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 October, 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 ___
---
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2b under the Securities Exchange Act of 1934:
Yes: ___ No: X
---
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-_________
Relevant Event dated October 30, 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: October 31, 2003 By: /s/ Jason DeZwirek
---------------- ----------------------------------
Jason DeZwirek, Chairman of the Board,
Executive V.P., Secretary and Director
API ELECTRONICS REPORTS FIRST QUARTER REVENUE GROWTH OF 48%
NEW YORK - October 31, 2003 - API Electronics Group, Inc. (OTCBB: APIEF) today
announced financial results for the first quarter of its 2004 fiscal year,
ending August 31, 2003.
Revenues for the three month period increased by 48.3% to US$2,434,080, up from
US$1,641,595 posted for the same period in fiscal year 2003. Growth during the
period was attributed primarily to US$611,962 in sales revenue from TM Systems,
which was acquired by API in February 2003.
Orders booked were US$2,134,805, in line with the US$2,142,272 recorded for Q1
of fiscal year 2003.
API's backlog, which values unfilled orders placed with the company for the
current fiscal year, is US$5,878,000 as of August 31, 2003.
The cost of goods sold as a percentage of sales was 74.7%, in line with the
74.0% of sales posted for the same fiscal 2003 period. Accordingly, the gross
margin for the fiscal 2004 period was 25.3% and 26.0% for the fiscal 2003
period.
API incurred a net loss of one half of one cent (-$0.005) per share for the
quarter ended August 31, 2003 compared to six tenths of one cent (-$0.006) per
share for the quarter ended August 31, 2002.
The combined total of cash reserves and marketable securities held by API at the
end of its fiscal first quarter was $3,256,744.
"API is pleased to present strong first quarter results for its 2004 fiscal
year, highlighted by a 48.3 percent increase in sales," said Tom Mills,
President and COO of API Electronics. "We have a strong balance sheet, over
three million dollars in cash reserves and a healthy backlog. This puts API in
an excellent position going forward. API is on track for a successful second
quarter and to report positive earnings per share for the fiscal 2004 year. In
addition, we remain extremely optimistic about our prospects for continued
growth."
ABOUT API ELECTRONICS:
API Electronics Group Inc., through its wholly owned subsidiaries API
Electronics Inc., Filtran Group and TM Systems, is engaged in the manufacture of
electronic components and systems for the defense and communications industries.
API and its subsidiaries have been providing top of the line parts to numerous
global producers of military hardware, telecommunications equipment, computer
peripherals, process control equipment and instrumentation for a combined total
of over 50 years. API's TM Systems subsidiary has been in business for over 30
years and provides critical systems to various U.S. government departments,
including the United States Navy, as well as numerous domestic and foreign
commercial corporations. With a growing list of blue chip customers, including
Honeywell/Allied Signal, General Dynamics, Lockheed Martin and numerous other
top technology-based firms around the world, API regularly ships off-the-shelf
and custom designed products to clients in more than 34 countries. API owns
state-of-the-art manufacturing and technology centers in New York State,
Connecticut and Ontario, Canada totaling 51,000 square feet. The company also
has manufacturing capabilities in China and a distribution center in Britain.
Filtran and API Electronics are ISO 9001 registered companies. API Electronics
trades on
the OTC Bulletin Board under the symbol APIEF. For further information about
Filtran Group and API Electronics, please visit the company websites at
www.filtran.com and www.apielectronics.com.
FOR FURTHER INFORMATION:
API Electronics Group
Tel: 1-877-274-0274
api@primorisgroup.com
This press release may contain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. All forward-looking
statements are subject to certain risks, uncertainties and assumptions. These
risks and uncertainties, which are more fully described in API's Annual and
Quarterly Reports filed with the Securities and Exchange Commission, include
changes in market conditions in the industries in which the Company operates.
Should one or more of these risks or uncertainties materialize, or should the
assumptions prove incorrect, actual results may vary in material aspects from
those currently anticipated.
FORM 27
SECURITIES ACT (ONTARIO)
MATERIAL CHANGE REPORT UNDER SECTION 75(2) OF THE ACT
1. Reporting Issuer:
API Electronics Group Inc. (the "Issuer")
505 University Avenue, Suite 1400
Toronto, Ontario
M5G 1X3
2. Date of Material Change:
October 30, 2003.
3. Publication of Material Change:
Filing of consolidated interim financial statements for the three-month
period ended August 31, 2003.
4. Summary of Material Change:
The Issuer announced financial results for the three-month period ended
August 31, 2003.
