Page 1 of 7 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 September 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 September 30, 1997 Common stock, par value $.01 8,308,124 Page 2 of 7 PART 1, FINANCIAL INFORMATION ITEM 1, FINANCIAL STATEMENTS APA OPTICS, INC. CONDENSED BALANCE SHEETS ASSETS September 30 March 31 1997 1997 CURRENT ASSETS: (Unaudited) (Audited) Cash and short-term investments $3,167,286 $3,875,205 Accounts receivable 344,838 355,981 Inventories: Raw materials 19,037 15,666 Work-in-process & finished goods 121,740 132,697 Prepaid expenses 13,403 27,408 Bond reserve funds 42,917 70,000 TOTAL CURRENT ASSETS 3,709,221 4,476,957 PROPERTY AND EQUIPMENT, NET 2,577,828 2,107,755 OTHER ASSETS 2,798,728 2,834,686 $ $ 9,085,777 9,419,398 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILTIES: Current portion of long-term debt $ $ 223,021 158,021 Accounts payable 92,277 59,210 Accrued expenses 117,167 118,216 TOTAL CURRENT LIABILITIES 432,465 335,447 LONG-TERM DEBT 3,476,532 3,670,983 SHAREHOLDERS' EQUITY Undesignated shares; 5,000,000 shares authorized; none issued --- --- Common stock, $.01 par value; 15,000,000 shares authorized; 8,308,124 & 8,306,624 issued 83,081 83,066 Paid-in-capital 8,215,970 8,244,423 Retained earnings (deficit) (3,122,271) (2,914,521) 5,176,780 5,412,968 $ $ 9,085,777 9,419,398 * 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 1997 1996 1997 1996 REVENUES $ $ $ $1,211, 653,385 672,66 1,315,0 054 6 25 COSTS AND EXPENSES: Cost of sales and services 675,651 442,32 1,209,7 799,068 8 10 Selling, general & administrative 118,339 157,26 240,398 306,489 3 Research & development 76,625 117,65 135,054 226,006 0 870,615 717,24 1,585,1 1,331,5 1 62 63 Gain/loss from operations: (217,23 (44,57 (270,13 (120,50 0) 5) 7) 9) INTEREST INCOME & EXPENSE: Interest income 86,020 94,355 156,148 115,543 Interest expense (47,306 (56,29 (93,162 (64,814 ) 3) ) ) 38,714 38,062 62,986 50,729 INCOME (LOSS) BEFORE INCOME TAXES (178,51 (6,513 (207,15 (69,780 6) ) 1) ) (BENEFIT) 300 250 600 500 NET INCOME (LOSS) $ $ $ (178,81 (6,763 $(207,7 (70,280 6) ) 51) ) EARNINGS (LOSS) PER COMMON & COMMON EQUIVALENT SHARE (EXHIBIT 11) $ $ $ $ (.02) (.00) (.03) (.01) WEIGHTED AVERAGE SHARES OUTSTANDING 8,307,8 8,160, 8,307,3 8,081,1 31 736 84 97 Page 4 of 7 APA OPTICS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended September 30 1997 1996 OPERATING ACTIVITIES Net income (loss) $ $ (207,751 (70,280) ) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 213,541 219,768 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable 11,143 (418,109) Decrease in inventories and prepaid expenses 48,674 32,897 Costs in excess of billings on research contracts --- 210,658 Increase in accounts payable and accrued expenses 97,018 16,004 Other (1,695) 19,682 Net cash provided by operating activities 160,930 10,620 INVESTING ACTIVITIES Purchases of property and equipment (635,614 (272,505) ) Net cash (used in) investing activities (635,614 (272,505) ) FINANCING ACTIVITIES Proceeds from the sale of common stock 3,438 1,281,263 Long-term debt proceeds --- 3,722,483 Earnest money deposit on bond financing --- (315,000) Debt placement costs --- (286,869) Bond reserve funds (1,780,26 (42,222) 9) Repayment of long-term debt (194,451 (116,909) ) Net cash provided by (used in) financing activities (233,235 2,504,699 ) Increase (decrease) in cash (707,919 2,242,814 ) Cash at Beginning of Period 3,875,20 2,256,309 5 Cash at end of Period $3,167,2 $4,499,12 86 3 Supplemental schedule of non-cash transactions: Land and corresponding deferred revenue $ $ 250,000 250,000 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 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 of fiscal 1998 ended September 30, 1997 were $653,385, a decrease of three percent from the second quarter of