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 September, 2002
API ELECTRONICS GROUP INC. (Formerly: Investorlinks.com Inc.)
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(Translation of registrant's name into English)
505 University Ave., Suite 1400, Toronto, Ontario M5G 1X3
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(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- _____________
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: September 30, 2002 By: /s/ Jason DeZwirek
------------------ -------------------------------
Jason DeZwirek, Chairman of the Board,
Executive V.P., Secretary and Director
QUARTERLY AND YEAR END REPORT
[LOGO BCSC] British Columbia Securities Commission 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 the Securities 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
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ISSUER DETAILS DATE OF REPORT
NAME OF ISSUER FOR QUARTER ENDED YY MM DD
API ELECTRONICS GROUP INC. 2002/05/31 2002 09 26
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ISSUER ADDRESS
505 UNIVERSITY AVENUE, SUITE 1400
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CITY PROVINCE POSTAL CODE ISSUER FAX NO. ISSUER TELEPHONE NO.
TORONTO ON M5G 1X3 416-593-4658 416-593-6543
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CONTACT NAME CONTACT POSITION CONTACT TELEPHONE NO.
JASON DEZWIREK CHAIRMAN 416-593-6543
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CONTACT EMAIL ADDRESS WEB SITE ADDRESS
jason@kaboose.com www.api-electronics.com
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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.
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DIRECTOR'S SIGNATURE PRINT FULL NAME DATE SIGNED
. "JASON DEZWIREK" JASON DEZWIREK YY MM DD
2002 09 26
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DIRECTOR'S SIGNATURE PRINT FULL NAME DATE SIGNED
. "PHILLIP DEZWIREK" PHILLIP DEZWIREK YY MM DD
2002 09 26
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2
SCHEDULE "A"
FINANCIAL INFORMATION
See attached audited consolidated financial statements of API Electronics Group
Inc. (the "Company") for the fiscal years ended May 31, 2002 and 2001.
API Electronics Group Inc.
Consolidated Financial Statements
For the years ended May 31, 2002 and 2001
(Expressed in US Dollars)
API Electronics Group Inc.
Consolidated Financial Statements
For the years ended May 31, 2002 and 2001
(Expressed in US Dollars)
Contents
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2
Auditors' Report
Consolidated Financial Statements 3
Balance Sheets 4
Statements of Operations and Deficit 5
Statements of Cash Flows 6
Summary of Significant Accounting Policies 9
Notes to Financial Statements
Auditors' Report
To the Shareholders of
API Electronics Group Inc.
We have audited the consolidated balance sheet of API Electronics Group Inc. as
at May 31, 2002 and the consolidated statements of operations and deficit and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
applicable in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at May 31, 2002 and the
results of its operations and its cash flows for the year then ended in
accordance with generally accepted in Canada.
The consolidated financial statements for the year ended May 31, 2001 were
audited by another auditor who expressed an opinion without reservation on those
statements in his report dated July 14, 2001.
(signed) BDO Dunwoody LLP
Chartered Accountants
Toronto, Ontario
August 2, 2002
2
API Electronics Group Inc.
Balance Sheets
(Expressed in US Dollars)
May 31 2002 2001
- --------------------------------------------------------------------------------------------
Assets
Current
Cash $ 1,408,637 $ 41,073
Accounts receivable 1,073,058 340,383
Inventories (Note 2) 1,852,483 1,277,399
Prepaid expenses 45,358 13,174
------------------------------
4,379,536 1,672,029
Capital assets (Note 3) 2,867,382 881,700
Goodwill (Note 4) 962,529 10,552
Intangible assets (Note 5) 325,712 -
------------------------------
$ 8,535,159 $ 2,564,281
============================================================================================
Liabilities and Shareholders' Equity
Current
Bank indebtedness (Note 6) $ 284,488 $ 342,146
Accounts payable 874,269 341,216
Current portion of long-term debt (Note 7) 1,072,706 58,640
------------------------------
2,231,463 742,002
Future income tax liability (Note 8) 530,000 -
Long term debt (Note 7) 1,299,125 229,550
Convertible promissory note (Note 9) - 902,422
------------------------------
4,060,588 1,873,974
------------------------------
Shareholders' equity
Share capital (Note 10) 4,642,007 100
Paid in capital 770,790 770,790
Deficit (938,226) (80,583)
------------------------------
4,474,571 690,307
------------------------------
$ 8,535,159 $ 2,564,281
============================================================================================
On behalf of the Board:
(signed) Jason DeZwirek Director
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(signed) Phillip DeZwirek Director
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The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
3
API Electronics Group Inc.
