UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Soliciting Material Pursuant to
[_] Confidential, For Use of the SS.240.14a-11(c) or SS.240.14a-12
Commission Only (as permitted
by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
APA OPTICS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
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APA OPTICS, INC.
2950 N.E. 84TH LANE
BLAINE, MINNESOTA 55449
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO OUR SHAREHOLDERS:
The 2003 Annual Meeting of the shareholders of APA Optics, Inc., a
Minnesota corporation (the "Company"), will be held at the Four Points Sheraton,
1330 Industrial Boulevard, Minneapolis, Minnesota 55431, on August 21, 2003, at
3:30 p.m., Central Daylight Time, to consider and vote upon the following
matters:
1. Election of five directors.
2. Such other business as may properly come before the meeting or any
adjournment or adjournments thereof.
We have fixed the close of business on July 7, 2003, as the record date
for the determination of shareholders entitled to notice of and to vote at the
Annual Meeting. Our transfer books will not be closed.
Whether or not you expect to be present personally at the Annual
Meeting, please complete, date, sign, and return the accompanying Proxy in the
enclosed, self-addressed envelope at your earliest convenience. This will insure
your participation in the decisions to be made by the shareholders. We sincerely
hope that all shareholders who can attend the Annual Meeting will do so.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Kenneth A. Olsen
Kenneth A. Olsen
Secretary
July 17, 2003
TABLE OF CONTENTS
SOLICITATION AND REVOCATION OF PROXIES.......................................1
BOARD RECOMMENDATIONS........................................................2
VOTING RIGHTS................................................................2
OWNERSHIP OF COMMON STOCK....................................................2
PROPOSAL 1: ELECTION OF DIRECTORS...........................................4
EXECUTIVE COMPENSATION.......................................................7
CERTAIN RELATIONSHIPS AND TRANSACTIONS......................................10
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.....................11
RELATIONSHIP WITH INDEPENDENT AUDITORS......................................12
OTHER MATTERS...............................................................13
SHAREHOLDER PROPOSALS FOR 2004 ANNUAL MEETING...............................13
ADDITIONAL INFORMATION......................................................14
APPENDIX A: AUDIT COMMITTEE CHARTER
21
APA OPTICS, INC.
2950 N.E. 84TH LANE
BLAINE, MINNESOTA 55449
-----------------
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
AUGUST 21, 2003
-----------------
SOLICITATION AND REVOCATION OF PROXIES
The accompanying Proxy is solicited by the Board of Directors of APA
Optics, Inc. (the "Company") in connection with the 2003 Annual Meeting of the
Shareholders of the Company, to be held on August 21, 2003, at 3:30 p.m.
Minneapolis time, at the Four Points Sheraton, 1330 Industrial Boulevard,
Minneapolis, Minnesota 55431 and any adjournments thereof. This Proxy Statement
is first being mailed to shareholders on or about July 17, 2003.
HOW TO VOTE
o By signing and returning the enclosed proxy card, you will be giving
your proxy to our board of directors and authorizing them to vote your
shares.
HOW YOUR PROXY WILL BE VOTED
o Unless revoked, all properly executed Proxies will be voted as
specified. Proxies that are signed but that lack any specification
will, subject to the following, be voted FOR all nominees for
director. If any other matters properly come before the Annual
Meeting, or if any of the persons named to serve as directors should
decline or be unable to serve, the persons named in the Proxy will
vote in accordance with their discretion.
HOW TO REVOKE YOUR PROXY
o You have the power to revoke your proxy at any time before the
convening of the Annual Meeting. Revocations of proxy will be honored
if received by us, at the Company, addressed to the attention of Anil
K. Jain, on or before August 20, 2003. In addition, on the day of the
meeting, prior to the convening thereof, revocations may be delivered
to the tellers who will be seated at the door of the meeting room.
ABSTENTIONS
o If you abstain from voting as to any matter, your shares shall be
deemed present at the meeting for purposes of determining a quorum and
for purposes of calculating the vote with respect to such matter, but
shall not be deemed to have been voted in favor
of such matter. Abstentions, therefore, as to any proposal will have
the same effect as votes against such proposal.
BROKER NON-VOTES
o If a broker turns in a "non-vote" Proxy, indicating a lack of voting
instruction by the beneficial holder of the shares and a lack of
discretionary authority on the part of the broker to vote on a
particular matter, then the shares covered by such non-vote Proxy will
be considered present at the meeting for purposes of determining a
quorum but will not be considered to be represented at the meeting for
purposes of calculating the vote required for approval of such matter.
COST OF SOLICITATION
o We will pay all expenses in connection with the solicitation of
proxies. Proxies are being solicited primarily by mail, but officers,
directors, and other employees of the Company may also solicit proxies
by telephone, telegraph, or personal calls. No extra compensation will
be paid by us for such solicitation. We may reimburse brokers, banks,
and other nominees holding shares for others for the cost of
forwarding proxy materials to, and obtaining proxies from, their
principals.
BOARD RECOMMENDATIONS
The Board of Directors unanimously recommends that you vote FOR
election of each nominee.
VOTING RIGHTS
Only shareholders of record at the close of business on July 7, 2003,
are entitled to notice of and to vote at the meeting or any adjournment thereof.
As of that date, we had issued and outstanding 11,872,331 shares of common
stock. Each holder of record of our common stock is entitled to one vote for
each share registered in the shareholder's name as of the record date. The
Articles of Incorporation of the Company do not grant the shareholders the right
to vote cumulatively for the election of directors. No shareholder will have
appraisal rights or similar dissenter's rights as a result of any matters
expected to be voted on at the meeting.