fiscal 1997 ended September 30, 1996. The second quarter revenues of fiscal 1998 are also down one percent as compared to the first quarter of fiscal 1998. Revenues for the first two quarters of fiscal 1998 are up nine percent as compared to the first two quarters of fiscal 1997. The slight change in revenues can be attributed to work shifted from government contracts to internal research and development. The Company continues to devote personnel toward product development associated with the Aberdeen facility. For the second quarter of fiscal 1998, the Company is reporting a loss of $178,816 as compared to a loss of $6,763 in the second quarter of fiscal 1997. For the first six months of fiscal 1998, the Company is reporting a loss of $207,751 as compared to a loss of $70,280 for the first six months of fiscal 1997.The Company's increased loss for the first six months of fiscal 1998, as compared to the first six months of fiscal 1997 is mainly due to the decreased gross profit margin, from thirty-four percent for the first six months of fiscal 1997 to eight percent for the first six months of 1998. The decreased gross profit margin is a result of the hiring of 11 employees in our Aberdeen facility. As yet there has been no production and no sales generated from Aberdeen. The Company expects the losses to continue in the next quarters, until the Aberdeen sales develop. The Company's backlog of uncompleted contracts is down to $2,000,000, at September 30, 1997 as compared to $3,200,000 at March 31, 1997. Liquidity and Capital Resources: The Company's cash balance at September 30, 1997 is $3,167,286 compared to $3,875,205 at March 31, 1997. The primary use of cash during the first six months ended September 30, 1997 was for payments on the building in Aberdeen, S.D. and purchases of equipment for that facility. The Company's cash balance will increase during the next two quarters, following a draw on the South Dakota Bond funds which was projected to be drawn in the second quarter but was delayed. Forward-looking statements contained herein are made pursuant to the safe harbor provisions of the Private 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 a material impact on the Company's performance, including, without limitation, delays in or increased costs of production, 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. Page 6 of 7 PART II. OTHER INFORMATION ITEMS 1 - 3. Not Applicable. Item 4. Submission of Matters to a Vote of Security- Shareholders. (a.) The Company held its Annual Meeting of Shareholders on August 20, 1997. c.) 1. The Shareholders voted for four directors, each to serve a one year term. The vote was as follows for each of the nominees: Name Affirmative Authority Withheld Anil K. Jain 7,466,506 0 Kennth Olsen 7,466,506 0 Grgory Von Wald 7,466,506 0 Lincoln Hudson 7,214,472 252,034 2. The shareholders also considered adoption of the 1997 Stock Compensation Plan. Voting on approval of the Plan was as follows: 5,283,567 shares in favor, 94,310 opposed, 46,450 abstentions, and 2,042,179 broker nonvotes. Item 5. Not Applicable Page 7 of 7 ITEM 6. Exhibits and Reports on Form 8-K. (a) 10.1 Form of Agreement Regarding Repurchase of Stock upon Change in control Event with Anil K. Jain and Kenneth A. Olsen. 10.2 Form of Agreement Regarding Employment/Compensation upon Change in Control entered into with Anil K. Jain and Kenneth A. Olsen. b) Reports on Form 8-K There were no reports on Form 8-K filed during the three months ended September 30, 1997. (c) Exhibit 27: Financial Data Schedules. 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. November 13, 1997 /s/ Anil K. Jain Date Anil K. Jain President Principal Executive Officer Treasurer & Principal Financial Officer November 13, 1997 /s/ Randal J. Becker Date Randal J. Becker Principal Accounting Officer