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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
For the quarterly period ended December 31, 2000 or
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from NA to NA.
Commission File Number 0-16106
APA OPTICS, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1347235
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2950 N.E. 84th LANE, BLAINE, MINNESOTA 55449
(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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class: Outstanding at January 11, 2001
Common stock, par value $.01 11,913,631
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APA OPTICS, INC.
CONDENSED BALANCE SHEETS
December 31, March 31,
2000 2000
-------------- -------------
ASSETS
CURRENT ASSETS:
Cash and short-term investments $ 38,293,785 $ 5,941,906
Accounts receivable 197,669 209,337
Inventories:
Raw materials 201,272 146,841
Work-in-process & finished goods 106,508 129,684
Prepaid expenses 89,399 19,803
Bond reserve funds - 65,000
-------------- -------------
TOTAL CURRENT ASSETS 38,888,633 6,512,571
PROPERTY AND EQUIPMENT NET 2,631,690 2,459,760
OTHER ASSETS 798,088 638,060
-------------- -------------
TOTAL ASSETS $ 42,318,411 $ 9,610,391
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 376,712 $ 140,871
Accounts payable 154,728 82,412
Accrued expenses 295,934 172,672
-------------- -------------
TOTAL CURRENT LIABILITIES 827,374 395,955
LONG-TERM DEBT 2,526,397 2,908,387
SHAREHOLDERS' EQUITY:
Undesignated shares; 4,999,500 shares authorized - none issued
Preferred stock, $.01 par value, 500 shares authorized:
Issued and outstanding shares - none on December 31, 2000
and 500 on March 31, 2000 - 5
Common stock, $.01 par value, 50,000,000 shares authorized:
Issued and outstanding shares - 11,913,631 shares on
December 31, 2000 and 8,997,992 shares on March 31, 2000 119,136 89,980
Paid-in-capital 51,214,451 16,408,446
Retained earnings (deficit) (12,368,947) (10,192,382)
-------------- -------------
TOTAL SHAREHOLDERS' EQUITY 38,964,640 6,306,049
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 42,318,411 $ 9,610,391
============== =============
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APA OPTICS, INC.
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------ ---------------------------
2000 1999 2000 1999
------------ ----------- ------------ ------------
REVENUES $ 280,945 $ 136,516 $ 455,924 $ 239,142
COSTS AND EXPENSES:
Cost of sales 737,063 712,743 1,752,855 1,742,292
Research and development 285,478 231,481 859,139 653,230
Selling, general and administrative 504,300 170,736 1,286,278 670,031
------------ ----------- ------------ ------------
1,526,841 1,114,960 3,898,272 3,065,553
LOSS FROM OPERATIONS (1,245,896) (978,444) (3,442,348) (2,826,411)
OTHER INCOME (EXPENSE):
Interest income 642,187 25,665 1,394,029 73,622
Interest expense (32,878) (35,711) (94,442) (107,303)
------------ ----------- ------------ ------------
609,309 (10,046) 1,299,587 (33,681)
LOSS BEFORE INCOME TAXES (636,587) (988,490) (2,142,761) (2,860,092)
INCOME TAXES 250 250 750 750
------------ ----------- ------------ ------------
NET LOSS $ (636,837) $ (988,740) $(2,143,511) $(2,860,842)
============ =========== ============ ============
NET LOSS PER SHARE:
Basic and diluted ($0.05) ($0.11) ($0.20) ($0.33)
============ =========== ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic and diluted 11,913,287 8,955,187 10,940,216 8,663,912
============ =========== ============ ============
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APA OPTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
December 31,
--------------------------
2000 1999
------------ ------------
OPERATING ACTIVITIES:
Net loss $(2,143,511) $(2,860,842)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 297,518 312,703
Changes in operating assets and liabilities:
Accounts receivable 11,668 (95,700)
Inventories and prepaid expenses (52,101) (61,072)
Accounts payable and accrued expenses 195,578 36,366
Other (93,235) (24,271)
------------ ------------
Net cash used in operating activities (1,784,083) (2,692,816)
INVESTING ACTIVITIES:
Property and equipment additions, net (406,448) (177,622)
------------ ------------
Net cash used in investing activities (406,448) (177,622)
FINANCING ACTIVITIES:
Proceeds from the sale of common stock 39,835,156 1,880,075
Redemption of preferred stock (5,000,000) -
Repayment of long-term debt (146,149) (119,153)
Dividend on preferred stock (33,054) -
Bond reserve funds (113,543) (9,019)
------------ ------------
Net cash provided by financing activities 34,542,410 1,751,903
INCREASE (DECREASE) IN CASH 32,351,879 (1,118,535)
CASH AND CASH EQUIVALENTS, beginning of period 5,941,906 2,812,849
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $38,293,785 $ 1,694,314
============ ============
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NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying 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 generally accepted accounting principles 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, 2000.