The presence in person or by proxy of holders of a majority of the
shares of common stock entitled to vote at the Annual Meeting will constitute a
quorum for the transaction of business.
OWNERSHIP OF COMMON STOCK
The following table shows as of July 7, 2003, the stock ownership of
(i) all persons known by us to be beneficial owners of more than five percent of
our outstanding shares of common stock, (ii) each director and each nominee for
election as a director, (iii) the Named
2
Executive Officers (as defined below under the caption "Executive
Compensation"), and (iv) all current directors and executive officers as a
group:
Name and Address of Number of Shares Percentage of
Beneficial Owner Beneficially Owned Outstanding Shares
---------------- ------------------ ------------------
Anil K. Jain 1,670,502(l) 14.1
2950 N.E. 84th Lane
Blaine, Minnesota 55449
Kenneth A. Olsen 742,832(2) 6.3
2950 N.E. 84th Lane
Blaine, Minnesota 55449
David Peters -0- *
2950 N.E. 84th Lane
Blaine, Minnesota 55449
Herman Lee 761,700 6.4
20152 Highway 9N
Borup, Minnesota 56519
John G. Reddan -0- *
148 Canabury Court
Little Canada, Minnesota 55117
Ronald G. Roth 304,800(3) 2.6
19 East Oaks Road
North Oaks, MN 55127
Stephen A. Zuckerman, M.D. 13,000(3) *
2828 Kenwood Isles Drive
Minneapolis, MN 55408
All current directors and executive 2,731,134 (3)(4) 23.0
officers as a group (6 persons)
* Less than 1%.
(1) Includes 5,250 shares held by Dr. Jain as custodian for minor relatives.
Dr. Jain disclaims beneficial ownership of such shares.
(2) Includes 19,332 shares held in trusts for Anil K. Jain's children, of
which Mr. Olsen serves as trustee. Mr. Olsen disclaims beneficial
ownership of such shares.
(3) Includes 5,000 shares that may be acquired upon exercise of options that
are or will become exercisable within sixty days of the record date.
(4) Includes shares that may be acquired upon exercise of options that are or
will become exercisable within sixty days of the record date.
3
PROPOSAL NO. 1
ELECTION OF DIRECTORS
Our Board of Directors has nominated the individuals listed below for
election as directors, each to serve until the next annual meeting of the
shareholders and until his successor is elected and qualified or until his
earlier resignation or removal. All of the nominees are currently directors.
John G. Reddan was elected to the Board in November 2002 to fill the vacancy
created by the resignation of Greg Von Wald.
Unless instructed not to vote for the election of directors or not to
vote for any specific nominee, your proxy will be voted to elect the listed
nominees. If any nominee withdraws as a candidate or is otherwise unavailable to
stand for election at the meeting, the named proxies will vote for such other
persons as they may determine, in their discretion. We do not anticipate that
any candidate will withdraw.
The following information is provided with respect to the nominees for
directors:
Name Age Director Since
---- --- --------------
Anil K. Jain 57 1979
Kenneth A. Olsen 59 1980
Ronald G. Roth 58 2002
Stephen A. Zuckerman, M.D. 61 2002
John G. (Jack) Reddan 73 2002
Dr. Anil K. Jain has been president of the Company since 1979, Chairman
of the Board since 1987, and chief executive officer since 1988. He also served
as chief financial officer and treasurer until August 2000. Dr. Jain is a past
director and former chairman of Minnesota Project Innovation, Inc., a nonprofit
corporation.
Kenneth A. Olsen has been secretary of the Company since 1983 and vice
president since 1992. Mr. Olsen manages the Company's optics fabrication
operations. Prior to joining the Company in 1979, Mr. Olsen had been employed at
3M since 1966.
Ronald G. Roth was Chairman of the Board and Chief Executive Officer of
Waste Systems Corp., a privately held waste hauling and disposal company, for 25
years prior to its sale to a national sold waste management company in 1995.
From 1995 to 2001, he was Chairman of the Board of Access Cash International
L.L.C., a North American provider of ATMs and related processing and financial
services until its sale to a national payment and technology solutions company.
Since 1990 he has been an owner of, and has served in various capacities,
including director and officer, with Phillips Recycling Systems, a privately
held regional recycling service provider in Minnesota. Mr. Roth graduated with a
B.A. in Marketing from Michigan State University.
4
Dr. Stephen L. Zuckerman served as a director of the Company from
January 1986 through August 1991 and was reappointed to the Board in February
2002. Dr. Zuckerman is Chief of Internal Medicine at Aspen Medical Group East
Lake Street Clinic, and in addition, has been actively involved for many years
with developing companies in the high tech area. He served as chairman of the
board of ProtaTek International Inc., a biotechnology company manufacturing for
the human and veterinary marketplace, from 1984 to 1987, as co-founder and
chairman of the board of Hypertension Diagnostic Inc., also a biotechnology
company that has developed a methodology for early detection of blood vessel
disorders, from 1988 to 1991, and was a member of the board of Biosensor Inc.
(1989 to 1991) and Micromedics Inc. (1986 to 1991 and February 2002 to present).
