FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the
Securities and Exchange Act of 1934
For the month of April, 2004
API ELECTRONICS GROUP INC.
(Formerly: Investorlinks.com Inc.)
(Translation of registrant’s name into English)
505 University Ave., Suite 1400, Toronto, Ontario M5G 1X3
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover form 20-F or Form 40-F:
Form 20-F x Form 40-F ¨
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2b under the Securities Exchange Act of 1934:
Yes: ¨ No: x
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-
Relevant Event dated April 28, 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
API ELECTRONICS GROUP INC. | ||||
(Formerly Investorlinks.com Inc.) | ||||
Date: April 28, 2004 | By: | /s/ Jason DeZwirek | ||
Jason DeZwirek, Chairman of the Board, Executive V.P., Secretary and Director |
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![]() | British Columbia Securities Commission | QUARTERLY AND YEAR END REPORT
BC FORM 51-901 (previously Form 61) |
Freedom of Information and Protection of Privacy Act: The personal information requested on this form is collected under the authority of and used for the purpose of administering theSecurities Act. Questions about the collection or use of this information can be directed to the Supervisor, Financial Reporting (604-899-6729), PO Box 10142, Pacific Centre, 701 West Georgia Street, Vancouver BC V7Y 1L2. Toll Free in British Columbia 1–800–373–5393
ISSUER DETAILS | DATE OF REPORT | |||||||
NAME OF ISSUER | ||||||||
API ELECTRONICS GROUP INC. | 2004/02/29 | 2004/04/28 | ||||||
ISSUER ADDRESS
505 UNIVERSITY AVENUE, SUITE 1400 | ||||||||
CITY | PROVINCE | POSTAL CODE | ISSUER FAX NO. | ISSUER TELEPHONE NO. | ||||
TORONTO | ON | M5G 1X3 | 416-593-4658 | 416-593-6543 | ||||
CONTACT NAME | CONTACT POSITION | CONTACT TELEPHONE NO. | ||||||
JASON DEZWIREK | CHAIRMAN | 416-593-6543 | ||||||
CONTACT EMAIL ADDRESS | WEB SITE ADDRESS | |||||||
jason@kaboose.com | www.api-electronics.com` | |||||||
CERTIFICATE
The three schedules required to complete this Report are attached and the disclosure contained therein has been approved by the Board of Directors. A copy of this Report will be provided to any shareholder who requests it. | ||||||||
DIRECTOR’S SIGNATURE Ø | PRINT FULL NAME | DATE SIGNED YY MM DD | ||||||
“JASON DEZWIREK” | JASON DEZWIREK |
2004 04 28 | ||||||
DIRECTOR’S SIGNATURE Ø | PRINT FULL NAME | DATE SIGNED YY MM DD | ||||||
“PHILLIP DEZWIREK” | PHILLIP DEZWIREK | 2004 04 28 |
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SCHEDULE “A”
FINANCIAL INFORMATION
See attached unaudited consolidated financial statements of API Electronics Group Inc. (the “Company”) for the nine-months ended February 29, 2004.
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SCHEDULE “B”
See attached unaudited consolidated financial statements of the Company for the nine-months ended February 29, 2004.
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SCHEDULE “C”
Management’s Discussion and Analysis
Overview
API Electronics Group Inc. (“API” or “Company”) is a North American based company focused on the manufacture of specialized electronic components and microelectronic circuits. API Electronics, Inc. (“Electronics”) is a leading designer and manufacturer of power transistors, small signal transistors, tuning diodes, hybrid circuits, resistor/capacitor networks, diodes, and other critical elements with precisely defined functional capabilities for advanced military, industrial, commercial, automotive and medical applications. The Company is a leading supplier of defence electronic components to the U.S. Department of Defence and its subcontractors as well as having a strong commercial user base.
API’s business strategy has been to strengthen its leadership position for its components through continued emphasis on technological advances, operational efficiencies, cost reductions, competitiveness and acquisitions. To this end, on May 31, 2002, API acquired all the outstanding shares of the privately-held “Filtran Group” (Filtran Inc. of Ogdensburg, New York; Filtran Limited, Canadian Dataplex Limited and Tactron Communications <Canada> Limited all of Nepean, Ontario, Canada). Filtran Group is a leading global supplier of superior quality electronic components to major producers of communications equipment, military hardware, computer peripherals, process control equipment and instrumentation. In business since 1969, Filtran Group is ISO 9001 registered and offers off-the-shelf and custom designed products and regularly ships components to clients in more than 34 countries. The acquisition broadens API’s product offerings for current and potential customers as well as providing synergies in the areas of engineering and technological capabilities. In February 2003, the Company acquired certain assets (contracts in progress, inventory, machinery and equipment and intangibles) of TM Systems Inc. and commenced business as TM Systems II Inc. (“TM”). In business for over 30 years, TM supplies the defence sector with naval landing and launching equipment, flight control and signalling systems, radar systems alteration, data communication and test equipment as well as aircraft ground support equipment. The acquisition expands API’s core-military and defence-related electronics business. On April 13, 2004, the Company purchased certain assets of Islip Transformer & Metal Co. Inc. (“Islip”), a private company that supplies critical systems and components to the U.S. Department of Defense. The acquisition further augments API’s in-demand components and systems for both government and corporate clients.