5. Full Description of Material Change:
See consolidated interim financial statements for the three-month period
ended August 31, 2003 filed on SEDAR.
6. Senior Officer:
Jason DeZwirek
Chairman
Telephone: 416-593-3000
I, Jason DeZwirek, Chairman, certify that the foregoing accurately
discloses the material change referred to herein.
Signed at Toronto, Ontario this 30/th/ day of October, 2003.
"JASON DEZWIREK"
----------------------------
Jason DeZwirek, Chairman
API Electronics Group Inc.
IT IS AN OFFENCE FOR A PERSON TO MAKE A STATEMENT IN A DOCUMENT REQUIRED TO BE
FILED OR FURNISHED UNDER THE ACT OR THIS REGULATION THAT, AT THE TIME AND IN THE
LIGHT OF THE CIRCUMSTANCES UNDER WHICH IT IS MADE, IS A MISREPRESENTATION.
QUARTERLY AND YEAR END REPORT
[LOGO] BC FORM 51-901
BCSC
British Columbia Securities Commission (previously Form 61)
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ISSUER DETAILS DATE OF REPORT
FOR QUARTER YY MM DD
NAME OF ISSUER ENDED
2003 10 30
API ELECTRONICS GROUP INC. 2003/08/31
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ISSUER ADDRESS
505 UNIVERSITY AVENUE, SUITE 1400
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CITY PROVINCE POSTAL ISSUER FAX NO. ISSUER TELEPHONE
CODE NO.
TORONTO ON 416-593-4658
M5G 1X3 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
.. YY MM DD
"Jason DeZwirek" JASON DEZWIREK
2003 10 30
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DIRECTOR'S SIGNATURE PRINT FULL NAME DATE SIGNED
.. YY MM DD
"Phillip DeZwirek" PHILLIP DEZWIREK
2003 10 30
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SCHEDULE "A"
FINANCIAL INFORMATION
See attached unaudited consolidated financial statements of API Electronics
Group Inc. (the "Company") for the three-months ended August 31, 2003.
SCHEDULE "B"
See attached unaudited consolidated financial statements of the Company for the
three-months ended August 31, 2003.
SCHEDULE "C"
Management's Discussion and Analysis
Overview
API Electronics Group Inc. ("API" or "Company") is a North American based
company focused on the manufacture of specialized electronic components and
microelectronic circuits. API Electronics, Inc. ("Electronics") is a leading
designer and manufacturer of power transistors, small signal transistors, tuning
diodes, hybrid circuits, resistor/capacitor networks, diodes, and other critical
elements with precisely defined functional capabilities for advanced military,
industrial, commercial, automotive and medical applications. The Company is a
leading supplier of defence electronic components to the U.S. Department of
Defence and its subcontractors as well as having a strong commercial user base.
API's business strategy has been to strengthen its leadership position for its
components through continued emphasis on technological advances, operational
efficiencies, cost reductions, competitiveness and acquisitions. To this end, on
May 31, 2002, API acquired all the outstanding shares of the privately-held
"Filtran Group" (Filtran Inc. of Ogdensburg, New York; Filtran Limited, Canadian
Dataplex Limited and Tactron Communications (Canada) Limited all of Nepean,
Ontario, Canada). Filtran Group is a leading global supplier of superior quality
electronic components to major producers of communications equipment, military
hardware, computer peripherals, process control equipment and instrumentation.
In business since 1969, Filtran Group is ISO 9001 registered and offers
off-the-shelf and custom designed products and regularly ships components to
clients in more than 34 countries. The acquisition broadens API's product
offerings for current and potential customers as well as providing synergies in
the areas of engineering and technological capabilities. In February 2003, the
Company acquired certain assets (contracts in progress, inventory, machinery and
equipment and intangibles) of TM Systems Inc. and commenced business as TM
Systems II Inc. ("TM"). In business for over 30 years, TM supplies the defence
sector with naval landing and launching equipment, flight control and signalling
systems, radar systems alteration, data communication and test equipment as well
as aircraft ground support equipment. The acquisition expands API's
core-military and defence-related electronics business.
The Company's objectives are to seek long-term stable growth for all of its
operating segments (Electronics, Filtran Group, and TM) through continuous
capital investment, employing today's production methods and technologies, and
by demanding uncompromising quality control.
