933 in reliance on Section 4(2) and Section 4(6) of the
Act.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statements of Operations Data
Revenues............................................ $ 420,809 $ 722,030 $2,190,637 $2,769,270 $2,485,833
Net loss............................................ (3,796,296) (2,513,798) (967,767) (11,023) (92,474)
Net loss per share, basic and diluted............... (.43) (.30) (.12) -- (.01)
Weighted average number of shares, basic and diluted 8,744,125 8,512,274 8,376,661 8,192,879 7,734,082
Balance Sheet Data
Total assets........................................ $9,610,391 $6,804,976 $9,629,912 $9,419,398 $4,756,349
Long-term obligations, including current portion.... 3,049,258 3,214,712 3,609,652 3,829,004 445,000
Shareholders' equity................................ 6,306,049 3,389,295 5,859,863 5,412,968 4,107,228
</TABLE>
The above selected financial data should be read in conjunction with
the financial statements and related notes included in this Report beginning at
page 15 and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing in Item 7 of this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
GENERAL
We are engaged in designing, manufacturing, and marketing optical
components and various optoelectronic products. For several years, we also
received significant revenues from research and development services projects
sponsored by various government agencies. In fiscal 1998, we shifted our
emphasis from research and development to product development, with the intent
to eventually manufacture and market our own proprietary products. Accordingly,
revenues from research and development contracts have decreased significantly
during the last three fiscal years.
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For the last several years our goal has been to manufacture and market
products/components based on our technology developments. We have focused on
dense wavelength division multiplexer (DWDM) components for fiber optic
communications and gallium nitride-based ultraviolet (UV) detectors (both
components and integrated detector/electronic/display packages) because we
believe that these two product areas have significant potential markets and
because we have expertise and/or patent positions related to them. If we are
successful in manufacturing and marketing these products, we expect to
significantly increase our revenues and achieve profitability.
In fiscal 1999 we significantly reduced our R&D contracts (historically
a significant source of revenue for us) to concentrate on development and
production of our own proprietary products. This shift will significantly reduce
our revenues and increase our losses until we realize revenues from our
products. During this time, we will need additional funding to sustain our
operations and additional equipment, as well as additional personnel to meet our
objectives.
RESULTS OF OPERATIONS
Fiscal 2000 Compared to Fiscal 1999. Operating revenues for fiscal 2000
were $420,809, a decrease of 42% from operating revenues of $722,030 in fiscal
1999. The decrease in revenues reflects our decision to focus on product
development rather than contract research and development. Contract fees
decreased from $484,329 in fiscal 1999 to $160,108 in fiscal 2000, and our
backlog of uncompleted contracts at March 31, 2000 was $28,400 as compared to
$189,000 at March 31, 1999. Revenues from sales of products increased by
approximately 10% as compared to fiscal 1999. Sales of new products in fiscal
2000 were minimal; however, we believe we have made significant progress in
developing our new products and the related manufacturing processes and that
revenues from sales of such products will increase in fiscal 2001.
Cost of sales increased by approximately 53%, to $2,086,527, in fiscal
2000 from $1,366,105 in fiscal 1999. Cost of contract fees increased by 17% in
fiscal 2000. Gross margin for product sales was negative in both fiscal 2000 and
fiscal 1999, reflecting continued personnel and product development costs. Gross
margin for contract fees was negative in both fiscal 2000 and fiscal 1999. The
continued deterioration in gross margin is the result of decreased contract
revenues. Research and development expenses decreased by approximately 15% in
fiscal 2000, to $326,988 from $382,445 in fiscal 1999, and selling, general and
administrative expenses increased by 8% to $782,694 from $727,989 in fiscal
1999. The increase in costs of sales and selling, general and administrative
expenses reflects our focus on product development, including the hiring of
additional personnel for production, marketing, and sales.
We reported a loss from operations in fiscal 2000 of $3,753,623, a
substantial increase over the loss from operations of $2,591,750 in fiscal 1999.
This loss results from the combination of significantly decreased revenues
without a corresponding decrease in costs and expenses.