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. The
reclassifications had no impact on losses previously reported.
NOTE 2. SHAREHOLDERS' EQUITY
On July 18, 2000 the Company redeemed all 500 shares of its outstanding 2%
preferred stock for a total of $5,000,000 plus $33,054 in accrued dividends.
During the nine months ended December 31, 2000, the Company sold a total of
2,845,868 shares of its common stock to various institutional investors under a
Registration Statement on Form S-3. Net proceeds to the Company were
$39,557,303.
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NOTE 3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- --------------------------
2000 1999 2000 1999
------------ ----------- ------------ ------------
Numerator:
Net loss $ (636,837) $ (988,740) $(2,143,511) $(2,860,842)
Preferred stock dividends - - (33,054) -
------------ ----------- ------------ ------------
Numerator for basic and diluted
earnings per share-loss available
to common shareholders $ (636,837) $ (988,740) $(2,176,565) $(2,860,842)
------------ ----------- ------------ ------------
Denominator for basic and diluted
earnings per share-weighted-
average shares 11,913,287 8,955,187 10,940,216 8,663,912
============ =========== ============ ============
Basic and diluted earnings per share ($0.05) ($0.11) ($0.20) ($0.33)
============ =========== ============ ============
ITEM 2. MANAGEMENT'S DISCUSSION
-------------------------------
AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------
AND RESULTS OF OPERATIONS
-------------------------
GENERAL
- -------
Prior to 1998, APA Optics, Inc. ("APA") generated significant revenues by
providing research and development services in connection with projects
sponsored by various government agencies. In fiscal 1998, APA shifted its
emphasis from research and development to product development in an effort to
capitalize on the proprietary technology it had developed. APA realized this
shift would significantly reduce revenues and increase losses until APA
generates revenues from the sale of its products.
APA focuses on two product areas for development:
- Fiber Optic Components. APA manufactures and markets DWDM (Dense
Wavelength Division Multiplexing) multiplexer/demultiplexer components.
These components enable DWDM systems to increase the bandwidth of a single
Optical fiber between 8 and 80 times its original capacity. Based on
patented and patent pending diffraction grating technology, these products
address current and next generation DWDM networking requirements including:
o High channel counts (up to 80 in a single component),
o Narrow channel spacing (to 50 GHz),
o High data transmission rates (10 Gb/sec),
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o Add/drop multiplexing (patent pending), and
o Fiber free communications (single mode and multimode).
- Gallium Nitride (GaN) Semiconductors. APA is a research pioneer in GaN, a
next generation semiconductor material. APA manufactures GaN Ultraviolet
Radiation (UV) detectors and has integrated this technology into products
Including the UV Power Meter, UV Lamp monitor, Detector/Amplifier module
and the SunUVWatchTM.
RESULTS OF OPERATIONS
- -----------------------
Operating revenues for the three-month and nine-month periods ended
December 31, 2000, were $280,945 and $455,924, reflecting 106% and 91%
increases, respectively, over the comparable periods in fiscal 2000. The
majority of the increase occurred in sales of DWDM components that totaled
$229,080 and $332,230 for the three-month and nine-month periods ended December
31, 2000, respectively. In November 2000, the Company decided to temporarily
postpone large-scale production of its SunUVWatchTM in order to focus on
improving the performance and reliability of the watch. The Company has
completed the improvements and expects to begin large-scale production of the
modified SunUVWatchTM by the first quarter of fiscal 2002.
Cost of sales increased for the three-month period ended December 31, 2000
to $737,063 reflecting a 3% increase over the comparable period in fiscal 2000.
For the nine-month period ended December 31, 2000, cost of sales increased to
$1,752,855, a 1% increase from the comparable period in fiscal 2000. Gross
margins for sales were negative in both periods. The fluctuation in cost of
sales and the negative gross margins are influenced by the low unit production
and sales levels relative to the capital equipment and personnel committed to
production in the early phases of market penetration of the Company's products.
The Company expects to continue to experience negative gross margins until there
is a significant increase in sales and production levels.
Research and development expenses increased by $53,997 and $205,909 for the
three and nine-month periods ended December 31, 2000. These amounts represent
increases of 23% and 32% over research and development expenses in the
comparable periods of fiscal 2000. The increases result from the Company's
continued investment in the development of its DWDM and GaN technologies. The
Company plans to expand its research and product development activities in the
future and will incur increased expenses related to these activities.
