AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 4, 2000
REGISTRATION NO. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------------
APA OPTICS, INC.
(Exact Name of registrant as specified in its charter)
MINNESOTA 3827 41-1347235
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation) Classification Code Number) Identification
Number)
-------------------------------
2950 N.E. 84TH LANE, BLAINE, MINNESOTA 55449 (763) 784-4995
(Address, including zip code and telephone number, including area code of
registrant's principal executive offices)
-------------------------------
ANIL K. JAIN, CHIEF EXECUTIVE OFFICER
APA OPTICS, INC.
2950 N.E. 84TH LANE
BLAINE, MINNESOTA 55449
TELEPHONE: (763) 784-4995 TELEFAX: (763) 784-2038
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------------------
COPIES TO:
JANNA R. SEVERANCE, ESQ.
MOSS & BARNETT, A PROFESSIONAL ASSOCIATION
4800 NORWEST CENTER, 90 SOUTH SEVENTH STREET
MINNEAPOLIS, MINNESOTA 55402-4129
TELEPHONE: (612) 347-0367
-------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time, commencing as soon as practicable after the effective
date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being registered on this Form are being
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) AGGREGATE OFFERING PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common stock, $.01 par value 307,500 $28.375 $8,725,312.50 $2,304
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents shares to be sold by the selling shareholders named herein,
including:
* Up to 250,000 shares that may be acquired upon conversion of the
registrant's 2% Series A Convertible Preferred Stock, at an assumed
conversion price of $35.00 per share (including 107,114 shares
estimated to be issuable if dividends are accreted to stated value
rather than paid in cash).
* 50,000 shares that may be acquired upon the exercise of warrants
issued in connection with the 2% Series A Convertible Preferred
Stock.
* 7,500 shares that may be acquired upon exercise of warrants issued
to the agent who placed the 2% Series A Convertible Preferred Stock.
* Also includes an indeterminate number of shares that the selling
shareholders may acquire as a result of a stock split, stock
dividend or similar transaction involving the common stock pursuant
to the anti-dilution provisions of the 2% Series A Convertible
Preferred Stock and the warrants.
<PAGE>
* Does not include additional shares that may be acquired by the
selling shareholders upon conversion of the 2% Series A Convertible
Preferred Stock attributable to the operation of the conversion
price formula set forth in the certificate of designation for the 2%
Series A Convertible Preferred Stock due to a decline in the market
price of the common stock as a result of which the conversion price
is less than the assumed conversion price set forth above.
(2) Calculated solely for the purpose of determining the registration fee
pursuant to Rule 457(c) based upon the average of the high and low prices
per share of the Company's common stock on the Nasdaq SmallCap Market on
March 31, 2000.
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
ii
<PAGE>
307,500 SHARES
APA OPTICS, INC.
COMMON STOCK
This prospectus covers up to 307,500 shares of the common stock, par
value $.01 per share, of APA Optics, Inc., a Minnesota corporation, which may be
sold from time to time by certain shareholders named in this prospectus. Our
common stock is traded on the Nasdaq SmallCap Market under the symbol APAT. On
March 31, 2000, the closing sale price for the common stock as reported on the
Nasdaq SmallCap Market was $29.375 per share.
The shares of common stock offered by this prospectus may be sold by
the selling shareholders from time to time in transactions on the open market or
in negotiated transactions, in each case at prices satisfactory to them.
SEE "RISK FACTORS" BEGINNING AT PAGE 6 TO READ ABOUT FACTORS
YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
No person has been authorized by us to give any information or to make
any representations about the offering of common stock made by this prospectus
other than the information and representations contained in this prospectus.
Accordingly, you should not rely on information outside of this prospectus. This
prospectus is not an offer to sell or buy any security other than the common
stock offered by this prospectus; it is not an offer to sell or buy securities
in any jurisdiction in which such offer is not qualified; and it is not an offer
to buy or sell securities to any person to whom such offer would be unlawful.
The information in this prospectus is current as of the date of this prospectus.
Your receipt of this prospectus does not mean that there has been no change in
the affairs of APA Optics, Inc. since the date of this prospectus or that the
documents which are incorporated by reference in this prospectus are correct as
of any date after the date of such documents.
THE DATE OF THIS PROSPECTUS IS _____________, 2000.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
iii
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
APA Optics is subject to the informational requirements of the
Securities Exchange Act of 1934, and files reports, proxy statements and other
information with the Securities and Exchange Commission. These reports, proxy
statements and other information can be inspected and copies can be made at:
* the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549
* the regional offices of the Commission located at 500 West Madison
Street, Chicago, Illinois 60601 and at 7 World Trade Center, New
York, New York 10048
* the offices of Nasdaq Operations, 1735 K Street, N.W., Washington,
D.C.
These materials may also be accessed electronically by means of the
Securities and Exchange Commission's home page on the Internet
(http://www.sec.gov).
This prospectus is a part of a registration statement on Form S-3 that
APA Optics has filed with the Securities and Exchange Commission. You may obtain
copies of the registration statement from the Commission at the addresses in the
preceding paragraph. This prospectus does not contain all of the information set
forth in the registration statement and its exhibits. The registration statement
provides further information about us and the shares. While we believe this
prospectus provides the material information regarding the contracts and
documents described in it, the statements contained in this prospectus about the
contents of any contract or any other documents are not necessarily complete
and, in each such instance, you should inspect the copy of such contract or
document filed as an exhibit to the registration statement.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by APA Optics with the Commission
pursuant to the Securities Exchange Act of 1934 (File No. 0-16106) are
incorporated by reference in this prospectus, except as otherwise superseded or
modified herein:
Our annual report on Form 10-K for the fiscal year ended March 31,
1999.
Our quarterly reports on Form 10-Q for the fiscal quarters ended June
30, 1999, September 30, 1999 and December 31, 1999.
Our registration statement on Form 8-A, dated July 28, 1987,
registering our common stock under Section 12(g) of the Securities Exchange Act
of 1934.
Our proxy statement on Schedule 14A for our annual shareholders meeting
for the fiscal year ended March 31, 1999.
All other reports and documents filed by us pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act since March 31, 1999 and prior to the
termination of the offering of the common stock, are also deemed to be
incorporated by reference into this prospectus.
iv
<PAGE>
Any statement in any document incorporated or deemed to be incorporated
by reference is modified or superseded to the extent that a statement in this
prospectus or in any other subsequently filed document incorporated by reference
modifies or supersedes such statement.
We will furnish you, without charge, with a copy of any or all of the
documents referred to above (other than exhibits to such documents). Requests
for copies should be directed, orally or in writing, to:
Anil K. Jain, Chief Executive Officer
APA Optics, Inc.
2950 N.E. 84th Lane
Blaine, MN 55434
Telephone: (763) 784-4995
v
<PAGE>
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY.............................................................1
THE COMPANY....................................................................3
RISK FACTORS...................................................................6
FORWARD-LOOKING STATEMENTS....................................................14
USE OF PROCEEDS...............................................................15
PRICE RANGE OF COMMON STOCK...................................................15
SELLING SHAREHOLDERS..........................................................15
PLAN OF DISTRIBUTION..........................................................17
INTERESTS OF NAMED EXPERTS AND COUNSEL........................................18
MATERIAL CHANGES..............................................................19
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION..........................19
ANTITAKEOVER STATUTE..........................................................19
vi
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY CONTAINS INFORMATION ABOUT APA OPTICS, INC.,
SOMETIMES REFERRED TO AS "APA OPTICS" OR THE "COMPANY." IT MAY NOT CONTAIN ALL
THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE
PROSPECTUS, THE DOCUMENTS WHICH ARE INCORPORATED BY REFERENCE IN THE PROSPECTUS,
INCLUDING THE FINANCIAL DATA AND RELATED NOTES, AND THE OTHER INFORMATION
CONTAINED IN THE FORM S-3 REGISTRATION STATEMENT BEFORE MAKING AN INVESTMENT
DECISION. THE REFERENCES TO "WE," "US," AND "OUR" MEAN APA OPTICS, EXCEPT WHERE
IT IS CLEAR BY THE CONTEXT THAT THE REFERENCE IS TO SOMEONE ELSE.
THE COMPANY
APA Optics is engaged in the business of designing, manufacturing, and
marketing optical components and various optoelectronic products. Currently, we
are 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). We selected these areas of concentration because we believe they have
significant potential markets and because we have significant expertise and/or
patent positions relating to them.
For several years we received significant revenues from providing
research and development services in connection with projects sponsored by
various government agencies. In fiscal 1998, we determined to shift our emphasis
from research and development to product development, realizing that this shift
would significantly reduce revenues and increase losses until we realize
revenues from our products. If we are successful in manufacturing and marketing
our products, we expect to significantly increase revenues and achieve
profitability.
APA Optics was incorporated in Minnesota in March 1979 and became a
publicly owned company in 1986. Our principal offices are located at 2950 N.E.
84th Lane, Blaine, Minnesota 55434, and our telephone number is (763) 784-4995.
RISK FACTORS
An investment in our common stock involves a high degree of risk and is
not appropriate for persons who cannot afford to lose their entire investment.
See "Risk Factors."
THE OFFERING
The shares of common stock which are offered by this prospectus are
shares which will be issued to the selling shareholders named in this prospectus
if they choose to convert their 2% Series A Convertible Preferred Stock and/or
exercise related 5-year warrants for purchase of an aggregate of 50,000 shares
of common stock. They acquired the Preferred Stock and warrants in March 2000
for a total purchase price of $5 million. They may convert their Preferred Stock
and exercise their warrants, at their option, at a price of $35.00 per share
(subject to adjustments under certain circumstances). If all shares of the
Preferred Stock are converted and all warrants are exercised, at $35.00 per
share, 200,357 shares of common stock will be added to the Company's issued and
outstanding common stock (assuming that all Preferred Stock dividends are paid
in cash rather than accreted to the stated value of the Preferred Stock).
Certain information about the Company's common stock and this offering is
summarized below.
Concurrently with this offering we have filed a registration statement
for sale of common stock for gross proceeds of $100 million. As of the date of
this prospectus, we do not know whether any shares will be sold or the price at
which sales may be made.
<PAGE>
Common stock to be issued upon conversion of
Preferred Stock(1)............................ 142,857 shares
Common stock to be issued upon exercise of
warrants...................................... 57,500 shares
Common stock to be outstanding after
conversion of Preferred Stock and exercise
of warrants (1)(2)............................ 9,198,349
Use of proceeds............................... APA will not receive any
proceeds from the
conversion of the
Preferred Stock or the
sale of common stock by
the selling
shareholders. We will
receive $1,750,000 if
the warrants are
exercised in full.
These funds will be
used for general
corporate purposes.
Nasdaq symbol................................. APAT
Transfer Agent and Registrar.................. Norwest Shareowner
Services, South
St. Paul, Minnesota
(1) Assumes that (a) dividends are paid in cash rather than accreted to
stated value and (b) a conversion price of $35.00 per share. If
dividends are accreted to stated value, or if the conversion price
is adjusted to a lower price pursuant to the terms of the Preferred
Stock, the number of shares of common stock issuable upon
conversion will increase.
(2) Assumes no issuance of common stock other than in connection with
this offering and no exercise of any warrants or options for common
stock or conversion of any securities convertible to common stock.
As of March 15, 2000 we had reserved for issuance:
(a) 151,358 shares for various warrants, not including additional
warrants in an amount not currently calculable which may be
issued in connection with certain bond financing; and
(b) 1,246,338 shares under employee benefit plans, a directors
option plan, and other options.
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended December 31 Year Ended March 31
----------------------------- -------------------
(unaudited)
Statement of operations data: 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 239,142 $ 629,122 $ 722,030 $ 2,190,637
Net income (loss) (2,860,842) (1,755,353) (2,513,798) (967,767)
Net income (loss) per share (basic) (.33) (.21) (.30) (.12)
Net income (loss) per share (diluted) (.33) (.21) (.30) (.12)
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999 March 31
----------------- --------
(unaudited)
Balance sheet data: 1999 1998
---- ----
<S> <C> <C> <C>
Working capital $ 1,860,158 $ 2,864,549 $ 5,345,480
Total assets 5,741,421 6,804,976 9,629,912
Shareholders' equity 2,408,527 3,389,295 5,859,863
</TABLE>
THE COMPANY
Since the founding of APA Optics in 1979, we have focused on leading
edge research in sophisticated optoelectronic and optical system areas with the
primary goal of developing advanced products for subsequent marketing and
fabrication. We currently manufacture DWDM optical components, offer a range of
gallium nitride (GaN) based devices and services, and market custom optics
products.
For the last several years our goal has been to manufacture and market
products and components based on our technology developments. We have selected
two product areas based on significant potential markets and our expertise
and/or patent positions: 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).
If we are successful in manufacturing and marketing these products, we expect to
significantly increase revenues and achieve profitability.
PRODUCTS
Our current products are as follows:
* Optical Lens Systems. We design and build multi-element lens
systems and components, including mounting structures, for
precision quality optical needs in many applications, including
laser-based systems, imaging systems, inspection systems, display
systems, display optics, focusing optics for ultraviolet fire
alarms, alignment verification optics for dual magnetic recording
heads, and multi-magnification optics systems for optical
comparators.
* Optical Thin Film Coatings. We custom design, develop, and
fabricate optical thin film coatings for optical components of
lasers, laser systems, optical instruments, and optical devices. We
use optical thin film coating services in two major ways: to apply
antireflective coatings onto Company-fabricated lens components,
and to design, develop and fabricate coatings for lens components
supplied by customers.
* Optoelectronics Devices. We are focusing research and development
efforts on several optoelectronic devices. Optoelectronic devices
are vital components of communication systems and optical
instruments.
Currently, we are developing the following products:
* Dense Wavelength Division Multiplexer (DWDM). Recently, we
demonstrated the feasibility of a DWDM capable of transmitting
several channels through a single optical fiber for
3
<PAGE>
communication applications. We developed the DWDM based on our
development of optical modulator (single channel) technology during
the early 1990s for fiber optic communication. These modulators
have the capability of direct high speed (several billion bits per
second) data loading and unloading on laser beams going through
optical fibers, either for short distance or long distances. The
DWDM, a small part of the modulator, utilizes high frequency
halographic gratings. Our new DWDM is a major break-through because
it enables transmission of information on several different
channels within a single fiber (a simple analogy is the expansion
of a single lane highway to multi-lane throughway). As a result,
the DWDM provides higher speed as well as increased and regulated
data handling capabilities as compared to a single channel
modulator. We are currently performing environmental packaging of
the DWDM. We filed the first patent related to the DWDM Optical
Modulator in June 1994, which was allowed on May 8, 1995. Since
then, we have filed for four additional patents related to DWD
Multiplexer/Demultiplexer devices. We were awarded two of these
patents in March 1997 and February 1998. The other two applications
are still pending.
* UV Detector. The UV Detector is a high response solid state
detector based on single-crystal gallium nitride (GaN). The GaN
detector is expected to have applications in spectrometry, solar
radiation measurement, excimer-laser measurement and calibration,
biomedical instrumentation, and flame detection and monitoring. The
detector is visible blind, which allows detection of UV radiation
in the presence of room lights without a filter. We believe the GaN
detector has advantages over photomultiplier tubes because of its
ruggedness and chemical inertness, which suit it for application in
high-vibration and harsh environments as well as high-temperature
operation. We have been awarded at least four patents in nitride
related technologies.
* Other Products. We are in the process of introducing several other
products by packaging our UV detectors with electronics and
displays for many applications. Among these are a solar sensing
watch to detect potential cancer causing UV radiation for consumer
applications, UV radiation based flame sensors for industrial
applications, and UV radiation meters for laboratory and industrial
applications. All of these products have significant similarities
and, therefore, do not require significant financial resources for
development.
MARKETING AND DISTRIBUTION
We delivered a limited number of alpha units of our DWDM to customers
during fiscal 1999 and 2000. We have sold several UV detectors to more than 30
customers, as well as a few detector/electronics packages. During this time, we
have been aggressively marketing both products by advertising in relevant
professional magazines, showcasing our products in trade shows, direct mailing,
personal visits, and distributors in various countries, including Japan,
Germany, Italy and France. We also maintain product information on our Web page.
