"A SPECTRUM OF
OPPORTUNITY..."
APA OPTICS, INC.
1996 Annual Report
An innovative, research-oriented company, APA Optics, Inc. is
involved primarily in the areas of optoelectronics and precision
optical systems for lasers and other applications.
From its founding in 1979, the company has concentrated on
leading edge research in a range of sophisticated optoelectronic
and optical system areas. A primary goal has been to identify
and develop high technology innovations emerging from its
research activities
that have substantial commercial potential and produce them for
original equipment manufacturing markets. APA Optics, Inc.
expects to begin fabricating Wavelength
Divisional Multiplexer optical modulator components later this
year, with complete systems produced subsequently.
APA Optics, Inc. has its headquarters in Blaine, Minnesota,
a suburb of Minneapolis, and will soon begin constructing an
optoelectronics manufacturing center in Aberdeen,
South Dakota.
CONTENTS
Letter from the President............1
Fiscal 1996 Review..............................2
Optics Success..................................3
Marketing and Production Strategy...4
Role of Aberdeen................................5
The Fiber Optics Market.......................6
AlGaN Research.................................8
Financial Results.................................9
Directors/StockTransfer...................17
1
LETTER TO SHAREHOLDERS:
I am pleased to report that your Company has experienced a
rewarding and auspicious year, one which has seen APA Optics set
on a firm course for future success.
Dramatic progress was made in restoring the Company to
profitability while APA Optics
worked actively to advance its product development programs.
With the assistance of a favorable financing program, APA Optics
will soon be engaged in the design and construction
of a facility in Aberdeen, S.D., which will become the
Company's optoelectronics
manufacturing center.
The development agreement concluded with the State of South
Dakota and the Aberdeen Development Corporation will provide
important assistance in establishing this key product
fabrication facility. The Aberdeen facility project totals $7.6
million, with APA Optics contributing $2 million. The Company
expects to complete and occupy the building by early 1997.
The Aberdeen facility will produce Wavelength Division
Multiplexed (WDM) optical
modulator components and, ultimately, completely integrated
units. To take advantage of current market opportunities, the
Company has decided to manufacture and introduce its components
first and then produce the integrated units following successful
testing of
commercial units. WDM optical modulator products were selected
for APA's entry into
product fabrication because of the vast marketing potential
presented by the fast
growing fiber optic communications industry.
In reviewing financial performance, APA Optics made substantial
progress in becoming
profitable in fiscal 1996, posting profits in two quarters. For
fiscal 1996, however, the
Company had a loss of $92,474, a reduction of 81 percent from
the loss of $468,681
experienced in fiscal 1995.
Overall revenues increased by 23 percent in fiscal 1996,
totaling $2,485,833, as compared
to $2,028,485 in the 1995 fiscal year.
The Company ended the fiscal year 1996 with a substantial
contract backlog and a cash
balance of $2,256,309. This large cash balance is mainly due to
the proceeds from a private placement of common stock which
netted the Company $1,805,061. The Company also
retired $95,000 of long term debt.
Total shareholders' equity at year end, March 31, 1996, was
$4,107,228, as compared to $2,385,037 at the end of the 1995
fiscal year. The Company's strengthened balance sheet
will better position the Company to capitalize on future
opportunities.
The 1997 fiscal year promises to be a dynamic and fruitful year
for APA Optics. As our
theme for this report suggests, the Company is faced with an
entire spectrum of opportunity. The final development agreement
with South Dakota and Aberdeen has been completed and
we are proceeding briskly to make APAOptics' new manufacturing
center a reality.
We are bolstering our staff capabilities in the product
fabrication area and, at the same time, expanding our product
marketing programs. APA will be fully prepared to seize our new
opportunities for the benefit of the Company and its
shareholders.
I appreciate your support and understanding as we position the
Company for an era of new prosperity and product progress.
Sincerely,
Anil K. Jain
Juune 26, 1996
2
PRODUCT FOCUS AND IMPROVED FINANCIALS ARE 1996 HALLMARKS
The development agreement provides APA Optics, Inc. with
financial assistance in excess of $5.5 million. The Company
will invest an additional $2 million in the project.
The WDM optical modulator is the primary focus of the
Company's product development activities, given its enormoMoving
strategically to position itself for improved profitability and
the accomplishment of its long term goals, APA Optics, Inc. took
several key steps in the 1996 fiscal year. The Company's plans
to begin product manufacturing and marketing were advanced with
the focus on commercial development of the Wavelength Division
Multiplexed (WDM) optical modulator.