Consolidated Statements of Operations and Deficit
(Expressed in US Dollars)
For the years ended May 31 2002 2001
- ----------------------------------------------------------------------------------
Sales $ 2,903,120 $ 2,653,040
Cost of sales 2,255,841 1,930,582
------------------------------
Gross profit 647,279 722,458
------------------------------
Expenses
Business development 501,583 -
Selling 339,048 246,844
General and administrative 685,747 300,598
------------------------------
1,526,378 547,442
------------------------------
Operating income (loss) (879,099) 175,016
Other (income) expenses
Other income (75,565) (13,719)
Interest on long term debt 37,467 86,342
------------------------------
(38,098) 72,623
------------------------------
Income (loss) before income taxes (841,001) 102,393
Income taxes (Note 8) 16,642 292
------------------------------
Net income (loss) for the year (857,643) 102,101
Deficit, beginning of year (80,583) (182,684)
------------------------------
Deficit, end of year $ (938,226) $ (80,583)
==================================================================================
Earnings (loss) per share - basic (Note 14) $ (0.12) $ 0.02
==================================================================================
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
4
API Electronics Group Inc.
Statements of Cash Flows
(Expressed in US Dollars)
For the years ended May 31 2002 2001
- ---------------------------------------------------------------------------------------
Cash was provided by (used in)
Operating activities
Net income (loss) for the year $ (857,643) $ 102,101
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Amortization 150,138 120,132
Capitalized interest - 38,673
Changes in non-cash working capital
balances (Note 11(a)) (103,543) (317,641)
--------------------------
(811,048) (56,735)
--------------------------
Investing activities
Purchase of capital assets (257,217) (187,850)
Business acquisition, net of cash acquired (955,374) -
--------------------------
(1,212,591) (187,850)
--------------------------
Financing activities
Cash acquired through reverse take-over, net of
acquisition costs 1,178,376 -
Issue of share capital 2,296,212 -
Bank indebtedness repayments (112,200) (5,083)
Repayment of long term debt (58,575) (12,422)
Increase in long term debt 87,390 222,000
--------------------------
3,391,203 204,495
--------------------------
Net increase (decrease) in cash for the year 1,367,564 (40,090)
Cash, beginning of year 41,073 81,163
--------------------------
Cash, end of year $ 1,408,637 $ 41,073
=======================================================================================
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
5
API Electronics Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
May 31, 2002 and 2001
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 Acquisition and
Name Change On August 31, 2001, Investorlinks.com Inc. a
public company incorporated under the laws
of the Province of Ontario, and API
Electronics Inc. ("API Electronics"), a
private company incorporated under the laws
of the State of New York, completed the
business combination referred to in Note
1(a) to the financial statements. Pursuant
to Articles of Amendment dated September 10,
2001, the Company changed its name from
Investorlinks.com Inc. to API Electronics
Group Inc. As stated in Note 1(a), the
business combination has been accounted for
as a reverse take-over of the Company by API
Electronics.
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 (b) to the financial statements.
Principles of Consolidation The consolidated financial statements
include the accounts of the Company (the
legal parent), together with its wholly
owned subsidiaries, API Electronics 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.
6
API Electronics Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
May 31, 2002 and 2001
Revenue Recognition Revenue is recognized when risk and title passes to
the customer, which is generally upon shipment of the
product. Revenues from contracts are recognized on the
percentage of completion basis, measured by the
percentage of contract costs incurred to date compared
to estimated total contract costs for each contract.
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
Website development 3 years
Goodwill Effective January, 2002, the Canadian Institute of
Chartered Accountants issued new accounting standards
relating to accounting for goodwill and other
intangible assets acquired in business combinations.
