UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
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14A-6(E)(2))
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[ ] Soliciting Material Pursuant to Sec.240.14a-12
APA Optics, Inc.
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(Name of Registrant as Specified In Its Charter)
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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 2004 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 19, 2004, at
3:30 p.m., Central Daylight Time, to consider and vote upon the following
matters:
1. Election of five directors.
2. Amendment of the Articles of Incorporation to change the name of the
Company to APA Enterprises, Inc.
3. 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 6, 2004, 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
Kenneth A. Olsen
Secretary
July 19, 2004
TABLE OF CONTENTS
Page
----
SOLICITATION AND REVOCATION OF PROXIES . . . . . . . . . . . . . . . . . . . . 1
BOARD RECOMMENDATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
VOTING RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
OWNERSHIP OF COMMON STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
PROPOSAL 1: ELECTION OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . 4
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
CERTAIN RELATIONSHIPS AND TRANSACTIONS . . . . . . . . . . . . . . . . . . . .13
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. . . . . . . . . . . .14
RELATIONSHIP WITH INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . .14
PROPOSAL 2: CHANGE OF NAME . . . . . . . . . . . . . . . . . . . . . . . . . .16
OTHER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
SHAREHOLDER PROPOSALS FOR 2004 ANNUAL MEETING. . . . . . . . . . . . . . . . .16
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
APA OPTICS, INC.
2950 N.E. 84TH LANE
BLAINE, MINNESOTA 55449
_________________
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
AUGUST 19, 2004
_________________
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 2004 Annual Meeting of the
Shareholders of the Company, to be held on August 19, 2004, 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 16, 2004.
HOW TO VOTE
- 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
- 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
and FOR changing the name of the Company. 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
- 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 18, 2004. 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
- 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
- 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
- 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 and FOR the change of name of the company.
VOTING RIGHTS
Only shareholders of record at the close of business on July 6, 2004, 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.
Amendment of the Articles of Incorporation to change the name of the
Company requires the affirmative vote of a majority of the shares present at the
Annual Meeting, either in person or by proxy, which are entitled to vote on that
matter (but in no event less than the majority of a quorum). Election of
directors is by plurality vote.
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.
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OWNERSHIP OF COMMON STOCK
The following table shows as of July 6, 2004, 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 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
2950 N.E. 84th Lane
Blaine, Minnesota 55449 1,670,502 (l) 14.1
Kenneth A. Olsen
2950 N.E. 84th Lane
Blaine, Minnesota 55449 742,832 (2) 6.3
Cheri Podzimek
5480 Nathan Lane
Plymouth, Minnesota 55442 -0- *
Herman Lee
20152 Highway 9N
Borup, Minnesota 56519 761,700 6.4
John G. Reddan
1950 Ridgewood Avenue
White Bear Lake, MN 55110 11,000 (3) *
Ronald G. Roth
19 East Oaks Road
North Oaks, MN 55127 334,800 (3) 2.8
Stephen A. Zuckerman, M.D.
2828 Kenwood Isles Drive
Minneapolis, MN 55408 23,000 (3) *
All current directors and
executive officers as a group (6
persons)
2,782,134 (3)(4) 23.4
* 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.
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(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 15,000 shares that may be acquired upon exercise of options that
are or will become exercisable within sixty days of the record date.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
Our Nominating Committee has named 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.
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 58 1979
Kenneth A. Olsen 60 1980
Ronald G. Roth 59 2002
Stephen A. Zuckerman, M.D. 62 2002
John G. (Jack) Reddan 74 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 currently
serves as Chief Financial Officer. 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. From 1992
through 2003 he also served as vice president in charge of 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
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provider in Minnesota. Mr. Roth graduated with a B.A. in Marketing from Michigan
State University.
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 as 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, Minneapolis, Minnesota (2000 to present).
John G. (Jack) Reddan joined the Board of Directors in November 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 for 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 6 meetings during fiscal 2004.