Consolidated Results of Operations
Three Months ended August 31, 2003 compared to August 31, 2002
Sales Revenue
The Company continued to record strong sales growth in first quarter ended
August 31, 2003. Revenues increased by 48.3% to $2,434,080 from $1,641,595
posted in first quarter ended August 31, 2002. The growth during the period was
attributed primarily to the February 2003-acquired TM with sales revenue in the
amount of $611,962.
Cost of Goods Sold and Gross Margin
The cost of goods sold was 74.7% of sales in 2003 and reasonably in line with
the 74.0% of sales posted in 2002. Accordingly, the gross margin for 2003 period
was 25.3% and 26.0% for the 2002 period.
Selling Expenses
Selling expenses increased to $187,175 for the August 31, 2003 period from
$139,629 for the period ended August 31, 2002. As a percentage of sales the 2003
selling expenses came in at 7.7% a slight improvement over the 8.5% posted in
2002. The 34.1% increase in selling expenses is consistent with the 48.3%
increase in sales revenue.
General and Administrative Expenses
General and administrative expenses increased to $537,104 for 2003 from $361,051
incurred during 2002. As a percentage of sales, the 2003 general and
administration expenses were 22.0% and this was consistent with the 22.0% posted
in 2002.
Several components of general and administrative expenses saw increases as a
result of the February 6, 2003 acquisition of TM and the overall increase in
sales revenue. The components that saw larger increases are as follows: Officer
salaries - $84,918 (2002 - $33,406), rent - $42,974 (2002 - $9,664), office
supplies and expense - $20,728 (2002 -$11,078).
In addition, administrative depreciation and amortization rose to $170,155 (2002
- - $55,270) as a result of the overall increase in the Capital and Intangible
Asset base arising from the acquisition of TM.
Management continues to emphasize efficiencies and control of overheads. It is
anticipated that TM's operations will be fully integrated into Electronics'
state-of-the art facilities in fiscal 2004. This should provide savings in
overhead and administrative costs.
Other Income and Expense
Other income during the quarter was $11,116 in 2003 compared to $13,507 in 2002.
Other expense relates to interest on long-term debt and the Company saw a
decrease from $30,983 in 2002 to $23,651 in 2003. The decrease is attributed to
lower debt levels in 2003.
Net Income / Loss
The Company incurred a net loss for the three months ended August 31, 2003 of
$121,029($0.005/share) compared to a net loss of $91,849($0.006/share) for the
three months ended August 31, 2002.
Liquidity and Capital Resources
Summary
At August 31, 2003, the Company had cash reserves of $2,976,402 compared to
$1,561,199 as at May 31, 2003. In addition, the Company had marketable
securities of $280,342 at August 31, 2003(May 31, 2003 - $431,168). The
portfolio of securities consists principally of company paper and bonds with
maturities of less than one year ($243,958) and income trust units ($34,245).
At August 31, 2003 working capital (the excess of current assets over current
liabilities) totalled $2,759,243 compared to $2,195,522 at May 31, 2003. The
current ratio at August 31, 2003 increased slightly to 1.53:1 from the 1.46:1
ratio as at May 31, 2003. The quick ratio (which excludes inventory and prepaid
expenses from current assets) was 0.91:1 at August 31, 2003 - a slight increase
from the 0.83:1 posted at May 31, 2003.
As at August 31, 2003, the Company's working capital was sufficient to meet the
Company's current requirements.
Inventory rose 7.5% from $2,931,924 as at May 31, 2003 to $3,152,036 as at
August 31, 2003. Accounts receivable decreased 13.1% from $1,619,487 as at May
31, 2003 to $1,407,421 as at August 31, 2003. Accounts payable declined 6.6%
from $1,265,458 at May 31, 2003 to $1,182,467 as at August 31, 2003.
Long-term debt (current and long-term portion) decreased slightly from
$2,931,687 at May 31, 2003 to $2,816,942 at August 31, 2003.
The debt to equity ratio (current & long-term debt to shareholder's equity)
improved to 0.33 as at August 31, 2003 compared to 0.35 as at May 31, 2003.
Total assets increased to $14,267,341 at August 31, 2003 from $13,495,221 as at
May 31, 2003. This was attributed to higher cash and cash equivalents generated.
Cash Flow
Cash generated (used) in operating activities increased to $782,039 for three
months ended August 31, 2003 compared to $18,133 for the three months ended
August 31, 2002.
The major source of cash in 2003 was provided through the issue of common shares
upon the exercise of warrants in the amount of $435,000, proceeds on sale of
land and building of $108,186, proceeds on sale of marketable securities in the
amount of $192,694, and bank indebtedness advances of $75,000.