Our DWDM product manager focuses on sales of DWDM and two persons work on
marketing and sales of gallium nitride-based products.
SOURCES OF RAW MATERIALS
Two of the principal materials used in our business are optical glass
and optical chips. Optical glass is commercially available through several
distributors. We currently use at least two vendors for optical chips and
continuously look for additional vendors for these parts. Certain chemicals and
other materials necessary for our products are routinely available from several
sources.
4
<PAGE>
ENVIRONMENTAL COMPLIANCE
Because we handle a number of chemicals in our operations, we must
comply with federal, state and local laws and regulations regarding the handling
and disposal of such chemicals. The cost of such compliance is not material.
MAJOR CUSTOMERS
In prior years, we provided research and development services under
contracts with various governmental agencies. Currently, we have no material
contracts with any of such agencies.
Revenues from the following unrelated customers constituted more than
ten percent of our total operating revenues in the last three fiscal years:
Year Ended March 31
Name 1999 1998 1997
- ------------------------------------ ------------- ------------- ------------
Air Force 23% 20% 42%
Army 0% 25% 22%
Navy 18% 38% 36%
ARPA 59% 17% -0%
---- ---- ----
Total 100% 100% 100%
==== ==== ====
COMPETITION
Competition in the optoelectronics and optics fabrication businesses is
significant. Many of the companies engaged in these businesses are well-financed
and have significantly greater research, development, production, and marketing
resources than we do. However, we believe that we have a competitive advantage
due to our patents and the uniqueness of our devices. In particular, we believe
that our DWDM is the most efficient (lowest insertion loss) and compact device
currently available.
RESEARCH AND DEVELOPMENT
During the fiscal years ended March 31, 1999, 1998, and 1997 we spent
approximately $382,000, $339,000, and $375,000, respectively, on research and
development sponsored by the Company, all of which was related to the DWDM, UV
detector and related products. In addition, in each of those years, we spent
approximately $837,000, $1,431,000, and $1,610,000, respectively, on research
activities sponsored by customers. During the 11 months ended February 29, 2000,
we spent approximately $299,000, on research and development sponsored by the
Company, all of which was related to the DWDM, UV detector and related products
and approximately $181,000, on research activities sponsored by customers.
5
<PAGE>
EMPLOYEES
As of March 15, 2000, we employed 36 full-time employees (including
executive officers).
RISK FACTORS
BEFORE YOU INVEST IN THE COMMON STOCK YOU SHOULD CONSIDER THAT THE
VALUE OF THE SHARES IN THE SECONDARY MARKET IS SUBJECT TO VARIOUS RISKS,
INCLUDING THOSE DESCRIBED BELOW. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR,
OUR BUSINESS, RESULTS OF OPERATIONS OR CASH FLOWS COULD BE ADVERSELY AFFECTED.
IN THOSE CASES, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY
LOSE ALL OR PART OF YOUR INVESTMENT. THESE RISKS SHOULD BE EVALUATED TOGETHER
WITH ALL OF THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE YOU DECIDE TO
PURCHASE ANY OF THE SHARES WHICH ARE OFFERED. SPECIFIC RISK FACTORS WHICH YOU
SHOULD CONSIDER INCLUDE THE FOLLOWING:
WE HAVE LIMITED EXPERIENCE IN MANUFACTURING. Although we have been
involved in the manufacturing of optical components for several years, and have
manufactured limited quantities of UV detectors and alpha DWDMs, we have not
engaged in high volume manufacturing of these products. We may be unable to
manufacture products that satisfy the volume and quality requirements of our
customers, and, as a result, we may not achieve significant revenues or
profitability.
WE MAY NOT BE ABLE TO REDUCE OUR MANUFACTURING COSTS SUFFICIENTLY OR
PLAN OUR MANUFACTURING EXPANSION accurately. We expect the price of our existing
products to decline due to various factors, such as increased competition,
including from companies with lower labor and production costs; a limited number
of potential customers with significant bargaining leverage; introduction of new
products by competitors; and greater economies of scale for higher volume
manufacturers. To increase our revenues, we must increase our unit volumes and
our manufacturing capacity. Adding capacity increases our fixed costs and the
levels of unit shipments we must produce to achieve positive gross margins. As a
result, if we are unable to increase our revenues or continuously reduce our
manufacturing costs, our gross margins will not improve and we will continue to
incur losses.
We are increasing our manufacturing capacity at our existing facilities
in Aberdeen, South Dakota. Developing manufacturing capabilities involves
significant risks which could materially adversely affect our gross margins and
revenues, including:
* Our inability to qualify a new manufacturing line for all of our
customers;
* unanticipated cost increases;
* unavailability or late delivery of equipment;
* unforeseen environmental or engineering problems; and
* personnel recruitment delays.
Expanding our manufacturing capacity requires substantial time to build
out and equip facilities and train personnel. If we receive orders substantially
in excess of our planned capacity, we might not be able to fulfill them quickly
enough to meet customer requirements. Our inability to deliver products timely
could enable competitors to win business from our customers.
6
<PAGE>
WE MAY NOT BE ABLE TO EFFECTIVELY INCREASE PRODUCTION AND MAINTAIN
ACCEPTABLE MANUFACTURING YIELDS, RESULTING IN DELAY OF PRODUCT SHIPMENTS AND
IMPAIRMENT OF OUR GROSS MARGINS. Manufacturing our products is highly complex
and labor intensive. As we rapidly increase production and hire more people, our
manufacturing yield, which is the percentage of our products which meet customer
specifications, could decline, resulting in product shipment delays, possible
lost revenue opportunities, higher customer returns, and impaired gross margins.
Some of our manufacturing lines have experienced lower than expected yields,
which could continue in the future. Rapid increases in production levels to meet
demand may also result in higher overtime costs and other expenses.
WE HAVE HAD LIMITED SALES AND EXPECT LOSSES. To date, we have had only
limited sales of UV detectors and DWDMs. As of December 31, 1999, we had an
accumulated deficit of $9,256,929. We expect operating losses to continue until
sales of these products reach a level sufficient to cover operating costs. We
may never generate sales at the required levels or become profitable. Our
auditors' opinion concerning our financial statements for the fiscal year ended
March 31, 1999 states that our accumulated deficit and recurring losses from
operations raise substantial doubt about our ability to continue as a going
concern.
Our ability to achieve profitability will depend on our ability to
develop and bring new proprietary products to market. Our ability to become
profitable will also depend upon a variety of other factors, including the
following:
* The price, volume and timing of sales of products;
* Variations in gross margins of our products, which may be affected
by sales mix and competitive pricing pressures;
* Changes in the level of our research and development; and
* Acquisitions of products, technology or companies.
Our long-term success will also be affected by expenses, difficulties
and delays frequently encountered in developing and commercializing new
products, competition, and the regulatory environment in which we operate. We
cannot be certain that we will ever achieve significant revenues or profitable
operations.
WE MUST CONTINUE TO FUND PRODUCT DEVELOPMENT. The continued existence
and the growth and profitability of the Company depend upon the success of our
product manufacturing and marketing efforts. In order for new products to be
successfully marketed, they must satisfy the needs of potential customers by
performing under the conditions in which such customers intend to use the
products. We must continue development of these products and their packaging to
ensure that these products will meet such requirements. However, our products
may not perform as anticipated or as needed by customers.
OUR BUSINESS WILL SUFFER IF WE FAIL TO OBTAIN ADEQUATE FUNDING IN A
TIMELY MANNER. We expect that we will need substantial additional funding. Our
business, results of operations and cash flows will be adversely affected if we
fail to obtain adequate funding in a timely manner. Our funding requirements
will depend on many factors, including:
* The progress of our research and development programs;
7
<PAGE>
* Revenue growth, if any;
* The amount of cash generated, if any, by our operations;
* The costs involved in preparing, filing, prosecuting, maintaining,
enforcing and defending patent claims and other intellectual
property rights;
* Competing technological and market developments; and
* The need for additional manufacturing facilities to accommodate
growth.
We anticipate that our existing capital resources as of the date of
this prospectus will be adequate to fund operations and capital expenditures at
least through March 31, 2001. However, if we experience unanticipated cash
requirements during this period, we could require additional funds much sooner.
We may receive funds from the sale of equity securities, or the exercise of
outstanding warrants and options to acquire common stock. However, we cannot
assure you that any of those fundings will occur, or if they occur, that they
will be on terms favorable to us. Also, the dilutive effect of those fundings
could adversely affect our results per share.
ASSERTING AND DEFENDING INTELLECTUAL PROPERTY RIGHTS WILL HARM OUR
RESULTS OF OPERATIONS REGARDLESS OF SUCCESS. Our business will be harmed if
competitors develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets, if our trade secrets
are disclosed or if we cannot effectively protect our rights to unpatented trade
secrets.
We actively seek patent protection for our proprietary products and
technologies. We have a number of United States patents and also have licenses
to or assignments of numerous issued United States patents. However, litigation
may be necessary to protect our patent position, and we cannot be certain that
we will have the required resources to pursue the necessary litigation or
otherwise to protect our patent rights. Our efforts to protect our patents may
fail. In addition to pursuing patent protection in appropriate cases, we also
rely on trade secret protection for unpatented proprietary technology. However,
trade secrets are difficult to protect.
Claims may be brought against us in the future based on patents held by
others. These persons could bring legal actions against us claiming damages and
seeking to enjoin manufacturing and marketing of the affected product. If any of
these actions are successful, in addition to any potential liability for
damages, we could be required to obtain a license in order to continue to
manufacture or market the affected product. We cannot assure you whether we
would prevail in any of these actions or that we could obtain any licenses
required under any of these patents on acceptable terms, if at all.
We know of no pending patent infringement suits, discussions regarding
possible patent infringements or threats of patent infringement litigation
either related to:
* patents held by us; or
* our products or proposed products.
There could be significant litigation in our industry regarding patent
and other intellectual property rights. If we become involved in any litigation,
it could consume a substantial portion of our resources, regardless of the
outcome of the litigation.
8
<PAGE>
WE EXPERIENCE STRONG COMPETITION AND CHANGES IN TECHNOLOGY COULD RESULT
IN MORE COMPETITION. The business in which we engage is highly competitive. Many
of our competitors include large, well-financed and established companies who
have far greater marketing, product development, and financial resources than we
do.
We may not be able to successfully anticipate changes in technology,
industry standards, customer requirements and product offerings, yet our ability
to develop and introduce new and enhanced products will impact our position as a
leader in the deployment of high-capacity solutions. The accelerating pace of
deregulation in the telecommunications industry will likely intensify the
competition for improved technology. There has been an increase in the funding
of new companies intending to develop new products for the rapidly evolving
telecom industry. These companies have time-to-market advantages due to the
narrow and exclusive focus of their efforts. New companies may provide
additional competition for our existing product lines as well as potential
future products. The introduction of new products embodying new technologies or
the emergence of new industry standards could render our existing products
uncompetitive from a pricing standpoint, obsolete or unmarketable. Any of these
outcomes would have a material adverse effect on our business, financial
condition and results of operations.
Because many of our competitors have greater financial and other
resources than we do, they may be able to more quickly:
* respond to new technologies or technical standards;
* react to changing customer requirements and expectations;
* manufacture, market and sell current products;
* develop new products or technologies; and
* deliver competitive products at lower prices.
As a result of these factors, our customers could decide to purchase
products from our competitors and reduce their purchases from us.
In addition, our competitors or customers may acquire our suppliers and
potential suppliers. Our customers may also develop their own internal sources
of supply in competition with us. For example, Corning has announced an
expansion of its ability to produce thin film optical filters by a factor of ten
as well as the acquisition of Oak Industries, a maker of components used in WDM
systems. Lucent Technologies, has announced an investment in privately-held
Horizon Photonics, Inc., a provider of automated manufacturing of passive
optical components. Lucent has also commented publicly that it sells a large
portion of its components on the merchant market in addition to supplying its
own needs. Cisco Systems, an emerging player in WDM systems, has announced the
acquisition of Pirelli Optical Systems and a strategic investment of $100
million in Pirelli's optical components and submarine optical transmission
system businesses. In addition, Nortel Networks has announced a $400 million
investment in its optical networking and components business, including a new
facility for the fabrication of optical components.
WE CURRENTLY HAVE LIMITED MARKETING EXPERTISE AND PERSONNEL AND EXPECT
TO INCUR SUBSTANTIAL MARKETING COSTS. Our growth is dependent upon our ability
to implement an aggressive, strong, and consistent marketing program for the
Company's new products. During fiscal 1999, we hired two
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<PAGE>
individuals to serve as marketing and sales managers. In addition, we currently
market our products through independent distributors in several foreign
countries. We believe that it is necessary to significantly expand our marketing
efforts to market our new products successfully. Accordingly, we expect to incur
substantial costs in connection with marketing and sales efforts. However, we
cannot be sure that our efforts will result in significantly greater product
recognition or market penetration, or significantly increased levels of
revenues.
ACCEPTANCE OF OUR NEW PRODUCTS IS UNCERTAIN. Although we have received
several indications of interest from potential customers, we have not received
any significant production orders. Because our products are relatively new in
the market and are still being evaluated by potential customers, we cannot
predict accurately the volume or timing of any orders.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPLETE DEVELOPMENT AND ACHIEVE
COMMERCIAL ACCEPTANCE OF OUR NEW PRODUCTS. Although we have delivered evaluation
units of our DWDM and UV detector products, we do not yet have products that can
be manufactured or distributed on a commercial basis. The maturing process from
laboratory prototype to commercial acceptance involves a number of steps,
including:
* successful completion of product development;
* validation of manufacturing methods;
* extensive quality assurance and reliability testing; and
* identification and qualification of component suppliers.
Each of these steps in turn presents serious risks of failure, rework
or delay, any one of which could materially and adversely affect the speed and
scope of product introduction and marketplace acceptance of the products. In
addition, unexpected intellectual property disputes, failure of critical design
elements, and a host of other execution risks may delay or even prevent the
introduction of these products. We have not yet demonstrated commercial
acceptance of these products and commercialization may require substantial sales
and marketing efforts over lengthy sales cycles. Our best efforts may not be
successful in attaining significant commercial acceptance and purchase of our
products.
PRODUCT PERFORMANCE PROBLEMS COULD LIMIT OUR SALES PROSPECTS. The
production of new fiberoptic systems with high technology content involves
occasional problems as the technology and manufacturing methods mature. If
significant reliability, quality or monitoring problems develop, a number of
material adverse effects could result, including:
* manufacturing rework costs;
* high service and warranty expense;
* high levels of product returns;
* delays in collecting accounts receivable;
* reduced orders from existing customers; and
* declining interest from potential customers.
10
<PAGE>
Although we maintain accruals for product warranties, actual costs
could exceed these amounts.
IF OUR NEW PRODUCT INTRODUCTIONS ARE DELAYED, OR IF OUR NEW PRODUCTS
HAVE DEFECTS, OUR REVENUES WOULD BE HARMED AND OUR COSTS COULD INCREASE. If we
do not introduce new products in a timely manner, we will not obtain incremental
revenues from these products or be able to replace more mature products with
declining revenues or gross margins. Customers could decide to purchase
components from our competitors, resulting in lost revenue over a longer term.
We could also incur unanticipated costs if new product introductions are delayed
or we need to fix defective new products.
WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE RAPID GROWTH. If we are
successful in marketing our products, and if we receive orders for volume
manufacturing, we will need to develop an infrastructure able to support growth,
including comprehensive and reliable management information systems and
additional manufacturing and other personnel. We may be unable to develop such
systems or locate, hire, train and retain necessary personnel.
WE ARE DEPENDENT ON KEY PERSONNEL. Although we have hired a business
manager for fiber optic products, as well as marketing and sales managers, we
are still dependent upon the continued services of Dr. Anil K. Jain. The loss of
his services could have a significant adverse impact upon the Company's
operations and development. We do not have an employment agreement or a
noncompete agreement with Dr. Jain, although we maintain $1,000,000 in key man
life insurance on him.
WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED TO
SUCCEED. If we cannot hire and retain technical personnel with advanced skills
and experience in the specialized field of fiber optics, our product development
programs may be delayed and our customer support efforts may be less effective.
If we are unable to hire the necessary managerial, sales and marketing
personnel, we may not be able to increase our revenues.
