Page 1 of 6 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB X Quarterly report pursuant to Section 13 or 15(d) of the Securitie s Exchange Act of 1934 For the quarterly period ended June 30, 1997 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 June 30, 1997 Common stock, par value $.01 8,307,124 Page 2 of 6 PART 1, FINANCIAL INFORMATION ITEM 1, FINANCIAL STATEMENTS APA OPTICS, INC. CONDENSED BALANCE SHEETS ASSETS June 30 March 31 1997 1997 CURRENT ASSETS: (Unaudited) (Audited) * Cash and short-term investments $3,432,773 $3,875,20 5 Accounts receivable 450,302 355,981 Inventories: Raw materials 18,639 15,666 Work-in-process & finished 137,188 goods 132,697 Prepaid expenses 17,932 27,408 Bond reserve funds 105,417 70,000 TOTAL CURRENT ASSETS 4,162,251 4,476,957 PROPERTY AND EQUIPMENT NET 2,423,886 2,107,755 OTHER ASSETS 2,792,465 2,834,686 $9,378,602 $ 9,419,398 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term $ 158,021 $ debt 158,021 Accounts payable 91,098 59,210 Accrued expenses 117,896 118,216 TOTAL CURRENT LIABILITIES 367,015 335,447 LONG-TERM DEBT 3,658,803 3,670,983 SHAREHOLDERS' EQUITY Undesignated shares; 5,000,00 shares authorized; none issued --- --- Common stock, $.01 par value; 15,000,000 shares authorized; 8,307,124 & 8,306,624 issued 83,071 83,066 Paid-in capital 8,213,168 8,244,423 Retained earnings (deficit) (2,943,455) (2,914,52 1) 5,352,784 5,412,968 $9,378,602 $ 9,419,398 *Derived from audited financial statements age 3 of 6 APA OPTICS, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended June 30 1997 1996 REVENUES $ 661,640 $ 538,388 COSTS AND EXPENSES: Cost of sales and services 534,059 356,740 Selling general & administrative 122,059 149,226 Research & development 58,429 108,356 714,547 614,322 Gain/Loss from Operations: (52,907) (75,934) INTEREST INCOME & EXPENSE: Interest Income 70,128 21,188 Interest Expense (45,856) (8,521) 24,272 12,667 INCOME (LOSS) BEFORE INCOME TAXES (28,635) (63,267) INCOME TAX EXPENSE 300 250 NET INCOME (LOSS) $ (28,935) $ (63,517) EARNINGS (LOSS) PER COMMON & COMMON EQUIVALENT SHARE $ $ (.00) (.01) WEIGHTED AVERAGE SHARES OUTSTANDING 8,306,932 8,000,784 Page 4 of 6 APA OPTICS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended June 1997 1996 OPERATING ACTIVITIES Net income (loss) $ $ (28,935) (63,517) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 103,529 109,294 Changes in operating assets and liabilities: Accounts receivable (94,321) 22,255 Inventories and prepaid expenses (33,405) (65,472) Accounts payable and accrued expenses 31,568 (1,322) Other (1,543) 24,028 Net cash provided by (used in) operating activities (23,107) 25,266 INVESTING ACTIVITIES (Purchases) Sales of property and ( equipment (395,660) 248,773) Net cash (used in) investing activities (395,660) (248,773) FINANCING ACTIVITIES Proceeds from the sale of common stock 625 527,077 Long-term debt proceeds --- 3,659,362 Repayment of Long Term Debt (12,180) --- Bond placement costs --- (277,182) Bond reserve funds (12,110) (2,112,139) Net cash provided by (used in) 1,797,118 financing activities (23,665) Increase (decrease) in cash 1,573,611 (442,432) Cash at Beginning of Period 2,256,309 3,875,205 Cash at End of Period $ $3,829,920 3,432,773 Supplemental schedule of non-cash transactions: Land and corresponding deferred $ $ 250,000 revenue 250,000 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 results 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 first quarter of fiscal 1998 ended June 30, 1997 were $661,640, an increase of 23% from the first quarter of fiscal 1997 ended June 30, 1996. The increase in revenues can be attributed to government contracts work. Government contract revenues have increased after hiring additional research scientists in fiscal 1997. Production revenues are lower the first quarter of fiscal 1998 as compared to the first quarter of fiscal 1997. For the first quarter of fiscal 1998, the Company is reporting a net loss of $28,935 as compared to a net loss of $63,517 in the first quarter of fiscal 1997. The Company's gross profit margin decreased to 19% for the first three months of fiscal 1998 from 34% for the first three months of fiscal 1997. The decrease in the gross profit margin is attributed to extra burden costs associated with the Aberdeen facility. At this time the Company is hiring people and purchasing equipment for the facility. The Company anticipates beginning production by the end of September 1997. Research and development costs have decreased to $58,429 for the first three months of fiscal 1998 from $108,356 for the first three months of fiscal 1997. The Company plans to continue to incur IR&D costs attributed to further development of the WDM receiver. Liquidity and Capital Resources: The Company's cash balance at June 30, 1997 is $3,432,773 compared to $3,875,205 at March 31, 1997. The Company's account receivable balance has increased to $450,302 at June 30, 1997 compared to $355,981 at March 31, 1997, primarily due to a slight delay in payment on government contracts. These payments were received early in the second quarter of fiscal 1998. The cash decrease can be attributed to payments on the building in Aberdeen, SD and purchases of equipment for the facility . The Company's cash balance will increase in the second quarter of fiscal 1998 following a draw on the South Dakota Bond funds, which will likely be paid out. in August of 1997. The Bond will reimburse the Company approximately $1.6 million spent for the facility using the Company's cash reserves. The debt has been on the Company's books for about one year, and the offsetting asset is on the balance sheet under "other assets". Forward-looking statements contained herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain important factors, such as changes in production costs and construction delays, could cause results to differ materially from those anticipated by some of the statements contained in this report. Investors are cautioned that all forward-looking statements involve risks and uncertainty. Page 6 of 6 PART II. OTHER INFORMATION ITEM 1 . Not Applicable. ITEM 2. (a.) Effective May 15, 1997, the Issuer extended the term of 300,000 outstanding Warrants due to expire on May 31, 1997, to November 30, 1997. (c.) On May 6, 1997, the Company issued 1,000 shares of Common Stock to a director upon exercise of an outstanding option. The exercise price of the option was $3.50 per share, paid by $625.00 in cash and $2,875.00 by tendering to the Issuer 500 shares of Common Stock valued at $5.75 per share. No underwriter or selling agent was used and no discounts or commissions were paid. The Issuer claims exemption for this transaction under Section 4(2) of the Securities Act of 1933 as a transaction not involving a public offering. ITEMS 3 - 5. Not Applicable 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 June 30, 1997. Signatures In accordance with the requirements of the Securities Exchange Act of 1934, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. APA OPTICS, INC. 8/05/97 /s/ Anil K. Jain Date Anil K. Jain President Principal Executive Officer Treasurer & Principal Financial Officer 8/05/97 /s/ Randal J. Becker Date Randal J. Becker Principal Accounting Officer