We realized $100,989 in interest income in fiscal 2000, down 56% from
$228,195 in fiscal 1999, reflecting lower average cash balances during the year.
Interest expense in fiscal 2000 totaled $142,662, down 4% from $149,243 in
fiscal 1999, reflecting reduced balances on outstanding obligations.
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Our net loss in fiscal 2000 was $3,796,296, compared to $2,513,798 in
fiscal 1999. As noted above, this loss was primarily a result of significantly
decreased revenues and significantly higher cost of sales and other operating
expenses. Further losses can be expected until revenues from production
increase, or operating costs decrease, sufficiently to produce positive cash
flow.
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 our 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 our
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.
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 our focus on product development, including the hiring of
additional personnel for production, marketing, and sales.
We 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.
We 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.
Our 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.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents at March 31, 2000, totaled $5,941,906 as
compared to $2,812,849 at March 31, 1999. We used $3,537,944 of net cash for
operating activities, of which the most significant cause was our net loss of
$3,796,296. We used $195,342 net cash in investing activities in fiscal 2000,
all for the purchase of property and equipment. This compares to use of net cash
of $236,891 in fiscal 1999 and $925,494 in fiscal 1998. In all three years, such
property and equipment was purchased primarily for the Aberdeen
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facility. During fiscal 2000, we received $6,862,343 net cash from financing
activities, primarily from sales of our common and preferred stock. In 1999, we
used $159,685 net cash in financing activities, which included payment of a
$240,000 balance on a loan from the Minnesota Agricultural and Economic
Development Board.
In connection with the construction of the manufacturing facility in
Aberdeen, we took advantage of certain economic incentive programs offered by
the State of South Dakota and the City of Aberdeen. At March 31, 2000, the total
principal outstanding on the several loans obtained in connection with these
financing packages was $3,049,258. 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 4 of Notes to Financial Statements included in
this Report. These loans require us to maintain certain minimum levels of net
worth and income to outstanding debt ratios. We were out of compliance with
these covenants in fiscal 2000. Such noncompliance does not constitute an event
of default but triggers further covenants under the loan agreement, with which
we were in compliance at March 31, 2000.
We anticipate approximately $2 million in capital expenditures in
fiscal 2001, primarily for equipment. The funds for these purchases will come
primarily from proceeds from sales of our securities pursuant to a
"shelf-registered" public offering, described below.
Our use of net cash in operating activities during fiscal 2000
emphasizes our need to increase sales in order to maintain operations. For the
past several years, we have 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 we reduced our emphasis on contract research
and development, resulting in significantly reduced revenues. This shift in
emphasis was necessary to utilize our personnel and facilities in the product
development effort. We believe that design of the new products and the
manufacturing process is now essentially complete, and we have stepped up
efforts to market these products. However, we cannot guarantee that we will
succeed in increasing revenues. If we do not adequately increase revenues, we
plan to decrease expenses by reducing inventory and personnel and discontinuing
one or more products. In addition, we have investigated and will continue to
investigate sources of additional capital. In March 2000, we sold 500 shares of
2% Series A Convertible Stock in a private transaction for gross proceeds of $5
million. In April 2000, we filed a "shelf registration statement" for sale of up
to $100 million of common stock to institutional investors at market based
prices from time to time through a placement agent, Ladenburg Thalmann & Co.
Through June 23, 2000, we sold 574,036 shares of common stock in this offering
for gross proceeds of $8,450,941. However, we cannot guarantee that we will be
able to obtain additional financing through this offering or otherwise, if
needed.
YEAR 2000 READINESS
The cost associated with our year 2000 readiness program was not
material. Since January 1, 2000, we have not experienced any significant year
2000-related problems and we do not expect any to occur. Thus, we expect that
any future costs will not be material and will have no adverse effect on our
earnings or financial position.
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FORWARD LOOKING STATEMENTS
Statements in this Report about future sales prospects and other
matters to occur in the future are forward looking statements and are subject to
uncertainties due to many factors, many of which are beyond our control. These
factors include, but are not limited to, the continued development of our
products, acceptance of those products by potential customers, our ability to
sell such products at a profitable price, and our ability to fund our
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our 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.