An important element of this move toward product
development and marketing was the decision to build an
optoelectronics manufacturing center. Early in the 1996 fiscal
year, a preliminary agreement was announced for construction of
such a fabrication facility in Aberdeen, South Dakota. A letter
of understanding was signed with the State of South Dakota and
the Aberdeen Development Corporation to build the facility and a
final agreement was recently concluded. Construction is
expected to begin shortly.
Tus commercial potential. The innovative device, now in
the final stages of product development, offers the opportunity
to dramatically multiply the capacity of fiber optics, since
several communications channels are created within a single
fiber using only one laser. APA anticipates that the technology
will be introduced initially as WDM modulator components,
followed by the complete optical modulator.
Financial progress...
APA Optics, Inc. completed the 1996 fiscal year with
greatly improved financial results. Overall, the Company
reported a loss of $.01 a share in fiscal 1996, as compared to a
loss of $.06 a share in fiscal 1995. APA was able to report
small profits in two of the four quarters of fiscal 1996.
Management expects its Blaine operations to be profitable in
fiscal 1997. However, the Company expects to incur significant
costs in establishing its Aberdeen facility. The Company
expects to post an overall profit in fiscal 1998.
Business outlook...
While the Company's major emphasis is firmly on the move
toward manufacturing and marketing products that have emerged
from research and development programs, the
Company will continue to benefit from its research activities.
Research activities represent an important revenue source for
the Company.
"The WDM optical modulator is the primary focus of the Company's
product development activities at this time, given its enormous
commercial potential"
R&D AGENDA
APA Optics will continue aggressive and targeted research
efforts in the coming year, a
reflection of the importance of the development of
technologically advanced and marketable products for the future.
Contract research revenues exceeded $2.2 million in fiscal 1996,
representing an increase of
41 percent over those realized in fiscal 1995. APA Optics
expects that its contract research work will remain strong. In
addition, the Company continues to enjoy a significant contract
backlog, ensuring substantial contract research revenues in the
months ahead.
With its sound base in Aluminum Gallium Nitride (AlGaN)
technologies, APA will continue active development of three
promising devices, the Ultraviolet (UV) detector, both UV and
blue lasers, and transistors.
R&D activities at APA Optics are targeted, in large measure, on
the development of high
quality materials that may be used in fabricating
optoelectronic devices. With vertically integrated in-house
research and development capabilities, including microelectronic
fabrication and test and package facilities, the Company is a
leader in the development of AlGaN/InGaN (Indium Gallium
Nitride) materials systems.
3
Research and development activities, completely supported by
Department of Defense
contracts, focus on three devices:
Ultraviolet Detectors for medical imaging, flame sensing and
other commercial applications.
High frequency transistors for high power amplifiers.
Blue-green LEDs for optical data storage and display
applications.
The progress made so far has resulted in approximately 30 papers
published in international journals and invitations to
participate in large R&D consortia in each of the subject areas.
AlGaN Ultraviolet Detector Development
APA is presently fabricating and packaging ultraviolet detectors
for commercial flame
sensing and UV power measurement needs. While they have the
same responsivity as
currently used silicon detectors, APA's GaN detectors show no
visible radiation response, making them highly desirable and
superior to silicon based detectors.
Current work emphasizes improving fabrication procedures to
increase reproducibility.
APA also is increasing the aluminum content to further increase
their insensitivity to
visible radiation. Research also has begun to make imaging
arrays, as opposed to
individual devices.
Several R&D detector samples have been supplied to commercial
users and government laboratories for full evaluation of system
needs. These fully packaged devices are the first commercial
GaN based devices available in the U.S.
GaN Transistor Development
GaN transistor development activities at APA, funded by the U.S.
Navy and the Strategic Defense Initiative Office, are aimed at
developing needed fabrication technologies for
transistors capable of operating at frequencies as high as 40GHz
and temperatures up to
500o C. This should significantly reduce the size and weight of
amplifiers used in device applications, such as radars, mobile
phones and satellites.
Significant technical progress in fiscal 1996 resulted in
working devices and the emphasis
is now on packaging and reliability testing. APA devices have
demonstrated power
amplification far beyond that of competitive technologies.
Blue-Green Light Emitters
The Company's activities are focused on developing high power
blue-green LEDs and lasers. Worldwide, several research groups
are currently working in this area. APA's work has
resulted in bright blue-green LEDs that are desirable for
display applications, devices
which, with further development, could be translated into
commercial products. The
green LED market is estimated at 10 million devices per month,
as new uses such as
traffic lights are addressed.
U.S. Air Force supported activity at APA is aimed at developing
blue-purple lasers. Able
to increase data storage on an optical disk by a factor of
four, or more, these lasers can
also replace the argon-ion lasers presently used extensively in
lab applications.