Goodwill will no longer be required to be amortized,
but is now subject to an annual test for impairment.
Any impairment in the value of the goodwill is written
off against earnings.
Prior to 2002, goodwill was amortized on a
straight-line basis over 5 years.
Intangible Assets Intangible assets which have a finite life are
amortized over their estimated useful lives.
The non-compete agreement is amortized using the
straight-line basis over 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.
7
API Electronics Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
May 31, 2002 and 2001
Foreign Currency
Translation The consolidated financial statements are stated in
United States dollars, "the reporting currency". The
transactions of the Company have been recorded during
the period in Canadian dollars. The translation of
Canadian dollars into United States dollars have been
made 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.
The Filtran Group is a self-sustaining group which is
translated at current rates of exchange. All exchange
gains and losses will be accumulated in the foreign
exchange translation account on the balance sheet.
There was no foreign exchange translation amount at
year end as the Filtran Group was acquired May 31,
2002.
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.
Advertising Costs The Company's policy is to expense advertising costs
as incurred. Advertising expenses included in selling
expenses is $14,535 (2001 - $12,767).
Stock-Based
Compensation Plans The Company has a stock-based compensation plan which
is described in Note 8. No compensation expense is
recognized for these plans when stock or stock options
are issued to employees. Any consideration paid on the
exercise of options or purchase of stock is credited
to share capital.
8
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2002 and 2001
1. (a) Business Acquisition, Name Change and Share Consolidation
On August 31, 2001, the Company acquired all of the 197 issued and
outstanding shares of API Electronics for $2,600,000. The purchase
price was satisfied by the issue of 6,500,000 units of the Company at
$0.40 per unit. Each unit consists of one common share and 1/2 of one
Series A common share purchase warrants exercisable at $0.45 per share
expiring February 28, 2003 and 1/2 of one Series B common share
purchased warrant exercisable at $ 0.75 expiring August 30, 2003. As a
result of the transaction, the original shareholders of API Electronics
owned 60% of the issued shares of the Company. The business acquisition
resulted in a change in business focus and an introduction of new
management for the Company. Accordingly, the Company has accounted for
the acquisition as a reverse take-over by API Electronics. Application
of reverse take-over accounting results in the following:
i) API Electronics is deemed to be the acquirer for accounting
purposes and its assets and liabilities are included in the
consolidated balance sheet at their carrying values. The
comparative figures are those of API Electronics.
ii) The consolidated balance sheet combines the assets and
liabilities of the Company as an acquisition under the purchase
method of accounting for business combinations.
The net assets of the Company acquired, at fair value, as at August 31,
2001 are as follows:
Cash and cash equivalents $1,213,248
Marketable securities 1,848
Other current assets 122,305
Capital assets 3,559
Current liabilities (132,815)
----------
Net assets acquired 1,208,145
Less: Cost of acquisition (34,872)
----------
Consideration attributed to share capital of shares issued $1,173,273
==========
Pursuant to Articles of Amendment dated September 10, 2001, the Company
changed its name from Investorlinks.com.Inc. to API Electronics Group
Inc. and consolidated the issued and outstanding common shares on the
basis of one common share for every three issued and outstanding common
share of the Company.
(b) 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.
9
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2002 and 2001
1. (b) Business Acquisition (continued)
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
===========
2. Inventories
2002 2001
-------------------------
Finished good $ 1,232,246 $ 866,799
Work-in-process 123,442 151,500
Raw materials 496,795 259,100
-------------------------
$ 1,852,483 $ 1,277,399
=========================
3. Capital Assets
2002
----------------------------------------
Cost Accumulated Net
Amortization Book Value
Land $ 394,127 $ - $ 394,127
Buildings 1,780,573 160,099 1,620,474
Computer equipment 38,063 - 38,063
Computer software 50,322 - 50,322
Furniture and fixtures 40,252 6,751 33,501
Machinery and equipment 1,511,764 806,557 705,207
Web site development costs 30,826 5,138 25,688
----------------------------------------
$ 3,845,927 $ 978,545 $ 2,867,382
========================================
10
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollar)
May 31, 2002 and 2001
3. Capital Assets (continued)
2001
-------------------------------------
Cost Accumulated Net
Amortization Book Value
Land $ 147,875 $ - $ 147,875
Buildings 465,060 137,320 327,740
Furniture and fixtures 6,751 6,751 -
Machinery and equipment 1,101,000 694,915 406,085
------------------------------------
$ 1,720,686 $ 838,986 $ 881,700
====================================
Included in machinery and equipment is $ 133,362 (2001 - $42,001) of
property held under capital leases.
