As filed with the Securities and Exchange Commission on November 25, 2003
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended May 31, 2003
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0-29142
API ELECTRONICS GROUP INC.
(formerly InvestorLinks.com Inc.)
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(Exact name of Registrant as specified in its charter)
Province of Ontario, Canada
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(Jurisdiction of incorporation or organization)
505 University Ave., Suite 1400, Toronto, Ontario M5G 1X3
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares, no par value
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
1
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the Annual
Report:
23,541,314 Common Shares as of
October 31, 2003
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_] Inapplicable [_]
Indicate by check mark which financial statement item the registrant has elected
to follow:
Item 17 [X] Item 18 [_]
2
PART I
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
General
The selected consolidated statement of operations data set forth below for the
two year period ended May 31, 2003, and the selected consolidated balance sheet
data set forth below at May 31, 2003 and May 31, 2002 are derived from the
consolidated financial statements of the Company included in Part III, Item 17
of this Annual Report, which consolidated financial statements have been audited
by BDO Dunwoody LLP.
Note 1(a) to the consolidated financial statements included in Part III, Item 17
of this Annual Report describes the Company's acquisition of API Electronics,
Inc. ("API") in August 2001, and the accounting for the business acquisition.
API is deemed to be the acquirer for Canadian generally accepted accounting
principles ("Cdn. GAAP"). For US generally accepted accounting principles ("US
GAAP"), API is also deemed to be the acquirer. Accordingly, comparative figures
for the fiscal years ended May 31, 2001, 2000 and 1999 for Cdn. GAAP and US GAAP
included in the selected financial data are those of API and are derived from
the financial statements of API which have been audited by Perry Colletti, CPA.
The comparative financial statements of the Company included in Part III, Item
17 of this Annual Report include the financial statements of API for the fiscal
year ended May 31, 2001, which have been audited by Perry Colletti, CPA. API has
conducted operations for approximately twenty-one (21) years.
Note 1(b) to the consolidated financial statements included in Part III, Item 17
of this Annual Report describes the Company's acquisition (the "Filtran
Acquisition") of the outstanding shares of Filtran, Inc., Filtran Limited,
Canadian Dataplex Limited and Tactron Communications (Canada) Limited,
collectively referred to as the "Filtran Group" of companies as of May 31, 2002.
For Cdn. GAAP and US GAAP the Filtran Group acquisition has been accounted for
using the purchase method.
Note 1(c) to the consolidated financial statements included in Part III, Item 17
of this Annual Report describes the Company's purchase, through its wholly-owned
subsidiary, TM Systems II, Inc. ("TM Systems") of the assets of TM Systems, Inc.
(the "TM Systems Acquisition"), as of February 6, 2003. For Cdn. GAAP and US
GAAP, the TM Systems Acquisition has been accounted for using the purchase
method.
Because of the reverse take-over of the Company by API, the Selected Financial
Data for Cdn. GAAP and US GAAP does not include any financial data for
InvestorLinks.com Inc. ("InvestorLinks"), the Company's former name. Prior to
the acquisition of the Company by API on August 31, 2001, the
3
Company closed its Internet website, then its primary business, and wrotedown
all related assets to their estimated net recoverable amounts.
The selected financial data should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto included in Part III,
Item 17 of this Annual Report, and "Item 5 -- Operating and Financial Review and
Prospects" herein.
The information set forth in this Annual Report is current as of November 15,
2003, unless an earlier or later date is indicated, and references to the "date
of this Annual Report" shall be deemed to refer to such date.
4
The Company's accounts are presented in US dollars. In this Annual Report, all
dollar amounts are expressed in US dollars except where otherwise indicated.
Selected Consolidated Financial Data
API Electronics Group Inc.
(formerly known as InvestorLinks.com Inc.)
Prepared Pursuant to
United States Generally Accepted Accounting Principles
(In thousands of US $, except per share data)
Fiscal Years Ended May 31
Audited
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2003 2002 2001 2000 1999
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Income Statement Data:
Net sales ............................ $ 8,254 $ 2,903 $ 2,653 $ 1,787 $ 1,776
Income (loss) from operations ........ (572) (933) 175 (281) (121)
Net income (loss) .................... (1,869) (911) 102 (367) (151)
Net income (loss) per common share ... (0.10) (0.09) 0.03 (0.11) (0.05)
Balance Sheet Data:
Current assets ....................... 6,982 4,383 1,672 1,328 1,092
Capital assets ....................... 3,276 2,867 882 803 843
Goodwill and intangible assets ....... 3,289 1,288 10 21 32
Total assets ......................... 13,547 8,538 2,564 2,153 1,967
Current liabilities .................. 4,734 2,231 742 688 289
Long-term debt ....................... 232 1,299 1,495 1,240 1,147
Future income tax liability .......... 248 530 -- -- --
Shareholders' equity ................. $ 8,333 $ 4,478 $ 327 $ 225 $ 531
5
Selected Consolidated Financial Data
API Electronics Group Inc.
(formerly known as InvestorLinks.com Inc.)
Prepared Pursuant to
Canadian Generally Accepted Accounting Principles
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(In thousands of US $, except per share data)
Fiscal Years Ended May 31
Audited
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2003 2002 2001 2000 1999
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Statement of Operations:
Net sales ............................ $ 8,254 $ 2,903 $ 2,653 $ 1,787 $ 1,776
Income (loss) for operations ......... (572) (879) 175 (281) (121)
Net income (loss) .................... (549) (858) 102 (306) (151)
Earnings (loss) per common share ..... (0.03) (0.08) 0.02 (0.05) (0.02)
Balance Sheet Data:
Current assets ....................... 6,930 4,380 1,672 1,328 1,092
Capital assets ....................... 3,276 2,867 882 803 843
Goodwill and intangible assets ....... 3,289 1,288 10 21 32
Total assets ......................... 13,495 8,535 2,564 2,153 1,967
Current liabilities .................. 4,734 2,231 742 688 289
Long-term debt ....................... 232 1,299 1,132 1,240 1,147
Future income tax liability .......... 248 530 -- -- --
Shareholders' equity ................. $ 8,281 $ 4,475 $ 690 $ 225 $ 531
Reconciliation to United States Generally Accepted Accounting Principles
The consolidated financial statements of the Company have been prepared in
accordance with Cdn. GAAP, which differ materially in certain respects from US
GAAP. For a description of these differences see Note 17 to the consolidated
financial statements of the Company for its fiscal year ended May 31, 2003
included in Item 17 of this Annual Report.
Dividend Policy
The Company does not intend to pay dividends in cash or in kind in the future.
The Company expects to retain its earnings to finance the further growth of the
Company. The directors of the Company will determine if and when dividends
should be declared and paid in the future based upon the earnings and financial
conditions of the Company at the relevant time and such other factors as the
directors may deem relevant. All of the Common Shares of the Company are
entitled to an equal share in any dividends declared and paid.
6
B. CAPITALIZATION AND INDEBTEDNESS
Not Applicable
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not Applicable
D. RISK FACTORS
In the discussion below, unless the context requires otherwise, references to
the Company shall include its subsidiaries, API, Filtran Group and TM Systems.
Uncertainties and Risk Factors
The Company is subject to a number of significant uncertainties and risks
including, but not limited to, those described below and those described
elsewhere in this Annual Report, which may ultimately affect the Company in a
manner and to a degree that cannot be foreseen at this time. On August 31, 2001,
the Company completed an acquisition through which the primary business of the
Company became the manufacture and supply of semiconductors and microelectronic
circuits for military, aerospace, and commercial applications through its
newly-acquired, wholly-owned subsidiary API. As of May 31, 2002, the Company
acquired Filtran Group, an affiliated group of companies that are suppliers of
electronic components for customers in the communications, computer,
instrumentation and process control industries, with manufacturing facilities in
the United States and Canada. Effective February 6, 2003, the Company acquired
the assets of TM Systems, Inc. TM Systems is a manufacturer of naval landing and
launching equipment, flight control and signaling systems, radar systems
alteration, data communication and test equipment, and aircraft ground control
equipment, that are sold to military contractors with multi-national operations.
Prior to August 2001, the primary business of the Company for the period
beginning June 6, 2000 and ending August 31, 2001 was the operation of the
Internet investment site www.InvestorLinks.com through its wholly-owned
subsidiary IL Data Canada, Inc. ("IL"). The Company's website activities were
effectively discontinued prior to April 30, 2001 and the related assets were
sold during the fiscal year ended May 31, 2002. Prior to June 6, 2000, the
Company had been engaged in developing and exploiting mineral properties.
Because of the complete change in the Company's business resulting from the
August 31, 2001 acquisition of API, the risk factors below focus only on the
Company's semiconductor, microelectronic circuit, electronic component and
related military equipment business activities since the acquisition of API. The
risks of the Company's prior business activities are no longer relevant to the
Company.
General Risks and Risks Relating to an Investment in the Securities of the
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Company
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Stock Market Price and Volume Volatility
The market for the common stock of the Company has been volatile. The stock
price is volatile for reasons both related to the performance of the Company or
events pertaining to the industry, as well as factors unrelated to the Company
or its industry. Shares of the Company's Common Stock can be expected to be
subject to volatility in both price and volume arising from market expectations,
announcements and press releases regarding the Company's business, and changes
in estimates and evaluations by securities analysts or other events or factors.
Over the years, the securities markets in the United States and Canada have
experienced a high level of price and volume volatility, and the market price of
securities of many companies, particularly small-capitalization companies such
as the Company, have experienced wide fluctuations which have not necessarily
been related to the operations, performances, underlying asset
7
values, or prospects of such companies. For these reasons, the shares of the
Company's Common Stock also can be expected to continue to be subject to
significant volatility resulting from purely market forces over which the
Company will have no control. Further, despite the existence of a market for
trading the Company's Common Stock in the United States, the market has limited
liquidity and the stockholders of the Company may be unable to sell significant
quantities of Common Stock in the public trading markets without a significant
reduction in the price of the stock.
Stock Market Issues
The Company's Common Stock currently trades on the OTC Bulletin Board ("OTCBB")
in the United States. The OTCBB is operated by NASDAQ. The Company intends to
file an application to be quoted on the NASDAQ small cap market, as determined
by and subject to approval of the Board of Directors. Unlike the OTCBB, the
NASDAQ small cap market has corporate governance and other public interest
standards, which the Company will have to meet. Such standards and regulations
may restrict the Company's capital raising or other activities by requiring
stockholder approval for certain issuances of stock, for certain acquisitions,
and for the adoption of stock option or stock purchase plans. The Company also
will have to provide proxy statements to shareholders for all shareholders
meetings. The Company will have to adopt a Code of Ethics for its officers,
directors and employees. In addition, to meet NASDAQ's newly adopted
requirements, a majority of the members of the Company's Board of Directors will
have to be independent directors as defined by NASDAQ. The Company will have to
adopt a written audit committee charter. In addition, the audit committee will
have to be composed of at least three (3) members, all of whom are independent
as defined by NASDAQ, and under SEC Rule 10A-3(c), and who have not participated
in the preparation of the financial statements of the Company or any subsidiary
of the Company during the past three (3) years. One member of the audit
committee must have specified employment experience in finance or accounting.
The new rules become effective for small business filers such as the Company on
July 31, 2005. Until that date, the Company would have to be in compliance with
the current NASDAQ rules, which that small business issuers like the Company
establish and maintain an audit committee of at least two members, a majority of
which are independent. These rules would require the Company to have an audit
committee composed of a majority of independent directors with a minimum of two
members. Accordingly, the Company would have to appoint two independent
directors to serve on its audit committee and one of its current audit committee
members would have to resign, so that its audit committee would consist of a
majority of independent directors. The Company does not meet either of these
requirements. In order to attract independent directors, the Company will need
to purchase directors and officers insurance, which is costly.
We May Have Increasing Difficulty to Attract and Hold Outside Board Members.
The directors and management of publicly traded corporations are increasingly
concerned with the extent of their personal exposure to lawsuits and shareholder
claims, as well as governmental and creditor claims which may be made against
them in connection with their positions with publicly-held companies. Outside
directors are becoming increasingly concerned with the availability of directors
and officers liability insurance to pay on a timely basis the costs incurred in
defending shareholder claims. Directors and officers liability insurance has
recently become much more expensive and difficult to obtain than it had been. It
has become increasingly more difficult for entities like the Company to attract
and retain qualified outside directors to serve on its Board.
Reverse Stock Split
The Company's shareholders approved a reverse stock split of from up to a one
(1) for three (3) basis, to up to a one (1) for ten (10) basis at the Company's
annual meeting in October 2003. The Company's
8
management will determine the ratio for the reverse stock split within the
numbers approved by the shareholders. The Company's management proposed the
reverse stock split as a means to increase the price of the Company's stock
sufficiently to enable the Company to qualify for listing on the NASDAQ small
cap market. Although the reverse stock split is intended to increase the
Company's stock price, the stock price may not increase proportionately to the
reverse stock split and the Company's aggregate market value may decline. The
Board of Directors will determine when and if the Company effects a reverse
stock split.
Change of Domicile to Delaware
The Company's shareholders approved the Company's change of domicile to Delaware
at the Company's annual meeting in October 2003. The Board of Directors will
determine when and if the Company changes its domicile to Delaware. If the
Company changes its domicile (reincorporates) to Delaware, the Company will
become subject to United States ("US") federal and Delaware state corporate law.
The Company will no longer be a foreign private issuer under the US securities
laws and will become subject to the more extensive reporting requirements
applicable to domestic US entities and, unless an exemption applies, the Company
will be required to file an additional stock registration form with the United
States Securities and Exchange Commission prior to such change of domicile. The
Company's financial statements will be prepared in accordance with US GAAP. The
Company expects to incur other certain expenses and other changes in legal
requirements as a result of becoming a Delaware corporation, but believes such
action is in the long term best interests of the Company.
Dilution Through Employee, Director and Consultant Options and Warrants
Because the success of the Company is highly dependent upon its employees,
directors and consultants, the Company has and intends in the future to grant to
some or all of its key employees, directors and consultants options or warrants
to purchase shares of its Common Stock as non-cash incentives. The Company has
adopted a stock option plan expressly for this purpose. Subject to certain
limitations, those options may be granted at exercise prices below those for the
Common Stock prevailing in the public trading market at the time, or may be
granted at exercise prices equal to market prices at times when the public
market is depressed. To the extent that significant numbers of such options may
be granted and exercised, the interests of the other stockholders of the Company
may be diluted. As of the date of this Annual Report, the Company has granted
outstanding options to purchase 100,000 Common Shares to employees, directors,
and consultants, and has issued warrants to purchase 7,199,158 Common Shares to
its directors. There have been proposals from lawmakers in the United States to
require that options be expensed when issued, which could have a negative impact
on the Company's financial statements with respect to the reconciliation between
Canadian Generally Accepted Accounting Principals and GAAP, or if the Company
changes its domicile to Delaware, with respect to its financial statements,
which will be prepared in accordance with GAAP.
Dividends
The Company intends to invest all available funds to finance the growth of the
Company's business and therefore investors cannot expect to receive any
dividends on the Common Stock of the Company in the foreseeable future. Even
were the Company to determine a dividend could be declared, the Company could be
precluded from paying dividends by restrictive provisions of loans, leases or
other financing documents or by legal prohibitions under applicable corporate
law.
Directors and Assets Outside United States
Since certain of the Company's past directors and two of its current directors
are domiciled outside of the United States, it may not be possible to effect
service of process upon such directors, and since all or a substantial portion
of the assets of such directors are located outside the United States, there may
be difficulties in enforcing against such directors judgments obtained in United
States courts. Also, because a
9
significant portion of the Company's assets are located outside the United
States, there may be difficulties in enforcing against the Company judgments
obtained in United States courts. If the Company does not change its domicile to
the United States, the same risks exist with respect to directors and assets
outside of Canada.
Adjustments and Changes Resulting from Acquisitions
We have recently expanded our operations through strategic acquisitions,
specifically, the Filtran Acquisition and the TM Systems Acquisition, and may
continue to expand and diversify our operations with additional acquisitions. If
we are unsuccessful in integrating these companies into our operations or if
integration is more difficult than anticipated, then we may experience
disruptions that could harm our business. Some of the risks that may affect our
ability to integrate acquired companies include those associated with:
. unexpected losses of key employees or customers of the acquired
companies;
. conforming the acquired company's standards, processes, procedures and
controls with our operations;
. coordinating our new product and process development;
. retaining management from the acquired companies, hiring additional
management and other critical personnel; and
. increasing the scope, geographic diversity and complexity of our
operations.
We have raised the capital required to make such acquisitions from the sale of
stock and options, which is dilutive to our stockholders.
Additionally, in the period following an acquisition, we will be required to
evaluate goodwill and acquisition-related intangible assets for impairment. When
such assets are found to be impaired, they will be written down to estimated
fair value, with a charge against earnings.
Integrating acquired organizations and their products and services may be
difficult, expensive, time-consuming and a strain on our resources and our
relationships with employees and customers and ultimately may not be successful.
Possibility of Good-Will Impairments
All public companies have been required to adopt Statement of Financial
Accounting Standard No. 142 ("SFAS 142"), which changes the accounting for
goodwill from an amortization method to an impairment-only approach. We early
adopted this standard at the beginning of fiscal year 2002. Consequently,
goodwill and other intangible assets with indefinite lives will no longer be
amortized, while those intangible assets with known useful lives will continue
to be amortized over their respective useful lives. At least annually, we are
required to reassess whether there has been an impairment of goodwill in any one
or more business units, which would, if we determine that an impairment exists,
result in a charge to earnings and a reduction in goodwill on our balance sheet.
Whenever we determine that there has been an impairment of good will or other
intangible assets with indefinite lives, we will record an impairment loss equal
to the excess of the carrying value of goodwill over its then fair value. The
identification of intangible assets and the determination of the fair value and
useful lives of goodwill and other intangible assets are subjective in nature
and often involve the use of significant estimates and assumptions. The
judgments made in determining the estimated useful lives assigned to each class
of assets can significantly affect net income. The rules of SFAS 142 are complex
and very restrictive. SFAS 142 is more restrictive than the previously
10
followed SFAS 121. SFAS 142 uses a more restrictive approach than the prior
method of determining impairment under GAAP.
Goodwill was acquired through the common share purchase of the Filtran Group
(Filtran Limited, Filtran Inc., Canadian Dataplex Limited, and Tectron
Communications(Canada) Limited) on May 31, 2002. It consists of proprietary
designs, customer lists, distribution channels, and intellectual property. As at
May 31, 2003, management has determined that there has been no impairment in the
valuation of goodwill.
The value of intangible assets, including goodwill, is exposed to future adverse
changes if we experience any declines in operating results or if any negative
industry or economic trends or other factors in futures performance are below
projections that we currently use in making estimates. The estimates that are
used in the evaluation of goodwill and other intangible assets are consistent
with the plans and estimates that we use to manage our business. If new products
fail to gain market acceptance or if market projections are otherwise too big,
revenue and other forecasts will not be achieved, and additional impairment
charges to goodwill may be recorded as a result.
To the extent of the non-impaired goodwill and to the extent of any goodwill of
any business that we acquire in the future, a future impairment could also
affect our future results and balances in a similar way.
Certain Forward-looking Statements
This Annual Report (including the documents incorporated or deemed to be
incorporated by reference herein) contains certain forward-looking statements
(as such term is defined in the Private Securities Litigation Reform Act of
1995) and information relating to the Company that are based on the beliefs of
the management of the Company as well as assumptions made by and information
currently available to the management of the Company. When used in this Annual
Report, the words "anticipate," "believe," "estimate," "expect," "intend,"
"plan" and similar expressions, as they relate to the Company or the management
of the Company, identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events, the outcome of which
is subject to certain risks, including among others general economic and market
conditions, the state of the international, federal, state and local regulatory
environment, lack of demand for the Company's products and services, and other
risks described in this Item 3D of this Annual Report and elsewhere. Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results or outcomes may vary materially from
those described herein as anticipated, believed, estimated, expected, intended
or planned.
Future Capital Needs
The Company may require additional funds for future capital expenditures.
Adequate funds for these purposes, whether from additional financings,
collaborative arrangements with other companies, or other sources, may not be
available when needed or on favorable terms.
In addition, any strategic investments and acquisitions that we may make to help
us grow our business may require additional capital resources. We cannot assure
you that the capital required to fund these investments and acquisitions will be
available in the future.
Conflicts of Interest
Certain of the directors and officers of the Company are also directors and/or
officers and/or shareholders of other companies. Such associations may give rise
to conflicts of interest from time to time. The
11
directors of the Company are required by law to act honestly and in good faith
with a view to the best interests of the Company and to disclose any interest,
which they may have in any project or opportunity of the Company. If a conflict
of interest arises at a meeting of the board of directors, any director in a
conflict must disclose his interest and abstain from voting on such matter. The
NASDAQ rules require that such matters be referred to the audit committee. In
determining whether or not the Company will participate in any project or
opportunity, the directors will primarily consider the degree of risk to which
the Company may be exposed and its financial position at the time.
Control by Principal Stockholders, Officers and Directors Could Adversely Affect
the Company's Stockholders
The Company's officers, directors and greater-than-five-percent stockholders
(and their affiliates), acting together, hold substantial amounts of the
outstanding stock of the Company and as a result will have a controlling
influence on (i) matters submitted to the Company's stockholders for approval
(including the election and removal of directors and any merger, consolidation
or sale of all or substantially all of the Company's assets) and (ii) the
Company's management and affairs. However, these persons, acting alone, do not
have sufficient numbers of votes to approve matters submitted to stockholders.
This concentration of ownership may have the effect of delaying, deferring or
preventing a change in control of the Company, impeding a merger, consolidation,
takeover or other business combination involving the Company or discouraging a
potential acquirer from making a tender offer or otherwise attempting to obtain
control of the Company, which in turn could materially adversely affect the
market price of the Company's stock. If the Company becomes listed on the NASDAQ
small cap market, then the Company will become subject to NASDAQ's corporate
governance rules which require, among other things, shareholder approval of (i)
a number of related party transactions, (ii) certain stock issuances, and (iii)
other corporate reorganizations. Accordingly, the Company will need to prepare a
proxy statement that will be reviewed by the SEC disclosing material aspects of
any such transaction and seek shareholder approval of the proposed transactions.
Accounting for Issuance of Stock Options
Under US GAAP (FAS 123), stock options granted to non-employees are recognized
as an expense based on their fair value at the date of grant.
The Company follows APB 25 for options granted to employees. For employees,
compensation expense is recognized under the intrinsic value method,
compensation cost is the excess, if any, of the quoted market price at grant
date over the exercise price. Such expense is reflected over the service period;
if for prior services, expensed at date of grant; if for future services,
expensed over vesting period. In 2002 the exercise price of 300,000 stock
options outstanding to directors was less than the market value of the shares at
the date granted, therefore, a compensation expense of $54,000 was recognized
for US GAAP purposes. No options were granted during 2003.
If the Company issues a substantial number of options in any year, such issuance
could have a negative affect on the Company's statement of operations and net
income.
Risks Related to the Company's Primary Businesses - the Operation of API,
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Filtran Group and TM Systems
- ----------------------------
Downturns in the Highly Cyclical Semiconductor Industry and/or the Electronic
Component Industry Would Adversely Affect the Company's Operating Results and
the Value of the Company
12
The semiconductor and electronic component industries are highly cyclical, and
the value of the Company's business may decline during the "down" portion of
these cycles. The markets for API's products depend on continued demand in the
aerospace, military defense systems, and commercial end-markets, and these
end-markets may experience changes in demand that could adversely affect our
operating results and financial condition. The markets for Filtran Group's
products depend upon continued demand in the telecommunications, computer,
instrumentation and process control end-markets, and these end-markets may
experience changes in demand that could adversely affect our operating results
and financial condition. The current downturn in the telecommunications industry
has negatively affected Filtran Group's sales. The markets for TM Systems'
products depend primarily upon continued demand within the military defense
industry for its products, which include naval landing and launching equipment,
flight control and signaling systems, radar systems alteration, data
communication and test equipment, and aircraft ground control equipment.
The Semiconductor and Electronic Components Businesses Are Highly Competitive
and Increased Competition Could Reduce the Value of an Investment in the Company
The semiconductor and electronic component industries, including the areas in
which API, Filtran Group and TM Systems do business, are highly competitive. The
Company expects intensified competition from existing competitors and new
entrants. Competition is based on price, product performance, product
availability, quality, reliability and customer service. Even in strong markets,
pricing pressures may emerge. For instance, competitors may attempt to gain a
greater market share by lowering prices. The market for commercial products is
characterized by declining selling prices. API and Filtran Group anticipate that
their average selling prices will continue to decrease in future periods,
although the timing and amount of these decreases cannot be predicted with any
certainty. The Company competes in various markets with companies of various
sizes, many of which are larger and have greater financial and other resources
than the Company has, and thus may be better able to pursue acquisition
candidates and to withstand adverse economic or market conditions. In addition,
companies not currently in direct competition with the Company may introduce
competing products in the future. API, Filtran Group and TM Systems each has
numerous competitors. Some of API's current major competitors include Microsemi
Corporation (NASDAQ National Market Symbol "MSCC"), Semtech Corp. (NASDAQ:
"SMTC"), International Rectifier Corp. (NYSE: "IRF"), Knox Semiconductor,
National Hybrid, Aeroflex Incorporated, and Skyworks Solutions. Filtran Group
has numerous competitors. Some of Filtran Group's current major competitors
include Pulse Engineering, a division of Technitrol (NYSE:TNL), Midcom Inc., Bel
Fuse, Inc. (NASOAQ:BELFA and NASDAQ:BELFB), ATC Frost Magnetics, Inc. and Halo
Electronics. TM Systems also has various competitors, including EMW,
Leatherwood, S&W. The Company or any one of its subsidiaries may not be able to
compete successfully in the future and competitive pressures may harm the
financial condition and/or operating results of the Company.
Reliance on Defense Spending
The Company is dependent upon the US defense industry and its military
subcontractors for the sale of many of its products. While the US government
currently plans increases in defense spending, the actual timing and amount of
such increases has been occurring at a rate that has been slower than expected.
In addition, changes in appropriations and in the national defense policy and
decreases in ongoing defense programs could adversely affect the Company's
performance. Such occurrences are beyond the Company's control. The effects of
defense spending increases are difficult to estimate and subject to many sources
of delay.
13
The Company's contracts with prime US Government contractors contain customary
provisions permitting termination at any time, at the convenience of the US
Government or the prime contractors upon payment to the Company for costs
incurred plus a reasonable profit. If the Company experiences significant
reductions or delays in procurements of its products by the US Government, or
terminations of government contracts or subcontracts, its operating results
could be materially and adversely affected. Certain contracts are also subject
to price re-negotiation in accordance with US Government sole source procurement
provisions.
New Technologies Could Result in the Development of Competing Products and a
Decrease in Demand for the Company 's Products
The failure of either the Company or any of its subsidiaries to develop new
technologies or to react to changes in existing technologies could materially
delay their development of new products (which for API are typically adaptations
of existing products formerly manufactured by others), which could result in
decreased revenues and/or a loss of the Company's market share to competitors.
Rapidly changing technologies and industry standards, along with frequent new
product introductions, characterize much of the semiconductor and electronic
component industries. The financial performance of the Company depends on its
ability to design, develop, manufacture, assemble, test, market and support new
products (which for API are typically adaptations of existing products formerly
manufactured by others), and enhancements on a timely and cost-effective basis.
A fundamental shift in technologies in the Company's product markets could have
a material adverse effect on the Company or each of its subsidiaries'
competitive position.
Growth-Related Risks
The Company may be subject to growth-related risks, including capacity
constraints and pressure on its internal systems and controls. The ability of
the Company to manage its growth effectively will require it to continue to
implement and improve its operational and financial systems and to expand, train
and manage its employee base. Growth and expansion activities are subject to a
number of risks, including:
. Unavailability or late delivery of the advanced, and often customized,
equipment used in the production of our products;
. Delays in bringing new product equipment on-line;
. Delays in supplying products to our existing customers; and
. Unforeseen environmental or engineering problems relating to existing
or new facilities.
These and other risks may affect the ultimate cost and timing of our present or
future expansion of our capacity.
The inability of the Company to manage its growth could have a material adverse
impact on its business, operations and prospects.
Risks Related to Complexity of Manufacturing Processes
The Company's manufacturing processes are highly complex, require advanced and
costly equipment and are continuously being modified in an effort to improve
yields and product performance. Impurities or other difficulties in the
manufacturing process can lower yields. The Company's operations could be
materially adversely affected if production at any of its facilities is
interrupted for any reason. The Company may experience manufacturing
difficulties in the future.
14
The Company May Not be Able to Develop New Products to Satisfy Changes in Demand
The industries in which the Company operates are dynamic and constantly
evolving. The Company cannot assure investors that it will successfully identify
new product opportunities and develop and bring products to market in a timely
and cost-effective manner, or that products or technologies developed by others
will not render the Company's products or technologies obsolete or
noncompetitive. In addition, to remain competitive the Company must continue to
improve manufacturing yields and expand sales. The Company may not be able to
accomplish these goals.
The introduction of new products presents significant business challenges
because product development commitments and expenditures must be made well in
advance of product sales. The success of a new product depends on accurate
forecasts of long-term market demand and future technological developments, as
well as on a variety of specific implementation factors, including:
. timely and efficient completion of process design and development;
. timely and efficient implementation of manufacturing and assembly
processes;
. product performance;
. the quality and reliability of the product; and
. effective marketing, sales and service.
The failure of our products to achieve market acceptance due to these or other
factors could harm our business.
Our Products May be Found to be Defective, Product Liability Claims May Be
Asserted Against Us and We May Not Have Sufficient Liability.
One or more of our products may be found to be defective after shipment,
requiring a product replacement, recall or a software fix which would cure the
defect but impede performance of the product. We may also be subject to product
returns which could impose substantial costs and harm our business.
Product liability claims may be asserted with respect to our technology or
products. Although we currently have insurance, there can be no assurance that
we have obtained a sufficient amount of insurance coverage, that asserted claims
will be within the scope of coverage of the insurance, or that we will have
sufficient resources to satisfy any asserted claims.
Failure to Protect the Company's Proprietary Technologies or Maintain the Right
to Use Certain Technologies May Negatively Affect the Company's Ability to
Compete
The Company relies heavily on its proprietary technologies, which consist
primarily of drawings, specifications, and processes purchased from others. The
Company's future success and competitive position may depend in part upon its
ability to obtain or maintain protection of certain proprietary technologies
used in principal products. The Company generally does not have, nor does it
generally intend to apply for, patent protection on any aspect of its technology
or its business processes or methods. The Company's reliance upon protection of
some of its technology as "trade secrets" will not necessarily protect it from
the use by other persons of its technology, or the use by others of technology
that is similar or superior to that which is embodied in the Company's trade
secrets. Others may be able independently to duplicate or improve upon the
Company's technology in whole or in part. The Company cannot assure investors
that it will be able to maintain the confidentiality of its technology,
dissemination of which could have a material adverse effect on its business. In
addition, litigation may be
15
necessary to determine the scope and validity of the Company's proprietary
rights. Obtaining or protecting the Company 's proprietary rights may require
the Company to defend claims of intellectual property infringement by its
competitors. While the Company currently is not engaged as a defendant in
intellectual property litigation that it believes will have a material adverse
effect on its business, the Company could become subject to lawsuits in which it
is alleged that the Company has infringed upon the intellectual property rights
of others.
If any such infringements exist, arise or are claimed in the future, the Company
may be exposed to substantial liability for damages and may need to obtain
licenses from patent owners, discontinue or change its processes or products or
expend significant resources to develop or acquire non-infringing technologies.
The Company cannot assure investors that it would be successful in such efforts
or that such licenses would be available under reasonable terms. The Company's
failure to develop or acquire non-infringing technologies or to obtain licenses
on acceptable terms or the occurrence of related litigation itself could have a
material adverse effect on the Company's operating results and financial
condition.
The Company Must Commit Resources to Product Production Prior to Receipt of
Purchase Commitments and Could Lose Some or All of the Associated Investment
The Company sells many of its products pursuant to purchase orders for current
delivery, rather than pursuant to long-term supply contracts. Many of these
purchase orders may be revised or canceled prior to shipment without penalty. As
a result, the Company must commit resources to the production of products
without any advance purchase commitments from customers. The cancellation or
deferral of product orders, the return of previously sold products, or
overproduction due to the failure of anticipated orders to materialize, could
result in the Company holding excess or obsolete inventory, which could result
in inventory write-downs. The Company's inability to sell products after it has
devoted significant resources to them could have a material adverse effect on
the Company's business, financial condition and results of operations.
Variability of the Company's Manufacturing Yields May Affect the Company's Gross
Margins
The Company's manufacturing yields vary significantly among products, depending
on the complexity of a particular integrated circuit's design and the Company's
experience in manufacturing that type of integrated circuit. In the past, the
Company has experienced difficulties in achieving planned yields, which have
adversely affected the Company's gross margins.
The fabrication of integrated circuits is a highly complex and precise process.
Problems in the fabrication process can cause a substantial percentage of wafers
to be rejected or numerous integrated circuits on each wafer to be
nonfunctional, thereby reducing yields. These difficulties include:
. defects in masks, which are used to transfer circuit patterns onto the
Company's wafers;
. impurities in the materials used;
. contamination of the manufacturing environment; and
. equipment failure.