See Item 14(a)(1) for financial statements filed with this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of our executive officers, their ages, positions and
offices as of March 31, 2000.
NAME AGE POSITION
Dr. Anil K. Jain 54 Chief Executive Officer, President,
Chief Financial Officer and Treasurer
Kenneth A. Olsen 56 Vice President and Secretary
Randal J. Becker 47 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 and the information required by Items
11, 12, and 13, below, is incorporated in this Report by reference to the proxy
statement for our annual meeting of shareholders (anticipated to be held in
August 2000).
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
12
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The following financial statements are filed herewith:
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors.......................................................... 15
Balance Sheets as of March 31, 1999 and 2000............................................ 16-17
Statements of Operations for the years ended March 31, 2000, 1999 and 1998.............. 18
Statement of Shareholders' Equity for the years ended March 31, 2000, 1999 and 1998..... 19
Statements of Cash Flows for the years ended March 31, 2000, 1999 and 1998.............. 20
Notes to Financial Statements at March 31, 2000......................................... 21-27
</TABLE>
(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, 2000.
(c) Exhibits
See Exhibit Index on page 28.
13
<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 29, 2000 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Anil K. Jain President, Chief Executive Officer, Treasurer, June 29, 2000
--------------------------------- Chief Financial Officer, and Director
Anil K. Jain
/s/ Kenneth A. Olsen Secretary, Vice President, and Director June 29, 2000
---------------------------------
Kenneth A. Olsen
/s/ Randal J. Becker Principal Accounting Officer June 29, 2000
---------------------------------
Randal J. Becker
/s/ Gregory Von Wald Director June 29, 2000
---------------------------------
Gregory Von Wald
/s/ William R. Franta Director June 29, 2000
---------------------------------
William R. Franta
/s/ Michael A. Gort Director June 29, 2000
---------------------------------
Michael A. Gort
</TABLE>
14
<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, 2000 and 1999, and the related statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended March 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of APA Optics, Inc. at March 31,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 2000, in conformity with
accounting principles generally accepted in the United States.
Ernst & Young LLP
Minneapolis, MN
May 5, 2000
15
<PAGE>
APA Optics, Inc.
Balance Sheets
MARCH 31
--------
2000 1999
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents ..... $5,941,906 $2,812,849
Accounts receivable, net of $0
allowance for doubtful accounts 209,337 85,091
Inventories:
Raw materials ............... 146,841 54,208
Work-in-process ............. 129,684 167,659
Prepaid expenses .............. 19,803 18,911
Bond reserve funds ............ 65,000 60,000
---------- ----------
Total current assets ............. 6,512,571 3,198,718
Property, plant and equipment, net 2,459,760 2,592,503
Other assets:
Bond reserve funds ............ 213,353 533,100
Bond placement costs .......... 164,012 212,012
Other ......................... 260,695 268,643
---------- ----------
638,060 1,013,755
---------- ----------
Total assets ..................... $9,610,391 $6,804,976
========== ==========
16
<PAGE>
<TABLE>
<CAPTION>
MARCH 31
2000 1999
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 82,412 $ 53,416
Accrued expenses ................................................ 172,672 147,553
Current maturities of long-term debt ............................ 140,871 133,200
------------ ------------
Total current liabilities .......................................... 395,955 334,169
Long-term debt ..................................................... 2,908,387 3,081,512
Shareholders' equity
Undesignated shares; 4,999,500 shares authorized, none issued
Convertible preferred stock, $.01 par value
Authorized shares - 500
Issued and outstanding shares - 500 ........................... 5 --
Common stock, $.01 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - 8,997,992 in 2000,
8,512,274 in 1999 ........................................... 89,980 85,123
Additional paid-in capital ...................................... 16,408,446 9,700,258
Accumulated deficit ............................................. (10,192,382) (6,396,086)
------------ ------------
Total shareholders' equity ......................................... 6,306,049 3,389,295