Depreciation and amortization expense amounted to $150,138 (2001 -
$120,132). Of this amount $115,979 (2001 - $96,106) was included in cost
of sales.
4. Goodwill
2002 2001
-----------------------
Goodwill $1,015,289 $ 52,760
Less: Accumulated amortization (52,760) (42,208)
-----------------------
$ 962,529 $ 10,552
=======================
5. Intangible Assets
2002 2001
-----------------------
Non-compete agreement (Note 1(b)) $ 325,712 $ -
Less: Accumulated amortization - -
-----------------------
$ 325,712 $ -
=======================
6. Bank Indebtedness
API Electronics's bank indebtedness is secured by all of its assets
pursuant to a general security agreement and in addition is guaranteed by
two of its former major shareholders. The bank indebtedness is due on
demand and bears interest at prime plus 1/2%.
The Company's wholly owned subsidiary, Filtran Canada has a line of credit
of Cdn $1,000,000 with the Bank of Nova Scotia. As at May 31, 2002 the
Company has borrowed $42,343 (Cdn $65,000) against this line of credit.
The line of credit bears interest at prime plus 1/2 percent and is secured
by a special assignment of inventory, accounts receivable and unlimited
guarantee from TCCL and a guarantee of Cdn $500,000 from CDL.
11
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2002 and 2001
7. Long-term Debt
2002 2001
---------------------------
Promissory note payable to former shareholders of the
Filtran Group, secured by a collatered mortgage on real
property registered in Ontario and the issued and
outstanding shares of the Filtran Group, repayable in
two equal payment of Cdn $1,500,000 on May 31, 2003 and
May 31, 2004 plus interest at 5% per annum $ 1,954,270 $ -
Bank term loans, secured by machinery and
equipment, repayable in monthly instalments of $4,621
plus interest at rates varying from 7.75% to 10% 95,145 55,917
Loan payable, unsecured and non-interest bearing,
repayable in monthly instalments of $1,000 (i) 39,000 174,000
Mortgage payable, secured by real estate, repayable
in blended monthly instalments of $3,737 at interest
rates of 6.75% and 8.75% 166,262 -
Various equipment capital leases, with annual lease
payments of $26,949 including interest at
approximately 9% 102,089 14,698
Due to shareholder, non-interest bearing with no specific
terms of repayment 15,065 43,575
---------------------------
2,371,831 288,190
Less: Current portion 1,072,706 58,640
---------------------------
$ 1,299,125 $ 229,550
===========================
(i) On March 16, 2001, the Company entered into a joint venture agreement
with a Massachusetts Corporation for the use and sale of semi-
conductor equipment. The agreement took effect on April 1, 2001.
During the year, the venture partners agreed to mutually end the
agreement. The Company returned equipment valued at $120,000 and the
Company's indebtedness was reduced by the same amount. As at May 31,
2002 the Company's indebtedness amounted to $39,000.
The long term debt repayable over the next five fiscal years is as
follows:
2003 $ 1,072,706
2004 1,117,270
2005 81,141
2006 66,346
2007 19,301
Generally accepted accounting principles require disclosure of fair value
of financial instruments. Fair value is the amount at which the instrument
could be exchanged in a current transaction. Management has determined
that there is no significant difference between the fair value and the
carrying value of the long-term debt.