The manufacture of filters and transformers is a multi-level process. Each
component has dependency on the other. Each raw material must yield consistent
results or productivity is adversely affected. The difficulties that may be
experienced in this process include:
16
. impurities in the materials used;
. equipment failure; and
. bottlenecks (product cannot move to the next stage until the previous
stage is completed).
The manufacturing process for the stabilized Glide Slope Indicator (SGSI) is a
unique process in that it is highly reliant on subcontractors. These units are
comprised of four major units, three of which are manufactured by separate
manufacturing companies.
The difficulties that may be experienced in this process include:
. defects in subcontractors components;
. impurities in the materials used;
. equipment failure; and
. reliability of subcontractor.
Because a large portion of the Company's costs of manufacturing these products
are relatively fixed, it is critical for the Company to improve the number of
shippable integrated circuits per wafer and increase the production volume of
wafers in order to maintain and improve the Company's results of operations.
Yield decreases can result in substantially higher unit costs, which could
materially and adversely affect the Company's operating results and have done so
in the past. Moreover, the Company cannot assure investors that it will be able
to continue to improve yields in the future or that it will not suffer periodic
yield problems, particularly during the early production of new products or
introduction of new process technologies. In either case, the Company's results
of operations could be materially and adversely affected.
Risks Related to Supply of Materials and Services
The Company purchases most of its raw materials, including silicon wafers,
bobbins, cores, diodes, hydraulic pumps, gyroscopes, stabilized platforms, and
electronic transformers on a purchase order basis from a number of vendors.
Although the Company tries to have alternative supply sources for all necessary
materials, some materials and services have a single source supplier. If any
subcontractors or vendors are unable to provide these materials in the future,
the relationships with the Company's customers could be seriously affected and
its revenues, financial condition and cash flows could be severely damaged.
Although the Company seeks to reduce its dependence on sole and limited source
suppliers both for services and for materials, disruption or financial,
operational, production or quality assurance difficulties at any of these
sources could occur and cause the Company to have problems with the delivery of
necessary supplies.
Inventories May Become Obsolete
The life cycles of some of the Company's products depend heavily upon the life
cycles of the end products into which these products are designed. Products with
short life cycles require the Company to manage closely its production and
inventory levels. Inventory may also become obsolete because of adverse changes
in end-market demand. The life cycles for electronic components have been
shortening over time at an accelerated pace. The Company may be adversely
affected in the future by obsolete or excess inventories which may result from
unanticipated changes in the estimated total demand for the Company's products
or the estimated life cycles of the end products into which the Company's
products are designed.
17
The Company's International Operations and Sales Expose the Company to Material
Risks
The Company expects revenues from foreign markets to continue to represent a
portion of total revenues. The Company maintains contracts with entities in the
United States, Canada, Europe and certain other countries. There are risks
inherent in doing business internationally, including:
. changes in, or impositions of, legislative or regulatory requirements,
including environmental regulations and tax laws in the countries in
which the Company sells its products;
. trade restrictions;
. local economic conditions;
. transportation delays;
. work stoppages;
. economic and political instability;
. changes in import/export regulations, tariffs and freight rates;
. difficulties in collecting receivables and enforcing contracts
generally;
. currency exchange rate fluctuations;
. possibility of involvement in legal proceedings in a foreign country;
and
. terrorism or insurgencies of some sort.
In addition, the laws of certain foreign countries may not protect the Company's
products or intellectual property rights to the same extent as do US and
Canadian laws. Therefore, the risk of piracy of the Company's technology and
products may be greater in these foreign countries. Although the Company has not
experienced any material adverse effect on its operating results as a result of
these and other factors, the Company cannot assure investors that such factors
will not have a material adverse effect on the Company's financial condition and
operating results in the future.
Delays in Production, Implementing New Production Techniques or Resolving
Problems Associated with Technical Equipment Malfunctions Could Adversely Affect
the Company's Manufacturing Efficiencies
The Company's manufacturing efficiencies will be an important factor in its
future profitability, and the Company cannot assure investors that it will be
able to maintain or increase its manufacturing efficiencies. The Company's
manufacturing processes are highly complex, require advanced and costly
equipment, and are continually being modified in an effort to improve yields and
product performance. The Company may experience manufacturing problems in
achieving acceptable yields or experience product delivery delays in the future
as a result of, among other things, capacity constraints, construction delays,
upgrading or expanding existing facilities, or changing process technologies,
any of which could result in a loss of future revenues. The Company's operating
results also could be adversely affected by the increase in fixed costs and
operating expenses related to increases in production capacity if revenues do
not increase proportionately.
Interruptions, Delays or Cost Increases Affecting the Company's Materials,
Parts, Equipment or Subcontractors May Impair the Company's Competitive
Position.
Some of the Company's products are assembled and tested by third-party
subcontractors. The Company does not have any long-term agreements with these
subcontractors. As a result, the Company may not have assured control over its
product delivery schedules or product quality. Due to the amount of time
typically required to qualify assemblers and testers, the Company could
experience delays in the shipment of its products if it is forced to find
alternative third parties to assemble or test them. Any
18
product delivery delays in the future could have a material adverse effect on
the Company's operating results and financial condition. The Company's
operations and ability to satisfy customer obligations could be adversely
affected if its relationships with these subcontractors were disrupted or
terminated.
Although the Company seeks to reduce its dependence on its sole and limited
source suppliers, disruption or termination of any of these sources could occur,
and such disruptions or terminations could harm the Company's business and
operating results. In the event that any of the Company's subcontractors were to
experience financial, operational, production or quality assurance difficulties
resulting in a reduction or interruption in supply, its operating results would
suffer until alternate subcontractors, if any, became available.
Risks Related to Markets in Which Filtran Group Sells its Products -
Telecommunications Industry
Filtran Group's primary market is the telecommunications industry. The
telecommunications industry has experienced a substantial downturn over the past
three years. As a result demand for Filtran Group's products from its customers
in that industry has decreased. Decreased demand has had an adverse affect on
Filtran's operating results and profitability. There can be no assurance that
demand from Filtran Group's telecommunications customers will recover and if so,
when. The average selling price for Filtran's products tend to decrease over
their life cycle. In addition, the recent economic contraction has increased
pressure on our customers to seek lower prices from their suppliers. As a
result, Filtran's customers are likely to continue to demand lower prices from
the Filtran group of companies. There also can be no assurance that Filtran
Group can penetrate other markets to replace the decrease in purchase orders and
the downward pressure in prices from its telecommunications customers.
Environmental Liabilities Could Adversely Impact the Company's Financial
Position
United States federal, state and local laws and regulations and federal,
provincial and local laws, rules and regulations in Canada, impose various
restrictions and controls on the discharge of materials, chemicals and gases
used in the Company's manufacturing processes. In addition, under some laws and
regulations, the Company could be held financially responsible for remedial
measures if its properties are contaminated or if it sends waste to a landfill
or recycling facility that becomes contaminated, even if the Company did not
cause the contamination. Also, the Company may be subject to common law claims
if it releases substances that damage or harm third parties. Further, future
changes in environmental laws or regulations may require additional investments
in capital equipment or the implementation of additional compliance programs in
the future. Any failure to comply with environmental laws or regulations could
subject the Company to serious liabilities, and could have a material adverse
effect on its operating results and financial condition.
In the conduct of the Company's manufacturing operations, it has handled and
continues to handle materials that are considered hazardous, toxic or volatile
under US federal, state and local laws and Canadian, federal, provincial and
local laws, rules and regulations. The risk of accidental release of such
materials cannot be completely eliminated. In addition, contaminants may migrate
from or within, or through property. These risks may give rise to claims. Where
third parties are responsible for contamination, the third parties may not have
funds, or make funds available when needed, to pay remediation costs imposed
under environmental laws and regulations.
19
Fixed Costs May Reduce Operating Results If Our Sales Fall Below Expectations.
Our expense levels are based, in part, on our expectations as to future sales.
Many of our expenses, particularly those relating to capital equipment and
manufacturing overhead, are relatively fixed. Decreases in lead times between
orders and shipments and customers' ordering practices could adversely affect
our ability to project future sales. We might be unable to reduce spending
quickly enough to compensate for reductions in sales. Accordingly, shortfalls in
sales could materially and adversely affect our operating results.
Potential Effects of System Outages
Risks are presented by electrical or telecommunications outages, computer
hacking, viruses, or other general system failure. To try to manage our
operations efficiently and effectively, we rely heavily on our internal
information and communications systems and on systems or support services from
third parties. Any of these are subject to failure. System-wide or local
failures that affect our information processing could have material adverse
effects on our business, financial condition, results of operations and cash
flows. In addition, insurance coverage for the risks described above may be
unavailable or inadequate.
Dependence on Key Personnel
The Company is dependent upon a small number of key personnel. For example,
Thomas W. Mills, President and Chief Operating Officer of API, has held these
positions since 1991, has been employed by API since 1981, is extremely familiar
with all aspects of API's business, and has a proven track record of capable
leadership. Jerome Rabinowitz, Vice President of Sales, has improved sales since
he started with API in 1999. Similarly, Ian Bolt, Filtran Group's Marketing
Manager, has been with Filtran Group since 1969 and Koang Eng Lim, its Chief
Engineer, has been affiliated with Filtran Group since 1982. Walter Weiner and
Irwin Shuldman were executive officers of TM Systems, Inc. for over 25 years.
They joined the Company after the Company's acquisition of TM Systems, Inc.'s
assets on February 6, 2003. Mr. Weiner was named TM's Vice President of
Engineering, and Mr. Shuldman was named TM's Vice President of Sales. Each
individual signed a one-year employment contract effective February 6, 2003. The
loss of the services of one or more of such personnel could have a material
adverse effect on the Company. The Company's success will depend in large part
on the efforts of these individuals. It is not currently proposed that there
will be any long-term employment agreements or key-man insurance in respect of
such key personnel. The Company will face intense competition for qualified
personnel, and there can be no assurance that the Company will be able to
attract and retain such personnel.
Dependence on Recruiting and Retention of Sales and Customer Support and
Technical Personnel
The future revenue growth of the Company will depend in large part on its
ability to expand its sales force and its customer support capability. The
Company may not be able successfully to manage the expansion of such functions
or to recruit and train additional sales, consulting and client/customer support
personnel. If the Company is unable to hire and retain additional sales
personnel, it may not be able to increase its revenues to the extent necessary
to ensure ongoing profitability. If the Company is unable to hire trained
consulting and client/customer support personnel, it may be unable to meet
client or customer demands. The Company is unlikely to be able to increase its
revenues in the event it fails to expand its sales force or its consulting and
client/customer support staff. The Company also needs to be able to retain and
attract highly qualified technical personnel, and subject to similar risks if it
fails to do so. Even if the Company is successful in expanding its sales force
and client/customer support capabilities and its technical staff, such expansion
may not result in revenue growth.
20
Fluctuations and Changes in Earnings
While API has been in business for approximately 20 years, it has experienced
losses in some of its recent financial years, including the fiscal years ended
May 31, 1999, 2000, 2002 and 2003. API may experience significant fluctuations
in future quarterly results that may be caused by many factors, including (i)
the pace of development of its business; (ii) changes in the level of marketing
and other operating expenses to support future growth; (iii) competitive
factors; (iv) product obsolescence; (v) availability of adequate supplies; (vi)
changes in manufacturing yields, and (vii) general economic conditions.
While Filtran Group has been operating for over 30 years, it has experienced
losses in some of its recent financial years, including its fiscal year ended
August 31, 2000, for the nine months ended May 31, 2002, and the year ended May
31, 2003. Filtran Group's recent losses are the direct result of the downturn in
the telecommunications industry, which has caused a decrease in demand for
Filtran Group's products. Filtran Group is concentrating on developing sales
from manufacturers of high-end equipment manufacturers; however, there can be no
assurance that Filtran Group will be successful in such efforts. Filtran Group
may continue to experience fluctuations in earnings and/or depressed earnings
until the telecommunications industry recovers from its downturn and demand for
products from that industry recovers, or until its sales efforts generate
sufficient demand from customers in other industries. Filtran Group may also
experience fluctuations in quarterly results as a result of other factors,
including (i) the pace of development in its business; (ii) changes in the level
of marketing and other operating expenses to support future growth; (iii)
competitive factors, and (iv) general economic conditions.
TM Systems has been in business for over 30 years and posted a net profit in its
most recent period from the February 6, 2003 acquisition date to May 31, 2003.
In addition, TM posted net profits in each of its fiscal periods ending December
31, 2002, 2001 and 2000. However, TM may experience fluctuations in earnings or
experience losses if demand for the products, which is derived primarily from
the defense industry, decreases. Other factors which may cause fluctuations in
future quarterly results are (i) pace of development of its business, (ii)
competition, (iii) retirement of key personnel, and (iv) general economic
conditions.
Dependence on Additional Financing
The Company may require additional financing in order to support expansion,
develop new or enhanced services or products, respond to competitive pressures,
acquire complementary businesses or technologies, or take advantage of
unanticipated opportunities. The ability of the Company to arrange such
financing in the future will depend in part upon the prevailing capital market
conditions, as well as the business performance of the Company. There can be no
assurance that the Company will be successful in its efforts to arrange
additional financing under satisfactory terms. If additional financing is raised
by the issuance of shares of the Company's Common Stock, the Company's
shareholders may suffer dilution. If adequate funds are not available, or are
not available on acceptable terms, the Company may not be able to take advantage
of opportunities, or otherwise respond to competitive pressures and remain in
business.
Terrorist Attacks, War and Other Acts of Violence May Negatively Affect Our
Operations and Your Investment.
Terrorist attacks, such as the attacks that took place on September 11, 2001,
wars, such as the current war in Iraq, and other acts of violence such as those
that may result from the increasing tension in the Middle East and the Korean
Peninsula, or any other national or international crisis, calamity or emergency,
may
21
result in interruption to the business activities of many activities, business
losses and overall disruption of the U.S. economy at many levels. These events
or armed conflicts may directly impact our physical facilities or those of our
customers and suppliers. Additionally, these event or armed conflicts may cause
some of our customers or potential customers to reduce the level of expenditures
on their services and products that ultimately may reduce our revenue. The
consequences of these reductions are unpredictable, and we may not be able to
foresee events that could have an adverse effect on our business. For example,
as a result of these events, insurance premiums for businesses may increase and
the scope of coverage may be decreased. Consequently, we may not be able to
obtain adequate insurance coverage for our business and properties. A "high" or
"Orange" or "severe" or "Red" threat condition announced by the Homeland
Security Advisory System or similar agency and any consequent effect on the
transportation industry may adversely affect our ability to timely import
materials from our suppliers located outside the United States or impact our
ability to deliver our products to our customers without incurring significant
delays. To the extent that these disruptions result in delays or cancellations
of customer orders, a general decrease in corporate spending, or our inability
to effectively market our services and products, our business and results of
operations could be harmed.
Risks Related to Fire, Natural Disaster, Other Disasters, and Equipment Problems
If a fire, natural disaster or any other catastrophic event prevents the Company
or any of its subsidiaries from operating their factories for more than a few
days, the Company's revenues and financial condition could be severely impacted.
The Company has four manufacturing facilities located in different locations and
although it is unlikely that a fire, natural disaster or similar occurrence
would affect all such facilities, the loss of the use of one of these facilities
would negatively impact the Company. In addition, it is possible that a
catastrophic event such as the attacks of September 11, 2001, could impact all
facilities for some period of time. There are a number of foundries which, given
appropriate lead times, could meet some of the Company's fabrication needs.
However, in the event the Company has to use such foundries, it cannot guarantee
that it will be able to meet its customers' required delivery schedules. Because
of the unique nature of the Company's manufacturing processes, it would be
difficult for the Company to arrange for independent suppliers to produce
semiconductors, microelectronic circuits, bobbins, cores, diodes or other
electronic components in a short period of time. While the Company believes that
it has sufficient manufacturing capacity to meet its near term plans, prolonged
problems with the equipment at any of the facilities could cause the Company to
miss its production goals.
ITEM 4. INFORMATION ON THE COMPANY
INTRODUCTION
API Electronics Group Inc. (formerly InvestorLinks.com Inc.), incorporated in
the Province of Ontario, Canada (the "Company"), completed an acquisition on
August 31, 2001, by which the primary business of the Company became the
manufacture and supply of semiconductors and microelectronic circuits for
military, aerospace and commercial applications through its newly acquired,
wholly-owned subsidiary API Electronics, Inc. API Electronics, Inc. has been in
business for approximately 20 years. As of May 31, 2002, the Company purchased
the Filtran Group of companies, which companies are manufacturers of inductors,
filters and transformers, primarily for the telecommunications industry, with
manufacturing facilities in both Canada and the United States. The Filtran Group
has been in business for over 30 years. As of February 6, 2003, the Company,
through its wholly-owned subsidiary TM Systems, purchased the assets of TM
Systems, Inc., which is a manufacturer of naval landing and launching equipment,
flight control and signaling systems, radar systems alteration, data
communication and test equipment, and aircraft ground control equipment for
military use. TM Systems, Inc. had been in business for over 30 years. Prior
22
to August 31, 2001, and since June 6, 2000 the Company had been primarily
engaged in the business of a financial resource and directory portal provider on
the Internet, through the operation of the Internet investment site
www.InvestorLinks.com. That business was effectively closed down prior to the
end of the fiscal year ending April 30, 2001 and the assets of that business
were sold during the fiscal year ending May 31, 2002. Prior to September 7,
2001, and during the fiscal year ending April 30, 2001, the Company's name was
InvestorLinks.com Inc. Prior to June 6, 2000, and during the fiscal year ended
April 30, 2000, the Company's name was Opus Minerals Inc., and the Company was
in the business of locating, acquiring, exploring, and, if warranted, developing
and exploiting mineral properties.
The Company is a publicly traded company whose Common Shares (the "Common Stock"
or the "Common Shares") trade in the United States on the National Association
of Securities Dealers OTC Bulletin Board under the symbol "APIEF." Previously,
the Company's Common Stock traded on the Canadian Venture Exchange under the
symbol "YIK," and on the NASD OTC Bulletin Board under the symbol "IVLKF." The
Company voluntarily delisted from the TSX Venture Exchange, formerly known as
the Canadian Venture Exchange, as of August 31, 2001. The Company intends to
apply for listing on the NASDAQ small cap market, subject to the approval of,
and at such time as determined by, the Board of Directors.
A. HISTORY AND DEVELOPMENT OF THE COMPANY
The Company's legal name and commercial name is API Electronics Group Inc., and
the legal and commercial name of its primary businesses and wholly-owned
subsidiaries are API Electronics, Inc., the Filtran Group of companies
consisting of Filtran Inc., Canadian Dataplex Ltd., Filtran Ltd. and Tactron
Communications (Canada) Inc., and TM Systems II, Inc. The Company was
incorporated on May 14, 1985, in the Province of Ontario, Canada under the name
Shediac Bay Resources Inc. The Company is a corporation domiciled in the
Province of Ontario, Canada, and operates under the Ontario Business
Corporations Act. At the Company's annual shareholders meeting held on October
8, 2003, the Company's shareholders approved a change of the Company's domicile
from Ontario to the State of Delaware. The Board of Directors will determine
when and if the Company changes its domicile to Delaware.
Both the registered office and principle place of business of the Company are
located at 505 University Avenue, Suite 1400, Toronto, Ontario, Canada M5G 1X3.
The telephone numbers of the Company's registered office and principle place of
business in Ontario, Canada are (416) 593-6543 and 1(800) 606-2326. The Company
is not required to have an agent in its home country, Canada, or in the host
country, the United States.
From the time of the Company's incorporation on May 14, 1985 until June 6, 2000,
the Company was in the business of locating, acquiring, exploring, and, if
warranted, developing and exploiting, mineral properties.
On June 6, 2000, the Company acquired all of the shares of IL Data Canada, Inc.
in exchange for 6,800,000 Common Shares of the Company at an attributed value of
Canadian $1,700,000. IL Data Canada Inc. owned 100% of IL Data Corporation,
Inc., which, through a series of transactions, owned and operated the investment
website www.InvestorLinks.com. From June 6, 2001 through August 31, 2001, the
Company's primary business was that of a financial resource and directory portal
provider on the Internet. On July 25, 2000, the Company changed its name from
Opus Minerals Inc. to InvestorLinks.com Inc. In connection with these
transactions, the Company's Common Stock began trading on the National
Association of Securities Dealers OTC Bulletin Board under the symbol "IVLKF."
The Company no longer operates this website.
23
On August 30, 2001, the Company's shareholders approved the acquisition of all
of the issued and outstanding shares of API Electronics, Inc., a Delaware
corporation ("API") by the issuance of 6,500,000 post-consolidation units at
$.40 per unit. Each unit consists of one common share, 1/2 of one Series A
common share purchase warrant exercisable at $.45 per share for a period of 18
months from the date of issuance, and 1/2 of one Series B common share purchase
warrant exercisable at $.75 per share for a period of two years from date of
issuance. The expiration date of these warrants has been extended for one year.
This transaction constituted a reverse take-over of the Company by API, the
deemed acquiring company. Also on August 30, 2001, the Company's shareholders
approved a change of the Company's name from InvestorLinks.com Inc. to API
Electronics Group Inc., and the consolidation of the authorized common shares on
the basis that every three pre-consolidation Common Shares were converted into
one post-consolidation Common Share. The name change and share consolidation
became effective on September 10, 2001. On September 10, 2001, shares of the
Company's Common Stock began trading on the National Association of Securities
Dealers OTC Bulletin Board under the symbol "APIEF." As of August 31, 2001, the
Company's primary business became the manufacture and distribution of
semiconductors and microelectronic circuits for military, aerospace, and
commercial applications through its newly acquired, wholly-owned subsidiary API.
Additional details regarding the transactions summarized in this paragraph can
be found below in Item 17 of this Annual Report (see in particular Note 1(a) to
the financial statements contained therein).
Effective May 31, 2002, the Company acquired the 100% of the shares of the
Filtran Group of companies for $2,670,835. The purchase price was paid as
follows: $716,565 in cash and a promissory note for $1,954,270. As part of the
acquisition of the Filtran Group, the Company paid $325,712 in cash to Philip
Walter White, the former principal of the Filtran Group of companies, for
entering into a Non-Competition and Confidentiality Agreement with the Company.
The Filtran Group of companies include Filtran Ltd., Filtran Inc., Canadian
Dataplex Ltd. and Tactron Communications (Canada) Limited, which are wholly
owned by the Company and Filtran Ltd., a wholly-owned subsidiary of Tactron
Communications (Canada) Limited. Tactron Communications (Canada) Limited is a
holding company for Filtran Ltd. The Filtran Group of companies are
manufacturers of electronic components, particularly inductors, filters and
transformers. Additional details regarding the Filtran Acquisition can be found
in Item 17 of this Annual Report (see in particular Note 1(b) to the financial
statements contained therein.
In early June 2002, the Company raised $1,175,000 through the sale of 500,000
units at $2.35 per unit. Each unit consisted of one share of common stock of the
Company and one warrant to purchase one share of common stock exercisable at
$3.00 per share. The Filtran Acquisition was the primary use of the proceeds of
this offering.
Effective February 6, 2003, the Company through its wholly-owned subsidiary TM
Systems, acquired the assets of TM Systems, Inc. for a purchase price consisting
of (i) $1,500,000 paid in cash at closing, (ii) a promissory note in the
principal amount of $1,475,652 bearing interest at the annual rate of 1.65% (the
applicable federal rate at the closing date), due and payable one year from the
date of the closing, and subject to adjustment if orders fall below a specified
level, and (iii) certain earn-out payments equal to ten percent (10%) of the
gross proceeds of future deliveries for the two-year period following the
closing. As of October 31, 2003, TM Systems has made earn-out payments to TM
Systems, Inc. of $23,000. The assets purchased by TM Systems include inventory,
equipment, work-in-progress, contracts, orders, files, ledgers and furniture.
Additional details regarding the TM System Acquisition can be found in Item 17
of this Annual Report (see in particular Note 1(c) to the financial statements
contained therein).
TM Systems also assumed lease obligations for two separate premises
[manufacturing facilities] located in Albertson, New York and Bridgeport,
Connecticut from TM Systems, Inc. As of February 6, 2003, TM Systems also
entered into one-year employment arrangements with Walter Weiner and Irwin
24
Shuldman, who were executive officers of TM Systems, Inc., to serve as executive
officers of TM Systems for annual salaries of $100,000 each. TM Systems is a
manufacturer of naval landing and launching equipment, flight control and
signaling systems, alteration data communication and test equipment, and
aircraft ground control equipment.
Contemporaneous with the TM Systems Acquisition, the Company raised $2,770,000
in capital through the sale of 6,925,000 units at $0.40 per unit. Each unit
consisted of one share of common stock of the Company and one-half of a warrant
to purchase one share of common stock exercisable at $0.60 per share. The
Company used the proceeds of the financing for the TM Acquisition.
Principal Capital Expenditures and Divestitures Since August 31, 2001
The following chart contains a description, including the amount invested, of
the Company's principal capital expenditures and divestitures (including
interests in other companies), since August 2001, the date of the Company's
acquisition of API.
25
- ---------------------------------------------------------------------------------------------------------------------
Date Parties Type Description of Capital Amount Invested or
Expenditure or Divestiture Divested
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
August 30, Company, API Agreement and The Company acquired all $2,600,000 invested
2001 Acquisition Corp., Plan of Merger of the shares of API
API Electronics, Electronics, Inc.
Inc. and the
Shareholders of
API Electronics,
Inc.
- ---------------------------------------------------------------------------------------------------------------------
May 31, 2002 Company, Filtran, Share Purchase The Company purchased all of $2,670,835 consisting of
Inc., Canadian Agreement the outstanding shares of $716,565 in cash and a
Dataplex Ltd., Filtran, Inc., Canadian promissory note for
Tactron Dataplex Ltd., Tactron $1,954,270. The
Communications Communications (Canada) promissory note bears
(Canada) Limited, Limited and Filtran Ltd. interest at the rate of
Filtran Ltd. and 5% per annum, payable
the shareholders semi-annually. One-half
of Filtran, Inc., of the principal was
Canadian Dataplex payable on March 31,
Ltd., Tactron 2003 and the balance
Communications becomes due and payable
(Canada) Limited on March 31, 2004.
and Filtran Ltd.
- ---------------------------------------------------------------------------------------------------------------------
May 31, 2002 The Company and Non-Competition Philip Walter White agreed to $325,712 paid by the
Philip Walter and non-competition and Company to Philip Walter
White Confidentiality non-solicitation restrictions White.
Agreement for a term of five (5) years
and permanent confidentiality
restrictions. Mr. White was the
primary principal of the
Filtran Group of companies.
- ---------------------------------------------------------------------------------------------------------------------
26
- ---------------------------------------------------------------------------------------------------------------------
February 6, TM Systems, Inc., Asset Purchase The Company, through its TM Systems purchased the
2003 TM Systems II, Agreement wholly-owned subsidiary, TM assets of TM Systems,
Inc. and API Systems II, Inc. acquired the Inc. for a purchase
Electronics assets of TM Systems, Inc. price consisting of (i)
Group Inc. a $1,500,000 cash
payment, (ii) a
promissory note in the
principal amount of
$1,475,651, bearing
interest at the annual
rate of 1.65% and due
and payable one year
from the closing date of
the purchase, subject to
adjustment if orders
fall below a specified
level and (iii) earn out
payments equal to 10% of
the gross proceeds of
future deliveries for
the two year period
following the closing
date of the purchase.
- ---------------------------------------------------------------------------------------------------------------------
February 6, Walter Weiner, TM Employment TM Systems II, Inc. confirmed Annual Salary of
2003 Systems II, Inc. Letter its employment of Walter Weiner $100,000
and API Electronics as an executive officer for a
Group Inc. period of one year.
- ---------------------------------------------------------------------------------------------------------------------
February 6, Irwin Shuldman, TM Employment TM Systems II, Inc. confirmed Annual Salary of
2003 Systems II, Inc. Letter its employment of Irwin $100,000
and API Electronics Shuldman as an executive
Group Inc. officer for a period of one
year.
- ---------------------------------------------------------------------------------------------------------------------
Fiscal Year API Electronics, Facility API upgraded its manufacturing Cost of $411,436
2003 Inc. and various Improvements facilities (machinery and
contractors equipment and building).
- ---------------------------------------------------------------------------------------------------------------------
June 2003 Canadian Dataplex Sale of land Canadian Dataplex Ltd. sold Net Proceeds of $108,186
Ltd. and Buyer and building its land and building
- ---------------------------------------------------------------------------------------------------------------------
Descriptions of capital expenditures and divestitures of the Company occurring
prior to August 31, 2001 are excluded because the activities of the Company
prior to such time are not relevant to its current activities. As of the date of
this Annual Report, there are no material capital expenditures or divestitures
in progress.
With respect to API, there were no material capital expenditures or divestitures
for the period beginning June 1, 2000 and ending August 30, 2001.
Public Takeover Offers
There have been no public takeover offers by third parties in respect of the
Company's shares or by the Company in respect of other companies' shares since
June 1, 2000.
27
B. BUSINESS OVERVIEW
Business Overview - API Electronics, Inc., the Filtran Group of Companies and TM
- --------------------------------------------------------------------------------
Systems
- -------
API Electronics, Inc. - Operations, Activities and Products
Effective on August 31, 2001, subsequent to the end of the Company's fiscal year
ending April 30, 2001, the Company completed its acquisition of API Electronics,
Inc., a Delaware corporation, which then became a wholly-owned subsidiary of the
Company. This transaction constituted a reverse take-over of the Company by API,
the deemed acquiring company. From the time of the reverse take-over until the
acquisition of the Filtran Group, the primary business of the Company became the
manufacture and supply of semiconductors and microelectronic circuits for
military, aerospace, and commercial applications through its newly-acquired,
wholly-owned subsidiary API.
API manufactures niche specialty products that major semiconductor manufacturers
no longer produce or do not plan on producing in the future. API has focused on
the discontinued parts niche of the electronic component industry since its
formation approximately 20 years ago. In support of API's goals and objectives,
API has focused on maximizing the potential of the various products for which it
has become the sole source supplier. Through the implementation of engineering
process controls and total quality management principles, API has achieved
manufacturing efficiencies and effectiveness via specialization and
concentration on these niche products. This strategy has enabled API gradually
to increase its prices, thereby enhancing margins in these sole source
offerings.
API's reputation is that of a preferred supplier of custom replacement parts for
critical, fixed-design systems. Such niche products include Varactor tuning
diodes, specialty suppressor diodes for the relay market, and custom
microelectronic hybrid circuits designed, built and tested to customer
specifications. API also manufactures power and small-signal transistors,
silicon rectifiers, zener diodes, high-voltage diodes, and resistor/capacitor
networks. All microelectronic products are manufactured using semiconductor,
hybrid, and surface-mount technologies or a combination. All methods and
processes are controlled and monitored by API's Quality Assurance programs.
Applications for API's semiconductor products include: Telecommunications,
Aerospace, Military Defense Systems, Automated Test Equipment, Computing
Equipment, Medical Equipment, Robotics, Instrumentation and Automotive Systems.
API currently serves a broad group of customers with products and services
falling into four main categories: Hybrid Circuit, Power and Small-Signal
Transistor, Varactor Tuning Diode and Value-Added Distribution. API's products
facilitate the power supply in end products such as missiles, the space shuttle,
F-15 and F-16 fighter planes and B-1 bombers.
API's principal markets consist of the government and military markets
(approximately 53% of revenues), laboratory and commercial equipment, and other
replacement parts (approximately 47% of revenues) during the fiscal year ended
May 31, 2003. The Company's customers include government agencies, Departments
of Defense, and large military contractors such as Honeywell/Allied Signal, BAE
Systems Controls, Deutch Relays, Litton Systems and Lockheed-Martin. Other
customers include Raytheon, Northrop Grumman Litton, Alcatel, Tektroniz, Racal,
Ball Aerospace and the Defense Electronic Supply Center.
The main thrust of API's strategy has been to increase its market penetration
through the addition of the following competitors' product lines:
28
1. Ampower - Power Transistors
2. Unitrode - Power and Darlington Transistors
3. Solid Power Corp. - Homotaxial Power Transistors
4. MSI Electronics - Varactor Tuning, Abrupt, and Hyperabrupt Diodes
5. ASI Microsystems - Custom Hybrid Circuits
6. REL Labs - Standard Hybrid Amplifiers, Oscillators, and Networks
API has obtained the original designs of these companies to manufacture brand
new spare parts for aircraft, military, medical and commercial systems that were
built over the past three decades and are still providing essential services.
Additionally, API plans to invest in engineering and research and development to
become more active in High Current/High Voltage devices and introduce a line of
specialty power rectifiers. Offering foundry capabilities to other organizations
needing manufacturing facilities will also serve to achieve API's goal of
increased market penetration. API believes it is close to certification under
Qualified Product List (QPL). Once it is certified, API plans to return to its
previous QPL offerings and concentrate on achieving QPL status on other
products. Also, the purchase of standard materials in volume will capitalize on
discounted price points and support improved margins. QPL is a US Governmental
standard that holds companies to exacting criteria (design, fabrication,
assembly, and test processes).
Seeking better to communicate its capabilities to the industry as a whole,
including customers, sales reps, and distributors, API has instituted a
cost-effective sales and marketing program. Updated catalogs, brochures, line
cards, and product lists are augmented by its website describing API and its
capabilities. API seeks to improve its product sales in overseas markets through
an increased emphasis on the part of its domestic direct sales force and
improved communication with overseas sales representatives and distributors.