------------ ------------
Total liabilities and shareholders' equity ......................... $ 9,610,391 $ 6,804,976
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
17
<PAGE>
APA Optics, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Net sales ......................... $ 260,701 $ 237,701 $ 239,793
Contract fees ..................... 160,108 484,329 1,950,844
----------- ----------- -----------
420,809 722,030 2,190,637
Costs and expenses:
Cost of sales ..................... 2,086,527 1,366,105 901,538
Cost of contract fees ............. 978,222 837,242 1,430,578
Research and development .......... 326,989 382,445 338,615
Selling, general and administrative 782,694 727,988 616,532
----------- ----------- -----------
4,174,432 3,313,780 3,287,263
----------- ----------- -----------
Loss from operations ................. (3,753,623) (2,591,750) (1,096,626)
Interest income ...................... 100,989 228,195 310,925
Interest expense ..................... (142,662) (149,243) (181,066)
----------- ----------- -----------
Loss before income taxes ............. (3,795,296) (2,512,798) (966,767)
Income tax expense ................... 1,000 1,000 1,000
----------- ----------- -----------
Net loss ............................. $(3,796,296) $(2,513,798) $ (967,767)
=========== =========== ===========
Net loss per common share:
Basic and diluted ................. $ (.43) $ (.30) $ (.12)
=========== =========== ===========
Weighted average shares outstanding:
Basic and diluted ................. 8,744,125 8,512,274 8,376,661
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
18
<PAGE>
APA Optics, Inc.
Statement of Shareholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK
PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance March 31, 1997 ........... - $ - 8,306,624 $ 83,066
Stock options exercised, net... - - 3,500 35
Warrants exercised ............ - - 202,150 2,022
Warrants issued in lieu of debt
service payments ............. - - - -
Net loss ...................... - - - -
------------ ------------ ------------ ------------
Balance March 31, 1998 ........... - - 8,512,274 85,123
Warrants issued in lieu of debt
service payments ............ - - - -
Net loss ...................... - - - -
------------ ------------ ------------ ------------
Balance March 31, 1999 ........... - - 8,512,274 85,123
Issuance of common stock ...... - - 465,000 4,650
Warrants exercised ............ - - 20,718 207
Issuance of preferred stock ... 500 5 - -
Warrants issued in lieu of debt
service payments ............ - - - -
Net loss ...................... - - - -
------------ ------------ ------------ ------------
Balance March 31, 2000 ........... 500 $ 5 8,997,992 $ 89,980
============ ============ ============ ============
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED SHAREHOLDERS'
CAPITAL DEFICIT EQUITY
------------ ------------ ------------
<S> <C> <C> <C>
Balance March 31, 1997 ........... $ 8,244,423 $ (2,914,521) $ 5,412,968
Stock options exercised, net... 7,871 - 7,906
Warrants exercised ............ 1,343,861 - 1,345,883
Warrants issued in lieu of debt
service payments ............. 60,873 - 60,873
Net loss ...................... - (967,767) (967,767)
------------ ------------ ------------
Balance March 31, 1998 ........... 9,657,028 (3,882,288) 5,859,863
Warrants issued in lieu of debt
service payments ............ 43,230 - 43,230
Net loss ...................... - (2,513,798) (2,513,798)
------------ ------------ ------------
Balance March 31, 1999 ........... 9,700,258 (6,396,086) 3,389,295
Issuance of common stock ...... 1,870,475 - 1,875,125
Warrants exercised ............ 80,614 - 80,821
Issuance of preferred stock ... 4,724,995 - 4,725,000
Warrants issued in lieu of debt
service payments ............ 32,104 - 32,104
Net loss ...................... - (3,796,296) (3,796,296)
------------ ------------ ------------
Balance March 31, 2000 ........... $ 16,408,446 $(10,192,382) $ 6,306,049
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
19
<PAGE>
APA Optics, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ............................................ $(3,796,296) $(2,513,798) $ (967,767)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .................. 376,085 443,275 426,362
Changes in operating assets and liabilities:
Accounts receivable .......................... (124,246) 151,193 119,697
Inventories .................................. (54,658) (64,746) (8,758)
Prepaid expenses and other assets ............ 7,056 (31,286) (31,548)
Accounts payable and accrued expenses ........ 54,115 40,572 (17,029)
----------- ----------- -----------
Net cash used in operating activities ........... (3,537,944) (1,974,790) (479,043)
INVESTING ACTIVITIES