Selling, general and administrative expenses increased $333,564 and
$616,247 for the three-month and nine-month periods ended December 31, 2000,
reflecting 195% and 92% increases, respectively, over the comparable periods in
fiscal 2000. The increases were primarily due to an increase in personnel as
the Company prepares to meet anticipated demand for its products and costs
associated with moving the listing of the Company's stock from the NASDAQ Small
Cap Market to the NASDAQ National Market.
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Other income increased $619,355 and $1,333,268 for the three-month and
nine-month periods ended December 31, 2000, respectively, over the comparable
periods in fiscal 2000. The increases were due to interest income on the
increased cash balance during the periods resulting from the issuance of common
stock by the Company that netted $39.6 million. See Note 2 to the Financial
Statements.
The net loss was $636,837 (or $.05 per basic and diluted share) for the
three months ended December 31, 2000, a decrease of $351,903 or 36% from the
loss reported for the same period in fiscal 2000. For the nine months ended
December 31, 2000, the net loss was $2,143,511 (or $.20 per basic and diluted
share), a decrease of $717,331 or 25% from the loss reported for the same period
in fiscal 2000. The smaller net loss is attributable to an increase in interest
income and revenues primarily from DWDM sales, partially offset by the increase
in the operating expenses described above.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
APA's cash and short-term investments primarily consist of certificates of
deposits, US Government instruments or commercial paper with maturities of less
than one year. The balance of cash and short-term investments at December 31,
2000 is $38,293,785 compared to $5,941,906 at March 31, 2000. The increase in
cash and short-term investments primarily results from the sale of 2,845,868
shares of APA's common stock under a Registration Statement on Form S-3 for $100
million worth of common stock, of which approximately $41.5 million had been
sold on or before December 31, 2000. The funds will be used for the capital
expenditures described below, product development and marketing, the addition of
personnel and to fund operations. APA believes that it has sufficient funds for
operations for the remainder of fiscal 2001 and beyond.
For the nine months ended December 31, 2000, APA used $1,784,083 of cash
for operating activities, of which the most significant cause was the net loss
of $2,143,511. APA used $406,448 net cash in investing activities in the same
period, all for the purchase of equipment, primarily for the Aberdeen facility.
APA anticipates a total of approximately $4 million in capital expenditures
in fiscal 2001, primarily for equipment. The majority of the capital
expenditures relate to the expansion and automation of the Company's production
facilities and will be made in phases to meet demand for its products and to
allow the Company to respond to new business opportunities.
FORWARD LOOKING STATEMENTS
- ----------------------------
Forward-looking statements contained herein are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
These statements are based upon the Company's current expectations and judgments
about future developments in the Company's business. Certain important factors
could have been a material impact on the Company's performance, including,
without limitation, delays in or increased costs of production, delays in or
lower than anticipated sales of the Company's new products, the Company's
ability to sell such products at a profitable price, the Company's ability to
sell such products at a profitable price, the Company's ability to fund
operations, and other factors discussed from time to time in the Company's
filings with the Securities and Exchange Commision. 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- --------
APA's operations are not currently subject to market risks for interest
rates, foreign rates, commodity prices or other market price risks of a material
nature.
PART II
ITEM 1. NOT APPLICABLE
- --------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
- -------
On October 23, 2000, the Company adopted a shareholder rights plan.
Details regarding the plan are contained in the report on Form 8-K filed by the
company on November 8, 2000.
ITEM 3. NOT APPLICABLE
- --------
ITEM 4. NOT APPLICABLE
- --------
ITEM 5. NOT APPLICABLE
- --------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- --------
(a) Exhibits:
4 Share Rights Agreement dated October 23, 2000, by and between the
Company and Wells Fargo Bank Minnesota N.A. as Rights Agent (filed as
Exhibit 1 to the Registration Statements on Form 8-A filed November
8, 2000 and incorporated herein by reference.)
(b) Reports on Form 8-K:
On November 8, 2000, the Company filed a Form 8-K, dated October 23, 2000,
reporting under Items 5 and 7 the adoption of a shareholder rights plan.
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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.
2/7/01 /s/ Anil K. Jain
- ------------------- -------------------------------
Date Anil K. Jain
President and
Principal Executive Officer
2/7/01 /s/ Robert M. Ringstad
- ------------------- -------------------------------
Date Robert M. Ringstad
Chief Financial Officer