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, a compensation committee, and a
nominating committee, each of which is comprised of all non-employee (outside
directors). The members of these committees during fiscal 2004 were as follows:
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Audit Committee Compensation Committee Nominating Committee
- --------------------- ---------------------- ---------------------
Ronald Roth Ronald Roth, Chairman Ronald Roth, Chairman
Stephen Zuckerman, Stephen Zuckerman Stephen Zuckerman
Jack Reddan, Chairman Jack Reddan Jack Reddan
Audit Committee. The audit committee has sole authority to appoint, review
and discharge our independent auditors. The committee also reviews and approves
in advance the services provided by the independent auditors, oversees the
internal audit function and reviews our internal accounting controls. The audit
committee operates under a written charter adopted by the Board of Directors.
All members of the Audit Committee are "independent" under the current Nasdaq
stock market listing standards. The Board has identified John G. Reddan as the
current member of our Audit Committee who meets the definition of an "Audit
Committee Financial Expert" recently established by the Securities and Exchange
Commission ("SEC"). During fiscal 2004, the Audit Committee held 3 meetings.
See "RELATIONSHIP WITH INDEPENDENT AUDITORS - Report of Audit Committee" below.
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 2004 to consider the compensation of the executive officers. See
"EXECUTIVE COMPENSATION - Report of Compensation Committee" below.
Nominating Committee. The nominating committee selects nominees for
election as directors of the Company. The nominating committee was formed on May
27, 2004 and has met once, at which time it selected nominees for election at
the upcoming annual meeting. The nominating committee will consider qualified
director nominees recommended by shareholders for election in 2005 and beyond.
Our process for receiving and evaluating Board member nominations from our
shareholders is described below under the caption "Nomination of Director
Candidates."
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 $26,500 in directors' fees for services rendered during fiscal 2004.
We have discontinued the $500 meeting fee effective with the annual meeting in
2004.
In addition, 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 2004, options to purchase 15,000 shares at $2.91 per share were awarded
to nonemployee directors pursuant to this Plan.
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CODE OF ETHICS
The Company has adopted a code of ethics applicable to its chief executive
officer and senior financial officers. The code is available at no charge by
request to the Company in writing, to the attention of the Comptroller.
Additionally, the code is filed with the Securities and Exchange Commission as
an exhibit to the Company's Report on Form 10-KSB for the fiscal year ended
March 31, 2004 and is available on our website (www.apaoptics.com).
-----------------
NOMINATION OF DIRECTOR CANDIDATES
Effective May 27, 2004, the Board of Directors appointed a standing
nominating committee for selection of nominees for election to the Board of
Directors. The committee's charter is available on our website
(www.apaoptics.com) or by request in writing to the Company, to the attention of
-----------------
the Comptroller.
The nominating committee determines the required selection criteria and
qualifications of director nominees based upon the needs of the Company at the
time nominees are considered. In general, at a minimum, a candidate must
possess the ability to apply good business judgment and must be in a position to
properly exercise his or her duties of loyalty and care. In addition, the
committee evaluates candidates based on financial literacy, knowledge of the
Company's industry or other background relevant to the Company's needs, status
as a shareholder in the Company, "independence" for purposes of compliance with
the rules of the SEC and the Nasdaq Stock Market ("Nasdaq"), and willingness,
ability, and availability for service. Candidates will be preferred who hold an
established executive level position in business, finance, law, education,
research or government. When current Board members are considered for
nomination for reelection, the nominating committee also takes into
consideration their prior APA Board contributions, performance and meeting
attendance records.
The nominating committee has not utilized the services of any third party
search firm to assist in the identification or evaluation of Board member
candidates. However, the committee may engage a third party to provide such
services in the future, as it deems necessary or appropriate at the time in
question.
The nominating committee will consider qualified candidates for possible
nomination that are submitted by our shareowners. Shareholders who wish to make
such a submission may do so by sending the following information to the
nominating committee c/o APA Optics, Inc., Attn: Comptroller, at the Company:
(1) name of the candidate and a brief biographical sketch and resum ; (2)
contact information for the candidate and a document evidencing the candidate's
willingness to serve as a director if elected; (3) a signed statement as to the
submitting shareholder's current status as an owner and the number of shares
currently held. Nominations are further subject to the requirements of Section
2.14-a of the Company's Bylaws. Our Bylaws are available on our website
(www.apaoptics.com) or by request in writing to the Company (Attn: Comptroller).