The major source of cash in 2002 was $1,175,000 and this was provided through
the issue of common shares following a June 2002 private placement.
The major use of cash during 2003 was the purchase of capital assets in the
amount of $63,192 and the repayment of long-term debt in the amount of $114,102.
The major use of cash in 2002 was the purchase of capital assets of 177,870, the
purchase of marketable securities in the amount of $62,997, the repayment of
long-term debt of $53,562, and the repayment of bank indebtedness in the amount
of $42,342.
Financings
There were no financings during the three months ended August 31, 2003.
Subsequent Events
No significant subsequent events occurred after August 31, 2003.
Risks
The Company is exposed to a variety of risks in its business. These include
operational, currency, foreign operations, credit, and interest rate. Steps have
been taken in all areas to mitigate these risks.
API Electronics Group Inc.
Consolidated Interim Financial Statements
First Quarter
For the three month period ended August 31, 2003
(Expressed in US Dollars)
(Unaudited)
API Electronics Group Inc.
Consolidated Balance Sheets
(Expressed in US Dollars)
August 31 May 31
2003 2003
- --------------------------------------------------------------------------------------
(unaudited) (audited)
Assets
Current
Cash and cash equivalents $ 2,976,402 $ 1,561,199
Marketable securities (Note 2) 280,342 431,168
Accounts receivable 1,407,421 1,619,487
Unbilled revenue 80,699 324,078
Inventories (Note 3) 3,152,036 2,931,924
Prepaid expenses 89,300 61,988
----------------------------
7,986,200 6,929,844
Capital assets (Note 4) 3,120,468 3,275,979
Goodwill 918,529 918,529
Intangible assets (Note 5) 2,242,144 2,370,869
----------------------------
$ 14,267,341 $ 13,495,221
======================================================================================
Liabilities and Shareholders' Equity
Current
Bank indebtedness (Note 6) $ 75,000 $ -
Accounts payable 1,182,467 1,265,458
Deferred revenue 1,259,552 661,406
Future income tax liability (Note 8) 108,000 108,000
Current portion of long-term debt (Note 7) 2,601,938 2,699,458
----------------------------
5,226,957 4,734,322
Future income tax liability (Note 8) 248,186 248,000
Long term debt (Note 7) 215,004 232,229
----------------------------
5,690,147 5,214,551
----------------------------
Shareholders' equity
Share capital (Note 9) 9,179,507 8,744,507
Paid in capital 770,790 770,790
Cumulative foreign exchange translation adjustment 235,167 252,614
Deficit (1,608,270) (1,487,241)
----------------------------
8,577,194 8,280,670
----------------------------
$ 14,267,341 $ 13,495,221
======================================================================================
On behalf of the Board:
"JASON DEZWIREK"
- ------------------------------
"PHILLIP DEZWIREK"
- ------------------------------
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
2
API Electronics Group Inc.
Consolidated Statements of Operations and Deficit
(Expressed in US Dollars)
(Unaudited)
August 31 August 31
Three months ended 2003 2002
- -------------------------------------------------------------------------------
Revenue $ 2,434,080 $ 1,641,595
Cost of sales 1,817,785 1,215,288
----------------------------
Gross profit 616,295 426,307
----------------------------
Expenses
Selling 187,175 139,629
General and administrative 537,104 361,051
----------------------------
724,279 500,680
----------------------------
Operating loss (107,984) (74,373)
Other (income) expenses
Other income (11,116) (13,507)
Interest on long term debt 23,651 30,983
----------------------------
12,535 17,476
----------------------------
Loss before income taxes (120,519) (91,849)
Income taxes (Note 8) (510) -
----------------------------
Net loss for the period (121,029) (91,849)
Deficit, beginning of period (1,487,241) (938,226)
----------------------------
Deficit, end of period $(1,608,270) $(1,030,075)
===============================================================================
Loss per share - basic (Note 12) $ (0.005) $ (0.006)
===============================================================================
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
(Expressed in US Dollars)
(Unaudited)
August 31 August 31
Three months ended 2003 2002
- ---------------------------------------------------------------------------------------
Cash was provided by (used in)
Operating activities
Net loss for the period $ (121,029) $ (91,849)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization 220,371 92,519
Gain on sale of marketable securities (41,868) -
Loss on sale of land and building 16,243 -
Changes in non-cash working capital
balances (Note 10(a)) 708,322 17,463
----------------------------
782,039 18,133
----------------------------
Investing activities
Purchase of capital assets (63,192) (177,870)
Proceeds on sale of land and building 108,186 -
Proceeds on sale of marketable securities 192,694 -
Purchase of marketable securities - (62,997)
----------------------------
237,688 (240,867)
----------------------------
Financing activities
Issue of share capital 435,000 1,175,000
Bank indebtedness advances (repayments) 75,000 (42,342)
Repayment of long-term debt (114,102) (53,562)
----------------------------
395,898 1,079,096
----------------------------
Foreign exchange loss on cash held in foreign currency (422) -
----------------------------
Net increase (decrease) in cash for the period 1,415,203 856,362
Cash and cash equivalents, beginning of period 1,561,199 1,408,637
----------------------------
Cash and cash equivalents, end of period $ 2,976,402 $ 2,264,999
=======================================================================================
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
(Expressed in US Dollars)
(Unaudited)
August 31, 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. Through recent acquisitions, the
Company has expanded its manufacturing and design
of electronic components to include filters,
transformers, inductors, and custom power supplies
for land and amphibious combat systems, mission
critical information systems and technologies,
shipbuilding and marine systems, and business
aviation.