From 1982 to 1995 Dr. Zuckerman was president of M-T Venture Capital Fund, Inc.,
a Minnesota corporation created to invest in early-stage biotechnology and
medical technology companies. Since 1976, Dr. Zuckerman has consulted in the
health care delivery field, focusing his efforts on the regionalization of
health care services. He was the designer, founder and director of the
University of Minnesota Hospitals' Outreach Program from 1976 to 1984. Besides
his internal medicine practice, Dr. Zuckerman presently is chairman of the board
of The Foundation for Rural Health Care, a nonprofit organization that owns and
manages three rural nursing homes, and a member of the board of Micromedics,
Inc. He is also president of M-T Venture Capital Fund II, Inc. and chairman of
the board of The University Film Society (2000 to present), Minneapolis,
Minnesota.
John G. (Jack) Reddan joined the Board of Directors in November 2002 to
fill the vacancy created by the resignation of Greg Von Wald at the end of
September 2002. Mr. Reddan, retired, has worked as a volunteer with the
Presbytery of the Twin Cities Area (Presbyterian Church USA) in computer
application, hardware and software support, and accounting and finance. From
1992 to 1994, immediately following his retirement from Unisys Corp., he worked
as a volunteer with the Presbyterian Border Ministries in McAllen, Texas in
multiple capacities, including accounting consulting, which he continued until
1999. His last position at Unisys (1986 until retirement in 1991) was as Program
Manager - Communication Systems, where he was responsible for budgets,
procurement, and administration of hardware and software development. During his
career with Unisys (then known as Sperry Univac) he served as General Manager of
its division in Brazil (1970-1973) and as European regional manager for sales to
the U.S. government and military in Frankfurt, Germany (1967-1969).
BOARD MEETINGS. The Board of Directors held seven meetings during
fiscal 2002. All directors attended at least 85% of the meetings of the Board of
Directors and of each committee on which they served.
COMMITTEES
The Company has an audit committee and a compensation committee, each
of which is comprised of all non-employee (outside directors). The members of
these committees during fiscal 2003 were as follows:
5
Audit Committee Compensation Committee
--------------- ----------------------
Gregory Von Wald (1) Gregory Von Wald
Ronald Roth (2) Ronald Roth, Chairman (2)(3)
Stephen Zuckerman (2) Stephen Zuckerman (2)
Jack Reddan, Chairman (3)(4) Jack Reddan (4)
(1) Mr. Von Wald resigned from the Board of Directors and all
committees on September 30, 2002.
(2) Appointed February 5, 2002.
(3) Became chairman effective upon appointment to the committee.
(4) Appointed November 14, 2002.
AUDIT COMMITTEE. The Audit Committee is responsible for meeting with
the Company's independent public accountants to discuss the annual audit and
related accounting and financial matters. The audit committee held four meetings
in fiscal 2003. The Audit Committee operates under a written charter adopted by
the Board of Directors and the Audit Committee. The role of the Audit Committee
is to assist the Board of Directors in its oversight of the Company's financial
reporting process; management of the Company is responsible for the preparation,
presentation and integrity of the Company's financial statements, the Company's
accounting and financial reporting principles and internal controls and
procedures designed to assure compliance with accounting standards and
applicable laws and regulations. See "RELATIONSHIP WITH INDEPENDENT AUDITORS -
Report of Audit Committee" below, and the Audit Committee Charter filed as
Appendix A to this Proxy Statement.
COMPENSATION COMMITTEE. The compensation committee develops general
compensation policies and establishes compensation plans and specific
compensation levels for executive officers. The compensation committee met once
during fiscal 2003 to consider the compensation of the executive officers. See
"EXECUTIVE COMPENSATION - Report of Compensation Committee" below.
COMPENSATION OF DIRECTORS. Each director who is not also an employee of
the Company receives an annual director's fee of $5,000 and $500 for each Board
or committee meeting attended (subject to a maximum of $500 per day). We paid a
total of $25,500 in directors' fees for services rendered during fiscal 2003.
Under the terms of our Stock Option Plan for Nonemployee Directors,
each director who is not otherwise an employee of the Company receives annually,
on the first business day following the annual shareholders' meeting or, if
earlier, on September 1, an option to purchase 5,000 shares of common stock. The
exercise price for the option equals the fair market value of the stock on the
date of grant. Each option becomes exercisable on the earlier of the date of the
next annual shareholders' meeting or one year from the date of grant and is
exercisable for a period of four years thereafter. During fiscal 2003, options
to purchase 10,000 shares at $2.00 per share and 5,000 shares at $1.55 per share
were awarded to nonemployee directors pursuant to this Plan.
6
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth certain
information regarding compensation paid during each of our last three fiscal
years to our chief executive officer (the "Named Executive Officer"). No other
executive officer had total annual compensation in fiscal 2003 (based on salary
and bonus) which exceeded $100,000.
Annual Compensation
Name Fiscal ------------------- All Other
Principal Positions Year Salary Bonus Compensation
- ------------------- ---- ------ ----- ------------
Anil K. Jain 2003 $186,831 $ 0 $5,506 (3)
President and Chief Executive 2002 179,790 20,000 (1) 8,758 (3)
Officer 2001 147,015 83,025 (2) 8,260 (3)
(1) Bonus for fiscal year 2001 paid in fiscal year 2002.
(2) Includes payment of special bonus of $68,850 for services in fiscal
2001 and bonus of $14,175 for fiscal 1999.
(3) Consists of Company contribution on Dr. Jain's behalf to 401(k) plan
and an auto allowance.
CHANGE OF CONTROL ARRANGEMENT. We have an agreement with Anil K. Jain
providing for certain benefits in the event of a change in control of the
Company. If, following a change in control (as defined in the agreement), Dr.