The optoelectronics group is also engaged in developing GaN-
AlGaN based integrated
optics modulators that potentially could be long term
replacements for GaAs or LiNbO3
(Lithium Niobate) based devices. The GaN devices have the
advantage of being operational
from visible to IR wavelengths, without requiring a change of
materials. APA also is
continuing its research efforts in materials improvement,
process development and the
exploration of new substrate materials.
4
OUTSTANDING OPTICS
The precision optical systems group at APA Optics had a most
successful and productive
year, establishing a firm basis for the future.
The optics development and manufacturing group provides
companies with custom precision optics design and fabrication
services. The optics group also works to advance APA's own
internal research and development programs and product
development efforts.
Major achievements in optics during the 1996 fiscal year
enhanced the group's future design
and fabrication prospects and contributed significantly to APA's
product marketing emphasis.
A Challenging Assignment
The optics group successfully designed and fabricated a
challenging custom optical system
for a new customer on a quick turnaround basis with excellent
results. Specifically, the
project called for a complex lens system which could be
incorporated in a projection system
that would display computer screen images on a screen for
flight simulators.
While other companies had projected that several months would be
required to complete the project, APA was able to accomplish it
in less than a month.
The successful completion of this project led to APA receiving
another project assignment
from this customer, which also produced excellent results. APA
Optics expects to receive additional project assignments from
this company in the future.
WDM Contributions
In support of the company's R & D activities, the optics group
developed two compact zoom lenses and other unique optical
assemblies for the WDM optical modulator project. The Company
plans to use these optical assemblies in the WDM optical
modulator's tunable
receiver system.
The zoom lenses also have the potential of becoming independent
products. Specifically, the Company has developed two compact
zoom lenses for laser applications, one for visible lasers and
the other for lasers in the near infrared spectral band.
While zoom lenses are used routinely for several
applications, including both video
and still cameras, these newly developed lenses will find
utilization in laser and fiber optic communication applications.
5
MOVING AHEAD ON PRODUCT MARKETING STRATEGY AND MANUFACTURING
CENTER
APA Optics is moving rapidly in implementing its product
development, fabrication and marketing plans to capitalize on
growing demand in the exploding fiber communications market.
These markets, discussed in detail on pages 6 and 7, are
expected to provide immediate demand for APA's innovative WDM
optical modulator technology.
WDM Technology
The Company's patented WDM modulator system offers several
advantages over competing WDM technologies. Essentially,
optical fibers have the capability of handling data rates of
up to 25 million millions, or 25 Terra Hertzs, per second, but
they are not fully utilized
because of the limitations of existing transmitter and receiver
devices. One of the most
promising technologies to increase the capabilities of these
devices is the use of different
portions of the light spectrum to carry data, creating multi-
channel capacity.
The three core aspects of such multi-channel utilization
involve: light sources of different
colors; devices to modulate the data on different light waves
and feed it into the fiber; and,
finally, a device to receive the signals and sort out the data
from the different color waves.
Other companies are pursuing WDM technology, but most utilize
several very expensive
lasers, one for each color, called Distributed Feed-Back (DFB)
lasers. APA's patented
approach, on the other hand, uses a single, low cost, laser
diode to provide color waves for
WDM transmission. Both approaches are expected to be utilized
extensively in fiber communications markets.
Using a low cost laser diode, APA has demonstrated the
feasibility of its single laser WDM technology in the
laboratory. The Company has developed a multi-channel modulator
and
multi-channel receiver which can be used with the laser diode to
provide a four channel
WDM transmitter and receiver. The integrated
laser/modulator/optics/mechanical assembly system was developed
for the laboratory demonstration.
Marketing Strategy
In assessing its WDM production and marketing options, APA
looked at pursuing
the entire device and/or its various modular components. While
the integrated device
would have the advantage of being unique, it would have to
compete directly with all of the
DFB-based devices at the outset. Further, this course would
require significantly more effort, time and financial resources
to take the successful laboratory demonstration to the status of
a market-ready WDM optical modulator. On the other hand, the
modulator components could
be configured so that they would work with either DFB lasers or
low cost laser diodes. As a result, the Company has decided to
introduce its multi-channel receiver at the earliest possible
time, followed by the multi-channel high speed modulator. The
integrated WDM optical modulator would be the final stage of
this marketing strategy.
This marketing course provides early entry into the WDM
market, permits the
Company to work in the larger market common to all approaches
and significantly lowers
the costs of product development and introduction. Initially,
APA Optics would be working
with the manufacturers and distributors of DFB-based lasers,
rather than competing with them.
