Clearfield, Inc. - Quarter Report: 2006 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
SECURITIES
EXCHANGE ACT OF 1934
For
the
quarterly period ended September 30, 2006
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
Commission
File Number 0-16106
APA
Enterprises, Inc.
(Exact
name of Registrant as specified in its charter)
|
Minnesota
|
41-1347235
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
2950
N.E. 84th
Lane, Blaine, Minnesota 55449
(Address
of principal executive offices and zip code)
(763)
784-4995
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirement for
the past 90 days.
|
Yes
|
x
|
No
|
¨
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
the
Exchange Act).
|
Large
accelerated filer
|
¨
|
Accelerated
filer
|
¨
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Non-accelerated
filer
|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
|
Yes
|
¨
|
|
No
|
x
|
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
|
Class:
|
Outstanding
at November 2, 2006
|
|
Common
stock, par value $.01
|
11,872,331
|
APA
ENTERPRISES, INC.
FORM
10-Q
TABLE
OF
CONTENTS
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3
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3
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3
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3
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3
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3
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3
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3
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3
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3
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3
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3
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3
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3
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3
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3
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PART
I.
FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
APA
ENTERPRISES, INC.
CONSOLIDATED
CONDENSED BALANCE SHEETS
(Unaudited)
|
September
30,
2006
|
March
31,
2006
|
||||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
6,804,335
|
$
|
8,947,777
|
|||
|
Accounts
receivable, net of allowance for uncollectible accounts of $75,345
at
September 30, 2006 and $77,831 at March 31, 2006
|
2,371,600
|
1,892,483
|
|||||
|
Inventories
|
1,975,204
|
1,836,843
|
|||||
|
Bond
reserve fund
|
1,285,646
|
126,385
|
|||||
|
Prepaid
expenses and other
|
115,038
|
173,040
|
|||||
|
Total
current assets
|
12,551,823
|
12,976,528
|
|||||
|
Property,
plant and equipment, net
|
2,566,259
|
2,623,412
|
|||||
|
Other
assets:
|
|||||||
|
Bond
reserve funds
|
-
|
343,241
|
|||||
|
Goodwill
|
3,422,511
|
3,422,511
|
|||||
|
Other
|
396,692
|
227,879
|
|||||
|
3,819,203
|
3,993,631
|
||||||
|
Total
assets
|
$
|
18,937,285
|
$
|
19,593,571
|
|||
|
Liabilities
and shareholders’ equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Current
portion of long-term debt
|
$
|
1,254,727
|
$
|
1,342,481
|
|||
|
Accounts
payable
|
1,241,770
|
1,353,828
|
|||||
|
Accrued
compensation
|
834,962
|
815,046
|
|||||
|
Accrued
expenses
|
144,547
|
211,840
|
|||||
|
Total
current liabilities
|
3,476,006
|
3,723,195
|
|||||
|
Long-term
debt, net of current maturities
|
11,105
|
18,480
|
|||||
|
Deferred
rent
|
54,249
|
-
|
|||||
|
Deferred
income taxes
|
312,904
|
272,454
|
|||||
|
Total
liabilities
|
3,854,264
|
4,014,129
|
|||||
|
Shareholders’
equity:
|
|||||||
|
Undesignated
shares, 4,999,500 authorized shares; no shares issued and
outstanding
|
-
|
-
|
|||||
|
Preferred
stock, $.01 par value; 500 authorized shares; no shares issued and
outstanding
|
-
|
-
|
|||||
|
Common
stock, $.01 par value; 50,000,000 authorized shares; 11,872,331 shares
issued and outstanding at September 30, 2006 and March 31,
2006
|
118,723
|
118,723
|
|||||
|
Additional
paid-in capital
|
51,999,234
|
51,968,366
|
|||||
|
Accumulated
foreign currency translation
|
(16,991
|
)
|
(2,153
|
)
|
|||
|
Accumulated
deficit
|
(37,017,945
|
)
|
(36,505,494
|
)
|
|||
|
Total
shareholders’ equity
|
15,083,021
|
15,579,442
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
18,937,285
|
$
|
19,593,571
|
|||
SEE
ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
APA
ENTERPRISES, INC.
CONSOLIDATED
CONDENSED STATEMENTS OF
OPERATIONS
(Unaudited)
|
Three
Months Ended
September
30,
|
Six
Months Ended
September
30,
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Revenues
|
$
|
4,817,813
|
$
|
4,069,367
|
$
|
9,843,730
|
$
|
7,581,930
|
|||||
|
Cost
of sales
|
3,458,236
|
3,165,297
|
7,154,166
|
5,952,750
|
|||||||||
|
Gross
profit
|
1,359,577
|
904,070
|
2,689,564
|
1,629,180
|
|||||||||
|
Operating
expenses
|
|||||||||||||
|
Research
and development
|
135,205
|
343,372
|
288,992
|
666,970
|
|||||||||
|
Selling,
general and administrative
|
1,696,482
|
1,680,366
|
3,409,485
|
3,150,774
|
|||||||||
|
Loss
(gain) on disposal of assets
|
(6,498
|
)
|
16,809
|
(351,498
|
)
|
(93,126
|
)
|
||||||
|
1,825,189
|
2,040,547
|
3,346,979
|
3,724,618
|
||||||||||
|
Loss
from operations
|
(465,612
|
)
|
(1,136,477
|
)
|
(657,415
|
)
|
(2,095,438
|
)
|
|||||
|
Other
income
|
110,182
|
96,246
|
229,561
|
188,033
|
|||||||||
|
Other
expense
|
(20,733
|
)
|
(22,647
|
)
|
(41,347
|
)
|
(45,529
|
)
|
|||||
|
89,449
|
73,599
|
188,214
|
142,504
|
||||||||||
|
Loss
before income taxes
|
(376,163
|
)
|
(1,062,878
|
)
|
(469,201
|
)
|
(1,952,934
|
)
|
|||||
|
Income
taxes
|
24,270
|
750
|
43,250
|
1,700
|
|||||||||
|
Net
loss
|
$
|
(400,433
|
)
|
$
|
(1,063,628
|
)
|
$
|
(512,451
|
)
|
$
|
(1,954,634
|
)
|
|
|
Net
loss per share:
|
|||||||||||||
|
Basic
and diluted
|
($0.03
|
)
|
($0.09
|
)
|
($0.04
|
)
|
($0.16
|
)
|
|||||
|
Weighted
average shares outstanding:
|
|||||||||||||
|
Basic
and diluted
|
11,872,331
|
11,872,331
|
11,872,331
|
11,872,331
|
|||||||||
SEE
ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
APA
ENTERPRISES, INC.