Principal Markets in which API Competes
API's customers are located primarily in the United States, Canada, Israel, and
certain countries that are members of the North Atlantic Treaty Organization.
These are the primary markets in which API competes.
The geographical breakdown of revenue for API for the year ended May 31, 2003 is
as follows (000's):
United States $ 2,688 100%
============ ============
New Products
API has not introduced any significant new products or services in the year
prior to the date of this Annual Report.
Seasonality
API's revenues and business are not, in general, seasonal.
Raw Materials
Raw materials required by API's business consist primarily of silicon wafers. A
broad market for silicon wafers exists worldwide, and the prices of silicon
wafers has not historically been volatile.
29
Marketing Channels
API's marketing channels consist primarily of the use of an in-house sales
manager with a sales staff of two persons, and regional agents who act as
independent contractors to API. API does not use any special sales methods such
as installment sales.
Dependence on Patents, Licenses, Contracts and Processes
API is not dependent on patents, licenses, industrial contracts, commercial
contracts, financial contracts, or new manufacturing processes in such a manner
that such dependence would be material to API's business or profitability.
Material Effects of Government Regulations
Except as noted below, government regulations of the United States and the State
of New York related to environmental compliance, labor conditions, and
government contracting are typical in API's industry and do not have a material
effect on the Company's business. During the fiscal year ended May 31, 2003, the
Company upgraded its manufacturing facilities, and as a result received
certification that it is ISO 9001:2000 and AS 9100:2001 compliant. API is also
in the process of obtaining MIL-PRF-19500 (QML-19500) and MIL-PRF-38534
(QML-38534) certification, which will allow the Company to be listed as a
Qualified Source of Supply to the United States Defense Electronics Supply
Centers ("DESC's"). This is in addition to the various microelectronic devices
API presently supplies to U.S. DESC's. The United States Department of Defense
regulates certification and qualification requirements of the Defense
Electronics Supply Centers, while ISO certifications are granted by independent
organizations. ISO certifications are recognized on a worldwide basis.
Filtran Group of Companies - Operations, Activities and Products
- ----------------------------------------------------------------
The Company acquired 100% of the stock of the Filtran Group of companies as of
May 31, 2002. The companies included in the group are Filtran, Inc., Canadian
Dataplex Ltd., Tactron Communications (Canada) Inc. and Filtran Ltd. Filtran
Ltd. is owned directly by Tactron Communications (Canada) Limited, a holding
company that is wholly-owned by the Company.
Filtran Ltd. was incorporated in 1969 to manufacture filters and transformers.
Filters are frequency selective networks, usually consisting of a combination of
capacitors and inductors or transformers. Widely used in telegraphy and telex
networks that worked on the principle of frequency division multiplexing, these
analog techniques devices have been superseded by digital transmission methods.
Approximately 25 years ago Filtran, Inc. established itself in the US, initially
in eastern Florida but relocated in Ogdensburg, N.Y., which is a one-hour drive
from Ottawa. Filtran Ltd. located in Ottawa does the engineering, purchasing,
and marketing and provides the overall administration for Filtran Inc. as well
as manufacturing of all products for Canadian and European customers. Filtran
Inc. is strictly a manufacturing facility for US customers.
Manufacturers of telecommunications equipment, computers and computer
peripherals, process control equipment, power supplies, test equipment, medical
devices and similar products use these products. The power rating of these
specialty transformers ranges from microwatts in signal transformers to
30
2,000W - 3,000W for laminated power transformers. Filtran Group does not make
the larger transformers of the type used in power distribution networks to
cities, businesses or private homes.
Many changes have been made to Filtran Group's product lines over the years. As
linear power supplies have been superseded, in most instances, by switched mode
designs, Filtran Group has developed a range of ferrite based transformers and
inductors for high frequency applications and all the commonly used topologies.
Similarly, signal transformers have become smaller and the pulse rate for most
digital telecommunications systems has increased dramatically. Many newer
products use a number of toroidal transformers or inductors in a miniature flat
pack case. The Filtran Group's products facilitate the power supply in end
products such as army field radios and various types of telecommunications
equipment.
Filtran was the first transformer manufacturer in Canada to produce surface
mount devices (SMD's). Millions of these are in use all over the world. Because
of the coplanarity requirements of SMD's the company has invested in automatic
equipment to solder these under a blanket of dry nitrogen.
The main demand today for the Filtran Group's filters is in the ferrite core
transformers for ADSL application by the telecommunications industry. By late
2002, inventory levels of this product had been exhausted and there was new
demand for this product. The growth rate in this area is substantial and the
Company expects this demand to continue in the foreseeable future; however,
there is no expectation for overall demand in the telecommunications industry to
return to 1999 levels. There is a smaller demand for filters in railway
switching and signaling systems. The Company believes that Filtran Group is the
only company in North America which still designs and builds filters for sale to
others.
Filtran Ltd. and Filtran Inc. have always been custom manufacturers, either
building the product to the customer's print or designing and then building to
its specifications. The products include transformers of all kinds from small
signal types to large laminated units weighing 50 lb. or more.
About 3 years ago, as part of its long-term growth plan, Filtran Ltd. acquired a
local company called Canadian Dataplex Ltd., which company was established 25
years ago. Canadian Dataplex Ltd. had engineering skills in the design and
manufacturing of custom power supplies, which have now been integrated into the
Filtran Group.
Filtran Group is ISO 9001-2000 certified, which enables it to design,
manufacture and sell electronic components with the ISO 9001-2000 designation.
This certification recognizes the product under one of the highest measure of
quality standards for electronic components. This certification is an
international measure and applies to products world-wide.
Filtran Group builds a wide variety of inductors (chokes) from small signal
units up to heavy laminated devices. Filtran also designs and manufactures
filters for use by others. Some of these operate at frequencies into the GHz
region while others block the ripple from diesel generators delivering several
hundred amps at frequencies of a few hundred Hz. Most filters are passive; i.e.
they are formed by arrays of inductors and capacitors.
Principal Markets in which the Filtran Group Competes
Filtran's customers are located primarily in Canada and the US; however, it
sells products to customers in a number of other countries.
31
The geographical breakdown of revenues for the Filtran Group for the year ended
May 31, 2003 is as follows (000's):
United States $ 1,093 23%
Canada 3,555 77%
------------ ------------
Total $ 4,648 100%
============ ============
There are two major markets for Filtran's products - telecommunications
companies and high-end equipment manufacturers.
The breakdown of revenues for the Filtran Group for the year ended May 31, 2003
by industry of end users is as follows (000's):
High-end Equipment Manufacturers $ 2,254 48.5%
Telecommunications Companies 1,162 25%
Military and Defense 627 13.5%
Others 605 13.0%
------------ ------------
Total $ 4,648 100%
============ ============
1. Telecommunications Companies
All Canadian and US telecommunications equipment manufacturers are potential
customers for the Filtran companies. Filtran also does business with
telecommunications companies in Europe and Asia. Previously the high labor costs
in Canada and the US excluded the Filtran Group from the high volume product
sales. Now that the Filtran Group has established the relationships to outsource
the manufacture of certain products to companies in Asia, particularly China,
labor costs are no longer a barrier for Filtran Group to compete for these
orders.
2. High End Equipment Manufacturers
Filtran's target customers for non-telecommunications products are manufacturers
of professional quality equipment. There are an enormous variety of these high
end product equipment manufacturers in every major city in Canada and the US,
which constitutes a large untapped market for Filtran Group.
Filtran Group has always built products to "Best Commercial Standards" and
generally has not manufactured products for either the military or entertainment
markets. Many companies have proved by experience that it is not possible to
build to more than one quality level in the same manufacturing facility.
Manufacturing to military standards requires an administrative and overhead
structure greater than can be provided by Filtran Group and still remain
competitive in other market segments. The entertainment market uses large
volumes but buys almost solely on the basis of price.
32
3. Major Customers
Harris Corporation, R.F. Communications Division US
Qualitrol US
Lucent Technologies US
Carsan Engineering US
Alstom Signalling US
Electronics 2000 UK & Europe
Mitel Corp. Canada, US & UK
Computing Devices Canada
Sterne Canada
M.C.K. Canada
Telecite Canada
Jabil Italy
Siemens Germany
The volume of business provided to the Filtran Group by these customers equals
about 50% of total sales. No single customer represents more than 10% of total
sales
New Products
Filtran Group has not introduced any significant new products or services in the
year prior to the date of this Annual Report.
Seasonality
The revenues and business of the Filtran Group are not, in general, seasonal.
Raw Materials
The primary raw materials required by Filtran Group's business consist of cores,
bobbins, wire, lamination, tapes (polyamide, polyfilm, masking, copper,
glasscloth, antistatic), epoxy, solder tips, varnish, metal plates, PVC
insulation, diodes, and circuit boards. Filtran Group's purchasing policies
require the companies to find alternate sources for materials; however, some
materials have a single source supplier due to customer specifications or unique
construction requirements. Most of Filtran Group's raw material suppliers are
located in the United States. These materials are readily available. The lead
time for ordering manufactured materials has decreased to 4 to 6 weeks from up
to 24 months a few years ago during the technology boom. The prices for these
materials are relatively stable.
Marketing Channels
Filtran's principal markets are the United States and Canada. Filtran Group also
sells products in a large number (over 30) of European and Asian countries.
Filtran Group sells its products primarily through independent sales
representatives and distributors. Over the past four (4) years, Filtran Group
has invested in its website, which functions as a sales channel. Filtran Group
also is focusing on strengthening its direct sales force. In the fiscal year
ended May 31, 2002, Filtran Group hired an experienced internal sales
representative and hired a chief engineer in the fourth quarter of the fiscal
year ended May 31, 2003. Filtran Group does not use any special sales methods
such as installment sales.
33
Dependence on Patents, Licenses, Contracts and Processes
Filtran Group is not dependent on patents, licenses, industrial contracts,
commercial contracts financial contracts, or new manufacturing processes in such
a manner that such dependence would be material to Filtran Group's business or
profitability.
Material Effects of Government Regulations
Government regulations of the United States, the State of New York, the Province
of Ontario and Canada related to environmental compliance and labor conditions
are typical in Filtran Group's industry and do not have a material effect on
Filtran Group's business.
TM SYSTEMS - OPERATIONS, ACTIVITIES AND PRODUCTS
- ------------------------------------------------
TM Systems manufactures highly engineered products and systems for defense and
aerospace applications. The Company's advanced electronic, electromechanical
systems and engineered materials are mission-critical, standard equipment on a
wide range of military platforms. TM Systems provides equipment and services
that are purchased by military contractors for use by many countries, military
forces and governments.
TM Systems supplies the defense sector with naval aircraft landing and launching
equipment -- including Visual Landing Aids (VLA) and the Stabilized Glide Slope
Indicator (SGSI) -- flight control and signaling systems, radar systems
alteration, data communication and test equipment as well as aircraft ground
support equipment.
New Products
TM Systems has not introduced any significant new products or services in the
year prior to the date of this Annual Report.
Principal Markets in which TM Systems Competes
TM Systems' principal market is the military/defense industry. Acting as either
as a Prime Contractor or Subcontractor, 100% of the company's sales are to this
market. Its customers are all United States companies, most of which have
foreign subsidiaries and divisions. TM Systems sells products to these companies
and their foreign subsidiaries and divisions for use in products sold to many
countries.
TM's customers are located primarily in the United States.
The geographical breakdown of revenues for TM Systems for the period from
February 6, 2003 to May 31, 2003 is as follows (000's):
United States $ 918 100%
============ ============
Seasonality
TM Systems' revenues and business are not, in general, seasonal.
34
Raw Materials
TM Systems purchases most of its raw materials on a purchase order basis from a
number of vendors. Although TM Systems tries to have alternative supply sources
for all necessary materials, some materials and services have a single source
supplier. If any subcontractors or vendors are unable to provide these materials
in the future, the relationships with TM Systems' customers could be seriously
affected and its revenues, financial condition and cash flows could be severely
damaged. Although TM Systems seeks to reduce its dependence on sole and limited
source suppliers both for services and for materials, disruption or financial,
operational, production or quality assurance difficulties at any of these
sources could occur and cause delivery problems.
Market Channels
TM Systems' marketing channels consist primarily of the use of an in-house sales
manager with a one-person sales staff, and regional agents who act as
independent contractors to TM Systems. TM Systems does not use any special sales
methods such as installment sales.
Independence on Patents Licenses, Contracts and Processes
TM Systems is not dependent on patents, licenses, industrial contracts,
commercial contracts, financial contracts, or new manufacturing processes in
such a manner that such dependence would be material to the company's business
or profitability.
Material Effects of Government Regulations
Except as noted below, government regulations of the United States and the State
of New York related to environmental compliance, labor conditions, and
government contracting are typical in TM Systems industry and do not have a
material effect on the company's business. TM Systems does, however, lack
ISO-9002 certification. The company is currently upgrading its manufacturing
facilities in order to become ISO 9002 compliant, and expects to receive
certification prior to the end of fiscal year 2003.
A significant portion of TM Systems' sales is to military and aerospace markets,
which are subject to the business risks of changes in governmental
appropriations (Department of Defense) and changes in national defense policies
and priorities. All of TM Systems' contracts with prime US Government
contractors contain customary provisions permitting termination at any time, at
the convenience of the US Government or the prime contractors upon payment to
the company for costs incurred plus a reasonable profit. If the company
experiences significant reductions or delays in procurements of its products by
the US Government, or terminations of government contracts or subcontracts, it's
operating results could be materially and adversely affected. Certain contracts
are also subject to price renegotiation in accordance with US Government sole
source procurement provisions.
US and international military program sales, follow-on procurement, contract
continuance, and future program awards, upgrades and spares support are subject
to: US and international military budget constraints and determinations; US
congressional and international legislative body discretion; US and
international government administration policies and priorities; changing world
military threats, strategies and missions; competition from foreign
manufacturers of platforms and equipment; NATO country determinations regarding
participation in common programs; changes in US and international government
procurement timing, strategies and practices; and the general state of world
military readiness and deployment.
35
Revenue Breakdown
Set forth below is a breakdown of the Company's revenues by business and by
geographical market for the fiscal years ended May 31, 2003, May 31, 2002, and
May 31, 2001.
For the fiscal years ended May 31, 2003, May 31, 2002 and May 31, 2001
----------------------------------------------------------------------
Revenues by Category of Activity:
2003 2002/(1)/ 2001/(1)/
- --------------------------------------------------------------------------------
API's Activities $ 2,688,000 $ 2,903,000 $ 2,653,000
- --------------------------------------------------------------------------------
Filtran Group's Activities $ 4,648,000
- --------------------------------------------------------------------------------
TM Systems Activities $ 918,000
- --------------------------------------------------------------------------------
Total Revenues $ 8,254,000 $ 2,903,000 $ 2,653,000
- --------------------------------------------------------------------------------
Revenues by Geographic Market:
- --------------------------------------------------------------------------------
United States $ 4,699,000 $ 2,903,000 $ 2,258,000
- --------------------------------------------------------------------------------
Other $ 3,555,000 $ 0 $ 395,000
- --------------------------------------------------------------------------------
Total Revenues $ 8,254,000 $ 2,903,000 $ 2,653,000
- --------------------------------------------------------------------------------
(1) Does not include the Filtran Group of companies because such companies were
acquired as of May 31, 2002 or TM Systems because that entity acquired the
assets of TM Systems, Inc. as of February 6, 2003.
Closure of US Operations and Decline in Revenues of IL Data Canada, Inc.
The InvestorLinks.com website was not able to generate sufficient revenues to
warrant expenses incurred by the Company in maintaining the website in the
manner it was initially maintained. The Company closed down the website
operations prior to the end of the fiscal year ended April 30, 2001, and sold
the assets of that business during the fiscal year ended May 31, 2002.
C. ORGANIZATIONAL STRUCTURE
The Company, with its subsidiaries as described below, is a part of a group. The
corporate office of API Electronics, Inc., a corporation incorporated under the
laws of the State of Delaware in the United States, is located at 505 University
Avenue, Suite 1400, Ontario, Canada M5G 1X3. The Company holds 100% of the
ownership interest and voting power of API Electronics, Inc.
The corporate office of Filtran Inc., a company incorporated under the laws of
the State of New York, is located at 102 Ford Street, Bldg. 5A, Ogdensburg, NY
13669. The corporate office of Filtran Ltd., a company incorporated under the
laws of Ontario, is located at 229 Colonnade Road, Nepean, Ontario K2E 7K3. The
corporate office of Canadian Dataplex Ltd., a company incorporated under the
federal laws of Canada, is located at the same address as Filtran Ltd. in
Nepean, Ontario. The corporate office of Tactron Communications (Canada)
Limited, a company organized under the laws of Ontario and which is the holding
company for Filtran Ltd., is located at 3 Elenor Drive, Nepean, Ontario K2E 6A3.
The Company holds 100% ownership interest and voting power of Filtran Inc.,
Canadian Dataplex Ltd. and
36
Tactron Communications (Canada) Limited. Tactron Communications (Canada) Limited
owns 100% ownership interest and voting power of Filtran Ltd. Tactron
Communications (Canada) Limited is a holding company for Filtran Ltd. and does
not have operations.
TM Systems, a Delaware corporation, has facilities located at 830 Willis Avenue,
Albertson, New York 11507, and 345 Railroad Avenue, Bridgeport, Connecticut
06604. The Company holds 100% of the ownership interest and voting power of TM
Systems.
D. PROPERTY, PLANTS, AND EQUIPMENT
The Company has four manufacturing facilities. The following is the Company's
utilization capacity at each plant as at May 31, 2003:
API Electronics, Inc. Hauppauge, NY 80%
Filtran Limited Nepean, Ontario 70%
Filtran Inc. Ogdensburg, NY 50%
TM Systems Bridgeport, CT 100%
The executive offices of the Company and its subsidiary, API Electronics, Inc.
are located in leased facilities at 505 University Avenue, Suite 1400, Toronto,
Ontario, Canada M5G 1X3. The Company's wholly-owned subsidiary, API Electronics,
Inc., owns outright, without any major encumbrances, a 15,000 square foot
manufacturing facility in Hauppauge, New York. The productive capacity of this
manufacturing facility is sufficient to meet its present needs and its needs in
the foreseeable future. All of API's products are produced at this manufacturing
facility, which is located at 375 Rabro Drive, Hauppauge, New York 11788. To the
Company's knowledge, except as generally described in Item 3D of this Annual
Report above, there are no environmental issues that may affect the Company's
utilization of the assets located at this manufacturing facility.
The executive offices for Filtran Ltd. and Canadian Dataplex are located at 229
Colonnade Road, Nepean, Ontario K2E 7K3. Filtran Ltd. owns the facility and
there are no outstanding mortgages on the property. The facility is
approximately 16,000 square feet and it is used to manufacture electronic
components comprised primarily of: transformers, filters, inductors and power
supplies. Filtran Ltd. received a Certificate of Approval (Air) from the
Ministry of the Environment for atmospheric emissions sources at its facility at
229 Colonnade Road. To the Company's knowledge, except as generally described
above, there are no environmental issues that may affect the Company's
utilization of the assets located at this manufacturing facility. The Company
believes that the capacity of this manufacturing facility is sufficient to meet
the present needs of Filtran Ltd. and Canadian Dataplex and their needs in the
foreseeable future.
The executive office for Filtran Inc. is located at 102 Ford Street, Bldg 5A,
Ogdensburg, NY 13669. Filtran Inc. has a lease to own agreement with the City of
Ogdensburg for the facility. Filtran Inc. has financed the "purchase" of this
facility. As of August 31, 2003, the outstanding principal balance on the note
evidencing such financing was $89,137. The loan is secured by a mortgage on the
property. The facility is approximately 16,500 square feet and it is used to
manufacture electronic components comprised primarily of: transformers, filters
and inductors. There are no environmental issues at Filtran Inc. that management
is aware of and Filtran Inc. believes it complies with existing environmental
regulations and meets existing environmental standards. The Company believes
that the capacity of this manufacturing facility is sufficient to meet the
present needs of Filtran, Inc. and its needs in the foreseeable future.
37
TM Systems, Inc. has two leased facilities located at 830 Willis Avenue,
Albertson, New York 11507 and 345 Railroad Avenue, Bridgeport, Connecticut
06604. The Albertson facility is approximately 2,000 square feet and is used
primarily for warehousing. The rent for these premises is $22,500. The plant in
Bridgeport is approximately 2,500 square feet and is used primarily for the
manufacture of glide slope indicators and stabilized platform systems. The rent
for this facility is $27,600. There are no environmental issues at TM System's
facilities that management is aware of. The Company believes that these plants
are sufficient to meet the present needs of TM Systems and the needs of TM
Systems for the foreseeable future.
During the fiscal year ended May 31, 2003, API upgraded its manufacturing
facility in Hauppauge, New York, and has invested more than $400,000 in its
building and equipment. As of the date of this Annual Report, the Company does
not have any other material plans to construct, expand, or improve its
facilities or the facilities of its subsidiaries.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS (IN US$)
A. OPERATING RESULTS
Acquisition of API Electronics, Inc.
Effective on August 31, 2001, the Company completed its acquisition of API, a
Delaware corporation, which then became a wholly-owned subsidiary of the
Company. This transaction constituted a reverse take-over of the Company by API,
the deemed acquiring company. At the time of the reverse take-over until the
acquisition of the Filtran Group, the primary business of the Company became the
manufacture and supply of semiconductors and microelectronic circuits for
military, aerospace and commercial applications.
Note 1(a) to the consolidated financial statements included in Part III, Item 17
of this Annual Report describes the Company's acquisition of API on August 31,
2001, and the accounting for the business acquisition. API is deemed to be the
acquiror for Canadian generally accepted accounting principles ("Cdn. GAAP").
For US generally accepted accounting principles ("US GAAP"), API is also deemed
to be the acquirer. Accordingly, comparative figures for the fiscal years ended
May 31, 2001, 2000, and 1999 for Cdn. GAAP and US GAAP included in the Company's
selected financial data are those of API and are derived from the financial
statements of API which have been audited by Perry Colletti, CPA. The
comparative financial statements of the Company included in Part III, Item 17 of
this Annual Report include the financial statements of API for the fiscal year
ended May 31, 2001 which has been audited by Perry Colletti, CPA. API has been
in operations for approximately twenty years.
Acquisition of the Filtran Group
Effective May 31, 2002, the Company acquired the Filtran Group of companies,
consisting of Filtran, Inc., Filtran Ltd., Canadian Dataplex Limited and Tactron
Communications (Canada) Limited, the holding company for Filtran Ltd. The
Filtran Group of companies are suppliers of electronic components (primarily
inductors, transformers and filters) for customers in the communications,
computer, instrumentation and process control industries, with manufacturing
facilities in the United States and Canada.
Note 1(b) to the consolidated financial statements included in Part III, Item 17
of this Annual Report describes the Filtran Acquisition of the outstanding
shares of Filtran, Inc., Filtran Ltd., Canadian Dataplex Limited and Tactron
Communications (Canada) Limited as of May 31, 2002. For Cdn. GAAP and US GAAP,
the Filtran Group acquisition has been accounted for using the purchase method.
38
Acquisition of Assets of TM Systems, Inc.
Effective February 6, 2003, the Company through its wholly-owned subsidiary, TM
Systems, acquired the assets of TM Systems, Inc., a manufacturer of naval
landing and launching equipment, flight control and signaling systems, radar
systems alteration, data communication and test equipment, and aircraft ground
control equipment for military use. As part of the asset purchase, TM Systems
assumed the leases for two facilities operated by TM Systems, Inc., one located
in Albertson, New York and the other in Bridgeport, Connecticut.
Note 1(c) to the consolidated financial statements included in Part III, Item 17
of this Annual Report describes the TM Systems Acquisition of the assets of TM
Systems, Inc., as of February 6, 2003. For Cdn. GAAP and US GAAP, the TM Systems
acquisition has been accounted using the purchase method.
Closure of US Operations of IL Data Canada, Inc.
Prior to April 30, 2001, the Company ceased operations of the InvestorLinks.com
website. During the three-month period ending July 31, 2001, the Company closed
down its US operations, terminated the employment of all US employees, and
transferred the Company's US assets to Canada. The assets of the website, which
constituted the Company's prior business, were disposed of during the fiscal
year ended May 31, 2002.
Results of Operations
Overview
The Company is a North American based company focused on the manufacture of
specialized electronic components and microelectronic circuits. API 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
supplier of defense electronic components to the U.S. Department of Defense and
its subcontractors as well as having a strong commercial user base.
The Company'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, the Company 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 global supplier of
high 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
the Company'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. In business for over 30 years, TM
Systems 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 the Company's core-military and defense-related
electronics business.
39
The Company's objectives are to seek long-term stable growth for all of its
operating segments (API, Filtran Group, and TM Systems) through continuous
capital investment, employing today's production methods and technologies, and
by demanding uncompromising quality control.
The following discussion of the results of operations of the Company is a
comparison of the Company's two fiscal year periods ended May 31, 2003 and 2002.
Sales Revenue
The Company continued to record strong sales growth in fiscal 2003. Sales
increased by 184.3% to $8,253,541 from $2,903,120 posted in 2002. The growth
during the period was attributed to the Filtran Group and TM Systems' sales
revenue in the amount of $4,647,361 and $918,117 respectively. This was offset
by a decrease in the API's sales revenue from $2,903,120 to $2,688,063. The API
sales decrease is substantially all volume-related as it lost certain government
contracts in 2003 due to supply problems. API has now upgraded its manufacturing
standards through extensive plant and equipment renovations and is now compliant
with ISO 9001:2000 and AS 9100:2001. This will enable API to maintain itself on
all pre-qualification lists necessary to contract with the United States
Electronic Defense Supply Center. It is expected that revenue will return to the
$2.9M to $3.0M range in fiscal 2004. Fiscal 2003 is the initial year whereby the
operations of the Filtran Group (a full year) and TM Systems (from February 6,
2003 to May 31, 2003) are reflected in the Company's consolidated operations.
Cost of Goods Sold and Gross Margin
The cost of goods sold was 76.6% of sales in 2003 compared to 77.7% of sales in
2002. Accordingly, the gross margin for 2003 period of 23.4% was in line with
the 22.3% gross margin in the 2002 period. Individual subsidiary company's
products saw varying gross margins:
API Electronics Inc. (API) 8.4%
Filtran Group 26.6%
TM Systems 50.9%
The decrease in API's gross margin is attributed primarily to a write-down of
inventory in the amount of $399,000. If the effects of the inventory write-down
are removed, API's gross margin would have been 23.2%, which is more in line
with its historical gross margins. It is expected that API's gross margin will
return to the 22% to 24% range in fiscal 2004.
In light of the Company's acquisitions in 2003, consolidated gross margins are
expected to improve to the 26%-30% range in 2004.
The Company was able to improve its gross margin percentage during the 2003
period, despite competitive pressures, through ongoing cost reduction
initiatives.
Selling Expenses
Selling expenses increased to $666,138 for the year ended May 31, 2003 from
$339,048 for the year ended May 31, 2002. As a percentage of sales the 2003
selling expenses came in at 8.1%, an improvement over the 11.7% posted in 2002.
The improvement is attributed primarily to sales salaries, which are a fixed
cost, coming in at 3.9% of sales ($320,020) compared to sales salaries in 2002
coming in at 6.4% of sales ($184,813).
40
General and Administrative Expenses
General and administrative expenses increased to $1,478,776 for 2003 from
$685,747 incurred during 2002. As a percentage of sales, the 2003 general and
administration expenses were 17.9% compared to 23.6% in 2002.
Several components of general and administrative expenses saw increases as a
direct result of the Company's status as a public company and the acquisition of
API. Professional fees of $301,117 (2002 - $94,747), and press releases,
shareholder information and annual meeting of $56,104 (2002 - $9,070) 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 and the fiscal 2003 acquisition of TM Systems
resulted in increased general and administrative expenses for the Company.
Several components saw increases as follows: Office salaries - $252,369 (2002 -
$121,634), officer salaries - $203,437 (2002 - $91,000), consulting - $95,037
(2002 - $50,846), rent - $32,841 (2002 - $11,488), telephone - $56,545 (2002 -
$26,918), office supplies and expense - $56,567 (2002 -$32,903) and travel
$23,480 (2002 - $3,780).
In addition, amortization included in general and administrative expenses
increased to $353,839 (2002 - $34,134) as a result of the overall increase in
the Capital and Intangible Asset base arising from the acquisition of the
Filtran Group and TM Systems.
Management continues to emphasize efficiencies and control of overheads. It is
anticipated that TM Systems' operations will be fully integrated into API's
state-of-the art facilities by fiscal 2004. This should provide savings in
overhead and administrative costs.
Business Development
Business development and investor relations saw a large decrease from $501,583
in 2002 to $355,042 in the year ended May 31, 2003. The 2002 period saw major
one-time expenses (business plan, investor marketing and awareness) of
approximately $105,000 when the Company acquired API and introduced API and its
business to the public. Management has determined such expenditures have
benefited the Company to gain a market profile and to support recent and future
financings and acquisitions.
Other Income and Expense
Other income improved to $89,316 in 2003 from $75,565 in 2002. The increase is
attributed to a $40,969 gain earned in 2003 (2002 - $Nil) through the early
repayment of an amount owing on a promissory note, higher investment income of
$41,300 (2002 - $10,068), and a capital tax recovery of $34,118 (2002 - $Nil).
These increases were offset by a decrease in foreign exchange from a gain in
2002 of $30,513 to a loss in 2003 of $65,580. Also included in other income are
miscellaneous amounts of $38,509 (2002 - $34,984).
Other expense relates to interest on long-term debt and the Company saw a
substantial increase from $37,467 in 2002 to $107,789 in 2003. The increase is
attributed to the Filtran Group promissory note debt that added $69,771 of
interest expense in 2003.
Net Income / Loss
The Company incurred a net loss in 2003 of $549,015($0.03/share) compared to a
net loss of $857,643($0.08/share) for the 2002 year.
41
Impact of Inflation
Inflation has not been material to the business of the Company. The Company's
financial statements are present in United States dollars. The United States has
not experienced hyperinflation during the last five years.
Impact of Foreign Currency Fluctuations on the Company
Foreign currency fluctuations have not had substantial impact on the Company.
The Company does not hedge it foreign currency investments or holdings.
Impact of Governmental Policies or Factors on the Company
Except as explained below, no governmental economic, fiscal, monetary or
political policies or factors have materially affected, directly, or indirectly,
the Company's operations or investments by United States shareholders in the
past. Except as noted in the following sentence, the Company does not anticipate
that such policies or factors will materially affect, directly or indirectly,
the Company's operations or investments by United States shareholders in the
future. Notwithstanding the foregoing, the Company's operation of API and TM
Systems will be affected by governmental policies related to defense spending
(see also item 4B - Material Effects of Government Regulations above and item 5D
- - TREND INFORMATION below).
Liquidity and Capital Resources
Summary
At May 31, 2003, the Company had cash reserves of $1,561,199 compared to
$1,408,637 as at May 31, 2002. In addition, the Company had marketable
securities of $431,168 at May 31, 2003(2002 - $2,429). The portfolio of
securities consists principally of commercial paper and bonds with maturities of
less than one year ($242,397) and income trust units ($186,632)
At May 31, 2003 working capital (the excess of current assets over current
liabilities) totaled $2,195,522 compared to $2,148,073 at May 31, 2002. The
current ratio at May 31, 2003 decreased to 1.46:1 from the 2.0:1 ratio as at May
31, 2002. The quick ratio (which excludes inventory and prepaid expenses from
current assets) was 0.83:1 at May 31, 2003 - a decrease from the 1.1:1 posted at
May 31, 2002.
Inventory rose 58.3% from $1,852,483 at May 31, 2002 to $2,931,924 at May 31,
2003. Accounts receivable increased 50.9% from $1,073,058 at May 31, 2002 to
$1,619,487 at May 31, 2003. Accounts payable rose 44.7% from $874,269 at May 31,
2002 to $1,265,458 at May 31, 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 $2,931,687 at May 31, 2003. This increase resulted
primarily from the issue of the promissory note in connection with the TM
Systems acquisition in the amount of $1,475,652 and this was offset by the
repayment of part of the Filtran Group promissory note in the amount of
$855,852.
The debt to equity ratio (current & long-term debt to shareholder's equity)
improved to 0.35 as at May 31, 2003 compared to 0.53 as at May 31, 2002.
42
Total assets increased to $13,495,221 in 2003 from $8,535,159 in 2002. This is
attributed to recent acquisitions and financings.
The Company anticipates that it will have sufficient liquidity for current
requirements.
Cash Flow
Cash generated (used) in operating activities increased to $40,131 for year
ended May 31, 2003 compared to ($811,048) for year ended May 31, 2002. This
improvement was attributed primarily to a higher gross profit in 2003 in the
amount of $1,928,001 (2002 - $647,279) and a decrease in business development
expense in the amount of $355,042 (2002 - $501,583). Fiscal 2003 is the initial
year whereby the operations of Filtran Group (June 1, 2002 to May 31, 2003) and
TM Systems (February 6, 2003 to May 31, 2003) are reflected in the Company's
operations and the gross margins were 26.6% and 50.9% respectively.
The major financing activity in 2003 was provided through the issuance of common
shares in the amount of $4,102,500. Other major financing activities during 2003
were the repayment of bank indebtedness of $284,488 (2002 - $112,200), the
decrease in the long-term debt of $1,046,394 (2002 - increase of $87,390), and
the repayment of long-term debt in the amount of $nil (2002 - $58,575).The major
financing activities in 2002 were the issue of common shares in the amount of
$2,296,212 and the cash acquired through the reverse take-over by API in the
amount of $1,178,376.