12
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2002 and 2001
8. Income Taxes
As at May 31, 2002 the significant components of future income tax assets
consists of the following:
Future income tax assets
Loss carrying forwards $ 368,000
Capital assets 33,000
-------------
401,000
-------------
Future income tax liabilities
Capital assets (445,000)
Non-compete agreement (98,000)
-------------
(543,000)
-------------
Valuation allowance (388,000)
-------------
$ (530,000)
=============
A reconciliation between income taxes provided at actual rates and at the
basic rate of 40.29% for federal and provincial taxes is as follows:
Net loss $ (841,001)
=============
Recovery of income tax at statutory rates $ (339,000)
Increase in taxes resulting from:
Non-deductible items and other 16,000
Tax reassessment 1998 16,642
Change in valuation allowance 323,000
-------------
Provision for income taxes $ 16,642
=============
The Company has non-capital losses of approximately $914,000 to apply
against future taxable income. These losses will expire as follows:
$114,000 in 2006 and $800,000 in 2009.
9. Convertible Promissory Note
One June 1, 1999, the principal shareholder of API Electronics to whom the
Company owed $1,128,394 forgave interest due to him on his outstanding
principal loan balance for the year ended May 31, 2000.
On September 20, 2000 API Electronics signed a demand promissory note with
the principal shareholder in the amount of $1,265,492. Under the demand
promissory note, interest does not accrue on the unpaid balance unless and
until there is an event of default. The principal shareholder assigned the
note to a third party payee.
13
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2002 and 2001
9. Convertible Promissory Note (continued)
On April 1, 2001 API Electronics exchanged the demand promissory note for
a convertible note. Under the convertible note, the unpaid principal is
due and payable April 1, 2006. Interest does not accrue on the unpaid
balance unless and until there is an event of default. The outstanding
principal, but not unpaid and accrued interest on this convertible note,
if any, shall at the option of the payee, convert into that number of
common stock that equal, after the issuance, 49% of the then outstanding
shares of the share capital of API Electronics on the date specified by
the Payee by notice to API Electronics. The principal amount on the
convertible note is $1,265,492. A component of the note, amounting to
$363,070 has been recorded as other paid in capital and represents the
value attributable to the convertibility feature of the note. This
resulted in a debt discount in the same amount which is amortized over the
term of the note and the amortization is included in interest expense.
On July 1, 2001 the note was converted into 49% of the outstanding common
shares of API Electronics.
10. Share Capital
(a) Authorized
Unlimited special shares
Unlimited common shares
(b) Issued Common Shares
Number of
Shares Consideration
----------------------------
(i) Pre-business combination for API Electronics
Balance at June 1, 2000 and May 31, 2001 100 $ 100
Issued upon the conversion of Note (Note 9) 97 902,422
----------------------------
Balance at August 31, 2001 197 $ 902,522
============================
(ii) Pre-business combination for the Company
Balance at April 30, 2001 13,179,020 $ 2,985,416
Share consolidation (Note 1(a)) (8,786,048) -
----------------------------
Balance at August 31, 2001 4,392,972 $ 2,985,416
============================
(iii) Issued from date of reverse take-over
Share capital is comprised of the number of issued
and outstanding shares of the Company and the
stated capital of API Electronics 4,392,972 $ 902,522
Shares issued upon the reverse take-over (Note 1(a)) 6,500,000 1,173,273
Shares issued upon exercise of stock options 210,000 125,707
Shares issued upon exercise of warrants 3,200,842 1,920,505
Shares issued upon exercise of broker warrants 500,000 250,000
Shares issued as finders fee 100,000 270,000
----------------------------
14,903,814 $ 4,642,007
============================
14
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2002 and 2001
10. Share Capital (continued)
(c) Warrants
Common shares purchase warrants ("Warrants")
As at May 31, 2002 the following Warrants are outstanding and
exercisable:
Number Share for Exercise Expiry
Outstanding Warrants Price Date
------------------------------------------------------------------
226,667 1 for 1 $9.00 August 8, 2002
1,649,579 1 for 1 0.45 February 28, 2003
1,649,579 1 for 1 0.75 August 30, 2003
The continuity of common share purchase warrants is as follows:
Warrants outstanding, April 30, 2001 226,667
Issued - pursuant to advisory services 250,000
- pursuant to business acquisition (Note 1a)
- Series A 3,250,000
- Series B 3,250,000
- Series A - broker warrants 125,000
- Series B - broker warrants 125,000
Exercised
- Re: Advisory services (250,000)
- Series A (1,600,421)
- Series B (1,600,421)
- Series A - broker warrants (125,000)
- Series B - broker warrants (125,000)
------------
Warrants outstanding, May 31, 2002 3,525,825
============
(d) Stock Options
As at May 31, 2002 the following options are exercisable, except as
indicated, and outstanding:
Number Exercise Expiry
Issued to Outstanding Price Date
------------------------------------------------------------------
Directors 150,000 $0.45 August 31, 2006
Directors 150,000 0.75 August 31, 2006
Directors 25,000 (i) 2.35 April 1, 2007
(i) 5,000 vest July 2002 and 5,000 vest each year thereafter.
