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 May, 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 April 28, 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: May 1, 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
BC FORM 51-901
[LOGO] British Columbia Securities Commission (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 IL2. 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. 2003/02/28 2003 04 28
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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 416-593-3000
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CONTACT NAME CONTACT POSITION CONTACT TELEPHONE NO.
JASON DEZWIREK CHAIRMAN 416-593-3000
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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 04 28
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DIRECTOR'S SIGNATURE PRINT FULL NAME DATE SIGNED
[_] "PHILLIP DEZWIREK" PHILLIP DEZWIREK YY MM DD
2003 04 28
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1
SCHEDULE "A"
FINANCIAL INFORMATION
See attached unaudited consolidated financial statements of API Electronics
Group Inc. (the "Company") for the nine months ended February 28, 2003.
2
SCHEDULE "B"
See attached unaudited consolidated financial statements of the Company for the
nine months ended February 28, 2003.
3
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. In February 2003, the
Company acquired certain assets of TM Systems Inc.(TM). In business for over 30
years, TM supplies the defense 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 defense-related electronics
business.
Consolidated Results of Operations
Nine months ended February 28, 2003 compared to February 28, 2002
Sales Revenue
The Company continued to record strong sales growth during the nine months ended
February 28, 2003. Revenues increased by 137.9% to $5,523,823 from $2,321,625
posted in the nine months ended February 28, 2002. The growth during the period
was attributed to the Filtran Group's and TM's sales revenue in the amount of
$3,444,295 and $93,601 respectively, reflected in API's operations. Fiscal 2003
is the initial year whereby Filtran and TM operations are reflected in the
Company's consolidated operations.
Cost of Goods Sold and Gross Margin
The cost of goods sold was 73.6% of sales in 2003 compared to 76.1% of sales in
2002. Accordingly, the gross margin for 2003 period of 26.4% was in line with
the 23.9% gross margin in the 2002 period.
The Company was able to improve its gross margin percentage during the 2003
period, despite competitive pressures, through ongoing cost reduction
initiatives.
4
Consolidated Results of Operations (continued)
Selling Expenses
Selling expenses increased from $231,034 for the nine months ended February 28,
2002 to $472,380 for the nine months ended February 28, 2003. As a percentage of
sales the 2003 selling expenses came in at 8.5% an improvement over the 9.9%
posted in 2002. The 104.5% increase in selling expenses is consistent with the
137.9% increase in sales revenue.
General and Administrative Expenses
General and administrative expenses increased from $949,512 for the 2002 period
to $1,311,723 incurred during the 2003 period. As a percentage of sales, the
2003 general and administration expenses were 23.8% compared to 40.9% in 2002.
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
$170,662 (2002 - $42,288), public relations of $6,253 (2002 - $NIL), and
shareholder information of $39,625 (2002 - $2,592) 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 - $183,722 (2002 - $60,372), consulting - $58,729 (2002
- - $42,028), rent - $28,616 (2002 - $6,212), telephone - $35,589 (2002 -
$21,139).
In addition, administrative depreciation and amortization rose to $166,889 (2002
- - $23,272) 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 $575,661
in the nine months ended February 28, 2002 to $316,885 in the nine months ended
February 28, 2003. The 2002 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.
Nine months ended February 28, 2003 compared to February 28, 2002
Other Income and Expense
Other income increased from $68,544 for the period ended February 28, 2002 to
$108,335 for the period ended February 28, 2003. Included in 2003 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 $23,891 in 2002 to $69,870 in 2003. The increase is attributed to the
promissory note debt that was added as part of the Filtran Group acquisition.
5
Consolidated Results of Operations (continued)
Net Income / Loss
The Company incurred a net loss for the nine months ended February 28, 2003 year
of $289,224($0.018/share) compared to a net loss of $601,009($0.011/share) for
the nine months ended February 28, 2002.
Liquidity and Capital Resources
Summary
At February 28, 2003, the Company had cash reserves of $1,523,007 compared to
$1,408,637 as at May 31, 2002.
At February 28, 2003 working capital, the excess of current assets over current
liabilities totalled $2,838,463 compared to $2,148,073 at May 31, 2002. The
current ratio at February 28, 2003 was 2.0:1 - consistent with the 2.0:1 ratio
as at May 31, 2002. The quick ratio (which excludes inventory and prepaid
expenses from current assets) is 1.1:1 at February 28, 2003 - consistent with
the 1.1:1 posted at May 31, 2002.