Business Acquisitions and
Name Changes On 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 May 23, 2002 the company incorporated an entity
named "5/23 Corp" under the laws of the State of
Delaware. On January 13, 2003 "5/23 Corp" changed
its name to TM Systems II, Inc. ("TM II"). On
February 6, 2003, TM II acquired certain assets of
TM Systems Inc. and carries on business as TM
System II, Inc. TM II's business focus is similar
to that of the Company. The business combination,
which has been accounted for using the purchase
method, is described in Note 1(c) to the financial
statements.
5
API Electronics Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
(Unaudited)
August 31, 2003 and 2002
Principles of Consolidation The consolidated financial statements include the
accounts of the Company (the legal parent),
together with its wholly owned subsidiaries, API
Electronics, TM II and the Filtran Group.
Basis of Presentation These consolidated financial statements have been
prepared in accordance with Canadian generally
accepted accounting principles. All amounts are
disclosed in US dollars unless otherwise indicated.
Contract Revenue Revenue from contracts is recognized using the
percentage of completion method. The degree of
completion is determined based on costs incurred,
excluding costs that are not representative of
progress to completion, as a percentage of total
costs anticipated for each contract. Provision is
made for losses on contracts in progress when such
losses first become known. Revisions in cost and
profit estimates, which can be significant, are
reflected in the accounting period in which the
relevant facts become known.
Provisions for warranty claims and other allowances
are made based on contract terms and prior
experience.
Non-Contract Revenue Non-contract revenue is recognized when risk and
title passes to the customer, which is generally
upon shipment of the product.
Marketable Securities Temporary investments are stated at the lower of
cost and market value.
Inventory Raw materials are recorded at the lower of cost and
net realizable value. Finished goods and work in
process are stated at the lower of cost, which
includes material, labour and overhead, and net
realizable value. Cost is generally determined on a
first-in, first-out basis.
Capital Assets Capital assets are recorded at cost less
accumulated amortization and are amortized using
the straight-line basis over the following years:
Buildings 20 years
Computer equipment 3 years
Computer software 3 years
Furniture and fixtures 5 years
Machinery and equipment Ranging from 5 to 10 years
Vehicles 3 years
Website development 3 years
6
API Electronics Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
(Unaudited)
August 31, 2003 and 2002
Goodwill Effective April 1, 2001, the Company adopted the
CICA handbook section 3062 "Goodwill and Other
Intangible Assets". Goodwill is subject to an
impairment test on at least an annual basis or upon
the occurrence of certain events or circumstances.
Goodwill impairment is assessed based on a
comparison of the fair value of a reporting unit to
the underlying carrying value of the reporting
unit's net assets, including goodwill. When the
carrying amount of the reporting unit exceeds its
fair value, the fair value of the reporting unit's
goodwill is compared with its carrying amount to
measure the amount of impairment loss, if any.
Management has determined there is no impairment in
goodwill as of August 31, 2003.
Intangible Assets Intangible assets which have a finite life are
amortized using the straight-line basis over the
following period:
Non-compete agreements 5 years
Customer contracts 5 years
Income taxes The Company accounts for income taxes under the
asset and liability method. Under this method,
future income tax assets and liabilities are
recognized for the future tax consequences
attributable to differences between financial
reporting and tax bases of assets and liabilities
and available loss carryforwards. A valuation
allowance is established to reduce tax assets if it
is more likely than not that all or some portions
of such tax assets will not be realized.
