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 January, 2003
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 ________
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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
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If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-__________________
Relevant Event dated January 29, 2003.
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: January 30, 2003 By: /s/ Jason DeZwirek
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Jason DeZwirek, Chairman of the Board,
Executive V.P., Secretary and Director
QUARTERLY AND YEAR END REPORT
[LOGO] British Columbia Securities Commission BC FORM 51-901
BCSC (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
FOR QUARTER YY MM DD
NAME OF ISSUER ENDED 2003 01 29
API ELECTRONICS GROUP INC. 2002/11/30
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ISSUER ADDRESS
505 UNIVERSITY AVENUE, SUITE 1400
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CITY PROVINCE POSTAL ISSUER FAX NO. ISSUER TELEPHONE
TORONTO ON CODE 416-593-4658 NO.
M5G 1X3 416-593-3000
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CONTACT NAME CONTACT POSITION CONTACT
JASON DEZWIREK CHAIRMAN TELEPHONE NO.
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
2003 01 29
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DIRECTOR'S SIGNATURE PRINT FULL NAME DATE SIGNED
. "PHILLIP DEZWIREK" PHILLIP DEZWIREK YY MM DD
2003 01 29
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SCHEDULE "A"
FINANCIAL INFORMATION
See attached unaudited consolidated financial statements of API Electronics
Group Inc. (the "Company") for the six months ended November 30, 2002.
Schedule "B"
See attached unaudited consolidated financial statements of the Company for the
six months ended November 30, 2002.
SCHEDULE "C"
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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.
Consolidated Results of Operations
Six months ended November 30, 2002 compared to November 30, 2001
Sales Revenue
The Company continued to record strong sales growth during the six months ended
November 30, 2002. Revenues increased by 110.0% to $3,444,311 from $1,639,853
posted in the six months ended November 30, 2001. The growth during the period
was attributed to the Filtran Group's sales revenue in the amount of $2,072,894
reflected in API's operations for the first time.
Cost of Goods Sold and Gross Margin
The cost of goods sold was 74.2% of sales in 2002 compared to 72.8% of sales in
2001. Accordingly, the gross margin for 2002 period of 25.8% was in line with
the 27.2% gross margin in the 2001 period.
The Company was able to maintain its gross margin percentage during the 2002
period, despite competitive pressures, through ongoing cost reduction
initiatives.
Selling Expenses
Selling expenses increased from $167,924 for the six months ended November 30,
2001 to $291,159 for the six months ended November 30, 2002. As a percentage of
sales the 2002 selling expenses came in at 8.5% an improvement over the 10.2%
posted in 2001. The 74% increase in selling expenses is consistent with the 110%
increase in sales revenue.
General and Administrative Expenses
General and administrative expenses increased substantially from $369,372 for
the 2001 period to $718,969 incurred during the 2002 period. As a percentage of
sales, the 2002 general and
administration expenses were 20.8% compared to 22.5% in 2001.
Several components of general and administrative expenses saw increases as a
direct result of API's new status as a public company. Professional fees of
$133,057 (2001 - $29,423), public relations of $4,572 (2001 - $NIL), and
shareholder information of $19,103 (2001 - $470) all increased substantially and
were attributable to increased costs that are inherent with public company
compliance. In addition, the May 31, 2002 acquisition of the Filtran Group (note
1b in the notes to the consolidated financial statements) resulted in increased
general and administrative expenses for API. Several components saw increases as
follows: Office salaries - $123,334 (2001 - $33,500), consulting - $43,191 (2001
- - $14,486), rent - $19,071 (2001 - $1,268), telephone - $22,450 (2001 -
$15,311).
In addition, depreciation and amortization rose to $113,628 (2001 - $15,014) as
a result of the overall increase in the Capital and Intangible Asset base
arising from the acquisition of the Filtran Group.
Business development and investor relations saw a large decrease from $154,002
in the six months ended November 30, 2001 to $54,697 in the six months ended
November 30, 2002. The 2001 period saw major one-time expenses (business plan,
investor marketing and awareness) of approximately $105,000 when API first
became a public company).
Management continues to emphasize efficiencies and control of overheads.
