Page 1 of 7 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q X Quarterly report pursuant to Section 13 or 15(d) of the Securitie s Exchange Act of 1934 For the quarterly period ended September 30, 1998 or Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act 1934 For the transition period from to . Commission File Number 0-16106 APA Optics, Inc. (exact name of small business issuer as specified in its charter) Minnesota 41-1347235 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2950 N.E. 84th Lane, Blaine, Minnesota 55449 (Address of principal executive offices and zip code) Issuer's telephone number, including area code: (612) 784-4995 Indicate whether the issuer (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 issuer was required to file such reports), and (2) has been subject to the filing requirement for the past 90 days. Yes X No 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 September 30, 1998 Common stock, par value $.01 8,512,274 Page 2 of 7 PART 1, FINANCIAL INFORMATION ITEM 1, FINANCIAL STATEMENTS APA OPTICS, INC. CONDENSED BALANCE SHEETS ASSETS September 30 March 31 1998 1998 CURRENT ASSETS: (Unaudited) (Audited) * Cash and short-term investments $4,195,647 $5,184,215 Accounts receivable 147,991 236,284 Inventories: Raw materials 28,974 11,965 Work-in-process & finished goods 181,419 145,156 Prepaid expenses 7,484 22,975 Bond reserve funds 24,542 131,667 TOTAL CURRENT ASSETS 4,586,057 5,732,262 PROPERTY AND EQUIPMENT, NET 2,623,405 2,702,887 OTHER ASSETS 1,026,208 1,194,763 $ $ 8,235,670 9,629,912 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILTIES: Current portion of long-term debt $ $ 116,385 226,385 Accounts payable 97,389 36,960 Accrued expenses 131,701 123,437 TOTAL CURRENT LIABILITIES 345,475 386,782 LONG-TERM DEBT 3,168,705 3,383,267 SHAREHOLDERS' EQUITY Undesignated shares; 5,000,000 shares authorized; none issued --- --- Common stock, $.01 par value; 15,000,000 shares authorized; 8,512,274 & 8,512,274 issued 85,123 85,123 Paid-in-capital 9,657,028 9,657,028 Retained earnings (deficit) (5,020,661) (3,882,288) 4,721,490 5,859,863 $ $ 8,235,670 9,629,912 * Derived from audited financial statements Page 3 of 7 APA OPTICS, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended Six months ended September 30 September 30 1998 1997 1998 1997 REVENUES $ $ $ $1,315, 246,437 653,38 494,994 025 5 COSTS AND EXPENSES: Cost of sales and services 549,292 675,65 1,073,8 1,209,7 1 11 10 Selling, general & administrative 251,625 118,33 384,042 240,398 9 Research & development 129,629 76,625 220,632 135,054 930,546 870,61 1,678,4 1,585,1 5 85 62 Gain/loss from operations: (684,10 (217,2 (1,183, (270,13 9) 30) 491) 7) INTEREST INCOME & EXPENSE: Interest income 59,526 86,020 126,439 156,148 Interest expense (35,145 (47,30 (80,821 (93,162 ) 6) ) ) 24,381 38,714 45,618 62,986 Loss before Income taxes (659,72 (178,5 (1,137, (207,15 8) 16) 873) 1) Income taxes 500 300 500 600 Net Loss $ $ $ (660,22 (178,8 $(1,138 (207,75 8) 16) ,373) 1) Net loss per share Basic $ $ $ $ and diluted (.08) (.02) (.13) (.03) Weighted average shares outstanding Basic and diluted 8,307, 8,307,3 8,512,2 831 8,512,2 84 74 74 Page 4 of 7 APA OPTICS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended September 30 1998 1997 OPERATING ACTIVITIES Net income (loss) $(1,138, $ 373) (207,751) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 220,724 213,541 Changes in operating assets and liabilities: Accounts receivable 88,293 11,143 Inventories and prepaid expenses 69,344 48,674 Accounts payable and accrued expenses (41,308) 97,018 Other (11,833) (1,695) Net cash (used in) provided by operating activities (813,153 160,930 ) INVESTING ACTIVITIES (Purchases) Sales of property and equipment (93,241) (635,614) Net cash used in investing activities (93,241) (635,614) FINANCING ACTIVITIES Proceeds from the sale of common stock --- 3,438 Repayment of long term Debt (214,562 (194,451) ) Bond reserve funds 132,388 (42,222) Net cash used in financing activities (82,174) (233,235) Decrease in cash (988,568 (707,919) ) Cash at Beginning of Period 5,184,21 5 3,875,205 Cash at End of Period $4,195,6 47 $3,167,28 6 NOTE TO CONDENSED FINANCIAL STATEMENTS 1. In the opinion of management, the information furnished reflects all adjustments which are necessary to a fair statement of the results of the interim periods presented. All adjustments were of a normal recurring nature. The result of any interim period are not necessarily indicative of results for the full year. Page 5 of 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations: Revenues for the second quarter and first six months of fiscal 1999 ended September 30, 1998 were $246,437 and $494,994, respectively, in each case substantially below the levels of the comparable periods of fiscal 1998. The principal reason for the decrease in revenues was the Company's decision to focus professional staff on product development and production activities instead of government research work. While contract