-----------------
This information will be evaluated against the criteria established by the
committee and the specific needs of the Company at that time. Based upon such
preliminary assessment,
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candidate(s) who appear best suited to meet the needs of the Company may be
invited to participate in a series of interviews, which are used as a further
means of evaluating potential candidates. On the basis of information learned
during this process, the committee will determine which nominee(s) to propose
for election at the next annual meeting. The committee will use the same process
for evaluating all nominees, regardless of the source of the nomination.
No candidates for director nominations were submitted to the committee by
any shareholders in connection with the 2004 annual meeting. Any shareholders
desiring to present a nomination for consideration by the Committee prior to our
2005 annual meeting must do so at least 90 days prior to the one year
anniversary of this year's annual meeting (i.e. 90 days prior to August 19,
2005), as required by Section 2.14-a of our Bylaws.
SHAREHOLDER COMMUNICATION WITH THE BOARD
We do not have a formal procedure for shareholder communication with our
Board of Directors. Any matter intended for the Board, or for any individual
member or members of the Board, should be directed to our Comptroller at the
Company address with a request to forward the same to the intended recipient.
All such communications will be forwarded unopened.
We encourage all incumbent directors, as well as all nominees for election
as director, to attend the annual meeting of shareholders. All incumbent
directors and nominees attended the annual meeting in August 2003.
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 and our other executive officers whose
annualized compensation in fiscal 2004 (based on salary and bonus) exceeded
$100,000 (the "Named Executive Officers").
Annual Compensation
Name Fiscal ------------------- All Other
Principal Positions Year Salary Bonus Compensation
- ---------------------------------- ------ ------------------- ----------- --------------
Anil K. Jain 2004 $ 183,600 0 $ 8,084
President and Chief Executive 2003 $ 186,831 0 $ 5,506
Officer 2002 $ 179,790 $20,000 (1) $ 8,758 (2)
Cheri B. Podzimek(3) 2004 $ 78,208 0 $ 711(4)
President, APACN
(1) Bonus for fiscal year 2001, paid in fiscal year 2002.
(2) Consists of Company contribution on Dr. Jain's behalf to 401(k) plan and an
auto allowance.
(3) Ms. Podzimek joined the Company on June 27, 2003. Information in the table
reflects compensation for the period from June 27, 2003 through March 31,
2004.
(4) Consists of Company contribution on Ms. Podzimek's behalf to 401(k) plan.
8
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.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning individual option grants to
the Named Executive Officers in fiscal 2004:
- -------------------------------------------------------------------------------------------
Grant Date
Individual Grants Value
- ------------------------------------------------------------------------ -----------------
Percent of
Total
Options/
Number of SARs
Securities Granted to
Underlying Employees Exercise of
Options/SARs in Fiscal Base Price Expiration Grant Date
Name Granted (#) Year ($/Sh) Date Present Value $
- ------------------ ------------- ----------- ------------ ---------- -----------------
Cheri B. Podzimek 35,000 25% 2.55 10/30/09 $ 56,350 (1)
- -------------------------------------------------------------------------------------------
(1) Based upon the Black Scholes valuation method. Assumptions used include an
expected term of 5 years, risk-free interest rate of 3.3%, dividend yield
of zero, and historical volatility of 75%.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides information relating to option exercises during
fiscal 2004 and the number and value of shares of common stock subject to
options held by the Named Executive Officers as of March 31, 2004.
Number of Shares Underlying Value of Unexercised In-the-
Unexercised Options at Fiscal Money Options at Fiscal Year-
Year-End End
----------------------------- -----------------------------
Shares
Acquired on
Name Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
- ----------------- ----------- -------------- ------------- -------------- ------------- --------------
Anil K. Jain -0- -0- -0- -0- -0- -0-
Cheri B. Podzimek -0- -0- -0- 35,000 -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 2004,
there were no increases in the base salary of the executive officers.
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 paid to the executive officers for
fiscal 2003 and no determination has been made to date for fiscal 2004.
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.
10
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 2004, the annual base salary of the Company's
Chief Executive Officer was not increased and remained at $183,600. No bonus
was paid to the Chief Executive Officer for fiscal 2003 and no determination has
been made to date for fiscal 2004.
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, Chairman John G. Reddan Stephen A. Zuckerman, M.D.
Members of the Compensation Committee
11
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, 1999 through March 31, 2004.
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.