WE ARE DEPENDENT ON SUPPLIERS. We rely on outside vendors to supply
certain of the raw materials and other components of our products. For certain
components, we may rely on single sources of supply, which could result in the
unavailability of or interruptions in delivery of such components, manufacturing
delays caused by such unavailability or interruptions, and fluctuations in the
quality and price of such components. Delivery delays, quality problems and
price increases could hurt our ability to supply our customers with products in
a timely manner, which can cause our shipments and revenues to decline.
IF WE ARE UNABLE TO COMPLY WITH ENVIRONMENTAL LAWS AND REGULATIONS, OUR
BUSINESS MAY BE HARMED. We are subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
hazardous materials and waste products. We currently maintain a supply of
several hazardous materials at our facilities. We might be required to incur
significant cost to comply with environmental laws and regulations. In the event
of an accident, we could be held liable for any damages that result, and the
liability could exceed our resources.
BECAUSE CURRENT OFFICERS AND DIRECTORS OWN A LARGE PERCENTAGE OF OUR
STOCK, THESE SHAREHOLDERS MAY BE ABLE TO CONTROL APA OPTICS AND ALSO PREVENT
POTENTIALLY BENEFICIAL ACQUISITIONS OF APA OPTICS. As of March 15, 2000 our
officers and directors beneficially owned approximately 30% of the outstanding
shares of our common stock. Beneficial ownership includes shares of our common
stock subject to options exercisable within 60 days of March 15, 2000.
11
<PAGE>
These shareholders, if acting together, may be able to elect all of our
directors, and otherwise significantly influence matters requiring approval by
our shareholders. This concentration of ownership and the lack of cumulative
voting may also delay or prevent a third party from acquiring us.
These shareholders may have interests that differ from other
shareholders of APA Optics, particularly in the context of potentially
beneficial acquisitions of APA Optics. For example, to the extent that these
stockholders are employees of APA Optics, they may be less inclined to vote for
acquisitions of APA Optics involving the termination of their employment or
diminution of their responsibilities or compensation.
WE DO NOT INTEND TO PAY DIVIDENDS. We intend to use any cash flows from
operations to finance further growth of the Company's business. Accordingly,
investors should not purchase the shares with a view towards receipt of
dividends.
OUR STOCK PRICE MAY EXHIBIT VOLATILITY AND THE TRADING PRICE OF OUR
STOCK MAY DECREASE DUE TO FACTORS BEYOND OUR CONTROL. Our common stock price has
experienced substantial volatility in the past and is likely to remain volatile
in the future. Volatility can arise as a result of the activities of short
sellers and risk arbitrageurs and may have little relationship to our financial
results or prospects. The trading prices of our common stock is also affected by
the following factors, among others:
* Variations in anticipated or actual results of operations;
* Announcements of new products or technological innovations by
competitors; and
* Changes in earnings estimates of operational results by analysts.
Volatility can also result from divergence between our actual or
anticipated financial results and/or status of product development or
commercialization, and published expectations of analysts and announcements we
may make. We attempt to address possible divergence through our public
announcements and reports; however, the degree of specificity we can offer in
such announcements, and the likelihood that any forward-looking statements we
make will prove correct in actual results, can and will vary.
Our revenues and operating results have fluctuated significantly from
quarter-to-quarter in the past and may fluctuate significantly in the future as
a result of several factors, some of which are outside of our control. These
factors include:
* the size and timing of customer orders;
* our ability to manufacture and ship our products on a timely basis;
* our ability to obtain sufficient supplies to meet our product
manufacturing needs;
* our ability to meet customer product specifications and
qualifications;
* long and unpredictable sales cycles of up to a year or more;
* our ability to sustain high levels of quality across all product
lines; changes in our product mix;
12
<PAGE>
* customer cancellations or delivery deferrals;
* seasonality of customer demand; and
* difficulties in collecting accounts receivable.
Due to these factors, results are difficult to predict and you should
not rely on quarter-to-quarter comparisons of our results of operations as an
indication of our future performance. It is possible that, in future periods,
our results of operations may be below the expectations of public market
analysts and investors.
Moreover, the stock market from time to time has experienced extreme
price and volume fluctuations, which have particularly affected the market
prices for emerging growth companies and which have often been unrelated to the
operating performance of these companies. These broad market fluctuations may
adversely affect the market price of our common stock.
During the past three years from the date of this prospectus, the
market price per share of our common stock has fluctuated between approximately
$3.50 and $60.
OUR BUSINESS MAY BE HARMED IF WE BECOME SUBJECT TO SECURITIES CLASS
ACTION LITIGATION. In the past, following periods of volatility in the market
price of a company's common stock, securities class action litigation has been
brought against the issuing company. This type of litigation could be brought
against us in the future. The litigation could be expensive and divert
management's attention and resources, which could adversely affect our business
and results of operations whether or not our defense is successful. If the
litigation is determined against us, we could also be subject to significant
liabilities.
THE MARKET PRICE OF OUR STOCK MAY FALL IF OTHER SHAREHOLDERS SELL THEIR
STOCK. If our shareholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. These sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a price we deem appropriate.
As of March 15, 2000 we had 8,997,992 shares of our common stock
outstanding. Substantially all of these shares are eligible for sale in the
public market. In addition, we are currently registering for public sale 250,000
shares of common stock which may be offered upon conversion of our outstanding
2% Series A Convertible Preferred Stock and related warrants, and an
indeterminate number of shares of common stock (but not in excess of $100
million) offered directly by the Company.
THE VALUE OF YOUR STOCK MAY DECREASE IF OTHER SECURITY HOLDERS EXERCISE
THEIR OPTIONS OR WARRANTS OR CONVERT CONVERTIBLE SECURITIES. As of March 15,
2000 we had reserved 1,697,696 shares of our common stock for future issuance
upon exercise of outstanding options, warrants and convertible securities. If
these securities are exercised or converted, you may experience dilution in the
book value and earnings per share of your common stock. This may cause the
market price of our common stock to fall.
WE MAY ISSUE ADDITIONAL STOCK WITHOUT YOUR CONSENT. The Company has
authorized 20 million shares of common stock, of which 8,997,992 shares are
issued and outstanding as of March 15, 2000. We may seek shareholder
authorization to increase that amount at our next annual shareholders meeting.
The Board of Directors has authority, without action or vote of the
shareholders, to issue all or part of the authorized but unissued shares.
Additional shares may be issued in connection with future financings,
13
<PAGE>
acquisitions, employee plans, or otherwise. Any such issuance will dilute the
percentage ownership interest of existing shareholders, and may dilute the book
value of the common stock. We currently intend to sell up to $100 million in
common stock from time to time at prices related to current market prices
(subject to discount in some circumstances) in a registered public offering to
institutional investors. We do not know the number or price of shares to be
sold, or whether any shares will be sold. In addition, the Company is authorized
to issue up to 5 million undesignated shares, of which 1,500 shares have been
designated as 2% Series A Convertible Preferred Stock. As of March 15, 2000, 500
shares of 2% Series A Convertible Preferred Stock had been issued and were
outstanding. The Board of Directors can issue additional preferred stock in one
or more series and fix the terms of such stock without approval by shareholders.
Preferred stock may include the right to vote as a series on particular matters,
preferences as to dividends and liquidation, conversion and redemption rights
and sinking fund provisions. The issuance of preferred stock could affect the
rights of the holders of common stock adversely and reduce the value of the
common stock. In addition, specific rights granted to holders of preferred stock
could be used to restrict the Company's ability to merge with or sell its assets
to a third party.
OUR DIRECTORS' LIABILITY IS LIMITED UNDER MINNESOTA LAW. Our Articles
of Incorporation, as amended and restated, state that our directors are not
liable for monetary damages for breach of fiduciary duty, except for a breach of
the duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Minnesota law, and for any transaction in which
the director derived an improper personal benefit. In addition, our bylaws
provide that we shall indemnify our officers and directors to the fullest extent
permitted by Minnesota law for all expenses incurred in the settlement of any
actions against them in connection with their service as officers or directors
of the Company.
ANTI-TAKEOVER PROVISIONS. Minnesota law provides Minnesota corporations
with anti-takeover protections. These protective provisions could delay or
prevent a change in control of the Company by requiring shareholder approval of
significant acquisitions of voting stock of the Company. These provisions
operate even when many shareholders may think a takeover would be in their best
interests.
FORWARD-LOOKING STATEMENTS
This prospectus and the information which is incorporated by reference
in this prospectus include "forward-looking statements" within the meaning of
the securities laws. Statements about us and our expected financial position,
business and financing plans are forward-looking statements. Forward-looking
statements can be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," "seeks,"
"pro forma," "anticipates," "intends," or other variations or comparable
terminology, or by discussions of strategy or intentions. Although we believe
that the expectations reflected in our forward-looking statements are
reasonable, we cannot assure you that our expectations will prove to be correct.
Forward-looking statements are necessarily dependent upon assumptions, estimates
and data that may be incorrect or imprecise and involve known and unknown risks,
uncertainties and other factors. Accordingly, you should not consider our
forward-looking statements as predictions of future events or circumstances. A
number of factors could cause our actual results, performance, achievements or
industry results to be materially different from any future results, performance
or achievements expressed or implied by our forward-looking statements. These
factors include, but are not limited to: the competitive environment in our
industry; changes in economic conditions in general and in our business; changes
in prevailing interest rates and the availability of and terms of financing to
fund our business; our ability to attract and retain qualified personnel;
changes in our acquisition and capital expenditure plans; and other factors
discussed in this prospectus including, without limitation, those in our filings
with the Securities and Exchange Commission. Given these uncertainties,
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<PAGE>
you should not rely on our forward-looking statements in making an investment
decision. We disclaim any obligation to update you on any factors that may
affect the likelihood of realization of our expectations and we do not intend to
announce publicly the results of any revisions to any of our forward-looking
statements to reflect future events or developments. All written and oral
forward-looking statements attributable to us (including statements before and
after the date of this prospectus) are expressly qualified by these cautionary
statements.
USE OF PROCEEDS
We will not receive any proceeds from the conversion of the Preferred
Stock or the sale of common stock by the selling shareholders. We will receive
$1,750,000 in payment of the exercise price if the warrants are exercised in
full. Warrant exercise proceeds, if any, will be used for general corporate
purposes.
PRICE RANGE OF COMMON STOCK
Our common stock is listed and traded under the symbol "APAT" on the
Nasdaq and under the same symbol in the Nasdaq SmallCap Market. The following
table shows the high and low closing sale prices as reported by the Nasdaq
SmallCap Market during the last two fiscal years ended March 31, 1998 and 1999
and the first three quarters of our fiscal year ending March 31, 2000.
- --------------------------------------------------------------------------------
FISCAL YEAR 1998 1998 1999 1999 2000 2000
SALE PRICE LOW HIGH LOW HIGH LOW HIGH
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
First Quarter $5.25 $6.50 $5.62 $6.75 $5.25 $8.50
- --------------------------------------------------------------------------------
Second Quarter 5.37 6.62 4.25 6.00 3.50 7.93
- --------------------------------------------------------------------------------
Third Quarter 6.12 9.25 4.00 5.00 3.88 19.50
- --------------------------------------------------------------------------------
Fourth Quarter 5.50 8.00 4.75 10.00 -- --
- --------------------------------------------------------------------------------
We have never declared or paid a dividend on our common stock and the
Board of Directors currently intends to retain all earnings, if any, for use in
the business for the foreseeable future. Any future determination as to
declaration and payment of dividends will be made at the discretion of the Board
of Directors, subject to covenants in any loan documents restricting the payment
of dividends. Our current loan agreements restrict our ability to pay dividends.
SELLING SHAREHOLDERS
On March 15, 2000, Strong River Investments, Inc., Bay Harbor
Investments, Inc. and Ampal American-Israel Corporation purchased an aggregate
of $5,000,000 of 2% Series A Convertible Preferred Stock and warrants from APA
Optics in a private placement transaction. Strong River, Bay Harbor and Ampal
received 300, 100 and 100 shares, respectively, of Preferred Stock which may be
converted into our common stock. In addition, Strong River received warrants to
acquire 30,000 shares of our common stock, Bay Harbor received warrants to
acquire 10,000 shares of our common stock and Ampal received warrants to acquire
10,000 shares of our common stock.
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The warrants issued to Strong River, Bay Harbor and Ampal are
exercisable at $35.00 and expire on March 15, 2005. The Preferred Stock carries
a 2% cumulative dividend payable upon conversion in cash or common stock. As of
the date of this prospectus, the Preferred Stock is convertible into shares of
our common stock at $35.00 per share. Beginning September 14, 2000, and each
monthly period thereafter while shares of the Preferred Stock are outstanding,
the conversion price will reset in accordance with the formula set forth in the
Certificate of Designations, Rights, Preferences and Limitations of Series A 2%
Convertible Preferred Stock of APA. The conversion price is also subject to
adjustment pursuant to the anti-dilution provisions set forth in such
certificate.
Any shares of Preferred Stock outstanding three years after the funding
date automatically convert into shares of our common stock at the then
applicable conversion price. The Preferred Stock is redeemable under certain
circumstances as stated in the certificate.
A holder of the Preferred Stock may not convert into shares of common
stock if after the conversion, the holder, together with its affiliates, would
beneficially own over 9.999% of the outstanding shares of our common stock. This
restriction may be waived by a holder on not less than 61 days' notice to us.
In addition, as long as our common stock is listed for trading on
Nasdaq, we may not issue common stock on conversion of the Preferred Stock in an
amount which exceeds 19.999% of the outstanding common stock immediately prior
to the sale of the Preferred Stock without obtaining prior shareholder approval.
Since the number of shares of our common stock issuable upon conversion
of the Preferred Stock will change based upon fluctuations of the market price
of our common stock prior to a conversion, the actual number of shares of our
common stock that will be issued under the Preferred Stock, and consequently the
number of shares of our common stock that will be beneficially owned by Strong
River, Bay Harbor or Ampal cannot be determined at this time. Because of this
fluctuating characteristic, we agreed to register a number of shares of our
common stock that exceeds the number of our shares of common stock currently
beneficially owned by them. The number of shares of our common stock listed in
the table below as being beneficially owned by Strong River, Bay Harbor or Ampal
includes the shares of our common stock that are issuable to each of them,
subject to the 9.999% limitation, upon conversion of their Preferred Stock and
exercise of their warrants. However, the 9.999% limitation would not prevent
Strong River, Bay Harbor or Ampal from acquiring and selling in excess of 9.999%
of our common stock through a series of conversions and sales under the
Preferred Stock and acquisitions and sales under the warrants.
In connection with the March 2000 financing, Wharton Capital Partners,
Ltd., received warrants to purchase 7,500 shares of our common stock at $49.47
per share for its role as placement agent. The 7,500 shares are also being
offered to the public by means of this prospectus.
The following table sets forth the name of each person who is offering
shares of common stock by this prospectus, the number of shares of common stock
owned by each person now, the number of shares of common stock that may be sold
in this offering, and the number of shares of common stock each person will own
after the offering, assuming they sell all of the shares offered.
16
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<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
BENEFICIAL OWNERSHIP PRIOR SHARES TO BE SOLD IN BENEFICIAL OWNERSHIP
NAME TO OFFERING OFFERING AFTER OFFERING
- ------------------------------------------------------------------------------------------------------------
SHARES PERCENTAGE SHARES PERCENTAGE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Strong River Investments, Inc. 115,715(1) 1.3% 180,000(2) 0 0
- ------------------------------------------------------------------------------------------------------------
Bay Harbor Investments, Inc. 38,571(3) * 60,000(2) 0 0
- ------------------------------------------------------------------------------------------------------------
Ampal American-Israel Corporation 38,571(4) * 60,000(2) 0 0
- ------------------------------------------------------------------------------------------------------------
Wharton Capital Partners, Inc. 7,500 * 7,500
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Less than 1%.
(1) Consists of the shares of our common stock issuable to Strong River,
subject to the 9.999% limitation, upon conversion of its Preferred
Stock and exercise of its warrants.
(2) Pursuant to the agreement with Strong River, Bay Harbor and Ampal, we
are required to register such number of shares of common stock equal to
the sum of (i) 175% of the number of shares of common stock issuable
upon conversion in full of their Preferred Stock, assuming for such
purposes that their Preferred Stock is outstanding for three years and
that such conversion occurred on April 3, 2000 (which is the date of
filing of this registration statement with the Commission), and (ii)
the number of shares of common stock issuable upon exercise in full of
the warrants held by Strong River, Bay Harbor and Ampal.