The Company’s objectives are to seek long-term stable growth for all of its operating segments (Electronics, Filtran Group, and TM) through continuous capital investment, employing today’s production methods and technologies, and by demanding uncompromising quality control.
Consolidated Results of Operations
Nine Months ended February 29, 2004 compared to February 28, 2003
Sales Revenue
The Company continued to record strong sales growth in nine months ended February 29, 2004. Revenues increased by 48.1% to $8,182,367 from the $5,523,823 posted in the nine months ended February 28, 2003. The growth during the period was attributed primarily to the February 2003-acquired TM with sales revenue in the amount of $2,231,833.
Cost of Goods Sold and Gross Margin
The cost of goods sold was 71.2% of sales in 2004 and a slight improvement over the 71.6% of sales posted in 2003. Accordingly, the gross margin for 2004 period was 28.8% and 28.4% for the 2003 period.
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Selling Expenses
Selling expenses increased to $637,337 for the nine months ended February 29, 2004 from $472,380 for the nine months ended February 28, 2003. As a percentage of sales the 2004 selling expenses came in at 7.8% an improvement over the 8.6% posted in 2002.
General and Administrative Expenses
General and administrative expenses increased slightly to $1,177,568 for 2004 from $1,144,833 incurred during 2003. As a percentage of sales, the 2004 general and administration expenses were 14.4% and this was an improvement over the 20.7% posted in 2003.
Several components of general and administrative expenses saw increases in a few areas as a result of the February 6, 2003 acquisition of TM and the overall increase in sales revenue. The components that saw larger increases are as follows: Officers salaries - $238,961 (2003 - $120,929), rent and management fees - $146,298 (2003 - $28,616), office supplies and expense - $61,061 (2003 -$32,988) and professional fees - $230,438 (2003 - $170,662). These increases were offset by a substantial decrease in investor relations for period ending February 29, 2004 to $63,544 from $316,885 during the nine month period ending February 28, 2003. In the first few years as a public company, large expenditures on investor relations were considered critical to gain shareholder and investor awareness of the Company. While this continues to be important, expenditures in this area have been scaled back in 2004.
Amortization
Amortization increased to $670,492 during the nine months ended February 29, 2004 from the $276,047 amount for the nine months ended February 28, 2003. The increase resulted from the overall increase in the capital and intangible asset base arising from the acquisition of TM in February 2003.
Management continues to emphasize efficiencies and control of overheads. It is anticipated that TM’s operations will be fully integrated into Electronics’ state-of-the art facilities in fiscal 2004. This should provide savings in overhead and administrative costs. It is also anticipated that Islip’s operations will be integrated into those facilities in the near future.
Other Income and Expense
Other income during the quarter was $105,189 for the nine months ended February 29, 2004 compared to $108,335 for the nine months ended February 28, 2003.
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Consolidated Results of Operations(continued)
Nine Months ended February 29, 2004 compared to February 28, 2003
Other expense relates to interest on long-term debt and the Company saw an increase from $69,870 in 2003 to $80,131 in 2004. The increase is attributed to higher debt levels in 2004.
Operating Income (Loss)
The Company posted operating income (loss) for the nine months ended February 29, 2004 of ($127,961) a substantial improvement over the operating loss of ($324,820) for the period ending February 28, 2003. For the three months ended February 29, 2004, the Company posted net operating income of $12,976 a substantial improvement over the operating loss of ($203,144) for the three month period ending February 28, 2003.
Net Income / Loss
The Company incurred a net loss for the nine months ended February 29, 2004 of $106,772($0.005/share) compared to a net loss of $289,224($0.018/share) for the nine months ended February 28, 2003.
Liquidity and Capital Resources
Summary
At February 29, 2004, the Company had cash reserves of $505,298 compared to $1,561,199 as at May 31, 2003. In addition, the Company had marketable securities of $2,187 at February 29, 2004(May 31, 2003 - $431,168). The reduction in cash and marketable securities was attributed primarily to the repayment of the Filtran and TM promissory notes which had balances of $1,098,418 and $1,475,652 respectively as at May 31, 2003.
At February 29, 2004 working capital totalled $3,247,156 compared to $2,195,522 at May 31, 2003. The current ratio at February 29, 2004 increased to 2.64:1 from the 1.46:1 ratio as at May 31, 2003. The quick ratio (which excludes inventory and prepaid expenses from current assets) was 0.96:1 at February 29, 2004 – a slight increase from the 0.83:1 posted at May 31, 2003.
As at February 29, 2004, the Company’s working capital was sufficient to meet the Company’s current requirements.
Inventory rose 10.0% from $2,931,924 as at May 31, 2003 to $3,224,853 as at February 29, 2004. Accounts receivable decreased 18.2% from $1,619,487 as at May 31, 2003 to $1,324,827 as at February 29, 2004. Accounts payable increased 2.7% from $1,265,458 at May 31, 2003 to $1,299,190 as at February 29, 2004.
Long-term debt (current and long-term portion) decreased from $2,931,687 at May 31, 2003 to $219,592 at February 29, 2004 as a result of the repayments of the Filtran and TM promissory note which were due during the quarter and are now repaid in full.
As a result of the two promissory note repayments, the debt to equity ratio (current & long-term debt to shareholder’s equity) improved to 0.025 as at February 29, 2004 compared to 0.35 as at May 31. 2003.
