[TEXT]
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, 1999 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, 1999
Common stock, par value $.01
8,512,274
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<TABLE>
<CAPTION>
PART 1, FINANCIAL INFORMATION
ITEM 1, FINANCIAL STATEMENTS
APA OPTICS, INC.
CONDENSED BALANCE SHEETS
ASSETS June 30, March
31,
1999
1999
<S> <C> <C>
CURRENT ASSETS: (Unaudited)
(Audited)
*
Cash and short-term investments $ 1,912,833
$2,812,84
9
Accounts receivable 88,851
85,091
Inventories:
Raw materials 78,715
54,208
Work-in-process & finished 175,258
goods 167,659
Prepaid expenses 16,509
18,911
Bond reserve funds 16,250
60,000
TOTAL CURRENT ASSETS 2,288,416
3,198,718
PROPERTY AND EQUIPMENT NET 2,553,994
2,592,503
OTHER ASSETS 991,435
1,013,755
$ 5,833,845 $
6,804,976
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES:
Current portion of long-term $ 133,200 $
debt 133,200
Accounts payable 75,363
53,416
Accrued expenses 158,688
147,553
TOTAL CURRENT LIABILITIES 367,251
334,169
LONG-TERM DEBT 2,993,889
3,081,512
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 9,700,258
9,700,258
Retained earnings (deficit) (7,312,676)
(6,396,08
6)
2,472,705
3,389,295
$ 5,833,845 $
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
June 30
1999 1998
<S> <C> <C>
REVENUES $ 66,597 $ 248,557
COSTS AND EXPENSES:
Cost of sales and
services 651,260 524,519
Selling, general &
administrative 209,860 132,417
Research & development 118,112 91,003
979,232 747,939
Gain/loss from operations: (912,635) (499,382)
INTEREST INCOME & EXPENSE:
Interest Income 32,213 66,913
Interest Expense (35,918) (45,676)
21,237
(3,705)
Loss before income taxes (916,340) (478,145)
Income taxes
250 0
Net loss $ (916,590) $ (478,145)
Net loss per share
Basic and diluted $ $
(.11) (.06)
Weighted average shares
outstanding
Basic and diluted 8,512,274 8,512,274
</TABLE>
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APA OPTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ $
(916,590) (478,145)
Adjustments to reconcile net income to
net cash
provided by operating activities:
Depreciation and amortization
109,545 109,251
Changes in operating assets and
liabilities:
Accounts receivable
(3,760) 32,963
Inventories and
prepaid expenses
14,046 442
Accounts payable and accrued
expenses
33,082 13,759
Other
(2,375) (8,341)
Net cash used in operating
activities
(766,052) (330,071)
INVESTING ACTIVITIES
(Purchases) Sales of property and
equipment (47,036) (46,122)
Net cash used in investing activities
(47,036) (46,122)
FINANCING ACTIVITIES
Repayment of Long Term Debt
(87,623) (77,061)
Bond reserve funds
695 17,155
Net cash used in financing activities
(86,928) (59,906)
decrease in cash
(900,016) (436,099)
Cash at Beginning of Period
2,812,849 5,184,215
Cash at End of Period $ $ 4,748,116
1,912,833
</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.
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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 selected 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.) These areas were 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
Operating revenues for the first quarter of fiscal year
2000, ended June 30, 1999, were $66,597, a decrease of 73%
from operating revenues of $248,557 for the same period in
the prior year. The decrease in revenues reflects the
Company's decision to focus on product development rather
than contract research and development. Sales of new products
in fiscal 1999 were minimal; however, the Company believes it
has made significant progress in developing its new products
and the related manufacturing process and that revenues from
sales of such products will increase in fiscal 2000.
Cost of sales increased by approximately 24% to
$651,260, in first quarter 2000 from $524,519 in first
quarter 1999. Gross margin for sales was negative in both
periods, reflecting continued personnel and product
development costs. This deterioration is the result of
decreased contract revenues. Research and development
expenses increased by approximately 30% in first quarter
2000, to $118,112 from $91,003, and selling, general and
administrative expenses increased by 58% to $209,860 compared
to $132,417 in first quarter 1999. The increase in costs of
sales, research and development and selling, general
<PAGE>
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and administrative expenses reflects the Company's focus on
product development, including the hiring of additional
personnel for production, marketing, and sales.