Jain's employment is terminated within 36 months other than for "cause" (as
defined) or as a result of his retirement, disability, or death, or if Dr. Jain
terminates his employment for "good reason" (as defined), he is to receive a
lump sum payment equal to two and one-half times his annualized includable
compensation for the base period (as defined in Section 280G(d) of the Internal
Revenue Code of 1986, as amended). "Good reason" includes certain changes in Dr.
Jain's duties, responsibilities, status, salary, benefits, and other similar
terms of his employment made without his consent. A "change in control" for
purposes of the agreement includes a consolidation or merger of the Company in
which the Company is not the continuing or surviving corporation, any sale,
lease, exchange, or transfer of all or substantially all of the assets of the
Company, approval by the shareholders of any plan or proposal for liquidation or
dissolution of the Company, the acquisition by any person (as such term is used
in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended) of beneficial ownership of 30% or more of the Company's outstanding
common stock, or a change in the board of directors of the Company during any
period of two consecutive years such that individuals who at the beginning of
such period constituted the entire Board of Directors cease for any reason to
constitute a majority (with certain exceptions).
In addition, we have an agreement with Dr. Jain providing that upon the
occurrence of a change in control, in conjunction with a change in Dr. Jain's
current position, other than by voluntary resignation, Dr. Jain will have the
option to request the Company to purchase from him a number of shares of his
common stock equal to up to 4% of the shares of common stock outstanding
immediately prior to the change in control at a price per share equal to the
highest per share price paid in connection with the change in control event or
the highest price paid in the public market within the twelve months preceding
Dr. Jain's exercise of the option. This option is effective for a period of
twelve months after the change in control.
7
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted to the Named Executive Officer during the 2003
fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides information relating to option exercises
during fiscal 2003 and the number and value of shares of common stock subject to
options held by the Named Executive Officer as of March 31, 2003.
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
Anil K. Jain -0- -0- -0- -0- -0- -0-
REPORT OF THE COMPENSATION COMMITTEE
COMPENSATION POLICY. In determining the Company's executive
compensation policy and levels, the compensation committee seeks to attract and
retain qualified executive officers, motivate executive officers to improve the
Company's performance, and reward executive officers for individual
contributions to the achievement of the Company's business objectives. The
committee attempts to achieve these goals by combining annual base salaries with
bonuses based on corporate performance and on the achievement of specified
performance objectives. The compensation committee believes that cash
compensation in the form of salary and bonus provides executives with short-term
rewards for success in operations. The compensation committee also believes that
long-term compensation through the award of stock options encourages growth in
management stock ownership which leads to expansion of management's stake in the
long-term performance and success of the Company.
BASE SALARY. In determining the base salary of each of the executive
officers, the Company relies on information regarding salaries paid to executive
officers with comparable responsibilities employed by companies with comparable
businesses and also takes into account the Company's cash needs. In fiscal 2003,
the base salary of the executive officers was increased by an average of 2.0%.
BONUSES. Annual incentives for the Chief Executive Officer and the
other executive officers are intended to reward the attainment of annually
established goals in various areas over which the individual officer has
significant influence or control, including product development, product
manufacturing, sales levels and others. No bonuses were or will be paid to the
executive officers for fiscal 2002 or in fiscal 2003.
8
STOCK OPTIONS. To date, because the Chief Executive Officer owns a
significant percentage of the Company's outstanding common stock, he has not
been awarded options. Options have been awarded to other management employees.
COMPENSATION OF CHIEF EXECUTIVE OFFICER. The compensation committee
believes that the compensation of the Chief Executive Officer should reflect the
Company's performance. In fiscal 2003, the annual base salary of the Company's
Chief Executive Officer was increased to $183,600, or by 2%. No bonus was paid
to the Chief Executive Officer for fiscal 2002 or fiscal 2003.
SECTION 162 LIMITATION. The compensation committee has considered
whether any revisions to the Company's executive compensation policy may be
necessary due to provisions of Section 162 of the Internal Revenue Code, which
limits to $1,000,000 the deductibility of compensation paid to certain
executives. It is the current policy of the compensation committee to maximize,
to the extent reasonably possible, the Company's ability to obtain a corporate
tax deduction for compensation paid to executive officers of the Company to the
extent consistent with the best interest of the Company and its shareholders.
Ronald G. Roth John G. Reddan Stephen A. Zuckerman, M.D.
Chairman
Members of the Compensation Committee
STOCK PERFORMANCE GRAPH
The following performance graph compares the cumulative total returns
for the Company's common stock, The Nasdaq Stock Market (U.S.) Index and The
Nasdaq Non-Financial Index for the period from March 31, 1998 through March 31,
2003. The comparison assumes $100 was invested in the Company's Common Stock and
in each index at the beginning of the period and reinvestment of dividends.
9
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG APA OPTICS, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ NON-FINANCIAL INDEX
[CHART]
BASE LINE CUMULATIVE TOTAL RETURN
--------- -----------------------------------------------------
3/98 3/99 3/00 3/01 3/02 3/03
APA Optics, Inc. 100.00 117.89 494.74 148.43 45.64 22.40
Nasdaq Stock Market 100.00 135.08 250.99 100.0 101.32 74.37
(U.S.)
Nasdaq Non-Financial 100.00 139.72 273.29 102.21 100.33 70.92
CERTAIN RELATIONSHIPS AND TRANSACTIONS
SUBLEASE FOR COMPANY FACILITY. Effective December 1, 1984, we entered
into a sublease for office and manufacturing space with Jain-Olsen Properties, a
partnership consisting of Anil K. Jain and Kenneth A. Olsen, who are officers,
directors, and principal shareholders of the Company. In fiscal 2000, we entered
into an Amendment and Extension of the Sublease through November 30, 2004.