CONSOLIDATED
CONDENSED STATEMENTS OF CASH
FLOWS
(Unaudited)
|
Six
Months Ended
September
30,
|
|||||||
|
2006
|
2005
|
||||||
|
Cash
Flow from operating activities
|
|||||||
|
Net
loss
|
$
|
(512,451
|
)
|
$
|
(1,954,634
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||
|
Depreciation
and amortization
|
296,796
|
543,722
|
|||||
|
Deferred
taxes
|
40,450
|
-
|
|||||
|
Gain
on sale of assets
|
(351,498
|
)
|
(93,126
|
)
|
|||
|
Stock
based compensation
|
30,868
|
5,183
|
|||||
|
Foreign
currency translation
|
(14,838
|
)
|
(2,493
|
)
|
|||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
receivable, net
|
(479,117
|
)
|
(270,549
|
)
|
|||
|
Inventories
|
(138,361
|
)
|
(380,341
|
)
|
|||
|
Prepaid
expenses and other
|
(110,811
|
)
|
(51,775
|
)
|
|||
|
Accounts
payable and accrued expenses
|
(105,186
|
)
|
416,025
|
||||
|
Net
cash used in operating activities
|
(1,344,148
|
)
|
(1,787,988
|
)
|
|||
|
Cash
flow from investing activities
|
|||||||
|
Purchases
of property and equipment
|
(274,737
|
)
|
(233,942
|
)
|
|||
|
Proceeds
from sale of assets
|
386,592
|
111,680
|
|||||
|
Net
cash provided by (used in) investing activities
|
111,855
|
(122,262
|
)
|
||||
|
Cash
flow from financing activities
|
|||||||
|
Repayment
of long-term debt
|
(95,129
|
)
|
(68,083
|
)
|
|||
|
Decrease
(increase) in bond reserve funds
|
(816,020
|
)
|
45,648
|
||||
|
Net
cash used in financing activities
|
(911,149
|
)
|
(22,435
|
)
|
|||
|
Decrease
in cash and cash equivalents
|
(2,143,442
|
)
|
(1,932,685
|
)
|
|||
|
Cash
and cash equivalents at beginning of period
|
8,947,777
|
10,813,492
|
|||||
|
Cash
and cash equivalents at end of period
|
$
|
6,804,335
|
$
|
8,880,807
|
|||
SEE
ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
Note
1.
|
Basis
of Presentation
|
The
accompanying consolidated condensed financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America
for
complete financial statements. For further information, refer to the financial
statements and footnotes thereto included in the Company’s annual report on Form
10-K for the year ended March 31, 2006.
In
the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Certain
reclassifications of previously reported amounts have been made to conform
that
presentation to the current period presentation.
In
preparation of the Company’s consolidated financial statements, management is
required to make estimates and assumptions that affect reported amounts of
assets and liabilities and related revenues and expenses during the reporting
periods. Actual results could differ from the estimates used by
management.
|
Note
2.
|
Net
Loss Per Share
|
The
following table sets forth the computation of basic and diluted net loss per
share:
|
Three
Months Ended
September
30,
|
Six
Months Ended
September
30,
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Numerator
for basic and diluted net loss per share
|
$
|
(400,433
|
)
|
$
|
1,063,628
|
)
|
$
|
(512,451
|
)
|
$
|
(1,954,634
|
)
|
|
|
Denominator
for basic and diluted net loss per share - weighted average shares
outstanding
|
11,872,331
|
11,872,331
|
11,872,331
|
11,872,331
|
|||||||||
|
Basic
and diluted net loss per share
|
($0.03
|
)
|
($0.09
|
)
|
($0.04
|
)
|
($0.16
|
)
|
|||||
Common
stock options and warrants to purchase 618,565 and 647,195 shares of common
stock with a weighted average exercise price of $2.77 and $2.96 were outstanding
at September 30, 2006 and 2005, respectively, but were excluded from calculating
diluted net loss per share because they were antidilutive.
|
Note
3.
|
Segment
Reporting
|
The
Company has identified two reportable segments based on its internal
organizational structure, management of operations, and performance evaluation.
These segments are (1) Optronics and (2) Cables and Networks
(APACN). Optronics’
revenue is generated in the design, manufacture and marketing of ultraviolet
(UV) detection and measurement devices. Cables & Networks’ revenue is
derived primarily from standard and custom fiber optic cable assemblies, copper
cable assemblies, value added fiber optics frames, panels and modules. Expenses
are allocated between the two segments based on detailed information contained
in invoices. In addition, overhead costs, including management’s time and other
expenses, are allocated to each segment as appropriate.
Segment
detail is summarized as follows (unaudited, in thousands):
|
Optronics
|
Cables
& Networks
|
Eliminations
|
Consolidated
|
||||||||||
|
Three
months ended September 30, 2006
|
|||||||||||||
|
External
sales
|
$
|
33
|
$
|
4,785
|
$
|
-
|
$
|
4,818
|
|||||
|
Gross
profit (loss)
|
(116
|
)
|
1,476
|
-
|
1,360
|
||||||||
|
Income
(loss) from operations
|
(655
|
)
|
189
|
-
|
(466
|
)
|
|||||||
|
Depreciation
and amortization
|
84
|
58
|
-
|
142
|
|||||||||
|
Capital
expenditures
|
94
|
5
|
-
|
99
|
|||||||||
|
Assets
|
18,406
|
8,222
|
(7,691
|
)
|
18,937
|
||||||||
|
Three
months ended September 30, 2005
|
|||||||||||||
|
External
sales
|
$
|
109
|
$
|
4,058
|
$
|
(98
|
)
|
$
|
4,069
|
||||
|
Gross
profit (loss)
|
(192
|
)
|
1,097
|
(1
|
)
|
904
|
|||||||
|
Income
(loss) from operations
|
(1,143
|
)
|
7
|
-
|
(1,136
|
)
|
|||||||
|
Depreciation
and amortization
|
207
|
67
|
-
|
274
|
|||||||||
|
Capital
expenditures
|
42
|
71
|
-
|
113
|
|||||||||
|
Assets
|
20,257
|
7,440
|
(7,347
|
)
|
20,350
|
||||||||
|
Six
months ended September 30, 2006
|
|||||||||||||
|
External
sales
|
$
|
84
|
$
|
9,760
|
$
|
-
|
$
|
9,844
|
|||||
|
Gross
profit (loss)
|
(218
|
)
|
2,908
|
-
|
2,690
|
||||||||
|
Income
(loss) from operations
|
(1,016
|
)
|
359
|
-
|
(657
|
)
|
|||||||
|
Depreciation
and amortization
|
172
|
125
|
-
|
297
|
|||||||||
|
Capital
expenditures
|
270
|
5
|
-
|
275
|
|||||||||
|
Assets
|
18,406
|
8,222
|
(7,691
|
)
|
18,937
|
||||||||
|
Six
months ended September 30, 2005
|
|||||||||||||
|
External
sales
|
$
|
213
|
$
|
7,566
|
$
|
(197
|
)
|
$
|
7,582
|
||||
|
Gross
profit (loss)
|
(378
|
)
|
2,009
|
(2
|
)
|
1,629
|
|||||||
|
Loss
from operations
|
(2,035
|
)
|
(60
|
)
|
-
|
(2,095
|
)
|
||||||
|
Depreciation
and amortization
|
417
|
127
|
-
|
544
|
|||||||||
|
Capital
expenditures
|
129
|
105
|
-
|
234
|
|||||||||
|
Assets
|
20,257
|
7,440
|
(7,347
|
)
|
20,350
|
||||||||
|
Note
4.
|
Sale
of Land
|
In
June
2005 the Company sold approximately two acres of its land in Aberdeen, South
Dakota to the Aberdeen Development Corporation (ADC) in exchange for the
retirement of its remaining $120,000 debt on its loan with ADC. The land was
granted to APA in conjunction with building a facility in Aberdeen and was
part
of a single parcel of approximately 12 acres on which the Company constructed
and operates its manufacturing facility. The Company recognized a gain of
approximately $109,000 on the sale of the land in the first quarter of fiscal
2006.
|
Note
5.
|
Closing
of Aberdeen Facility
|
The
Company ceased all of its operations in Aberdeen during the later part of fiscal
year 2006 as a part of its consolidation of manufacturing operations. The
Company owned facility, located approximately on a 10-acre parcel, is designated
for lease or sale after sub-division of the land in approximately two 5-acre
parcels. The Company does not have a formal plan for leasing or selling the
facility and thus the building remains classified as property, plant and
equipment as of September 30, 2006. The company plans to retain the 5-acre
vacant land for potential future use. The facility was built using proceeds
from
bonds issued by the South Dakota Economic Development and Finance Authority.