The major cash investing activities in 2003 and 2002 were related to business
acquisitions. Fiscal 2003 saw the acquisition of TM Systems in the amount of
$1,521,958 and 2002 saw the acquisition of the Filtran Group in the amount of
$955,374. Other major investing activities during 2003 were the purchase of
capital assets in the amount of $725,789 (2002 - $257,217) and the investment
in marketable securities of $428,739 (2002 - $nil).
In June 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 each warrant
entitles the holder to purchase one additional common share at a price of $3.00
per share. Proceeds from the private placement have been 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 entitles the holder to
acquire one common share at a price of $0.60 for a period of two years following
closing.
Capital Assets and Intangibles
The acquisition of TM Systems as at February 6, 2003 saw the Company add
equipment in the amount of $25,120, inventory of parts and supplies in the
amount of $288,009, inventory of work in process in the amount of $468,697. The
Company also acquired customer contracts in the amount of $1,715,784, and a
non-compete agreement in the amount of $500,000.
As of the date of this Annual Report, the Company's capital assets are
sufficient for the Company's present requirements.
The Company holds cash and cash equivalents in Canadian currency. Two of the
company's subsidiaries (TM Systems and API) hold cash and cash equivalents in
United States currency. The Company's other
43
group of subsidiaries (Filtran Group) holds cash and cash equivalents in United
States and Canadian currencies. Neither the Company nor any of its subsidiaries
uses financial instruments or hedging.
The Company did not have material commitments for capital expenditures as of the
end of its fiscal year ending May 31, 2003.
2002 versus 2001
- ----------------
The following discussion of the results of operations of the Company is a
comparison of the Company's two fiscal year periods ended May 31, 2002 and 2001.
Sales Revenue
The Company recorded increased sales during the fiscal year ended May 31, 2002.
Sales increased by 9.4% to $2.9 million from $2.65 million the previous year.
The growth during the period was led by the performance of core product lines
and accelerated by favourable market conditions for the Company's products in
the military industry.
Cost of Goods Sold and Gross Margin
The cost of products sold as a percentage of sales increased during 2002 period
compared to 2001. The cost of goods sold was 77.7% of sales in 2002 compared to
72.8% of sales in 2001. Accordingly, the gross margin for 2002 period decreased
to 22.3% from the 27.2% gross margin in the 2001 period. The decrease is
attributed mainly to increased competitive pricing in the market.
Selling Expenses
Selling expenses increased from $246,844 for the year ended May 31, 2001 to
$339,048 for the year ended May 31, 2002. As a percentage of sales the 2002
selling expenses came in at 11.7% compared to 9.3% for 2001. The increase was
primarily attributed to the addition of one sales person to support increased
product sales levels.
General and Administrative Expenses
General and administrative expenses increased substantially from $300,598 for
the 2001 year to $685,747 incurred during the 2002 year.
Several components of general and administrative expenses saw increases as a
direct result of API's new status as a public company. Investor relations of
$108,758 (2001 - $0), professional services of $94,747 (2001 - $9,000),
shareholder information of $9,070 (2001 - $0), transfer agent fees of $10,382
(2001 - $0) all increased substantially and were attributable to increased costs
that are inherent with public company compliance.
Management continues to emphasize efficiencies and control of overheads.
Professional services expense was higher than normal as additional fees were
incurred in API's first year as a public company. Also, investor relations
expense was higher than normal as additional fees were incurred to launch the
profile of API in the investment community. These expenses are expected to
decrease on a going forward basis.
44
Business Development
The Company incurred business development expenses of $610,341 in the fiscal
year ended May 31, 2002 to assist it in the transition from a private company to
a public company. Of this amount, the Company has disclosed $501,583 as a
business development expense and the balance of $108,759 has been included in
general and administrative expenses. Management expects that it will not be
necessary to incur as significant an amount of business development expenses on
a going forward basis.
Other Income and Expense
Other income increased to $75,565 for 2002 from $13,719 for 2001 due to the
rental income and recovery of expenses of $30,000 for 2002 ($12,000 - 2001) from
a Massachusetts corporation and a foreign exchange gain of $20,512 (nil - 2001).
On November 30, 2001 the Company and the Massachusetts corporation agreed to
mutually end the cost sharing arrangement. Interest expense decreased to $37,467
for 2002 from $86,542 due to the interest paid to the principal shareholder of
API of $38,673 for the period from June 1, 2000 to September 20, 2000. On
September 20, 2000, the loan was converted to a non-interest bearing demand
promissory note.
Net Income / Loss
The Company incurred a net loss for the 2002 year of $857,643 compared to a net
income of $102,101 for the 2001 year. The loss is attributed in substantial part
to the business development costs of $501,583 as described above.
Impact of Inflation
During this period, inflation was not material to the business of the Company.
The Company's financial statements are presented in United States dollars. The
United States has not experienced hyperinflation during the last five years.
Impact of Foreign Currency Fluctuations on the Company
During this period, foreign currency fluctuations did not have substantial
impact on the Company. The Company does not hedge its foreign currency
investments or holdings.
Impact of Governmental Policies or Factors on the Company
See prior discussion in this Item 5.
LIQUIDITY AND CAPITAL RESOURCES
Summary
At May 31, 2002, the Company had cash reserves of $1,408,637 compared to $41,073
as at May 31, 2001.
At May 31, 2002 working capital amounted to $2,148,073 compared to $930,027 at
May 31, 2001. The increase in working capital is attributed primarily to the
cash acquired through the reverse take-over of $1,178,376 and the issuance of
share of capital of $2,296,212 during 2002.
45
During 2002, cash was used to fund operations in the amount of $811,048
(2001-$56,735), to fund the acquisition of the Filtran Group of companies of
$955,374 and to purchase capital assets of $257,217 (2001-$187,850).
Cash Flow
Cash used in operating activities increased from $(56,735) for the year ended
May 31, 2001 to $(811,048) for year ended May 31, 2002. This increase is
attributed primarily to the 2002 loss of $857,643.
The major financing activity in 2002 was provided by the exercise of warrants
and options. This exercise of securities added cash totaling $2,296,212 (2001 -
$nil) during the year. The other significant financing activity was the
$1,178,376 (2001 - $nil) acquired via the reverse take-over transaction of API
as described in note 1(a) of the consolidated financial statements. In
connection with the API acquisition, the Company issued common stock and common
stock purchase warrants to the stockholders of API. One half of the warrants are
exercisable at $0.45 per share and the other half of the warrants are
exercisable at $0.75 per share. Approximately 50% of these warrants were
exercised during the fiscal year ended May 31, 2002. If the warrants that remain
outstanding are fully exercised, the cash consideration to the Company would be
in excess of $1,970,418. The other major financing activity in 2002 was the
increase in long-term debt in the amount of $87,390 (2001 - $222,000).
The major investing activities during 2002 were the Filtran Group acquisition in
the amount of $955,374 (2001 - $nil), the purchase of capital assets in the
amount of $257,217 (2001 - $187,850), bank indebtedness repayments in the amount
of $112,200 (2001 - $5,083), and the repayment of long-term debt in the amount
of $58,575 (2001 - $12,422).
Capital Assets and Intangibles
The acquisition of the Filtran Group substantially improved the Company's design
and manufacturing capabilities. The addition of machinery and equipment in the
amount of $312,841 and land and building in the amount of $1,577,094 brought
API's state-of-the-art facilities to 48,500 square feet. In addition, the
Company acquired the goodwill of the Filtran Group, which is comprised of its
excellent management team, its qualified workforce and its quality control
system, which includes its ISO 9001 certification. The value of goodwill is
reflected in the financial statement in the amount of $962,529.
Furthermore, the Company acquired a non-compete agreement from Filtran Group
former principal for the amount of $325,712 to help ensure all the benefits and
synergies of the acquisition can be realized in the future.
The Company did not have material commitments for capital expenditures as of the
end of its fiscal year ending May 31, 2002.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
During the last three financial years, the Company did not spend material
amounts of money on research and development activities, and did not have formal
research and development policies.
D. TREND INFORMATION
The past two and one-half years have been very difficult for the technology
industry. Notwithstanding the difficulty, over the past two years the Company
has experienced a 184.3% increase in sales in 2003
46
and a modest increase of 9% in 2002. The increase for 2003 was due primarily to
the acquisition of the Filtran Group of companies. As a result of the TM Systems
Acquisition effective February 6, 2003, the Company again expects sales to
increase materially in the near term.
For the first quarter of 2004, consolidated sales increased by 48% over sales
for the comparative 2003 first quarter period (unaudited). For the fiscal year
2004 first quarter, API's sales increased by 1% as compared to the 2003 first
quarter sales (unaudited), and Filtran Group's sales increased by 19% as
compared to the 2003 first quarter sales (unaudited). The 48% increase is
attributed largely to the $612,000 sales revenue added by TM Systems in the
first quarter of 2004 (unaudited).
API believes that new orders should increase as a result of the new military
budget approved by the US government. API is also taking cost cutting steps
through restructuring its manufacturing and IT systems. API continues to
emphasize new product development, and its ISO 9000-2000 system is now in place.
API has spent more than $400,000 on the upgrade of its Hauppauge, NY facility
(equipment and building). API believes it is poised to emerge from the downturn
in the technology industry with a sharper strategic focus, improved products and
a significantly lower cost structure.
Although demand from defense industry customers of API has continued to be
strong since 9/11/01, Filtran Group has experienced decreased demand as a result
of the downturn in the telecommunications industry. The telecommunications
industry continues to carry substantial uncertainty, so it would be difficult to
predict when demand from that sector can be expected to increase. This lack of
demand has increased sales price pressures over the last two years, which
Filtran Group is continuing to experience.
In order to increase sales, Filtran Group has been attempting to enter the Video
DSL market. The VDSL market is one of the few areas experiencing growth in the
telecommunications industry. Filtran Group is focused on overcoming pricing
pressures in that market, which it believes it must do in order to gain
significant sales. To do so, Filtran Group has outsourced the manufacturing of
certain products to manufacturers in China. Filtran Group is working closely
with these manufacturers to maintain quality control and to decrease the cost to
manufacture these units, in order to generate such sales.
Filtran Group is aggressively pursuing growth strategies with the hiring of
additional qualified sales persons in the United States. Filtran Group has hired
a business development specialist who has begun setting up a nationwide
representative network in the United States. In order to support its increased
sales efforts, Filtran Group is developing a new product catalogue and continues
to improve its website. Before the end of the calendar year 2002, Filtran Group
will introduce a new standard product catalog that will feature many new
products including surface mount chip inductors, filter connectors and many new
designs in its standard product lines of transformers, inductors, chokes,
filters and power supplies. Filtran Group believes its growth potential is best
in the United States markets, particularly in the military, transportation,
industrial equipment, medical, power conversion and other electrical and
electronic equipment OEM's that have historically comprised Filtran Group's
Canadian customer base.
Filtran Group also is developing a synergistic partnership with API targeting
the military relay market. Much of the groundwork has already been completed on
this project and Filtran Group expects to receive contracts resulting from these
efforts within the 6-month period following the date of this Annual Report.
TM Systems supplies the defense sector with naval landing and launching
equipment, control and signaling systems, and other support equipment. Its
customer base consists of various US government departments, including the US
Navy, as well as numerous domestic and foreign corporation.
47
The US government's recently approved military budget earmarks significant
amounts for ongoing defense and homeland security. TM Systems believes that new
domestic orders should increase as a result of this development. Furthermore,
foreign country demand may also increase in response to global terror concerns.
TM Systems' Stabilized Glide Slope Indicator (SGSI) is an
electro-hydraulic-optical landing and designed for use on air capable and
amphibious assault ships. Increasing operational readiness will require the Navy
to be independent of land-based command centers. Furthermore, political
conflicts have led to a reduction of land-bases available in certain foreign
countries.
E. OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet financing arrangements or transactions.
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
- -----------------------------------------------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Long-Term Debt Obligations $ 2,799,575 $ 2,668,126 $ 106,449 $ 25,000 --
- -----------------------------------------------------------------------------------------------------
Capital (Finance) Lease 132,112 31,332 72,056 28,724 --
Obligations
- -----------------------------------------------------------------------------------------------------
Operating Lease 62,954 30,822 32,132 -- --
Obligations
- -----------------------------------------------------------------------------------------------------
Purchase Obligations -- -- -- -- --
- -----------------------------------------------------------------------------------------------------
Other Long-Term 356,000 108,000 248,000
Liabilities Reflected on
the Company's Balance
Sheet under the GAAP of
the Primary Financial
Statements (represents
deferred taxes)
- -----------------------------------------------------------------------------------------------------
G. FORWARD-LOOKING STATEMENTS
The Company desires to take advantage of the "safe harbor" provided in Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 and is making this cautionary statement in connection with such safe
harbor legislation. This Form 20-F, or any other written or oral statements made
by or on our behalf may include forward-looking statements which reflect our
current
48
views with respect to future events and financial performance. The words
"believe," "expect," "anticipate," "intends," "estimate," "forecast," "project"
and similar expressions, as they relate to the Company or the management of the
Company, identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events, the outcome of which
is subject to certain risks, including among others, general economic and market
conditions, the state of the international, federal, state and local regulatory
environment, lack of demand for the Company's products and services, and other
risks described in this Item 3D of this Annual Report and elsewhere. Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results or outcomes may vary materially from
those described herein as anticipated, believed, estimated, expected, intended
or planned.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT, AND EMPLOYEES
A. DIRECTORS, SENIOR MANAGEMENT AND KEY EMPLOYEES AND PERSONNEL AS OF THE DATE
OF THIS ANNUAL REPORT
Phillip DeZwirek
----------------
Phillip DeZwirek is the Vice-Chairman and Treasurer of the Company. As of
the date of this Annual Report, Phillip DeZwirek also serves as the Chief
Financial Officer and Controller of the Company. From August 31, 2001 until
the end of the 2001 calendar year, Phillip DeZwirek had been a director,
Chairman of the Board, Chief Executive Officer, Chief Financial Officer and
Treasurer of the Company. Phillip DeZwirek has been a director, Chairman of
the Board and the Chief Executive Officer of CECO Environmental Corp. since
August 1979. Mr. DeZwirek also served as Chief Financial Officer of CECO
Environmental Corp. from August 1979 until January 26, 2000. Mr. DeZwirek's
principal occupations during the past five years have been serving as
Chairman of the Board and Vice President of CECO Filters (since 1985);
serving as Treasurer and Assistant Secretary of CECO Group (since December
10, 1999); serving as a director of Kirk & Blum and kbd/Technic (since
1999); serving as President of Can-Med Technology, Inc. d/b/a Green Diamond
Corp. (since 1990); and serving as Chairman and as a director of Digital
Fusion Multimedia Corp. (from January 1995 until June 1998). Mr. DeZwirek
has also been involved in private investment activities for the past five
years.
Date of Birth: December 5, 1937
Current Outside Business Activities:
Chairman of the Board and Chief Executive Officer of CECO Environmental
Corp.
Chairman of the Board and Vice President of CECO Filters
Treasurer and Assistant Secretary of CECO Group
Director, Kirk & Blum
Director, kbd/Technic
President of Can-Med Technology, Inc. d/b/a Green Diamond Corp.
Thomas W. Mills
---------------
On August 31, 2001 Thomas W. Mills became a director and the President and
Chief Operating Officer of the Company. Thomas W. Mills is President and
Chief Operating Officer of the Company's wholly-owned subsidiary, API
Electronics, Inc. He has worked within the electronics
49
industry since 1967 and has specialized in semiconductors since 1969. His
management career has spanned Production Control, Production/Manufacturing,
Quality Control/Assurance, Program/Project Operation, and Vice President of
Operations. Mr. Mills, who has been with API Electronics, Inc. since 1981,
holds an economics degree and has taken courses in Industrial Engineering.
Date of Birth: January 31, 1945
Current Outside Business Activities: None.
Jason DeZwirek
--------------
Jason DeZwirek is a director and the Chairman, Chief Executive Officer and
Secretary of the Company. From August 31, 2001 until the end of the 2001
calendar year, Jason DeZwirek was a director, Executive Vice President, and
Secretary of the Company. Jason DeZwirek has been Vice President and a
Director of CECO Environmental Corp. since February 1994 and the Secretary
of CECO since February 20, 1998. He also serves as Vice President of
Can-Med Technology, Inc. d/b/a Green Diamond Corp. Mr. DeZwirek's principal
occupation since October 1999 has been as Founder and President of Kaboose
Inc., a company engaged in the development of interactive educational
content. Mr. DeZwirek has also been involved in private investment
activities for the past five years.
Date of Birth: September 3, 1970
Current Outside Business Activities:
President of Kaboose Inc.
Vice President, Secretary and Director of CECO Environmental Corp.
Vice President of Can-Med Technology, Inc. d/b/a Green Diamond Corp.
Joanne E. Mills
---------------
On August 31, 2001, Joanne E. Mills became the Assistant Secretary of the
Company. Joanne E. Mills is the Secretary of API Electronics, Inc., a
wholly-owned subsidiary of the Company, and has worked for API Electronics,
Inc. since 1990. She currently serves as the Human Resources Director of
API Electronics, Inc., where she administers health and dental plans, the
401(k) retirement plan, payroll direction, insurance plans, and various
other administrative functions.
Date of Birth: August 11, 1946
Current Outside Business Activities: None.
Jerome Rabinowitz
-----------------
Jerome Rabinowitz has been the Vice President of Sales and Marketing of the
Company since August 31, 2001. He has been Vice President-Sales of API
since March 1999. Mr. Rabinowitz
50
has been employed in the electronics industry since 1965 and specialized in
the semiconductor sector since 1969. He has held management positions in
sales, marketing, purchasing and inventory control. During 1997 and 1998,
he was employed by ACI Electronics, Inc. as a marketing director. From
March 1998 to March 1999, he was vice president of sales at Knight
Electronics.
Date of Birth: January 15, 1943
Current Outside Business Activities: None
Koang Eng Lim, M.Sc, P.Eng
--------------------------
Koang E. Lim is Chief Engineer at Filtran Group. Koang E. Lim has over 35
years of specialized experience in electrical network design starting in
1965 with Bell-Northern Research in London, England. He graduated from
London University with Bachelor and Master degrees in Engineering in 1958
and 1963, respectively, and is registered with the Professional Engineers
of Ontario. He spent 6 years with BNR in the network group doing research
and development of filters, equalizers and software. He was granted a
patent for Active Lattice Networks in 1968.
Koang E. Lim was a Senior Lecturer in the University of Singapore from
1972-78, responsible for teaching electrical communication and network
theory to 3/rd/ and 4/th/ year students. From 1978 to 1981, he was with
Spar Aerospace in St. Anne de Bellevue, Montreal, working on filters,
amplitude and delay equalizers for satellite communications. From 1981 to
1982, he was with Gandalf, engaged in the development of active filters for
use in modems.
Koang E. Lim joined Filtran Group in August 1982. He retired in 2000 and
now works for the Company on a consulting basis. As a Chief Engineer at
Filtran Group, he is responsible for engineering designs and completing
quote files and is a liaison with customers for technical issues. His
responsibilities include final approval of products made at Filtran Group's
facilities and offshore facilities.
Date of Birth: June 9, 1931
Current Outside Business Activities: None
Ian Bolt
--------
Ian Bolt is Marketing Manager at Filtran Group. Ian has over thirty years
of experience in all areas of operations of Filtran Group. Ian is a Higher
National Certificate (HNC) graduate from Croydon Technical College in the
U.K. in 1963. He gained experience with large multinational corporations
before joining Filtran Group. He worked as assistant manufacturing manager
for radio tube receivers production at Mullards, now Phillipps Electronics,
for two years before joining Canadian General Electrics as Radio Engineer.
At CGE he was responsible for all technical aspects of manufacturing
production. He moved to be quality assurance manager at Ferritronics to
support the design and manufacture for voice telephony for military radios.
51
Mr. Bolt joined Filtran Group in December 1969. In his present position as
Marketing Manager, he oversees the material control and service managers
and all customer service relations.
Date of Birth: August 3, 1945
Current Outside Business Activities: None
Walter Weiner
-------------
Walter Weiner is Vice President of Engineering at TM Systems. He was
appointed to that position on February 6, 2003 upon the purchase of the
assets of TM Systems Inc. by the Company. Prior to that appointment, he was
President and Chief Engineer of TM Systems, Inc. for almost 30 years. He
has over 53 years of experience designing and producing equipment for the
US Department of Defense. He joined TM Systems, Inc. in 1974 after a career
which included overseeing the production of Blood Cell Counters,
Communication Equipment, and Weapon Guidance Systems. Mr. Weiner graduated
from New York University in 1950 with a BS in Mathematics. He went on to
earn an MS in Mathematics in 1951, and in 1952, a PhD (ABD) in Mathematics.
Mr. Weiner then graduated from Polytechnic Institute in 1955 with a BSEE.
Date of Birth: February 22, 1925
Current Outside Business Activities: None
Irwin Shuldman
--------------
Irwin Shuldman is Vice President of Sales at TM Systems. He was appointed
to that position on February 6, 2003 upon the purchase of the assets of TM
Systems, Inc. by the Company. Prior to that appointment, he was Vice
President of Marketing and Sales for over 30 years for TM Systems, Inc. He
has over 47 years of direct experience providing equipment, systems and
related documentation to the US Department of Defense. Mr. Shulman is one
of the original founders of TM Systems, Inc., which at the time of the
acquisition by the Company specializes in Visual Landing Aid Systems and
Data Communication Equipment and Systems. Mr. Shuldman graduated from the
City College of New York in 1954 and continued his education nearing
completion of a Bachelor of Electrical Engineering in addition to his
Business degree. Mr. Shuldman joined TM Systems in the late 1960's.
Date of Birth: July 21, 1932
Current Outside Business Activities: None
Jason DeZwirek is Phillip DeZwirek's son. Joanne E. Mills and Thomas W. Mills
are married to each other. There are no other family relationships between any
two or more of the directors or senior management members named above. There are
no arrangements or understandings with major shareholders, customers, suppliers
or others, pursuant to which any person referred to above was selected as a
director or member of senior management.
52
The Company's directors and executive officers as of the end of the most recent
fiscal year and as of the date of this Annual Report are summarized in the
following table:
- --------------------------------------------------------------------------------
Name Position(s)
- --------------------------------------------------------------------------------
Phillip DeZwirek Director, Vice Chairman, Chief Financial Officer,
Treasurer, and Controller
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Thomas W. Mills Director, President, and Chief Operating Officer
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Jason DeZwirek Director, Chairman, Chief Executive Officer and
Secretary
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Joanne E. Mills Assistant Secretary
- --------------------------------------------------------------------------------
B. COMPENSATION
Compensation Required to be Disclosed Under the Ontario Securities Act
- ----------------------------------------------------------------------
The Ontario Securities Act requires that the Company disclose information about
the compensation paid to, or earned by the Company's Chief Executive Officer and
each of the other four most highly compensated executive officers of the Company
earning more than Canadian $100,000 in total salary and bonus for the fiscal
year in question. The only executive officers of the Company for whom disclosure
is required under the Ontario Securities Act for the fiscal year ended May 31,
2003 are: Jason DeZwirek, the Chief Executive Officer and Chairman, Thomas W.
Mills, President, Jerome Rabinowitz, Vice President-Sales at API, Ian Bolt,
Marketing Manager at Filtran Group of companies, Walter Weiner, Vice President
of Engineering of TM Systems, and Irwin Shuldman, Vice President of Sales of TM
Systems.
Information regarding Phillip DeZwirek, the Vice-Chairman and Treasurer of the
Company, also is included.
Summary of Compensation
The following table is a summary of compensation paid to the Named Executive
Officers for the Company's most-recently completed fiscal year:
53
============================================================================================================
Annual Compensation Long Term Compensation
- ------------------------------------------------------------------------------------------------------------
Fiscal Securities
Year- Other Under
Name and Position of ending Annual Options/ All Other
Principal May 31 Salary Bonus Compensation Granted Compensation
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Jason DeZwirek /(1)/ 2003 Nil Nil $ 47,196 Nil Nil/(2)/
Chairman, Chief
Executive Officer,
Secretary
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Phillip DeZwirek /(3)/ 2003 Nil Nil Nil Nil Nil/(2)/
Vice-Chairman, Chief
Financial Officer,
Treasurer
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Thomas W. Mills/(4)/ 2003 $ 111,800 Nil Nil Nil $ 6,588/(2),(5)/
President, Chief
Operating Officer
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Jerome Rabinowitz/(6)/ 2003 $ 130,000 $ 5,000 Nil Nil Nil
Vice President - Sales
and Marketing
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Ian Bolt/(7)/ 2003 Canadian Nil Canadian Nil Nil
Marketing Manager at $ 125,000 $ 10,000
Filtran Group
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Walter Weiner/(8)/ 2003 $ 30,771 Nil Nil Nil Nil
Vice President of
Engineering at TM Systems
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Irwin Shuldman/(9)/ 2003 $ 30,771 Nil Nil Nil Nil
Vice President of Sales
at TM Systems
- ------------------------------------------------------------------------------------------------------------
============================================================================================================
<FN>
<F1>
(1) Jason DeZwirek was elected a Director and appointed Secretary and Executive
Vice President on August 31, 2001. He continued as Secretary and
additionally assumed the positions of Chairman and Chief Executive Officer
at the end of the 2001 calendar year. Amounts paid to Jason DeZwirek by the
Company were paid to him as consulting fees.
<F2>
(2) The expiration dates of certain warrants owned or controlled by Jason
DeZwirek, Phillip DeZwirek and Thomas Mills were extended. See Note 9(e) to
the financial statements included in Part III, Item 17 of this Annual
Report for a discussion of such extension.
<F3>
(3) Phillip DeZwirek was elected a Director and appointed Treasurer, Chief
Financial Officer and Chairman on August 31, 2001. He continued as a
Director and has held the positions of Vice-Chairman, Chief Financial
Officer and Treasurer since the end of the 2001 calendar year.
<F4>
(4) Thomas Mills was elected a Director and appointed President on August 31,
2001.
<F5>
(5) Thomas Mills received the use of a company car, resulting in expenses of
$6,588 to the Company.
<F6>
(6) Jerome Rabinowitz was appointed Vice President - Sales and Marketing of the
Company on August 31, 2001.
<F7>
(7) Ian Bolt is the Marketing Manager of Filtran Group and has use of a vehicle
leased by the Company, which costs the Company (Canadian) $10,000 per year.
<F8>
(8) Walter Weiner was appointed Vice President of Engineering of TM Systems on
February 6, 2003, for an annual salary of $100,000.
<F9>
(9) Irwin Shuldman was appointed Vice President of Sales of TM Systems on
February 6, 2003, for an annual salary of $100,000.
</FN>
54
Compensation Previously Disclosed Publicly
- ------------------------------------------
The Company disclosed compensation to certain of the Company's officers and
directors in an August 27, 2003 Notice of Special Meeting of Shareholders to be
held October 8, 2003 ("2003 Annual Meeting") and Management Information Circular
relating to its election of directors, appointment of auditors (the "Circular"),
approval of a reverse stock split, changing the Company's domicile to Delaware
and the adoption of a new stock option plan, which Circular was publicly
disclosed in a Form 6-K filing with the United States Securities and Exchange
Commission.
In the Circular, the Company disclosed that API, the Company's wholly-owned
subsidiary, pays Thomas W. Mills an annual salary of $111,800, and an annual car
allowance of $6,588. API pays Jerome Rabinowitz an annual salary of $130,000 and
in the fiscal year ended May 31, 2003 paid him a bonus of $5,000. The Company
pays Jason DeZwirek annual consulting compensation of $47,196. API Electronics,
Inc. does not pay any further compensation to Mr. or Mrs. Mills, Jason DeZwirek,
Mr. Rabinowitz or to any of its directors.
Cash Compensation of Directors During the Financial Year Ended May 31, 2003
- ---------------------------------------------------------------------------
No directors of the Company were compensated in cash by the Company or any of
its subsidiaries during the financial year ended May 31, 2003, for their
services in their capacity as directors.
Stock Option Plan
- -----------------
On August 1, 2003, the board of directors of the Company authorized a new stock
option plan ("2003 Option Plan") for directors, officers, employees and
consultants of the Company and its subsidiaries, which reserves an aggregate of
4,603,262 Common Shares for issuance on the exercise of such options. The 2003
Option Plan supplants and replaces the Company's then existing Company's 1995
stock option plan ("Former Plan"). The terms of the 2003 Option Plan restrict
options granted, at any one point in time, to a maximum of 20% of the
outstanding Common Shares. Also, no optionee can be granted options of more than
5% of the outstanding Common Shares at any one point in time. The maximum term
of any option granted is five years. The 2003 Option Plan was approved by the
Company stockholders at the 2003 Annual Meeting.
During the financial year-ended May 31, 2002, and under the terms of the Former
Plan, the Company granted to Phillip DeZwirek, Jason DeZwirek and Thomas Mills
100,000 options each; 50,000 exercisable at USD$0.45 and 50,000 exercisable at
USD$0.75, all expiring August 31, 2006 and convertible on a one-for-one basis
upon exercise (collectively, "Existing Options"). Pursuant to the terms of the
2003 Option Plan, the Existing Options granted under the Former Plan are deemed
to be re-granted under the 2003 Option Plan. Additionally, none of the terms and
conditions of the Existing Options will be altered by their inclusion under the
2003 Option Plan, and the Existing Options are also to be exercisable by the
holders thereof without further shareholder or regulatory approval. During
fiscal 2003, Phillip DeZwirek and Jason DeZwirek each exercised 50,000 stock
options @$0.45 and 50,000 options@$0.75.
Stock Options Granted to Directors and Officers
- -----------------------------------------------
The Company did not grant any stock options to any of its officers or directors
during its fiscal year ending May 31, 2003.
55
Long-Term Incentive Plan Awards
- -------------------------------
The Company did not have a long-term incentive plan (the definition of
"long-term incentive plan" contained in the Ontario Securities Act expressly
excludes a stock option plan) during the financial year ended May 31, 2003.
Pension and Retirement Benefits
- -------------------------------
During the fiscal year ending May 31, 2003, the Company provided its employees
and employees of its subsidiaries with a simplified retirement benefit plan
whereby the Company matched employees' contributions up to the lesser of three
percent of each employees' annual income or $6,000. The total cost to the
Company for such contributions for the fiscal year ended May 31, 2003 was
$9,714. Neither the Company nor its subsidiaries have set aside or accrued any
funds for the purpose of providing pension, retirement, or similar benefits.
C. BOARD PRACTICES
On August 31, 2001, the number of directors of the Company was increased from
four to five, the then current directors resigned from the board of directors,
and Phillip DeZwirek, Thomas W. Mills, and Jason DeZwirek were appointed to the
Board of Directors. At the November 7, 2002 annual shareholders meeting, the
number of directors was reduced from five to three. The three directors named
below continue to serve as of the date of this Annual Report. The current terms
of each of the Company's directors began on October 8, 2003, the date of the
Company's 2003 Annual Meeting of Shareholders, and will expire on the date of
the Company's 2004 Annual Meeting of Shareholders. Each of the directors named
below has served as a Director of the Company since the date set forth beside
his name:
Name Beginning of Tenure Expiration of Term
- ------------------------ ------------------- -------------------
Phillip DeZwirek August 31, 2001 2004 annual meeting*
Thomas W. Mills August 31, 2001 2004 annual meeting*
Jason DeZwirek August 31, 2001 2004 annual meeting*
* such directors may be re-elected at such meeting
None of the Company's directors are parties to service contracts with the
Company or any of its subsidiaries providing for benefits upon termination of
employment.
The Company does not have a remuneration committee. As of the date of this
Annual Report, the Company's audit committee consists of two non-independent
directors, Phillip DeZwirek and Jason DeZwirek, both of whom are executive
officers and directors of the Company. Phillip DeZwirek and Jason DeZwirek also
are major shareholders of the Company. Phillip and Jason DeZwirek are father and
son. The members are appointed by the Company's directors at the conclusion of
the annual meeting to hold office until the next annual meeting, or until their
successors are elected or appointed. The audit committee appoints the Company's
auditors, which appointment also is subject to shareholder approval, approves
the terms of the auditor's engagement and approves, in advance, any additional
work to be performed for the Company by its auditors. The audit committee
reviews the financial statements of the Company and reports thereon to the
Company's Board of Directors before the financial statements are approved by the
Board of Directors.
56
In the event the Company is accepted for quotation in the NASDAQ small cap
market, then a majority of the members of the Company's will have to be
independent directors as defined by NASDAQ. The Company's audit committee will
have to composed of at least three (3) members, all of whom are independent as
defined by NASDAQ and under SEC Rule 10A-3(b)(1), and who have not participated
in the preparation of the financial statements of the Company or any subsidiary
of the Company during the past three years. Each member of the audit committee
must be able to read and understand fundamental financial statements, including
an issuer's balance sheet, income statement and cash flow statement. One member
of the audit committee must have employment experience in finance or accounting,
professional certification in accounting, or any other comparable experience or
background which results in the individual's financial sophistication, including
being or having been a chief executive officer, chief financial officer or other
senior officer with financial oversight responsibilities. These rules were
recently approved by the SEC and become effective for small business filers on
July 31, 2005. The current NASDAQ rules require that small business issuers like
the Company establish and maintain an audit committee of at least two members, a
majority of which are independent. Under the current rules, the Company would be
required to have an audit committee composed of a majority of independent
directors with a minimum of two members. Accordingly, these rules would require
that the Company appoint two independent directors to serve on its audit
committee and that one of its current audit committee members, so that its audit
committee would consist of a majority of independent directors. NASDAQ also
requires that all listed issuers adopt a written audit committee charter that
covers specified responsibilities and duties. The audit committee must review
and reassess the adequacy of the written audit committee charter on an annual
basis.