Certain terms of the sublease are set forth in Note K of Notes to Financial
Statements included in our 2003 Annual Report, which is being distributed with
this Proxy Statement. We made rent and tax payments under the lease of $139,000
and $138,000 to Jain-Olsen Properties during fiscal 2003 and 2002, respectively,
and we are obligated to make payments in fiscal 2004 of $140,000 in rent plus
taxes. The sublease will expire in November 2004. We believe the lease terms are
at least as favorable to us as terms we could have negotiated with an unrelated
third party.
10
KEY MAN INSURANCE. We maintain key man insurance in the amount of
$2,000,000 on the life of Anil K. Jain and in the amount of $500,000 on the life
of Kenneth A. Olsen, both of whom are directors and officers. Up to $500,000 of
the proceeds of each policy is intended to be used to purchase shares of our
common stock owned by the insured at the request of the personal representative
of the insured's estate. The per share price for the repurchase will be the fair
market value of the common stock as of the date of the event triggering the
repurchase.
SPLIT DOLLAR INSURANCE. In November 1989, we adopted a split dollar
life insurance plan (the "1989 Plan") for the benefit of Anil K. Jain. Under the
terms of the 1989 Plan, we pay the premiums on a $5 million insurance policy
(the "Policy") on the lives of Dr. Jain and his spouse. The Policy is a whole
life, joint and survivor policy, on which all premiums are paid by us and income
is imputed to Dr. Jain in an amount equal to the term rate for his insurance as
established by the insurer. No premium payments have been made since January
1996.
The Policy is owned by the Jain Children's Irrevocable Trust dated
November 28, 1989 (the "Trust"). The 1989 Plan is designed so that we will
recover all premium payments and advances made by us on account of the Policy
held by the Trust. Our interest in the premium payments and advances is secured
by a collateral assignment of the Policy. Upon the death of the last to die of
Dr. Jain and his spouse, we will be reimbursed from the insurance proceeds paid
to the Trust in an amount equal to the total premiums and advances made by us.
In the event the trustee of the Trust surrenders the Policy for its cash
surrender value at some date in the future, we will be reimbursed for the
premiums paid on the Policy.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company and any written representations that no Forms 5 were
required, the Company believes that all reports required to be filed by its
officers, directors, and greater than 10% beneficial shareholders under Section
16(a) of the Exchange Act were timely filed.
11
RELATIONSHIP WITH INDEPENDENT AUDITORS
CHANGE OF AUDITOR
On March 8, 2002, the Audit Committee recommended, and the Board of
Directors approved, the appointment of Grant Thornton LLP as our new independent
accountant and auditor, replacing Ernst & Young LLP. The Company did not consult
with Grant Thornton LLP on any matters related to accounting principles or
practices, financial statement disclosures or audit procedures prior to
selecting and appointing Grant Thornton LLP as its auditor.
Ernst & Young LLP's reports on the Company's financial statements for
the previous fiscal year ended March 31, 2001, did not contain any adverse
disclaimer of opinion and were not qualified as to uncertainty, audit accounting
principles. During the Company's two most recent fiscal years ended March 31,
2001 and the subsequent interim period ended March 2, 2002, (i) there were no
disagreements between the Company and Ernst & Young LLP on any matter of
accounting principle practices, financial statement disclosure or auditing scope
or procedure if not resolved to the satisfaction of Ernst & Young LLP, would
have caused Ernst & Young LLP to reference to the subject matter of the
disagreement in connection with its reports and (ii) there were no "reportable
events," as defined in Item 304(a)(1)(v) of Regulation S-K of the Securities and
Exchange Commission. The decision to replace Ernst & Young LLP was not the
result of any disagreement between the Company and Ernst & Young LLP on any
matter of accounting principle or practice, financial disclosure or audit
procedure.
Grant Thornton LLP, independent auditors, audited the financial
statements of the Company for the fiscal years ended March 31, 2003 and 2002.
The Company anticipates that Grant Thornton LLP will be retained as the
Company's independent auditors for fiscal 2004. Representatives of Grant
Thornton LLP are expected to be present at the Annual Meeting and will have the
opportunity to make a statement, if they desire to do so, and would be available
to respond to appropriate questions.
REPORT OF AUDIT COMMITTEE
The Audit Committee of the Board of Directors is comprised of three
nonemployee directors. All members are independent as defined under the rules of
The Nasdaq Stock Market.
The Audit Committee held three meetings during fiscal 2003. The
meetings were designed to facilitate and encourage communication between the
Audit Committee and the Company's independent auditors, Grant Thornton LLP.
During these meetings, the Audit Committee reviewed and discussed the
audited financial statements with management and the auditors.
The discussions with the auditors also included the matters required by
Statement on Auditing Standards No. 61 (Communication with Audit Committees).
The auditors also provided to the Audit Committee the written disclosures and
the letter regarding their
12
independence as required by the Independence Standards Board Standard No. 1.
This information was discussed with the auditors.
Based on these discussions, the Audit Committee recommended to the
Board of Directors that the audited financial statements for the fiscal year
ended March 31, 2003 be included in the Company's annual report on Form 10-K.
Ronald G. Roth John G. Reddan Stephen A. Zuckerman, M.D.