In
August 2006, the Company paid $871,911 into an escrow account to retire the
bonds. These funds, reflected as Bond Reserve Funds, will be used to make final
payment on the bonds on October 1, 2006, the next bond redemption date. The
payment was made pursuant to a Notice of Default and Acceleration received
by
the Company. The primary reason for the notice was related to the Company
ceasing all of its South Dakota operations in the latter part of fiscal year
2006 as part of its consolidation of manufacturing operations. The Company
has
made timely interest and principal payments, and the reason for the notice
was
not related to the payments.
|
Note
6.
|
Sale
of Metal Organic Chemical Vapor Deposition (MOCVD)
Operation
|
In
March
2006 the Company sold certain equipment and related intellectual property
related to its MOCVD operations to an unrelated party for a total consideration
of $1.9 million in cash and a license back of the technology within a specified
field of use. The asset purchase agreement includes an additional consulting
agreement for up to $100,000 over the course of one year. The Company recorded
a
gain of approximately $1.2 million on the sale in the fourth quarter of fiscal
2006. Because the Company does not track discrete financial information for
these assets, this has not been presented as a discontinued operation.
|
Note
7.
|
Stock
Based Compensation
|
Effective
April 1, 2006, the Company adopted FASB Statement No. 123(R), “Share-Based
Payment,”
(SFAS
123(R)) which requires an entity to reflect on its income statement, instead
of
pro forma disclosures in its financial footnotes, the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. Statement 123(R) supersedes the Company’s previous
accounting under Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees.”
The
Company adopted SFAS 123(R) using the modified prospective transition method,
which provides that the Company’s consolidated financial statements for prior
periods have not been restated to reflect, and do not include, the impact of
SFAS 123(R). As required by SFAS 123(R), the following pro forma table
illustrates the effect on net loss as if the fair-value-based approach of SFAS
No.123 (R) had been applied during the three and six months ended September
30,
2005:
|
|
Three
Months Ended
September
30, 2005
|
Six
Months Ended
September
30, 2005
|
|||||
|
Net
loss to common shareholders - as reported
|
$
|
(1,063,628
|
)
|
$
|
(1,954,634
|
)
|
|
|
Less:
Total stock-based employee compensation expense determined under
fair
value based method for all awards, net of related tax
effects
|
(29,961
|
)
|
(61,526
|
)
|
|||
|
Net
loss - pro forma
|
$
|
(1,093,589
|
)
|
$
|
(2,016,160
|
)
|
|
|
Basic
and diluted net loss per common share - as reported
|
($0.09
|
)
|
($0.16
|
)
|
|||
|
Basic
and diluted net loss per common share - pro forma
|
($0.09
|
)
|
($0.17
|
)
|
|||
SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company’s Consolidated
Statements of Operations. The Company recorded $11,243 and $30,868 of related
compensation expense for the three and six month periods ended September 30,
2006, respectively. This expense is included in selling, general and
administrative expense. There was no tax benefit from recording this non-cash
expense. The impact of this compensation expense on both basic and diluted
loss
per share was less than $0.01 for the three and six months ended September
30,
2006. As of September 30, 2006, $106,152 of total unrecognized compensation
expense related to non-vested awards is expected to be recognized over a
weighted average period of approximately 3.36years.
The
Company uses the Black-Scholes-Merton (“Black-Scholes”) option-pricing model as
a method for determining the estimated fair value for employee stock awards.
This is the same option-pricing model used in prior years to calculate pro
forma
compensation expense under SFAS 123 footnote disclosures. Compensation expense
for employee stock awards is recognized on a straight-line basis over the
vesting period of the award. The adoption of SFAS 123(R) also requires certain
changes to the accounting for income taxes and the method used in determining
diluted shares, as well as additional disclosure related to the cash flow
effects resulting from share-based compensation. The relevant interpretive
guidance of Staff Accounting Bulletin 107 was applied in connection with its
implementation and adoption of SFAS 123(R).
The
Company estimates the fair value of stock option awards based on the following
assumptions:
|
Six
Months
Ended
September
30, 2006
|
|
|
Expected
volatility
|
64%
|
|
Expected
life (in years)
|
5
years
|
|
Expected
dividends
|
0%
|
|
Risk-free
interest rate
|
4.78%
|
The
weighted average fair value of options granted during the six months ended
September 30, 2006 was $0.77. The Company’s approach to estimating expected
volatility on its stock awards granted during the quarter considers both the
historical volatility in the trading market for its common stock and a look
back
period equal to the expected life of the grants. Expected volatility is one
of
several assumptions in the Black-Scholes model used by the Company to make
an
estimate of the fair value of options granted under the Company’s stock plans.
The Company believes this approach results in a better estimate of expected
volatility.
In
estimating the expected term, both exercise behavior and post-vesting
termination behavior were included in the analysis, as well as consideration
of
outstanding options. The risk-free interest rate used in the Black-Scholes
option valuation model is the historical yield on U.S. Treasury zero-coupon
issues with equivalent remaining terms. The Company does not pay any cash
dividends on the Company’s common stock and does not anticipate paying any cash
dividends in the foreseeable future. Consequently, an expected dividend yield
of
zero is used in the Black-Scholes option valuation model.
Stock
Option Plans
We
have
adopted a 1997 Stock Compensation Plan, a Stock Option Plan for Nonemployee
Directors, and a 2007 Stock Compensation Plan (the Plans), pursuant to which
we
may grant stock options, stock appreciation rights, restricted stock,
performance shares, and other stock and cash awards to eligible participants.
We
have also granted stock options outside of the Plans in limited situations.
Under the Plans, an aggregate of approximately 681,485 shares of our Company’s
common stock remained available for issuance at September 30, 2006. In general,
the stock options we have issued under the Plans vest over a period of five
years and expire six years from the date of grant. New shares are issued under
existing registration statements upon exercise. The 1997 Stock Compensation
Plan
expired with the adoption of the 2007 Stock Compensation Plan. All outstanding
incentives, granted under the 1997 Plan will remain in effect until satisfied
or
terminated.