15
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2002 and 2001
10. Share Capital (continued)
(d) Stock Options (continued)
The continuity of stock options is as follows: Weighted
Number of Average
Options Price
----------------------
Options outstanding, April 30, 2001 123,667 $ 7.08
Cancelled (113,667) 7.65
Granted- August 2001 500,000 0.60
- April, 2002 25,000 2.35
Exercised (210,000) 0.60
----------------------
Options outstanding, May 31, 2002 325,000 $ 0.73
======================
11. Cash Flow Information
(a) Changes in non-cash working capital are as follows:
2002 2001
----------------------
Accounts receivable $ 9,726 $ (74,096)
Inventory (107,685) (304,473)
Prepaid expenses 86,370 (5,215)
Accounts payable (91,954) 66,143
----------------------
$ (103,543) $ (317,641)
======================
(b) Supplemental Cash Flow Information
2002 2001
----------------------
(i) Non-cash transaction
Convertible promissory note converted into
common stock $ 902,422 $ -
Disposal of capital assets in settlement of
equipment loan 120,000 -
Finders fee paid through issue of common shares 270,000 -
Shares issued on business acquisition (Note 1(a)) 1,173,273 -
(ii) Cash paid for interest $ 37,467 $ 86,342
16
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2002 and 2001
12. Related party Transactions
(a) Included in capital assets are web site development costs in the
amount of $30,826 (2001 - $NIL) paid to a company of which a
shareholder of the company is a director.
(b) Included in consulting expenses are fees of $27,522 (2001 - $NIL)
paid to an individual who is a director and officer of the Company.
(c) On July 1, 2001 the convertible promissory note held by a principal
shareholder of API Electronics was converted into common shares of
API Electronics (Note 9)
These related party transactions were in the normal course of operations
and are recorded at the exchange amount agreed to by the related parties.
13. Segmented Information
(a) The Company's operations are conducted in two reportable segments
which are distinguished by geographic location in Canada and United
States. Both segments design and manufacture electronic components.
Since the Canada segment was acquired May 31, 2002 all revenues are
derived from the United States segment.
2002 2001
-----------------------
Total Assets
Property and equipment
United States $1,209,281 $ 881,700
Canada 1,658,101 -
Goodwill
United States - 10,552
Canada 962,529 -
Other assets
United States 2,104,140 1,672,029
Canada 2,558,765 -
----------------------
$8,492,816 $2,564,281
======================
(b) Major Customer
2002 2001
-----------------------
Revenue
U.S. Department of Defence 20% 22%
U.S. Department of Defence subcontractors 50% 44%
17
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2002 and 2001
14. Per Share Data
The weighted average number of shares issued and outstanding for the year
ended May 31, 2002 was 7,447,517. The number of shares outstanding for the
period from the beginning of the fiscal year to the date of the reverse
takeover is deemed to be the number of shares issued by the legal parent
to the shareholders of the legal subsidiary as described in note 1(a). For
the period from the date of the reverse takeover to the end of the fiscal
year, the actual weighted average of shares issued during the period is
used.
The effect of the exercise of outstanding options and warrants would be
anti-dilutive.