6
This strategy also offers benefits in product fabrication, in
that optical and electronic
components may either be manufactured by APA or purchased from
others and then
assembled and tested at the new Aberdeen facility. Overall, the
phased approach also
promises an earlier flow of significant revenues from APA's WDM
technology
ABERDEEN'S VITAL ROLE
APA Optics new optoelectronic manufacturing facility is slated
to come on line at precisely
the right time. Having recently closed on the $5.5 million
financial assistance package
from the Aberdeen Development Corporation and the State of South
Dakota, APA is
moving ahead on construction. Design work is underway on the
24,000-square foot facility
and construction and equipment procurement will be accomplished
this summer. The
advanced manufacturing center will be completed in early 1997.
Initially, the facility will be able to manufacture and package
optoelectronic devices, such as
the 4-channel receiver. Testing and packaging of GaAs modulator
devices also will be
possible at the Aberdeen center. In the later part of 1997 and
early 1998, additional
equipment in excess of $1.5 million will be purchased and
installed. This will allow for the processing of GaAs
modulators, assembly and inspection of the GaAs modulators and
the integrated WDM optical modulator.
Aberdeen Financing Sources
Uses of Funds On APA Optics Aberdeen Facility
THE ENORMOUS POTENTIAL OF THE FIBER COMMUNICATIONS MARKET
The capacity demands for both data and voice transmission over
fiber optic communications networks are expanding dramatically,
with more and more computer and technological applications being
added on an almost daily basis. The combination of demand
factors places enormous burdens on communications organizations
to gear up to meet the service demands
of the 21st Century.
The inventor of Ethernet and founder of 3Com Corporation,
Robert M. Metcalfe,
writes in InfoWorld that wavelength division multiplexing (WDM)
will help meet the
burgeoning demands of interactive media on the information
superhighway. "Meeting such demands would require U.S. telcos
to increase the capacity of their optical-fiber infrastructure--
now a boggling 250,000 route miles costing $250 billion--by as
much as 1,000 times before 2001," he asserts.
"In today's exploding telecommunications market, our
customers are demanding more
and more capacity from our network," says Fred Briggs, the chief
engineering officer of MCI Communications Corp. MCI's current
backbone network operates at 2.5 gigabits per second,
or 2.5 billion bits of capacity over a single strand of fiber
optic glass. The company is now moving toward introduction of
Four-Wavelength WDM, which would quadruple its network capacity
without the cost of adding additional fiber optic lines.
The potential demand for increased data and voice
transmission capability is almost beyond measurement, largely
because of new products and applications that are surfacing on
almost a daily basis. Some relate to the growth of home
offices, which rely almost entirely
on fiber optic lines to tie them with their base company, or
entrepreneurs who must be
linked with clients and suppliers.
7
While much of the increased capacity demand is PC driven,
another development
suggests even wider needs. Oracle Corporation plans to
introduce the network
computer (NC) late this year, an appliance-like device that
consumers may use to tap
into the Internet, the World Wide Web, low cost wide area
networks and local area
networks (LANS) inside of nest organizations. Far simpler than
the typical PC, the
NC doesn't require a separate monitor and can be hooked up to a
television set. It is
expected to be marketed at less than $500 per device, making
NC's accessible by a large
segment of the American public. Currently, somewhat less than
30 percent of U.S.
households are estimated to have PC's, but the lower cost of the
NC is envisioned as
pressing penetration to 90 percent or more, since the required
investment is in the range
of a TV set.
Assessing market potential on the basis of the most
developed markets can be misleading. While the growth
anticipated in the U.S. and other developed economies is most
impressive,
it is dwarfed by the staggering demands expected to be posed
worldwide by technological progress in less developed countries.
Fiber optics systems will be called upon to meet
challenges that were hardly imagined at the time networking was
being introduced.
APA Optics, Inc., in examining the market potential for its
WDM optical modulator, performed market estimates based upon
applications in cable television (CATV), LANs,
data communications, telecommunications and joint activities.
In the cable television area, experts estimate that
technologies or devices that could reduce the number of fiber
strands in the fiber cable from the currently envisioned 100
strands
to 10 strands will significantly lower both initial and
operational costs of fiber optic installations.
Depending on the existing standards for down stream
communications, each major
fiber optic network may need 200,000 WDM optical modulators,
based on one device for
every 500 homes and 100,000,000 cable users, overall.
Aggressive system architecture designs, which would make
possible upstream fiber optic communication between 72-home end
nodes
and intermediate nodes, could increase demand for WDM optical
modulators to 15,000,000.