Options
transaction under these plans during the three and six months ended September
30, 2006 are summarized as follows:
|
Numberof
shares
|
Weighted
average
exerciseprice
|
||||||
|
Outstanding
at March31, 2006
|
276,470
|
$
|
2.80
|
||||
|
Granted
|
25,000
|
1.33
|
|||||
|
Canceled
|
(37,490
|
)
|
2.87
|
||||
|
Outstanding
at June 30, 2006
|
263,980
|
2.65
|
|||||
|
Granted
|
15,000
|
1.28
|
|||||
|
Canceled
|
(10,415
|
)
|
5.39
|
||||
|
Outstanding
at September 30, 2006
|
268,565
|
2.46
|
|||||
The
following table summarizes information concerning outstanding and exercisable
stock options at September 30, 2006:
|
Options
outstanding
|
||||||||||||||
|
Range
of
exercise
prices
|
Number
outstanding
|
Weighted
average
remaining
contractual
life
|
Weighted
average
exercise
price
|
Aggregate
Intrinsic
value
|
||||||||||
|
$
|
0.00-$1.29
|
15,000
|
5.92
years
|
$
|
1.28
|
$
|
19,200
|
|||||||
|
1.30-2.91
|
228,565
|
3.83
years
|
1.87
|
427,417
|
||||||||||
|
5.53-8.90
|
25,000
|
0.23
years
|
8.56
|
214,000
|
||||||||||
|
268,565
|
3.61
years
|
$
|
2.46
|
$
|
660,617
|
|||||||||
|
Options
exercisable
|
||||||||||||||
|
Range
of
exercise
prices
|
Number
outstanding
|
Weighted
average
remaining
contractual
life
|
Weighted
average
exercise
price
|
Aggregate
intrinsic
value
|
||||||||||
|
$
|
0.00-$1.29
|
-
|
0
years
|
$
|
-
|
$
|
-
|
|||||||
|
1.30-2.91
|
82,405
|
3.15
years
|
2.06
|
169,754
|
||||||||||
|
5.53-8.90
|
25,000
|
0.23
years
|
8.56
|
214,000
|
||||||||||
|
107,405
|
2.47
years
|
3.57
|
$
|
383,754
|
||||||||||
|
Note
8.
|
Inventories
|
Inventories
consist of the following as of:
|
September
30, 2006
|
March
31, 2006
|
||||||
|
Raw
Materials
|
$
|
1,654,448
|
$
|
1,588,816
|
|||
|
Work-in-progress
|
36,682
|
48,474
|
|||||
|
Finished
Goods
|
284,074
|
199,553
|
|||||
|
$
|
1,975,204
|
$
|
1,836,843
|
||||
|
Note
9.
|
Major
Customer
Concentration
|
As
of
September 30, 2006, two customers comprised approximately 22% of total sales
for
the six months ended September 30, 2006 and one customer accounted for 13%
of
accounts receivable as of the quarter end. No one customer provided greater
than
10% of sales for the same period of the prior fiscal year.
|
Note
10.
|
Commitments
and Contingencies
|
Electronic
Instrumentation and Technology, Inc. ("EIT") filed suit against APA on May
25,
2005 (see information in Part II, Item I of this Report.) The suit alleged
that
APA had committed various fraudulent acts in conjunction with preliminary
business discussions between EIT and APA which preceded APA's introduction
of
its Profiler M product. APA denied EIT's claims of wrongful conduct and the
case
went to trial in December 2005. The jury found in favor of EIT on one claim
and
awarded EIT $35,000. EIT filed certain post-trial motions, all of which were
denied by the court. EIT did not appeal the verdict and this matter is
concluded.
Statements
in this Report about future sales prospects and other matters to occur in the
future are forward looking statements and are subject to uncertainties due
to
many factors, many of which are beyond our control. These factors include,
but
are not limited to, the continued development of our products, acceptance of
those products by potential customers, our ability to sell such products at
a
profitable price, and our ability to fund our operations. For further discussion
regarding these factors, see “Factors That May Influence Future
Results.”
OVERVIEW
APA
Enterprises, Inc., (formerly known as APA Optics, Inc.) consists of the
Optronics group and the Cables & Networks group (APACN or Cables &
Networks). Optronics is active in the development, design, manufacture and
marketing of ultraviolet (UV) measurement instruments for consumers and
industrial customers, and gallium nitride (GaN) based transistors for power
amplifiers and other commercial applications. APACN designs, manufactures and
markets a variety of fiber optic and copper components for the data
communication and telecommunication industries. Both groups also source
components and devices from third parties for direct and value-added sales
to
our customers in all these technology areas.
APACN
focuses on custom-engineered products for telecommunications customers,
primarily related to cabling management requirements of the Fiber-to-the-Home
(“FTTH”) marketplace and in designing and terminating custom cable assemblies
for commercial and industrial original equipment manufacturers (“OEM’s”). To
date, APACN has been able to successfully establish itself as a value-added
supplier to its target market of independent telephone companies and cable
television operators as well as OEM’s who value a high level of engineering
services as part of their procurement process. APACN has expanded its product
offerings and broadened its customer base since its inception three years
ago.
APACN
also invested in expanding its sales and engineering expenditures by 32% during
fiscal 2006 to increase its potential revenues during fiscal year 2007 and
beyond. APACN is already realizing the impact of these efforts in terms of
increased sales, particularly during the last two quarters of the fiscal year
2006 and first two quarters of fiscal year 2007. The increase in revenues is
due
to additional customers and product acceptance, mainly in the
Fiber-to-the-Premise market, as well as an increase in revenue generated from
a
new supply agreement to an existing customer serving the test equipment market.
Optronics
discontinued the fiber optic product line in March 2006.
In
fiscal
year 2006 Optronics sold its MOCVD facility, certain equipment and intellectual
property related to research and development work surrounding gallium nitride
based heterojunction field effect transistors. The sale to an unrelated third
party for consideration including $1.9 million in cash enables the Company
to
focus its R&D efforts on power amplifiers built using GaN technology by
using commercially available parts, rather than building its own transistors.
This is expected to decrease operating costs and shorten the time to market
for
power amplifiers. The Company also sold certain intellectual capitalized assets
for $345,000 during the first quarter of fiscal year 2007. In August 2006,
the
Company paid approximately $872,000 into an escrow account to retire the bonds
issued by the South Dakota Economic Development and Finance Authority. These
funds will be used to make final payment on the bonds on October 1, 2006, the
next redemption date.
Plastic
and metal models of the consumer Personal UV Monitor (PUVM) offered by Optronics
continue in production, and the focus remains on marketing and sales. We have
also introduced samples of a new product called the SunUVStationTM
to
several catalog and retail distributors for their evaluation. This product,
which is similar in size to an outdoor temperature gauge, measures the UV Index
and is targeted to consumers and institutions for use in backyards, patios,
swimming pool areas, and other public places where people need to be reminded
about UV intensity. Final assembly and packaging of this product is being
performed in our APA facility in India. The SunUVStationTM
complements the PUVM and retailers are interested in offering both.
Optronics’
4-band Profiler
M
radiometer, which serves the printing and coating industries that use UV curing,
is in production. This instrument measures the intensity and distribution of
four UV bands to help set up and monitor the curing process. Two domestic
distributors offer the product, and discussions and evaluation tests with
additional domestic and international distributors are underway. We are in
the
process of establishing sales channels through equipment and supplies
manufacturers in addition to general distributors. Optronics is exhibiting
the
Profiler
M
in
selected trade shows with encouraging results. In recent months, the Company
held numerous discussions with potential customers of the Profiler M while
attending trade shows in Atlanta and Chicago.
