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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
Securitie
s
Exchange
Act of
1934
For the quarterly period ended September 30, 1999 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 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 checkmark 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 September 30, 1999
Common stock, par value $.01
8,823,774
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
APA OPTICS, INC.
CONDENSED BALANCE SHEETS
ASSETS September 30 March 31
1999 1999
<S> <C> <C>
CURRENT ASSETS: (Unaudited) (Audited)
*
Cash and short-term investments
$2,097,810 $2,812,849
Accounts receivable
81,907 85,091
Inventories:
Raw materials
237,271 54,208
Work-in-process & finished
goods 148,607 167,659
Prepaid expenses
11,913 18,911
Bond reserve funds
32,500 60,000
TOTAL CURRENT ASSETS
2,610,008 3,198,718
PROPERTY AND EQUIPMENT, NET
2,515,511 2,592,503
OTHER ASSETS
979,982 1,013,755
$ $
6,105,501 6,804,976
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILTIES:
Current portion of long-term debt $ $
133,200 133,200
Accounts payable
66,803 53,416
Accrued expenses
159,283 147,553
TOTAL CURRENT LIABILITIES
359,286 334,169
LONG-TERM DEBT
2,976,321 3,081,512
SHAREHOLDERS' EQUITY
Undesignated shares; 5,000,000
shares
Authorized; none issued
--- ---
Common stock, $.01 par value;
15,000,000
shares authorized; 8,823,774 &
8,512,274
Issued
88,238 85,123
Paid-in-capital
10,949,843 9,700,258
Retained earnings (deficit)
(8,268,187) (6,396,086)
2,769,894 3,389,295
$ $
6,105,501 6,804,976
</TABLE>
* Derived from audited financial statements
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<TABLE>
<CAPTION>
APA OPTICS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Six months ended
September 30 September 30
1999 1998 1999
1998
<S> <C> <C> <C> <C>
REVENUES $ $ $ $
36,029 246,43 102,626 494,994
7
COSTS AND EXPENSES:
Cost of sales and
services 661,835 549,29 1,313,0 1,073,8
2 95 11
Selling, general &
administrative 214,504 251,62 424,364 384,042
5
Research & development
95,022 129,62 213,134 220,632
9
971,361 930,54 1,950,5 1,678,4
6 93 85
Gain/loss from (1,183,
operations: (935,33 (684,1 (1,847, 491)
2) 09) 967)
INTEREST INCOME &
EXPENSE:
Interest income
15,744 59,526 47,957 126,439
Interest expense
(35,674 (35,14 (71,592 (80,821
) 5) ) )
(19,930 24,381 (23,635 45,618
) )
Loss before income taxes (1,137,
(955,26 (659,7 (1,871, 873)
2) 28) 602)
Income taxes
250 500 500 500
Net Loss $ $ $(1,138
(955,51 (660,2 $(1,872 ,373)
2) 28) ,102)
Net loss per share-basic $ $ $ $
and diluted (.11) (.08) (.22) (.13)
Weighted average shares
outstanding-
Basic and diluted 8,512,
8,522,7 274 8,517,5 8,512,2
41 08 74
</TABLE>
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<TABLE>
<CAPTION>
APA OPTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
September 30
1999 1998
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $(1,872, $(1,138,3
102) 73)
Adjustments to reconcile net income to
net cash
Provided by operating activities:
Depreciation and amortization
214,157 220,724
Changes in operating assets and
liabilities:
Accounts receivable
3,184 88,293
Inventories and prepaid expenses
(129,513 69,344
)
Accounts payable and accrued
expenses 25,117 68,692
Other
(10,509) (11,833)
Net cash used in operating activities (1,769,6
66) (703,153)
INVESTING ACTIVITIES
(Purchases) Sales of property and
equipment (89,164) (93,241)
Net cash used in investing activities
(89,164) (93,241)
FINANCING ACTIVITIES
Proceeds from the sale of common stock
1,252,70 ---
0
Repayment of long term debt
(105,191 (324,562)
)
Bond reserve funds
(3,718) 132,388
Net cash (used in) provided by financing
activities 1,143,79 (192,174)
1
Decrease in cash
(715,039 (988,568)
)
Cash at Beginning of Period 2,812,84
9 5,184,215
Cash at End of Period $2,097,8
10 $4,195,64
7
</TABLE>
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>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company is engaged in the business of designing,
manufacturing, and marketing optical components and various
optoelectronic products. For the last several years the
Company's goal has been to manufacture and market
products/components based on its technology developments. The
Company is focused on two product areas: dense wavelength
division multiplexer (DWDM) components for fiber optic
communications and gallium nitride-based ultraviolet (UV)
detectors (both components and integrated
detector/electronic/display packages), both selected due to
significant potential markets and the Company's expertise
and/or patent positions.