(3) Consists of the shares of our common stock issuable to Bay Harbor,
subject to the 9.999% limitation, upon conversion of its Preferred
Stock and exercise of its warrants.
(4) Consists of the shares of our common stock issuable to Ampal, subject
to the 9.999% limitation, upon conversion of its Preferred Stock and
exercise of its warrants.
(5) Consists of the shares of our common stock issuable to Wharton Capital
Partners, Inc. if it exercises the warrant it received for placing the
Preferred Stock.
PLAN OF DISTRIBUTION
The selling shareholders have advised us that there are presently no
underwriting arrangements with respect to the sale of the shares; however, such
arrangements may exist in the future.
The selling shareholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling shareholders may use any one or more of the
following methods when selling shares:
* ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
* block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
* purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
* an exchange distribution in accordance with the rules of the
applicable exchange;
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* privately negotiated transactions;
* short sales;
* broker-dealers may agree with the selling shareholders to sell a
specified number of such shares at a stipulated price per share;
* a combination of any such methods of sale; and
* any other method permitted pursuant to applicable law.
The selling shareholders may also engage in short sales against the
box, puts and calls and other transactions in securities of the Company or
derivatives of Company securities and may sell or deliver shares in connection
with these trades. The selling shareholders may pledge their shares to their
brokers under the margin provisions of customer agreements. If a selling
shareholder defaults on a margin loan, the broker may, from time to time, offer
and sell the pledged shares.
Broker-dealers engaged by the selling shareholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling shareholders (or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling shareholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling shareholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
The selling shareholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
We are required to pay all fees and expenses incident to the
registration of the shares, including up to $5,000 of the fees and disbursements
of counsel to the selling shareholders. We have agreed to indemnify the selling
shareholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
EXPERTS AND LEGAL MATTERS
The financial statements of APA Optics, Inc. as of March 31, 1999 and
1998, and for each of the three years in the period ended March 31, 1999,
incorporated by reference in this prospectus and in the registration statement
of which this prospectus is a part have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon (which contains an
explanatory paragraph describing conditions that raise substantial doubt about
the ability of APA Optics to continue as a going concern, as described in Note 2
to the financial statements) also incorporated by reference herein. Such
financial statements have been incorporated by reference in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
18
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The validity of the shares of common stock offered by this prospectus
has been passed upon for the Company by Moss & Barnett, A Professional
Association, Minneapolis, Minnesota.
MATERIAL CHANGES
There have been no material changes in the financial condition or
business of the Company since its Report on Form 10-Q for the quarter ended
December 31, 1999 except for our placement of $5 million in 2% Series A
convertible preferred stock and related warrants for purchase of 50,000 shares
of common stock in March 2000.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation limit personal liability for breach of
the fiduciary duty of our directors, to the fullest extent provided by the
Minnesota Business Corporation Act. The Articles eliminate the personal
liability of directors for damages occasioned by breach of fiduciary duty,
except for liability based on the director's duty of loyalty to APA Optics,
liability for acts or omissions not made in good faith, liability for acts or
omissions involving intentional misconduct, liability based on payments of
improper dividends, liability based on violations of state securities laws, and
liability occurring prior to the date such provision was added. Any amendment to
or repeal of these provisions will not be applied retroactively to adversely
affect any right or protection of a director with respect to any acts or
omissions occurring prior to the amendment or repeal. In addition, the Minnesota
Business Corporation Act and our Bylaws provide that our officers and directors
have the right to indemnification from the Company for liability arising out of
certain actions to the fullest extent permissible by law.
This indemnification may be available for liabilities arising in
connection with this offering. However, in the opinion of the Securities and
Exchange Commission, indemnification for liabilities arising under the
Securities Act of 1933 is against public policy as expressed in the Act and is
therefore unenforceable.
ANTITAKEOVER STATUTE
Section 302A.671 of the Minnesota Business Corporation Act (the
"Minnesota Act") applies, with certain exceptions, to any acquisition of voting
stock of APA Optics, including the receipt of a proxy, from a person other than
APA Optics, and other than in connection with certain mergers and exchanges to
which APA Optics is a party, that results in the beneficial ownership by the
acquiring party of 20% or more of the Company's voting stock then outstanding.
Under Section 302A.671 any such acquisition must be approved by a majority vote
of our shareholders. In general, in the absence of such approval, shares
exceeding the threshold are denied voting rights and may be redeemed by us at
the then fair market value within 30 days after the acquiring person fails to
give a timely information statement to the Company or after the date that
shareholders vote not to grant voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Act generally prohibits any business
combination by a Minnesota company with any shareholder that purchases 10% or
more of the company's voting shares (an "interested shareholder") within four
years following the interested shareholder's share acquisition date, unless the
business combination is approved by a committee of all of the disinterested
members of the Board of Directors of the company before the share acquisition.
These statutory provisions could delay or prevent a change in control
of APA Optics.
19
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307,500 SHARES
APA OPTICS, INC.
COMMON STOCK
----------------------
PROSPECTUS
----------------------
________________, 2000
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the issuance and distribution
of the Common Stock registered hereby, other than underwriting discounts and
fees, are set forth in the following table:
SEC registration fee................................. $ 2,304
Legal fees and expenses.............................. 10,000
Accounting fees and expenses......................... 5,000
Blue Sky fees and expenses........................... 1,000
Printing and engraving expenses...................... 5,000
Miscellaneous........................................ 1,000
-------
Total............................................ $24,304
=======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Unless prohibited in a corporation's articles or bylaws, Minnesota
Statutes ss.302A.521 requires indemnification of officers, directors, employees
and agents, under certain circumstances, against judgments, penalties, fees,
settlements and reasonable expenses (including attorneys' fees and
disbursements) incurred by such person in connection with a threatened or
pending proceeding with respect to the acts or omissions of such person in his
or her official capacity. The general effect of Minnesota Statutes ss.302A.521
is to reimburse (or pay on behalf of) directors and officers of the registrant
any personal liability that may be imposed for certain acts performed in their
capacity as directors and officers of the registrant, except where such persons
have not acted in good faith. The Bylaws of the Registrant provide for such
indemnification to the maximum extent permitted by Minnesota Statutes.
ITEM 16. EXHIBITS
Exhibit No. Description of Exhibit
*3.1 Restated Articles of Incorporation, as amended
*3.2 Bylaws, as amended
4.5(a) Certificate of Designation of 2% Convertible Preferred
Stock
4.5(b) Form of common stock warrant issued in connection with
the 2% Series A Convertible Preferred Stock
5.1 Opinion and Consent of Counsel to APA Optics
23.1 Consent of Ernst & Young LLP
2
<PAGE>
23.2 Consent of Counsel to APA Optics (filed as part of
Exhibit 5.1)
- --------------------------
* Incorporated by reference to exhibit filed as a part of Form 10-KSB for the
fiscal year ended March 31, 1995.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act") may be permitted to directors,
officers and controlling persons of the issuer pursuant to the foregoing
provisions or otherwise, the issuer has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the issuer of expenses
incurred or paid by a director, officer or controlling person of the issuer in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the issuer will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) Because the registration statement incorporates Exchange Act
documents filed subsequent to the effective date of the registration statement,
the Company hereby undertakes that, for purposes of determining any liability
under the Securities Act of 1933, each filing of the Company's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934 (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) If the Company relies upon Rule 430A under the Act, the Company
undertakes that, for determining any liability under the Act, it will:
(1) Treat the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed under Rule 424(b)(1) or (4)
or 497(h) under the Act as part of this registration statement as of
the time the Commission declared it effective.
(2) Treat each post-effective amendment that contains a form
of prospectus as a new registration statement for the securities
offered in the registration statement, and that offering of the
securities at that time as the initial bona fide offering of those
securities.
(d) Insofar as the Company is registering securities under Rule 415 of
the Securities Act, the Company will:
(1) file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement
to include any additional or changed material information on the plan
of distribution.
3
<PAGE>
(2) for determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly authorized this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Minneapolis, State of Minnesota, on April 3,
2000.
APA OPTICS, INC.
By: /s/ Anil K. Jain
-------------------------------------
Anil K. Jain, Chief Executive Officer
(Principal executive officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Anil K. Jain, his true and lawful
attorney-in-fact and agent with full power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, and to
sign any registration statement for the same offering covered by Rule 462(b)
promulgated under the Securities Act of 1933, as amended, and any and all
amendments (including post-effective amendments) thereto, and to file the same,
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming that said attorney-in-fact and agent or his substitute, may lawfully
do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Anil K. Jain Chief Executive Officer and Chief April 3, 2000
- -------------------------- Financial Officer (Principal
Anil K. Jain executive officer and principal
financial officer)
/s/ Kenneth A. Olsen Director April 3, 2000
- --------------------------
Kenneth A. Olsen
/s/ Gregory J. Von Wald Director April 3, 2000
- --------------------------
Gregory J. Von Wald
/s/ Michael A. Gort Director April 3, 2000
- --------------------------
Michael A. Gort
5
<PAGE>
/s/ William R. Franta Director April 3, 2000
- --------------------------
William R. Franta
/s/ Randal J. Becker Principal accounting officer April 3, 2000
- --------------------------
Randal J. Becker
*Executed by the undersigned as attorney-in-fact
for the named signatory
- ---------------------------
Anil K. Jain
6
EXHIBIT 4.5(a)
PREFERRED STOCK S-3
CERTIFICATE OF DESIGNATION OF VOTING POWER,
PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL AND
OTHER SPECIAL RIGHTS
AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS
OF
2% SERIES A CONVERTIBLE PREFERRED STOCK
OF
APA OPTICS, INC.
-----------------
Pursuant to Section 302A.401 of the
Minnesota Business Corporation Act
-----------------
APA Optics, Inc., a Minnesota corporation (the "Company"), certifies
that pursuant to the authority contained in Article 3.03 of its Articles of
Incorporation, as amended (the "Articles of Incorporation"), and in accordance
with the provisions of Sections 302A.401 and 302A.239 of the Minnesota Business
Corporation Act, the Board of Directors of the Company (the "Board of
Directors"), pursuant to minutes of action effective March 13, 2000, duly
approved and adopted the following resolution which resolution remains in full
force and effect on the date hereof:
RESOLVED, that pursuant to the authority vested in the Board of
Directors by the Articles of Incorporation, the Board of Directors does hereby
designate, create, authorize and provide for the issue of preferred stock having
a par value of $.01 per share, which shall be designated as 2% Series A
Convertible Preferred Stock (the "Preferred Stock") consisting of 500 shares,
including 1,000 shares reserved for possible future issuance from time to time
and shall have the voting powers, preferences and relative participating,
optional and other special rights, and qualifications, limitations, and
restrictions thereon as follows:
<PAGE>
TERMS OF PREFERRED STOCK
Section 1. Designation, Amount and Par Value. The series of
preferred stock shall be designated as its 2% Series A Convertible Preferred
Stock (the "Preferred Stock") and the number of shares so designated shall be
500 (which shall not be subject to increase without the consent of the holders
of the Preferred Stock (each, a "Holder" and collectively, the "Holders")). Each
share of Preferred Stock shall have a par value of $.01 and a stated value equal
to the sum of $10,000 plus all unpaid and accrued dividends to the date of
determination to the extent not previously paid in cash in accordance with the
terms hereof (the "Stated Value").
Section 2. Dividends.
(a) Holders shall be entitled to receive, out of funds legally
available therefor, and the Company shall pay, cumulative dividends at the rate
per share (as a percentage of the Stated Value per share) of 2% per annum,
payable on each Conversion Date (as defined in Section 5(a)) for such share, in
cash or by accretion of the Stated Value. Subject to the terms and conditions
herein, the decision whether to accrete dividends hereunder to the Stated Value
or to pay for dividends in cash shall be at the discretion of the Company. The
Company shall provide the Holders written notice of its intention to accrete
dividends hereunder to the Stated Value or pay dividends in cash not less than
ten days prior to each Conversion Date for so long as shares of Preferred Stock
are outstanding (the Company may indicate in such notice that the election
contained in such notice shall continue for later periods until revised).
Failure to timely provide such written notice shall be deemed (if permitted
hereunder) an election by the Company to accrete dividends hereunder to the
Stated Value. Dividends on the Preferred Stock shall be calculated on the basis
of a 360-day year, shall accrue daily commencing on the Original Issue Date (as
defined in Section 8), and shall be deemed to accrue from such date whether or
not earned or declared and whether or not there are profits, surplus or other
funds of the Company legally available for the payment of dividends. Except as
otherwise provided herein, if at any time the Company pays less than the total
amount of dividends then accrued on account of the Preferred Stock, such payment
shall be distributed ratably among the Holders based upon the number of shares
of Preferred Stock held by each Holder. Any dividends to be paid in cash
hereunder that are not paid within three Trading Days (as defined in Section 8)
following a dividend payment date shall continue to accrue and shall entail a
late fee, which must be paid in cash, at the rate of 18% per annum or the lesser
rate permitted by applicable law (such fees to accrue daily, from the date such
dividend is due hereunder through and including the date of payment).
(b) Notwithstanding anything to the contrary contained herein, the
Company must pay dividends in cash if:
(i) the number of shares of Common Stock (as defined in
Section 8) at the time authorized, unissued and unreserved for all purposes is
insufficient to accrete such dividends to the Stated Value to permit conversion
in full of all outstanding Stated Value;
(ii) after the Dividend Effectiveness Date (as defined in
Section 8), Underlying Shares (as defined in Section 8) (x) are not registered
for resale pursuant to an effective Underlying Shares Registration Statement (as
defined in Section 8) and (y) may not be
2
<PAGE>
sold without volume restrictions pursuant to Rule 144 promulgated under the
Securities Act (as defined in Section 8), as determined by counsel to the
Company pursuant to a written opinion letter, addressed to the Company's
transfer agent in the form and substance acceptable to the applicable Holder and
such transfer agent (if the Company is permitted and elects to pay dividends in
shares of Common Stock under this clause (ii) prior to the Dividend
Effectiveness Date and thereafter an Underlying Shares Registration Statement
shall be declared effective by the Commission (as defined in Section 8), the
Company shall, within three Trading Days after the date of such declaration of
effectiveness, exchange such Underlying Shares for shares of Common Stock that
are free of restrictive legends of any kind);
(iii) the Common Stock is not then listed or quoted on the
Nasdaq SmallCap Market ("NASDAQ"), or on the New York Stock Exchange, American
Stock Exchange or Nasdaq National Market (each, a "Subsequent Market"); or
(iv) the accretion of such dividends to the Stated Value and
subsequent conversions of all then outstanding Stated Value would result in a
violation of Section 5(a)(iii) or the rules of the Nasdaq Stock Market or any
other rules and regulations governing any Subsequent Market on which the Common
Stock is then listed or quoted for trading.
(c) So long as any Preferred Stock shall remain outstanding, neither
the Company nor any subsidiary thereof shall redeem, purchase or otherwise
acquire directly or indirectly any Junior Securities (as defined in Section 8),
nor shall the Company directly or indirectly pay or declare any dividend or make
any distribution (other than a dividend or distribution described in Section 5
or dividends due and paid in the ordinary course on preferred stock of the
Company at such times when the Company is in compliance with its payment and
other obligations hereunder) upon, nor shall any distribution be made in respect
of, any Junior Securities, nor shall any monies be set aside for or applied to
the purchase or redemption (through a sinking fund or otherwise) of any Junior
Securities or shares pari passu with the Preferred Stock. However, the Company
may accept shares of Junior Securities as payment of the exercise price of stock
options by the Company's employees, officers and directors.
Section 3. Voting Rights. Except as otherwise provided herein and as
otherwise required by law, the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, the Company
shall not, without the affirmative vote of the Holders of a majority of the
shares of the Preferred Stock then outstanding, (a) alter or change adversely
the powers, preferences or rights given to the Preferred Stock or alter or amend
this Certificate of Designation, (b) authorize or create any class of stock
ranking as to dividends or distribution of assets upon a Liquidation (as defined
in Section 4) senior to or otherwise pari passu with the Preferred Stock, (c)
amend its certificate or articles of incorporation or other charter documents so
as to affect adversely any rights of the Holders, (d) increase the authorized
number of shares of Preferred Stock, or (e) enter into any agreement with
respect to the foregoing.