The Company reported a loss from operations for the
first quarter of fiscal 2000 of $912,635, a substantial
increase over the loss from operations of $499,362 in the
first quarter of the prior year. This loss results from the
combination of significantly decreased revenues without a
corresponding decrease in costs and expenses.
The Company realized $32,213 in interest income for the
first quarter of fiscal 2000, down 52% from $66,913 in the
prior period, reflecting lower average cash balances during
the year. Interest expenses in first quarter 2000 totaled
$35,918, down 21% from $45,676 in the prior period,
reflecting reduced balances on outstanding obligations.
Liquidity and Capital Resources:
The Company's cash and equivalents balance at June 30,
1999 is $1,912,833 as compared to $2, 812,849 at March 31,
1999. This reduction primarily results from the use of
$766,052 net cash in operating activities, of which the most
significant cause was the Company's net loss of $916,590. The
Company used $47,036 net cash in investing activities during
the first quarter, all for purchase of property and
equipment. This compares to use of net cash of $46,122 in
first quarter 1999. In both periods, such property and
equipment was purchased primarily for the Aberdeen facility.
During the first quarter of fiscal 2000, the Company used
$86,625 net cash in financing activities, primarily for
repayment of debt associated with the Aberdeen facility.
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 June 30, 1999, the total
principal outstanding on the several loans obtained in
connection with these financing packages was $3,127,089.
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 minimum 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 June 30, 1999.
The Company anticipates approximately $250,000 in
capital 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 quarter of fiscal 2000 and the
related decrease in its cash balance emphasizes the Company's
need to increase sales in order to maintain its operations.
The auditor's report on the fiscal 1999
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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. A
marketing team hired during fiscal 1999 has identified
several potential markets and customers. The Company believes
that it can generate sufficient revenues from sales of these
products to sustain its operations through the rest of the
fiscal year. If the Company does not adequately increase
revenues, it plans to decrease expenses by reducing inventory
and personnel and to discontinue one or more products. In
addition, the Company will investigate sources of additional
capital. There can be no assurance, however, that the Company
will be successful in achieving its plans 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 has contacted
its various business partners to receive assurances that such
entities are year 2000 ready. The Company intends to develop
a contingency plan prior to the end of 1999. 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.
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 factors, many 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.
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ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk.
The Company's operations are not currently subject to
market risks for interest rates, foreign rates, commodity
prices or other market price risks of a material nature.
Part II
ITEM 1-5. 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, 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.
8/13/99
/s/ Anil K. Jain
Date
Anil K. Jain
President
Principal Executive Officer
Treasurer & Principal Financial
Officer
8/13/99
/s/ Randal J. Becker
Date
Randal J. Becker
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> JUN-30-1999
<CASH> 1,912,833
<SECURITIES> 0
<RECEIVABLES> 88,851
<ALLOWANCES> 0
<INVENTORY> 253,973
<CURRENT-ASSETS> 2,288,416
<PP&E> 6,499,627
<DEPRECIATION> 3,945,633
<TOTAL-ASSETS> 5,833,845
<CURRENT-LIABILITIES> 367,251
<BONDS> 0
0
0
<COMMON> 85,123
<OTHER-SE> 2,387,582
<TOTAL-LIABILITY-AND-EQUITY> 5,833,845
<SALES> 66,597
<TOTAL-REVENUES> 66,597
<CGS> 651,260
<TOTAL-COSTS> 651,260
<OTHER-EXPENSES> 327,972
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (35,918)
<INCOME-PRETAX> (916,340)
<INCOME-TAX> 250
<INCOME-CONTINUING> (916,590)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (916,590)
<EPS-BASIC> (.11)
<EPS-DILUTED> (.11)
</TABLE>