D. EMPLOYEES
The Company, including its subsidiaries, employed the following numbers of
employees as of the dates and at the locations set forth below:
- ------------------------------------------------------------------------
Location 4/30/01 10/1/01 5/31/02 10/1/02 5/31/03 10/1/03
- ------------------------------------------------------------------------
Toronto, Ontario,
Canada 1 0 1 1 0 0
- ------------------------------------------------------------------------
Charlottesville,
Virginia 2 0 0 0 0 0
- ------------------------------------------------------------------------
Hauppauge,
New York 0 50 35 32 28 31
- ------------------------------------------------------------------------
Ogdensburg,
New York 0 0 22 19 18 18
- ------------------------------------------------------------------------
Nepean,
Ontario 0 0 126 122 138 132
- ------------------------------------------------------------------------
Kanata,
Ontario 0 0 7 4 0 0
- ------------------------------------------------------------------------
Albertson,
New York 0 0 0 0 3 3
- ------------------------------------------------------------------------
Bridgeport,
Connecticut 0 0 0 0 6 6
- ------------------------------------------------------------------------
TOTAL 3 50 191 178 193 190
- ------------------------------------------------------------------------
The Company, including its subsidiaries, employed the following numbers of
employees as of the dates and in the categories of activities set forth below:
57
- ------------------------------------------------------------------------
Activity 4/30/01 10/1/01 5/31/02 10/1/02 5/31/03 10/1/03
- ------------------------------------------------------------------------
Corporate
Offices 1 0 1 1 0 0
- ------------------------------------------------------------------------
Website
Management 2 0 0 0 0 0
- ------------------------------------------------------------------------
API *
Management 0 3 3 3 2 2
- ------------------------------------------------------------------------
API
Sales 0 2 2 2 2 2
- ------------------------------------------------------------------------
API Design
Engineering 0 1 1 1 1 1
- ------------------------------------------------------------------------
API Testing /
Environmental
Engineering 0 2 2 1 1 1
- ------------------------------------------------------------------------
API Process
Engineering 0 4 4 3 1 1
- ------------------------------------------------------------------------
API Quality
Assurance 0 2 2 2 2 2
- ------------------------------------------------------------------------
API Production
Management 0 3 3 3 1 2
- ------------------------------------------------------------------------
API
Assembly 0 31 16 16 17 19
- ------------------------------------------------------------------------
API Accounting /
Human Resources 0 2 2 1 1 1
- ------------------------------------------------------------------------
Filtran *
Management 0 0 2 2 1 1
- ------------------------------------------------------------------------
Filtran
Sales 0 0 4 4 3 2
- ------------------------------------------------------------------------
Filtran Design
Engineering 0 1 6 5 8 8
- ------------------------------------------------------------------------
Filtran Testing /
Environmental
Engineering 0 0 7 7 11 10
- ------------------------------------------------------------------------
Filtran Quality
Assurance 0 0 4 4 5 4
- ------------------------------------------------------------------------
Filtran
Production
Management 0 0 10 8 9 8
- ------------------------------------------------------------------------
Filtran
Assembly 0 0 101 95 99 99
- ------------------------------------------------------------------------
Filtran
Accounting/
Human Resources 0 0 7 6 3 3
- ------------------------------------------------------------------------
Filtran
Purchasing,Stock,
Shipping and
Maintenance 0 0 12 12 17 15
- ------------------------------------------------------------------------
Filtran Production 0 0 2 2 0 0
- ------------------------------------------------------------------------
58
- ------------------------------------------------------------------------
TM Systems
Management*** 0 0 0 0 1 1
- ------------------------------------------------------------------------
TM Systems Sales 0 0 0 0 1 1
- ------------------------------------------------------------------------
TM Systems Design
Engineering 0 0 0 0 1 1
- ------------------------------------------------------------------------
TM Systems
Testing/
Environmental
Engineering 0 0 0 0 1 1
- ------------------------------------------------------------------------
TM Systems Product
Management 0 0 0 0 1 1
- ------------------------------------------------------------------------
TM Systems
Assembly 0 0 0 0 3 3
- ------------------------------------------------------------------------
TM Systems
Accounting
& Human Resources 0 0 0 0 1 1
- ------------------------------------------------------------------------
TOTAL 3 51 191 178 193 190
- ------------------------------------------------------------------------
* API = API Electronics, Inc., a wholly-owned subsidiary of the Company
** Filtran = Filtran Inc., Canadian Dataplex Ltd. and Tactron Communications
(Canada) Limited, wholly-owned subsidiaries of the Company and Tactron
Communications' wholly-owned subsidiary, Filtran Limited.
*** TM Systems = TM Systems II, Inc., a wholly-owned subsidiary of the Company.
The number of employees of the Company significantly increased (i) as of May 31,
2002, the effective date of the Company's acquisition of the Filtran Group of
companies and (ii) as of February 6, 2003 (shown as of 5/31/2003), the effective
date of the TM Acquisition.
E. SHARE OWNERSHIP
Share Ownership of Directors and Officers
- -----------------------------------------
As of October 31, 2003, an aggregate of 23,541,314 Common Shares and no Special
Shares of the Company were issued and outstanding. The table below sets forth
the share ownership in the Company of the persons listed in subsection 6.B of
this Item 6 above as of October 31, 2003, based on numbers reported to the
Company by the persons set forth below. None of the persons set forth below have
different voting rights.
59
- --------------------------------------------------------------
Name Number of Common Percentage of Issued and
Shares Held Outstanding Common
Shares/(d)/
- --------------------------------------------------------------
Phillip DeZwirek 3,083,853/(a)/ 13.10%
- --------------------------------------------------------------
Thomas W. Mills 328,250/(b)/ 1.39%
- --------------------------------------------------------------
Jason DeZwirek 2,918,878/(c)/ 12.40%
- --------------------------------------------------------------
Jerome Rabinowitz None ---
- --------------------------------------------------------------
Ian Bolt None ---
- --------------------------------------------------------------
Walter Weiner None ---
- --------------------------------------------------------------
Irwin Shuldman None ---
- --------------------------------------------------------------
Notes:
- -----
(a) Mr. Phillip DeZwirek holds 50% of Icarus Investments Corp., which in turn
holds 50.01% of Can-Med Technology, Inc. Can-Med Technology, Inc. (doing
business as Green Diamond Corp.) held 2,818,878 Common Shares of the
Company as of October 31, 2003. All of such shares are attributed to Mr.
DeZwirek, which represent approximately 11.97% of the outstanding Common
Shares of the Company. Mr. Phillip DeZwirek controls Technapower Industries
Corporation, a company that held 164,958 Common Shares of the Company,
representing an additional 0.70% of the Company's Common Shares, as of
October 31, 2003. Mr. Phillip DeZwirek directly holds 100,000 shares of
common stock of the Company, which represent approximately 0.43% of the
outstanding Common Shares of the Company. Mr. DeZwirek also holds warrants
to purchase 2,969,241 shares of common stock of the Company, which are not
included in this chart.
(b) Excludes options to purchase 100,000 shares of common stock of the Company
held by Mr. Mills and ownership of warrants to purchase 329,916 shares of
common stock of the Company.
(c) Mr. Jason DeZwirek holds 50% of Icarus Investments Corp., which in turn
holds 50.01% of Can-Med Technology, Inc. Can-Med Technology Inc. (doing
business as Green Diamond Corp.) held 2,818,878 Common Shares of the
Company as of October 31, 2002. All of such shares are attributed to Mr.
DeZwirek, which represents approximately 11.97% of the outstanding Common
Shares of the Company. Mr. Jason DeZwirek directly holds 100,000 shares of
common stock of the Company, which represent approximately 0.43% of the
outstanding Common Shares of the Company. Mr. DeZwirek also holds warrants
to purchase 2,804,283 shares of common stock of the Company, which are not
included in this chart.
(d) Percentages are computed by dividing the number of Common Shares held
(excluding options and warrants to purchase Common Shares), by the
23,541,314 Common Shares of the Company issued and outstanding as of
October 31, 2003. Note that percentages held by the Company's major
shareholders, as disclosed in Item 7A below, which reflect shares
beneficially owned (including options and warrants), may be higher.
Stock Option Plan
- -----------------
On August 1, 2003, the board of directors authorized the 2003 Option Plan for
directors, officers, employees and consultants of the Company and its
subsidiaries. The terms of the plan restrict options granted at any point in
time to 20% of the outstanding shares of the Company. Also, no optionee can be
granted options of more than 5% of the outstanding Common Shares of the Company
at one point in time. The maximum term of any option granted is five years. The
2003 Option Plan replaces the Company's then existing 1995 stock option plan.
Pursuant to the terms of the 2003 Option Plan, the outstanding options issued
under the Company's 1995 stock option plan are deemed to be re-granted under the
2003 Option Plan.
Stock Options Held by Directors and Officers
- --------------------------------------------
The following table sets forth all outstanding stock options and the value of
exercised and unexercised options held by directors and officers of the Company
for whom individual disclosure is required under Ontario law or for whom the
Company has elected to disclose publicly as of the date of this Annual Report.
60
All of such options were issued during the fiscal year ended May 31, 2002 under
the Company's 1995 stock option plan and are deemed regranted under the 2003
Option Plan.
Common Share Purchase Options (1)
- --------------------------------------------------------------------------------
Optionee Number of Exercise Expiration Value of
Shares Price Date Unexercised
In-The-Money
Options/SARs at
May 31, 2003(2)
- --------------------------------------------------------------------------------
Phillip DeZwirek (3) $.45 August 31, 2006 -0-
- --------------------------------------------------------------------------------
Phillip DeZwirek (3) $.75 August 31, 2006 -0-
- --------------------------------------------------------------------------------
Thomas W. Mills 50,000 $.45 August 31, 2006 $30,000
- --------------------------------------------------------------------------------
Thomas W. Mills 50,000 $.75 August 31, 2006 $15,000
- --------------------------------------------------------------------------------
Jason DeZwirek (3) $.45 August 31, 2006 0-
- --------------------------------------------------------------------------------
Jason DeZwirek (3) $.75 August 31, 2006 -0-
- --------------------------------------------------------------------------------
Jerome Rabinowitz None --- --- ---
- --------------------------------------------------------------------------------
Ian Bolt None --- --- ---
- --------------------------------------------------------------------------------
Walter Weiner None --- --- ---
- --------------------------------------------------------------------------------
Irwin Shuldman None --- --- ---
- --------------------------------------------------------------------------------
(1) No purchase price was associated with any of the stock options set forth
above. The number of shares and exercise prices associated with the stock
options set forth above reflect post-consolidation numbers and prices--see
Note 9(d) to the financial statements contained in Part III, Item 17 of
this Annual Report.
(2) The closing price of the Company's shares of Common Stock on May 30, 2003,
that last trading day of the Company's 2003 fiscal year, was $1.05.
(3) During fiscal 2003, both Phillip DeZwirek and Jason DeZwirek exercised the
following stock options:
(a) 50,000 options @$0.45 on December 16, 2002 when the Company's shares
of Common Stock closed at $0.53.
(b) 50,000 options @$0.75 on January 13, 2003 when the Company's shares of
Common Stock closed at $0.96.
Warrants Held by Directors and Officers
- ---------------------------------------
The following table sets forth all outstanding warrants to purchase Common
Shares granted to persons for whom individual disclosure is required under
Ontario law or for whom the Company has elected to disclose publicly as of the
date of this Annual Report:
61
Warrants to Purchase Common Shares(1)
- --------------------------------------------------------------------------------
Warrant Holder Number of Exercise Expiration Value of
Shares Price Date Unexercised
In-The-Money
Warrants at
May 31, 2003(2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Phillip DeZwirek/(a)/ 1,484,621 $.45 February 28, 2004 $ 890,772.60
- --------------------------------------------------------------------------------
Phillip DeZwirek/(a)/ 1,484,621 $.75 August 30, 2004 $ 445,386.30
- --------------------------------------------------------------------------------
Thomas W. Mills 164,958 $.45 February 28, 2004 $ 98,974.80
- --------------------------------------------------------------------------------
Thomas W. Mills 164,958 $.75 August 30, 2004 $ 49,487.40
- --------------------------------------------------------------------------------
Jason DeZwirek/(b)/ 1,402,142 $.45 February 28, 2004 $ 841,285.20
- --------------------------------------------------------------------------------
Jason DeZwirek/(b)/ 1,402,142 $.75 August 30, 2004 $ 420,642.60
- --------------------------------------------------------------------------------
Jerome Rabinowitz None --- --- ---
- --------------------------------------------------------------------------------
Ian Bolt None --- --- ---
- --------------------------------------------------------------------------------
Walter Weiner None --- --- ---
- --------------------------------------------------------------------------------
Irwin Shuldman None --- --- ---
- --------------------------------------------------------------------------------
- ----------
Notes:
- -----
(a) Mr. Phillip DeZwirek holds 50% of Icarus Investments Corp., which in turn
holds 50.01% of Can-Med Technology, Inc. Can-Med Technology, Inc. (doing
business as Green Diamond Corp.) held Series A Warrants to purchase
1,402,142 Common Shares of the Company at an exercise price of $.45 and
Series B Warrants to purchase 1,402,142 Common Shares of the Company at an
exercise price of $.75 as of October 31, 2003. Ownership of all of such
warrants has been attributed to Phillip DeZwirek. Mr. Phillip DeZwirek also
controls Technapower Industries Corporation, a company that held Series A
Warrants to purchase 82,479 Common Shares of the Company at an exercise
price of $.45 and Series B Warrants to purchase 82,479 Common Shares of the
Company at an exercise price of $.75 as of October 31, 2003. All of the A
Warrants expire in February 2004 and all of the B Warrants expire in August
2004.
(b) Mr. Jason DeZwirek holds 50% of Icarus Investments Corp., which in turn
holds 50.01% of Can-Med Technology, Inc. Can-Med Technology, Inc. (doing
business as Green Diamond Corp.) held Series A Warrants to purchase
1,402,142 Common Shares of the Company at an exercise price of $.45 and
Series B Warrants to purchase 1,402,142 Common Shares of the Company at an
exercise price of $.75 as of October 31, 2003. Ownership of all of such
warrants has been attributed to Jason DeZwirek. All of the A Warrants
expire in February 2004 and all of the B Warrants expire in August 2004.
(1) The warrants described in the table above were issued in connection with
the transaction described in Note 1(a) to the financial statements
contained in Part III, Item 17 of this Annual Report, and for the
consideration described therein. The number of shares and exercise prices
associated with the warrants set forth above reflect post-consolidation
numbers and prices--see Note 9(c) to the financial statements contained in
Part III, Item 17 of this Annual Report.
(2) The closing price of the Company's shares of Common Stock on May 30, 2003,
that last trading day of the Company's 2003 fiscal year, was $1.05.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table discloses all known major shareholders beneficially owning
5% or more of the Company's issued and outstanding shares of Common Stock as of
October 31, 2003 (plus Thomas Mills,
62
who owns under 5%). As of October 31, 2003 (and as of the date of this Annual
Report), an aggregate of 23,541,314 Common Shares and no Special Shares of the
Company were issued and outstanding. None of the major shareholders have
different voting rights.
- -------------------------------------------------------------------------------
Name Number of Common Percentage of Issued
Shares Beneficially and Outstanding Common
Owned Shares /(a)/
- -------------------------------------------------------------------------------
Can-Med Technology, Inc. doing 5,623,162/(b)/ 21.53%
business as Green Diamond Corp.
- -------------------------------------------------------------------------------
Phillip DeZwirek 6,053,078/(c)/ 22.83%
- -------------------------------------------------------------------------------
Jason DeZwirek 5,723,162/(d)/ 21.72%
- -------------------------------------------------------------------------------
Thomas W. Mills 758,166/(e)/ 3.19%
- -------------------------------------------------------------------------------
Notes:
- -----
(a) Computed by dividing the number of shares beneficially held by each
shareholder, including Common Shares underlying options and warrants
exercisable within 60 days, by the total number of issued and outstanding
Common Shares of the Company plus such shareholder's Common Shares
underlying options and warrants exercisable within 60 days.
(b) Includes 2,818,878 Common Shares and 2,804,284 Common Shares underlying
warrants exercisable within 60 days.
(c) Includes 2,818,878 Common Shares and 2,804,284 Common Shares underlying
warrants exercisable within 60 days held of record by Can-Med Technology,
Inc. d/b/a Green Diamond Corp. ("Green Diamond Corp."). Mr. Phillip
DeZwirek is the President of Green Diamond Corp., and holds a 50% equity
interest in Icarus Investments Corp., which in turn holds a 50.01% equity
interest in Green Diamond Corp. Also includes 164,958 Common Shares and
164,958 Common Shares underlying warrants exercisable within 60 days held
of record by Technapower Industries Corporation, a corporation controlled
by Mr. Phillip DeZwirek. Mr. Phillip DeZwirek directly holds 100,000 shares
of common stock of the Company.
(d) Includes 2,818,878 Common Shares and 2,804,284 Common Shares underlying
warrants exercisable within 60 days held of record by Can-Med Technology,
Inc. d/b/a Green Diamond Corp. ("Green Diamond Corp."). Mr. Phillip
DeZwirek, Mr. Jason DeZwirek's father, is the President of Green Diamond
Corp., and Mr. Jason DeZwirek holds a 50% equity interest in Icarus
Investments Corp., which in turn holds a 50.01% equity interest in Green
Diamond Corp. Mr. Jason DeZwirek directly holds 100,000 shares of common
stock of the Company.
(e) Includes 328,250 Common Shares and 329,916 Common Shares underlying
warrants exercisable within 60 days. Also includes 100,000 Common Shares
underlying options exercisable within 60 days held of record by Thomas
Mills.
Each of the major shareholders listed above obtained his or its Common Shares
and warrants effective August 31, 2001. There have been no other significant
changes in the percentage ownership held by any of the above major shareholders
prior to August 31, 2001, or after such date.
The following table discloses the geographic distribution of the holders of
record of the Company's Common Stock as of October 31, 2003:
63
- ----------------------------------------------------------------------
Number of Number of Percentage of Percentage of
Country Shareholders Shares Shareholders Shares
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Canada 1,042 18,094,828 78.11% 76.86%
- ----------------------------------------------------------------------
United States 284 5,431,406 21.29% 23.07%
(host country)
- ----------------------------------------------------------------------
Australia 4 1,166 0.30% 0.00%
- ----------------------------------------------------------------------
Denmark 1 2 0.075% 0.00%
- ----------------------------------------------------------------------
Botswana 1 13,333 0.075% 0.06%
- ----------------------------------------------------------------------
New Zealand 1 500 0.075% 0.00%
- ----------------------------------------------------------------------
England 1 79 0.075% 0.00%
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Total 1,334 23,541,314 100% 100%
- ----------------------------------------------------------------------
The Company may be indirectly controlled by Can-Med Technology Inc., which, as
of October 31, 2003, held 2,818,878 shares of Common Stock of the Company
(excluding warrants), representing approximately 11.97% of the Company's issued
and outstanding shares of Common Stock as of October 31, 2003. The Company may
be indirectly controlled by Phillip DeZwirek, who indirectly, through his
ownership of a portion of Can-Med Technology Inc. and Technapower Industries
Corporation and his direct ownership of shares, held approximately 13.10% of the
Company's issued and outstanding shares of Common Stock (excluding options and
warrants) as of October 31, 2003. The Company may be indirectly controlled by
Jason DeZwirek, who indirectly, through his ownership of a portion of Can-Med
Technology Inc. and his direct ownership of shares, held approximately 12.40% of
the Company's issued and outstanding shares of Common Stock (excluding options
and warrants) as of October 31, 2003. The Company is not aware of any other
corporations, foreign governments, natural persons, or legal persons that may
directly or indirectly own or control the Company. All of the shares of common
stock held by Can-Med Technology, Inc. are attributed to both Phillip DeZwirek
and Jason DeZwirek.
There are no arrangements known to the Company, the operation of which may at a
subsequent date result in a change in control of the Company.
B. RELATED PARTY TRANSACTIONS SINCE JUNE 1, 2002
Effective June 1, 2003, the Company entered into a Management Services Agreement
with Can-Med Technology (d/b/a Green Diamond Corp.), a major shareholder of the
Company that is controlled by Jason DeZwirek, the Chairman, Chief Executive
Officer and a director of the Company, and Phillip DeZwirek, the Vice-Chairman,
Chief Financial Officer, Treasurer and a director of the Company. The Management
Services Agreement provides that Green Diamond Corp. will provide executive
office space, office equipment and supplies, telecommunications, personnel and
management services to the Company for an annual fee of $170,000.
The Company acquired API as of August 31, 2001. See Note 1(a) to the financial
statements included in Part III, Item 17 of this Annual Report for a discussion
of the acquisition of API. In connection with that transaction, the Company
issued to the stockholders of API, in exchange for all of the outstanding stock
of API, 6,500,000 units of the Company, each unit consisting of one common share
and 1/2 of one Series A common share purchase warrant exercisable at $0.45 per
share, expiring March 30, 2003 and 1/2 of one Series B common share purchase
warrant exercisable at $0.75 per share, expiring September 30, 2003. The
expiration dates of these warrants were extended to February 28, 2004 and August
30, 2004,
64
respectively, effective February 25, 2003. As a result of the share exchange,
the Company issued to (i) Can-Med Technology, which is 50.01% owned by Icarus
Investments Corp., which is owned 50% by Phillip DeZwirek and 50% by Jason
DeZwirek, 2,818,878 shares of common stock, 1,402,142 Series A warrants and
1,402,142 Series B warrants, (ii) Technapower Industries, a company controlled
by Phillip DeZwirek, 164,958 shares of common stock, 82,479 Series A warrants
and 82,479 Series B warrants, and (iii) Thomas Mills, 328,250 shares of common
stock, 164,958 Series A warrants and 164,958 Series B warrants.
The bank debt of API is guaranteed by Phillip DeZwirek and Thomas W. Mills. See
Note 6 to the financial statements included in Part III, Item 17 of this Annual
Report.
See Item 6.B. for current compensation paid to officers and directors of the
Corporation.
C. INTERESTS OF EXPERTS AND COUNSEL
Not Applicable.
ITEM 8. FINANCIAL INFORMATION
Consolidated Financial Statements
See the Consolidated Financial Statements set forth in Part III, Item 17 hereof
and filed as a part of this Annual Report.
Export Sales
Export sales did not constitute a significant portion of the Company's total
sales volume as of May 31, 2003, the end of the Company's most recent fiscal
year.
Legal or Arbitration Proceedings
As of the date of this Annual Report, there are no legal or arbitration
proceedings that may have, or have had in the recent past, significant effects
on the Company's financial position or profitability.
Company Policy on Dividend Distributions
The Company does not intend to pay dividends in cash or in kind in the
foreseeable future. The Company expects to retain its earnings to finance the
further growth of the Company. The directors of the Company will determine if
and when dividends should be declared and paid in the future based upon the
earnings and financial conditions of the Company at the relevant time and such
other factors as the directors may deem relevant. All of the Common Shares of
the Company are entitled to an equal share in any dividends declared and paid.
Significant Changes
No significant changes have occurred since May 31, 2003, the date of the
Consolidated Financial Statements set forth in Part III, Item 17 hereof and
filed as a part of this Annual Report.
65
ITEM 9. THE OFFER AND LISTING
Not applicable except for Item 9A(4) and Item 9C.
A(4). PRICE HISTORY
Price History in the Canadian Market
The following table sets forth the reported high and low sale prices and, as
applicable, the volume of trading of the Company's Common Shares, as adjusted to
reflect a 1:3 consolidation of the Company's Common Shares effective September
10, 2001 and a 1:10 consolidation of the Company's Common Shares effective May
18, 1999, and as reported by the Canadian Dealing Network Inc. ("CDN") (prior to
December 22, 2000) or the TSX Venture Exchange, formerly known as the Canadian
Venture Exchange ("CDNX") (after December 22, 2000 through August 8, 2001), as
applicable, for the periods indicated:
Canadian $
Period High Low
--------------------------------- ---------- ----------
Past 6 Calendar Months/(a)/ Not
--------------------------- ----------
Applicable
----------
Quarterly Data Since Q1 2002
----------------------------
2002: Second Quarter (10/31/01)/(a)/... 1.50 1.29
First Quarter (7/31/01).......... 0.75 0.27
2003: FYE 5/31/03/(a)/................. N/A N/A
2002: FYE 5/31/02/(b)/................. $ 1.50 $ 0.27
2001: FYE 4/30/01/(c,d)/ .............. 2.28 0.75
2000: FYE 4/30/00/(d)/ ................ 12.15 0.75
1999: FYE 4/30/99 ..................... 16.50 2.10
(a) The Company's trading was halted on the CDNX as of August 8, 2001. The
Company's Board of Directors determined not to seek to re-establish trading
of its Common Shares on the CDNX and delisted voluntarily from the CDNX.
(b) The Company's Common Shares ceased trading in Canada as of August 8, 2001.
Accordingly, the information is for the period beginning May 1, 2001 and
ending August 8, 2001.
(c) Beginning December 22, 2000, the date on which trading commenced on the
CDNX.
(d) The Company's Common Shares were not traded in Canada from March 3, 2000
until December 22, 2000.
Prior to December 22, 2000, the Company's Common Shares were traded on the CDN,
and were traded under the symbol OPUS from May 1999 until March 3, 2000. On
March 3, 2000, when the Company announced a transaction with IL Data
Corporation, the Company's Common Shares were removed from the visible quotation
provided by the CDN because the transaction represented a change in control, a
change in business and a change of name for the Company. The IL Data Corporation
transaction was completed on June 6, 2000, the name change occurred on July 25,
2000, and the Company filed an application for quotation with CDN on August 11,
2000.
In the meantime, some companies that were quoted on CDN were invited to apply
for listing on the CDNX. The Company made the application for listing on the
CDNX and filed the necessary
66
documentation, and began listing the shares of the Company on Tier 3 of CDNX as
of December 22, 2000.
For the period from December 22, 2000 through August 8, 2001, the Common Stock
of the Company was listed on the CDNX under the symbol "YIK" and CUSIP
#461459109. The Company's trading was halted on the CDNX as of August 8, 2001,
and its shares no longer trade on CDNX. This is a result of the fact that the
Company's Board of Directors, based on business and timing factors, decided not
to obtain pre-approval from the CDNX for its August 31, 2001 acquisition of API
Electronics, Inc., which constituted a reverse take-over transaction requiring
pre-approval. The Company's Board of Directors determined not to seek to
re-establish trading of its Common Shares on the CDNX, and requested to be
delisted voluntarily from the CDNX.
Price History in the United States Market
During the fiscal year ending April 30, 2001 and through September 7, 2001,
while the Company's name was InvestorLinks.com Inc., the Common Stock of the
Company was traded over-the-counter on the National Association of Securities
Dealers OTC Bulletin Board ("OTCBB") under the symbol "IVLKF." On August 30,
2001, the Company's shareholders approved a change of the Company's name from
InvestorLinks.com Inc. to API Electronics Group Inc., and the consolidation of
the authorized common shares on the basis that every three pre-consolidation
Common Shares were converted into one post-consolidation Common Share. The name
change and share consolidation became effective on September 10, 2001, when the
Company filed Articles of Amendment in Ontario. On September 10, 2001, shares of
the Company's Common Stock began trading on the OTC under the symbol "APIEF."
The Company intends to apply for listing on the NASDAQ small cap market, subject
to approval of, and at such time as determined by, the Board of Directors. The
Company does not know whether its application will be accepted and its Common
Stock listed on NASDAQ. If accepted, the Company expects its listing will be
effective before the end of its 2004 fiscal year, and that such listing may be
effective in the first quarter of 2004.
The following table sets forth the reported high and low bid prices of the
Common Shares, as adjusted to reflect a 1:3 consolidation of the Company's
Common Shares effective September 10, 2001 and a 1:10 consolidation of the
Company's Common Shares effective May 18, 1999, and as reported by the NASD for
the fiscal periods indicated (the Common Stock commenced trading on the OTCBB in
February 1997). Such over-the-counter market quotations are based on closing
prices and reflect interdealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
67
Period High Low
------------------------------ ------ -----
Past 6 Calendar Months
----------------------
2003: October....................... 0.99 0.71
September..................... 0.91 0.63
August........................ 1.00 0.79
July.......................... 1.20 0.91
June.......................... 1.08 0.80
May........................... 1.20 1.01
Quarterly Data Since Q1 2002
----------------------------
Fiscal 2004: Second Quarter (until
10/31/03)..................... 0.99 0.63
First Quarter (8/31/03)....... 1.20 0.79
Fiscal 2003: Fourth Quarter (5/31/03)...... 1.31 1.01
Third Quarter (2/28/03)....... 1.02 0.52
Second Quarter (11/30/02)..... 1.12 0.47
First Quarter (8/31/02)....... 3.98 0.91
Fiscal 2002: Fourth Quarter (5/31/02)...... 3.48 2.30
Third Quarter (2/28/02)....... 2.79 1.50
Second Quarter (11/30/01)..... 2.05 0.25
First Quarter (8/31/01)....... 0.75 0.33
2003: FYE 5/31/03................... 1.20 0.63
2002: FYE 5/31/02................... 3.48 0.25
2001: FYE 4/30/01 .................. 10.125 0.375
2000: FYE 4/30/00 .................. 9.186 0.450
1999: FYE 4/30/99 .................. 13.11 1.500
The Company's Common Stock is not registered to trade in the United States in
the form of American Depository Receipts (ADR's) or similar certificates.
The Company's Common Stock is issued in registered form and the following
information is taken from the records of Equity Transfer Services Inc. (located
in Toronto, Ontario, Canada), the registrar and transfer agent for the Common
Stock. The Company's Common Stock is not subject to any special restrictions on
transfer.
As of October 31, 2003, the stockholders' list for the Company's Common Shares
showed 1,334 registered stockholders and 23,541,314 Common Shares outstanding.
Since a portion of the Company's Common Shares is held by agents in street name,
and the Company (pursuant to applicable Canadian and corporate law) only sends
information concerning the Company, including with respect to its Annual General
Meeting, to shareholders who request this information, the Company cannot
accurately estimate the total number of beneficial holders of its Common Shares.
For the same reason the Company is unaware of how
68
many of its outstanding Common Shares are held beneficially by United States
residents. In accordance with Rule 12g5-1 of the Securities Exchange Act of
1934, the Company's share register indicated, as of October 31, 2003, 284
stockholders of record having addresses in the United States (including voting
trustees, depositories, share transfer agents, or any person acting on behalf of
the Company within the United States), which persons held 5,431,406 of the
Company's issued and outstanding Common Shares, representing approximately
23.07% of the total issued and outstanding Common Shares as of such date.
C. MARKETS
See Item 9A(4) above.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
The Company's corporation number as assigned by the Ontario Ministry of Consumer
and Commercial Relations is 1028514. The Company's Articles of Amalgamation do
not contain the Company's purpose or its objectives, as neither is required
under the laws of Ontario.
Neither the Articles of Amalgamation nor the Bylaws prohibit a director of the
Company from voting on any resolution to approve a material contract or
transaction in which such director has a material interest. Neither the Articles
of Amalgamation nor the Bylaws of the Company limit the directors' power, in the
absence of an independent quorum, to vote compensation to themselves or any
members of their body. The Bylaws provide that directors shall receive
remuneration, as the board of directors shall determine from time to time.
(Bylaws, Paragraph 4.11). The board of directors may, without the authorization
of the shareholders, (i) borrow money upon the credit of the Company; (ii)
issue, reissue, sell or pledge debt obligations of the Company; whether secured
or unsecured (iii) give a guarantee on behalf of the Company to secure
performance of obligations; and (iv) charge, mortgage, hypothecate, pledge or
otherwise create a security interest in all currently owned or subsequently
acquired real or personal, movable or immovable, tangible or intangible,
property of the Company to secure obligations of the Company. (Bylaws, Paragraph
10.1). Neither the Articles of Amalgamation nor the Bylaws of the Company
discuss the retirement or non-retirement of directors under an age limit
requirement, and there is no number of shares required for director
qualification.
A description of the rights, preferences and restrictions attached to each class
of the Company's shares as set forth in the Company's Articles of Amalgamation
follows:
The Company's Articles of Amalgamation provide that the Company is authorized to
issue an unlimited number of Common Shares ("Common Shares") and an unlimited
number of Special Shares ("Special Shares"). Of the Special Shares, the Company
has designated a class of up to 500,000 Preference Shares ("Preference Shares").
While the Company has issued Common Shares, it has not issued any Preference
Shares or other Special Shares.
Dividend Rights. The Company's Articles of Amalgamation provide that no
dividends shall be declared, set aside, or paid on the Preference Shares. Thus,
only holders of Common Shares are entitled to be paid dividends under the
Company's current Articles of Amalgamation.
69
Voting Rights. Neither the Company's Articles of Amalgamation nor its Bylaws
provide for the election or reelection of directors at staggered intervals. The
holders of Common Shares and Preference Shares have equal voting rights at
meetings of the Company's shareholders.