Inventory rose 23.7% from $1,852,483 as at May 31, 2002 to $2,290,976 as at
February 28, 2003. Accounts receivable increased 31.1% from $1,073,058 as at May
31, 2002 to $1,406,761 as at February 28, 2003. Accounts payable rose 35.2% from
$874,269 at May 31, 2002 to $1,181,673 as at February 28, 2003. 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) increased substantially from
$2,371,831 at May 31, 2002 to $2,844,171 at February 28, 2003. This increase
resulted primarily from the issue of the promissory note in connection with the
TM System acquisition in the amount of $1,500,000 and this was offset by the
repayment of part of the Filtran Group promissory note in the amount of
$995,926.
The debt to equity ratio improved to 0.55 as at February 28, 2003 compared to
0.91 as at May 31. 2002.
Cash Flow
Cash generated (used) in operating activities increased from ($744,168) for the
nine months ended February 28, 2002 to ($290,422) for nine months ended February
28, 2003.
The major source of cash in 2002 was provided through the issue of common shares
in the amount of $4,065,000 and the net long-term debt advances in the amount of
$472,340.
The major use of cash during 2003 was the purchase of capital assets in the
amount of $362,630 and the acquisition of the assets of TM Systems Inc. in the
amount of $3,022,263.
6
Consolidated Results of Operations (continued)
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.
In February 2003, the Company completed a private placement financing of
$2,770,000. Under the terms of the financing, 6,925,000 units were issued 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 $0.60 for a period of two years following
closing.
Subsequent Events
No significant subsequent events occurred after February 28, 2003.
Nine months ended February 28, 2003 compared to February 28, 2002
Risks
The Company is exposed to a variety of risks in its operations. These include
operational, currency, foreign operations, credit, and interest rate. Steps have
been taken in all areas to mitigate these risks.
7
API Electronics Group Inc.
Consolidated Interim Financial Statements
Third Quarter
For the nine month period ended February 28, 2003
(Prepared from the records of the company - without audit or review)
Expressed in US$
1
API Electronics Group Inc.
Balance Sheets
(Prepared from the records of the company - without audit or review)
(Expressed in US$)
February 28 May 31
2003 2002
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Assets
Current
Cash $ 1,523,007 $ 1,408,637
Accounts receivable 1,406,761 1,073,058
Inventories (Note 2) 2,290,976 1,852,483
Marketable securities 263,670 -
Prepaid expenses 94,141 45,358
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5,578,555 4,379,536
Capital assets (Note 3) 3,002,821 2,867,382
Goodwill (Note 4) 3,984,792 962,529
Intangible assets (Note 5) 276,856 325,712
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$ 12,843,024 $ 8,535,159
============================
Liabilities and Shareholders' Equity
Current
Bank indebtedness (Note 6) $ - $ 284,488
Accounts payable 1,181,673 874,269
Current portion of long-term debt (Note 7) 1,558,419 1,072,706
----------------------------
2,740,092 2,231,463
Future income tax liability (Note 8) 536,958 530,000
Long term debt (Note 7) 1,285,752 1,299,125
----------------------------
4,562,802 4,060,588
----------------------------
Shareholders' equity
Share capital (Note 9) 8,707,007 4,642,007
Paid in capital 770,790 770,790
Cumulative foreign exchange translation 29,875 -
Deficit (1,227,450) (938,226)
----------------------------
8,280,222 4,474,571
----------------------------
$ 12,843,024 $ 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)
(Prepared from the records of the company - without audit or review)
(Expressed in US$)
Nine Months Ended Three Months Ended
February 28 February 28
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2003 2002 2003 2002
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Sales $ 5,523,823 $ 2,321,625 $ 2,079,512 $ 681,772
Cost of sales 4,064,540 1,765,486 1,509,681 571,128
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Gross profit 1,459,283 556,139 569,831 110,644
Expenses
Selling expenses 472,380 231,034 180,221 63,110
General and administrative 1,311,723 949,513 592,754 580,141
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1,784,103 1,180,547 772,975 643,251
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Operating Income (324,820) (624,408) (203,144) (532,607)
--------------------------------------------------------------
Other (Income)
Expenses
Other income (108,335) (68,544) (39,057) (9,416)
Interest expense 69,870 23,891 9,921 5,066
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(38,465) (44,653) (29,136) (4,350)
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Income (loss) before income
taxes (286,355) (579,755) (174,008) (528,257)
Income taxes 2,869 21,524 2,869 (8,746)
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Net income (loss) (289,224) (601,009) (176,877) (519,511)
Retained earnings (deficit),
beginning of period (938,226) (80,583) (1,050,573) (162,081)
--------------------------------------------------------------
Deficit, end of period $(1,227,450) $ (681,592) $(1,227,450) $ (681,592)
==============================================================
Earning (loss) per share - basic $ (0.018) $ (0.05) $ (0.011) $ (0.05)
==============================================================
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
(Prepared from the records of the company - without audit or review)
(Expressed in US$)
Nine Months Ended Three Months Ended
February 28 February 28
--------------------- ---------------------
2003 2002 2003 2002