Local area and metropolitan area networks will provide
significant markets for WDM optical modulators. With similar
gigabit technology employed in both LAN and MAN,
building-sized and campus-sized networks, respectively, WDM is
viewed as playing a major
role in upgrading existing systems and enabling the use of new
system architectures. APA
Optics estimates that potential LANs/MANs demand will be in the
area of several billion
dollars annually, worldwide.
As we see computing systems become increasingly powerful
and versatile, the data communications networks, which
facilitate the exchange of data between these systems, must
also evolve to support new applications. When data networks
were originally developed, applications such as e-mail were not
even foreseen. Now, the focus is on inter networking, utilizing
a set of protocols to govern the way computers communicate over
a network and
rules for internetworks, allowing any computer to communicate
with any other network.
Telecommunications networks, primarily designed to transmit
high quality voice
sounds between telephones, are being used increasingly to
transmit data, such as computer
data and faxes. With a 20 percent annual growth rate for data
as compared to growth of 3 percent for voice, most telephone
companies see their data communications services becoming
an ever more important part of their business. Telephone
networks are now becoming digital, blurring the distinctions
between computer and telephone networks.
The introduction of new services to consumers in their
homes and the convergence of the computer, data and telephone
industries will all contribute to substantial future demand for
WDM products.
8
A RANGE OF USES
Cable Television
Home Office
Suburban Business Campus
New Housing Development
Public School Network
Government Services Network
Metropolitan Business Network
Business Campus
College Campus
Medical Campus
Mlitary Base
Voice Data Communication
Remote monitoring, testing and repair of networks
9
Management Discussion and Analysis. . . . . . . . . . . . . . .
.Results of Operations
Operating revenues for fiscal 1996 were $2,485,833, an increase
of approximately 23 percent over the operating revenues of
$2,028,485 for fiscal 1995. This significant increase in
revenue was due to an increase in government contract fees from
$1,572,603 in fiscal 1995 to $2,205,318 in fiscal 1996. This
$632,715 increase in contract fees was due to our substantial
contract backlog, excellent performance from our research team,
contract work support from our optics group and the addition of
new members to our research team. The Company's contract
backlog was approximately $4,000,000 ($3 million in contracts
and $1 million in options) at the end of fiscal 1996, about the
same as at the end of fiscal 1995, despite the increased
revenues. The Company also is currently negotiating several new
contracts, worth approximately $2,750,000. Production revenues
for fiscal year 1996 were $280,515, as compared to $455,882 for
the 1995 fiscal year. The decrease in production revenues was
anticipated, as the Company continues to emphasize the
development of optoelectronic products, utilizing all of its
available resources for future production and expansion of
facilities to Aberdeen, South Dakota.
The Company is reporting a net loss of $92,474, ($.01 per share)
for fiscal 1996, as compared to a loss of $468,681 ($.06 per
share) for fiscal 1995. Although the 1996 loss was a
substantial improvement over the 1995 loss, the Company had
forecast a profit for the year. At the end of the third quarter
of this year, the Company was showing a slight profit. The loss
for the fourth quarter was the result of delay in funding of one
government contract in the amount of approximately $157,000.
The Company has already expensed most of the costs associated
with this contract.
With the strong backlog at year-end and ongoing contract
negotiations, the Company anticipates profitability from its
Blaine, Minnesota operations during fiscal 1997. The Company,
however, plans to incur significant expenses in establishing its
Aberdeen facilities for optoelectronic product development and
manufacturing during the 1997 fiscal year.
Liquidity & Capital Resources:
The Company has substantial cash reserves at fiscal year end,
March 31, 1996, of $2,256,309, as compared to a cash balance of
$401,034 for the fiscal year ended March 31, 1995. This large
increase in cash was accomplished through a private placement of
the Company's stock, netting the Company approximately
$1,800,000. The Company's current ratio of 10 to 1 for fiscal
1996 compares to 5 to 1 for fiscal 1995.
In June 1996, the Company concluded the funding assistance
arrangements with the City of Aberdeen, South Dakota, and the
State of South Dakota. Most of the funds raised through the
private placement will be used in the South Dakota expansion.
The Company believes it has sufficient cash for operations
through fiscal 1997 and beyond.