Other Income and Expense
Other income increased from $59,128 for the period ended November 30, 2001 to
$69,278 for the period ended November 30, 2002. Included in 2002 is a $40,025
gain earned through the early repayment of an amount owing on the promissory
note issued in connection with the Filtran Group acquisition. Other expense
relates to interest on long-term debt and the Company saw a substantial increase
from $18,825 in 2001 to $59,949 in 2002. The increase is attributed to the
addition of debt in the form of the promissory note that added $48,158 of
interest expense.
Consolidated Results of Operations
Six months ended November 30, 2002 compared to November 30, 2001
Net Income / Loss
The Company incurred a net loss for the six months ended November 30, 2002 year
of $112,347($0.007/share) compared to a net loss of $81,498($0.01/share) for the
six months ended November 30, 2001.
Liquidity and Capital Resources
Summary
At November 30, 2002, the Company had cash reserves of $593,943 compared to
$1,408,637 as at May 31, 2002.
At November 30, 2002 working capital, the excess of current assets over current
liabilities totalled $2,973,936 compared to $2,148,073 at May 31, 2002. The
current ratio at November 30, 2002 was 3.6:1 compared to 2.0:1 at May 31, 2002.
The quick ratio (which excludes inventory and prepaid expenses from current
assets) is 1.7:1 at November 30, 2002 compared with 1.1:1 as at May 31, 2002.
The increase in the current and quick ratio is attributed primarily to the
increased sales level and cash received from a private placement.
Inventory rose 12.5% from $1,852,483 as at May 31, 2002 to $2,084,211 as at
November 30, 2002. Accounts receivable increased 9.2% from $1,073,058 as at May
31, 2002 to $1,172,341 as
at November 30, 2002. Accounts payable rose 18.9% from $874,269 at May 31, 2002
to $1,039,711 as at November 30, 2002. Inventory, accounts receivable and
accounts payable are the major working capital components and their increase is
consistent with higher sales and production levels.
Long-term debt (current and long-term portion) decreased substantially from
$2,371,831 at May 31, 2002 to $1,303,325 at November 30, 2002. This decrease
resulted primarily from the repayment of the promissory note in the amount of
$995,926.
The debt to equity ratio improved to 0.24 as at November 30, 2002 compared to
0.53 as at May 31, 2002.
Cash Flow
Cash generated (used) in operating activities increased from ($262,957) for the
six months ended November 30, 2001 to ($330,543) for six months ended November
30, 2002.
The major source of cash in 2002 was provided by the issue of 500,000 units of
share capital that provided $1,175,000 in cash.
The major use of cash during 2002 was the purchase of capital assets in the
amount of $285,715 and the repayments of bank indebtedness $284,488 and
long-term debt repayments of $1,068,506.
Financings
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.
Subsequent Events
On December 17, 2002, the Company signed a letter of intent to acquire TM
Systems Inc. of Albertson, New York. The acquisition is pending the completion
of due diligence by the Company and the signing of a definitive purchase
agreement. It is anticipated that the purchase will be an all cash acquisition
in the amount of $3,000,000 with adjustments if certain sales revenues are not
met. Although the acquisition is expected to close in early 2003, there can be
no assurance that the purchase will be consummated.
The acquisition is also contingent upon a minimum private placement financing of
$2.4 million which was announced December 19, 2002. Under the terms of the
financing, a minimum of 6 million units (and up to 8 million) will be offered
with each unit consisting of one common share at $0.40 per share and a
half-share purchase warrant. Each full share purchase warrant will entitle the
holder to acquire one common share at a price of $0.60 for a period of two years
following closing.
Risks
The Company is exposed to a variety of risks in its operations. These include
operational, currency, foreign operations, credit, and interest rate. Steps have
been taken in all areas to mitigate these risks.
API Electronics Group Inc.
Consolidated Interim Financial Statements
Second Quarter
For the six month period ended November 30, 2002
(Unaudited)
Expressed in US$
API Electronics Group Inc.