Rights to Share in the Company's Profits. See "Dividend Rights" above.
Rights to Share in Any Surplus in the Event of Liquidation. Under the Company's
Articles of Amalgamation, upon the dissolution, winding up or liquidation of the
Company, holders of Preference Shares are entitled to receive a sum equivalent
to the amount paid for the Preference Shares prior to any distribution to the
holders of Common Shares or shares ranking junior to the Preference Shares.
Holders of Preference Shares are not entitled to share in any further
distribution of the assets or property of the Company. Holders of the Common
Shares are entitled to receive the remaining property of the Company upon
dissolution.
Redemption Provisions. Under the Company's Articles of Amalgamation, the
Company, when redeeming shares:
. Shall not redeem Preference Shares prior to the expiration of five
years from the issuance date without the prior consent of the holder
of the Preference Shares to be redeemed;
. Shall, at least thirty days prior to the redemption date, mail a
notice to all registered holders of Preference Shares stating its
intention to redeem such shares. The notice shall set forth the
redemption price, the date on which redemption is to occur, and the
number of the holder's shares that are to be redeemed. If only a
portion of the holder's shares is to be redeemed, the Company shall
issue such holder a new certificate for the balance of such shares.
After the redemption date, the holders shall not be entitled to
exercise any rights of shareholders unless the Company failed to pay
the redemption price;
. May at any time, with the consent of the holder, purchase for
cancellation all or part of the Preference Shares; and
. May purchase any of its issued Common Shares subject to the provisions
of the Ontario Business Corporations Act.
Sinking Fund Provisions. Neither the Company's Articles of Amalgamation nor its
Bylaws contain sinking fund provisions.
Liability to Further Capital Calls by the Company. Neither the Company's
Articles of Amalgamation nor its Bylaws contain provisions allowing the Company
to make further capital calls with respect to any shareholder of the Company.
Discriminatory Provisions Based on Substantial Ownership. Neither the Company's
Articles of Amalgamation nor its Bylaws contain provisions which discriminate
against any existing or prospective holders of securities as a result of such
shareholder owning a substantial number of shares.
Miscellaneous Provisions. Under the Company's Articles of Amalgamation, holders
of Preference Shares shall not be entitled to sell, assign, transfer or dispose
of Preference Shares without the previous, express consent of the directors and
the prior written consent of the Ontario Securities Commission. In the event the
Company were to pay dividends on the issued and outstanding shares, the dividend
must be claimed within six years of the payment date and payment shall be
forfeited and shall revert to the Company if not so claimed.
70
Neither the Articles of Amalgamation nor the Bylaws of the Company address the
process by which the rights of holders of stock may be changed. The general
provisions of the Ontario Business Corporations Act apply to this process, and
require shareholder meetings and independent voting for such changes.
Annual general meetings of the Company's shareholders are held on such day as is
determined by resolution of the directors. (Bylaws, Paragraph 6.1). Special
meetings of the Company's shareholders may be convened by unanimous shareholder
agreements or by order of the board of directors. (Bylaws, Paragraph 6.2).
Shareholders of record must be given notice of such special meeting not less
than 21 days nor more than 50 days before the date of the meeting. Notices of
meetings of shareholders, other than for consideration of the financial
statements and auditors reports, election of directors and reappointment of
incumbent auditors, must state the nature of the business to be transacted in
detail and must include the text of any special resolution or bylaw to be
submitted to the meeting. (Bylaws, Paragraph 6.3). The Company's board of
directors is permitted to fix a record date for any meeting of the shareholders
that is between 21 and 50 days prior to such meeting. (Bylaws, Paragraph 6.5).
However, as a result of Ontario securities laws applicable to the Company, the
record date must be no fewer than 30 and no more than 60 days prior to the
meeting date. The only persons entitled to admission at a meeting of the
shareholders are shareholders entitled to vote, the Company's directors, the
Company's auditors, and others entitled by law, by invitation of the chairman of
the meeting, or by consent of the meeting. (Bylaws, Paragraph 6.7).
Neither the Articles of Amalgamation nor the Bylaws of the Company discuss
limitations on the rights to own securities or exercise voting rights thereon.
There is no provision of the Company's Articles of Amalgamation or Bylaws that
would delay, defer or prevent a change in control of the Company, and that would
operate only with respect to a merger, acquisition, or corporate restructuring
involving the Company (or any of its subsidiaries). The Company's Bylaws do not
contain a provision indicating the ownership threshold above which shareholder
ownership must be disclosed. With respect to the matters discussed in this Item
10B, the law applicable to the Company is not significantly different from
United States law. Neither the Articles of Amalgamation nor Bylaws contain
provisions governing changes in capital that are more stringent than the
conditions required by law.
C. MATERIAL CONTRACTS
The following table summarizes each material contract, other than contracts
entered into in the ordinary course of business, to which the Company or any
member of the Company's group is a party, for the two years immediately
preceding the publication of this Annual Report:
71
- -------------------------------------------------------------------------------------------------------------------
Date Parties Type Terms and Conditions Consideration
- -------------------------------------------------------------------------------------------------------------------
May 31, 2002 Company and Philip Share Purchase The Company purchased the The purchase price for
Walter White, Rose Agreement shares of Filtran Inc., Filtran the shares of Filtran
Mary White, Coranne Limited, Canadian Dataplex Inc., Filtran Limited,
Adele White, Jane Ltd., and Tactron Canadian Dataplex Ltd.,
Murphy, Coreen Communications (Canada) Limited and Tactron
White, Derek White, from their shareholders. Communications (Canada)
Gillian Pershaw, Limited was $2,670,835
Brian Kenneth White, payable as follows:
Edna Grace $716,505 in cash and a
Trepannier, Filtran promissory note in the
Inc., Filtran principal amount of
Limited, Canadian $1,954,270.The
Dataplex Ltd., and promissory note bears
Tactron interest at the rate of
Communications 5% per annum, calculated
(Canada) Limited and payable
semi-annually.One-half
of the principal is due
and payable on May 31,
2003 and the balance
becomes due and payable
on May 31, 2004.
- -------------------------------------------------------------------------------------------------------------------
May 31, 2002 Company and Philip Non-Competition Philip Walter White, a The Company paid Philip
Walter White and principal of the Filtran Inc., Walter White $325,712 as
Confidentiality Filtran Limited, Canadian consideration for the
Agreement Dataplex Ltd., and Tactron Non-Competition and
Communications (Canada) Limited confidentiality
Confidentiality agreed to Agreement
non-competition and Agreement
non-solicitation restrictions
for a term of five (5) years,
and permanent confidentiality
restrictions.
- -------------------------------------------------------------------------------------------------------------------
June 11, 2002 Company and Aton Subscription Aton Ventures Fund Ltd. Aton Ventures Fund Ltd.
Ventures Fund Ltd. Agreement purchased from the Company in a paid $235,000 in cash
private placement 100,000 units for the units.
for $2.35 per unit, each unit
consisting of one share of
common stock of the Company and
one warrant to purchase one
share of common stock of the
Company, exercisable at $3.00
per share.
- -------------------------------------------------------------------------------------------------------------------
72
- -------------------------------------------------------------------------------------------------------------------
June 11, 2002 Company and Aton Subscription Aton Select Fund Ltd. purchased Aton Select Fund Ltd.
Select Fund Ltd. Agreement from the Company in a private paid $235,000 in cash
placement 100,000 units for for the units
$2.35 per unit, each unit
consisting of one share of
common stock of the Company and
one warrant to purchase one
share of common stock of the
Company, exercisable at $3.00
per share.
- -------------------------------------------------------------------------------------------------------------------
June 14, 2002 Company and Syrah Subscription Syrah Invest Corp. purchased Syrah Invest Corp. paid
Invest Corp. Agreement from the Company in a private $705,000 in cash for the
placement 300,000 units for units.
$2.35 per unit, each unit
consisting of one share of
common stock of the Company and
one warrant to purchase one
share of common stock of the
Company, exercisable at $3.00
per share.
- -------------------------------------------------------------------------------------------------------------------
January 16, The Company and Subscription Asian Capital Limited purchased Asian Capital Limited
2003 Asian Capital Agreement from the Company in a private paid $200,000 for the
Limited placement 500,000 units for units.
$0.40 per unit, each unit
consisting of one share of
common stock of the Company and
one-half of a warrant to
purchase one share of common
stock the Company, exercisable
at $0.60 per share.
- -------------------------------------------------------------------------------------------------------------------
January 16, The Company and Dart Subscription Dart Management Corporation Dart Management
2003 Management Agreement purchased from the Company in a Corporation paid
Corporation private placement 600,000 units $240,000 for the units.
for $0.40 per unit, each unit
consisting of one share of
common stock of the Company and
one-half of a warrant to
purchase one share of common
stock the Company, exercisable
at $0.60 per share.
- -------------------------------------------------------------------------------------------------------------------
73
- -------------------------------------------------------------------------------------------------------------------
January 20, The Company and Subscription Stick Capital Inc. purchased Stick Capital Inc. paid
2003 Stick Capital Inc. Agreement from the Company in a private $50,000 for the units.
placement 125,000 units for
$0.40 per unit, each unit
consisting of one share of
common stock of the Company and
one-half of a warrant to
purchase one share of common
stock the Company, exercisable
at $0.60 per share.
- -------------------------------------------------------------------------------------------------------------------
January 27, The Company and Subscription Kostas Papakostas purchased Kostas Papakostas paid
2003 Kostas Papakostas Agreement from the Company in a private $20,000 for the units.
placement 50,000 units for
$0.40 per unit, each unit
consisting of one share of
common stock of the Company and
one-half of a warrant to
purchase one share of common
stock the Company, exercisable
at $0.60 per share.
- -------------------------------------------------------------------------------------------------------------------
January 31, The Company and Subscription Eusibio Mario Lopez Perez Eusibio Mario Lopez
2003 Eusibio Mario Lopez Agreement purchased from the Company in a Perez paid $50,000 for
Perez private placement 125,000 units the units.
for $0.40 per unit, each unit
consisting of one share of
common stock of the Company and
one-half of a warrant to
purchase one share of common
stock the Company, exercisable
at $0.60 per share.
- -------------------------------------------------------------------------------------------------------------------
February 3, The Company and Subscription Thomas Christen purchased from Thomas Christen paid
2003 Thomas Christen Agreement the Company in a private $260,000 for the units.
placement 650,000 units for
$0.40 per unit, each unit
consisting of one share of
common stock of the Company and
one-half of a warrant to
purchase one share of common
stock the Company, exercisable
at $0.60 per share.
- -------------------------------------------------------------------------------------------------------------------
74
- -------------------------------------------------------------------------------------------------------------------
February 3, The Company and Ming Subscription Ming Capital Enterprises Inc. Ming Capital Enterprises
2003 Capital Enterprises Agreement purchased from the Company in a Inc. paid $260,000 for
Inc. private placement 650,000 units the units.
for $0.40 per unit, each unit
consisting of one share of
common stock of the Company and
one-half of a warrant to
purchase one share of common
stock the Company, exercisable
at $0.60 per share.
- -------------------------------------------------------------------------------------------------------------------
February 3, The Company and Subscription Partner Marketing AG purchased Partner Marketing AG
2003 Partner Marketing Agreement from the Company in a private paid $200,000 for the
AG placement 500,000 units for units.
$0.40 per unit, each unit
consisting of one share of
common stock of the Company and
one-half of a warrant to
purchase one share of common
stock the Company, exercisable
at $0.60 per share.
- -------------------------------------------------------------------------------------------------------------------
February 3, The Company and Subscription Seloz Gestion & Finance SA, Seloz Gestion & Finance
2003 Seloz Gestion & Agreement Switzerland purchased from the SA, Switzerland paid
Finance SA, Company in a private placement $180,000 for the units.
Switzerland 450,000 units for $0.40 per
unit, each unit consisting of
one share of common stock of
the Company and one-half of a
warrant to purchase one share
of common stock the Company,
exercisable at $0.60 per share.
- -------------------------------------------------------------------------------------------------------------------
February 3, The Company and Subscription Shangri-La Investments Inc. Shangri-La Investments,
2003 Shangri-La Agreement purchased from the Company in a Inc. paid $260,000 for
Investments Inc. private placement 650,000 units the units.
for $0.40 per unit, each unit
consisting of one share of
common stock of the Company and
one-half of a warrant to
purchase one share of common
stock the Company, exercisable
at $0.60 per share.
- -------------------------------------------------------------------------------------------------------------------
February 3, The Company and Subscription Syrah Invest Corp. Syrah Invest Corp.
- -------------------------------------------------------------------------------------------------------------------
75
- -------------------------------------------------------------------------------------------------------------------
2003 Syrah Invest Corp. Agreement purchased from the Company in a paid $180,000 for the
private placement 450,000 units units.
for $0.40 per unit, each unit
consisting of one share of
common stock of the Company and
one-half of a warrant to
purchase one share of common
stock the Company, exercisable
at $0.60 per share.
- -------------------------------------------------------------------------------------------------------------------
February 3, The Company and Subscription Terraco Holding S.A. purchased Terraco Holding S.A.
2003 Terraco Holding S.A. Agreement from the Company in a private paid $200,000 for the
placement 500,000 units for units.
$0.40 per unit, each unit
consisting of one share of
common stock of the Company and
one-half of a warrant to
purchase one share of common
stock the Company, exercisable
at $0.60 per share.
- -------------------------------------------------------------------------------------------------------------------
February 3, The Company and Hans Subscription Hans Schopper purchased from Hans Schopper paid
2003 Schopper Agreement the Company in a private $180,000 for the units.
placement 450,000 units for
$0.40 per unit, each unit
consisting of one share of
common stock of the Company and
one-half of a warrant to
purchase one share of common
stock the Company, exercisable
at $0.60 per share.
- -------------------------------------------------------------------------------------------------------------------
February 3, The Company and Subscription Crystal Overseas Trading Inc. Crystal Overseas Trading
2003 Crystal Overseas Agreement purchased from the Company in a Inc. paid $200,000 for
Trading Inc. private placement 500,000 units the units.
for $0.40 per unit, each unit
consisting of one share of
common stock of the Company and
one-half of a warrant to
purchase one share of common
stock the Company, exercisable
at $0.60 per share.
- -------------------------------------------------------------------------------------------------------------------
76
- -------------------------------------------------------------------------------------------------------------------
February 3, The Company and Bank Subscription Bank Sal. Oppenheim jr. & Cie Bank Sal. Oppenheim jr.
2003 Sal. Oppenheim jr. & Agreement (Schweiz) AG purchased from the & Cie (Schweiz) AG paid
Cie (Schweiz) AG Company in a private placement $80,000 for the units.
200,000 units for $0.40 per
unit, each unit consisting of
one share of common stock of
the Company and one-half of a
warrant to purchase one share
of common stock the Company,
exercisable at $0.60 per share.
- -------------------------------------------------------------------------------------------------------------------
February 6, The Company and Les Subscription Les Immeubles Desco Inc. Les Immeubles Desco Inc.
2003 Immeubles Desco Inc. Agreement purchased from the Company in a paid $50,000 for the
private placement 125,000 units units.
for $0.40 per unit, each unit
consisting of one share of
common stock of the Company and
one-half of a warrant to
purchase one share of common
stock the Company, exercisable
at $0.60 per share.
- -------------------------------------------------------------------------------------------------------------------
February 6, The Company and Subscription 1530403 Ontario Inc. purchased 1530403 Ontario Inc.
2003 1530403 Ontario Inc. Agreement from the Company in a private paid $120,000 for the
placement 300,000 units for units.
$0.40 per unit, each unit
consisting of one share of
common stock of the Company and
one-half of a warrant to
purchase one share of common
stock the Company, exercisable
at $0.60 per share.
- -------------------------------------------------------------------------------------------------------------------
77
- -------------------------------------------------------------------------------------------------------------------
February 6, The Company and Subscription 1057111 Ontario Ltd. purchased 1057111 Ontario Ltd.
2003 1057111 Ontario Ltd. Agreement from the Company in a private paid $40,000 for the
placement 100,000 units for units.
$0.40 per unit, each unit
consisting of one share of
common stock of the Company and
one-half of a warrant to
purchase one share of common
stock the Company, exercisable
at $0.60 per share.
- -------------------------------------------------------------------------------------------------------------------
February 6, The Company, TM Asset Purchase Asset Purchase Agreement $1,500,000 in cash, a
2003 Systems, Inc. and TM Agreement pursuant to which API promissory note for
Systems II, Inc. Electronics Group Inc.'s $1,475,651 bearing
wholly-owned subsidiary, TM interest at the annual
Systems II, Inc. purchased the rate of 1.65% plus
assets of TM Systems, Inc. possible earn-out
amounts based on sales
and deliveries for the
two-year period
following the date of
the transaction.
- -------------------------------------------------------------------------------------------------------------------
February 6, The Company and Employment Letter of Employment confirming $100,000 annual salary
2003 Irwin Shuldman Letter Irwin Shuldman's employment as
an executive officer with TM
Systems II, Inc. for a period
of one year.
- -------------------------------------------------------------------------------------------------------------------
February 6, The Company and Employment Letter of Employment confirming $100,000 annual salary
2003 Walter Weiner Letter Walter Weiner's employment as
an executive officer with TM
Systems II, Inc. for a period
of one year.
- -------------------------------------------------------------------------------------------------------------------
June 1, 2003 The Company and Management Agreement whereby Green Diamond $170,000 annual fees
Can-Med Technology Services Corp. will provide rental of
(d/b/a Green Diamond Agreement premises, office equipment and
Corp.) supplies, telecommunications,
personnel and management
services.
- -------------------------------------------------------------------------------------------------------------------
D. EXCHANGE CONTROLS
There are no governmental laws, decrees or regulations in Canada that restrict
the export or import of capital, or affect the remittance of dividends, interest
or other payments to a non-resident holder of Common Stock of the Company, other
than withholding tax requirements (see "Item 7 -- Taxation").
78
Except as provided in the Investment Canada Act discussed below, there are no
limitations imposed under the laws of Canada, the Province of Ontario, or by the
constituent documents of the Company on the right of a non-resident to hold or
vote the Common Stock of the Company.
The Investment Canada Act (the "ICA"), which became effective on June 30, 1985,
regulates the acquisition by non-Canadians of control of a Canadian business
enterprise. In effect, the ICA requires review by Investment Canada, the agency
which administers the ICA, and approval by the Canadian government, in the case
of an acquisition of control of a Canadian business by a non-Canadian where: (i)
in the case of a direct acquisition (for example, through a share purchase or
asset purchase), the assets of the business are Canadian $5 million or more in
value; or (ii) in the case of an indirect acquisition (for example, the
acquisition of the foreign parent of the Canadian business) where the Canadian
business has assets of Canadian $5 million or more in value or if the Canadian
business represents more than 50% of the assets of the original group and the
Canadian business has assets of $5 million or more in value. Review and approval
are also required for the acquisition or establishment of a new business in
areas concerning "Canada's cultural heritage or national identity" such as book
publishing, film production and distribution, television and radio production
and distribution of music, and the oil and natural gas industry, regardless of
the size of the investment.
As applied to an investment in the Company, three methods of acquiring control
of a Canadian business would be regulated by the ICA: (i) the acquisition of all
or substantially all of the assets used in carrying on the Canadian business;
(ii) the acquisition, directly or indirectly, of voting shares of a Canadian
corporation carrying on the Canadian business; or (iii) the acquisition of
voting shares of an entity which controls, directly or indirectly, another
entity carrying on a Canadian business. An acquisition of a majority of the
voting interests of an entity, including a corporation, is deemed to be an
acquisition of control under the ICA. An acquisition of less than one-third of
the voting shares of a corporation is deemed not to be an acquisition of
control. An acquisition of less than a majority, but one-third or more, of the
voting shares of a corporation is presumed to be an acquisition of control
unless it can be established that the acquisition the corporation is not, in
fact, controlled by the acquirer through the ownership of voting shares. For
partnerships, trusts, joint ventures or other unincorporated entities, an
acquisition of less than a majority of the voting interests is deemed not to be
an acquisition of control.
In 1988, the ICA was amended, pursuant to the Free Trade Agreement dated January
2, 1988 between Canada and the United States, to relax the restrictions of the
ICA. As a result of these amendments, except where the Canadian business is in
the cultural, oil and gas, uranium, financial services or transportation
sectors, the threshold for direct acquisition of control by US investors and
other foreign investors acquiring control of a Canadian business from US
investors has been raised from Canadian $5 million to Canadian $150 million of
gross assets, and indirect acquisitions are not reviewable.
In addition to the foregoing, the ICA requires that all other acquisitions of
control of Canadian businesses by non-Canadians are subject to formal
notification to the Canadian government. These provisions require a foreign
investor to give notice in the required form, which notices are for information,
as opposed to review, purposes.
E. TAXATION
Certain Canadian Federal Income Tax Consequences
Management of the Company has been advised by its Canadian legal counsel that
the following general summary fairly describes the principal Canadian federal
income tax consequences applicable to a holder
79
of Common Shares of the Company who is a resident of the United States and who
is not a resident of Canada and who does not use or hold, and is not deemed to
use or hold, his or her Common Shares of the Company in connection with carrying
on a business in Canada (a "non-resident shareholder").
This summary is based upon the current provisions of the Income Tax Act (Canada)
(the "ITA"), the regulations thereunder (the "Regulations"), the current
publicly announced administration and assessing policies of the Canada Customs
and Revenue Agency, and all specific proposals (the "Tax Proposals") to amend
the ITA and Regulations announced by the Minister of Finance (Canada) prior to
the date hereof. This description is not exhaustive of all possible Canadian
federal income tax consequences and, except for the Tax Proposals, does not take
into account or anticipate any changes in law, whether by legislative,
governmental or judicial action, nor does it take into account provincial or
foreign tax considerations which may differ significantly from those discussed
herein. The following discussion is for general information only and is not
intended to be, nor should it be construed to be, legal or tax advice to any
holder of Common Shares of the Company, and no opinion or representation with
respect to the Canadian Federal Income Tax consequences to any such holder or
prospective holder is made. Accordingly, holders and prospective holders of
Common Shares of the Company should consult with their own tax advisors about
the federal, provincial and foreign tax consequences of purchasing, owning and
disposing of Common Shares of the Company.
Dividends
Dividends paid on the Common Shares of the Company to a non-resident holder will
be subject to withholding tax under the ITA. The Canada-US. Income Tax
Convention (1980) (the "Treaty") provides that the normal 25% withholding tax
rate is reduced to 15% on dividends paid on shares of a corporation resident in
Canada (such as the Company) to residents of the United States, and also
provides for a further reduction of this rate to 5% where the beneficial owner
of the dividends is a corporation which is a resident of the United States which
owns at least 10% of the voting shares of the corporation paying the dividend.
Capital Gains
A non-resident of Canada is subject to tax under the ITA in respect of a capital
gain realized upon the disposition of a share of a corporation if the shares are
considered to be "taxable Canadian property" of the holder within the meaning of
the ITA and no relief is afforded under any applicable tax treaty. For purposes
of the ITA, the Common Shares of the Company will be taxable Canadian property
to a non-resident holder unless the Common Shares are listed on a prescribed
stock exchange. The Common Shares are not listed on a prescribed stock exchange.
If the common shares become listed on the NASDAQ small cap market, the common
shares will be listed on a prescribed stock exchange.
In the case of a non-resident holder to whom Common Shares of the Company
represent taxable Canadian property and who is a resident of the United States
and not a former resident of Canada, no Canadian taxes will be payable on a
capital gain realized on such shares by reason of the Treaty unless the value of
such shares is derived principally from real property situated in Canada within
the meaning of the Treaty.
Certain United States Federal Income Tax Consequences
The following is a general discussion of certain possible United States federal
income tax consequences, under current law, generally applicable to a US Holder
(as defined below) of Common Shares of the Company. This discussion does not
address all potentially relevant federal income tax matters and does
80
not address consequences peculiar to persons subject to special provisions of
federal income tax law, such as those described below as excluded from the
definition of a US Holder. In addition, this discussion does not cover any
state, local or foreign tax consequences (See "Certain Canadian Federal Income
Tax Consequences" above).
The following discussion is based upon the sections of the Internal Revenue Code
of 1986, as amended (the "Code"), Treasury Regulations, published Internal
Revenue Service ("IRS") rulings, published administrative positions of the IRS
and court decisions that are currently applicable, any or all of which could be
materially and adversely changed, possibly on a retroactive basis, at any time.
The following discussion is for general information only and it is not intended
to be, nor should it be construed to be, legal or tax advice to any holder or
prospective holder of Common Shares of the Company, and no opinion or
representation with respect to the United States federal income tax consequences
to any such holder or prospective holder is made. Accordingly, holders and
prospective holders of Common Shares of the Company should consult their own tax
advisors about the federal, state, local, and foreign tax consequences of
purchasing, owning and disposing of Common Shares of the Company.
US Holders
As used herein, a "US Holder" includes a holder of Common Shares of the Company
who is a citizen or legal resident of the United States, a corporation created
or organized in or under the laws of the United States or of any political
subdivision thereof and any other person or entity whose ownership of Common
Shares of the Company is effectively connected with the conduct of a trade or
business in the United States. A US Holder does not include persons subject to
special provisions of federal income tax law, such as tax-exempt organizations,
qualified retirement plans, financial institutions, insurance companies, real
estate investment trusts, regulated investment companies, broker-dealers,
non-resident alien individuals or foreign corporations whose ownership of Common
Shares of the Company is not effectively connected with the conduct of a trade
or business in the United States and shareholders who acquired their stock
through the exercise of employee stock options or otherwise as compensation.
Distributions on Common Shares of Company
US Holders receiving dividend distributions (including constructive dividends)
with respect to Common Shares of the Company are required to include in gross
income for United States federal income tax purposes the gross amount of such
distributions to the extent that the Company has current or accumulated earnings
and profits, without reduction for any Canadian income tax withheld from such
distributions. Such Canadian tax withheld may be credited, subject to certain
limitations, against the US Holder's United States federal income tax liability
or, alternatively, may be deducted in computing the US Holder's United States
federal taxable income by those who itemize deductions. (See more detailed
discussions at "Foreign Tax Credit" below). To the extent that distributions
exceed current or accumulated earnings and profits of the Company, they will be
treated first as a return of capital up to the US Holder's adjusted basis in the
Common Shares and thereafter as gain from the sale or exchange of the Common
Shares.
Preferential tax rates for long-term capital gains are applicable to a US Holder
that is an individual, estate or trust. There are no preferential tax rates for
long-term capital gains for a US holder that is a corporation.
Dividends paid on the Common Shares of the Company will not generally be
eligible for the dividends received-deduction provided to corporations receiving
dividends from certain United States corporations. Preferential tax rates for
dividends are applicable to a US Holder that is an individual, estate or trust.
81
A US Holder which is a corporation may, under certain circumstances, be entitled
to a 70% deduction of the United States source portion of dividends received
from the Company (unless the Company qualified as a "foreign personal holding
company" or a "passive foreign investment company," as defined below) if such US
Holder owns shares representing at least 10% of the voting power and value of
the Company. The availability of this deduction is subject to several complex
limitations, which are beyond the scope of this discussion.
Foreign Tax Credit
A US Holder who pays (or has withheld from distributions) Canadian income tax
with respect to the ownership of Common Shares of the Company may be entitled,
at the option of the US Holder, to either a deduction or a tax credit for such
foreign tax paid or withheld. Generally, it will be more advantageous to claim a
credit because a credit reduces United States federal income taxes on a dollar
for dollar basis, while a deduction merely reduces the taxpayer's income subject
to tax. This election is made on a year by year basis and applies to all foreign
taxes paid by (or withheld from) the US Holder during that year. There are
significant and complex limitations, which apply to the credit, among which is
the general limitation that the credit cannot exceed the proportionate share of
the US Holder's United States income tax liability that the US Holder's foreign
source income bears to his or her or its worldwide taxable income. In the
determination of the application of this limitation, the various items of income
deduction must be classified into foreign and domestic sources. Complex rules
govern this classification process. There are further limitations on the foreign
tax credit for certain types of income such as "passive income," "high
withholding tax interest," "financial services income," "shipping income," and
certain other classifications of income. The availability of the foreign tax
credit and the application of the limitations on the credit are fact specific
and holders and prospective holders of Common Shares of the Company should
consult their own tax advisors regarding their individual circumstances.
Disposition of Common Shares of Company
A US Holder will recognize gain or loss upon the sale of Common Shares of the
Company equal to the difference, if any, between the amount of cash plus the
fair market value of any property received, and the shareholder's tax basis in
the Common Shares of the Company. This gain or loss will be capital gain or loss
if the Common Shares are a capital asset in the hands of the US Holder. In such
event the gain or loss will be short-term or long-term capital gain or loss
depending upon whether the holding period of the US Holder is more than twelve
months. Gains and losses are netted and combined according to special rules in
arriving at the overall capital gain or loss for a particular tax year.
Deductions for net capital losses are subject to significant limitations. For US
Holders who are individuals, any unused portion of such net capital loss may be
carried over to be used in later tax years until such net capital loss is
thereby exhausted. For US Holders that are corporations (other than corporations
subject to Subchapter S of the Code), an unused net capital loss may be carried
back three years from the loss year and carried forward five years from the loss
year to be offset against capital gains until such net capital loss is thereby
exhausted.
Other Considerations
In the following circumstances, the above sections of this discussion may not
describe the United States federal income tax consequences resulting from the
holding and disposition of Common Shares of the Company:
82
Foreign Personal Holding Company. If at any time during a taxable year more than
50% of the total combined voting power or the total value of the Company's
outstanding shares is owned, actually or constructively, by five or fewer
individuals who are citizens or residents of the United States and 60% or more
of the Company's gross income for such year was derived from certain passive
sources (e.g. from dividends received from its subsidiaries), the Company would
be treated as a "foreign personal holding company." In that event, US Holders
that hold Common Shares of the Company would be required to include in gross
income for such year their allowable portions of such passive income to the
extent the Company does not actually distribute such income.
Foreign Investment Company. If 50% or more of the combined voting power or total
value of the Company's outstanding shares are held, actually or constructively,
by citizens or residents of the United States, United States domestic
partnerships or corporations, or estates or trusts other than foreign estates or
trusts (as defined by the Code Section 7701(a)(31)), and the Company is found to
be engaged primarily in the business of investing, reinvesting, or trading in
securities, commodities, or any interest therein, it is possible that the
Company might be treated as a "foreign investment company" as defined in Section
1246 of the Code, causing all or part of any gain realized by the US Holder
selling or exchanging Common Shares of the Company to be treated as ordinary
income rather than capital gain.
Passive Foreign Investment Company. For any taxable year of the Company, if at
least 75% of the Company's gross income is "Passive income" (as defined in the
Internal Revenue Code of 1986, as amended (the "Code"), or if at least 50% of
the Company's assets, by average fair market value, are assets that produce or
are held for the production of passive income, the Company will be a Passive
Foreign Investment Company ("PFIC"). There can be no assurance that the Company
will not be determined to be a PFIC in its current or future taxable years.
If the Company is a PFIC for any taxable year during which a U.S. Holder owns
any Common Stock, the U.S. Holder will be subject to special U.S. federal income
tax rules, set forth in Sections 1291 to 1297 of the Code, with respect to all
of such U.S. Holder's Common Stock. For example, gifts, exchanges pursuant to
corporate reorganizations and use of the Common Stock as security for a loan may
be treated as taxable dispositions, and a stepped-up basis upon the death of
such a U.S. Holder may not be available. Furthermore, in the absence of an
election by such U.S. Holder to treat the Company as a "qualified electing fund"
(the "QEF election"), as discussed below, the U.S. Holder would be required to
(i) report any gain on disposition of any Common Stock as ordinary income rather
than capital gain, (ii) to compute the tax liability on such gain and on certain
distributions as if the Items had been earned pro rata over the U.S. Holder's
holding period (or a certain portion thereof) for the Common Stock, and (iii)
would be subject to the highest ordinary income tax rate for each taxable year
of the U.S. Holder in which the Items were treated as having been earned. Such
U.S. Holder would also be liable for interest (which may be non-deductible by
certain U.S. Holders) on the foregoing tax liability as if such liability had
been due with respect to each such prior year.
If the Company is a PFIC for any taxable year during which a U.S. Holder owns
any Common Stock, the adverse taxation of disposition gains and certain
distributions may be avoided by any U.S. Holder who makes a QEF Election on or
before the due date (including extensions) for filing such U.S. Holder's tax
return for such taxable year. Such a U.S. Holder would be taxed on dividends and
capital gains as if the Company had never been a PFIC, but would also be taxed
on its pro-rata share of the Company's earnings and profits for the Company's
taxable year in which it was (or was treated as) a PFIC and which ends with or
within such U.S. Holder's taxable year, regardless of whether such amounts are
actually distributed by the Company. Should such an election be made (and if the
Company is a PFIC, U.S. Holders are strongly urged
83
to consider this special election), there are a number of specific rules and
requirements applicable thereto, and such an electing U.S. Holder is strongly
urged to consult his own tax advisor in that regard.