10
Balance Sheets March 31
1996 1995
Assets
Current assets:
Cash $2,256,309 $ 401,034
Accounts receivable 406,852 421,943
Inventories:
Raw materials 24,806 61,791
Work-in-process and finished goods 105,993
146,414
Costs in excess of billings on research contracts 210,658
- -
Prepaid expenses 30,305 31,225
Bond reserve funds 66,667 63,333
Total current assets 3,101,590 1,125,740
Property and equipment 1,157,570 1,492,282
Other assets:
Bond reserve funds 151,278 151,278
Bond placement costs - 20,629
Receivable from officer 220,695 180,730
Other 125,216 92,438
497,189 445,075
Total assets $4,756,349 $3,063,097
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 112,857 $ 97,584
Accrued expenses 91,264 40,476
Current maturities of long-term debt 100,000
95,000
Total current liabilities 304,121 233,060
Long-term debt 345,000 445,000
Shareholders' equity:
Undesignated shares; 5,000,000 shares authorized, none
issued
Common stock, $.01 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - 7,990,007 in 1996
and 7,376,923 in 1995 79,900 73,769
Additional paid-in capital 6,930,826 5,122,292
Retained earnings (deficit) (2,903,498 )
(2,811,024 )
Total shareholders' equity 4,107,228 2,385,037
Total liabilities and shareholders' equity $4,756,349
$3,063,097
See accompanying notes.
11
Statements of Operations Year ended March 31
1996 1995
Revenues:
Net sales $ 280,515 $ 455,882
Contract fees 2,205,318 1,572,603
2,485,833 2,028,485
Costs and expenses:
Cost of sales 479,022 559,080
Cost of contract fees 1,559,101 1,124,485
Research and development 30,435 227,384
Selling, general and administrative 531,922
556,107
2,600,480 2,467,056
Loss from operations (114,647 ) (438,571 )
Interest income 59,601 14,059
Interest expense (36,428 ) (43,169 )
Loss before income taxes (91,474 ) (467,681 )
Income taxes 1,000 1,000
Net loss $ (92,474 ) $ (468,681 )
Net loss per share $(.01 ) $(.06 )
Weighted average shares outstanding 7,734,082 7,325,970
See accompanying notes.
Statements of Shareholders' Equity
Common Stock Retained
Paid-In Earnings
Shares Par Value Capital
(Deficit)
Balance March 31, 1994 7,274,923 $72,749 $4,855,733
$(2,342,343 )
Stock options exercised, net 2,000 20 730 -
Shares issued under private stock
offering, net of issuance costs 100,000 1,000
265,829 -
Net loss - -- - (468,681 )
Balance March 31, 1995 7,376,923 73,769 5,122,292
(2,811,024 )
Stock options exercised, net 12,084 121 6,183
- -
Warrants exercised 1,000 10 3,290 -
Shares issued under private stock
offering, net of issuance costs 600,000
6,000 1,799,061 -
Net loss - - - (92,474 )
Balance March 31, 1996 7,990,007 $79,900 $6,930,826
$(2,903,498 )
See accompanying notes.
12
Statements of Cash Flows
Year ended March 31
1996 1995
Operating activities
Net loss $ (92,474 ) $(468,681 )
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 450,584 445,736
Loss on sale of equipment - 857
Changes in operating assets and liabilities:
Accounts receivable 15,091 (9,576 )
Inventories 77,406 55,953
Costs in excess of billings on research contracts
(210,658 ) -
Prepaid expenses and other assets (99,193 )
(710 )
Accounts payable and accrued expenses 66,061
(33,508 )
Net cash provided by (used in) operating activities 206,817
(9,929 )
Investing activities
Proceeds from sale of property and equipment - 125,000
Purchases of property and equipment (67,873 ) (110,213
)
Other - (53,940 )
Net cash used in investing activities (67,873 ) (39,153
)
Financing activities
Proceeds from sales of Common Stock 1,814,665 267,579
Repayment of long-term debt (95,000 ) (85,000 )
Bond reserve funds (3,334 ) (6,667 )
Net cash provided by financing activities 1,716,331
175,912
Increase in cash 1,855,275 126,830
Cash at beginning of year 401,034 274,204
Cash at end of year $2,256,309 $ 401,034
See accompanying notes.
Notes To Financial Statements
13
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.
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 and Equipment Property and equipment are stated at
cost. Depreciation of property and equipment is provided on the
straight-line method over the following estimated useful lives
of the assets:
Years
Manufacturing equipment 7 - 10
Tools 3 - 7
Office equipment 5 - 18
Leasehold improvements 15 - 18
Revenue Recognition 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.
Summary of Significant Accounting Policies (continued)
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 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.
Stock-Based Compensation In October 1995, the Financial
Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company has not determined the impact of the
new statement on its financial statements.
Net Loss Per Share The net loss per share has been determined
by dividing net loss by the weighted average number of common
shares outstanding during each year. Shares issuable upon
exercise of stock options and warrants were not considered in
the computations since their effect would be anti-dilutive.