Balance Sheets
(Unaudited)
(Expressed in US$)
November 30 May 31
2002 2002
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Assets
Current
Cash $ 593,943 $ 1,408,637
Accounts receivable 1,172,341 1,073,058
Inventories (Note 2) 2,084,211 1,852,483
Marketable securities 251,727 -
Prepaid expenses 33,069 45,358
--------------------------
4,135,291 4,379,536
Capital assets (Note 3) 2,998,856 2,867,382
Goodwill (Note 4) 962,529 962,529
Intangible assets (Note 5) 293,142 325,712
--------------------------
$ 8,389,818 $ 8,535,159
===============================================================================
Liabilities and Shareholders' Equity
Current
Bank indebtedness (Note 6) $ - $ 284,488
Accounts payable 1,039,711 874,269
Current portion of long-term debt (Note 7) 121,644 1,072,706
--------------------------
1,161,355 2,231,463
Future income tax liability (Note 8) 537,190 530,000
Long term debt (Note 7) 1,181,681 1,299,125
--------------------------
2,880,226 4,060,588
--------------------------
Shareholders' equity
Share capital (Note 9) 5,817,007 4,642,007
Paid in capital 770,790 770,790
Cumulative foreign exchange translation (27,632) -
Deficit (1,050,573) (938,226)
--------------------------
5,509,592 4,474,571
--------------------------
$ 8,389,818 $ 8,535,159
===============================================================================
On behalf of the Board:
(signed) Jason DeZwirek Director
----------------------------------------
(signed) Phillip DeZwirek Director
-------------------------------
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
2
API Electronics Group Inc.
Consolidated Interim Statement of Operations
and Retained Earnings (Deficit)
(Unaudited)
(Expressed in US$)
Six Months Ended Three Months Ended
November 30 November 30
------------------- -------------------
2002 2001 2002 2001
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Sales $ 3,444,311 $ 1,639,853 $ 1,802,716 $ 714,837
Cost of sales 2,554,859 1,194,358 1,339,571 597,871
-------------------------------------------------------
Gross profit 889,452 445,495 463,145 116,966
Expenses
Selling expenses 292,159 167,924 152,530 92,051
General and administrative 718,969 369,372 357,918 279,416
-------------------------------------------------------
1,011,128 537,296 510,448 371,467
------------------------------------------------------
Operating Income (121,676) (91,801) (47,303) (254,501)
------------------------------------------------------
Other (Income)
Expenses
Other income (69,278) (59,128) (55,771) (2,207)
Interest expense 59,949 18,825 28,966 7,295
------------------------------------------------------
(9,329) (40,303) (26,805) 5,088
------------------------------------------------------
Income (loss) before income
taxes (112,347) (51,498) (20,498) (259,589)
Income taxes - 30,000 - 30,000
------------------------------------------------------
Net income (loss) (112,347) (81,498) (20,498) (289,589)
Retained earnings (deficit),
beginning of period (938,226) (80,583) (1,030,075) 127,508
------------------------------------------------------
Deficit, end of period $ (1,050,573) $ (162,081) $ (1,050,573) $ (162,081)
==============================================================================================
==============================================================================================
Earning (loss) per share - basic $ (0.007) $ (0.01) $ (0.001) $ (0.03)
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 Cash Flows
(Unaudited)
(Expressed in US$)
Six Months Ended Three Months Ended
November 30 November 30
------------------- -------------------
2002 2001 2002 2001
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Cash provided by (used in)
Operating activities
Net income (loss) for the period $ (112,347) $ (81,498) $ (20,498) $ (289,589)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Amortization 186,811 75,068 94,292 37,534
Net change in non-cash working capital
balances (Note 10) (405,007) (256,527) (359,473) (101,768)
-----------------------------------------------------
(330,543) (262,957) (285,679) (353,823)
-----------------------------------------------------
Investing activities
Capital assets (285,715) (116,650) (117,273) (105,972)
-----------------------------------------------------
Financing activities
Cash acquired through reverse take-over,
net of cost of acquisition - 1,178,375 - 1,178,375
Issue of share capital 1,175,000 5,707 5,707
Decrease in cumulative foreign translation (27,632) - (11,454) -
Bank indebtedness repayments (284,488) (106,100) (242,146) (53,049)
Long-term debt repayments (1,068,506) (63,012) (1,014,944) (104,269)
Increase in future income tax liability 7,190 - 440 -
-----------------------------------------------------
(198,436) 1,014,970 (1,268,104) 1,026,764
-----------------------------------------------------
Net increase (decrease) in cash (814,694) 635,363 (1,671,056) 566,969
Cash, beginning of period 1,408,637 41,073 2,264,999 109,467
-----------------------------------------------------
Cash, end of period $ 593,943 $ 676,436 $ 593,943 $ 676,436
=========================================================================================================
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
4
API Electronics Group Inc.