research activity would have produced current revenues, product planning and fabrication do not produce revenues until the products are sold. Revenues are expected to remain in the same range near term. For the second quarter and first six months of fiscal 1999, the Company incurred net losses of $660,228 and $1,138,373, respectively, as compared to net losses of $178,816 and $207,751 in the comparable periods of fiscal 1998. The loss in the second quarter of fiscal 1999 is significantly higher, largely because of increased consulting costs due to a contract dispute with the government and higher research and development costs on the Company's UV detectors and wavelength divisional multiplexers (WDM). Significant quarterly losses are expected in the next quarter. Quarterly losses will continue until the Company receives sufficient revenues from sales of its new products. APA Optics, Inc. has sold qualification units of its UV detectors to a wide range of customers for diverse applications and now has 2,000 of these detector units on hand. The Company has written off all labor costs on these units so as not to overstate inventories. In addition, evaluation units of the new WDM product have been sold to three large corporations, significant factors in the communications equipment industry. The Company believes that these products represent its future and is dedicated to successfully producing and marketing these advanced products. Liquidity and Capital Resources: The Company's cash balance at September 30, 1998 is $4,195,647 compared to $5,184,215 at March 31, 1998. This decrease in cash is attributed primarily to the $1,138,373 loss during the first six months of fiscal 1999. The Company believes it has sufficient working capital to sustain its operations through the end of fiscal 1999 and beyond. Page 6 of 7 Forward-Looking Statements: Forward-looking statements contained herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act 1995. These statements are based upon the Company's current expectations and judgements about future developments in the Company's performance and may be affected by several factors, including, without limitation, delays in or increased costs of production, delays in or lower than anticipated sales of the Company's new products, and other factors discussed from time to time in the Company's filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on forward- looking statements. The Company undertakes no obligation to update such statements to reflect actual events. Year 2000 Issues: The Company continues to assess the impact of the Year 2000 issues on its reporting systems and operations. To date, the Company has requested and received confirmations regarding Year 2000 compliance from its major suppliers and principal financial institutions. The Company is comfortable with the Year 2000 compliance externally. The Company believes that internally there will be little or no impact on operations at the turn of the century. However, the Company will be testing its computers and software in the next few months in order to ensure there will be no disruption to normal operations in the year 2000. When this assessment is complete, the Company will determine the need for and draft an appropriate contingency plan. ITEMS 1-4. Not Applicable ITEM 5. Other Information The proxy rules of the Securities and Exchange Commission permit shareholders of a company, after timely notice to the company, to present for shareholder consideration for inclusion in the company's proxy statement unless such proposals can be properly omitted by the company in accordance with the proxy rules. The APA Optics, Inc. 1999Annual Meeting of Shareholders is expected to be held on or about August 18, 1999, and proxy materials in connection with that meeting are expected to be mailed on or about July 20, 1999. In order to be included in the Company's proxy materials for the 1999 Annual Meeting, shareholder proposals prepared in accordance with the proxy rules, must be received by the Company on or before March 23, 1999. In addition, pursuant to a recent amendment to Commission Rule 14a-4, a shareholder must give notice to the Company prior to June 6, 1999, of any proposal which such shareholder intends to raise at the 1999 Annual Meeting. If the Company receives notice of such proposal after June 6, 1999, under Rule 14a-4, the persons named in the proxy solicited by the Company's Board of Directors for the 1999 Annual Meeting may exercise discretionary voting power with respect to such proposal. Page 7 of 7 ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibit 27: Financial Data Schedules (b) There were no reports on Form 8-K filed during the three months ended September 30, 1998. 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 OPTICS, INC. November 13, 1998 /s/ Anil K. Jain Date Anil K. Jain President Principal Executive Officer Treasurer & Principal Financial Officer November 13, 1998 /s/ Randal J. Becker Date Randal J. Becker Principal Accounting Officer