Chairman
Members of the Audit Committee
INDEPENDENT AUDITORS' FEES
AUDIT SERVICES. The Company paid Grant Thornton LLP related fees of
$36,020 for the fiscal year ended March 31, 2003. These fees were paid for
professional services related to the audit of the financial statements, reviews
of quarterly financial statements included as part of the Company's Form 10-Q
filings for the year and fees related to other miscellaneous regulatory filings.
The Company paid no fees to Ernst & Young LLP for the fiscal year ended
March 31, 2003.
INFORMATION AND TECHNOLOGY SERVICES. The Company did not engage Ernst &
Young LLP or Grant Thornton LLP for services related to information technology
during the year ended March 31, 2003.
OTHER NON-AUDIT SERVICES. For the year ended March 31, 2003, the
Company was not billed by Ernst & Young LLP for any non-audit services. Grant
Thornton LLP billed the Company $4,511 for tax return preparation fees.
OTHER MATTERS
We are not aware that any matter other than those described in the
Notice of Meeting will be presented for action at the meeting. If, however,
other matters do properly come before the meeting, it is the intention of
Messrs. Jain and Olsen (the persons named as proxies) to vote the proxied shares
in accordance with their best judgment on such matters.
SHAREHOLDER PROPOSALS FOR 2004 ANNUAL MEETING
The Company's 2004 Annual Meeting of Shareholders is expected to be
held on or about August 19, 2004, and proxy materials in connection with that
meeting are expected to be mailed on or about July 10, 2004. In order to be
included in the Company's proxy materials for the 2004
13
Annual Meeting, shareholder proposals prepared in accordance with the proxy
rules must be received by the Company on or before March 25, 2004.
In addition, pursuant to the Company's Bylaws, a shareholder must give
notice to the Company prior to May 25, 2004 of any nominations for director or
any proposal which such shareholder intends to raise at the 2004 Annual Meeting.
If the Company receives notice of such nomination or proposal on or after that
date, such nomination or proposal will not be considered at the annual meeting.
Additionally, if the Company receives notice of a shareholder proposal
after June 2, 2004, it will be considered untimely pursuant to SEC Rules 14a-4
and 14a-5(e), and the persons named in the proxies solicited by the Board of
Directors for the 2004 Annual Meeting may exercise discretionary voting power
with respect to the proposal.
ADDITIONAL INFORMATION
A copy of the Company's Report to Shareholders for the fiscal year
ended March 31, 2003, accompanies this Notice of Annual Meeting and Proxy
Statement.
THE COMPANY WILL FURNISH WITHOUT CHARGE A COPY OF ITS ANNUAL REPORT ON
FORM 10-K (EXCLUSIVE OF EXHIBITS) FOR THE FISCAL YEAR ENDED MARCH 31, 2003, TO
EACH PERSON WHO IS A SHAREHOLDER OF THE COMPANY AS OF JULY 7, 2003, UPON RECEIPT
OF A WRITTEN REQUEST FOR SUCH REPORT. SUCH REQUESTS SHOULD BE SENT TO:
APA OPTICS, INC.
Attention: Secretary
2950 N.E. 84th Lane
Blaine, Minnesota 55449
By Order of the Board of Directors
/s/ Kenneth A. Olsen
Kenneth A. Olsen
Secretary
July 17, 2003
14
APPENDIX A
APA OPTICS, INC.
AUDIT COMMITTEE CHARTER
Objective
- ---------
The audit committee of the board of directors of APA shall use its best efforts
to ensure the independence of the company's independent accountants, the
integrity of management, and the adequacy of disclosure to the company's
shareholders, potential shareholders, and the investment community.
MEMBERS
The audit committee shall be appointed annually by the board of directors, with
its chairman (if any) to be selected by the committee. The committee shall have
at least three members. Each member must also be a member of the board of
directors. All of the committee members shall be "independent" and no member
shall own or control 20% or more of the company's securities. A director is
"independent" if he/she is an "independent director" as defined in the rules of
the Nasdaq Stock Market, Inc., and any other exchange on which the company's
securities are listed.
In selecting members of the audit committee, the board shall give consideration
to each nominee's capacity to serve, business experience, knowledge of APA
operations, finance, accounting, and auditing, facility in obtaining information
by inquiry, and commitment and available time.
Each member shall have the ability to read and understand fundamental financial
statements, and at least one member shall be an "audit committee financial
expert" as defined in the rules of the Securities and Exchange Commission.
The committee shall annually elect one of its members as chairperson. The
chairperson shall schedule meetings, preside over meetings, and report to the
board.
Vacancies on the committee shall be filled by the board of directors.
Meetings
- --------
The committee shall meet a minimum of 4 times per year and as scheduled by the
committee chairman. A majority of members (at least 2 of 3) shall constitute a
quorum. Each member shall be entitled to one vote. At the request of the
committee, meetings may be held with members of
15
management or the company's internal accounting staff or representatives of the
company's independent accountants or consultants. The committee shall prepare
and preserve written minutes of its meetings. The committee may appoint a
committee member or a non-committee member as secretary. The committee may take
action by conference telephone call, which shall constitute a meeting, or by
written action signed by all members.
The activities and findings of the committee and minutes of committee meetings
shall be made available to each member of the board.
AUTHORITY
The committee shall have unrestricted access to the company's personnel and
records and will be given the resources to discharge its duties. The committee
shall have the authority to engage independent counsel and other advisors, as it
deems necessary, to carry out its duties. The committee may conduct
investigations into significant matters brought to its attention during the
conduct of its duties and may retain persons having special competence as
necessary. The committee shall have the sole authority and responsibility to
select, evaluate, and, where appropriate, replace the outside auditors. The
committee also has the sole authority and responsibility to approve any
significant non-audit relationship with the independent auditors.