For comparative purposes, the May 31, 2001 weighted average number of
shares is 6,500,000, the actual number of shares issued to the legal
subsidiary in the reverse takeover described in note 1(a).
15. Financial Instruments
As at May 31, 2002 and 2001 there were no significant differences between
the carrying amounts and the fair values of these instruments.
It is management's opinion that the Company is not exposed to significant
interest rate, currency, or credit risk.
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 (Note 13), 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.
16. 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 May 31, 2002.
2003 $ 30,822
2004 22,243
2005 9,889
18
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2002 and 2001
16 Commitments and Contingencies (Continued)
(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 year ended May 31, 2002, the Company incurred
$30,157 (2001 - $17,425) as its obligation under the terms of the
plan. Of this amount $30,157 (2001 - $17,425) has been charged to
general and administrative expenses.
17. Comparative Figures
Comparative figures have been reclassified to conform with current year
presentation.
18. Subsequent Events
On June 19, 2002, the Company completed a $1,175,000 private placement
offering of 500,000 units at a price of $2.35 per unit. Each unit consists
of one common share and one warrant. The warrants expire on June 30, 2004
and entitles the holders to purchase one additional common share at a
price of $3.00 per share. Proceeds from the private placement will be used
for general working capital purposes and to fund ongoing acquisition
activities.
19
Schedule "B"
See attached consolidated financial statements of the Company for the fiscal
years ended May 31, 2002 and 2001.
20
SCHEDULE "C"
Management's discussion and analysis of
financial condition and results of operations
Results of Operations
Summary
API Electronics Group Inc. ("API" or "Company") is a leading manufacturer of
electronic components and microelectronic circuits 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. For the nine months
ended May 31, 2002, the Filtran Group posted sales revenue of $3.34 million.
Sales Revenue
The Company continued to record strong sales growth during the fiscal year ended
May 31, 2002. Revenues increased by 9.4% to $2.9 million from $2.65 million the
previous year. The growth during the period was led by the performance of core
product lines and accelerated by favourable market conditions for the Company's
products in the military industry.
Cost of Goods Sold and Gross Margin
The cost of products sold as a percentage of sales increased during 2002 period
compared to 2001. The cost of goods sold was 77.7% of sales in 2002 compared to
72.8% of sales in 2001. Accordingly, the gross margin for 2002 period decreased
to 22.3% from the 27.2% gross margin in the 2001 period. The decrease is
attributed mainly to increased competitive pricing in the market.
Selling Expenses
Selling expenses increased from $246,844 for the year ended May 31, 2001 to
$339,048 for the year ended May 31, 2002. As a percentage of sales the 2002
selling expenses came in at 11.7% compared to 9.3% for 2001. The increase was
primarily attributed to the addition of one sales person to support increased
product sales levels.
General and Administrative Expenses
General and administrative expenses increased substantially from $300,598 for
the 2001 year to $685,747 incurred during the 2002 year. Several components of
general and administrative expenses saw increases as a direct result of API's
new status as a public company. Investor relations of $108,758 (2001 - $0),
professional services of $94,747 (2001 - $9,000), shareholder information of
$9,070 (2001 - $0), transfer agent fees of $10,382 (2001 - $0)
21
all increased substantially and were attributable to increased costs that are
inherent with public company compliance.
Management continues to emphasize efficiencies and control of overheads. There
are several areas where certain expenses could be classified as non-recurring in
nature.
Website maintenance of $7,434 and IL Data expenses (expenses of
InvestorLinks.com - a predecessor company) of $7,156 are such non-recurring
expenses. In addition, professional services expense was higher than normal as
additional fees were incurred in API's first year audit as a public company.
Management estimates that going forward these expenses should see a decrease of
least $20,000. Also, investor relations expense was higher than normal as
additional fees were incurred to launch the profile of API in the investment
community. These fees were necessary in API's first year as a public company but
management estimates that going forward investor relations should see a decrease
of approximately $50,000.