Our
wholly owned subsidiary, APA Optronics, Pvt. Ltd, India (APA India), established
in fiscal year 2005, is now operational. The subsidiary, with its prime focus
on
low cost manufacturing of APA’s products and components, has already started
supplying samples of Gallium Nitride and fiber optic products which are expected
to be delivered for sale in the near future. The subsidiary is also providing
software development for our Profiler
M
product.
Phase II of the software for the Profiler has now been completed. The subsidiary
provides marketing and sales support for our products both in the U.S. and
India. In particular, it has started the marketing of patch cords and associated
equipment for fiber optic communications, and during the second quarter began
generating revenue from the sale of patch cords and other components to several
customers. The subsidiary, currently located in a leased facility, is in the
process of constructing a larger facility in India to accommodate its future
requirements. The new facility is expected to be completed in fiscal year
2007.
RESULTS
OF OPERATIONS
THREE
MONTHS ENDED SEPTEMBER 30, 2006 VS. THREE MONTHS ENDED SEPTEMBER 30,
2005
Consolidated
revenues for the three months ended September 30, 2006 increased $748,446,
or
18%, to $4,817,813 from $4,069,367 in 2005 mainly due to increased revenues
at
Cables & Networks.
Revenues
at Cables & Networks were $4,784,737, compared to $4,057,740 reported in the
same quarter a year ago, an increase of 18%. The overall increase in revenue
reflects continued growth in new customers and product acceptance in both the
broadband and OEM markets. Sales for the current quarter to broadband service
providers and commercial data networks were approximately $3,731,000 versus
$2,847,000 in the prior year quarter. The increase was primarily due to higher
revenues from customers in the Fiber-to-the-Premise market. Sales to OEM’s were
approximately $1,054,000 versus $1,210,000 in the year ago period. The decrease
was due to price pressures that resulted in the loss of a major customer,
however, this loss was partially off-set due to additional orders provided
under
a supply contract to a customer serving the test equipment market. We expect
that future sales of Cables & Networks products will continue to account for
a substantial portion of our revenue. With the introduction of a broader product
offering in both segments, coupled with the expansion of the sales team into
additional markets, we anticipate that revenues at Cables & Networks during
the third and fourth quarters of fiscal year 2007 will be comparable with the
revenue of the first and second quarters of fiscal 2007.
Gross
revenues at Optronics decreased 70% to $33,076 from $109,877 in the same quarter
a year ago mainly due to the termination of manufacturing activities in
Aberdeen, South Dakota. Gross revenues for the quarter ended September 30,
2005
reflect $98,250 of sales to Cables & Networks for subcontracted labor.
Optronics did not provide any subcontract labor to Cables & Networks in the
quarter ended September 30, 2006.
GROSS
PROFIT AND COST OF SALES
Cables
& Networks’ gross profit increased $378,768, or 35%, to $1,476,013 from
$1,097,245. Specifically, gross profit as a percent of revenue was 31% in the
current quarter as compared to 27% in the same quarter last year. The increase
in gross profit was mainly due to an increase in revenue without an increase
in
the corresponding fixed costs, as well as component and labor cost reductions.
Gross
cost of sales (before inter-company eliminations) at Optronics decreased
$152,615, or 50%, to $149,512 from $302,127. Gross cost of sales for second
quarter of fiscal year 2006 reflects $97,325 related to cost of sales to Cables
& Networks for subcontracted labor. Optronics did not provide any
subcontract labor to Cables & Networks in the quarter ended September 30,
2006. These costs are eliminated as inter-company cost of sales in the
consolidated financials in each quarter. Cost of sales expenses for the current
period for all Optronics product lines consists of approximately $45,000 in
personnel costs, $30,000 in depreciation and $75,000 in materials, overhead
and
other product expenses. This compares to prior year personnel expenses of
approximately $146,000, depreciation of $64,000, and materials, allocated
overhead and other expenses of $92,000.
We
anticipate comparable gross margins for Cables & Networks and cost of sales
for Optronics for the upcoming quarter.
RESEARCH
AND DEVELOPMENT EXPENSES
Research
and development expenses consist of the research and development expense at
Optronics. There have been no significant research and development expenses
at
Cables & Networks. Expenses decreased $208,167 to $135,205, from $343,372 in
the prior year period. The change reflects a decrease in personnel, facility
and
depreciation costs due to the sale of its MOCVD operations.
SELLING,
GENERAL, AND ADMINISTRATIVE
Consolidated
selling, general, and administrative (S, G, & A) expenses during the three
months ended September 30, 2006 increased $16,116, or 1%, to $1,696,482 from
$1,680,366 in the same period in 2005.
S,
G,
& A expenses at Cables & Networks during the three months ended
September 30, 2006 increased $197,983, or 18%, to $1,288,167 from $1,090,184
in
2005. The majority of the increase is attributable to additional sales personnel
and related selling costs as a part of our plan to grow our revenue and customer
base. We expect upcoming quarter expenses to remain at levels seen in the second
quarter.
S,
G,
& A expenses at Optronics during the three months ended September 30, 2006
decreased $182,792, or 31%, to $408,315 from $591,107 in the same period in
2005. The decrease is due largely to the expensing of warrants in the prior
quarter which were fully amortized as of March 31, 2006.
GAIN
ON DISPOSAL OF ASSETS
Consolidated
gain on disposal of assets in the three months ended September 30, 2006 was
$6,498 versus a loss of $16,809 in 2005. The majority of the activity is at
the
Optronics division.
INCOME
(LOSS) FROM OPERATIONS
Consolidated
losses from operations decreased $670,865, or 59% during the three months ended
September 30, 2006, to $465,612 from $1,136,477 in the same period in
2005.
The
income from operations at Cables & Networks in the three months ended
September 30, 2006 was $188,975 compared to $7,061 in the same period in 2005.
The
increased income in the quarter was mainly due to increased revenues, offset
by
higher selling expenses absorbed as part of Cables & Networks’ planned
investment in revenue growth.
The
loss
from operations at Optronics decreased $488,951 in the three months ended
September 30, 2006, or 43%, to $654,587, from a loss of $1,143,538 in the year
ago period. The decrease in the loss is mainly due to consolidation and
discontinuation of MOCVD and Aberdeen operations.
OTHER
INCOME AND EXPENSE
Consolidated
other income and expense increased $15,850 to $89,449 in the three months ended
September 30, 2006 from $73,599 in 2005.
Other
expense at Cables & Networks increased $29,009 in the three months ended
September 30, 2006 due to an increase in interest expense, primarily due to
a
higher interest rate in the current period.
Other
income at Optronics increased $43,772 to $228,865 in the three months ended
September 30, 2006. This resulted from an increase in interest income due to
a
higher rate of interest earned on investments over the quarter ending September
30, 2005. Other expense decreased $1,087 to $20,512 in the three months ended
September 30, 2006, from $21,599 in the period ending September 30,
2005.
NET
LOSS
Consolidated
net loss for the quarter decreased $663,195, or 62%, to $400,433, or $.03 cents
per share, from $1,063,628, or $.09 cents per share in the year ago
period.
Cables
& Networks had a net profit of $45,801 in the quarter, compared to a loss of
$83,334 in the year ago quarter. The increased profitability was due mainly
to
increased revenues.
Optronics
recorded a net loss of $446,234 in the three months ended September 30, 2006,
a
decrease of $534,060 from a loss of $980,294 from the same period of 2005.