Foreign Currency
Translation The Company's functional currency is United States
Dollars and the consolidated financial statements
are stated in United States dollars, "the reporting
currency". Integrated operations have been
translated from Canadian dollars into United States
dollars at the year end exchange rate for monetary
balance sheet items, the historical rate for
non-monetary balance sheet items, and the average
exchange rate for the year for revenues, expenses,
gains and losses. The gains or losses on
translation are included in net income (loss) for
the year.
Self-sustaining operations are translated at
current rates of exchange. All exchange gains and
losses will be accumulated in the foreign exchange
translation account on the balance sheet.
7
API Electronics Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
(Unaudited)
August 31, 2003 and 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.
Stock-Based
Compensation Plans The Company has a stock-based compensation plan
which is described in Note 9. No compensation
expense is recognized for these plans when stock or
stock options are issued to employees and
directors. Any consideration paid on the exercise
of options or purchase of stock is credited to
share capital.
Research and
Development Expenses Research and development expenses are recorded at
net of applicable investment tax credits.
Financial Instruments The Company's financial instruments include certain
instruments with short term maturity and long term
debt. Unless otherwise noted, it is management's
opinion that the Company is not exposed to
significant interest rate, currency or credit risks
arising from its financial instruments.
The Company carries out a portion of transactions
in foreign currencies. Included in the Company's
cash, marketable securities, accounts receivable
and payable are balances denominated in Cdn dollars
in the amounts of $1,288,634 (May 31, 2003 -
$1,288,634), $361,209 (May 31, 2003 - $361,209),
$380,458 (May 31, 2003 - $380,458) and $645,852
(May 31, 2003 - $645,852) respectively.
As at August 31, 2003 there were no significant
differences between the carrying amounts and the
fair values of the Company's financial instruments
unless otherwise noted.
Cash and Cash equivalents Cash and cash equivalents consist of cash on hand,
bank balances and investments in money market
instruments with maturities of three months or
less.
8
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
August 31, 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.
9
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
August 31, 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) Incorporation and Asset Purchase
On May 23, 2002, the Company incorporated an entity named "5/23 Corp"
under the laws of the State of Delaware. On January 13, 2003, "5/23
Corp" changed its name to TM Systems II, Inc. ("TM II"). On February
6, 2003, TM II acquired certain assets of TM Systems Inc. and carries
on business as TM System II, Inc. The purchase price was satisfied
through payment of cash in the amount of $1,500,000 and a promissory
note given in the amount of $1,475,652 with interest of 1.65% per
annum and payable on or before February 6, 2004. Also incurred were
professional fees in connection with the acquisition in the amount of
$21,958 giving a total acquisition cost of $2,997,610.
The assets acquired at fair value, as at February 6, 2003 are as
follows:
Capital assets $ 25,120
Inventory - parts and supplies 288,009
Inventory - work in progress 468,697
-----------
Fair value of tangible net assets 781,826
Customer contracts 1,715,784
Non-compete agreement 500,000
-----------
Net assets acquired $ 2,997,610
===========
If the aggregate of gross orders that TM II ships, invoices and any
advance payment that TM II receives, falls below $3,000,000 for the
period from February 6, 2003 to December 31, 2003, the promissory note
will be adjusted by a percentage reduction equal to the percentage
shortfall.
TM II is required to pay an additional 10% of gross revenue for
certain contracts specified in the asset purchase agreement.
10
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
August 31, 2003 and 2002
2. Marketable Securities
August 31 May 31
2003 2003
---------------------------
Shares in venture issues $ 2,139 $ 2,139
Income trust units 34,245 186,632
Short term company paper and bonds
(maturity less than one year) 243,958 242,397
--------------------------
$ 280,342 $ 431,168
==========================
3. Inventories
August 31 May 31
2003 2003
----------------------------
Inventory as at August 31, 2003 was estimated
based upon gross margin percentage $ 3,152,036 $ 2,931,924
============================
11
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollar)
(Unaudited)
August 31, 2003 and 2002
4. Capital Assets
August 31, 2003
--------------------------------------------
Cost Accumulated Net
Amortization Book Value
Land $ 410,067 $ - $ 410,067
Buildings 2,164,438 320,523 1,843,915
Computer equipment 79,257 35,379 43,878
Computer software 116,648 51,141 65,507
Furniture and fixtures 72,770 20,969 51,801
Machinery and equipment 1,789,672 1,115,497 674,175
Vehicles 23,655 5,373 18,282
Web site development costs 30,826 17,983 12,843
--------------------------------------------
$ 4,687,333 $ 1,566,865 $ 3,120,468
============================================
May 31, 2003
--------------------------------------------
Cost Accumulated Net
Amortization Book Value
Land $ 423,985 $ - $ 423,985
Buildings 2,279,785 306,224 1,973,561
Computer equipment 77,255 34,009 43,246
Computer software 101,326 47,091 54,235
Furniture and fixtures 71,017 20,751 50,266
Machinery and equipment 1,779,892 1,083,418 696,474
Vehicles 24,259 5,679 18,580
Web site development costs 30,826 15,194 15,632
--------------------------------------------
$ 4,788,345 $ 1,512,366 $ 3,275,979
============================================
Included in machinery and equipment is $158,774 (May 31, 2003 - $158,774)
of property held under capital leases. Depreciation and amortization
expense amounted to $220,371 (2002 - $92,519). Of this amount $50,543
(2002 - $36,799) was included in cost of sales.