[GRAPHIC OMITTED]
CUMULATIVE TOTAL RETURN
BASE LINE
----------------------------------------------
3/99 3/00 3/01 3/02 3/03 3/04
APA Optics, Inc. 100.00 419.64 125.90 38.71 19.00 35.57
Nasdaq Stock Market 100.00 215.25 77.53 60.69 49.47 82.63
(U.S.)
Nasdaq Non-Financial 100.00 207.54 80.00 81.00 58.17 87.85
12
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Lease for Company Facility. We have leased our principal executive office
and manufacturing facility in Blaine, Minnesota since December 1, 1984 from
Jain-Olsen Properties, a partnership consisting of Anil K. Jain and Kenneth A.
Olsen (who are officers, directors, and principal shareholders of the Company).
Certain terms of the lease are set forth in Note K of Notes to Financial
Statements included in our 2004 Annual Report, which is being distributed with
this Proxy Statement. The lease expires on November 30, 2004 but can be
extended for at least another five years. As of the date of this Proxy
Statement, the Company intends to extend the lease, with certain amendments,
including options to extend through November 30, 2019. We made rent and tax
payments under the lease of $149,549 and $138,142 to Jain-Olsen Properties
during fiscal 2004 and 2003, respectively, and we are obligated to make payments
in fiscal 2005 of $102,477 in rent and taxes for the remainder of the current
lease term ending November 30, 2004. We believe the current lease terms and the
proposed amended lease terms are at least as favorable to us as terms we could
have negotiated with an unrelated third party.
Key Man Insurance. We maintain key man insurance in the amount of
$2,000,000 on the life of Anil K. Jain, who is a director and officer. Up to
$500,000 of the proceeds of the 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.
Kenneth Olsen Severance Arrangement. Kenneth Olsen, secretary, former vice
president, and a member of the Board of Directors of the Company, reduced his
hours of work to 20
13
hours/week beginning June 1, 2003. During this time, Mr. Olsen maintained all
the benefits he otherwise participated in with the Company as of June 1, 2003.
The Company retained the right to recall him for increased or full time work at
any time in future, if needed. In consideration of this right to recall, the
Company guaranteed at least 20 hours/week work until December 31, 2003,
resulting in proportional adjustments (actual hours vs. 40 hours/week) in
compensation. Commencing January 1, 2004, the terms of Mr. Olsen's employment
are as follows:
- Fifteen (15) months of full time salaried employment (pay rate
equivalent to pay rate prior to this agreement, which is $96,900 per
year). During the term of this agreement, he will be available to APA
and will not be employed elsewhere. He also has the option to
voluntarily resign from his employment and take any unused portion of
the compensation under the employment package as a lump sum, if he
chooses.
- Mr. Olsen will not be provided any benefits at the Company's expense.
However, he may participate in any standard benefit provided by the
Company electing to so participate and by providing for a deduction
from his compensation for the cost of the benefit or reimbursing the
full amount of expenses incurred by the Company in providing the
designated benefits.
- Mr. Olsen will be entitled to the balance of any unpaid compensation
as a severance package if his employment is terminated by the Company
prior to March 31, 2005 for any reason other than a just cause
involving misconduct of Mr. Olsen.
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, except for the following items.
Stephen A. Zuckerman, a director, filed a report on Form 4, after the required
filing date, with respect to a purchase of shares of common stock by his spouse.
Dr. Zuckerman disclaims beneficial ownership of such shares. Director options,
issued annually after the annual shareholders meeting, were granted on August
22, 2003 but were not reported on Form 4 until September 3, 2003, for directors
Dr. Stephen Zuckerman and Ronald Roth, and September 4, 2003 for Jack Reddan.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
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 3 meetings during fiscal 2004. The meetings were
designed to facilitate and encourage communication between the Audit Committee
and the internal auditors and the Company's independent auditors, Grant Thornton
LLP.
14
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 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, 2004 be included in the Company's annual report on Form 10-K.
Ronald G. Roth John G. Reddan Stephen A. Zuckerman, M.D.
Members of the Audit Committee
INDEPENDENT AUDITORS' FEES
The firm of Grant Thornton LLP, independent accountants, audited our
financial statements for the years ending March 31, 2004, 2003 and 2002. Our
audit committee has appointed them to serve as our auditors for the fiscal year
ending March 31, 2005. Representatives of Grant Thornton LLP are expected to
attend the annual meeting to answer any questions and will have the opportunity
to make a statement if they wish.