Section 4. Liquidation. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a "Liquidation"),
the Holders shall be entitled to receive out of the assets of the Company,
whether such assets are capital or surplus, for each share of Preferred Stock an
amount equal to the Stated Value per share before any distribution or
3
<PAGE>
payment shall be made to the holders of any Junior Securities, and if the assets
of the Company shall be insufficient to pay in full such amounts, then the
entire assets to be distributed to the Holders shall be distributed among the
Holders ratably in accordance with the respective amounts that would be payable
on such shares if all amounts payable thereon were paid in full. A sale,
conveyance or disposition of 50% or more of the assets of the Company or the
effectuation by the Company of a transaction or series of related transactions
in which more than 33% of the voting power of the Company is disposed of, or a
consolidation or merger of the Company with or into any other company or
companies into one or more companies not wholly-owned by the Company shall not
be treated as a Liquidation, but instead shall be subject to the provisions of
Section 5. The Company shall mail written notice of any such Liquidation, not
less than 45 days prior to the payment date stated therein, to each record
Holder.
Section 5. Conversion.
(a)(i) Conversions at Option of Holder. Each share of Preferred
Stock shall be convertible into shares of Common Stock (subject to the
limitations set forth in Section 5(a)(iii)), at the Conversion Ratio (as defined
in Section 8), at the option of the Holder at any time and from time to time for
a period of three years (unless extended pursuant to the terms hereof) from and
after the Original Issue Date (the "Initial Conversion Date"). Holders shall
effect conversions by surrendering the certificate or certificates representing
the shares of Preferred Stock to be converted to the Company, together with the
form of conversion notice attached hereto as Exhibit A (a "Conversion Notice").
Each Conversion Notice shall specify the number of shares of Preferred Stock to
be converted and the date on which such conversion is to be effected, which date
may not be prior to the date the Holder delivers such Conversion Notice pursuant
to the terms of Section 5(h) hereof (the "Conversion Date"). If no Conversion
Date is specified in a Conversion Notice, the Conversion Date shall be the date
that a Conversion Notice is deemed delivered hereunder. If the Holder is
converting less than all shares of Preferred Stock represented by the
certificate or certificates tendered by the Holder with the Conversion Notice,
or if a conversion hereunder cannot be effected in full for any reason, the
Company shall promptly deliver to such Holder (in the manner and within the time
set forth in Section 5(b)) a certificate representing the number of shares of
Preferred Stock not converted.
(ii) Automatic Conversion. Subject to the provisions of this
paragraph and Section 5(a)(iii)(B), all outstanding shares of Preferred Stock
for which a Conversion Notice has not previously been received or of which
redemption has not been made or required hereunder shall be automatically
converted on the earlier of (i) the third anniversary of the Original Issue Date
at the then applicable Conversion Price (as defined in Section 5(c)(i)), and
(ii) the Trading Day, following the date on which the Underlying Shares
Registration Statement is declared effective (the "Effective Date") on which the
Closing Price (as defined in Section 8) is higher than $50.00 (subject to
equitable adjustment for stock split, combinations and similar events) for 20
consecutive Trading Days. The conversion contemplated by this paragraph shall
not occur without the consent of the Holder at such time as (a)(1) an Underlying
Shares Registration Statement is not then effective or (2) the Holder is not
permitted to resell Underlying Shares pursuant to Rule 144(k) promulgated under
the Securities Act, without volume restrictions, as evidenced by an opinion
letter of counsel acceptable to the Holder and the transfer agent for the Common
Stock; (b) there are not sufficient shares of Common Stock authorized and
reserved for issuance upon such conversion; or (c) the Company shall have
4
<PAGE>
defaulted in any material respect on its covenants and obligations hereunder or
under the Purchase Agreement or Registration Rights Agreement (each as defined
in Section 7). Notwithstanding the foregoing, the three-year period for
conversion under clause (i) of this Section shall be extended (on a day-for-day
basis) for any Trading Days after the Effective Date that a Holder is unable to
resell Underlying Shares under an Underlying Shares Registration Statement due
to (a) the Common Stock not being listed or quoted for trading on the NASDAQ or
any Subsequent Market, (b) the failure of such Underlying Shares Registration
Statement to be declared effective, or if so declared, to remain effective
during the Effectiveness Period (as defined in the Registration Rights
Agreement) as to all Underlying Shares, or (c) the suspension of the Holder's
right to resell Underlying Shares thereunder. The provisions of Sections
5(a)(iii)(A) and (B) shall not apply to any automatic conversion pursuant to
this Section 5(a)(ii).
(iii) Certain Conversion Restrictions.
(A) A Holder may not convert shares of Preferred Stock or
receive shares of Common Stock as payment of dividends hereunder to the extent
such conversion or receipt of such dividend payment would result in the Holder,
together with any affiliate thereof, beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act (as defined in Section 8) and
the rules promulgated thereunder) in excess of 9.999% of the then issued and
outstanding shares of Common Stock, including shares issuable upon conversion
of, and payment of dividends on, the shares of Preferred Stock held by such
Holder after application of this Section. Since the Holder will not be obligated
to report to the Company the number of shares of Common Stock it may hold at the
time of a conversion hereunder, unless the conversion at issue would result in
the issuance of shares of Common Stock in excess of 9.999% of the then
outstanding shares of Common Stock without regard to any other shares which may
be beneficially owned by the Holder or an affiliate thereof, the Holder shall
have the authority and obligation to determine whether the restriction contained
in this Section will limit any particular conversion hereunder and to the extent
that the Holder determines that the limitation contained in this Section
applies, the determination of which portion of the shares of Preferred Stock are
convertible shall be the responsibility and obligation of the Holder. If the
Holder has delivered a Conversion Notice for shares of Preferred Stock that,
without regard to any other shares of Common Stock that the Holder or its
affiliates may beneficially own, would result in the issuance of shares of
Common Stock in excess of the permitted amount hereunder, the Company shall
notify the Holder of this fact and shall honor the conversion for the maximum
number of shares of Preferred Stock permitted to be converted on such Conversion
Date in accordance with the periods described in Section 5(b) and, at the option
of the Holder, either retain shares of Preferred Stock tendered for conversion
in excess of the permitted amount hereunder for future conversions or return
such excess shares of Preferred Stock to the Holder. The provisions of this
Section may be waived by a Holder (but only as to itself and not as to any other
Holder) upon not less than 61 days prior notice to the Company. Other Holders
shall be unaffected by any such waiver.
(B) If the Common Stock is then listed for trading on the
NASDAQ or the Nasdaq National Market and the Company has not obtained the
Shareholder Approval (as defined below), then the Company may not issue in
excess of 1,749,507 of Common Stock upon conversions of Preferred Stock at a
price per share that is less than the Closing Price on the Trading Day
immediately preceding the Original Issue Date (such number of shares, the
5
<PAGE>
"Issuable Maximum"). The Issuable Maximum equals 19.999% of the number of shares
of Common Stock outstanding immediately prior to the closing of transactions set
forth in the Purchase Agreement. Each Holder shall be entitled to a portion of
the Issuable Maximum equal to the quotient obtained by dividing (x) the number
of shares of Preferred Stock issued and sold to such Holder on the Original
Issue Date by (y) the aggregate number of shares of Preferred Stock issued and
sold by the Company on the Original Issue Date. If any Holder shall no longer
hold shares of Preferred Stock, then such Holder's remaining portion of the
Issuable Maximum shall be allocated pro-rata among the remaining Holders. If on
any Conversion Date (A) the shares of Common Stock are listed for trading on the
NASDAQ or the Nasdaq National Market, (B) the Conversion Price then in effect is
such that the aggregate number of shares of Common Stock that would then be
issuable upon conversion in full of all then outstanding shares of Preferred
Stock, together with any shares of Common Stock previously issued upon
conversion of shares of Preferred Stock, would exceed the Issuable Maximum, and
(C) the Company shall not have previously obtained the vote of shareholders (the
"Shareholder Approval"), if any, as may be required by the applicable rules and
regulations of the Nasdaq Stock Market (or any successor entity) applicable to
approve the issuance of shares of Common Stock in excess of the Issuable Maximum
pursuant to the terms hereof, then the Company shall issue to the Holder
requesting a conversion a number of shares of Common Stock equal to such
Holder's pro-rata portion (which shall be calculated pursuant to the terms
hereof) of the Issuable Maximum and, with respect to the remainder of the
aggregate Stated Value of the shares of Preferred Stock then held by such Holder
for which a conversion in accordance with the Conversion Price would result in
an issuance of shares of Common Stock in excess of such Holder's pro-rata
portion (which shall be calculated pursuant to the terms hereof) of the Issuable
Maximum (the "Excess Stated Value"), the converting Holder shall have the option
to require the Company to either (1) use its best efforts to obtain the
Shareholder Approval applicable to such issuance as soon as is possible, but in
any event not later than the 90th day after such request, or (2) pay cash to the
converting Holder in an amount equal to the Mandatory Redemption Amount (as
defined in Section 8) for the Excess Stated Value. If the converting Holder
shall have elected the first option pursuant to the immediately preceding
sentence and the Company shall have failed to obtain the Shareholder Approval on
or prior to the 90th day after such request, then within three (3) days of such
90th day, the Company shall pay cash to the converting Holder in an amount equal
to the Mandatory Redemption Amount for the Excess Stated Value. If the Company
fails to pay the Mandatory Redemption Amount in full pursuant to this Section
within seven days after the date payable, the Company will pay interest thereon
at a rate of 18% per annum or such lesser maximum amount that is permitted to be
paid by applicable law, to the converting Holder, accruing daily from the
Conversion Date until such amount, plus all such interest thereon, is paid in
full. The Company and the Holder understand and agree that shares of Common
Stock issued to and then held by the Holder as a result of conversions of
Preferred Stock shall not be entitled to cast votes on any resolution to obtain
Shareholder Approval pursuant hereto.
(b)(i) Not later than three Trading Days after each Conversion Date,
the Company will deliver to the Holder (A) a certificate or certificates which
shall be free of restrictive legends and trading restrictions (other than those
required by Section 3.1(b) of the Purchase Agreement) representing the number of
shares of Common Stock being acquired upon the conversion of shares of Preferred
Stock, (B) one or more certificates representing the number of shares of
Preferred Stock not converted and (C) a bank check in the amount of accrued and
unpaid dividends (if the Company has elected or is required to pay accrued
dividends in cash).
6
<PAGE>
Notwithstanding the foregoing or anything to the contrary contained herein, the
Company shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon conversion of any shares of Preferred Stock until one
Trading Day after certificates evidencing such shares of Preferred Stock are
delivered for conversion to the Company, or the Holder of such Preferred Stock
notifies the Company that such certificates have been lost, stolen or destroyed
and provides a bond (or other adequate security) reasonably satisfactory to the
Company to indemnify the Company from any loss incurred by it in connection
therewith. The Company shall, upon request of the Holder, if available, use its
best efforts to deliver any certificate or certificates required to be delivered
by the Company under this Section electronically through the Depository Trust
Corporation or another established clearing corporation performing similar
functions. If in the case of any Conversion Notice such certificate or
certificates are not delivered to or as directed by the applicable Holder by the
third Trading Day after the Conversion Date, the Holder shall be entitled to
elect by written notice to the Company at any time on or before its receipt of
such certificate or certificates thereafter, to rescind such conversion, in
which event the Company shall immediately return the certificates representing
the shares of Preferred Stock tendered for conversion.
(ii) In addition to any other rights available to the Holder,
if the Company fails to deliver to the Holder such certificate or certificates
pursuant to Section 5(b)(i), by the third Trading Day after the Conversion Date,
and if after such third Trading Day the Holder purchases (in an open market
transaction or otherwise) Common Stock to deliver in satisfaction of a sale by
such Holder of the Underlying Shares which the Holder was entitled to receive
upon such conversion (a "Buy-In"), then the Company shall (A) pay in cash to the
Holder the amount by which (x) the Holder's total purchase price (including
brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the
product of (1) the aggregate number of shares of Common Stock that such Holder
was entitled to receive from the conversion at issue multiplied by (2) the
market price of the Common Stock at the time of the sale giving rise to such
purchase obligation and (B) at the option of the Holder, either return the
shares of Preferred Stock for which such conversion was not honored or deliver
to such Holder the number of shares of Common Stock that would have been issued
had the Company timely complied with its conversion and delivery obligations
under Section 5(b)(i). For example, if the Holder purchases Common Stock having
a total purchase price of $11,000 to cover a Buy-In with respect to an attempted
conversion of shares of Preferred Stock with respect to which the market price
of the Underlying Shares on the date of conversion totaled $10,000, under clause
(A) of the immediately preceding sentence the Company shall be required to pay
the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In. Nothing
herein shall limit a Holder's right to pursue any other remedies available to it
hereunder, at law or in equity, including, without limitation, a decree of
specific performance and/or injunctive relief with respect to the Company's
failure to timely deliver certificates representing shares of Common Stock upon
conversion of the shares of Preferred Stock as required pursuant to the terms
hereof.
(c)(i) The conversion price (the "Conversion Price") for each share
of Preferred Stock shall, subject to adjustment as hereinafter set forth, be as
follows:
1. On and after the Initial Conversion Date, the Conversion Price shall
equal $35.00 (the "Fixed Conversion Price").
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2. Commencing September 14, 2000, and during each monthly period
thereafter (each, a "Reset Date"), the Conversion Price will equal
the lower of (a) the Fixed Conversion Price and (b) the Reset
Conversion Price (as defined in Section 8).
3. For any conversion that occurs pursuant to clause (ii) of Section
5(a)(ii), the Conversion Price shall equal the Fixed Conversion
Price.
(ii) If the Company, at any time while any shares of Preferred
Stock are outstanding, shall (a) pay a stock dividend or otherwise make a
distribution or distributions on shares of its Junior Securities or pari passu
securities payable in shares of Common Stock, (b) subdivide outstanding shares
of Common Stock into a larger number of shares, (c) combine outstanding shares
of Common Stock into a smaller number of shares, or (d) issue by
reclassification and exchange of the Common Stock any shares of capital stock of
the Company, then the Fixed Conversion Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock outstanding
before such event and of which the denominator shall be the number of shares of
Common Stock outstanding after such event. Any adjustment made pursuant to this
Section 5(c)(ii) shall become effective immediately after the record date for
the determination of shareholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or re-classification.
(iii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall issue rights, warrants or options to all
holders of Common Stock entitling them to subscribe for or purchase shares of
Common Stock at a price per share less than the Per Share Market Value at the
record date mentioned below, then the Conversion Price shall be multiplied by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such rights, warrants or
options, plus the number of shares of Common Stock which the aggregate offering
price of the total number of shares so offered would purchase at such Per Share
Market Value, and the denominator of which shall be the sum of the number of
shares of Common Stock outstanding immediately prior to such issuance plus the
number of shares of Common Stock offered for subscription or purchase. Such
adjustment shall be made whenever such rights or warrants are issued, and shall
become effective immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants. However, upon the
expiration of any right, warrant or option to purchase shares of Common Stock
the issuance of which resulted in an adjustment in the Conversion Price pursuant
to this Section 5(c)(iii), if any such right, warrant or option shall expire and
shall not have been exercised, the Conversion Price shall immediately upon such
expiration shall be recomputed and effective immediately upon such expiration
shall be increased to the price which it would have been (but reflecting any
other adjustments in the Conversion Price made pursuant to the provisions of
this Section 5 upon the issuance of other rights or warrants) had the adjustment
of the Conversion Price made upon the issuance of such rights, warrants, or
options been made on the basis of offering for subscription or purchase only
that number of shares of Common Stock actually purchased upon the exercise of
such rights, warrants or options actually exercised.