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Consolidated Results of Operations(continued)
Nine Months ended February 29, 2004 compared to February 28, 2003
Total assets decreased to $11,176,051 at February 29. 2004 from $13,495,221 as at May 31, 2003. This was attributed to the repayment of the Filtran and TM promissory notes from the Company’s cash and equivalents on hand.
Cash Flow
Cash generated (used) in operating activities increased to $584,628 for the nine months ended February 29, 2004 compared to $(503,081) for the nine months ended February 28, 2003. This was attributed to higher cash and cash equivalents generated by operations and reduced investments in non-cash working capital.
The major source of cash in 2004 was provided through the issue of common shares upon the exercise of warrants in the amount of $570,000, proceeds on sale of land and building of $108,186, proceeds on sale of marketable securities in the amount of $476,004, and bank indebtedness advances of $45,000.
The major source of cash in 2003 was provided through the issue of common shares in the amount of $4,065,000 following a June 2002 private placement, and long-term debt advances of $469,586.
The major use of cash during 2004 was the purchase of capital assets in the amount of $168,788 and the repayment of long-term debt in the amount of $2,673,908.
The major use of cash in 2003 was the purchase of capital assets of 348,289, the purchase of marketable securities in the amount of $263,670, bank indebtedness repayments of $284,488, and the TM business acquisition in the amount of $3,022,263.
Financings
During the period, 950,000 warrants were exercised @ $0.60 per warrant for total proceeds of $570,000. There were no other financings during the nine months ended February 29, 2004.
Subsequent Events
On April 13, 2004, the Company purchased certain assets of Islip Transformer & Metal Co. Inc. (“Islip”), a private company that supplies critical systems and components to the U.S. Department of Defense. Under the terms of the all cash deal, the Company purchased Islip’s inventory, specific contracts, machinery and equipment, product rights and specifications, and trade name.
Risks
The Company is exposed to a variety of risks in its business. These include operational, currency, foreign operations, credit, and interest rate. Steps have been taken in all areas to mitigate these risks.
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API Electronics Group Inc.
Consolidated Interim Financial Statements
Third Quarter
For the nine month period ended February 29, 2004
(Expressed in US Dollars)
(Unaudited)
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API Electronics Group Inc.
Consolidated Balance Sheets
(Expressed in US Dollars)
February 29 2004 | May 31 2003 | |||||||
(unaudited) | (audited) | |||||||
Assets | ||||||||
Current | ||||||||
Cash and cash equivalents | $ | 505,298 | $ | 1,561,199 | ||||
Marketable securities (Note 2) | 2,187 | 431,168 | ||||||
Accounts receivable | 1,324,827 | 1,619,487 | ||||||
Unbilled revenue | 80,978 | 324,078 | ||||||
Inventories (Note 3) | 3,224,853 | 2,931,924 | ||||||
Prepaid expenses | 92,110 | 61,988 | ||||||
5,230,253 | 6,929,844 | |||||||
Capital assets (Note 4) | 3,042,574 | 3,275,979 | ||||||
Goodwill | 918,529 | 918,529 | ||||||
Intangible assets (Note 5) | 1,984,695 | 2,370,869 | ||||||
$ | 11,176,051 | $ | 13,495,221 | |||||
Liabilities and Shareholders’ Equity | ||||||||
Current | ||||||||
Bank indebtedness (Note 6) | $ | 45,000 | $ | — | ||||
Accounts payable | 1,299,190 | 1,265,458 | ||||||
Deferred revenue | 483,468 | 661,406 | ||||||
Future income tax liability (Note 8) | 108,000 | 108,000 | ||||||
Current portion of long-term debt (Note 7) | 47,439 | 2,699,458 | ||||||
1,983,097 | 4,734,322 | |||||||
Future income tax liability (Note 8) | 247,727 | 248,000 | ||||||
Long term debt (Note 7) | 172,153 | 232,229 | ||||||
2,402,977 | 5,214,551 | |||||||
Shareholders’ equity | ||||||||
Share capital (Note 9) | 9,314,507 | 8,744,507 | ||||||
Paid in capital | 770,790 | 770,790 | ||||||
Cumulative foreign exchange translation adjustment | 281,790 | 252,614 | ||||||
Deficit | (1,594,013 | ) | (1,487,241 | ) | ||||
8,773,074 | 8,280,670 | |||||||
$ | 11,176,051 | $ | 13,495,221 | |||||
On behalf of the Board:
“JASON DEZWIREK” |
“PHILLIP DEZWIREK” |
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements.
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API Electronics Group Inc.