Purchases of property and equipment ................. (195,342) (236,891) (925,494)
----------- ----------- -----------
Net cash used in investing activities ........... (195,342) (236,891) (925,494)
FINANCING ACTIVITIES
Proceeds from sales of preferred stock .............. 4,725,000 - -
Proceeds from sales of common stock ................. 1,875,125 - -
Proceeds from exercise of warrants and options ...... 80,821 - 1,353,789
Repayment of long-term debt ......................... (133,350) (351,710) (158,479)
Bond reserve funds .................................. 314,747 192,025 1,518,237
----------- ----------- -----------
Net cash provided by (used in) financing activities . 6,862,343 (159,685) 2,713,547
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents .... 3,129,057 (2,371,366) 1,309,010
Cash and cash equivalents at beginning of year ...... 2,812,849 5,184,215 3,875,205
----------- ----------- -----------
Cash and cash equivalents at end of year ............ $ 5,941,906 $ 2,812,849 $ 5,184,215
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Warrants issued in lieu of debt service payments .... $ 32,104 $ 43,230 $ 60,873
</TABLE>
SEE ACCOMPANYING NOTES.
20
<PAGE>
APA OPTICS, INC.
NOTES TO FINANCIAL STATEMENTS
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
maturity of three months or less when purchased to be cash equivalents.
Investments classified as cash equivalents consist primarily of certificates of
deposit. The fair value of investments approximates cost.
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.
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.
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. All earnings per share amounts for all periods have been
presented and, where appropriate, restated to conform to the requirements of
Statement 128.
21
<PAGE>
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. If impairment is determined to exist, it is
recorded as the excess of carrying value over estimated fair value.
2. ACCOUNTS RECEIVABLE
Accounts receivable includes $60,495 billed under retainage provisions of
government contracts in 2000 ($21,032 in 1999).
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
MARCH 31
2000 1999
---------- ----------
Land .............................. $ 60,000 $ 60,000
Building .......................... 1,679,424 1,679,424
Manufacturing equipment ........... 4,083,453 3,899,744
Tools ............................. 88,092 88,092
Office equipment .................. 193,952 188,884
Leasehold improvements ............ 536,447 536,447
---------- ----------
6,641,368 6,452,591
Less accumulated depreciation ..... 4,181,608 3,860,088
---------- ----------
$2,459,760 $2,592,503
========== ==========
4. LONG-TERM DEBT
In June 1996, the Company began construction of its new production facility in
Aberdeen, South Dakota to fabricate wavelength division multiplexed modulators.
As part of its financing of the facility, the Company has received economic
assistance from the State of South Dakota Governor's Office of Economic
Development and the Aberdeen Development Corporation (the parties) as follows:
<TABLE>
<S> <C>
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
==========
</TABLE>
22
<PAGE>
The following is a summary of the outstanding debt at March 31 related to the
Aberdeen facility:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
South Dakota Governor's Office of Economic Development and the
Aberdeen Development Corporation Bond, 5% to 6.75%, due in
various installments through 2016 .......................... $1,780,000 $1,840,000
Low interest loans, 0% to 3%, due in various ................. 556,396 586,107
installments through 2016
Forgivable loans, 3%, due in various installments
through 2003 ............................................... 712,862 788,605
---------- ----------
$3,049,258 $3,214,712
========== ==========
</TABLE>
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, 2000, 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,
2000 and 1999.
At March 31, 2000 and 1999, the Company had on deposit with trustees $278,353
and $593,100 in reserve funds for current bond maturities of which $65,000 and
$60,000 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 2000. 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, 2000. The carrying value of the bonds, based on similar
instruments, approximates market value at March 31, 2000 and 1999.
As partial payment of expenses related to the Aberdeen financing, the Company
issued warrants to purchase 31,875 shares of the Company's common stock at an
exercise price of $4.00 per share. The warrants expire in March 2002. The value
assigned to the warrants of $31,875 has been capitalized as bond placement costs
and is amortized over the life of the loan agreement.