12
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
August 31, 2003 and 2002
5. Intangible Assets
August 31 May 31
2003 2003
----------------------------
Non-compete agreements $ 858,712 $ 858,712
Less: Accumulated amortization (139,328) (96,392)
Customer contracts (Note 1(c)) 1,715,784 1,715,784
Less: Accumulated amortization (193,024) (107,235)
----------------------------
$ 2,242,144 $ 2,370,869
============================
6. Bank Indebtedness
The Company's wholly owned subsidiary, API Electronics has a working
capital line of credit of $250,000. As at August 31, 2003 the API
Electronics has borrowed $75,000 (May 31, 2003 - $Nil) against these lines
of credit. The credit is secured by all of its assets pursuant to a
general security agreement. The bank indebtedness is due on demand and
bears interest at prime plus 1%.
The Company's wholly owned subsidiary, Filtran Canada has a line of credit
of Cdn $1,000,000. As at August 31, 2003, the Filtran Canada has borrowed
$Nil (May 31, 2003 - $Nil) 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 a guarantee of Cdn
$1,310,000 from API Electronics Group Inc.
13
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
August 31, 2003 and 2002
7. Long-term Debt
August 31 May 31
2003 2003
------------------------------
Promissory note payable to former shareholders of the Filtran
Group, secured by a collateral mortgage on real property
registered in Ontario and the issued and outstanding shares of
the Filtran Group, repayable May 31, 2004 plus interest at 5%
per annum $ 1,045,799 $ 1,098,418
Promissory note payable in connection with the acquisition of
assets of TM Systems, due February 6, 2004 with an interest rate
of 1.65% per annum, secured by the assets of TM Systems II Inc. 1,475,652 1,475,652
Bank term loan, secured by machinery and equipment, repayable in
monthly instalments of $1,565 plus interest at prime plus 2% 42,060 47,400
Loan payable, unsecured and non-interest bearing (i) 39,000 39,000
Mortgage payable, secured by real estate, repayable in blended
monthly instalments of $3,812 at interest rates of 7.00% and
8.75% 89,136 138,489
Various equipment capital leases, with monthly lease payments of
$3,545 including interest at approximately 9%, secured by the
leased assets 124,681 132,112
Due to shareholder, non-interest bearing with no specific terms
of repayment 614 616
------------------------------
2,816,942 2,931,687
Less: Current portion 2,601,938 2,699,458
------------------------------
$ 215,004 $ 232,229
==============================
(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.
In fiscal 2002, 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 August
31, 2003 a new agreement regarding repayment has not been reached,
accordingly the debt has been classified as current.
The long term debt repayable over the next five fiscal years is as
follows:
2004 (9 months) $2,584,713
2005 91,928
2006 86,577
2007 35,179
2008 18,545
14
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
August 31, 2003 and 2002
8. Income Taxes
The significant components of future income tax assets consists of the
following as at May 31, 2003:
May 31
2003
-----------
Future income tax assets
Loss carry forwards $ 624,000
Other 15,000
Marketable securities 77,000
Capital assets 184,000
-----------
900,000
-----------
Future income tax liabilities
Capital assets (381,000)
Non-compete agreement (47,000)
Inventory (108,000)
Unrealized foreign exchange gain (117,000)
-----------
(653,000)
-----------
Valuation allowance (608,000)
-----------
$ (356,000)
===========
A reconciliation between income taxes provided at actual rates and at the
basic rate of 37.79% (May 31, 2002 - 40.29%) for federal and provincial
taxes is as follows:
Net loss $ (590,428)
===========
Recovery of income tax at statutory rates $ (223,000)
Increase in taxes resulting from:
Non-deductible items and other (33,413)
Tax reassessment 1998 -
Change in valuation allowance 215,000
-----------
Provision for income taxes - May 31, 2003 $ (41,413)
===========
The Company and its subsidiaries have non-capital losses of approximately
$1,971,000 to apply against future taxable income. These losses will
expire as follows: $599,000 in 2008 and $1,372,000 in 2010.