Consolidated Interim Statement of Operations
and Retained Earnings (Deficit)
(Unaudited)
(Expressed in US$)
Nine Months Ended February 29 | Three Months Ended February 29 | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Sales | $ | 8,182,367 | $ | 5,523,823 | $ | 2,861,572 | $ | 2,079,512 | ||||||||
Cost of sales(exclusive of items shown separately below) | 5,824,931 | 3,955,383 | 2,057,364 | 1,474,066 | ||||||||||||
Gross profit | 2,357,436 | 1,568,440 | 804,208 | 605,446 | ||||||||||||
Expenses | ||||||||||||||||
Selling expenses | 637,337 | 472,380 | 229,762 | 180,221 | ||||||||||||
General and administrative | 1,177,568 | 1,144,833 | 292,831 | 539,133 | ||||||||||||
Amortization | 670,492 | 276,047 | 268,639 | 89,236 | ||||||||||||
2,485,397 | 1,893,260 | 791,232 | 808,590 | |||||||||||||
Operating Income | (127,961 | ) | (324,820 | ) | 12,976 | (203,144 | ) | |||||||||
Other (Income) | ||||||||||||||||
Expenses | ||||||||||||||||
Other income | (105,189 | ) | (108,335 | ) | (3,331 | ) | (39,057 | ) | ||||||||
Interest expense | 80,131 | 69,870 | 25,884 | 9,921 | ||||||||||||
(25,058 | ) | (38,465 | ) | 22,553 | (29,136 | ) | ||||||||||
Income (loss) before income taxes | (102,903 | ) | (286,355 | ) | (9,577 | ) | (174,008 | ) | ||||||||
Income taxes | 3,869 | 2,869 | 2,869 | 2,869 | ||||||||||||
Net income (loss) | (106,772 | ) | (289,224 | ) | (12,446 | ) | (176,877 | ) | ||||||||
Retained earnings (deficit), beginning of period | (1,487,241 | ) | (938,226 | ) | (1,581,567 | ) | (1,050,573 | ) | ||||||||
Deficit, end of period | $ | (1,594,013 | ) | $ | (1,227,450 | ) | $ | (1,594,013 | ) | $ | (1,227,450 | ) | ||||
Earning (loss) per share – basic | $ | (0.005 | ) | $ | (0.018 | ) | $ | (0.001 | ) | $ | (0.011 | ) | ||||
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements.
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API Electronics Group Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(Expressed in US$)
Nine Months Ended February 29 | Three Months Ended February 29 | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Cash provided by (used in) | ||||||||||||||||
Operating activities | ||||||||||||||||
Net income (loss) for the period | $ | (106,772 | ) | $ | (289,224 | ) | $ | (12,446 | ) | $ | (176,877 | ) | ||||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||||||
Amortization | 670,492 | 276,047 | 268,639 | 89,236 | ||||||||||||
Gain on settlement of debt | (39,000 | ) | — | — | — | |||||||||||
Gain on sale of marketable securities | (47,695 | ) | — | (5,827 | ) | — | ||||||||||
Loss on sale of land and building | 16,243 | — | — | — | ||||||||||||
Net change in non-cash working capital balances (Note 10) | 91,360 | (489,904 | ) | (396,680 | ) | (321,259 | ) | |||||||||
584,628 | (503,081 | ) | (146,314 | ) | (408,900 | ) | ||||||||||
Investing activities | ||||||||||||||||
Business acquisition | — | (3,022,263 | ) | — | (3,022,263 | ) | ||||||||||
Purchase of capital assets | (168,788 | ) | (348,289 | ) | (82,203 | ) | 55,523 | ) | ||||||||
Proceeds on sale of land and building | 108,186 | — | — | — | ||||||||||||
Proceeds on sale of marketable securities | 476,004 | — | 184,393 | — | ||||||||||||
Purchase of marketable securities | — | (263,670 | ) | — | (11,943 | ) | ||||||||||
415,402 | (3,634,222 | ) | 102,190 | (3,089,729 | ) | |||||||||||
Financing activities | ||||||||||||||||
Issue of share capital | 570,000 | 4,065,000 | — | 2,890,000 | ||||||||||||
Bank indebtedness advances (repayments) | 45,000 | (284,488 | ) | (30,000 | ) | — | ||||||||||
Long-term debt repayments | (2,673,908 | ) | 469,586 | (2,610,654 | ) | 1,535,520 | ||||||||||
(2,058,908 | ) | 4,250,098 | (2,640,654 | ) | 4,425,520 | |||||||||||
Foreign exchange gain (loss) on cash held in foreign currency | 2,977 | 1,575 | (3,119 | ) | 2,173 | |||||||||||
Net increase (decrease) in cash | (1,055,901 | ) | 114,370 | (2,687,897 | ) | 929,064 | ||||||||||
Cash, beginning of period | 1,561,199 | 1,408,637 | 3,193,195 | 593,943 | ||||||||||||
Cash, end of period | $ | 505,298 | $ | 1,523,007 | $ | 505,298 | $ | 1,523,007 | ||||||||
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API Electronics Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
(Unaudited)
February 29, 2004 and 2003
Nature of Business | API Electronics Group Inc.’s (“the Company”) business focus is the manufacture and design of high reliability semiconductor and microelectronics circuits for military, aerospace and commercial applications. Through recent acquisitions, the Company has expanded its manufacturing and design of electronic components to include filters, transformers, inductors, and custom power supplies for land and amphibious combat systems, mission critical information systems and technologies, shipbuilding and marine systems, and business aviation. | |
Business Acquisitions and Name Changes | On May 31, 2002 the Company completed the acquisition of all the outstanding common shares of Filtran Inc. (“Filtran USA”), a private company incorporated under the laws of the State of New York; Filtran Limited (“Filtran Canada”), a private company incorporated under the laws of Ontario; Canadian Dataplex Limited (“CDL”), a private company incorporated under the laws of Canada, Tactron Communications (Canada) Limited (“TCCL”), a private company incorporated under the laws of Ontario. Filtran USA, Filtran Canada, CDL, TCCL are known collectively as the “Filtran Group”. The Filtran Group’s business focus is similar to that of the Company. The business combination, which has been accounted for using the purchase method, is described in Note 1 (a) to the financial statements. | |
On May 23, 2002 the company incorporated an entity named “5/23 Corp” under the laws of the State of Delaware. On January 13, 2003 “5/23 Corp” changed its name to TM Systems II, Inc. (“TM II”). On February 6, 2003, TM II acquired certain assets of TM Systems Inc. and carries on business as TM System II, Inc. TM II’s business focus is similar to that of the Company. The business combination, which has been accounted for using the purchase method, is described in Note 1(b) to the financial statements. |
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API Electronics Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
(Unaudited)
February 29, 2004 and 2003