In order to perform product development and production,
the Company must devote its personnel and facilities to that
effort. For several years, the Company received significant
revenues from providing research and development services in
connection with projects sponsored by various government
agencies. In fiscal 1998, the Company determined to shift its
emphasis from research and development to product
development, realizing that this shift would significantly
reduce revenues and increase losses until the Company
realized revenues from its products. If the Company is
successful in manufacturing and marketing these products, the
Company expects to significantly increase its revenues and
achieve profitability. Although the Company has purchased a
significant amount of equipment in recent fiscal years, it
will still need additional equipment as well as additional
personnel to meet its objectives.
Results of Operations:
Revenues for the second quarter and the first six months
of fiscal year 2000, ended September 30, 1999, were $36,029
and $102,626, respectively, decreases of 85% and 79%,
respectively, from revenues of $246,437 and $494,994 for the
same periods in the prior year. The decreases in revenues
reflect the Company's decision to focus on product
development and reduce its emphasis on contract research and
development. Although sales of new products have been
minimal, the Company believes it has made significant
progress in developing its new products and the related
manufacturing process.
Cost of sales increased by approximately 20% and 22% to
$661,835 and $1,313,095, respectively, in the second quarter
and first six months of fiscal 2000 from $549,292 and
$1,073,811 in the same periods of fiscal 1999. Research and
development expenses decreased by 27% and 3% to $95,022 and
$213,134, respectively, for the second quarter and the first
six months of fiscal 2000 as compared to $129,629 and
$220,632 in the same periods of the prior year. Selling,
general and administrative expenses in the second quarter of
fiscal 2000 decreased by 15% from $251,625 in fiscal 1999 to
$214,504 and increased by 10% during the first six months of
fiscal 2000, from $384,042 in fiscal 1999 to $424,364. The
decrease during the second quarter reflects a large
expenditure for legal fees in the second quarter of fiscal
1999, and the increase during the six months reflects the
Company's focus on product development, including the hiring
of additional personnel for production, marketing, and sales.
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The Company reported a loss from operations for the
second quarter and first six months of fiscal 2000 of
$935,332 and $1,847,967 respectively, substantial increases
over the loss from operations of $684,109 and $1,183,491 in
the comparable periods of the prior year. This loss resulted
from the combination of significantly decreased revenues
without a corresponding decrease in costs and expenses.
The Company realized interest income of $15,744 and
$47,957 respectively, during the second quarter and the first
six months of fiscal 2000, down 74% and 62%, respectively,
from $59,526 and $126,439 in the same periods of the prior
year, reflecting lower average cash balances during fiscal
2000. Interest expense in the second quarter and the first
six months of fiscal 2000 totaled $35,674 and
$71,592,respectively, decreases of 2% and 11%, respectively,
from $35,145 and 80,821 in the comparable prior periods.
Liquidity and Capital Resources:
The Company's cash and equivalents at September 30, 1999
is $2,097,810 as compared to $2,812,849 at March 31, 1999.
This reduction primarily results from the use of $1,847,967
net cash in operating activities, of which the most
significant cause was the Company's net loss of $1,872,102.
The Company increased raw materials to $237,271 during the
first six months of fiscal 2000 as compared to $54,208 at
fiscal 1999 year end. The increase is mainly due to long lead
time parts for the DWDM modulator.
The Company used $89,164 net cash in investing
activities during the first six months, all for purchases of
property and equipment. This compares to use of net cash of
$93,241 in the first six months of fiscal 1999. In both
periods, the property and equipment was purchased primarily
for the Aberdeen facility.
During the first six months of fiscal 2000, the Company
received $1,143,791 from financing activities, the principal
portion of which was $1,252,700 from a private placement of
the Company's Common Stock. The Company raised an additional
$625,000 during the third quarter.
In connection with the construction of the manufacturing
facility in Aberdeen, the Company took advantage of certain
economic incentive programs offered by the State of South
Dakota and the City of Aberdeen. At September 30, 1999, the
total principal outstanding on the several loans obtained in
connection with these financing packages was $3,109,521.
Interest on the loans ranges from 0% to 6.75%, and the loans
are due between 2003 and 2016. These loans require that the
Company maintain certain levels of net worth and income to
outstanding debt ratios. The Company was out of compliance
with these covenants in fiscal 1999. Such noncompliance does
not constitute an event of default but triggers further
covenants under the loan agreement, with which the Company
was in compliance at September 30, 1999.
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The Company anticipates approximately $250,000 in
capital expenditures in fiscal 2000, primarily for equipment.
The funds for these purchases will come from funds available
under the financing packages with the State of South Dakota
and the City of Aberdeen. The Company also expects to receive
reimbursement from certain bond funds for purchases of
equipment made in fiscal 1999.