Summary of Significant Accounting Policies
(Unaudited)(Expressed in US Dollars)
November 30, 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.
5
API Electronics Group Inc.
Summary of Significant Accounting Policies
(Unaudited)(Expressed in US Dollars)
November 30, 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 that 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.
6
API Electronics Group Inc.
Summary of Significant Accounting Policies
(Unaudited)(Expressed in US Dollars)
November 30, 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 that is
translated at current rates of exchange. All
exchange gains and losses are accumulated in the
foreign exchange translation account on the balance
sheet. The foreign exchange translation amount at
November 30, 2002 was ($27,632).
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 they are incurred. Advertising expenses included
in selling expenses is $1,803 (2001 - $14,535).
Stock-Based
Compensation Plans The Company has a stock-based compensation plan that
is described in Note 9(d). 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.
7
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Unaudited)(Expressed in US Dollars)
November 30, 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.
8
(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
(Unaudited)(Expressed in US Dollars)
November 30, 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
November 30 May 31
2002 2002
Inventory as at November 30, 2002 was estimated
based upon gross margin percentage $ 2,084,211 $ 1,852,483
3. Capital Assets
November 30, 2002
Cost Accumulated Net
Amortization Book Value
Land $ 392,764 $ - $ 392,764
Buildings 2,004,936 203,188 1,801,748
Computer equipment 37,469 1,986 35,483
Computer software 48,660 7,393 41,267
Furniture and fixtures 42,103 7,326 34,777
Machinery and equipment 1,520,780 865,505 655,275
Vehicles 18,956 2,110 16,846
Web site development costs 30,826 10,130 20,696
--------------------------------------------
$ 4,096,494 $ 1,097,638 $ 2,998,856
============================================
10
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Unaudited)(Expressed in US Dollars)
November 30, 2002 and 2001
3. Capital Assets (continued)
May 31, 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
--------------------------------------------
Included in machinery and equipment is $133,362 (2001 - $42,001) of property
that are held under capital leases.
Depreciation and amortization expense amounted to $186,811 (2001 - $75,068).
Of this amount $73,183 (2001 - $60,054) was included in cost of sales.
4. Goodwill
November 30 May 31
2002 2002
Goodwill $ 1,015,289 $ 1,015,289
Less: Accumulated amortization (52,760) (52,760)
--------------------------------
$ 962,529 $ 962,529
5. Intangible Assets
November 30 May 31
2002 2002
Non-compete agreement (Note 1(b)) $ 325,713 $ 325,712
Less: Accumulated amortization (32,571) -
-------------------------------
$ 293,142 $ 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%. During the period ending November 30, 2002, the
full amount of the bank indebtedness was repaid.
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 November 30, 2002 the
Company has borrowed $Nil (May 31, 2002-$42,343) 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
(Unaudited)(Expressed in US Dollars)
November 30, 2002 and 2001
7. Long-term Debt
November 30 May 31
2002 2002
----------------------------
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 on May 31, 2004 plus interest at
5% per annum $ 958,344 $ 1,954,270
Bank term loans, secured by machinery and equipment, repayable
in monthly instalments of $1,582 plus interest at a rate of
approximately 8% 49,499 95,145
Loan payable, unsecured and non-interest bearing, repayable in
monthly instalments of $1,000 (i) 39,000 39,000
Mortgage payable, secured by real estate, repayable in blended
monthly instalments of $3,737 at interest rates of 6.75% and
8.75% 149,468 166,262
Various equipment capital leases, with annual lease payments
of $26,949 including interest at approximately 9%
92,294 102,089
Due to shareholder, non-interest bearing with no specific
terms of repayment
14,720 15,065
----------------------------
Less: Current portion 1,303,325 2,371,831
121,644 1,072,706
----------------------------
$ 1,181,681 $ 1,299,125
============================
(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 November 30, 2002 the Company's
indebtedness amounted to $39,000.