Principles of Consolidation | The consolidated financial statements include the accounts of the Company (the legal parent), together with its wholly owned subsidiaries, API Electronics, TM II and the Filtran Group. | |||
Basis of Presentation | These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. All amounts are disclosed in US dollars unless otherwise indicated. | |||
Contract Revenue | Revenue from contracts is recognized using the percentage of completion method. The degree of completion is determined based on costs incurred, excluding costs that are not representative of progress to completion, as a percentage of total costs anticipated for each contract. Provision is made for losses on contracts in progress when such losses first become known. Revisions in cost and profit estimates, which can be significant, are reflected in the accounting period in which the relevant facts become known. | |||
Provisions for warranty claims and other allowances are made based on contract terms and prior experience. | ||||
Non-Contract Revenue | Non-contract revenue is recognized when risk and title passes to the customer, which is generally upon shipment of the product. | |||
Marketable Securities | Temporary investments are stated at the lower of cost and market value. | |||
Inventory | Raw materials are recorded at the lower of cost and net realizable value. Finished goods and work in process are stated at the lower of cost, which includes material, labour and overhead, and net realizable value. Cost is generally determined on a first-in, first-out basis. | |||
Capital Assets | Capital assets are recorded at cost less accumulated amortization and are amortized using the straight-line basis over the following years: |
Buildings | 20 years | |||
Computer equipment | 3 years | |||
Computer software | 3 years | |||
Furniture and fixtures | 5 years | |||
Machinery and equipment | Ranging from 5 to 10 years | |||
Vehicles | 3 years | |||
Website development | 3 years |
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API Electronics Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
(Unaudited)
February 29, 2004 and 2003
Goodwill | Effective April 1, 2001, the Company adopted the CICA handbook section 3062 “Goodwill and Other Intangible Assets”. Goodwill is subject to an impairment test on at least an annual basis or upon the occurrence of certain events or circumstances. Goodwill impairment is assessed based on a comparison of the fair value of a reporting unit to the underlying carrying value of the reporting unit’s net assets, including goodwill. When the carrying amount of the reporting unit exceeds its fair value, the fair value of the reporting unit’s goodwill is compared with its carrying amount to measure the amount of impairment loss, if any. Management has determined there is no impairment in goodwill as of February 29, 2004. | |||
Intangible Assets | Intangible assets that have a finite life are amortized using the straight-line basis over the following period: | |||
Non-compete agreements | 5 years | |||
Customer contracts | 5 years | |||
Income taxes | The Company accounts for income taxes under the asset and liability method. Under this method, future income tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial reporting and tax bases of assets and liabilities and available loss carryforwards. A valuation allowance is established to reduce tax assets if it is more likely than not that all or some portions of such tax assets will not be realized. | |||
Foreign Currency Translation | The Company’s functional currency is United States Dollars and the consolidated financial statements are stated in United States dollars, “the reporting currency”. Integrated operations have been translated from Canadian dollars into United States dollars at the year-end exchange rate for monetary balance sheet items, the historical rate for non-monetary balance sheet items, and the average exchange rate for the year for revenues, expenses, gains and losses. The gains or losses on translation are included in net income (loss) for the year. | |||
Self-sustaining operations are translated at current rates of exchange. All exchange gains and losses will be accumulated in the foreign exchange translation account on the balance sheet. |
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API Electronics Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
(Unaudited)
February 29, 2004 and 2003
Accounting Estimates | The preparation of these consolidated financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting periods. By their nature, these estimates are subject to uncertainty and the effect on the consolidated financial statements of changes in such estimates in future periods could be material. | |
Stock-Based Compensation Plans | The Company has a stock-based compensation plan that is described in Note 9. No compensation expense is recognized for these plans when stock or stock options are issued to employees and directors. Any consideration paid on the exercise of options or purchase of stock is credited to share capital. | |
Research and Development Expenses | Research and development expenses are recorded at net of applicable investment tax credits. | |
Financial Instruments | The Company’s financial instruments include certain instruments with short-term maturity and long-term debt. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest rate, currency or credit risks arising from its financial instruments. | |
As at February 29, 2004 there were no significant differences between the carrying amounts and the fair values of the Company’s financial instruments unless otherwise noted. | ||
Cash and Cash equivalents | Cash and cash equivalents consist of cash on hand, bank balances and investments in money market instruments with maturities of three months or less. |
17
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
February 29, 2004 and 2003
1(a) | Business Acquisition |
On May 31, 2002, the Company acquired all of the issued and outstanding shares of the Filtran Group of companies for $2,996,547 (Cdn $4,100,000). The purchase price was satisfied through payment of cash in the amount of $1,042,277 and a promissory note given in the amount of $1,954,270 (Cdn $3,000,000). Also incurred were professional fees in connection with the acquisition in the amount of $327,065 giving a total acquisition cost of $3,323,612.