15
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
August 31, 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 at May 31, 2002 14,903,814 $ 4,642,007
Shares issued upon private placement - June 2002 500,000 1,175,000
Shares issued upon exercise of stock options 200,000 120,000
Shares issued upon private placement - February 2003 6,925,000 2,770,000
Shares issued upon exercise of warrants 62,500 37,500
-----------------------------
Balance at May 31, 2003 22,591,314 8,744,507
Shares issued upon exercise of warrants 725,000 435,000
-----------------------------
Balance at August 31, 2003 23,316,314 $ 9,179,507
=============================
16
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
August 31, 2003 and 2002
9. Share Capital (continued)
(c) Warrants
Common shares purchase warrants ("Warrants")
As at August 31, 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 March 30, 2004
1,649,579 1 for 1 0.75 September 30, 2004
500,000 1 for 1 3.00 June 30, 2004
2,675,000 1 for 1 0.60 February 28, 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
Exercised
- Re: Private Placement - February 2003 (62,500)
Expired
Re: Advisory services (226,667)
------------
Warrants outstanding, May 31, 2003 7,199,158
Exercised
- Re: Private Placement - February 2003 (725,000)
------------
Warrants outstanding, August 31, 2003 6,474,158
============
17
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
August 31, 2003 and 2002
9. Share Capital (continued)
(d) Stock Options
As at August 31, 2003 the following options are exercisable 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
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
Cancelled - February 2003 (25,000) (2.35)
- April 2003 (200,000) 0.60
-----------------------------
Options outstanding, August 31, 2003 and May 31, 2003 100,000 $ 0.60
=============================
10. Cash Flow Information
(a) Changes in non-cash working capital are as follows:
August 31 August 31
2003 2002
-----------------------------
Accounts receivable $ 205,762 8,632
Inventory (234,550) (52,902)
Unbilled revenue 243,379 -
Prepaid expenses (27,583) (10,957)
Accounts payable (76,832) 72,690
Deferred revenue 598,146 -
-----------------------------
$ 708,322 $ 17,463
=============================
(b) Supplemental Cash Flow Information
August 31 August 31
2003 2002
-----------------------------
Cash paid for interest $ 23,651 $ 30,983
18
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
(Unaudited)
August 31, 2003 and 2002
11. Related party Transactions
Included in general and administrative expenses are consulting fees of
$13,085 (2002 - $11,632) paid to an individual who is a director and
officer of the Company.
These related party transactions were in the normal course of operations
and are recorded at the exchange amount agreed to by the related parties.
12. Per Share Data
The weighted average number of shares issued and outstanding for the
period ended August 31, 2003 was 22,953,814 (2002 - 15,304,913). The
effect of the exercise of outstanding options and warrants would be
anti-dilutive.
13. Economic Dependence
Accounts receivable consist principally of amounts due from the US
Department of Defence, US Department of Defence subcontractors, and
commercial/industrial users. Although, the U.S. Department of Defence
(directly and through subcontractors) accounts for a significant portion
of the Company's revenue, management has determined that the Company is
not economically dependent on this business as, if necessary, it could
re-deploy resources to further service the commercial/industrial user.
14. Commitments and Contingencies
(a) Rent
The following is a schedule by years of approximate future minimum rental
payments under operating leases that have remaining non-cancelable lease
terms in excess of one year as of August 31, 2003.
2004 (9 months) $ 23,116
2005 22,243
2006 9,889
(b) 401(k) Plan
During 1998, the Company adopted a 401(k) deferred compensation
arrangement. Under the provision of the plan, the Company is required to
match 50% of employee contributions up to a maximum of 3% of the
employee's eligible compensation. Employees may contribute up to a maximum
of 15% of eligible compensation. The Company may also make discretionary
contributions up to a total of 15% of eligible compensation. During the
period ended August 31, 2003, the Company incurred $Nil (2002 - $6,301) as
its obligation under the terms of the plan. Of this amount $Nil (2002 -
$6,301) has been charged to general and administrative expenses.
15. Comparative Figures
Comparative figures have been reclassified to conform with current year
presentation.
19