Business Development
These costs increased from $0 in 2001 to $501,583 in 2002. These costs relate
primarily to business plan development to help create market awareness for
products and investors and to help provide support for any future financing and
acquisitions. The Company believes that spending in this area was critical to
assist the company gain exposure in the competitive public company environment
and ultimately to increase shareholder value. Although benefits from these
expenditures will continue in the future, management has determined that the
$501,583 is a non-recurring expense going forward.
Other Income and Expense
Other income increased substantially from $13,719 for the year ended May 31,
2001 to $75,568 for the year ended May 31, 2002. The increase was attributed to
rental income realized during the year. Other expense relates to interest on
long-term debt and the Company saw a substantial decrease from $86,342 in 2001
to $37,467 in 2002.
Net Income/Loss
The Company incurred a net loss for the 2002 year of $857,643 compared to a net
income of $102,101 for the 2001 year. The loss is largely attributed to the
business development costs of $501,583 as described above.
Liquidity and Capital Resources
Summary
At May 31, 2002, the Company had cash reserves of $1,366,294 compared to $41,073
as at May 31, 2001.
At May 31, 2002 working capital, the excess of current assets over current
liabilities totalled $2,148,073 compared to $930,027 at May 31, 2001. The
current ratio at May 31, 2002 was 2.0:1 compared to 2.25:1 at May 31, 2001. The
quick ratio (which excludes inventory and prepaid expenses from current assets)
is 1.1:1 at May 31, 2002 compared with .51:1 as at May 31, 2001. The increase in
the current and quick ratio is attributed primarily to the increased sales
level, cash received from the exercise of warrants, and a favourable working
capital position of the Filtran Group at acquisition.
Specific working capital components saw large increases as at May 31, 2002.
Accounts receivable rose 215% from $340,383 at May 31, 2001 to $1,073,058 (the
2002 addition of the Filtran Group accounts receivable of $790,029 substantially
explains the increase). Accounts payable rose 156% from $341,216 at May 31, 2001
to $874,269 at May 31, 2002 (the 2002 addition of the Filtran Group accounts
payable of $492,191 substantially explains the increase).
22
Long-term debt (current and long-term portion) increased from $570,766 in 2001
to $2,371,831 in 2002. The increase is attributed largely to the promissory note
in the amount of $1,954,270 issued in connection with the acquisition of the
Filtran Group.
The debt to equity ratio improved to 0.53 in 2002 compared to 1.74 in 2001.
Cash Flow
Cash used in operating activities increased from $(56,735) for the year ended
May 31, 2001 to $(811,048) for year ended May 31, 2002. This increase is
attributed primarily to the 2002 loss of $857,643.
The major source of cash in 2002 was provided by the exercise of warrants and
options. This exercise of securities added cash totalling $2,296,212 during the
year. The other significant source of cash was $1,178,376 acquired via the
reverse take-over transaction as described in note 1(a) of these consolidated
financial statements.
The major uses of cash during 2002 were the Filtran Group acquisition in the
amount of $997,717 and the purchase of capital assets in the amount of $257,217.
On June 19, 2002, the Company completed a $1,175,000 private placement offering
of 500,000 units at $2.35 per unit. Each unit consists of one common share and
one warrant. The warrants expire on June 30, 2004 and entitles the holders to
purchase one additional common share at a price of $3.00 per share. Proceeds
from the private placement will be used for general working capital purposes and
to fund ongoing acquisition activities.
Capital Assets and Intangibles
The acquisition of the Filtran Group substantially improved API's design and
manufacturing capabilities. The addition of machinery and equipment in the
amount of $312,841 and land & building in the amount of $1,577,094 brought API's
state-of-the-art facilities to 48,500 square feet.
API also acquired Filtran Group's thousands of engineered designs, a blue-chip
customer base, an excellent management team and workforce, and a first-rate
quality control system anchored by their ISO 9001 registration. These values are
reflected as goodwill in the amount of $962,529. Furthermore, API acquired a
non-compete agreement in the amount of $325,712 to help ensure all the benefits
and synergies of the acquisition can be realized in the future.
Risks
The Company is exposed to a variety of risks in its operations. These include
operational, currency, foreign operations, credit, and interest rate. Steps have
been taken in all areas to mitigate these risks.
23