Responsibility
- --------------
While the fundamental responsibility for the company's financial statements and
disclosures rests with management and the independent auditor, the audit
committee must review:
o major issues regarding accounting principles and financial statement
presentations, including any significant changes in the company's
selection or application of accounting principles, and major issues as
to the adequacy of the company's internal controls and any special
audit steps adopted in light of material control deficiencies;
o analyses prepared by management and/or the independent auditor setting
forth significant financial reporting issues and judgments made in
connection with the preparation of the financial statements, including
analyses of the effects of alternative GAAP methods on the financial
statements;
o the effect of regulatory and accounting initiatives, as well as
off-balance sheet structures, on the financial statements of the
company; and
o earnings press releases (paying particular attention to any use of
"pro forma," or "adjusted" non-GAAP, information), as well as
financial information and earnings guidance provided to analysts and
rating agencies.
o establish procedures for (1) the receipt, retention, and treatment of
complaints received by the company regarding accounting, internal
accounting controls, or auditing matters; and (2) the confidential,
anonymous submission by employees of the company of concerns regarding
questionable accounting or auditing matters.
16
The audit committee shall have such other responsibilities as may be designated
to it from time to time by the board of directors. In addition, the audit
committee shall annually review and assess the adequacy of its Charter and
recommend to the board of directors any modifications in its duties and
responsibilities.
Operations
- ----------
The audit committee shall:
o Assist board oversight of (1) the integrity of the company's financial
statements, (2) the company's compliance with legal and regulatory
requirements, (3) the independent auditor's qualifications and
independence, and (4) the performance of the company's independent
auditors.
o Prepare the report that SEC rules require be included in the company's
annual proxy statement.
o Retain and terminate the company's independent auditors (subject, if
applicable, to shareholder ratification).
o At least annually, obtain and review a report by the independent
auditor describing: such firm's internal quality-control procedures;
any material issues raised by the most recent internal quality-control
review, or peer review, of the firm, or by any inquiry or
investigation by governmental or professional authorities, within the
preceding five years, respecting one or more independent audits
carried out by the firm, and any steps taken to deal with any such
issues; and (to assess the auditor's independence) all relationships
between the independent auditor and the company. The audit committee
should present its conclusions with respect to the independent auditor
to the full board
o Discuss the annual audited financial statements and quarterly
financial statements with management and the independent auditor,
including the company's disclosures under "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
o Discuss earnings press releases, as well as financial information and
earnings guidance provided to analysts and rating agencies. The audit
committee's responsibility to discuss earnings releases as well as
financial information and earnings guidance may be done generally
(i.e., discussion of the types of information to be disclosed and the
type of presentation to be made). The audit committee need not discuss
in advance each earnings release or each instance in which the company
may provide earnings guidance.
o As appropriate, obtain advice and assistance from outside legal,
accounting or other advisors.
o Discuss policies with respect to risk assessment and risk management.
The audit committee should analyze the company's major financial risk
exposures and discuss with
17
management the steps management has taken to monitor and control such
exposures. The audit committee is not required to be the sole body
responsible for risk assessment and management.
o Periodically meet separately with management, with personnel
responsible for the internal preparation of financial reports and
records, and with independent auditors.
o Review with the independent auditor any audit problems or difficulties
and management's response. Among the items the audit committee may
want to review with the auditor are: any accounting adjustments that
were noted or proposed by the auditor but were "passed" (as immaterial
or otherwise); any communications between the audit team and the audit
firm's national office respecting auditing or accounting issues
presented by the engagement; and any "management" or "internal
control" letter issued, or proposed to be issued, by the audit firm to
the company. The review should also include discussion of the
responsibilities, budget and staffing of the company's internal
financial functions.
o Set clear hiring policies for employees or former employees of the
independent auditors which shall comply in all respects with the rules
of the Securities and Exchange Commission concerning independence of
auditors and similar rules of any stock exchange on which the
company's securities are listed.
o Report regularly to the board of directors. The audit committee should
review with the full board any issues that arise with respect to the
quality or integrity of the company's financial statements, the
company's compliance with legal or regulatory requirements, the
performance and independence of the company's independent auditors, or
the performance of the internal financial accounting.
o Annually evaluate the performance of the audit committee.
o Review, discuss and report to the board of directors concerning
changes, if any, made or proposed by the government, accounting
profession, or the company relating to accounting principles and their
applications that could materially affect the company.
o Review, discuss and report to the board of directors concerning
significant issues reviewed by legal counsel concerning litigation,
contingencies, claims, or assessments.
o Review, discuss and report to the board of directors concerning
significant adjustments proposed by the independent accountants.
o Inquire of the independent accountants as to whether there have been
any disagreements with management which, if not satisfactorily
resolved, would have caused them to issue a nonstandard report on the
company's financial statements.
o Review unusual reporting issues prior to the issuance of any press
release on financial results.
o Advise the independent accountants and members of the internal
accounting staff that they may communicate directly with any member of
the committee on a confidential basis.
18
Internal Accounting Controls
- ----------------------------
The committee shall undertake such review as it deems necessary to ensure that
there exists an effective system of internal accounting controls. Without
limitation and as it deems appropriate, the committee shall:
o Meet privately with the independent accountants and appropriate
members of the company's financial staff to discuss pertinent matters.
o Review with the chief financial officer the activities, organizational
structure, and qualifications of the internal financial staff.
o Inquire of the chief financial officer and independent accountants the
extent to which their planned audit scope can be relied on to detect
material weaknesses in internal controls or the occurrence of
fraudulent financial reporting.