The following table presents fees for professional services rendered for
the two most recent fiscal years.
2004 2003
------- -------
Audit fees (1) $62,400 $39,110
Audit-related fees (2) $ 7,308 $ 7,450
Tax fees
Tax returns and compliance $ 8,900 $ 5,560
Other tax (3) $ 7,500 $ 775
________________________
(1) Audit fees include fees billed for 2003, fees billed and expected to be
billed for 2004 by Grant Thornton LLP for professional services rendered
for the audit of our annual financial statements, the review of our
financial statements included in our reports on Form 10-Q, services in
connection with registration statements filed with the SEC, and accounting
consultations necessary for the rendering of an opinion on our financial
statements.
(2) Audit-related services include due diligence and other acquisition-related
services.
(3) Other tax services include acquisition-related tax structuring, tax
planning, state tax planning and other tax consultation.
15
Our Audit Committee must pre-approve all audit services, engagement fees
and terms, and all permitted non-audit engagements, subject to the de minimus
exceptions permitted pursuant to the Securities Exchange Act of 1934. Pursuant
to its pre-approval policy, the Audit Committee has authorized management to
engage Grant Thornton for tax planning and preparation and filing of the
company's tax returns.
PROPOSAL NO. 2
CHANGE OF NAME
Subject to ratification by the shareholders, our Board of Directors has
voted to change the name of the Company from "APA Optics, Inc." to "APA
Enterprises, Inc." The name change is intended to reflect the diversification
of the Company's business into several operating divisions. There will be no
change in the Company's Nasdaq trading symbol as a result of the name change.
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 2005 ANNUAL MEETING
The Company's 2005 Annual Meeting of Shareholders is expected to be held on
or about August 18, 2005, and proxy materials in connection with that meeting
are expected to be mailed on or about July 11, 2005. In order to be included in
the Company's proxy materials for the 2005 Annual Meeting, shareholder proposals
prepared in accordance with the proxy rules must be received by the Company on
or before April 1, 2005.
In addition, pursuant to the Company's Bylaws, a shareholder must give
notice to the Company prior to May 20 2005 of any nominations for director or
any proposal which such shareholder intends to raise at the 2005 Annual Meeting.
If the Company receives notice of such nomination or proposal on or after May
20, 2005, such nomination or proposal will not be considered at the annual
meeting.
Additionally, if the Company receives notice of a shareholder proposal
after June 6, 2005, 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 2005 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, 2004, 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
16
MARCH 31, 2004, TO EACH PERSON WHO IS A SHAREHOLDER OF THE COMPANY, UPON RECEIPT
OF A WRITTEN REQUEST FOR SUCH REPORT. SUCH REQUESTS SHOULD BE SENT TO:
APA OPTICS, INC.
Attention: Comptroller
2950 N.E. 84th Lane
Blaine, Minnesota 55449
By Order of the Board of Directors
Kenneth A. Olsen
Secretary
July 19, 2004
17
APA OPTICS, INC.
PROXY
ANNUAL MEETING OF SHAREHOLDERS - AUGUST 19, 2004
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 2004 Annual Meeting of Shareholders to be held at the
Four Points Sheraton, 1330 Industrial Boulevard, Minneapolis, Minnesota 55431,
August 19, 2004, at 3:30 p.m., Central Daylight Time, and at any adjournment
thereof, as directed below with respect to the proposals set forth below, 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.
1. ELECTION OF DIRECTORS:
FOR all nominees listed WITHHOLD AUTHORITY to vote for
below (except as marked to all nominees listed below [ ]
the contrary below) [ ]
Anil K. Jain, Kenneth A. Olsen, John G. Reddan, Ronald G. Roth and Stephen A.
Zuckerman
(INSTRUCTION: TO WITHHOLD AUTHORITY FOR ANY INDIVIDUAL NOMINEE, WRITE THAT
NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)
___________________________________________________________
2. CHANGE OF NAME OF COMPANY:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. 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!
Dated and Signed ________________, 2004
_____________________________________
Signature of Shareholder(s)
_____________________________________
Signature of Shareholder(s)
Please sign as your name(s) appears above. When signing as attorney,
executor, administrator, trustee, guardian, authorized 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.