The
decrease in the loss is mainly due to the consolidation and termination of
MOCVD
and Aberdeen operations. Achieving profitability in the future will strongly
depend upon Optronics’ ability to successfully manufacture and market
gallium-nitride products.
SIX
MONTHS ENDED SEPTEMBER 30, 2006 VS. SIX MONTHS ENDED SEPTEMBER 30,
2005
Consolidated
revenues for the six months ended September 30, 2006 increased $2,261,800,
or
30%, to $9,843,730 from $7,581,930 in 2005.
Revenues
at Cables & Networks were $9,759,811, compared to $7,566,128 reported in the
same period a year ago, an increase of 29%. The overall increase in revenue
reflects continued growth in new customers and product acceptance in both the
broadband and OEM markets. Sales for the current two quarters to broadband
service providers and commercial data networks were approximately $7,440,000
versus $5,432,000 in the prior year quarter. The increase was primarily due
to
higher revenues from customers in the Fiber-to-the-Premise market. Sales to
OEM’s were approximately $2,320,000 versus $2,134,000 in the year ago period.
The increase is due to additional orders provided under a supply contract to
a
customer serving the test equipment market. We expect that future sales of
Cables & Networks products will continue to account for a substantial
portion of our revenue. With the introduction of a broader product offering
in
both segments, coupled with the expansion of the sales team into additional
markets, we anticipate that revenues at Cables & Networks during the third
and fourth quarters of fiscal year 2007 will be comparable with the revenue
of
the first and second quarters of fiscal 2007.
Gross
revenues at Optronics decreased 61% to $83,919 from $212,775 in the same period
a year ago mainly due to the termination of manufacturing activities in
Aberdeen, South Dakota. Gross revenues for the quarter ended September 30,
2005
reflect $196,973 of sales to Cables & Networks for subcontracted labor.
Optronics did not provide any subcontract labor to Cables & Networks in the
two quarters ended September 30, 2006.
GROSS
PROFIT AND COST OF SALES
Cables
& Networks’ gross profit increased $899,037, or 45%, to $2,908,222 from
$2,009,185. Specifically, gross profit as a percent of revenue was 30% in the
first six months of fiscal year 2007 as compared to 27% in the same period
last
year. The increase in gross profit was mainly due to an increase in revenue
without an increase in the corresponding fixed costs, as well as component
and
labor cost reductions.
Gross
cost of sales (before inter-company eliminations) at Optronics decreased
$287,935, or 49%, to $302,577 from $590,512. Gross cost of sales for the first
six months of fiscal year 2006 reflects $194,705 related to cost of sales to
Cables & Networks for subcontracted labor. Optronics did not provide any
subcontract labor to Cables & Networks in the quarter ended September 30,
2006. These costs are eliminated as intercompany cost of sales in the
consolidated financials in each quarter. Cost of sales expenses for the current
period for all Optronics product lines consists of approximately $95,000 in
personnel costs, $64,000 in depreciation and $144,000 in materials, overhead
and
other product expenses. This compares to prior year personnel expenses of
approximately $283,000, depreciation of $131,000, and materials, allocated
overhead and other expenses of $177,000. The reduced product development
expenses within the GaN area also contributed to the decreased cost of sales.
We
anticipate comparable gross margins for Cables & Networks and cost of sales
for Optronics for the upcoming quarter.
RESEARCH
AND DEVELOPMENT EXPENSES
Research
and development expenses consist of the research and development expense at
Optronics. There have been no significant research and development expenses
at
Cables & Networks. Expenses decreased $377,978 to $288,992 during the six
months ended September 30, 2006, from $666,970 in the prior year period. The
change reflects a decrease in personnel, facility and depreciation costs due
to
the sale of its MOCVD operations.
SELLING,
GENERAL, AND ADMINISTRATIVE
Consolidated
selling, general, and administrative (S, G, & A) expenses increased $258,711
during the six months ended September 30, 2006, or 8%, to $3,409,485 from
$3,150,774 in 2005.
S,
G,
& A expenses at Cables & Networks increased $480,327 during the six
months ended September 30, 2006, or 23%, to $2,550,059 from $2,069,732 in the
same period in 2005. The majority of the increase is attributable to additional
sales personnel and related selling costs as a part of our plan to grow our
revenue and customer base. We expect upcoming quarter expenses to remain at
levels seen in the first and second quarters.
S,
G,
& A expenses at Optronics decreased $223,884, or 21%, to $859,426 from
$1,083,310 in 2005. The decrease is due largely to the expensing of warrants
in
the prior quarter which were fully amortized as of March 31, 2006.
GAIN
ON DISPOSAL OF ASSETS
Gain
on
disposal of assets were entirely within the Optronics division. Gain on disposal
of assets increased $258,372 to $351,498 in the six months ended September
30,
2006 from $93,126 in the prior year. Gains for fiscal year 2007 represent the
sale of patents. Gains for fiscal year 2006 were primarily from the exchange
of
land for the forgiveness of debt.
INCOME
(LOSS) FROM OPERATIONS
Consolidated
losses from operations decreased $1,438,023, or 69%, to $657,415 in the six
months ended September 30, 2006 from $2,095,438 in 2005.
The
income from operations at Cables & Networks was $359,292 in the six months
ended September 30, 2006 versus loss of $60,547 in the fiscal 2006 period.
The
increased income in the period was mainly due to increased revenues, offset
by
higher selling expenses absorbed as part of Cables & Networks’ planned
investment in revenue growth.
The
loss
from operations at Optronics decreased $1,018,184, or 50%, to $1,016,707 in
the
six months ended September 30, 2006, from a loss of $2,034,891 in the year
ago
period. The decrease in the loss is mainly due to the gain of $345,000 realized
due to the sale of two patents and the termination of MOCVD related activities.
We expect to incur losses at Optronics until we realize significant revenues
from the sales of our PUVM and GaN related products.
OTHER
INCOME AND EXPENSE
Consolidated
other income and expense increased $45,710 to $188,214 from $142,504 in 2005.
Other
expense at Cables & Networks increased $53,782 due to an increase in
interest expense, primarily due to a higher interest rate in the current period.
Other
income at Optronics increased $97,225 to $459,689. This resulted from an
increase in interest income due to a higher rate of interest earned on
investments over the six months ended September 30, 2005. Other expense
decreased $2,267 to $40,930, from $43,197 in the period ended September 30,
2005.
NET
LOSS
Consolidated
net loss for the six months ended September 30, 2006 decreased $1,442,183,
or
74%, to $512,451, or $.04 cents per share, from $1,954,634, or $.16 cents per
share in the year ago period.
Cables
& Networks had a net profit of $86,497 year to date, compared to a loss of
$238,510 in 2005. The increased profitability was due mainly to increased
revenues.
Optronics
recorded a net loss of $598,948 in the six months ended September 30, 2006,
a
decrease of $1,117,176 from a loss of $1,716,124 for the same period in 2005.
The decrease in the loss is mainly due to the consolidation of operations
resulting in a $859,105 decrease in operating expenses during the six months
ended September 30, 2006 as compared to the same period of last year. Achieving
profitability in the future will strongly depend upon Optronics’ ability to
successfully manufacture and market gallium-nitride products.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company’s cash and cash equivalents consist primarily of money market funds,
U.S. Government instruments and other government instruments with original
maturities of less than three months.
