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 December 31, 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 December 31, 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 December 31 March 31 1998 1998 CURRENT ASSETS: (Unaudited) (Audited) Cash and short-term investments $3,532,075 $5,184,215 Accounts receivable 98,309 236,284 Inventories: Raw materials 41,976 11,965 Work-in-process & finished goods 169,038 145,156 Prepaid expenses 23,898 22,975 Bond reserve funds 38,291 131,667 TOTAL CURRENT ASSETS 3,903,587 5,732,262 PROPERTY AND EQUIPMENT, NET 2,566,638 2,702,887 OTHER ASSETS 1,019,254 1,194,763 $ $ 7,489,479 9,629,912 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ $ 118,906 226,385 Accounts payable 26,356 36,960 Accrued expenses 129,961 123,437 TOTAL CURRENT LIABILITIES 275,223 386,782 LONG-TERM DEBT 3,110,724 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 9,656,050 9,657,028 Retained earnings (deficit) (5,637,641) (3,882,288) 4,103,532 5,859,863 $ $ 7,489,479 9,629,912 * Derived from audited financial statements Page 3 of 7 APA OPTICS, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended Nine months ended December 31 December 31 1998 1997 1998 1997 REVENUES $ $ $ $1,772, 134,128 457,27 629,122 299 4 COSTS AND EXPENSES: Cost of sales and services 536,709 555,04 1,610,5 1,764,7 7 20 57 Selling, general & administrative 143,710 127,76 527,752 368,158 0 Research & development 84,119 128,55 304,751 263,607 3 764,538 811,36 2,443,0 2,396,5 0 23 22 Gain/loss from operations: (630,41 (354,0 (1,813, (624,22 0) 86) 901) 3) INTEREST INCOME & EXPENSE: Interest income 51,578 67,052 178,017 223,200 Interest expense (37,898 (44,41 (118,71 (137,57 ) 0) 9) 2) 13,680 22,642 59,298 85,628 Loss before income taxes (616,73 (331,4 (1,754, (538,59 0) 44) 603) 5) Income taxes 250 250 750 850 Net loss $ $ $ (616,98 (331,6 $(1,755 (539,44 0) 94) ,353) 5) Net loss per share-Basic $ $ $ $ and diluted (.07) (.04) (.21) (.06) Weighted average shares outstanding Basic and diluted 8,512,2 8,424, 8,346,6 74 765 8,512,2 53 74 Page 4 of 7 APA OPTICS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended December 31 1998 1997 OPERATING ACTIVITIES Net income (loss) $(1,755, $ 353) (539,445) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 331,304 314,127 Changes in operating assets and liabilities: Accounts receivable 137,975 37,669 Inventories and prepaid expenses 38,560 (2,016) Accounts payable and accrued Expenses (111,559 19,303 ) Other (25,142) (15,346) Net cash (used in) operating Activities (1,384,2 (185,708) 15) INVESTING ACTIVITIES (Purchases) Sales of property and equipment (123,055 (855,310) ) Net cash used in investing activities (123,055 (855,310) ) FINANCING ACTIVITIES Proceeds from the sale of common stock --- 1,353,789 Earnest money deposit on bond financing --- 315,000 Repayment of long term debt (272,543 (210,563) ) Bond reserve funds 127,673 1,278,837 Net cash (used in) provided by financing activities (144,870 2,737,063 ) Decrease in cash (1,652,1 1,696,045 40) Cash at beginning of period 5,184,21 3,875,205 5 Cash at end of period $ $ 3,532,07 5,571,250 5 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 third quarter of fiscal 1999 ended December 31,1998 were $134,128, a decrease of 71% from the third quarter of fiscal 1998. The third quarter revenues of fiscal 1999 are also down 46% as compared to the second quarter of fiscal 1999. Revenues for the first three quarters of fiscal 1999 are down 65% as compared to the first three quarters of fiscal 1998. The decrease in revenues can be attributed to a shift in work from government contracts to internal research and development. The Company continues to devote personnel toward product development associated with the Aberdeen facility. For the third quarter of fiscal 1999, the Company incurred a net loss of $616,980 as compared to a net loss of $331,694 in the third quarter of fiscal 1998. For the first nine months of fiscal 1999, the Company incurred a loss of $1,755,353 as compared to a loss of $539,445 for the first nine months of fiscal 1998. The Company's increased loss for the third quarter and first nine months of fiscal 1999, as compared to the third quarter and first nine months of fiscal 1998 is mainly due to decreased revenues. 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. Liquidity and Capital Resources: The Company's cash balance at December 31, 1998 is $3,532,075 compared to $5,184,215 at March 31, 1998. The decrease in cash during the first nine months ended December 31, 1998 is attributable primarily to the decreased revenues and increased losses incurred in the first nine months of fiscal 1999. The Company believes it has sufficient cash to sustain operations through the end of fiscal 1999 and beyond. However, if sales of products do not increase, the Company may need to seek additional funding for operations. There can be no assurance that such funding will be available on terms favorable to the Company if at all. Page 6 of 7 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 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, and believes that these entities will be ready. The Company has updated its accounting software for year 200 compliance and believes there will be no disruption to its normal operations at the turn of the century. The Company has spent approximately $5,000 on the year 2k issue and believes this will be the total costs expensed. The Company may develop a contingency plan in the event either it or its various business partners encounters problems. Page 7 of 7 ITEMS 1-5. Not Applicable. ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibit 27: Financial Data Schedule There were no reports on Form 8-K filed during the three months ended December 31, 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. February 15, 1999 /s/ Anil K. Jain Date Anil K. Jain President Principal Executive Officer Treasurer & Principal Financial Officer February 15, 1999 /s/ Randal J. Becker Date Randal J. Becker Principal Accounting Officer