Controlled Foreign Corporation. If more than 50% of the voting power of all
classes of stock or the total value of the stock of the Company is owned,
directly or indirectly, by citizens or residents of the United States, United
States domestic partnerships and corporations or estates or trusts other than
foreign estates or trusts, each of whom own 10% or more of the total combined
voting power of all classes of stock of the Company or the total value of the
stock of the Company ("United States shareholder"), the Company could be treated
as a "controlled foreign corporation" under Subpart F of the Code. This
classification would result in many complex consequences including the required
inclusion into income by such United States shareholders of their pro rata
shares of "Subpart F income" (as specially defined by the Code) of the Company
and the Company's earnings invested in US property and previously excluded
Subpart F withdrawn from certain types of investments (as specifically defined
by the Code). In addition, under Section 1248 of the Code, gain from the sale or
exchange of Common Shares of the Company by a US person who is or was a United
States shareholder (as defined in the Code, a holder of Common Shares of the
Company who is or was a United States shareholder at any time during the five
year period ending with the sale or exchange) is treated as ordinary dividend
income to the extent of earnings and profits of the Company attributable to the
stock sold or exchanged. Because of the complexity of Subpart F, and because it
is not clear that Subpart F would apply to the holders of Common Shares of the
Company, a more detailed review of these rules is outside the scope of this
discussion.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
The documents concerning the Company which are referred to in this Annual Report
may be inspected at the Company's executive offices located at 505 University
Avenue, Suite 1400, Toronto, Ontario M5G 1X3.
The Company also files reports, including annual reports on Form 20-F, periodic
reports on Form 6-K and other information with the Securities and Exchange
Commission ("SEC") pursuant to the rules and regulations of the SEC that apply
to foreign private issuers. You may read and copy any materials filed with the
SEC at its Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. You also may access materials the Company
has filed with the SEC, which are publicly available through Edgar files, at the
SEC's website at www.sec.gov.
I. SUBSIDIARY INFORMATION
A list of subsidiaries is set forth in Item 4C, "Organizational Structure."
84
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable. The Company is a small business issuer, in accordance with
Section 12(b)-2 of the Act.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
There are no reportable events for Item 13.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures that is
designed to provide reasonable assurance that information, which is required to
be disclosed by the Company in the reports that it files or submits under the
Securities and Exchange Act of 1934, as amended, is accumulated and communicated
to management in a timely manner. The Company's Chief Executive Officer and
Chief Financial Officer have evaluated this system of disclosure controls and
procedures as of the end of the period covered by this annual report, and
believe that the system is operating effectively to ensure appropriate
disclosure. There have been no changes in the Company's internal control over
financial reporting during the most recent fiscal year that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Not required.
ITEM 16B. CODE OF ETHICS
Not required.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(a) Audit Fees
The aggregate fees billed for professional services rendered by BDO
Dunwoody LLP, the principal accountant for the Company, for the audit of the
Company's annual financial statements and services normally provided by such
accountants in connection with the Company's statutory and regulatory filings
for the Company's fiscal year ended May 31, 2003, were Cdn $116,600 (2002 - Cdn
$98,821).
85
(b) Audit-Related Fees
There were no additional fees billed for assurance and related services by
BDO Dunwoody LLP, the principal accountant for the Company, that are reasonably
related to the performance of the audit or review of the Company's financial
statements and are not reported above, for the Company's fiscal year ended May
31, 2003.
(c) Tax Fees
The aggregate fees billed for professional services rendered by BDO
Dunwoody LLP, the principal accountant for the Company for tax compliance, tax
advice and tax planning for the Company's fiscal year ended May 31, 2003, were
Cdn $5,500 for tax compliance for the 2002 fiscal year (2002 - Cdn $1,800 for
tax compliance for the 2001 fiscal year). Additional fees billed by BDO Dunwoody
LLP for the Company's fiscal year ended May 31, 2003 for services rendered were
Cdn $14,292. Such services included special tax service rendered in connection
with the refiling of Ontario corporate tax returns for the years 1998, 1999 and
2000.
(d) All Other Fees
The aggregate fees billed for products and services rendered by BDO
Dunwoody LLP, the principal accountant for the Company, other than the fees
reported in this Item 16C above, for the Company's fiscal year ended May 31,
2002, were Cdn $10,880 for assisting management with the accounting for the
reverse take-over transaction by API and for the assistance in the preparation
of the second quarter financial statements, and Cdn $18,518 for due diligence
services rendered in connection with the Filtran Group acquisition.
(e) Audit Committee's Pre-Approval Policies
The audit committee approves the engagement terms for all audit and
non-audit services to be provided by the Company's accountants before such
services are provided to the Company or any of its subsidiaries.
The audit committee approved one hundred percent (100%) of the services
provided to the Company and its subsidiaries described in Items 16C (b) through
(d) above.
(f) Auditors Use of Non-Permanent Employees
None of the hours expended by BDO Dunwoody LLP on its engagement to audit
the Company's financial statements for the fiscal year ended May 31, 2003, were
performed by persons other than fulltime permanent employees of BDO Dunwoody
LLP.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
86
PART III
--------
ITEM 17. FINANCIAL STATEMENTS
As noted in Note 1(a) to the consolidated financial statements of the Company
included with this Part III, Item 17 of the Annual Report, comparative figures
for API for the year ended May 31, 2001 have been presented because API is the
deemed acquiring company in a reverse take-over of the Company by API effective
August 31, 2001.
The financial statements, which follow were prepared in accordance with Canadian
Generally Accepted Accounting Principles ("Cdn GAAP") and are expressed in US
dollars. A reconciliation from Cdn GAAP to US GAAP is disclosed in Note 17 to
the financial statements. The financial statements include the following:
(i) Auditors' Report of BDO Dunwoody LLP on the consolidated financial
statements for the years ended May 31, 2003 and May 31, 2002.
(ii) Auditors Report of Perry Colletti, CPA on the financial statements
for the year ended May 31, 2001.
(iii) Consolidated Balance Sheet at May 31, 2003 and 2002.
(iv) Consolidated Statements of Operations and Deficit for the years ended
May 31, 2003, 2002, and 2001.
(v) Statements of Cash Flows for the years ended May 31, 2003, 2002, and
2001.
(vi) Summary of Significant Accounting Policies
(vii) Notes to Consolidated Financial Statements
87
================================================================================
Auditors' Report
- --------------------------------------------------------------------------------
To the Directors of
API Electronics Group Inc.
We have audited the consolidated balance sheets of API Electronics Group Inc. as
at May 31, 2003 and 2002 and the consolidated statements of operations and
deficit and cash flows for each of the two years in the period ended May 31,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
applicable in Canada and the United States of America. Those standards require
that we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at May 31, 2003 and 2002 and
the results of its operations and its cash flows for each of the two years in
the period ended May 31, 2003 in accordance with accounting principles generally
accepted in Canada.
(signed) BDO Dunwoody LLP
Chartered Accountants
Toronto, Ontario
July 25, 2003
88
================================================================================
Auditor's Report
- --------------------------------------------------------------------------------
To the Directors of
API Electronics Group Inc.
I have audited the statements of operations and deficit and cash flows of API
Electronics Group Inc. for the year ended May 31, 2001. These financial
statements are the responsibility of the Company's management. My responsibility
is to express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards
applicable in the United States of America. Those standards require that I plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.
In my opinion, these financial statements present fairly, in all material
respects, the results of its operations and its cash flows for the year ended
May 31, 2001 in accordance with accounting principles generally accepted in
Canada.
(signed) Perry Colletti, CPA
Certified Public Accountant
Farmingdale, New York
July 14, 2001
89
================================================================================
API Electronics Group Inc.
Consolidated Balance Sheets
(Expressed in US Dollars)
May 31 2003 2002
- -------------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents $ 1,561,199 $ 1,408,637
Marketable securities (Note 2) 431,168 2,429
Accounts receivable 1,619,487 1,073,058
Unbilled revenue 324,078 --
Inventories (Note 3) 2,931,924 1,852,483
Prepaid expenses 61,988 42,929
--------------- ---------------
6,929,844 4,379,536
Capital assets (Note 4) 3,275,979 2,867,382
Goodwill 918,529 962,529
Intangible assets (Note 5) 2,370,869 325,712
--------------- ---------------
$ 13,495,221 $ 8,535,159
===============================================================================
Liabilities and Shareholders' Equity
Current
Bank indebtedness (Note 6) $ -- $ 284,488
Accounts payable 1,265,458 874,269
Deferred revenue 661,406 --
Future income tax liability (Note 8) 108,000 --
Current portion of long-term debt
(Note 7) 2,699,458 1,072,706
--------------- ---------------
4,734,322 2,231,463
Future income tax liability (Note 8) 248,000 530,000
Long term debt (Note 7) 232,229 1,299,125
--------------- ---------------
5,214,551 4,060,588
--------------- ---------------
Shareholders' equity
Share capital (Note 9) 8,744,507 4,642,007
Paid in capital 770,790 770,790
Cumulative foreign exchange translation
adjustment 252,614 --
Deficit (1,487,241) (938,226)
--------------- ---------------
8,280,670 4,474,571
--------------- ---------------
$ 13,495,221 $ 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.
90
================================================================================
API Electronics Group Inc.
Consolidated Statements of Operations and Deficit
(Expressed in US Dollars)
For the years ended May 31 2003 2002 2001
- -------------------------------------------------------------------------------
Sales $ 8,253,541 $ 2,903,120 $ 2,653,040
Cost of sales 6,325,540 2,255,841 1,930,582
---------------------------------------------
Gross profit 1,928,001 647,279 722,458
---------------------------------------------
Expenses
Business development 355,042 501,583 --
Selling 666,138 339,048 246,844
General and administrative 1,478,776 685,747 300,598
---------------------------------------------
2,499,956 1,526,378 547,442
---------------------------------------------
Operating income (loss) (571,955) (879,099) 175,016
---------------------------------------------
Other (income) expenses
Other income (89,316) (75,565) (13,719)
Interest expense 107,789 37,467 86,342
---------------------------------------------
18,473 (38,098) 72,623
---------------------------------------------
Income (loss) before income
taxes (590,428) (841,001) 102,393
Income taxes (Note 8) (41,413) 16,642 292
---------------------------------------------
Net income (loss) for the year (549,015) (857,643) 102,101
Deficit, beginning of year (938,226) (80,583) (182,684)
---------------------------------------------
Deficit, end of year $ (1,487,241) $ (938,226) $ (80,583)
===============================================================================
Earnings (loss) per share -
basic (Note 13) $ (0.03) $ (0.08) $ 0.02
===============================================================================
The accompanying summary of significant accounting policies and notes are
an integral part of these financial statements.
91
================================================================================
API Electronics Group Inc.
Statements of Cash Flows
(Expressed in US Dollars)
For the years ended May 31 2003 2002 2001
- ----------------------------------------------------------------------------------------------
Cash was provided by (used in)
Operating activities
Net income (loss) for the year $ (549,015) $ (857,643) $ 102,101
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Amortization 737,448 150,138 120,132
Capitalized interest -- -- 38,673
Future income tax (70,640) -- --
Changes in non-cash working capital
balances (Note 10(a)) (77,662) (103,543) (317,641)
---------------------------------------------
40,131 (811,048) (56,735)
---------------------------------------------
Investing activities
Purchase of capital assets (725,789) (257,217) (187,850)
Business acquisition, net of cash acquired (1,521,958) (955,374) --
Marketable securities (428,739) -- --
---------------------------------------------
(2,676,486) (1,212,591) (187,850)
---------------------------------------------
Financing activities
Cash acquired through reverse take-over,
net of acquisition costs 1,178,376 --
Issue of share capital 4,102,500 2,296,212 --
Bank indebtedness repayments (284,488) (112,200) (5,083)
Repayment of long term debt -- (58,575) (12,422)
Increase (decrease) in long term debt (1,046,394) 87,390 222,000
---------------------------------------------
2,771,618 3,391,203 204,495
---------------------------------------------
Foreign exchange gain on cash held in
foreign currency 17,299 -- --
---------------------------------------------
Net increase (decrease) in cash for the year 152,562 1,367,564 (40,090)
Cash, beginning of year 1,408,637 41,073 81,163
---------------------------------------------
Cash, end of year $ 1,561,199 $ 1,408,637 $ 41,073
==============================================================================================
The accompanying summary of significant accounting policies and notes are
an integral part of these financial statements.
92
================================================================================
API Electronics Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
Nature of Business
API Electronics Group Inc.'s ("the Company") business focus is the manufacture
and design of high reliability semiconductor and microelectronics circuits for
military, aerospace and commercial applications. Through recent acquisitions,
the Company has expanded its manufacturing and design of electronic components
to include filters, transformers, inductors, and custom power supplies for land
and amphibious combat systems, mission critical information systems and
technologies, shipbuilding and marine systems, and business aviation.
Business Acquisition and Name Change
On August 31, 2001, Investorlinks.com Inc. a public company incorporated under
the laws of the Province of Ontario, and API Electronics Inc. ("API
Electronics"), a private company incorporated under the laws of the State of New
York, completed the business combination referred to in Note 1(a) to the
financial statements. Pursuant to Articles of Amendment dated September 10,
2001, the Company changed its name from Investorlinks.com Inc. to API
Electronics Group Inc. As stated in Note 1(a), the business combination has been
accounted for as a reverse take-over of the Company by API Electronics.
On May 31, 2002 the Company completed the acquisition of all the outstanding
common shares of Filtran Inc. ("Filtran USA"), a private company incorporated
under the laws of the State of New York; Filtran Limited ("Filtran Canada"), a
private company incorporated under the laws of Ontario; Canadian Dataplex
Limited ("CDL"), a private company incorporated under the laws of Canada; and
Tactron Communications (Canada) Limited ("TCCL"), a private company incorporated
under the laws of Ontario. Filtran USA, Filtran Canada, CDL and 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 Systems 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.
93
================================================================================
API Electronics Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
Principles of Consolidation
The consolidated financial statements for the year ended May 31, 2003 and 2002
include the accounts of the Company (the legal parent), together with its wholly
owned subsidiaries, API Electronics, TM II and the Filtran Group. The financial
statements for the year ended May 31, 2001 are the accounts of API Electronics
(the legal subsidiary).
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
Website development 3 years
94
================================================================================
API Electronics Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
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. 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 at May 31, 2003.
Prior to 2002, goodwill was amortized on a straight-line basis over 5 years.
Intangible Assets
Intangible assets which have a finite life are amortized 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 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.
95
================================================================================
API Electronics Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
Accounting Estimates
The preparation of these consolidated financial statements in conformity with
Canadian generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and reported amounts of revenues and
expenses during the reporting periods. By their nature, these estimates are
subject to uncertainty and the effect on the consolidated financial statements
of changes in such estimates in future periods could be material.
Advertising Costs
The Company's policy is to expense advertising costs as incurred. Advertising
expenses included in selling expenses is $46,242 (2002 - $14,535; 2001 -
$12,767).
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
Research and development expenses are recorded at net of applicable investment
tax credits.
Financial Instruments
The Company's financial instruments include certain short 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, currency and
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
(2002 - $898,693), $361,209 (2002 - $1,903), $380,458 (2002 - $557,860) and
$645,852 (2002 - $719,740) respectively.
As of May 31, 2003 there is no significant differences between the carrying
amounts and 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.
96
================================================================================
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
1. (a) Business Acquisition, Name Change and Share Consolidation
On August 31, 2001, the Company acquired all of the 197 issued and
outstanding shares of API Electronics for $2,600,000. The purchase
price was satisfied by the issue of 6,500,000 units of the Company at
$0.40 per unit. Each unit consists of one common share and 1/2 of one
Series A common share purchase warrant exercisable at $0.45 per share
expiring February 28, 2003 and 1/2 of one Series B common share
purchase 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.
Prior to the acquisition, the Company ceased operations and became a
public shell company whose principal asset was cash. 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 pre-business combination
(Note 10(b)(ii)).
(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.
97
================================================================================
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
1. (b) Business Acquisition - (continued)
The business combination was accounted for using the purchase method,
whereby the fair market values of the net assets of the Filtran Group
are reflected in the Company's balance sheet as at May 31, 2002.
The net assets acquired at fair value, as at May 31, 2002 are as
follows:
Cash $ 101,623
Current assets 1,204,202
Capital assets 1,984,492
Current liabilities (507,256)
Long-term liabilities (217,690)
Future income tax liabilities (530,000)
------------
Fair value of tangible net assets 2,035,371
Non-compete agreement 325,712
Goodwill 962,529
------------
Total cost of acquisition $ 3,323,612
============
(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 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 $1,475,652 with interest at 1.65% per
annum and payable on or before February 2, 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.
98
================================================================================
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
2. Marketable Securities
Market Value 2003 2002
------------------------------------------
Shares in venture issuers $ 10,940 $ 2,139 $ 2,429
Income trust units 229,400 186,632 --
Short term company
paper and bonds
(maturity less
than one year) 249,600 242,397 --
------------------------------------------
$ 489,940 $ 431,168 $ 2,429
==========================================
- --------------------------------------------------------------------------------
3. Inventories
2003 2002
---------------------------
Finished goods $ 951,837 $ 1,232,246
Work-in-process 1,062,038 123,442
Raw materials 918,049 496,795
---------------------------
$ 2,931,924 $ 1,852,483
===========================
- --------------------------------------------------------------------------------
4. Capital Assets 2003
------------------------------------------
Accumulated Net Book
Cost Amortization 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
==========================================
99
================================================================================
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
4. Capital Assets - (continued)
2002
------------------------------------------
Accumulated Net Book
Cost Amortization 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 $158,774 (2002 - $133,362) of
property held under capital leases.
Depreciation and amortization expense amounted to $533,821 (2002 -
$150,138, 2001 - $120,132). Of this amount $164,543 (2002 - $115,979, 2001
- $96,106) was included in cost of sales.
- --------------------------------------------------------------------------------
5. Intangible Assets
2003 2002
---------------------------
Non-compete agreements $ 858,712 $ 325,712
Less: Accumulated amortization (96,392) --
Customer contracts (Note 1(c)) 1,715,784 --
Less: Accumulated amortization (107,235) --
---------------------------
$ 2,370,869 $ 325,712
===========================
- --------------------------------------------------------------------------------
6. Bank Indebtedness
The Company's wholly owned subsidiary, API Electronics has a working
capital line of credit of $350,000 and a $100,000 equipment line of credit.
As at May 31, 2003, API Electronics has borrowed $Nil (2002 - $242,146)
against these lines of credit. The credit is secured by all of its assets
pursuant to a general security agreement and in addition is guaranteed by
two of its former major shareholders. The bank indebtedness is due on
demand and bears interest at prime plus 1/2%.
The Company's wholly owned subsidiary, Filtran Canada has a line of credit
of Cdn $1,000,000 (2002 - Cdn $1,000,000). As at May 31, 2003, Filtran
Canada has borrowed $Nil (2002 - $42,342 (Cdn $65,000)) against this line
of credit. The line of credit bears interest at prime plus 1/2 percent and
is secured by a special assignment of inventory, accounts receivable and a
guarantee of Cdn $1,310,000 from API Electronics Group Inc.
100
================================================================================
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
7. Long Term Debt
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 May 31, 2004
plus interest at 5% per annum $ 1,098,418 $ 1,954,270
Promissory note payable in connection with
the acquisition of assets of TM Systems,
due February 6, 2004 with an interest
rate of 1.65% per annum, secured by the
assets of TM Systems II, Inc. 1,475,652 --
Bank term loan, secured by machinery and
equipment, repayable in monthly
instalments of $1,565 plus interest at
prime plus 2% 47,400 95,145
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% 138,489 166,262
Various equipment capital leases, with
annual lease payments of $3,545 including
interest at approximately 9%, secured by
the leased assets 132,112 102,089
Due to shareholder, non-interest bearing
with no specific terms of repayment 616 15,065
---------------------------
2,931,687 2,371,831
2,699,458 1,072,706
---------------------------
Less: Current portion $ 232,229 $ 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.
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 May 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 $ 2,699,458
2005 91,928
2006 86,577
2007 35,179
2008 18,545
101
================================================================================
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
8. Income Taxes
The significant components of future income tax assets consists of the
following:
2003 2002
---------------------------
Future income tax assets
Loss carrying forwards $ 624,000 $ 368,000
Other 15,000 --
Marketable securities 77,000 --
Capital assets 184,000 33,000
---------------------------
900,000 401,000
---------------------------
Future income tax liabilities
Capital assets (381,000) (445,000)
Non-compete agreement (47,000) (98,000)
Inventory (108,000) --
Unrealized foreign exchange gain (117,000) --
---------------------------
(653,000) (543,000)
---------------------------
Valuation allowance (603,000) (388,000)
---------------------------
$ (356,000) $ (530,000)
===========================
A reconciliation between income taxes provided at actual rates and at the
basic rate of 37.79% (2002 - 40.29%, 2001 - 28%) for federal and provincial
taxes is as follows:
2003 2002 2001
------------------------------------------
Net loss $ (590,428) $ (841,001) $ 102,101
==========================================
Recovery of income tax at
statutory rates $ (223,000) $ (339,000) $ 29,000
Increase in taxes
resulting from:
Non-deductible items
and other (33,413) 16,000 --
Tax reassessments 1998 16,642 292
Change in valuation
allowance 215,000 323,000 (29,000)
------------------------------------------
Provision for income taxes $ (41,413) $ 16,642 $ 292
==========================================
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.
102
================================================================================
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
9. Share Capital
(a) Authorized
Unlimited special shares
Unlimited common shares
(b) Issued Common Shares
Number of
Shares Consideration
--------------------------
(i) Pre-business combination for API Electronics
Balance at May 31, 1999 to May 31, 2001 100 $ 100
Issued upon the conversion of Note 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 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
==========================
103
================================================================================
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
9. Share Capital - (continued)
(c) Warrants
Common shares purchase warrants ("Warrants")
As at May 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 February 28, 2004
1,649,579 1 for 1 0.75 August 30, 2004
500,000 1 for 1 3.00 June 30, 2004
3,400,000 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
===========
104
================================================================================
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
9. Share Capital - (continued)
(d) Stock Options
As at May 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)
Exercised (200,000) 0.60
--------------------
Options outstanding, May 31, 2003 100,000 $ 0.60
====================
(e) Pro-forma Information
During 2003, the Company modified 3,299,158 warrants to directors by
extending the term of the warrant for one year as director
compensation. The fair value has been estimated at the modification
date using the Black-Scholes option pricing model. The current
period compensation expense was calculated with the following
assumptions: weighted average risk free interest rate of 4%,
volatility factor of 44%, expected life of one year.
The following is the Company's pro-forma information with the fair
value method applied to the modification of warrants during the year:
2003
----------
Net loss for the year $ (549,015)
Compensation expense during the year on modified warrants (189,702)
----------
Pro-forma loss for the year $ (738,717)
----------
Pro-forma loss per share $ (0.04)
----------
- --------------------------------------------------------------------------------
10. Cash Flow Information
(a) Changes in non-cash working capital are as follows:
2003 2002 2001
--------------------------------------
Accounts receivable $ (507,471) $ 9,726 $ (74,096)
Inventory (229,959) (107,685) (304,473)
Unbilled revenue (324,078) -- --
Prepaid expenses (15,906) 86,370 (5,215)
Accounts payable 338,346 (91,954) 66,143
Deferred revenue 661,406 -- --
--------------------------------------
$ (77,662) $ (103,543) $ (317,641)
======================================
105
================================================================================
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
10. Cash Flow Information - (continued)
(b) Supplemental Cash Flow Information
2003 2002 2001
----------------------------------
(i) Non-cash transaction
Convertible promissory note
converted into common stock $ -- $ 902,422 $ --
Disposal of capital assets in
settlement of equipment loan -- 120,000 --
Finders fee paid through
issue of common shares -- 270,000 --
Shares issued on business
acquisition (Note 1(a)) -- 1,173,273 --
Note received on business
acquisition (Note 1(c)) 1,475,652 -- --
(ii) Cash paid for interest $ 107,789 $ 37,467 $ 86,342
- --------------------------------------------------------------------------------
11. Related party Transactions
(a) Included in capital asset additions are web site development costs in
the amount of $Nil (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 $47,196 (2002 - $27,522,
2001 - $Nil) 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. Segmented Information
(a) The Company's operations are conducted in two reportable segments
which are distinguished by geographic location in Canada and United
States. Both segments design and manufacture electronic components.
2003 2002
----------------------------
Revenue
United States $ 4,698,497 $ 2,903,120
Canada 3,555,044 --
----------------------------
Total $ 8,253,541 $ 2,903,120
============================
106
================================================================================
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
12. Segmented Information - (continued)
(a) (continued)
2003 2002
---------------------------
Total Assets
Property and equipment
United States $ 1,801,069 $ 1,209,281
Canada 1,474,910 1,658,101
Goodwill
United States --
Canada 918,529 962,529
Other assets
United States 6,456,300 2,104,140
Canada 2,844,413 2,601,108
---------------------------
$ 13,495,221 $ 8,535,159
===========================
Segment profit (loss)
United States $ 608,220 $ 308,231
Canada 653,643 --
---------------------------
Total 1,261,863 308,231
Business development 355,042 501,583
General and administrative 1,478,776 685,747
Other income (89,316) (75,565)
Interest expense 107,789 37,467
Income tax expense (41,413) 16,642
---------------------------
Net profit (loss) $ (549,015) $ (857,643)
===========================
(b) Major Customer
2003 2002 2001
---------------------------
Revenue
U.S. Department of Defence 3% 20% 22%
U.S. Department of Defence
subcontractors 50% 50% 44%
107
================================================================================
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
13. Per Share Data
The weighted average number of shares issued and outstanding for the year
ended May 31, 2003 was 17,780,897 (2002 - 10,742,248). The number of shares
outstanding for the period from the beginning of the fiscal year to the
date of the reverse takeover is deemed to be the number of shares issued by
the legal parent to the shareholders of the legal subsidiary as described
in note 1(a). For the period from the date of the reverse takeover to the
end of the fiscal year, the actual weighted average of shares issued during
the period is used.
The effect of the exercise of outstanding options and warrants would be
anti-dilutive.
For comparative purposes, the May 31, 2001 weighted average number of
shares is 6,500,000, the actual number of shares issued to the legal
subsidiary in the reverse takeover described in note 1(a).
- --------------------------------------------------------------------------------
14. 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
(Note 12), 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.
- --------------------------------------------------------------------------------
15. Commitments and Contingencies
(a) Rent
The following is a schedule by years of approximate future minimum
rental payments under operating leases that have remaining
non-cancelable lease terms in excess of one year as of May 31, 2003.
2004 $ 30,822
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 year ended May 31, 2003, the Company incurred
$9,714 (2002 - $30,157, 2001 - $17,425) as its obligation under the
terms of the plan. Of this amount $9,714 (2002 - $30,157, 2001 -
$17,425) has been charged to general and administrative expenses.
108
================================================================================
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
16. Comparative Figures
Comparative figures have been reclassified to conform with current year
presentation.
- --------------------------------------------------------------------------------
17. Generally Accepted Accounting Principles in Canada and the United States
The Company's accounting policies do not differ materially from accounting
principles generally accepted in the United States ("US GAAP") except as
follows:
(a) Portfolio Investments
Under accounting principles generally accepted in Canada ("Canadian
GAAP"), gains (losses) in shares of public companies are not
recognized until investments are sold unless there is deemed to be an
impairment in value which is other than temporary. Under US GAAP, such
investments that are not held for trading purposes are recorded at
market value and the unrealized gains and losses other than those
arising from permanent impairment are recognized as a separate item in
the shareholder's equity section of the balance sheet. These
investments include shares in venture issuers and Income Trust Units.
(b) Stock Options and Warrants
Under US GAAP (FAS 123), stock options granted to non-employees are
recognized as an expense based on their fair value at the date of
grant. Prior to the adoption of the Canadian Institute of Chartered
Accountants ("CICA") Section 3870, under Canadian GAAP the options are
disclosed and no compensation expense is recorded. The Company had no
consultant options issued or outstanding.
The Company follows APB 25 for options granted to employees. For
employees, compensation expense is recognized under the intrinsic
value method. Under this method, compensation cost is the excess, if
any, of the quoted market price at grant date over the exercise price.
Such expense is reflected over the service period; if for prior
services, expensed at date of grant; if for future services, expensed
over vesting period. In 2002 the exercise price of 300,000 stock
options outstanding to directors was less than the market value of the
shares at the date granted, therefore, a compensation expense of
$54,000 was recognized for US GAAP purposes. No options were granted
during 2003.
In 2003, the Company modified the terms of certain warrants
outstanding to directors by extending the term of the warrants for one
year. The intrinsic value of the warrants at the modification date was
$1,319,663 and an additional compensation expense in this amount was
recognized in 2003.
(c) Other Comprehensive Income
Under US GAAP, comprehensive income must be reported which is defined
as all changes in equity other than those resulting from investments
by owners and distributions to owners.
Other comprehensive income (loss), which includes foreign currency
translation adjustments, is shown for US purposes in the Statement of
Shareholders' Equity.
Other comprehensive income (loss) also includes the unrealized holding
gains and losses in the available-for-sale securities see (Note 2).
109
================================================================================
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
17. Generally Accepted Accounting Principles in Canada and the United States -
(continued)
(d) Income Tax Provision
Under US GAAP, Investment Tax Credits related to the Company's
research and development activities would be netted against the income
tax provision rather than reducing the research and development
expenses included in general and administrative expenses. Under US
GAAP, the general and administrative expenses would be higher by
$22,316 (2002 - $Nil, 2001 - $Nil) and the income tax provision would
be reduced by the same amount.
(e) Recently Issued United States Accounting Standards
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill impairment at least
annually. In addition, SFAS 142 requires that the Company identify
reporting units for the purposes of assessing potential future
impairments of goodwill, reassess the useful lives of other existing
recognized intangible assets, and cease amortization of intangible
assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance
with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 31, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of when
those assets were initially recognized. SFAS 142 requires that the
Company complete a transitional goodwill impairment test six months
from the date of adoption. The Company is also required to reassess
the useful lives of other intangible assets within the first interim
quarter after adoption of SFAS 142. The adoption of this statement did
not have a material effect on the financial position and results of
operation.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires the fair value of a
liability for an asset retirement obligation to be recognized in the
period in which it is incurred if a reasonable estimate of fair value
can be made. The associated retirement costs are capitalized as part
of the carrying amount of the long-lived asset. SFAS No. 143 is
effective for the fiscal year beginning after June 15, 2002.
Currently, the Company is assessing, but, has not yet determined how
the adoption of SFAS No. 143 will impact its financial position and
results of operation.
In August 2001, the FASB issued Statement of Financing Accounting
Standards No. 144 "Accounting Impairment or Disposal of Long-Lived
Assets." This statement supersedes SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of". This statement
clarifies accounting and reporting for assets held for sale, scheduled
for abandonment or other disposal, and recognition of impairment loss
related to the carrying value of long-lived assets. This statement is
effective for fiscal years beginning after December 15, 2001. The
adoption of this statement did not have a material impact on the
Company's financial position or results of operations.
110
================================================================================
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
17. Generally Accepted Accounting Principles in Canada and the United States -
(continued)
(e) Recently Issued United States Accounting Standards
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 46, Amendment of FASB Statement No. 13, and
Technical Corrections". This statement eliminates the current
requirement that gains and losses on extinguishment of debt must be
classified as extraordinary items in the statement of operations.
Instead, the statement requires that gains and losses on
extinguishment of debt be evaluated against the criteria in APB 30 to
determine whether or not it should be classified as an extraordinary
item. Additionally the statement contains other corrections to
authoritative accounting literature in SFAS No. 4, 44 and 46. The
changes in SFAS No. 145 related to debt extinguishment become
effective for fiscal years beginning after May 15, 2002, and the other
changes were effective for all financial statements issued on or after
May 15, 2002. The adoption of this statement did not impact its
financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal
activity be recognized at the date the liability is incurred and is
measured and recorded at fair value. This is effective for exists or
disposal activities initiated after December 31, 2002. The adoption of
SFAS No. 146 did not impact its financial position and results of
operation.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" which amends SFAS
No. 123, "Accounting for Stock-Based Compensation". SFAS No. 148
provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation, and requires disclosure
about those effects in both annual and interim financial statements.
The adoption of SFAS No. 148 did not have a significant impact on the
Company's consolidated financial position or results of operations.
In January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities". FIN No. 46 clarifies the application of
Accounting Research Bulletin No. 51 for certain entities in which
equity investors do not have the characteristics for a controlling
financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated
financial support from other parties. FIN No. 46 applies to variable
interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after
that date. It applies in the second quarter of fiscal 2004 to variable
interest entities in which the Company may hold a variable interest
that it acquired before February 1, 2003. The provisions of FIN No. 46
require that the Company immediately disclose certain information if
it is reasonably possible that the Company will be required to
consolidate or disclose variable interest entities when FIN No. 46
becomes effective. The Company has determined that it does not have a
significant interest in such entities requiring the related disclosure
based on its preliminary analysis and assessment.
111
================================================================================
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
17. Generally Accepted Accounting Principles in Canada and the United States -
(continued)
(e) Recently Issued United States Accounting Standards - (continued)
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". SFAS 149 amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities". The changes are
intended to improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly.
Additionally, those changes are expected to result in more consistent
reporting of contracts as either derivatives or hybrid instruments.
SFAS 149 is effective for contracts entered into or modified after
June 30, 2003. The adoption of this statement did not have a material
effect on the financial position and results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liability and
Equity". SFAS No. 150 establishes a standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liability and equity. It also requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. It is to be
implemented by reporting a cumulative effect of a change in an
accounting principle for financial instruments created before the
issuance date of the Statement and still existing at the beginning of
the interim period of adoption. Restatement is not permitted.
