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 June 30, 1998 or Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to . 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) Registrant's telephone number, including area code: (612) 784-4995 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 June 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 June 30 March 31 1998 1998 CURRENT ASSETS: (Unaudited) (Audited) * Cash and short-term investments $ 4,748,116 $5,184,21 5 Accounts receivable 203,321 236,284 Inventories: Raw materials 10,182 11,965 Work-in-process & finished 157,546 goods 145,156 Prepaid expenses 11,926 22,975 Bond reserve funds 119,958 131,667 TOTAL CURRENT ASSETS 5,251,049 5,732,262 PROPERTY AND EQUIPMENT NET 2,663,758 2,702,887 OTHER ASSETS 1,173,657 1,194,763 $ 9,088,464 $ 9,629,912 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term $ 231,385 $ debt 226,385 Accounts payable 33,294 36,960 Accrued expenses 135,862 123,437 TOTAL CURRENT LIABILITIES 400,541 386,782 LONG-TERM DEBT 3,306,206 3,383,267 SHAREHOLDERS' EQUITY Undesignated shares; 5,000,00 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) (4,360,434) (3,882,28 8) 5,381,717 5,859,863 $ 9,088,464 $ 9,629,912 *Derived from audited financial statements Page 3 of 7 APA OPTICS, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended June 30 1998 1997 REVENUES $ 248,557 $ 661,640 COSTS AND EXPENSES: Cost of sales and services 524,519 534,059 Selling general & administrative 132,417 122,059 Research & development 91,003 58,429 747,939 714,547 Gain/Loss from Operations: (499,382) (52,907) INTEREST INCOME & EXPENSE: Interest Income 66,913 70,128 Interest Expense (45,676) (45,856) 21,237 24,272 Loss before Income taxes (478,145) (28,635) Income taxes 300 0 Net loss $ (478,145) $ (28,935) Net loss per share Basic and diluted $ $ (.06) (.00) Weighted average shares outstanding Basic and diluted 8,512,274 8,306,932 Page 4 of 7 APA OPTICS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended June 1998 1997 OPERATING ACTIVITIES Net income (loss) $ $ (478,145) (28,935) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 109,251 103,529 Changes in operating assets and liabilities: Accounts receivable 32,963 (94,321) Inventories and prepaid expenses 442 (33,405) Accounts payable and accrued expenses 13,759 31,568 Other (8,341) (1,543) Net cash used in operating activities (330,071) (23,107) INVESTING ACTIVITIES (Purchases) Sales of property and ( equipment (46,122) 395,660) Net cash used in investing activities (46,122) (395,660) FINANCING ACTIVITIES Proceeds from the sale of common stock --- 625 Repayment of Long Term Debt (77,061) (12,180) Bond reserve funds 17,155 (12,110) Net cash used in financing activities (59,906) (23,665) decrease in cash (436,099) (442,432) Cash at Beginning of Period 5,184,215 3,875,205 Cash at End of Period $ $ 3,432,773 4,748,116 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 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations: Revenues for the first quarter of fiscal 1999 ended June 30, 1998 were $248,557, a decrease of 62% from the first quarter of fiscal 1998 ended June 30, 1997. The decrease in revenues can be attributed to a substantial reduction in government contract work, which has historically been the Company's main source of revenues. The Company will need to replace these lost revenues with production revenues. For the first quarter of fiscal 1999, the Company is reporting a net loss of $478,146 as compared to a net loss of $28,935 in the first quarter of fiscal 1998. The substantial increase in losses for the first quarter 1999 can be attributed to the 62% reduction in revenues coupled with operating costs (approximately $225,000) including salaries, overhead, and depreciation at the Aberdeen Production Center in Aberdeen, South Dakota. The Company has also significant costs (approximately $91,000) in the continued development of its detectors and Wavelength Divisional Multiplexer (WDM), another product related to fiber optic communications. The Company anticipates the losses to continue until the Company achieves a level of revenue sufficient to cover the production costs. The Company has sold qualification units of its UV detectors to more than 20 companies. The Company hopes it can start selling these detectors in large quantities to generate revenues. The Company has also received orders for a few WDMs units from two large companies. The Company hopes that it will generate revenues from the sales of additional WDM units in the forthcoming quarters. Page 6 of 7 Liquidity and Capital Resources: The Company's cash balance at June 30, 1998 is $4,748,116 compared to $5,184,215 at March 31, 1998. The cash decrease can be attributed to the losses incurred during the first quarter of fiscal 1999. The Company believes it has sufficient working capital to sustain operations through fiscal 1999 and beyond. Forward-looking statements contained herein are made pursuant to the safe harbor provisions of the Private Litigation Reform Act 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 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. The Company has assessed and continues to assess the impact of the Year 2000 issues on its reporting systems and operations. The Company plans to devote the necessary resources to resolve all significant Year 2000 issues in a timely manner. If Year 2000 modifications are not properly completed either by the Company or any entities with whom the Company conducts business, the Company could be adversely impacted. PART II. OTHER INFORMATION ITEM 1 Legal Proceedings Status. On or about November 22, 1997, the Company commenced litigation in the Anoka County District Court (Minnesota) against two of its former employees, Asif Khan and Jinwei Yang, contending that the defendants are in breach of their respective confidentiality agreements and that APA is entitled to both damages and injunctive relief under the Uniform Trade Secrets Act. Both of the defendants were employed by the Company in the area of research and development of Gallium Nitride and are the subjects of a confidentiality agreement. APA's Motion for a Temporary Injuction was denied on February 19, 1998. In June 1998, the parties submitted to mediation and reached agreement on the terms of a settlement, which is subject to preparation and execution of related documentation. Page 7 of 7 ITEM 2-5. 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, 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. 8/12/98 /s/ Anil K. Jain Date Anil K. Jain President Principal Executive Officer Treasurer & Principal Financial Officer 8/12/98 /s/ Randal J. Becker Date Randal J. Becker Principal Accounting Officer