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Cash provided by (used in)
Operating activities
Net income (loss) for the period $ (289,224) $ (601,009) $ (176,877) $ (519,511)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Amortization 276,047 106,154 89,236 31,086
Net change in non-cash working capital
balances (Note 10) (777,245) (249,313) (372,238) 7,214
--------------------------------------------------------------
(790,422) (744,168) (459,879) (481,211)
--------------------------------------------------------------
Investing activities
Acquisition of assets of TM Systems (3,022,263) - (3,022,263) -
Purchase of capital assets (362,630) (187,353) (76,915) (70,703)
--------------------------------------------------------------
(3,384,893) (187,353) (3,099,178) (70,703)
Financing activities
Cash acquired through reverse take-over,
net of cost of acquisition - 1,178,375 - -
Issue of share capital 4,065,000 204,127 2,089,000 198,420
Share issue costs (8,226) (8,226)
Change in cumulative foreign exchange 29,875 - 57,507 -
Bank indebtedness advances (repayments) (284,488) (109,151) - (3,051)
Long-term debt advances (repayments) 472,340 (65,625) 1,540,846 (2,613)
Increase(decrease) in future income tax liability 6,958 - (232) -
--------------------------------------------------------------
4,289,685 1,199,500 4,488,121 184,530
--------------------------------------------------------------
Net increase (decrease) in cash 114,370 267,979 929,064 (367,384)
Cash, beginning of period 1,408,637 41,073 593,943 676,436
--------------------------------------------------------------
Cash, end of period $ 1,523,007 $ 309,052 $ 1,523,007 $ 309,052
==============================================================
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
(Prepared from the records of the company - without audit or review)
(Expressed in US Dollars)
February 28, 2003 and 2002
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. In 2002,
the Company 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. A further
acquisition in 2003 saw the Company expand its
defense-related business to include naval
aircraft and launching equipment, flight control
and signalling systems, radar systems
alteration, data communication and test
equipment, and aircraft ground support
equipment.
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.
On February 11, 2003 the Company completed the
acquisition of certain assets of TM Systems,
Inc., a private company incorporated as a
Delaware corporation. The acquisition is
described in Note 1(c) to the financial
statements.
Principles of Consolidation The consolidated financial statements include
the accounts of the Company (the legal parent),
and its wholly owned subsidiaries, API
Electronics, the Filtran Group, and TM Systems
II Inc.
5
API Electronics Group Inc.
Summary of Significant Accounting Policies
(Prepared from the records of the company - without audit or review)
(Expressed in US Dollars)
February 28, 2003 and 2002
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.
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.
6
API Electronics Group Inc.
Summary of Significant Accounting Policies
(Prepared from the records of the company - without audit or review)
(Expressed in US Dollars)
February 28, 2003 and 2002
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 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 February 28,
2003 was $29,875.
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 (2002 - $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
(Prepared from the records of the company - without audit or review)
(Expressed in US Dollars)
February 28, 2003 and 2002
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.
8
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Prepared from the records of the company - without audit or review)
(Expressed in US Dollars)
February 28, 2003 and 2002
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
==============
(c) Business Acquisition (continued)
On February 11, 2003, the Company acquired certain assets of TM Systems
Inc. for $3,000,000 and will carry on business as TM Systems 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 $1,500,000. Also
incurred were professional fees in connection with the acquisition in the
amount of $22,263 giving a total acquisition cost of $3,022,263.
The assets acquired at fair value, as at February 11, 2003 are as follows:
Contracts in progress, capital assets, and goodwill $ 3,022,263
==============
At present, the entire purchase price has been allocated to goodwill,
pending a valuation of the capital assets, contracts in progress, and the
goodwill acquired.
2. Inventories February 28 May 31
2003 2002
Inventory as at February 28, 2003 was estimated
based upon gross margin percentage $ 2,290,976 $ 1,852,483
3. Capital Assets February 28, 2003
Cost Accumulated Net
Amortization Book Value
Land $ 395,636 $ - $ 395,636
Buildings 2,057,687 250,617 1,807,070
Computer equipment 50,253 12,111 38,142
Computer software 59,212 19,925 39,287
Furniture and fixtures 51,245 15,294 35,951
Machinery and equipment 1,590,091 939,397 650,694
Vehicles 20,808 2,931 17,877
Web site development costs 30,826 12,662 18,164
==============================================
$ 4,255,758 $ 1,252,937 $3,002,821
9
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Prepared from the records of the company - without audit or review)
(Expressed in US Dollars)
February 28, 2003 and 2002
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 (2002 - $42,001) of property
that are held under capital leases. Depreciation and amortization expense
amounted to $276,047 (2002 - $75,068). Of this amount $109,158 (2002 -
$82,882) was included in cost of sales.