Impairment of Long-Lived Assets The Company records losses on
long-lived assets in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying
amount.
2. Accounts Receivable Accounts receivable includes $56,076
billed under retainage provisions of government contracts in
1996 ($86,801 in 1995). There is no allowance for doubtful
accounts.
3. Property and Equipment Property and equipment consists of
the following:
March 31
1996 1995
Manufacturing equipment $3,116,862 $3,075,069
Tools 76,597 75,696
Office equipment 198,832 207,985
Leasehold improvements 536,447 536,447
Land 60,000 60,000
3,988,738 3,955,197
Less accumulated depreciation 2,831,168 2,462,915
$1,157,570 $1,492,282
4. Receivable From Officer The receivable from officer
represents premiums paid by the Company on a life insurance
policy owned by the Company's president.
5. Costs in Excess of Billings on Research Contracts Costs in
excess of billings on research contracts represents unbilled
costs on Phase I government contracts which will be billed in
fiscal 1997.
6. Long-Term Debt Long-term debt consists of the following:
March 31
1996 1995
7% Minnesota Agricultural and Economic Development
Board Bond, due in increasing serial maturities
through fiscal year ending March 31, 2000, secured
by manufacturing equipment $445,000 $540,000 Less
current portion 100,000 95,000 $345,000
$445,000
In December 1989, the Company entered into a loan agreement with
the Minnesota Agricultural and Economic Development Board to
provide financing for the expansion of manufacturing facilities.
At March 31, 1996 and 1995, the Company had on deposit with
trustees $217,945 and $214,611 in reserve
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Long-Term Debt (continued)
for future payments on these bonds of which $66,667 and $63,333
is held in escrow for the payment of current bond maturities.
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 in compliance with
these covenants in fiscal 1996. The carrying value of the bonds
approximate market value at March 31, 1996.
Interest paid during fiscal year 1996 and 1995 was $36,428 and
$43,169, respectively.
Maturities of long-term debt through 2001 are as follows: 1997-
$100,000; 1998- $105,000; 1999- $115,000; 2000- $125,000.
7. Income Taxes As of March 31, 1996, the Company has
operating loss carryovers for federal income tax purposes of
approximately $3,262,000, which expire in fiscal years 2001 to
2010 and $43,000 in research and development credits which can
be used to offset federal income taxes. Credits will expire in
fiscal years 2000 to 2005.
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
1996 1995
Net operating losses $1,120,000 $1,110,000
Depreciation (215,000 ) (181,000 )
Research and development credits 43,000 43,000
Other 52,000 20,000
Total deferred tax asset 1,000,000 992,000
Less valuation allowance (1,000,000 ) (992,000 )
Net deferred taxes $ - $ -
Income tax expense consists of state taxes in 1996 and 1995.
Differences between income taxes and the amounts derived by
applying the statutory federal income tax rate to loss before
income taxes are as follows:
Year ended March 31
1996 1995
Statutory rate 34 % 34 %
Federal income taxes (benefit) $(31,000 ) $(159,000 )
State taxes, net of federal tax effect 1,000 1,000
Loss carryovers, without tax benefit 10,000 159,000
Effect of graduated tax rates 12,000 -
Other 9,000 -
$ 1,000 $ 1,000
8. 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.
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9. Stock Options and Warrants In fiscal year 1992, pursuant to
a sale of Common Stock, the Company issued warrants to purchase
46,000 shares of its Common Stock at $3.30 per share to the
underwriter of the offering. The warrants are exercisable
through July 1996. In fiscal year 1995, pursuant to a sale of
Common Stock, the Company issued warrants to purchase 10,000
shares of its Common Stock at $3.30 per share to the underwriter
of the offering. The warrants are exercisable through November
1999.
9. 9. Stock Options and Warrants (continued)
In fiscal year 1996, pursuant to a sale of Common Stock, the
Company issued warrants to purchase 60,000 shares of its Common
Stock at $3.75 per share to the underwriter and additional
warrants to purchase 300,000 shares of its Common Stock at $6.75
per share to the investors in the offering. The warrants are
exercisable through September 2001. As of March 31, 1996, there
were 415,000 warrants outstanding.
In fiscal years 1996 and 1995, certain shareholders tendered
13,416 and 2,500 shares of Common Stock as substantial payment
for 25,500 and 4,500 shares purchased upon exercise of their
stock options.