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(iv) If the Company or any subsidiary thereof, as applicable
with respect to Common Stock Equivalents (as defined below), at any time while
any shares of Preferred Stock are outstanding, shall issue shares of Common
Stock or rights, warrants, options or other securities or debt that is
convertible into or exchangeable for shares of Common Stock ("Common Stock
Equivalents"), entitling any Person to acquire shares of Common Stock at a price
per share less than the Conversion Price (if the holder of the Common Stock or
Common Stock Equivalent so issued shall at any time, whether by operation of
purchase price adjustments, reset provisions, floating conversion, exercise or
exchange prices or otherwise, or due to warrants, options or rights issued in
connection with such issuance, be entitled to receive shares of Common Stock at
a price less than the Conversion Price, such issuance shall be deemed to have
occurred for less than the Conversion Price), then the Conversion Price shall be
multiplied by a fraction, the numerator of which shall be the number of shares
of Common Stock outstanding immediately prior to the issuance of such Common
Stock or such Common Stock Equivalents plus the number of shares of Common Stock
which the offering price for such shares of Common Stock or Common Stock
Equivalents would purchase at the Conversion Price, and the denominator of which
shall be the sum of the number of shares of Common Stock outstanding immediately
prior to such issuance plus the number of shares of Common Stock so issued or
issuable, provided, that for purposes hereof, all shares of Common Stock that
are issuable upon conversion, exercise or exchange of Common Stock Equivalents
shall be deemed outstanding immediately after the issuance of such Common Stock
Equivalents. Such adjustment shall be made whenever such Common Stock or Common
Stock Equivalents are issued. However, upon the expiration of any Common Stock
Equivalents the issuance of which resulted in an adjustment in the Conversion
Price pursuant to this Section, if any such Common Stock Equivalents shall
expire and shall not have been exercised, the Conversion Price shall immediately
upon such expiration be recomputed and effective immediately upon such
expiration be increased to the price which it would have been (but reflecting
any other adjustments in the Conversion Price made pursuant to the provisions of
this Section after the issuance of such Common Stock Equivalents) had the
adjustment of the Conversion Price made upon the issuance of such Common Stock
Equivalents been made on the basis of offering for subscription or purchase only
that number of shares of the Common Stock actually purchased upon the exercise
of such Common Stock Equivalents actually exercised. Notwithstanding anything
herein to the contrary, the following shall not be subject to the provisions of
this Section: (1) issuances of any stock or stock options under any employee
benefit plan of the Company whether now existing or approved by the Company and
its stockholders in the future, (2) the rights, options and warrants outstanding
prior to the date hereof and specified in Schedule 2.1(c) to the Purchase
Agreement, but not any modifications thereof and (3) the issuance of shares of
Common Stock in payment of the purchase price of a Strategic Transaction (as
defined below). For purposes of this Section, a "Strategic Transaction" shall
mean a transaction or relationship in which the Company issues shares of Common
Stock to an entity which is, itself or through its subsidiaries, an operating
company in a business related to the business of the Company and in which the
Company receives material benefits in addition to the investment of funds, but
shall not include a transaction in which the Company is issuing securities
primarily for the purpose of raising capital.
(v) If the Company, at any time while shares of Preferred
Stock are outstanding, shall distribute to all holders of Common Stock (and not
to Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding
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those referred to in Sections 5(c)(ii)-(iv) above), then in each such case the
Conversion Price at which each share of Preferred Stock shall thereafter be
convertible shall be determined by multiplying the Conversion Price in effect
immediately prior to the record date fixed for determination of shareholders
entitled to receive such distribution by a fraction of which the denominator
shall be the Per Share Market Value determined as of the record date mentioned
above, and of which the numerator shall be such Per Share Market Value on such
record date less the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed applicable to one
outstanding share of Common Stock as determined by the Board of Directors in
good faith. In either case the adjustments shall be described in a statement
provided to the Holders of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of Common Stock.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.
(vi) All calculations under this Section 5 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be. The
number of shares of Common Stock outstanding at any given time shall not include
shares owned or held by or for the account of the Company, and the disposition
of any such shares shall be considered an issue or sale of Common Stock.
(vii) Whenever the Fixed Conversion Price or the Conversion
Price is adjusted pursuant to Section 5(c)(ii),(iii), (iv) or (v), the Company
shall promptly mail to each Holder a notice setting forth the Conversion Price
or Fixed Conversion Price (as applicable) after such adjustment and setting
forth a brief statement of the facts requiring such adjustment.
(viii) In case of any reclassification of the Common Stock, or
any compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property (other than compulsory share exchanges
which constitute Change of Control Transactions (as defined in Section 8)), the
Holders of the Preferred Stock then outstanding shall have the right thereafter
to convert such shares only into the shares of stock and other securities, cash
and property receivable upon or deemed to be held by holders of Common Stock
following such reclassification or share exchange, and the Holders of the
Preferred Stock shall be entitled upon such event to receive such amount of
securities, cash or property as a holder of the number of shares of Common Stock
of the Company into which such shares of Preferred Stock could have been
converted immediately prior to such reclassification or share exchange would
have been entitled. This provision shall similarly apply to successive
reclassifications or share exchanges.
(ix) In case of any merger or consolidation of the Company
with or into another Person, or sale by the Company of more than one-half of the
assets of the Company (on an as valued basis) in one or a series of related
transactions, a Holder shall have the right thereafter to (A) convert its shares
of Preferred Stock into the shares of stock and other securities, cash and
property receivable upon or deemed to be held by holders of Common Stock
following such merger, consolidation or sale, and such Holder shall be entitled
upon such event or series of related events to receive such amount of
securities, cash and property as the shares of Common Stock into which such
shares of Preferred Stock could have been converted immediately prior to such
merger, consolidation or sale would have been entitled or (B) in the
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case of a merger or consolidation, (x) require the surviving entity to issue
shares of convertible preferred stock or convertible debentures with such
aggregate stated value or in such face amount, as the case may be, equal to the
Stated Value of the shares of Preferred Stock then held by such Holder, plus all
accrued and unpaid dividends and other amounts owing thereon, which newly issued
shares of preferred stock or debentures shall have terms identical (including
with respect to conversion) to the terms of the Preferred Stock (except, in the
case of debentures, as may be required to reflect the differences between debt
and equity) and shall be entitled to all of the rights and privileges of a
Holder of Preferred Stock set forth herein and in the agreements pursuant to
which the Preferred Stock was issued (including, without limitation, as such
rights relate to the acquisition, transferability, registration and listing of
such shares of stock or other securities issuable upon conversion thereof), and
(y) simultaneously with the issuance of such convertible preferred stock or
convertible debentures, shall have the right to convert such instrument only
into shares of stock and other securities, cash and property receivable upon or
deemed to be held by holders of Common Stock following such merger or
consolidation. In the case of clause (B), the conversion price applicable for
the newly issued shares of convertible preferred stock or convertible debentures
shall be based upon the amount of securities, cash and property that each share
of Common Stock would receive in such transaction, the Conversion Ratio
immediately prior to the effectiveness or closing date for such transaction and
the Conversion Price stated herein. The terms of any such merger, sale or
consolidation shall provide the Holders of Preferred Stock the right to receive
the securities, cash and property set forth in this Section upon any conversion
or redemption following such event. This provision shall similarly apply to
successive such events. The rights set forth in this Section 5(c)(ix) shall not
alter the rights of a Holder set forth in Section 7, provided, that, a Holder
may only exercise the rights set forth in this Section 5(c)(ix) or the rights
set forth in Section 7 with respect to a single event giving rise to such
rights.
(x) If (a) the Company shall declare a dividend (or any other
distribution) on the Common Stock, (b) the Company shall declare a special
nonrecurring cash dividend on or a redemption of the Common Stock, (c) the
Company shall authorize the granting to all holders of Common Stock rights or
warrants to subscribe for or purchase any shares of capital stock of any class
or of any rights, (d) the approval of any shareholders of the Company shall be
required in connection with any reclassification of the Common Stock, any
consolidation or merger to which the Company is a party, any sale or transfer of
all or substantially all of the assets of the Company, or any compulsory share
exchange whereby the Common Stock is converted into other securities, cash or
property, or (e) the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding-up of the affairs of the Company, then the
Company shall notify the Holders at their last addresses as they shall appear
upon the stock books of the Company, at least 10 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of Common Stock of record entitled to such
dividend, distribution, redemption, rights or warrants are to be determined or
(y) the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale, transfer or
share exchange.
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Holders are entitled to convert shares of Preferred Stock during the 20-day
period commencing the date of such notice to the effective date of the event
triggering such notice.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued shares of Common Stock solely for
the purpose of issuance upon conversion of Preferred Stock, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holders, not less than such number of shares of Common Stock as shall be
issuable (taking into account the provisions of Section 5(a) and Section 5(c))
upon the conversion of all outstanding shares of Preferred Stock. The Company
covenants that all shares of Common Stock that shall be so issuable shall, upon
issuance, be duly and validly authorized and issued and fully paid and
nonassessable.
(e) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock, but
may, if otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the Per Share Market Value at such time. If any
fraction of an Underlying Share would, except for the provisions of this
Section, be issuable upon a conversion hereunder, the Company shall pay an
amount in cash equal to the Conversion Ratio multiplied by such fraction.
(f) The issuance of certificates for Common Stock on conversion of
Preferred Stock shall be made without charge to the Holders thereof for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Company shall not be required
to pay any tax that may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate upon conversion in a name other
than that of the Holder of such shares of Preferred Stock so converted.
(g) Shares of Preferred Stock converted into Common Stock or
redeemed in accordance with the terms hereof shall be canceled and may not be
reissued.
(h) Any and all notices or other communications or deliveries to be
provided by the Holders of the Preferred Stock hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile or sent by a nationally recognized overnight courier service,
addressed to the attention of the Chief Financial Officer of the Company
addressed to 2950 N.E. 84th Lane, Blaine, Minnesota 55449 or to facsimile number
763-784-2038, or to such other address or facsimile number as shall be specified
in writing by the Company for such purpose. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile or sent by a nationally
recognized overnight courier service, addressed to each Holder at the facsimile
telephone number or address of such Holder appearing on the books of the
Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the Holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
6:30 p.m. (New York City time)(with confirmation of transmission), (ii) the date
after the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section later than
6:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York
City time) on such date (with confirmation of
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transmission), (iii) the next business day, if sent by a nationally recognized
overnight courier service, or (iv) upon actual receipt by the party to whom such
notice is required to be given.
Section 6. Optional Redemption.
(a) Subject to the provisions of this Section 6, from and after the
Original Issue Date, the Company shall have the right, upon 30 calendar days'
notice (an "Optional Redemption Notice") to the Holders, to redeem all or any
portion of the shares of Preferred Stock which have not previously been redeemed
or for which Conversion Notices shall not have been delivered, at a price equal
to the Optional Redemption Price (as defined in Section 8). If on the date of
the delivery of the Optional Redemption Notice the Conversion Price shall be
equal to or greater than $30.00, then the Company may only deliver an Optional
Redemption Notice if: (i) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes is sufficient to satisfy
the Company's conversion obligations of all shares of Preferred Stock then
outstanding, (ii) the Underlying Shares then outstanding are registered for
resale pursuant to an effective Underlying Shares Registration Statement
pursuant to which the Holders are permitted to sell Underlying Shares or the
Underlying Shares may be resold without volume restrictions pursuant to Rule
144(k) promulgated under the Securities Act, and (iii) the Common Stock is
listed for trading on the NASDAQ or on a Subsequent Market. If on the date of
the delivery of the Optional Redemption Notice the Conversion Price shall be
equal to or greater than $30.00, then each of clauses (i) - (iii) of the
immediately preceding sentence must be true during the entire 30 calendar days
between the date of delivery of an Optional Redemption Notice and the date of
payment of the Optional Redemption Price. The entire Optional Redemption Price
shall be paid in cash. If on the date of the delivery of the Optional Redemption
Notice the Conversion Price shall be equal to or greater than $30.00, then a
Holder may, subject to Section 5(a)(i) hereof, convert (and the Company shall
honor such conversions in accordance with the terms hereof) any or all of the
shares of Preferred Stock subject to an Optional Redemption Notice, provided,
that the Conversion Notice for such shares is delivered prior to the 27th
calendar day following the receipt by such Holder of such an Optional Redemption
Notice.
(b) Failure by the Company to pay any portion of the Optional
Redemption Price by the 30th calendar day following the date of the delivery by
the Company of an Optional Redemption Notice shall result in the invalidation ab
initio of the unpaid portion of such optional redemption, and, notwithstanding
anything herein to the contrary, the Company shall thereafter have no further
rights to optionally redeem any shares of Preferred Stock. In such event, the
Company shall, at the option of the Holder, either, (i) not later than three
Trading Days from receipt of Holder's request for such election, return to the
Holder all of the shares of Preferred Stock for which such Optional Redemption
Price has not been paid in full (the "Unpaid Redemption Shares") or (ii) convert
all or any portion of the Unpaid Redemption Shares, in which event the Per Share
Market Value for such shares shall be the lower of the Per Share Market Value
calculated on the date the payment of the Optional Redemption Price was
originally due and the Per Share Market Value as of the Holder's written demand
for conversion. If the Holder elects option (ii) above, the Company shall within
three Trading Days of its receipt of such election deliver to the Holder the
shares of Common Stock issuable upon conversion of the Unpaid Redemption Shares
subject to such Holder's conversion demand and otherwise perform its obligations
hereunder with respect thereto.
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Section 7. Redemption Upon Triggering Events.
(a) Upon the occurrence of a Triggering Event, each Holder shall (in
addition to all other rights it may have hereunder or under applicable law),
have the right, exercisable at the sole option of such Holder, to require the
Company to redeem all or a portion of the Preferred Stock then held by such
Holder for a redemption price, in cash, equal to the sum of (i) the Mandatory
Redemption Amount plus (ii) the product of (A) the number of Underlying Shares
issued in respect of conversions hereunder and then held by the Holder and (B)
the Per Share Market Value on the date such redemption is demanded or the date
the redemption price hereunder is paid in full, whichever is greater (such sum,
the "Redemption Price"). The Redemption Price shall be due and payable within
five Trading Days of the date on which the notice for the payment therefor is
provided by a Holder. If the Company fails to pay the Redemption Price hereunder
in full pursuant to this Section on the date such amount is due in accordance
with this Section, the Company will pay interest thereon at a rate of 18% per
annum (or the lesser amount permitted by applicable law), accruing daily from
such date until the Redemption Price, plus all such interest thereon, is paid in
full. For purposes of this Section, a share of Preferred Stock is outstanding
until such date as the Holder shall have received Underlying Shares upon a
conversion (or attempted conversion) thereof that meets the requirements hereof.
A "Triggering Event" means any one or more of the following events
(whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of any
court, or any order, rule or regulation of any administrative or governmental
body):
(i) the failure of an Underlying Shares Registration Statement
to be declared effective by the Commission on or prior to the 180th day after
the Original Issue Date;
(ii) if, during the Effectiveness Period, the effectiveness of
the Underlying Shares Registration Statement lapses for any reason for more than
an aggregate of seven Trading Days (which need not be consecutive Trading Days),
or the Holder shall not be permitted to resell Registrable Securities under the
Underlying Shares Registration Statement for more than an aggregate of seven
Trading Days (which need not be consecutive Trading Days);
(iii) the failure of the Common Stock to be listed for trading
on the NASDAQ or on a Subsequent Market or the suspension of the Common Stock
from trading on the NASDAQ or on a Subsequent Market, in either case, for more
than seven Trading Days (which need not be consecutive Trading Days);
(iv) the Company shall fail for any reason to deliver
certificates representing Underlying Shares issuable upon a conversion hereunder
that comply with the provisions hereof prior to the tenth day after the
Conversion Date or the Company shall provide notice to any Holder, including by
way of public announcement, at any time, of its intention not to comply with
requests for conversion of any shares of Preferred Stock in accordance with the
terms hereof;
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(v) the Company shall be a party to any Change of Control
Transaction, or shall redeem more than a de minimis number of shares of Common
Stock or other Junior Securities (other than redemptions of Underlying Shares);
(vi) an Event (as defined in the Registration Rights
Agreement) shall not have been cured to the satisfaction of the Holders prior to
the expiration of 60 days from the Event Date (as defined in the Registration
Rights Agreement) relating thereto (other than an Event resulting from a failure
of an Underlying Shares Registration Statement to be declared effective by the
Commission on or prior to the 180th day after the Original Issue Date, which
shall be covered by Section 7(a)(i));
(vii) the Company shall fail for any reason to pay in full the
amount of cash due pursuant to a Buy-In within seven days after notice therefor
is delivered hereunder or shall fail to pay all amounts owed on account of an
Event within seven days of the date due;
(viii) the Company shall fail to have available a sufficient
number of authorized and unreserved shares of Common Stock to issue to such
Holder upon a conversion hereunder; or
(ix) the Company shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any breach of
the Transaction Documents (as defined in Section 8), and such failure or breach
shall not, if subject to the possibility of a cure by the Company, have been
remedied within twenty Business Days after the date on which written notice of
such failure or breach shall have been given.