The business combination was accounted for using the purchase method, whereby the fair market values of the net assets of the Filtran Group are reflected in the Company’s balance sheet as at May 31, 2002.
The net assets acquired at fair value, as at May 31, 2002 are as follows:
Cash | $ | 101,623 | ||
Current assets | 1,204,202 | |||
Capital assets | 1,984,492 | |||
Current liabilities | (507,256 | ) | ||
Long-term liabilities | (217,690 | ) | ||
Future income tax liabilities | (530,000 | ) | ||
Fair value of tangible net assets | 2,035,371 | |||
Non-compete agreement | 325,712 | |||
Goodwill | 962,529 | |||
Total cost of acquisition | $ | 3,323,612 | ||
(b) | Incorporation and Asset Purchase |
On May 23, 2002, the Company incorporated an entity named “5/23 Corp” under the laws of the State of Delaware. On January 13, 2003, “5/23 Corp” changed its name to TM Systems II, Inc. (“TM II”). On February 6, 2003, TM II acquired certain assets of TM Systems Inc. and carries on business as TM System II, Inc. The purchase price was satisfied through payment of cash in the amount of $1,500,000 and a promissory note given in the amount of $1,475,652 with interest of 1.65% per annum and payable on or before February 6, 2004. Also incurred were professional fees in connection with the acquisition in the amount of $21,958 giving a total acquisition cost of $2,997,610.
18
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
February 29, 2004 and 2003
1(b) | Incorporation and Asset Purchase (continued) |
The assets acquired at fair value, as at February 6, 2003 are as follows:
Capital assets | $ | 25,120 | |
Inventory - parts and supplies | 288,009 | ||
Inventory - work in progress | 468,697 | ||
Fair value of tangible net assets | 781,826 | ||
Customer contracts | 1,715,784 | ||
Non-compete agreement | 500,000 | ||
Net assets acquired | $ | 2,997,610 | |
If the aggregate of gross orders that TM II ships, invoices and any advance payment that TM II receives, falls below $3,000,000 for the period from February 6, 2003 to December 31, 2003, the promissory note will be adjusted by a percentage reduction equal to the percentage shortfall. As at February 29, 2004, the above $3,000,000 milestone was met and there was no adjustment to the promissory note
TM II is required to pay an additional 10% of gross revenue for certain contracts specified in the asset purchase agreement.
2. | Marketable Securities |
February 29 2004 | May 31 2003 | |||||
Shares in venture issues | $ | 2,187 | $ | 2,139 | ||
Income trust units | — | 186,632 | ||||
Short-term company paper and bonds (maturity less than one year) | — | 242,397 | ||||
$ | 2,187 | $ | 431,168 | |||
3. | Inventories |
February 29 2004 | May 31 2003 | |||||
Inventory as at February 29, 2004 was estimated based upon gross margin percentage | $ | 3,224,853 | $ | 2,931,924 | ||
19
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollar)
(Unaudited)
February 29, 2004 and 2003
4. | Capital Assets |
February 29, 2004 | |||||||||
Cost | Accumulated Amortization | Net Book Value | |||||||
Land | $ | 411,892 | $ | — | $ | 411,892 | |||
Buildings | 2,243,062 | 396,931 | 1,846,131 | ||||||
Computer equipment | 90,821 | 49,986 | 40,835 | ||||||
Computer software | 140,321 | 78,519 | 61,802 | ||||||
Furniture and fixtures | 79,958 | 31,848 | 48,110 | ||||||
Machinery and equipment | 1,857,159 | 1,250,081 | 607,078 | ||||||
Vehicles | 25,150 | 6,130 | 19,020 | ||||||
Web site development costs | 30,826 | 23,120 | 7,706 | ||||||
$ | 4,879,189 | $ | 1,836,615 | $ | 3,042,574 | ||||
May 31, 2003 | |||||||||
Cost | Accumulated Amortization | Net Book Value | |||||||
Land | $ | 423,985 | $ | — | $ | 423,985 | |||
Buildings | 2,279,785 | 306,224 | 1,973,561 | ||||||
Computer equipment | 77,255 | 34,009 | 43,246 | ||||||
Computer software | 101,326 | 47,091 | 54,235 | ||||||
Furniture and fixtures | 71,017 | 20,751 | 50,266 | ||||||
Machinery and equipment | 1,779,892 | 1,083,418 | 696,474 | ||||||
Vehicles | 24,259 | 5,679 | 18,580 | ||||||
Web site development costs | 30,826 | 15,194 | 15,632 | ||||||
$ | 4,788,345 | $ | 1,512,366 | $ | 3,275,979 | ||||
Included in machinery and equipment is $158,774 (May 31, 2003 - $158,774) of property held under capital leases. Depreciation and amortization expense amounted to $670,492 (2003 - $276,047). Of this amount $155,038 (2003 - $109,158) was included in cost of sales.
20
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
February 29, 2004 and 2003
5. | Intangible Assets |
February 29 2004 | May 31 2003 | |||||||
Non-compete agreements | $ | 858,712 | $ | 858,712 | ||||
Less: Accumulated amortization | (225,199 | ) | (96,392 | ) | ||||
Customer contracts (Note 1(c)) | 1,715,784 | 1,715,784 | ||||||
Less: Accumulated amortization | (364,602 | ) | (107,235 | ) | ||||
$ | 1,984,695 | $ | 2,370,869 | |||||
6. | Bank Indebtedness |
The Company’s wholly owned subsidiary, API Electronics has a working capital line of credit of $250,000. API Electronics has borrowed $45,000 (May 31, 2003 - $Nil) against this line of credit as at February 29, 2004. The credit is secured by all of its assets pursuant to a general security agreement. The bank indebtedness is due on demand and bears interest at prime plus 1%.