Corporate Compliance
- --------------------
The committee shall conduct such review as it deems necessary to ensure that the
company is maintaining effective controls against employee conflict of interest
and fraud and is in reasonable compliance with related laws. Without limitation
and as it deems appropriate, the committee shall:
o Review management's program to monitor compliance with the company's
code of conduct and the Foreign Corrupt Practices Act.
o Review significant related party transactions.
o Review the policies and procedures in effect for the review of officer
expenses and purchases.
o Review periodically the impact of significant accounting or reporting
developments that may affect the company.
o Review any legal matters that could have a significant impact on the
company's financial statements.
o If necessary, institute special investigations and, if appropriate,
hire special counsel or experts to assist.
19
Qualified Legal Compliance Committee
- ------------------------------------
The committee shall be the company's "qualified legal compliance committee" as
defined in the rules of the Securities and Exchange Commission. In this
capacity, the committee shall:
o Adopt written procedures for the confidential receipt, retention and
consideration of any report of a material violation of federal
securities laws, breach of fiduciary duty or similar violations by the
company or any officer, director, employee or agent of the company.
o Inform the company's chief legal officer and chief executive officer
of any report of evidence of a material violation.
o Determine whether an investigation is necessary regarding any report
of evidence of a material violation by the company, its officers,
directors, employees or agents and, if it determines an investigation
is necessary or appropriate:
o Notify the full board of directors;
o Initiate an investigation, which may be conducted either by the
chief legal officer (or the equivalent thereof) or by outside
attorneys; and
o Retain such additional expert personnel as the committee deems
necessary.
o At the conclusion of any such investigation:
o Recommend, by majority vote, that the company implement an
appropriate response to evidence of a material violation;
o Inform the chief legal officer and the chief executive officer
(or the equivalents thereof) and the board of directors of the
results of any such investigation and the appropriate remedial
measures to be adopted; and
o Acting by majority vote, take all other appropriate action,
including the notification of the Securities and Exchange
Commission in the event that the company fails in any material
respect to implement an appropriate response that the qualified
legal compliance committee has recommended.
Miscellaneous
- -------------
As to other related matters, without limitation and as it deems appropriate, the
committee shall:
o Discuss with the independent accountants the quality of the company's
financial and accounting personnel and any relevant recommendations
that the independent accountants may have, including those in their
"Report to Management."
20
o Review the extent of nonaudit services provided by the independent
accountants in relation to the objectivity needed in the audit.
o Evaluate the cooperation received by the independent accountants
during their audit examination, including the access to all requested
records, data, and information and elicit the comments of management
regarding the responsiveness of the independent accountants to the
company's needs.
o Request from outside auditors a formal written statement regarding all
relationships between the outside auditors and the company.
o Maintain an active dialogue with the outside auditors regarding any
undisclosed relations or services that could affect the objectivity
and independence of the outside auditors.
o Take, or recommend that the board of directors take, appropriate
action to oversee the outside auditors' independence.
21
APA OPTICS, INC.
ANNUAL MEETING OF SHAREHOLDERS
AUGUST 21, 2003
APA OPTICS, INC. PROXY
- --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Anil K. Jain and Kenneth A. Olsen, or either of
them, proxies or proxy, with full power of substitution, to vote all shares of
Common Stock of APA Optics, Inc. (the "Company") which the undersigned is
entitled to vote at the 2003 Annual Meeting of Shareholders to be held at the
Four Points Sheraton, 1330 Industrial Boulevard, Minneapolis, Minnesota 55431,
August 21, 2003, at 3:30 p.m., Central Daylight Time, and at any adjournment
thereof, as directed on the reverse side with respect to the proposals set
forth herein, all as more fully described in the Proxy Statement, and upon any
other matter that may properly come before the meeting or any adjournment
thereof.
SEE REVERSE FOR VOTING INSTRUCTIONS.
PLEASE DETACH HERE
1. Election of directors: 01 Anil K. Jain 04 Ronald G. Roth [ ] Vote FOR [ ] Vote WITHHELD
02 Kenneth A. Olsen 05 Stephen A. Zuckerman all nominees from all nominees
03 John G. Reddan (except as marked)
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE, ------------------------------------
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.) | |
------------------------------------
2. Upon such other matters as may properly come before the meeting.
The power to vote granted by this Proxy may be exercised by Anil K. Jain and
Kenneth A. Olsen, jointly or singly, or their substitute(s), who are present
and acting at said Annual Meeting or any adjournment of said Annual Meeting.
The undersigned hereby revokes any and all prior proxies given by the
undersigned to vote at this Annual Meeting.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE SHAREHOLDER'S INSTRUCTIONS. IF
THE SHAREHOLDER EXECUTES THIS PROXY BUT DOES NOT PROVIDE INSTRUCTIONS, THIS
PROXY WILL BE VOTED FOR THE ELECTION OF THE PROPOSED DIRECTORS.
It is urgent that each shareholder complete, date, sign, and mail this Proxy as
soon as possible. Your vote is important!
Address Change? Mark Box [ ] Indicate changes below: Dated and Signed ___________________________________, 2003
------------------------------------
| |
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Signature(s) in Box
Please sign as your name(s) appears above. When
signing as attorney, executor, administrator,
trustee, guardian, a officer of a corporation, or
partner of a partnership, please provide the name of
the entity on whose behalf you are signing and your
title.
PLEASE DO NOT FORGET TO DATE THIS PROXY.