4. Goodwill
February 28 May 31
2003 2002
Goodwill $ 4,037,552 $ 1,015,289
Less: Accumulated amortization (52,760) (52,760)
----------------------------
$ 3,984,792 $ 962,529
----------------------------
5 Intangible Assets
February 28 May 31
2003 2002
Non-compete agreement (Note 1(b)) $ 325,713 $ 325,712
Less: Accumulated amortization (48,857) -
----------------------------
$ 276,856 $ 325,712
----------------------------
6. Bank Indebtedness
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 February 28, 2003, 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.
10
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Prepared from the records of the company - without audit or review)
(Expressed in US Dollars)
February 28, 2003 and 2002
7. Long-term Debt
February 28 May 31
2003 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 $1,003,814 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% 47,609 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% 151,689 166,262
Various equipment capital leases, with annual lease
payments of $26,949 including interest at
approximately 9% 86,966 102,089
Due to shareholder, non-interest bearing with no specific
terms of repayment 15,093 15,065
Promissory note payable in connection with the acquisition
of assets of TM Systems, due February 19, 2004 with an 1,500,000 -
interest rate of 5% per annum
------------------------
2,844,171 2,371,831
Less: Current portion 1,558,419 1,072,706
------------------------
$1,285,752 $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 February 28, 2003 the Company's indebtedness amounted
to $39,000.
The long-term debt repayable over the next five fiscal years is as follows:
2003(3 months) $ 56,913
2004 2,590,294
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.
11
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Prepared from the records of the company - without audit or review)
(Expressed in US Dollars)
February 28, 2003 and 2002
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.
12
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Prepared from the records of the company - without audit or review)
(Expressed in US Dollars)
February 28, 2003 and 2002
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
----------------------------
Balance as 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
----------------------------
Balance as at February 28, 2003 22,528,814 $ 8,707,007
----------------------------
13
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Prepared from the records of the company - without audit or review)
(Expressed in US Dollars)
February 28, 2003 and 2002
9. Share Capital (continued)
(c) Warrants
Common shares purchase warrants ("Warrants")
As at February 28, 2003 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, 2004
1,649,579 1 for 1 0.75 August 30, 2003
500,000 1 for 1 3.00 June 30, 2003
3,462,500 1 for 1 0.60 March 31, 2005
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
Issued:
- Private placement - June 2002 500,000
- Private placement - February 2003 3,462,500
Expired during the year (226,667)
----------
Warrants outstanding, February 28, 2003 7,261,658
==========
(d) Stock Options
As at February 28, 2003 the following options are exercisable, except
as indicated, and outstanding:
Number Exercise Expiry
Issued to Outstanding Price Date
Directors 50,000 0.45 August 31, 2006
Directors 50,000 0.75 August 31, 2006
21
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Prepared from the records of the company - without audit or review)
(Expressed in US Dollars)
February 28, 2003 and 2002
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 May 31, 2002 325,000 0.73
Options cancelled (25,000) (2.35)
Exercised - February 2003 (200,000) 0.60
-----------------------
Options outstanding, February 28, 2003 100,000 $ 0.60
=======================
10. Cash Flow Information
(a) Changes in non-cash working capital are as follows:
Nine Months Ended Three Months Ended
February 28 February 28
2003 2002 2003 2002
Accounts receivable $(333,703) $(176,281) $(234,420) $ 9,871
Inventory (438,493) (22,261) (206,765) 18,740
Marketable securities (263,670) - (11,943) -
Prepaid expenses (48,783) 96,529 (61,072) 59,994
Accounts payable 307,404 (147,300) 141,962 (81,391)
--------------------------------------------------
$ (777,245) $(249,313) $(372,238) $ 7,214
--------------------------------------------------
(b) Supplemental Cash Flow Information
Nine Months Ended Three Months Ended
February 28 February 28
2003 2002 2003 2002
Cash paid for interest $ 69,870 $ 23,891 $ 9,921 $ 5,066
------------------------------------------------
15
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Prepared from the records of the company - without audit or review)
(Expressed in US Dollars)
February 28, 2003 and 2002
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 $30,896 (2002 - $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 February 28, 2003 was 15,844,091. For comparative purposes, 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.
16
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Prepared from the records of the company - without audit or review)
(Expressed in US Dollars)
February 28, 2003 and 2002
13. Financial Instruments
As at February 28, 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-cancellable lease terms in excess of one year as of February 28,
2003.
2003 (3 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.
17
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Prepared from the records of the company - without audit or review)
(Expressed in US Dollars)
February 28, 2003 and 2002
15. Comparative Figures
Comparative figures have been reclassified to conform to the current year
presentation.
18