Changes in stock options are as follows:
Shares Options Outstanding
Available for Total Shares
Price Grant Shares Exercisable
Per Share
Balance March 31, 1994
271,338 83,000 68,000 $2.25 -
$5.00
Granted (5,000 ) 5,000 - 3.50
Exercised - (4,500) (4,500) 2.25
Shares becoming
exercisable - - 15,000
Balance March 31, 1995
266,338 83,500 78,500 2.25
- - 5.00
Granted (5,000) 5,000 - 4.375
Exercised - (25,500) (25,500)
2.25 - 5.00 Canceled (25,000)
(53,000) (48,000) 2.25
Balance March 31, 1996
236,338 10,000 5,000
$3.50 - $4.375
10. 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, 1996 are as follows:
Year ending March 31: 1997 $118,000 1998
118,000 1999 118,000 2000 79,000
$433,000
Rental expense was $117,000 and $117,041 during the fiscal years
ended March 31, 1996 and 1995, respectively, all of which was
paid to the partnership.
11. 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 revenue from the agencies was
$2,205,318 in 1996 ($1,572,603 in 1995). The breakdown is as
follows:
1996 1995
Air Force 38% 55 %
Army 4 9
Navy 58 36
Total 100% 100%
12. Agreements In May 1995, the Company announced its intention
to build a 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 letters
of intent from the State of South Dakota Governor's Office of
Economic Development and the Aberdeen Development Corporation
(the parties) to provide the Company with economic assistance.
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12. Agreements (continued) The assistance package is as follows:
Bond financing for building construction and equipment
$1,920,000
Low interest loans 1,250,000
Forgivable loans 750,000
Grants 550,000
Equity investment 1,200,000
$5,670,000
The equity investment is for Common Stock of the Company. The
forgivable loans are contingent upon employment levels at the
facility meeting preset criteria. In exchange for any loans
forgiven, the Company will issue warrants to purchase Common
Stock of the Company at a predetermined price. Also, in
accordance with the intent letters, the Company has raised
approximately $2,000,000 in equity from other sources.
The Company expects to use approximately $4,500,000 to construct
the building and to purchase equipment. The remaining financing
and equity funds will be used for product development, marketing
and working capital.
Report of Independent Auditors
APA Optics, Inc.
We have audited the accompanying balance sheets of APA Optics,
Inc. as of March 31, 1996 and 1995, and the related statements
of operations, shareholders' equity and cash flows for the years
then ended. 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, 1996 and 1995, and the results
of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Minneapolis, Minnesota
May 3, 1996
Ernst & Young LLP.
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COMMON STOCK INFORMATION AND TRADE PRICES
FY '96 High Low FY'95 High Low
1st Qtr $4.88 $3.00
$4.75 $3.75
2nd Qtr 8.50 4.13 4.25 3.50
3rd Qtr 8.00 5.25 4.25 3.50
4th Qtr 6.00 5.00 3.75 3.00
There were 422 shareholders of record on March 31, 1996. APA
Optics, Inc. has not paid dividends on its common stock and does
not anticipate doing so in the foreseeable future.
ANNUAL MEETING The Annual Meeting of Shareholders will be held
on August 21, 1996 at 3:30 PM at the Sheraton Minneapolis
Metrodome, 1330 Industrial Blvd., Minneapolis, Minn.
LISTING OF SECURITIES The Common Stock of APA Optics, Inc. is
listed on the quotation system of The Nasdaq Small-Cap Market
under the symbol APAT.
AVAILABILITY OF FORM 10-KSB Shareholders may obtain, exclusive
of exhibits, a copy of the annual report to the Securities and
Exchange Commission (Form 10-KSB) for the year ended March 31,
1996 by writing to the Company.
STOCK TRANSFER AGENT Norwest Bank, 161 N. Concord
Exchange,
So. St. Paul, MN 55075
CORPORATE OFFICERS
Anil K. Jain, President and Treasurer
Kenneth A. Olsen, Vice President and Secretary
M. Asif Khan, Vice President, Optoelectronics
Randal J. Becker, Principal Accounting Officer
APA Optics, Inc.
2950 N.E. 84th Lane
Blaine, Minnesota 55449
612-784-4995- phone
612-784-2038- fax
Internet address:
http:\\www.apaoptics.com
Counsel: Moss & Barnett, Minneapolis, Minnesota
Accountants: Ernst & Young, Minneapolis, Minnesota
Investor Relations: The Wallace Group, Minneapolis, Minnesota
Board of Directors (from left to right): Lincoln Hudson,
Independent Management Consultant, Anil K. Jain, Chairman, and
Kenneth A. Olsen, Secretary
APA OPTICS, INC.
2950 N.E. 84th Lane
Blaine, MN 55449
phone-612-784-4995
fax-784-2038
internet: http:\\www.apaoptics.com
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