Cash
used
in operating activities was $1,344,148 for the six month period ended September
30, 2006 compared to $1,787,988 used in the same period in 2005. The cash used
in the current period decreased $443,840 despite an increase of $546,835 in
the
working capital from the prior year. This is primarily attributable to increase
in APACN’s accounts receivable and inventory associated with its growth in
revenues.
We
realized net cash increase of $111,855 in investing activities for the six
months ended September 30, 2006 compared to $122,262 used in the same period
of
the preceding fiscal year. The net realized cash due to investing activities
in
the current period includes proceeds from sale of capital assets in the amount
of $386,592 offsetting capital expenditures in the amount of $274,737. The
Company sold $111,680 worth of capital assets and had capital expenditures
of
$233,942 in the comparable period of the previous year. We anticipate
approximately $400,000 to $500,000 in capital expenditures in fiscal 2007,
including the completion of building of a new facility in India.
Net
cash
used in financing activities for the six months ended September 30, 2006 totaled
$911,149. We used $95,129 for reduction of debt and deposited $816,020 in an
escrow account to redeem bonds. During the same period in fiscal 2006 we used
$22,435 in financing activities, of which $68,083 was used for the scheduled
reduction of debt and $45,648 was generated from the reduction of bond reserve
funds.
We
believe we have sufficient funds for operations for at least the next twelve
months.
Our
contractual obligations and commitments are summarized in the table below (in
000’s) as of September 30, 2006:
|
Total
|
Less
than
1
Year
|
1-3
years
|
4-5
years
|
After
5
years
|
||||||||||||
|
Long-term
debt (1)
|
$
|
1,266
|
$
|
1,255
|
$
|
11
|
$
|
-
|
$
|
-
|
||||||
|
Leases
|
1,997
|
325
|
690
|
487
|
495
|
|||||||||||
|
Total
Contractual Cash
|
||||||||||||||||
|
Obligations
|
$
|
3,263
|
$
|
1,580
|
$
|
701
|
$
|
487
|
$
|
495
|
||||||
(1)
Includes fixed interest from 0.62 to 10.60%
APPLICATION
OF CRITICAL ACCOUNTING POLICIES
In
preparing our consolidated financial statements, we make estimates, assumptions
and judgments that can have a significant impact on our revenues, loss from
operations and net loss, as well as on the value of certain assets and
liabilities on our consolidated balance sheet. We believe that there are several
accounting policies that are critical to an understanding of our historical
and
future performance, as these policies affect the reported amounts of revenues,
expenses and significant estimates and judgments applied by management. While
there are a number of accounting policies, methods and estimates affecting
our
consolidated financial statements, areas that are particularly significant
include:
|
·
|
Stock
Option Accounting;
|
|
·
|
Accounting
for income taxes; and
|
|
·
|
Valuation
and evaluating impairment of long-lived assets and
goodwill
|
Stock
Option Accounting
In
December 2004, the FASB issued Statement of Financial Accounting Standards
No.
123—revised 2004 (“SFAS 123R”), “Share-Based Payment,” which replaces Statement
of Financial Accounting Standards No. 123 (“SFAS 123”) and supersedes APB
Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires
the measurement of all share-based payments to employees, including grants
of
employee stock options, using a fair-value based method and the recording of
such expense in our Consolidated Statements of Operations. In March 2005, the
SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), “Share-Based Payment,”
which provides interpretive guidance related to the interaction between SFAS
123R and certain SEC rules and regulations, as well as provides the SEC staff’s
views regarding the valuation of share-based payment arrangements.
We
adopted SFAS 123R using the modified prospective transition method, which
requires the application of the accounting standard as of April 1, 2006, the
first day of our fiscal year 2007. Our unaudited condensed consolidated
financial statements as of and for the three and six months ended September
30,
2006 reflect the impact of SFAS 123R. The compensation expense had impacted
both
basic and diluted loss per share by less than $0.01 for the three and six months
ended September 30, 2006. The Company recorded $11,243 and $30,868 of related
compensation expense for the three and six month periods ended September 30,
2006. In accordance with the modified prospective transition method, our
unaudited condensed consolidated financial statements for prior periods have
not
been restated, and do not include, the impact of compensation expense calculated
under SFAS 123R.
Accounting
for Income Taxes
As
part
of the process of preparing our consolidated financial statements, we are
required to estimate our income tax liability in each of the jurisdictions
in
which we do business. This process involves estimating our actual current tax
expense together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result
in
deferred tax assets and liabilities. We must then assess the likelihood that
these deferred tax assets will be recovered from future taxable income and,
to
the extent we believe that recovery is not more likely than not or unknown,
we
must establish a valuation allowance.
Significant
management judgment is required in determining our provision for income taxes,
our deferred tax assets and liabilities and any valuation allowance recorded
against our deferred tax assets. At March31, 2006, we recorded a full valuation
allowance of $13,390,433 against our deferred tax assets, due to uncertainties
related to our ability to utilize our deferred tax assets, consisting
principally of certain net operating losses carried forward. The valuation
allowance is based on our estimates of taxable income by jurisdiction and the
period over which our deferred tax assets will be recoverable. The Company
has
U.S. net operating loss (NOL)carryforwards of approximately $33,782,000 which
expire in fiscal years 2007 to 2026. To
date
the Company has not completed a section 382 analysis. If certain ownership
changes occurred under Section 382 of the Internal Revenue Code, there may
be
further limitations on the usage of the net operating loss carry
forwards.
Realization
of the NOL carryforwards and other deferred tax temporary differences are
contingent on future taxable earnings. The deferred tax asset was reviewed
for
expected utilization using a “more likely than not” approach by assessing the
available positive and negative evidence surrounding its recoverability.
We
will
continue to assess and evaluate strategies that will enable the deferred tax
asset, or portion thereof, to be utilized, and will reduce the valuation
allowance appropriately at such time when it is determined that the “more likely
than not” approach is satisfied.
Valuation
and evaluating impairment of long-lived assets and goodwill
Goodwill
represents the excess of the purchase price over the fair value of net assets
acquired. Goodwill is not amortized but reviewed for impairment at the fiscal
year end or whenever conditions exist that indicate an impairment could exist.
The
Company evaluates the recoverability of its long-lived assets in accordance
with
SFAS144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
SFAS144 requires recognition of impairment of long-lived assets in the event
that events or circumstances indicate an impairment may have occurred and when
the net book value of such assets exceeds the future undiscounted cash flows
attributed to such assets. We assess the impairment of long-lived assets
whenever events or changes in circumstances indicate that the carrying value
may
not be recoverable. No impairment of long-lived assets has occurred in fiscal
2007 through the six months ended September 30, 2006.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
Our
exposure to market risk for changes in interest rates relates primarily to
our
investment portfolio. We invest in short-term securities of high credit issuers
with maturities ranging from overnight up to 24 months. The average maturity
of
the portfolio does not exceed 12 months. The portfolio includes only marketable
securities with active secondary or resale markets to ensure liquidity. We
have
no investments denominated in foreign country currencies and, therefore, our
investments are not subject to foreign exchange risk.
|
CONTROLS
AND PROCEDURES.
|
|
(a)
|
Evaluation
of disclosure controls and procedures.