As part of the Company's plan to construct this production facility, the city of
Aberdeen, South Dakota gave the Company land with an approximate fair market
value of $250,000. The gift was contingent upon the Company staying in the new
building through June 23, 2002.
All of the above debt is secured by land, buildings, and certain equipment of
the Company.
Interest paid during fiscal year 2000, 1999 and 1998 was $142,662, $149,243, and
$181,066, respectively.
Maturities of long-term debt are as follows (assuming no debt is forgiven): 2001
- $140,871; 2002 - $377,908; 2003 - $528,701; 2004 - $315,709; 2005 - $102,639;
thereafter - $1,583,430.
5. INCOME TAXES
As of March 31, 2000, the Company has net operating loss carryovers for federal
income tax purposes of approximately $10,000,000, expiring in fiscal years 2001
to 2019, and $43,000 in research and development credits, expiring in fiscal
2001, which may 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:
23
<PAGE>
5. INCOME TAXES (CONTINUED)
MARCH 31
2000 1999
----------- -----------
Net operating losses ........... $ 3,395,000 $ 2,113,000
Depreciation ................... 9,000 6,000
Research and development credits 43,000 43,000
Other .......................... 100,000 71,000
----------- -----------
Total deferred tax asset ....... 3,547,000 2,233,000
Less valuation allowance ....... (3,547,000) (2,233,000)
----------- -----------
Net deferred taxes ............. $ - $ -
=========== ===========
Income tax expense consists entirely of state taxes in 2000, 1999 and 1998.
6. SHAREHOLDERS' EQUITY
The Board of Directors may by resolution establish from the undesignated shares
different classes or series of shares and may fix the relative rights and
preferences of shares in any class or series.
In fiscal year 2000, the Company sold in a private placement 500 shares of its
preferred stock, resulting in net proceeds of $4,725,000. The proceeds will be
used to fund operations. Also in September 1999, the Company sold 465,000 shares
of its common stock in a private placement resulting in net proceeds of
$1,870,475. These funds were used to fund operations.
The preferred stock carries a 2% cumulative dividend payable upon conversion in
cash or common stock. The preferred stock (plus any unpaid accreted dividends)
is convertible to common stock at the option of the holder and is automatically
converted on March 15, 2003 or, if earlier, on the date that the common stock
has sustained a market value of $50 per share for 20 consecutive trading days.
The initial conversion price of $35 per share is subject to adjustment pursuant
to the antidilution provisions of the Certificate of Designation of Voting
Power, Preferences and Relative, Participating, Optional and Other Special
Rights and Qualifications, Limitations and Restrictions of 2% Series A
Convertible Preferred Stock (the "Certificate"). In addition, beginning
September 14, 2000, and each monthly period thereafter while shares of the
preferred stock are outstanding, the conversion price is reset in accordance
with the formula set forth in the Certificate. A holder of the preferred stock
may not convert into shares of common stock if after the conversion the holder,
together with its affiliates, would beneficially own over 9.999% of the
outstanding shares of the common stock. This restriction may be waived by a
holder on not less than 61 days' notice to the Company. In addition, as long as
the Company's common stock is listed for trading on Nasdaq, the Company may not
issue common stock on conversion of the preferred stock in an amount which
exceeds 19.999% of the outstanding common stock immediately prior to the sale of
the preferred stock without obtaining prior shareholder approval. The preferred
stock is non-voting (except in specified circumstances) and is subject to
redemption at the Company's option on 30 days' notice (subject to certain
restrictions if the effective conversion price at the time of notice of
redemption is $30 or more). The Company is required to redeem the preferred
stock upon certain default events. The preferred stock is redeemable under
certain circumstances as stated in the Certificate.
24
<PAGE>
7. STOCK OPTIONS AND WARRANTS
Option activity is summarized as follows:
<TABLE>
<CAPTION>
SHARES AVAILABLE OPTIONS WEIGHTED AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
---------------- ----------- PER SHARE
----------------
<S> <C> <C> <C>
Balance March 31, 1997 ..... 661,338 81,000 $. 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
Granted .................. (65,000) 65,000 5.84
Canceled ................. 35,000 (35,000) 4.67
------- -------
Balance March 31, 2000 ..... 943,838 292,500 $ 4.49
======= =======
</TABLE>
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 advisers. Options are granted at values determined based on fair
market value on the date of grant and vesting normally occurs over a four-year
period.