The Company's use of net cash in operating activities
during fiscal 1999 and the first two quarters of fiscal 2000
and the related decrease in its cash balance emphasize the
Company's need to increase sales in order to maintain
operations. The auditor's report on the fiscal 1999 financial
statements contained a qualification as to the Company's
ability to continue as a going concern in light of its low
sales and high costs. For the past several years, the Company
has been working on the design and development of new
optoelectronic
products, in particular a dense wavelength division
multiplexer and products based on Gallium Nitride technology.
In order to focus on these efforts, beginning in fiscal 1998
the Company reduced its emphasis on contract research and
development, resulting in significantly reduced revenues.
This shift in emphasis was necessary to utilize the Company's
personnel and facilities in the product development effort.
The Company believes that design of the new products and the
manufacturing process is now essentially complete, and it has
stepped up its efforts to market these products. During
September and October 1999, the Company raised approximately
$1,800,000 in a private placement of its common stock. These
funds should enable the Company to keep operating through
fiscal year 2000. There can be no assurance, that the Company
will be successful in increasing sales of its new products,
or obtaining additional financing, if needed.
Year 2000 Readiness
The Company's year 2000 plan has been primarily directed
toward ensuring that the Company will be able to perform
critical functions, such as manufacturing, handling of all
financial transactions, and maintaining integrity of other
business operations, controls, financial reporting, security
and other matters. The Company has engaged in an assessment
of year 2000 readiness both internally and with its various
business partners, including vendors and service providers.
The Company has determined that substantially all software,
operating systems, and accounting systems have been corrected
or are year 2000 ready. Its security system and telephone
systems are year 2000 compliant. The Company is in process of
evaluating its voice-mail system with regards to Y2K
compliance. If there are any non-compliance issues in the
voice-mail, either these will be corrected or voice-mail will
be discontinued until the corrections can be made. The
Company has contacted its various business partners to
receive assurances that such entities are year 2000 ready.
The cost associated with the Company's year 2000 readiness
program has not been material to date and the Company expects
that any future costs will also not be material and will have
no adverse effect on the Company's earnings or financial
position.
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Forward-Looking Statements
Statements in this report with respect to future sales
prospects and other matters to occur in the future are
forward looking statements and are subject to uncertainties
from many factors, some of which are beyond the Company's
control. These factors include, but are not limited to, the
continued development of the Company's products, acceptance
of those products by potential customers, the Company's
ability to sell such products at a profitable price, the
Company's readiness for year 2000, and the Company's ability
to fund its operations.
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risk.
The Company's operations are not currently subject to
market risks for interest rates, foreign currency exchange
rates, commodity prices or other market price risks of a
material nature.
Part II
ITEMS 1, 3 and 4. Not Applicable
ITEM 2. Changes in Securities and Use of Proceeds.
The Company recently completed a private placement of
its common stock, par value $.01 per share (the "Stock"). On
September 28, 1999, the Company sold 310,000 shares, and on
October 15, 1999 the Company sold 155,000 shares of the
Stock. The shares were sold at a price of $4.375 per share,
or an aggregate consideration of $2,034,375. The shares were
purchased only by accredited investors and were exempt from
registration pursuant to Rule 506 of Regulation D of the
Securities and Exchange Commission. Broker-dealers involved
in placing the Stock will receive up to 8% of the placement
price of the shares, plus three-year warrants to purchase, at
a price of $4.875 per share, not more than 10% of the number
of shares sold.
ITEM 5. Other Information.
The Company announced that Senator Larry Pressler, who
had been reelected as a director at the shareholders meeting
in August 1999, has resigned as a director. Senator Pressler
noted that the time required by his other professional
commitments did not allow him to devote adequate attention to
his duties as a director of the Company.
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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 September 30,
1999.
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.
November 9, 1999
/s/ Anil K. Jain
Date
Anil K. Jain
President
Principal Executive Officer
Treasurer & Principal Financial
Officer
November 9, 1999
/s/ Randal J. Becker
Date
Randal J. Becker
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> SEP-30-1999
<CASH> 2,097,810
<SECURITIES> 0
<RECEIVABLES> 81,907
<ALLOWANCES> 0
<INVENTORY> 385,878
<CURRENT-ASSETS> 2,610,008
<PP&E> 6,541,756
<DEPRECIATION> 4,026,245
<TOTAL-ASSETS> 6,105,501
<CURRENT-LIABILITIES> 359,286
<BONDS> 0
0
0
<COMMON> 88,238
<OTHER-SE> 2,681,656
<TOTAL-LIABILITY-AND-EQUITY> 6,105,501
<SALES> 102,626
<TOTAL-REVENUES> 102,626
<CGS> 1,313,095
<TOTAL-COSTS> 1,313,095
<OTHER-EXPENSES> 637,498
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (71,592)
<INCOME-PRETAX> (1,871,602)
<INCOME-TAX> 500
<INCOME-CONTINUING> (1,872,102)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,872,102)
<EPS-BASIC> (.22)
<EPS-DILUTED> (.22)
</TABLE>