The Company’s wholly owned subsidiary, Filtran Canada is currently negotiating a line of credit of Cdn $1,000,000 (approx. US$732,000)).
21
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
February 29, 2004 and 2003
7. Long-term Debt
February 29 2004 | May 31 2003 | |||||
Promissory note payable to former shareholders of the Filtran Group, secured by a collateral mortgage on real property registered in Ontario and the issued and outstanding shares of the Filtran Group, repayable May 31, 2004 plus interest at 5% per annum | $ | — | $ | 1,098,418 | ||
Promissory note payable in connection with the acquisition of assets of TM Systems, due February 6, 2004 with an interest rate of 1.65% per annum, secured by the assets of TM Systems II Inc. | — | 1,475,652 | ||||
Bank term loan, secured by machinery and equipment, repayable in monthly instalments of $1,565 plus interest at prime plus 2% | 37,358 | 47,400 | ||||
Loan payable, unsecured and non-interest bearing | — | 39,000 | ||||
Mortgage payable, secured by real estate, repayable in blended monthly instalments of $3,812 at interest rates of 7.00% and 8.75% | 73,964 | 138,489 | ||||
Various equipment capital leases, with monthly lease payments of $3,545 including interest at approximately 9%, secured by the leased assets | 108,270 | 132,112 | ||||
Due to shareholder, non-interest bearing with no specific terms of repayment | — | 616 | ||||
219,592 | 2,931,687 | |||||
Less: Current portion | 47,439 | 2,699,458 | ||||
$ | 172,153 | $ | 232,229 | |||
The long-term debt repayable over the next five fiscal years is as follows:
2004 (3 months) | $ | 172,153 | |
2005 | 86,266 | ||
2006 | 80,531 | ||
2007 | 28,724 | ||
2008 | — |
22
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
February 29, 2004 and 2003
8. | Income Taxes |
The significant components of future income tax assets consist of the following as at May 31, 2003:
May 31 2003 | ||||
Future income tax assets | ||||
Loss carry forwards | $ | 624,000 | ||
Other | 15,000 | |||
Marketable securities | 77,000 | |||
Capital assets | 184,000 | |||
900,000 | ||||
Future income tax liabilities | ||||
Capital assets | (381,000 | ) | ||
Non-compete agreement | (47,000 | ) | ||
Inventory | (108,000 | ) | ||
Unrealized foreign exchange gain | (117,000 | ) | ||
(653,000 | ) | |||
Valuation allowance | (608,000 | ) | ||
$ | (356,000 | ) | ||
A reconciliation between income taxes provided at actual rates and at the basic rate of 37.79% (May 31, 2002 - 40.29%) for federal and provincial taxes is as follows:
Net loss | $ | (590,428 | ) | |
Recovery of income tax at statutory rates | $ | (223,000 | ) | |
Increase in taxes resulting from: | ||||
Non-deductible items and other | (33,413 | ) | ||
Tax reassessment 1998 | — | |||
Change in valuation allowance | 215,000 | |||
Provision for income taxes – May 31, 2003 | $ | (41,413 | ) | |
The Company and its subsidiaries have non-capital losses of approximately $1,971,000 to apply against future taxable income. These losses will expire as follows: $599,000 in 2008 and $1,372,000 in 2010.
23
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
February 29, 2004 and 2003
9. | Share Capital |
a) | Authorized |
Unlimited special shares
Unlimited common shares
(b) | Issued Common Shares |
Number of Shares | Consideration | ||||
Balance at May 31, 2002 | 14,903,814 | $ | 4,642,007 | ||
Shares issued upon private placement - June 2002 | 500,000 | 1,175,000 | |||
Shares issued upon exercise of stock options | 200,000 | 120,000 | |||
Shares issued upon private placement - February 2003 | 6,925,000 | 2,770,000 | |||
Shares issued upon exercise of warrants | 62,500 | 37,500 | |||
Balance at May 31, 2003 | 22,591,314 | 8,744,507 | |||
Shares issued upon exercise of warrants | 950,000 | 570,000 | |||
Balance at February 29, 2004 | 23,541,314 | $ | 9,314,507 | ||
(c) | Warrants |
Common shares purchase warrants (“Warrants”)
As at February 29, 2004 the following Warrants are outstanding and exercisable:
Number Outstanding | Share for Warrants | Exercise Price | Expiry Date | |||
1,649,579 | 1 for 1 | 0.45 | February 28, 2005 | |||
1,649,579 | 1 for 1 | 0.75 | August 30, 2005 | |||
500,000 | 1 for 1 | 3.00 | June 30, 2004 | |||
2,450,000 | 1 for 1 | 0.60 | February 28, 2005 |
The continuity of common share purchase warrants is as follows:
Warrants outstanding, May 31, 2002 | 3,525,825 | ||
Issued: | |||
- Re: Private Placement - June 2002 | 500,000 | ||
- Re: Private Placement - February 2003 | 3,462,500 | ||
Exercised: | |||
- Re: Private Placement - February 2003 | (62,500 | ) | |
Expired: | |||
- Re: Advisory services | (226,667 | ) | |
Warrants outstanding, May 31, 2003 | 7,199,158 | ||
Exercised: | |||
- Re: Private Placement – February 2003 | (950,000 | ) | |
Warrants outstanding, February 29, 2004 | 6,249,158 | ||
24
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
February 29, 2004 and 2003
9. | Share Capital (continued) |
(d) | Stock Options: |