The number of shares exercisable at March 31, 2000, 1999 and 1998 was 262,500,
15,000 and 5,000, respectively, at a weighted average exercise price of $4.10,
$5.70 and $5.65 per share, respectively.
The weighted average fair value of options granted in 2000, 1999 and 1998 was
$5.30, $2.05 and $2.83 per share, respectively. The exercise price of options
outstanding at March 31, 2000 ranged from $3.77 to $13.18 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 2000, 1999 and 1998, respectively: risk-free interest rates of
6.50%, 4.55%, and 5.61%, 0% dividend rate, volatility factor of the expected
market price of the Company's common stock of .44, .48, and .44 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.
25
<PAGE>
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:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Pro forma net loss .............................. $(4,083,136) $(2,626,002) $(991,568)
Pro forma net loss per common share -
basic and diluted ............................. $(.47) $(.31) $(.12)
===== ===== =====
</TABLE>
These pro forma amounts may not be indicative of future years' amounts.
The following is a table of the warrants to purchase shares of the Company's
common stock:
<TABLE>
<CAPTION>
WARRANTS EXERCISE PRICE EXPIRATION
OUTSTANDING PER SHARE DATE
------- -------------- -----------
<S> <C> <C> <C>
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
Granted................................... 108,337 4.88 - 49.47 2001 - 2005
Exercised................................. 20,718 3.30 - 4.00 1999 - 2003
Expired................................... 3,100 3.30 1999
-------
Balance at March 31, 2000................... 204,858 $3.75 - $49.47 2000 - 2005
=======
</TABLE>
8. COMMITMENTS
The Company leases office and manufacturing facilities from a partnership whose
two partners are major shareholders and officers of the Company. The lease
agreement, classified as an operating lease, expires November 30, 2004 and
provides for periodic increases of the rental rate based on increases in the
consumer price index. Future minimum lease obligations under the lease as of
March 31, 2000 are as follows:
Year ending March 31:
2001......................................................... $107,280
2002......................................................... 107,280
2003......................................................... 107,280
2004......................................................... 107,280
2005......................................................... 71,520
Rental expense, all of which was paid to the partnership, was $121,000 in fiscal
2000, $116,000 in fiscal 1999 and $118,000 in fiscal 1998.
9. MAJOR CUSTOMERS
In fiscal 2000, the U.S. Army accounted for 35% of net sales and contract fees.
No other customer accounted for more than 10% of net sales and contract fees. In
fiscal years 1999 and 1998 operating agencies of the U.S. Government accounted
for 67% and 89%, respectively, of the Company's net sales and contract fees as
follows:
26
<PAGE>
1999 1998
---- ----
Air Force....................... 15% 18%
Army............................ - 22
Navy............................ 12 34
ARPA............................ 40 15
--- ---
Total........................... 67% 89%
=== ===
27
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
-------------- ------------------------------------------------------------ ----------------------------------------
NUMBER DESCRIPTION PAGE NUMBER OR INCORPORATED
BY REFERENCE TO
-------------- ------------------------------------------------------------ ----------------------------------------
<S> <C> <C>
3.1 Restated Articles of Incorporation, as amended to date, Exhibit 3.1 to Registrant's Report on
and Statement regarding establishment of class of shares Form 10-KSB for the fiscal year ended
March 31, 1995
3.2 Bylaws, as amended and restated to date Exhibit 3.2 to Registrant's Report on
Form 10-KSB for the fiscal year ended
March 31, 1999
4.1(a) State of South Dakota Board of Economic Development Exhibit 4.1(a) to the Report on 10-QSB
$300,000 Promissory Note, REDI Loan: 95-13-A for the quarter ended June 30, 1996
(the "June 1996 10-QSB")
4.1(b) State of South Dakota Board of Economic Development Exhibit 4.1(b) to the June 1996 10-QSB
Security Agreement REDI Loan No: 95-13-A dated May 28, 1996
4.2(a) $700,000 Loan Agreement dated June 24, 1996 by and between Exhibit 4.2(a) to the June 1996 10-QSB
Aberdeen Development Corporation and APA Optics, Inc.