The Company’s chief executive officer and chief financial officer have
concluded that as of the end of the fiscal period covered by this
report
the Company’s disclosure controls and procedures (as defined in Exchange
Act Rule 13a-14(c)) were effective.
|
|
(b)
|
Changes
in internal controls.
There were no changes in the Company’s internal controls over financial
reporting during the fiscal period covered by this report that materially
affected, or are likely to materially affect, the Company’s control over
financial reporting.
|
PART
II
|
LEGAL
PROCEEDINGS
|
Electronic
Instrumentation and Technology, Inc. ("EIT") filed suit against APA on May
25,
2005 in the U.S. District Court for the Eastern District of Virginia, Case
Number 1:05 CV 571 (the "EIT litigation"), alleging that APA had committed
fraud
by knowing concealment, fraud in making contract, fraud by intentional
misrepresentation, misappropriation of trade secrets, tortious interference
with
prospective economic advantage, negligent misrepresentation, breach of contract,
unfair competition, and inequitable conduct in conjunction with preliminary
business discussions between EIT and APA which preceded APA's introduction
of
the Profiler M. APA filed an Answer on July 28, 2005, which denied EIT's claims
of wrongful conduct.
The
EIT
litigation was tried to a jury on December 28, 2005. The District Court
dismissed, as a matter of law, six of EIT's nine causes of action either before
or during the trial. Three of EIT's causes of action were submitted to the
jury
for determination. The jury found in favor of APA on EIT's claim for fraud
in
making contract and misappropriation of trade secrets. The jury found in favor
of EIT on its breach of contract claim and awarded EIT $35,000. EIT has filed
certain post-trial motions, all of which were denied by the court. EIT did
not
appeal the verdict and this matter is concluded.
|
RISK
FACTORS
|
FACTORS
THAT MAY INFLUENCE FUTURE RESULTS
The
statements contained in this Report on Form 10-Q that are not purely historical
are “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including, without
limitations, statements regarding the Company’s expectations, hopes, beliefs,
anticipations, commitments, intentions and strategies regarding the future.
Forward-looking statements include, but are not limited to, statements contained
in Management's Discussion and Analysis of Financial Condition and Results
of
Operations. Actual results could differ from those projected in any
forward-looking statements for the reasons, among others, detailed below. We
believe that many of the risks detailed here are part of doing business in
the
industry in which we compete and will likely be present in all periods reported.
The fact that certain risks are characteristic to the industry does not lessen
the significance of the risk. The forward-looking statements are made as of
the
date of this Report as Form 10-Q and we assume no obligation to update the
forward-looking statements or to update the reasons why actual results could
differ from those projected in the forward-looking statements. Readers of this
Report and prospective investors should also review the Risk Factors set forth
in our Report on Form 10-K for the fiscal year ended March 31,
2006.
Manufacturing
and Operations
We
are dependent upon skilled employees; If we lose the services of our key
personnel our ability to execute our operating plan, and our operating results,
may suffer.
Our
future performance depends in part upon the continued service and contributions
of key management, engineering, sales and marketing personnel, many of whom
would be difficult to replace quickly. If we lose any of these key personnel,
our business, operating results and financial condition could be materially
adversely affected or delay the development or marketing of existing or future
products. Competition for these personnel is intense and we may not be able
to
retain or attract such personnel. Our success will depend in part upon our
ability to attract and retain additional personnel with the highly specialized
expertise necessary to generate revenue and to engineer, design and support
our
products and services. We have recently lost two management level advanced
degree employees. Currently, these responsibilities have been absorbed by
existing employees.
Markets
and Market Conditions
Our
profitability can be adversely affected due to increased raw material
costs
Our
manufacturing costs may be impacted by unanticipated increases in raw material
costs during the time span between the cost quotes and actual procurement of
raw
materials. The impact can be significant for purchase orders requiring multiple
scheduled deliveries. Whereas we may be able to approach some of the customers
for costs adjustments, there is no assurance that we would be successful in
obtaining these adjustments. Failure to obtain price adjustments would result
in
decreased profitability and/or losses.
Our
inventory of raw material and supplies may incur significant obsolescence
Our
market demands rapid turn around from receipt of purchase orders to shipping
of
the products. We maintain significant inventory of raw materials and supplies
to
meet this demand resulting in risk of inventory obsolescence. Whereas we
anticipate and make provisions for a reasonable fraction of inventory
obsolescence, a significant higher level of obsolescence can adversely impact
our profitability.
Our
Customers
Our
sales could be negatively impacted if one or more of our key customers
substantially reduce orders for our products.
If
we
lose a significant customer, our sales and gross margins would be negatively
impacted. In addition, the loss of sales may require us to record impairment,
restructuring charges or exit a particular business or product line. As of
September 30, 2006, two customers comprised approximately 22% of total sales
for
the first two quarters ended September 30, 2006 and one customer accounted
for
13% of accounts receivable as of the quarter end. No one customer provided
greater than 10% of sales for the same period of the prior fiscal
year.
| UNREGISTERED SALES OF EQUITY SECURITY AND USE OF PROCEEDS |
None.
|
DEFAULT
UPON SENIOR SECURITIES
|
On
August
30, 2006, the Company paid $871,911 into an escrow account to retire the debt
from the South Dakota Economic Development and Finance Authority. These funds
will be used to make final payment on the Company’s dept to the State of South
Dakota on October 1, 2006, the next bond redemption date.
During
1996-97 the Company built its new production facility in Aberdeen, South Dakota.
This facility was partially funded by using proceeds of a $1.895 million bond
from the State of South Dakota Governor’s Office of Economic Development. The
bonds required the Company to maintain operations in the state of South Dakota
and compliance with certain financial covenants. The repayment will be made
pursuant to a Notice of Default and Acceleration received by the Company. The
primary reason for the notice was related to the Company ceasing all of its
South Dakota operations in the later part of fiscal year 2006 as part of its
consolidation of manufacturing operations. The Company has made timely interest
and principal payments, and the reason for the notice was not related to the
payments
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
On
August
17, 2006, the Company held its Annual Meeting of Shareholders. At the meeting,
the shareholders elected as directors Anil K. Jain (with 10,494,183 shares
voting for and 268,605 withheld), John G. Reddan (with 10,592,872 shares voting
for and 169,916 withheld), Ronald G. Roth (with 10,594,172 shares voting for
and
168,616 withheld), and Stephen A. Zuckerman (with 10,327,298 shares voting
for
and 435,490 withheld).
The
shareholders also approved the adoption of the Company’s 2007 Stock Compensation
Plan (with 5,382,527 shares voting for, 415,204 against, 52,031 abstaining,
and
4,913,026 broker-non votes)
|
OTHER
INFORMATION
|
None.
|
EXHIBITS
|
Exhibit
31.1 - Certification of Chief Executive Officer
and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002
Exhibit
32.1 - Certification required of Chief Executive
Officer and Chief Financial Officer by Section 906 of the Sarbanes Oxley Act
of
2002
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
APA
ENTERPRISES, INC.
|
|
|
November
9, 2006
|
/s/
Anil K. Jain
|
|
Date
|
Anil
K. Jain
|
|
President,
|
|
|
Chief
Executive Officer and Chief
Financial Officer (Principal
Executive and Principal Financial and
Accounting
Officer)
|