As at February 29, 2004 the following options are exercisable and outstanding:
Issued to | Number Outstanding | Exercise Price | Expiry Date | ||||
Directors | 50,000 | $ | 0.45 | August 31, 2006 | |||
Directors | 50,000 | $ | 0.75 | August 31, 2006 | |||
Directors | 4,400,000 | $ | 0.60 | January 8, 2009 |
The continuity of stock options is as follows:
Number of Options | Weighted Average Price | ||||||
Options outstanding, May 31, 2002 | 325,000 | $ | 0.73 | ||||
Cancelled: - February 2003 | (25,000 | ) | (2.35 | ) | |||
Exercised:- December 2002 | (100,000 | ) | (0.45 | ) | |||
- January 2003 | (100,000 | ) | (0.75 | ) | |||
Options outstanding, May 31, 2003 | 100,000 | 0.60 | |||||
Issued: - January 2004 | 4,400,000 | 0.60 | |||||
Options outstanding, February 29, 2004 | 4,500,000 | $ | 0.60 | ||||
10. | Cash Flow Information |
(a) | Changes in non-cash working capital are as follows: |
Nine Months ended | Three Months ended | |||||||||||||||
February 29, 2004 | February 28, 2003 | February 29, 2004 | February 28, 2003 | |||||||||||||
Accounts receivable | $ | 307,289 | $ | (317,676 | ) | $ | (154,638 | ) | $ | (204,928 | ) | |||||
Inventory | (274,000 | ) | (422,668 | ) | 3,745 | (178,166 | ) | |||||||||
Unbilled revenue | 243,100 | — | 17,340 | — | ||||||||||||
Prepaid expenses | (28,951 | ) | (47,924 | ) | (10,985 | ) | (59,784 | ) | ||||||||
Accounts payable | 21,860 | 298,364 | 113,133 | 121,619 | ||||||||||||
Deferred revenue | (177,938 | ) | — | (365,275 | ) | — | ||||||||||
$ | 91,360 | $ | (489,904 | ) | $ | (396,680 | ) | $ | (321,259 | ) | ||||||
(b) | Supplemental Cash Flow Information |
Nine Months ended | Three Months ended | |||||||||||
February 29, 2004 | February 28, 2003 | February 29, 2004 | February 28, 2003 | |||||||||
Cash paid for interest | $ | 80,131 | $ | 69,870 | $ | 25,884 | $ | 9,921 | ||||
25
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
February 29, 2004 and 2003
11. | Related Party Transactions |
Included in general and administrative expenses are consulting fees of $35,803 (2003 - $30,896) paid to an individual who is a director and officer of the Company and rent, management fees, and office administration fees of $126,963 (2003 - $Nil) paid to a company in which two of the directors are also directors of the Company.
These related party transactions were in the normal course of operations and are recorded at the exchange amount agreed to by the related parties.
12. | Per Share Data |
The weighted average number of shares issued and outstanding for the period ended February 29, 2004 was 23,066,314 (2003 - 15,844,091).
The effect of the exercise of outstanding options and warrants would be anti-dilutive.
13. | Economic Dependence |
Accounts receivable consist principally of amounts due from the US Department of Defence, US Department of Defence subcontractors, and commercial/industrial users.
Although, the U.S. Department of Defence (directly and through subcontractors) accounts for a significant portion of the Company’s revenue, management has determined that the Company is not economically dependent on this business as, if necessary, it could re-deploy resources to further service the commercial/industrial user.
14. | Commitments and Contingencies |
(a) | Rent |
The following is a schedule by years of approximate future minimum rental payments under operating leases that have remaining non-cancelable lease terms in excess of one year as of February 29, 2004.
2004 (3 months) | $ | 5,766 | |
2005 | 22,243 | ||
2006 | 9,889 |
(b) | 401(k) Plan |
During 1998, the Company adopted a 401(k) deferred compensation arrangement. Under the provision of the plan, the Company is required to match 50% of employee contributions up to a maximum of 3% of the employee’s eligible compensation. Employees may contribute up to a maximum of 15% of eligible compensation. The Company may also make discretionary contributions up to a total of 15% of eligible compensation. During the period ended February 29, 2004, the Company incurred $1,812 (2003 - $7,582) as its obligation under the terms of the plan. Of this amount $1,812 (2003 - $7,582) has been charged to general and administrative expenses.
15. | Comparative Figures |
Comparative figures have been reclassified to conform to the current period presentation.
26
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
February 29, 2004 and 2003
16. | Subsequent Events |
(a) On April 13, 2004, the Company purchased certain assets of Islip Transformer & Metal Co. Inc. (“Islip”), a private company that supplies critical systems and components to the U.S. Department of Defense. Under the terms of the all cash deal, the Company purchased Islip’s inventory, specific contracts, machinery and equipment, product rights and specifications, and trade name.
(b) On March 31, 2004, 300,000 warrants were exercised at $0.45 for total gross proceeds of $135,000. The proceeds will be used for general working capital purposes.
27