4.2(b) $300,000 Loan Agreement dated June 24, 1996 between Exhibit 4.2(b) to the June 1996 10-QSB
Aberdeen Development Corporation and APA Optics, Inc.
4.2(c) $250,000 Loan Agreement dated June 24, 1996 by and between Exhibit 4.2(c) to the June 1996 10-QSB
Aberdeen Development Corporation and APA Optics, Inc.
4.2(d) $300,000 Loan Agreement dated June 24, 1996 by and between Exhibit 4.2(d) to the June 1996 10-QSB
Aberdeen Development Corporation and APA Optics, Inc.
4.3(a) Loan Agreement between South Dakota Economic Development Exhibit 4.3(a) to the June 1996 10-QSB
Finance Authority and APA Optics, Inc.
4.3(b) Mortgage and Security Agreement - One Hundred Day Exhibit 4.3(b) to the June 1996 10-QSB
Redemption from APA Optics, Inc. to South Dakota Economic
Development Finance Authority dated as of June 24, 1996
4.4(a) Subscription and Investment Representation Agreement of NE Exhibit 4.4(a) to the June 1996 10-QSB
Venture, Inc.
4.4(b) Form of Common Stock Purchase Warrant for NE Venture, Inc. Exhibit 4.4(b) to the June 1996 10-QSB
4.5(a) Certificate of Designation for 2% Series A Exhibit 4.5(a) to Registration
Convertible Preferred Stock Statement on Form S-3 (Commission
File No. 333-33968)
28
<PAGE>
-------------- ------------------------------------------------------------ ----------------------------------------
NUMBER DESCRIPTION PAGE NUMBER OR INCORPORATED
BY REFERENCE TO
-------------- ------------------------------------------------------------ ----------------------------------------
4.5(b) Form of common stock warrant issued in connection with 2% Exhibit 4.5(b) to Registration
Series A Convertible Preferred Stock Statement on Form S-3 (Commission
File No. 333-33968)
4.6 Common Stock Purchase Warrant issued to Ladenburg Thalmann Page 30
& Co. Inc. to purchase 84,083 shares
10.1(a) Sublease Agreement between the Registrant and Jain-Olsen Exhibit 10.1 to the Registration
Properties and Sublease Agreement and Option Agreement Statement on Form S-18 filed with the
between the Registrant and Jain-Olsen Properties Chicago Regional Office of the
Securities and Exchange Commission on
June 26, 1986
10.1(b) Amendment and Extension of Sublease Agreement dated August Page 42
31, 1999
*10.2(a) Stock Option Plan for Nonemployee Directors Exhibit 10.3a to Registrant's Report
on Form 10-KSB for the fiscal year
ended March 31, 1994 (the "1994
10-KSB")
*10.2(b) Form of option agreement issued under the plan Exhibit 10.3b to 1994 10-KSB
*10.3 1997 Stock Compensation Plan Exhibit 10.3 to Registrant's Report on
Form 10-KSB for the fiscal year ended
March 31, 1997
*10.4 Insurance agreement by and between the Registrant and Anil Exhibit 10.5 to Registrant's Report on
K. Jain Form 10-K for the fiscal year ended
March 31, 1990
*10.5 Form of Agreement regarding Repurchase of Stock upon Exhibit 10.1 to Registrant's Report on
Change in Control Event with Anil K. Jain and Kenneth A. Form 10-QSB for the quarter ended
Olsen September 30, 1997 ("September 1997
10-QSB")
*10.6 Form of Agreement regarding Employment/Compensation upon Exhibit 10.2 to the September 1997
Change in Control with Messrs. Jain and Olsen 10-QSB
23.1 Consent of Ernst & Young LLP Page 44
27 Financial data schedule Page 45
</TABLE>
*Indicates management contract or compensation plan or arrangement required to
be filed as an exhibit to this form.
29