Section 8. Definitions. For the purposes hereof, the following terms
shall have the following meanings:
"Change of Control Transaction" means the occurrence of any of (i)
an acquisition after the date hereof by an individual or legal entity or "group"
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
effective control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 33% of the
voting securities of the Company, (ii) a replacement at one time or over time of
more than one-half of the members of the Company's board of directors which is
not approved by a majority of those individuals who are members of the board of
directors on the date hereof (or by those individuals who are serving as members
of the board of directors on any date whose nomination to the board of directors
was approved by a majority of the members of the board of directors who are
members on the date hereof), (iii) the merger of the Company with or into
another entity that is not wholly-owned by the Company, consolidation or sale of
50% or more of the assets of the Company in one or a series of related
transactions, or (iv) the execution by the Company of an agreement to which the
Company is a party or by which it is bound, providing for any of the events set
forth above in (i), (ii) or (iii).
"Closing Price" means on any particular date (a) the closing sales
price per share of Common Stock on such date on the NASDAQ or on the Subsequent
Market on which the Common Stock is then listed or quoted, or if there is no
such price on such date, then the closing sales price on the NASDAQ or on such
Subsequent Market on the date nearest preceding such
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date, or (b) if the Common Stock is not then listed or quoted on the NASDAQ or
on a Subsequent Market, the closing sales price for a share of Common Stock in
the over-the-counter market, as reported by the National Quotation Bureau
Incorporated (or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or (c) if the Common
Stock is not then reported by the National Quotation Bureau Incorporated (or
similar organization or agency succeeding to its functions of reporting prices),
then the average of the "Pink Sheet" quotes for the relevant conversion period,
as determined in good faith by the Holder, or (d) if the Common Stock is not
then publicly traded the fair market value of a share of Common Stock as
determined by an Appraiser selected in good faith by the Holders of a majority
of the shares of the Preferred Stock.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's common stock, par value $.01 per
share, and stock of any other class into which such shares may hereafter have
been reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, the numerator of
which is Stated Value (or Excess Stated Value, as the case may be) and the
denominator of which is the Conversion Price at such time.
"Dividend Effectiveness Date" means the earlier to occur of (x) the
Effectiveness Date (as defined in the Registration Rights Agreement) and (y) the
date that an Underlying Shares Registration Statement is declared effective by
the Commission.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Junior Securities" means the Common Stock and all other equity
securities of the Company other than those securities that are outstanding on
the Original Issue Date and which are explicitly senior in rights or liquidation
preference to the Preferred Stock.
"Mandatory Redemption Amount" for each share of Preferred Stock
means the sum of (i) the greater of (A) 120% of the Stated Value (or Excess
Stated Value, as the case may be) and (B) the product of (a) the Per Share
Market Value on the Trading Day immediately preceding (x) the date of the
Triggering Event or the Conversion Date, as the case may be, or (y) the date of
payment in full by the Company of the applicable redemption price, whichever is
greater, and (b) the Conversion Ratio calculated on the date of the Triggering
Event, or the Conversion Date, as the case may be, and (ii) all other amounts,
costs, expenses and liquidated damages due in respect of such share of Preferred
Stock.
"Optional Redemption Price" shall be sum of (i) 100% of the Stated
Value of the shares of Preferred Stock to be redeemed pursuant to Section 6 and
(ii) any other amounts or liquidated damages due in respect of such shares of
Preferred Stock.
"Original Issue Date" shall mean the date of the first issuance of
any shares of the Preferred Stock regardless of the number of transfers of any
particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
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"Per Share Market Value" means on any particular date (a) the
closing bid price per share of Common Stock on such date on the NASDAQ or on the
Subsequent Market on which the Common Stock is then listed or quoted, or if
there is no such price on such date, then the closing bid price on the NASDAQ or
on such Subsequent Market on the date nearest preceding such date, or (b) if the
Common Stock is not then listed or quoted on the NASDAQ or on a Subsequent
Market, the closing bid price for a share of Common Stock in the
over-the-counter market, as reported by the National Quotation Bureau
Incorporated (or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or (c) if the Common
Stock is not then reported by the National Quotation Bureau Incorporated (or
similar organization or agency succeeding to its functions of reporting prices),
then the average of the "Pink Sheet" quotes for the relevant conversion period,
as determined in good faith by the Holder, or (d) if the Common Stock is not
then publicly traded, the fair market value of a share of Common Stock as
determined by an Appraiser selected in good faith by the Holders of a majority
of the shares of the Preferred Stock.
"Person" means a corporation, an association, a partnership, an
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Purchase Agreement" means the Convertible Preferred Stock Purchase
Agreement, dated as of the Original Issue Date, to which the Company and the
original Holder are parties, as amended, modified or supplemented from time to
time in accordance with its terms.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the Original Issue Date, to which the Company and the
original Holder are parties, as amended, modified or supplemented from time to
time in accordance with its terms.
"Reset Conversion Price" means the average of the Per Share Market
Values during the five Trading Days preceding the applicable Reset Date;
provided, that (1) such five Trading Day period shall be extended for the number
of Trading Days during such period in which (A) trading in the Common Stock is
suspended by the NASDAQ or a Subsequent Market on which the Common Stock is then
listed, or (B) after the date declared effective by the Commission, the
Underlying Shares Registration Statement is not effective, or (C) after the date
declared effective by the Commission, the Prospectus included in the Underlying
Shares Registration Statement may not be used by the Holder for the resale of
Underlying Shares; and (2) the Reset Conversion Price that will control during
any monthly period shall equal the lowest Reset Conversion Price determined from
the initial Reset Date.
"Securities Act" means the Securities Act of 1933, as amended.
"Trading Day" means (a) a day on which the Common Stock is traded on
the NASDAQ or on the Subsequent Market on which the Common Stock is then listed
or quoted, as the case may be, or (b) if the Common Stock is not listed on the
NASDAQ or on a Subsequent Market, a day on which the Common Stock is traded in
the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if
the Common Stock is not quoted on the OTC Bulletin Board, a day on which the
Common Stock is quoted in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency
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succeeding to its functions of reporting prices); provided, however, that in the
event that the Common Stock is not listed or quoted as set forth in (a), (b) and
(c) hereof, then Trading Day shall mean any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
State of New York or the State of Minnesota are authorized or required by law or
other government action to close.
"Transaction Documents" shall have the meaning set forth in the
Purchase Agreement.
"Underlying Shares" means, collectively, the shares of Common Stock
into which the shares of Preferred Stock are convertible in accordance with the
terms hereof.
"Underlying Shares Registration Statement" means a registration
statement that meets the requirements of the Registration Rights Agreement and
registers the resale of all Underlying Shares by the Holder, who shall be named
as a "selling stockholder" thereunder.
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EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of 2%
Series A Convertible Preferred Stock indicated below, into shares of common
stock, par value $.01 per share (the "Common Stock"), of APA Optics Inc., a
Minnesota corporation (the "Company"), according to the conditions hereof, as of
the date written below. If shares are to be issued in the name of a person other
than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations:
----------------------------------------------------------
Date to Effect Conversion
----------------------------------------------------------
Number of shares of Preferred Stock to be Converted
----------------------------------------------------------
Stated Value of shares of Preferred Stock to be Converted
----------------------------------------------------------
Number of shares of Common Stock to be Issued
----------------------------------------------------------
Applicable Conversion Price
----------------------------------------------------------
Signature
----------------------------------------------------------
Name
----------------------------------------------------------
Address
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IN WITNESS WHEREOF, the Company has caused this Certificate to be duly
executed by the President of the Company this 13th day of March, 2000.
APA OPTICS, INC.
By: /s/ Anil K. Jain
-------------------------------------
Name: Anil K. Jain
Title: President
[STAMP]
STATE OF MINNESOTA
DEPARTMENT OF STATE
FILED DUP COPY
MAR 15 2000
Mary Kiffmeyer
SECRETARY OF STATE
20
EXHIBIT 4.5(b)
PREFERRED STOCK S-3
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES
ARE EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
APA OPTICS, INC.
WARRANT
Warrant No. ___ Dated: March 15, 2000
APA Optics, Inc., a Minnesota corporation (the "Company"), hereby
certifies that, for value received, [ ] or its registered assigns ("Holder"), is
entitled, subject to the terms set forth below, to purchase from the Company up
to a total of 50,000 shares of common stock, $.01 par value per share (the
"Common Stock"), of the Company (each such share, a "Warrant Share" and all such
shares, the "Warrant Shares") at an exercise price equal to $35.00 per share (as
adjusted from time to time as provided in Section 8, the "Exercise Price"), at
any time and from time to time from and after the date hereof and through and
including March 15, 2005 (the "Expiration Date"), and subject to the following
terms and conditions:
1. Registration of Warrant. The Company shall register this Warrant,
upon records to be maintained by the Company for that purpose (the "Warrant
Register"), in the name of the record Holder hereof from time to time. The
Company may deem and treat the registered Holder of this Warrant as the absolute
owner hereof for the purpose of any exercise hereof or any distribution to the
Holder, and for all other purposes, and the Company shall not be affected by
notice to the contrary.
<PAGE>
2. Registration of Transfers and Exchanges.
(a) The Company shall register the transfer of any portion of
this Warrant in the Warrant Register, upon surrender of this Warrant, with the
Form of Assignment attached hereto duly completed and signed, to the Transfer
Agent or to the Company at the address for notice set forth in Section 12. Upon
any such registration or transfer, a new warrant to purchase Common Stock, in
substantially the form of this Warrant (any such new warrant, a "New Warrant"),
evidencing the portion of this Warrant so transferred shall be issued to the
transferee and a New Warrant evidencing the remaining portion of this Warrant
not so transferred, if any, shall be issued to the transferring Holder. The
acceptance of the New Warrant by the transferee thereof shall be deemed the
acceptance by such transferee of all of the rights and obligations of a holder
of a Warrant.
(b) This Warrant is exchangeable, upon the surrender hereof by
the Holder to the office of the Company at the address for notice set forth in
Section 12 for one or more New Warrants, evidencing in the aggregate the right
to purchase the number of Warrant Shares which may then be purchased hereunder.
Any such New Warrant will be dated the date of such exchange.
3. Duration and Exercise of Warrants.
(a) This Warrant shall be exercisable by the registered Holder
on any business day before 6:30 P.M., New York City time, at any time and from
time to time on or after the date hereof to and including the Expiration Date.
At 6:30 P.M., New York City time on the Expiration Date, the portion of this
Warrant not exercised prior thereto shall be and become void and of no value.
Prior to the Expiration Date, the Company may not call or otherwise redeem this
Warrant without the prior written consent of the Holder.
(b) Subject to Sections 2(b), 5 and 9, upon surrender of this
Warrant, with the Form of Election to Purchase attached hereto duly completed
and signed, to the Company at its address for notice set forth in Section 12 and
upon payment of the Exercise Price multiplied by the number of Warrant Shares
that the Holder intends to purchase hereunder, in the manner provided hereunder,
all as specified by the Holder in the Form of Election to Purchase, the Company
shall promptly (but in no event later than 3 business days after the Date of
Exercise (as defined herein)) issue or cause to be issued and cause to be
delivered to or upon the written order of the Holder and in such name or names
as the Holder may designate, a certificate for the Warrant Shares issuable upon
such exercise, free of restrictive legends except (i) either in the event that a
registration statement covering the resale of the Warrant Shares and naming the
Holder as a selling shareholder thereunder is not then effective or the Warrant
Shares are not freely transferable without volume restrictions pursuant to Rule
144(k) promulgated under the Securities Act of 1933 as amended (the "Securities
Act"), or (ii) if this Warrant shall have been issued pursuant to a written
agreement between the original Holder and the Company, as required by such
agreement. Any person so designated by the Holder to receive Warrant Shares
shall be deemed to have become holder of record of such Warrant Shares as of the
Date of Exercise of this Warrant. The Company shall, upon request of the Holder,
if available, use its best efforts to deliver Warrant Shares hereunder
electronically through the Depository Trust Corporation or another established
clearing corporation performing similar functions.
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<PAGE>
A "Date of Exercise" means the date on which the Company shall
have received (i) this Warrant (or any New Warrant, as applicable), with the
Form of Election to Purchase attached hereto (or attached to such New Warrant)
appropriately completed and duly signed, and (ii) payment of the Exercise Price
for the number of Warrant Shares so indicated by the Holder hereof to be
purchased.
(c) This Warrant shall be exercisable, either in its entirety
or, from time to time, for a portion of the number of Warrant Shares. If less
than all of the Warrant Shares which may be purchased under this Warrant are
exercised at any time, the Company shall issue or cause to be issued, at its
expense, a New Warrant evidencing the right to purchase the remaining number of
Warrant Shares for which no exercise has been evidenced by this Warrant.
4. Piggyback Registration Rights. During the Effectiveness Period
(as defined in the Registration Rights Agreement, of even date herewith, between
the Company and the original Holder), the Company may not file any registration
statement with the Securities and Exchange Commission (other than registration
statements of the Company filed on Form S-8 or Form S-4, each as promulgated
under the Securities Act, pursuant to which the Company is registering
securities pursuant to a Company employee benefit plan or pursuant to a merger,
acquisition or similar transaction including supplements thereto, but not
additionally filed registration statements in respect of such securities) at any
time when there is not an effective registration statement covering the resale
of the Warrant Shares and naming the Holder as a selling shareholder thereunder,
unless the Company provides the Holder with not less than 20 days notice of its
intention to file such registration statement and provides the Holder the option
to include any or all of the applicable Warrant Shares therein, subject, in the
event of an underwritten offering, to customary cutbacks and lock-ups requested
by the managing underwriter of all selling stockholders thereunder, on a
pro-rata basis with such other selling stockholders. The piggyback registration
rights granted to the Holder pursuant to this Section shall continue until all
of the Holder's Warrant Shares have been sold in accordance with an effective
registration statement or upon the Expiration Date. The Company will pay all
registration expenses in connection therewith.
5. Payment of Taxes. The Company will pay all documentary stamp
taxes attributable to the issuance of Warrant Shares upon the exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the registration
of any certificates for Warrant Shares or Warrants in a name other than that of
the Holder. The Holder shall be responsible for all other tax liability that may
arise as a result of holding or transferring this Warrant or receiving Warrant
Shares upon exercise hereof.
6. Replacement of Warrant. If this Warrant is mutilated, lost,
stolen or destroyed, the Company shall issue or cause to be issued in exchange
and substitution for and upon cancellation hereof, or in lieu of and
substitution for this Warrant, a New Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
indemnity, if requested, satisfactory to it. Applicants for a New Warrant under
such circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may prescribe.
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<PAGE>
7. Reservation of Warrant Shares. The Company covenants that it will
at all times reserve and keep available out of the aggregate of its authorized
but unissued Common Stock, solely for the purpose of enabling it to issue
Warrant Shares upon exercise of this Warrant as herein provided, the number of
Warrant Shares which are then issuable and deliverable upon the exercise of this
entire Warrant, free from preemptive rights or any other actual contingent
purchase rights of persons other than the Holder (taking into account the
adjustments and restrictions of Section 8). The Company covenants that all
Warrant Shares that shall be so issuable and deliverable shall, upon issuance
and the payment of the applicable Exercise Price in accordance with the terms
hereof, be duly and validly authorized and issued and fully paid and
nonassessable.