The long-term debt repayable over the next five fiscal years is as follows:
2003(6 months) $ 56,913
2004 1,090,294
2005 72,015
2006 65,254
2007 18,849
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
(Unaudited)(Expressed in US Dollars)
November 30, 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.
13
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Unaudited)(Expressed in US Dollars)
November 30, 2002 and 2001
9. 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
Shares issued upon private placement 500,000 1,175,000
---------------------------
Balance as at November 30, 2002 15,403,814 $ 5,817,007
---------------------------
14
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Unaudited)(Expressed in US Dollars)
November 30, 2002 and 2001
9. Share Capital (continued)
(c) Warrants
Common shares purchase warrants ("Warrants")
As at November 30, 2002 the following Warrants are outstanding and
exercisable:
Number Share for Exercise Expiry
Outstanding Warrants Price Date
-----------------------------------------------------------
1,649,579 1 for 1 $0.45 February 28, 2003
1,649,579 1 for 1 0.75 August 30, 2003
500,000 1 for 1 3.00 June 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
- Private placement 500,000
Expired during the period (226,667)
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, November 30, 2002 3,799,158
===========
(d) Stock Options
As at November 30, 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
(Unaudited)(Expressed in US Dollars)
November 30, 2002 and 2001
9. 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, November 30, 2002 325,000 $ 0.73
=====================
10. Cash Flow Information
(a) Changes in non-cash working capital are as follows:
Six Months Ended Three Months Ended
November 30 November 30
2002 2001 2002 2001
------------------------------------------------------
Accounts receivable $ (99,283) $ (186,152) $ (107,915) $ 75,246
Inventory (231,728) (41,001) (178,826) (54,000)
Marketable securities (251,727) - (188,730) -
Prepaid expenses 12,289 36,535 23,246 28,789
Accounts payable 165,442 (65,909) 92,752 (151,803)
------------------------------------------------------
$ (405,007) $ (256,527) $ (359,473) $ (101,768)
------------------------------------------------------
(b) Supplemental Cash Flow Information
Six Months Ended Three Months Ended
November 30 November 30
2002 2001 2002 2001
Cash paid for interest $ 59,949 $ 18,825 $ 28,966 $ 7,295
-----------------------------------------------------
16
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Unaudited)(Expressed in US Dollars)
November 30, 2002 and 2001
11. Related party Transactions
(a) Included in capital assets are web site development costs in the
amount of $30,826 (May 31, 2002 - $30,826) paid to a company of which
a shareholder of the company is a director.
(b) Included in consulting expenses are fees of $19,317 (2001 - $4,756)
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.
12. Per Share Data
The weighted average number of shares issued and outstanding for the
period ended November 30, 2002 was 15,362,147. 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.
17
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Unaudited)(Expressed in US Dollars)
November 30, 2002 and 2001
13. Financial Instruments
As at November 30, 2002 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, 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 November 30,
2002.
2003 (6 months) $ 13,476
2004 22,243
2005 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.
18
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Unaudited)(Expressed in US Dollars)
November 30, 2002 and 2001
15. Comparative Figures
Comparative figures have been reclassified to conform to the current year
presentation.
16. Subsequent Events
On December 17, 2002, the Company signed a letter of intent to acquire TM
Systems Inc. of Albertson, New York. The acquisition is pending the
completion of due diligence by the Company and the signing of a definitive
purchase agreement. It is anticipated that the purchase will be an all
cash acquisition in the amount of $3,000,000 with adjustments if certain
sales revenues are not met. Although the acquisition is expected to close
in early 2003, there can be no assurance that the purchase will be
consummated.
The acquisition is also contingent upon a minimum private placement
financing of $2.4 million which was announced December 19, 2002. Under the
terms of the financing, a minimum of 6 million units (and up to 8 million)
will be offered with each unit consisting of one common share at $0.40 per
share and a half-share purchase warrant. Each full share purchase warrant
will entitle the holder to acquire one common share at a price of $0.60
for a period of two years following closing.
19