8. Certain Adjustments. The Exercise Price and number of Warrant
Shares issuable upon exercise of this Warrant are subject to adjustment from
time to time as set forth in this Section 8. Upon each such adjustment of the
Exercise Price pursuant to this Section, the Holder shall thereafter prior to
the Expiration Date be entitled to purchase, at the Exercise Price resulting
from such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this Warrant is
outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on
outstanding preferred stock as of the date hereof which contain a stated
dividend rate) or otherwise make a distribution or distributions on shares of
its Common Stock or on any other class of capital stock payable in shares of
Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger
number of shares, or (iii) combine outstanding shares of Common Stock into a
smaller number of shares, the Exercise Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding after such event. Any adjustment made pursuant to
this Section shall become effective immediately after the record date for the
determination of shareholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision or combination, and shall apply to successive subdivisions and
combinations.
(b) In case of any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, then the Holder shall have the right
thereafter to exercise this Warrant only into the shares of stock and other
securities and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification or share exchange, and the Holder
shall be entitled upon such event to receive such amount of securities or
property equal to the amount of Warrant Shares such Holder would have been
entitled to had such Holder exercised this Warrant immediately prior to such
reclassification or share exchange. The terms of any such reclassification or
share exchange shall include such terms so as to continue to give to the Holder
the right to receive the securities or property set forth in this Section 8(b)
upon any exercise following any such reclassification or share exchange.
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<PAGE>
(c) If the Company, at any time while this Warrant is
outstanding, shall distribute to all holders of Common Stock (and not to holders
of this Warrant) evidences of its indebtedness or assets or rights or warrants
to subscribe for or purchase any security (excluding those referred to in
Sections 8(a), (b) and (d)), then in each such case the Exercise Price shall be
determined by multiplying the Exercise Price in effect immediately prior to the
record date fixed for determination of shareholders entitled to receive such
distribution by a fraction of which the denominator shall be the Exercise Price
determined as of the record date mentioned above and of which the numerator
shall be such Exercise Price on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
the Company's independent certified public accountants that regularly examines
the financial statements of the Company (an "Appraiser").
(d) If the Company or any subsidiary thereof, as applicable,
with respect to Common Stock Equivalents (as defined below), at any time while
this Warrant is outstanding, shall issue in excess of an aggregate of 50,000
shares of Common Stock (subject to equitable adjustments for stock splits,
recombinations and similar events) or rights, warrants, options or other
securities or debt that is convertible into or exchangeable for in excess of an
aggregate of 50,000 shares of Common Stock (subject to equitable adjustments for
stock splits, recombinations and similar events) ("Common Stock Equivalents"),
entitling any person to acquire shares of Common Stock at a price per share less
than the Exercise Price (such price per share, the "Trigger Price") (if the
holder of the Common Stock or Common Stock Equivalent so issued shall at any
time, whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights issued in connection with such issuance, be entitled
to receive shares of Common Stock at a price less than the Exercise Price, such
issuance shall be deemed to have occurred for less than the Exercise Price),
then the Exercise Price shall be adjusted to equal the lesser of (i) 115% of the
Trigger Price and (ii) the Exercise Price. Such adjustment shall be made
whenever such Common Stock or Common Stock Equivalents are issued. However, upon
the expiration of any Common Stock Equivalents the issuance of which resulted in
an adjustment in the Exercise Price pursuant to this Section, if any such Common
Stock Equivalents shall expire and shall not have been exercised, the Exercise
Price shall immediately upon such expiration be recomputed and effective
immediately upon such expiration be increased to the price which it would have
been (but reflecting any other adjustments in the Exercise Price made pursuant
to the provisions of this Section after the issuance of such Common Stock
Equivalents) had the adjustment of the Exercise Price made upon the issuance of
such Common Stock Equivalents been made on the basis of offering for
subscription or purchase only that number of shares of the Common Stock actually
purchased upon the exercise of such Common Stock Equivalents actually exercised.
Notwithstanding anything herein to the contrary, the following shall not be
subject to the provisions of this Section: (1) issuances of any stock or stock
options under any employee benefit plan of the Company whether now existing or
approved by the Company and its stockholders in the future, (2) the rights,
options and warrants outstanding prior to the date hereof and specified in
Schedule 2.1(c) to the Purchase Agreement of even date herewith between the
original Holder and the Company, but not any modifications thereof and (3) the
issuance of shares of Common Stock in payment of the purchase price of a
Strategic Transaction (as defined below). For purposes of this Section, a
"Strategic Transaction" shall mean a transaction or relationship in which the
Company issues shares of Common
5
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Stock to an entity which is, itself or through its subsidiaries, an operating
company in a business related to the business of the Company and in which the
Company receives material benefits in addition to the investment of funds, but
shall not include a transaction in which the Company is issuing securities
primarily for the purpose of raising capital.
(e) In case of any (1) merger or consolidation of the Company
with or into another Person, or (2) sale by the Company of more than one-half of
the assets of the Company (on a book value basis) in one or a series of related
transactions, the Holder shall have the right thereafter to exercise this
Warrant for the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following such
merger, consolidation or sale, and the Holder shall be entitled upon such event
or series of related events to receive such amount of securities, cash and
property as the Common Stock for which this Warrant could have been exercised
immediately prior to such merger, consolidation or sale would have been
entitled. The terms of any such merger, consolidation or sale shall include such
terms so as continue to give the Holder the right to receive the securities,
cash and property set forth in this Section upon any conversion or redemption
following such event. This provision shall similarly apply to successive such
events.
(f) For the purposes of this Section 8, the following clauses
shall also be applicable:
(i) Record Date. In case the Company shall take a record
of the holders of its Common Stock for the purpose of entitling them (A) to
receive a dividend or other distribution payable in Common Stock or in
securities convertible or exchangeable into shares of Common Stock, or (B) to
subscribe for or purchase Common Stock or securities convertible or exchangeable
into shares of Common Stock, then such record date shall be deemed to be the
date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(ii) Treasury Shares. The number of shares of Common
Stock outstanding at any given time shall not include shares owned or held by or
for the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock.
(g) All calculations under this Section 8 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(h) Whenever the Exercise Price is adjusted pursuant to
Section 8(c) above, the Holder, after receipt of the determination by the
Appraiser, shall have the right to select an additional appraiser (which shall
be a nationally recognized accounting firm), in which case the adjustment shall
be equal to the average of the adjustments recommended by each of the Appraiser
and such appraiser. The Holder shall promptly mail or cause to be mailed to the
Company, a notice setting forth the Exercise Price after such adjustment and
setting forth a brief statement of the facts
6
<PAGE>
requiring such adjustment. Such adjustment shall become effective immediately
after the record date mentioned above.
If:
(i) the Company shall declare a dividend (or
any other distribution) on its Common
Stock; or
(ii) the Company shall declare a special
nonrecurring cash dividend on or a
redemption of its Common Stock; or
(iii) the Company shall authorize the granting
to all holders of the Common Stock
rights or warrants to subscribe for or
purchase any shares of capital stock of
any class or of any rights; or
(iv) the approval of any shareholders of the
Company shall be required in connection
with any reclassification of the Common
Stock, any consolidation or merger to
which the Company is a party, any sale
or transfer of all or substantially all
of the assets of the Company, or any
compulsory share exchange whereby the
Common Stock is converted into other
securities, cash or property; or
(v) the Company shall authorize the
voluntary dissolution, liquidation or
winding-up of the affairs of the
Company,
then the Company shall cause to be mailed to each Holder at its last address as
it shall appear upon the Warrant Register, at least 10 calendar days prior to
the applicable record or effective date hereinafter specified, a notice stating
(x) the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding-up; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
9. Payment of Exercise Price. The Holder shall pay the Exercise
Price in one of the following manners:
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(a) Cash Exercise. The Holder may deliver immediately
available funds; or
(b) Cashless Exercise. The Holder may surrender this Warrant
to the Company together with a notice of cashless exercise, in which event the
Company shall issue to the Holder the number of Warrant Shares determined as
follows:
X = Y [(A-B)/A]
where: X = the number of Warrant Shares to be issued to the
Holder.
Y = the number of Warrant Shares with respect to which
this Warrant is being exercised.
A = the average of the closing sale prices of the Common
Stock for the five (5) trading days immediately prior to
(but not including) the Date of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have been
commenced, on the issue date.
10. Certain Exercise Restrictions.
A Holder may not exercise this Warrant to the extent such
exercise would result in the Holder, together with any affiliate thereof,
beneficially owning (as determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules
promulgated thereunder) in excess of 9.999% of the then issued and outstanding
shares of Common Stock, including shares issuable upon such exercise and held by
such Holder after application of this Section. Since the Holder will not be
obligated to report to the Company the number of shares of Common Stock it may
hold at the time of an exercise hereunder, unless the exercise at issue would
result in the issuance of shares of Common Stock in excess of 9.999% of the then
outstanding shares of Common Stock without regard to any other shares which may
be beneficially owned by the Holder or an affiliate thereof, the Holder shall
have the authority and obligation to determine whether the restriction contained
in this Section will limit any particular exercise hereunder and to the extent
that the Holder determines that the limitation contained in this Section
applies, the determination of which portion of this Warrant is exercisable shall
be the responsibility and obligation of the Holder. If the Holder has delivered
a Form of Election to Purchase for a number of Warrant Shares that, without
regard to any other shares that the Holder or its affiliates may beneficially
own, would result in the issuance in excess of the permitted amount hereunder,
the Company shall notify the Holder of this fact and shall honor the exercise
for the maximum portion of this Warrant permitted to be exercised on such Date
of Exercise in accordance with the periods described herein and, at the option
of the Holder, either keep the portion of the
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Warrant tendered for exercise in excess of the permitted amount hereunder for
future exercises or return such excess portion of the Warrant to the Holder. The
provisions of this Section may be waived by a Holder (but only as to itself and
not to any other Holder) upon not less than 61 days prior notice to the Company.
Other Holders shall be unaffected by any such waiver.
11. Fractional Shares. The Company shall not be required to issue or
cause to be issued fractional Warrant Shares on the exercise of this Warrant.
The number of full Warrant Shares which shall be issuable upon the exercise of
this Warrant shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of this Warrant so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section, be issuable on
the exercise of this Warrant, the Company shall pay an amount in cash equal to
the Exercise Price multiplied by such fraction.
12. Notices. Any and all notices or other communications or
deliveries hereunder shall be in writing and shall be deemed given and effective
on the earliest of (i) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number specified in this
Section prior to 6.30 p.m. (New York City time) on a business day (with
confirmation of transmission), (ii) the business day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section later than 6:30 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City time) on
such date (with confirmation of transmission), (iii) the business day following
the date of mailing, if sent by a nationally recognized overnight courier
service, or (iv) upon actual receipt by the party to whom such notice is
required to be given. The addresses for such communications shall be: (i) if to
the Company, to 2950 N.E. 84th Lane, Blaine, Minnesota 55449, facsimile number
763-784-2038, attention President, or (ii) if to the Holder, to the Holder at
the address or facsimile number appearing on the Warrant Register or such other
address or facsimile number as the Holder may provide to the Company in
accordance with this Section.
13. Warrant Agent. The Company shall serve as warrant agent under
this Warrant. Upon thirty (30) days' notice to the Holder, the Company may
appoint a new warrant agent. Any corporation into which the Company or any new
warrant agent may be merged or any corporation resulting from any consolidation
to which the Company or any new warrant agent shall be a party or any
corporation to which the Company or any new warrant agent transfers
substantially all of its corporate trust or shareholders services business shall
be a successor warrant agent under this Warrant without any further act. Any
such successor warrant agent shall promptly cause notice of its succession as
warrant agent to be mailed (by first class mail, postage prepaid) to the Holder
at the Holder's last address as shown on the Warrant Register.
14. Miscellaneous.
(a) This Warrant shall be binding on and inure to the benefit
of the parties hereto and their respective successors and assigns. This Warrant
may be amended only in writing signed by the Company and the Holder and their
successors and assigns.
9
<PAGE>
(b) Subject to Section 14(a), above, nothing in this Warrant
shall be construed to give to any person or corporation other than the Company
and the Holder any legal or equitable right, remedy or cause under this Warrant.
This Warrant shall inure to the sole and exclusive benefit of the Company and
the Holder.
(c) The corporate laws of the State of Minnesota shall govern
all issues concerning the relative rights of the Company and its shareholders.
All other questions concerning the construction, validity, enforcement and
interpretation of this Warrant shall be governed by and construed and enforced
in accordance with the internal laws of the State of New York, without regard to
the principles of conflicts of law thereof. The Company and the Holder hereby
irrevocably submit to the exclusive jurisdiction of the state and federal courts
sitting in the City of New York, borough of Manhattan, for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waive, and agree
not to assert in any suit, action or proceeding, any claim that they are not
personally subject to the jurisdiction of any such court, or that such suit,
action or proceeding is improper. Each of the Company and the Holder hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by receiving a copy thereof sent
to the Company at the address in effect for notices to it under this instrument
and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit in
any way any right to serve process in any manner permitted by law.
(d) The headings herein are for convenience only, do not
constitute a part of this Warrant and shall not be deemed to limit or affect any
of the provisions hereof.
(e) In case any one or more of the provisions of this Warrant
shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Warrant shall not
in any way be affected or impaired thereby and the parties will attempt in good
faith to agree upon a valid and enforceable provision which shall be a
commercially reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Warrant.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
10
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer as of the date first indicated above.
APA OPTICS, INC.
By: /s/ Anil Jain
---------------------------------------------
Name: Anil K. Jain
-------------------------------------------
Title: President
------------------------------------------
11
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To APA Optics, Inc.:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of common stock, $.01 par value per share, of APA Optics, Inc. (the
"Common Stock") and , if such Holder is not utilizing the cashless exercise
provisions set forth in this Warrant, encloses herewith $________ in cash,
certified or official bank check or checks, which sum represents the aggregate
Exercise Price (as defined in the Warrant) for the number of shares of Common
Stock to which this Form of Election to Purchase relates, together with any
applicable taxes payable by the undersigned pursuant to the Warrant.
The undersigned requests that certificates for the shares of Common
Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
--------------------------------
- --------------------------------------------------------------------------------
(Please print name and address)
If the number of shares of Common Stock issuable upon this exercise
shall not be all of the shares of Common Stock which the undersigned is entitled
to purchase in accordance with the enclosed Warrant, the undersigned requests
that a New Warrant (as defined in the Warrant) evidencing the right to purchase
the shares of Common Stock not issuable pursuant to the exercise evidenced
hereby be issued in the name of and delivered to:
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
Dated:____________,___ Name of Holder:
(Print)
-------------------------------------
(By:)
---------------------------------------
(Name:)
(Title:)
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
13
<PAGE>
FORM OF ASSIGNMENT
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of APA Optics, Inc. to
which the within Warrant relates and appoints ________________ attorney to
transfer said right on the books of APA Optics, Inc. with full power of
substitution in the premises.
Dated:
________________, ___
--------------------------------------------
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
--------------------------------------------
Address of Transferee
--------------------------------------------
--------------------------------------------
In the presence of:
- -------------------------------
14
EXHIBIT 5.1
April 3, 2000
APA Optics, Inc.
2950 N.E. 84th Lane
Blaine, MN 55449
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel for APA Optics, Inc. (the "Company") in
connection with a Registration Statement on Form S-3 (the "Registration
Statement") that relates to the issuance of up to 250,000 shares of common stock
of the Company upon conversion of the Company's 2% Series A Convertible
Preferred Stock and up to 57,500 shares upon exercise of related warrants for
purchase of common stock (collectively, the "Shares").
In connection with the registration of the Shares, we have examined
such documents, records and matters of law as we have deemed necessary to the
rendering of the following opinion. Based upon that review, it is our opinion
that upon receipt of payment in full therefor, the Shares being registered, when
issued by the Company, will be validly issued, fully paid and non-assessable.
The foregoing opinion is subject to the qualification that the Shares
or any of them, when issued, will not when taken together with the then issued
and outstanding capital stock of the Company, exceed the authorized capital
stock of the Company.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever it appears in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
MOSS & BARNETT,
A Professional Association
/s/ Janna R. Severance
Janna R. Severance
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts and
Legal Matters" in the Registration Statement (Form S-3 No. 333-00000) and
related Prospectus of APA Optics, Inc. for the registration of 307,500 shares of
its common stock and to the incorporation by reference therein of our report
dated May 14, 1999, with respect to the financial statements of APA Optics, Inc.
included in its Annual Report (Form 10-K) for the year ended March 31, 1999,
filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
April 3, 2000