Management is of the opinion that the adoption of this statement will
not have a material effect on the financial position and results of
operations.
(f) The impact of the foregoing on the financial statements is as follows:
2003 2002
----------------------------
Total assets Canadian GAAP $ 13,495,221 $ 8,535,159
Unrealized gain on investments 51,569 3,192
----------------------------
Total assets US GAAP $ 13,546,790 $ 8,538,351
============================
Total liabilities Canadian and US GAAP $ 5,214,551 $ 4,060,588
----------------------------
Shareholders' equity Canadian GAAP 8,280,670 4,474,571
Unrealized gain on investments in
US GAAP 51,569 3,192
----------------------------
Shareholders' equity US GAAP 8,332,239 4,477,763
----------------------------
============================
Total liabilities and shareholders'
equity US GAAP $ 13,546,790 $ 8,538,351
112
================================================================================
API Electronics Group Inc.
Notes to Consolidated Financial Statements
(Expressed in US Dollars)
May 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
17. Generally Accepted Accounting Principles in Canada and the United States -
(continued)
2003 2002 2001
------------------------------------------
Net income (loss) per Canadian GAAP $ (549,015) $ (857,643) $ 102,101
Compensation expense (1,319,663) (54,000) --
------------------------------------------
Net income (loss) US GAAP (1,868,678) (911,643) 102,101
Unrealized gain on investments 48,377 3,192 --
------------------------------------------
Comprehensive net income (loss)
US GAAP $ (1,820,301) $ (908,451) $ 102,101
==========================================
Basic and diluted net income (loss)
per share US GAAP $ (0.10) $ (0.09) $ 0.03
==========================================
Shares used in the computation of
basic earnings (loss) per share 17,780,897 10,475,539 3,299,492
==========================================
Shares used in the computation of
diluted earnings (loss) per share 17,780,897 10,475,539 3,832,910
==========================================
==========================================
113
ITEM 18. FINANCIAL STATEMENTS
Not applicable.
ITEM 19. EXHIBITS
1. Articles of incorporation and bylaws as currently in effect:
1.1 Articles of Amalgamation, effective May 1, 1993, amalgamating
1024680 Ontario Ltd., Shepherd Ventures Inc., Dally Development
Corp. and TNK Resources Inc. into an amalgamated corporation
under the name TNK Resources Inc. under the articles of
incorporation of Dally Development Corp./(1)/
1.2 By-law Number A of Shediac Bay Resources, Inc. (the Company's
predecessor) dated May 14, 1985/(1)/
1.3 Special By-law Number 1 of A of Shediac Bay Resources, Inc.
(the Company's predecessor) dated May 14, 1985/(1)/
1.4 Articles of Amendment filed May 18, 1999 reflecting Name Change
from TNK Resources Inc. to Opus Minerals Inc./(3)/
1.5 Articles of Amendment filed July 25, 2000 reflecting Name
Change from Opus Minerals Inc. to InvestorLinks.com Inc./(4)/
1.6 Articles of Amendment filed September 6, 2001, effective
September 10, 2001, reflecting Name Change from
InvestorLinks.com Inc. to API Electronics Group Inc./(5)/
1.7 Restated Bylaws effective October 8, 2003/(7)/
2. Instruments defining rights of holders of equity or debt securities
being registered:
2.1 See Articles of Amalgamation described above in item 1.1./(1)/
2.2 Specimen Common Share certificate/(1)/
2.3 1995 Stock Option Plan and Board resolution defining rights of
holders of Management Stock Options granted thereunder/(1)/
2.4 Form of Share Purchase Warrant/(1)/
2.5 Form of Agent's Compensation Warrant/(1)/
2.6 See Consulting Agreement described below in item 3.21 for
description of Consultant's Options/(1)/
2.7 2003 Stock Option Plan/(7)/
114
3. Any voting trust agreements and any amendments to those agreements.
4. Material contracts:
4.1 Republic of Botswana Prospecting License No. 142/93, dated
September 8, 1993, in favor of TNK Resources Incorporated/(1)/
4.2 Republic of Botswana Renewal Prospecting License No. 142/93,
dated October 22, 1996, in favor of TNK Resources
Incorporated/(1)/
4.3 Republic of Botswana Prospecting License No. 143/93, dated
September 8, 1993, in favor of TNK Resources Incorporated/(1)/
4.4 Republic of Botswana Renewal Prospecting License No. 143/93,
dated October 22, 1996, in favor of TNK Resources
Incorporated/(1)/
4.5 Republic of Botswana Prospecting License No. 144/93, dated
September 8, 1993, in favor of TNK Resources Incorporated/(1)/
4.6 Republic of Botswana Renewal Prospecting License No. 144/93,
dated October 22, 1996, in favor of TNK Resources
Incorporated/(1)/
4.7 Republic of Botswana Prospecting License No. 145/93, dated
September 8, 1993, in favor of TNK Resources Incorporated/(1)/
4.8 Republic of Botswana Renewal Prospecting License No. 145/93,
dated October 22, 1996, in favor of TNK Resources
Incorporated/(1)/
4.9 Republic of Botswana Prospecting License No. 146/93, dated
September 8, 1993, in favor of TNK Resources Incorporated/(1)/
4.10 Republic of Botswana Renewal Prospecting License No. 146/93,
dated October 22, 1996, in favor of TNK Resources
Incorporated/(1)/
4.11 Republic of Botswana Prospecting License No. 147/93, dated
September 8, 1993, in favor of TNK Resources Incorporated/(1)/
4.12 Republic of Botswana Renewal Prospecting License No. 147/93,
dated October 22, 1996, in favor of TNK Resources
Incorporated/(1)/
4.13 Republic of Botswana Prospecting License No. 148/93, dated
September 8, 1993, in favor of TNK Resources Incorporated/(1)/
4.14 Republic of Botswana Renewal Prospecting License No. 148/93,
dated October 22, 1996, in favor of TNK Resources
Incorporated/(1)/
4.15 Republic of Botswana Prospecting License No. 149/93, dated
September 8, 1993, in favor of TNK Resources Incorporated/(1)/
4.16 Republic of Botswana Renewal Prospecting License No. 149/93,
dated October
115
22, 1996, in favor of TNK Resources Incorporated/(1)/
4.17 Republic of Botswana Prospecting License No. 156/93, dated
October 25, 1993, in favor of TNK Resources Incorporated/(1)/
4.18 Republic of Botswana Prospecting License No. 157/93, dated
October 25, 1993, in favor of TNK Resources Incorporated/(1)/
4.19 Republic of Botswana Renewal Prospecting License No. 157/93,
dated October 22, 1996, in favor of Midswana Diamond
Exploration Corporation/(1)/
4.20 Republic of Botswana Prospecting License No. 158/93, dated
October 25, 1993, in favor of TNK Resources Incorporated/(1)/
4.21 Republic of Botswana Renewal Prospecting License No. 158/93,
dated October 22, 1996, in favor of Midswana Diamond
Exploration Corporation/(1)/
4.22 Contract of Work dated December 21, 1987 between the Government
of the Republic of Indonesia and P.T. Marunda Wahau Mining/(1)/
4.23 Contract of Work dated December 2, 1986 between the Government
of the Republic of Indonesia and P.T. Alahan Panjang
Minerals/(1)/
4.24 Contract of Work dated December 2, 1986 between the Government
of the Republic of Indonesia and P.T. Sungai Tembese
Minerals/(1)/
4.25 Contract of Work dated December 21, 1987 between the Government
of the Republic of Indonesia and P.T. Buntok Maju Minerals/(1)/
4.26 Contract of Work dated October 24, 1987 between the Government
of the Republic of Indonesia and P.T. Tumbang Kuling
Minerals/(1)/
4.27 Assignment Agreement, dated September 16, 1994, between TNK
Resources Inc. and 1096883 Ontario Limited/(1)/
4.28 Agreement, dated September 26, 1994, between the persons shown
as the 1096883 Ontario Limited Shareholders and Sommerset
Industries Inc. and 1096883 Ontario Limited/(1)/
4.29 Memorandum of Agreement, dated February 14, 1996, between P.T.
Hutan Nauli and TNK Resources Inc./(1)/
4.30 Memorandum of Agreement, dated March 26, 1996, between TNK
Resources Inc. and 867323 Ontario Limited/(1)/
4.31 Agreement, dated April 8, 1996, between P.T. Hutan Nauli and
TNK Resources Inc./(1)/
4.32 Letter agreement, dated April 15, 1996, between TNK Resources
Inc. and Oil
116
Springs Energy Corp./(1)/
4.33 Employment Agreement, dated May 1, 1996, between TNK Resources
Inc. and Elizabeth J. Kirkwood/(1)/
4.34 Employment Agreement, dated May 1, 1996, between Midswana
Diamond Exploration Corp. and Elizabeth J. Kirkwood/(1)/
4.35 Letter agreement dated May 24, 1996, between TNK Resources Inc.
and P.T. Hutan Nauli/(1)/
4.36 Consulting Agreement, dated August 1, 1996, between TNK
Resources Inc. and 1165953 Ontario Inc./(1)/
4.37 Memorandum of Agreement, dated November 15, 1996, between P.T.
Hutan Nauli and TNK Resources Inc./(1)/
4.38 Prospecting Agreement (Area Agreement #1), dated February 20,
1998 between DeBeers Prospecting Botswana (Proprietary) Limited
and TNK Resources Inc./(2)/
4.39 Prospecting Agreement (Area Agreement #2), dated February 20,
1998 between DeBeers Prospecting Botswana (Proprietary) Limited
and TNK Resources Inc./(2)/
4.40 Prospecting Agreement (Area Agreement #3), dated February 20,
1998 between DeBeers Prospecting Botswana (Proprietary) Limited
and TNK Resources Inc./(2)/
4.41 Subscription Agreement, dated March 12, 1998 between TNK
Resources Inc. and Monopros Limited/(2)/
4.42 Memorandum and Articles of Association of TNK Area 1
(Proprietary) Limited, dated February 11, 1998/(2)/
4.43 Memorandum and Articles of Association of TNK Area 2
(Proprietary) Limited, dated February 11, 1998/(2)/
4.44 Memorandum and Articles of Association of TNK Area 3
(Proprietary) Limited, dated February 11, 1998/(2)/
4.45 Assignment Agreement, dated March 31, 1998 between TNK
Resources Inc. and TNK Resources Area 1 (Proprietary)
Limited/(2)/
4.46 Assignment Agreement, dated March 31, 1998 between TNK
Resources Inc. and TNK Resources Area 2 (Proprietary)
Limited/(2)/
4.47 Assignment Agreement, dated March 31, 1998 between TNK
Resources Inc. and TNK Resources Area 3 (Proprietary)
Limited/(2)/
4.48 Republic of Botswana Prospecting License No. 67/97, dated May
28, 1997, in favor of TNK Resources Incorporated, in favor of
TNK Resources Incorporated/(2)/
117
4.49 TNK Resources Inc. Application for the Renewal of Prospecting
Licence Nos. 142-149/93, Ghanzi District, dated August 12,
1998/(2)/
4.50 Republic of Botswana Prospecting License No. 93/98, dated
September 29, 1998, in favor of TNK Resources Inc./(2)/
4.51 Agency Agreement, dated October 12, 1999, between Taurus
Capital Markets Ltd. and Opus Minerals Inc./(3)/
4.52 Form of Common Share Purchase Warrant dated as of October 12,
1999/(3)/
4.53 Letter Agreement, dated July 13, 1998, between Mountain
Province Mining Inc. and Opus Minerals Inc./(3)/
4.54 Asset Sale Agreement, dated October 1998, between International
Capri Resources Ltd. And TNK Resources Inc./(3)/
4.55 Letter Agreement, dated November 27, 1998, regarding Baffin
Island Permit Applications./(3)/
4.56 Letter Agreement, dated December 1, 1998, regarding Services
for Baffin Island Exploration and Development./(3)/
4.57 Letter Agreement, dated August 3, 1999, regarding Borden
Peninsula, Baffin Island./(3)/
4.58 Letter Agreement, dated August 26, 1999, between Mountain
Province Mining Inc. and Opus Minerals Inc./(3)/
4.59 Agency Agreement, dated January 26, 1999, between Taurus
Capital Markets Ltd. and Opus Minerals Inc. and
Termination./(3)/
4.60 Warrant to Purchase Common Shares of Stroud Resources Inc./(3)/
4.61 Wolf Lake Property Option Agreement, dated April 14, 1999
between International Capri Resources Ltd. and Opus Minerals
Inc./(3)/
4.62 Letter Agreement, dated February 13, 1999 between International
Capri Resources Ltd. And Opus Minerals Inc./(3)/
4.63 Consulting agreement dated November 15, 1999 as amended by
agreement dated June 26, 2000 between the Company and Investor
Relations Group (Ontario) Inc. ("IRG") pursuant to which IRG
will provide ongoing investor relations activities to the
Company. Agreement was mutually terminated effective February
28, 2001, and the related options lapsed effective March 30,
2001./(4)/
4.64 Stock option agreement dated November 15, 1999 whereunder the
Company granted IRG options to acquire up to 300,000 common
shares of the Company at the price of $0.90 per share expiring
November 15, 2001. Agreement was mutually terminated effective
February 28, 2001, and the related options lapsed
118
effective March 30, 2001./(4)/
4.65 Acquisition Agreement dated January 17, 2000 between the
Company and Vertex Ventures Inc. (now First Strike Diamonds
Inc.) whereby the Company transferred and assigned all of its
interest in the mining properties located in Botswana, Africa
and Baffin Island, Nunavut, to First Strike in consideration
for the allotment and issuance of 6,266,667 common shares of
First Strike./(4)/
4.66 Securities Exchange Agreement made as of the 6th day of June,
2000 among the Company, IL Data Canada, Inc., all of the
shareholders of IL Data Canada, Inc., as vendors and Frank J.
Kollar and Romaine Gilliland as Principals whereunder the
Company acquired all of the issued and outstanding common
shares of IL Data Canada, Inc. which owns the business known as
InvestorLinks.com in consideration for the allotment of
issuance of 6,800,000 Common Shares of the Company./(4)/
4.67 Stock option agreement dated June 26, 2000 whereunder the
company granted IRG options to acquire up to 150,000 common
shares of the Company at the price of $2.55 US per share
expiring June 30, 2002./(4)/
4.68 Stock option agreements dated June 26, 2000 with officers,
directors, and employees of the Company./(4)/
4.69 Consulting and Advisory Board Agreements dated June 26, 2000
with Messrs. Joseph Carusone, Christos Livadas, Ben Johnson and
Ms. Suzanne Wood. Mr. Livadas' agreement and stock option and
grant were cancelled and forfeited by Release, dated March 1,
2001, between the parties. See Item 3.83 below. All agreements
expired as of June 26, 2001, and the related options have
lapsed./(4)/
4.70 Subscription Agreement dated August 2, 2000 with Stockhouse
Media Corp. ("Stockhouse") whereby Stockhouse subscribed for
1,500,000 Common Shares of the Company at the price of $2.25
per share in consideration for Stockhouse providing to the
Company Services (as therein described) over a period of two
years. See Note 4(b)(ii) of the Financial Statements included
in Item 17 of this Annual Report for further detail regarding
the termination of agreements with Stockhouse./(4)/
4.71 Services Agreement dated August 2, 2000 with Stockhouse which
sets out the services and functions to be performed by
Stockhouse to earn the 1,500,000 Common Shares of the Company
referred to above. See Note 4(b)(ii) of the Financial
Statements included in Item 17 of this Annual Report for
further detail regarding the termination of agreements with
Stockhouse./(4)/
4.72 Subscription Agreement effective August 8, 2000 between the
Company and Ming Capital Enterprises Ltd./(4)/
4.73 Warrant certificate issued to Ming Capital Enterprises Ltd. to
purchase up to 680,000 common shares at the price of $3.00 on
or before August 8, 2002./(4)/
4.74 Stock Option Agreement dated June 26, 2000 granting Kathy
Hobbs-Parent
119
options to purchase up to 9,000 Common Shares at $2.55 per
share, vesting at a rate of 1/3 per year for three years. Ms.
Hobbs-Parent's employment was terminated effective May 31,
2001. The options expired August 29, 2001./(5)/
4.75 Stock Option Agreement dated June 26, 2000 granting Elizabeth
J. Kirkwood options to purchase up to 18,000 Common Shares at
$2.55 per share on or before June 30, 2005 (Released by letter,
dated July 24, 2001, signed by Ms. Kirkwood - See Exhibit 3.92
below)./(5)/
4.76 Stock Option Agreement dated June 26, 2000 granting Sandra J.
Hall options to purchase up to 45,000 Common Shares at $2.55
per share on or before June 30, 2005 (Released by letter, dated
July 24, 2001, signed by Ms. Hall - See Exhibit 3.93
below)./(5)/
4.77 Stock Option Agreement dated June 26, 2000 granting George
Stubos options to purchase up to 90,000 Common Shares at $2.55
per share on or before June 30, 2005 (Cancelled by Release,
dated March 1, 2001, between the parties. See Exhibit 3.83
below)./(5)/
4.78 Stock Option Agreement dated June 26, 2000 granting Romaine
Gilliland options to purchase up to 110,000 Common Shares at
$2.55 per share on or before June 30, 2005. Mr. Gilliland
resigned effective April 10, 2001. The options lapsed July 10,
2001./(5)/
4.79 Stock Option Agreement dated June 26, 2000 granting Frank
Kollar options to purchase up to 290,000 Common Shares at $2.55
per share on or before June 30, 2005 (Cancelled by Release,
dated March 1, 2001, between the parties. See Exhibit 3.85
below)./(5)/
4.80 Stock Option Agreement dated June 26, 2000 granting Denise
Gervin options to purchase up to 15,000 Common Shares at $2.55
per share, vesting at a rate of 1/3 per year for three years.
Ms. Gervin's employment was terminated effective February 9,
2001. The options expired May 9, 2001./(5)/
4.81 Consulting and Stock Option Agreement dated June 26, 2000 with
Chris Papaioannou pursuant to which Mr. Papaioannou agrees to
provide consulting services to the Company for a three-year
period commencing June 26, 2000, and in consideration, the
Company agrees to provide Mr. Papaioannou (i) $2,166.67 per
month, (ii) reimbursement for expenses and (iii) options to
purchase up to 9,000 Common Shares at $2.55 per share for a
period of five years, vesting at a rate of 1/3 per year for
three years. Mr. Papaioannou terminated the Consulting
Agreement effective December 2000, and the related stock
options have lapsed./(5)/
4.82 Release dated March 1, 2001 by George Mr. Stubos whereby Stubos
agrees to (i) fully and completely release and discharge any
and all actions, causes of actions, claims and demands arising
out of any and all relationships with the Company, (ii) allow
the Company to purchase for cancellation 500,000 Common Shares
and (iii) cancel his option to buy 90,000 Common Shares, in
exchange for a lump-sum payment by the Company of $35,000./(5)/
120
4.83 Release dated March 1, 2001 by Christos Livadas whereby Mr.
Livadas agrees to (i) fully and completely release and
discharge any and all actions, causes of actions, claims and
demands arising out of any and all relationships with the
Company, (ii) allow the Company to purchase for cancellation
500,000 Common Shares and (iii) cancel his option to buy 90,000
Common Shares, in exchange for a lump-sum payment by the
Company of $25,000./(5)/
4.84 Release and Consulting Agreement dated March 1, 2001 with Frank
Kollar and Sierra Holdings Limited whereby Mr. Kollar and
Sierra Holdings Limited agree to (i) fully and completely
release and discharge any and all actions, causes of actions,
claims and demands arising out of any and all relationships
with the Company, (ii) allow the Company to purchase for
cancellation 3,890,000 Common Shares and (iii) cancel his
option to buy 290,000 Common Shares, in exchange for $209,000
to be paid by the Company immediately at the time of the
Release and $60,000 to be paid as set forth in the Consulting
Agreement./(5)/
4.85 Letter of Agreement for Website Services dated May 11, 2001
with Elizabeth J. Kirkwood and Crossbeam Limited doing business
as Crossbeam.com whereby Ms. Kirkwood and Crossbeam.com agree
to provide website set-up and maintenance services to the
Company for a six-month period from May 11, 2001 through
November 30, 2001 in exchange for payment by the Company of a
one-time payment of $4,000 for the initial set-up and $2,000
per month for maintenance thereafter. The Agreement is
automatically renewed for additional six-month terms absent
notice of cancellation. Either party may cancel on thirty days
notice./(5)/
4.86 Website Publisher Agreement dated June 11, 2001 with Engage,
Inc. ("Engage") granting Engage the right to sell advertising
space on the Company's website in exchange for Engage's
agreement to pay the Company a royalty of 50% on all Net
Advertising Revenue./(5)/
4.87 Non-binding Letter of Intent regarding potential business
combination of the Company and API Electronics, Inc. ("API")
dated June 19, 2001./(5)/
4.88 Letter Agreement dated June 26, 2001 with Taurus Capital
Markets Ltd. as the Company's exclusive financial advisor with
respect to the potential acquisition of API in exchange for (i)
a work fee of $15,000, (ii) reimbursement of certain
out-of-pocket costs and (iii) in the event of and upon
completion of the purchase of API, 250,000 broker warrants for
Units on the same terms as Units being issued to purchase
API./(5)/
4.89 Letter Agreement dated June 26, 2001 for settlement of lease,
dated July 3, 2000, between Gilray, LLC and IL Data Corporation
Inc., to commence August 1, 2000 and terminate July 31, 2003
whereby Gilray, LLC agrees to execute a Certificate of
Satisfaction fully releasing IL Data and/or the Company from
any further responsibility under the lease in exchange for
$18,000 and ownership of any and all furniture abandoned by
tenant on the premises./(5)/
121
4.90 Release dated July 24, 2001 by Elizabeth J. Kirkwood agreeing
to release 45,000 stock options previously granted by the
Company./(5)/
4.91 Release dated July 24, 2001 by Sandra J. Hall agreeing to
release 45,000 stock options previously granted by the
Company./(5)/
4.92 Stock Option Agreement dated August 2, 2001 granting James C.
Cassina options to purchase up to 50,000 Common Shares at $0.45
per share, and up to 50,000 Common Shares at Canadian $0.75 per
share on or before July 31, 2006. The number of shares and
exercise prices associated with the stock options set forth
reflect post-consolidation numbers and prices--see Note 11(b)
to the financial statements contained in Part III, Item 17 of
this Annual Report./(5)/
4.93 Stock Option Agreement dated August 2, 2001 granting Sandra J.
Hall options to purchase up to 50,000 Common Shares at $0.45
per share, and up to 50,000 Common Shares at $0.75 per share on
or before July 31, 2006. The number of shares and exercise
prices associated with the stock options set forth reflect
post-consolidation numbers and prices--see Note 11(b) to the
financial statements contained in Part III, Item 17 of this
Annual Report./(5)/
4.94 Agreement and Plan of Merger, dated July 27, 2001, between
InvestorLinks.com Inc. and API Electronics, Inc. et al.,
whereby the Company acquired all of the issued and outstanding
shares of API Electronics, Inc., a Delaware corporation for
consideration of 6,500,000 post-consolidation units at $.40 per
unit. Each unit consists of one Common Share, 1/2 of one Series
A Common Share purchase warrant exercisable at $.45 for a
period of 18 months from the date of issuance, and 1/2 of one
Series B Common Share purchase warrant exercisable at $.75 for
a period of two years from date of issuance./(5)/
4.95 Agreement of Merger, dated August 31, 2001, between API
Electronics, Inc. and API Acquisition Corp., whereby API
Electronics, Inc. merged with and into API Acquisition Corp.
with API Electronics, Inc. as the surviving corporation. Each
share of common stock of API Acquisition Corp. outstanding on
the effective date of the Agreement was cancelled and no
consideration was paid with respect to any such shares. Each
share of common stock of API Electronics, Inc., the surviving
corporation, outstanding on the effective date of the
Agreement, was (i) exchanged with InvestorLinks.com Inc., an
Ontario Corporation and the parent of API Acquisition Corp.
("IC"), for 33,163.27 shares of IC Common Stock and A and B
warrants to purchase an aggregate of 33,163.28 shares of IC
Common Stock and (ii) cancelled immediately thereafter. The
surviving corporation issued a new certificate for 100 shares
of common stock to IC, which represented all of the issued and
outstanding shares of the surviving corporation./(5)/
4.96 Stock Option Agreement dated August 31, 2001 granting Phillip
DeZwirek options to purchase up to 50,000 Common Shares at
$0.45 per share, and up to 50,000 Common Shares at $0.75 per
share on or before August 31, 2006./ /The number of shares and
exercise price associated with the stock options set forth
reflect post-consolidation numbers and prices - See Note 11(b)
to the financial
122
statements contained in Part III, Item 17 of this Annual
Report./(5) /
4.97 Stock Option Agreement dated August 31, 2001 granting Thomas W.
Mills options to purchase up to 50,000 Common Shares at $0.45
per share, and up to 50,000 Common Shares at $0.75 per share on
or before August 31, 2006./ /The number of shares and exercise
price associated with the stock options set forth reflect
post-consolidation numbers and prices - See Note 11(b) to the
financial statements contained in Part III, Item 17 of this
Annual Report./(5)/
4.98 Stock Option Agreement dated August 31, 2001 granting Jason
DeZwirek options to purchase up to 50,000 Common Shares at
$0.45 per share, and up to 50,000 Common Shares at $0.75 per
share on or before August 31, 2006./ /The number of shares and
exercise price associated with the stock options set forth
reflect post-consolidation numbers and prices - See Note 11(b)
to the financial statements contained in Part III, Item 17 of
this Annual Report./(5)/
4.99 Share Purchase Agreement dated May 31, 2002, by and among the
Company and Philip Walter White, Rose Mary White, Coranne Adele
White, Jane Murphy, Coreen White, Derek White, Gillian Pershaw,
Brian Kenneth White, Edna Grace Trepannier, Filtran Inc.,
Filtran Limited, Canadian Dataplex Ltd., and Tactron
Communications (Canada) Limited pursuant to which the Company
purchased the shares of Filtran Inc., Filtran Limited, Canadian
Dataplex Ltd., and Tactron Communications (Canada) Limited from
their shareholders./(6)/
4.100 Non-Competition and Confidentiality Agreement dated May 31,
2002 by and between the Company and Philip Walter White
pursuant to which Mr. White in consideration of $500,000 agreed
to non-competition and non-solicitation restrictions for a term
of five years and permanent confidentiality restrictions./(6)/
4.101 Subscription Agreement dated June 11, 2002, between the Company
and Aton Ventures Fund Ltd, pursuant to which Aton Ventures
Fund Ltd. purchased from the Company in a private placement
100,000 units for $2.35 per unit, each unit consisting of one
share of common stock of the Company and one warrant to
purchase one share of common stock of the Company, exercisable
at $3.00 per share, for an aggregate purchase price of
$235,000./(6)/
4.102 Subscription Agreement dated June 14, 2002, between the Company
and Syrah Invest Corp., pursuant to which Syrah Invest Corp.
purchased from the Company in a private placement 300,000 units
for $2.35 per unit, each unit consisting of one share of common
stock of the Company and one warrant to purchase one share of
common stock of the Company, exercisable at $3.00 per share,
for an aggregate purchase price of $705,000./(6)/
4.103 Subscription Agreement dated June 11, 2002, between the Company
and Aton Select Fund Ltd, pursuant to which Aton Select Fund
Ltd. purchased from the Company in a private placement 100,000
units for $2.35 per unit, each unit consisting of one share of
common stock of the Company and one warrant to purchase one
share of common stock of the Company, exercisable at $3.00 per
share, for an aggregate purchase price of $235,000./(6)/
123
4.104 Subscription Agreement dated January 31, 2003, between the
Company and Eusibio Mario Lopez Perez pursuant to which Eusibio
Mario Lopez Perez purchased from the Company in a private
placement 125,000 units for $0.40 per unit, each unit
consisting of one share of common stock of the Company and
one-half of a warrant to purchase one share of common stock the
Company, exercisable at $0.60 per share, for an aggregate
purchase price of $50,000./(7)/
4.105 Stock Purchase Warrant issued by the Company to Eusibio Mario
Lopez Perez to purchase an aggregate of 62,500 shares of common
stock of the Company for an exercise price of $0.60 per share,
exercisable during the two year period beginning February 6,
2003./(7)/
4.106 Subscription Agreement dated February 3, 2003, between the
Company and Thomas Christen pursuant to which Thomas Christen
purchased from the Company in a private placement 650,000 units
for $0.40 per unit, each unit consisting of one share of common
stock of the Company and one-half of a warrant to purchase one
share of common stock the Company, exercisable at $0.60 per
share, for an aggregate purchase price of $260,000./(7)/
4.107 Stock Purchase Warrant issued by the Company to Thomas Christen
to purchase an aggregate of 325,000 shares of common stock of
the Company for an exercise price of $0.60 per share,
exercisable during the two year period beginning February 6,
2003./(7)/
4.108 Subscription Agreement dated February 6, 2003, between the
Company and Les Immeubles Desco Inc. pursuant to which Les
Immeubles Desco Inc. purchased from the Company in a private
placement 125,000 units for $0.40 per unit, each unit
consisting of one share of common stock of the Company and
one-half of a warrant to purchase one share of common stock the
Company, exercisable at $0.60 per share, for an aggregate
purchase price of $50,000./(7)/
4.109 Stock Purchase Warrant issued by the Company to Les Immeubles
Desco Inc. to purchase an aggregate of 62,500 shares of common
stock of the Company for an exercise price of $0.60 per share,
exercisable during the two year period beginning February 6,
2003./(7)/
4.110 Subscription Agreement dated February 3, 2003, between the
Company and Ming Capital Enterprises Inc. pursuant to which
Ming Capital Enterprises Inc. purchased from the Company in a
private placement 650,000 units for $0.40 per unit, each unit
consisting of one share of common stock of the Company and
one-half of a warrant to purchase one share of common stock the
Company, exercisable at $0.60 per share, for an aggregate
purchase price of $260,000./(7)/
4.111 Stock Purchase Warrant issued by the Company to Ming Capital
Enterprises Inc. to purchase an aggregate of 325,000 shares of
common stock of the Company for an exercise price of $0.60 per
share, exercisable during the two year period beginning
February 6, 2003./(7)/
4.112 Subscription Agreement dated February 3, 2003, between the
Company and
124
Partner Marketing AG pursuant to which Partner Marketing AG
purchased from the Company in a private placement 500,000 units
for $0.40 per unit, each unit consisting of one share of common
stock of the Company and one-half of a warrant to purchase one
share of common stock the Company, exercisable at $0.60 per
share, for an aggregate purchase price of $200,000./(7)/
4.113 Stock Purchase Warrant issued by the Company to Partner
Marketing AG to purchase an aggregate of 250,000 shares of
common stock of the Company for an exercise price of $0.60 per
share, exercisable during the two year period beginning
February 6, 2003./(7)/
4.114 Subscription Agreement dated February 3, 2003, between the
Company and Seloz Gestion & Finance SA, Switzerland pursuant to
which Seloz Gestion & Finance SA, Switzerland purchased from
the Company in a private placement 450,000 units for $0.40 per
unit, each unit consisting of one share of common stock of the
Company and one-half of a warrant to purchase one share of
common stock the Company, exercisable at $0.60 per share, for
an aggregate purchase price of $180,000./(7)/
4.115 Stock Purchase Warrant issued by the Company to Seloz Gestion &
Finance SA, Switzerland to purchase an aggregate of 225,000
shares of common stock of the Company for an exercise price of
$0.60 per share, exercisable during the two year period
beginning February 6, 2003./(7)/
4.116 Subscription Agreement dated February 3, 2003, between the
Company and Shangri-La Investments Inc. pursuant to which
Shangri-La Investments Inc. purchased from the Company in a
private placement 650,000 units for $0.40 per unit, each unit
consisting of one share of common stock of the Company and
one-half of a warrant to purchase one share of common stock the
Company, exercisable at $0.60 per share, for an aggregate
purchase price of $260,000./(7)/
4.117 Stock Purchase Warrant issued by the Company to Shangri-La
Investments Inc. to purchase an aggregate of 325,000 shares of
common stock of the Company for an exercise price of $0.60 per
share, exercisable during the two year period beginning
February 6, 2003./(7)/
4.118 Subscription Agreement dated January 20, 2003, between the
Company and Stick Capital Inc. pursuant to which Stick Capital
Inc. purchased from the Company in a private placement 125,000
units for $0.40 per unit, each unit consisting of one share of
common stock of the Company and one-half of a warrant to
purchase one share of common stock the Company, exercisable at
$0.60 per share, for an aggregate purchase price of
$50,000./(7)/
4.119 Stock Purchase Warrant issued by the Company to Stick Capital
Inc. to purchase an aggregate of 62,500 shares of common stock
of the Company for an exercise price of $0.60 per share,
exercisable during the two year period beginning February 6,
2003./(7)/
4.120 Subscription Agreement dated February 3, 2003, between the
Company and Syrah Invest Corp. pursuant to which Syrah Invest
Corp. purchased from the
125
Company in a private placement 450,000 units for $0.40 per
unit, each unit consisting of one share of common stock of the
Company and one-half of a warrant to purchase one share of
common stock the Company, exercisable at $0.60 per share, for
an aggregate purchase price of $180,000./(7)/
4.121 Stock Purchase Warrant issued by the Company to Syrah Invest
Corp. to purchase an aggregate of 225,000 shares of common
stock of the Company for an exercise price of $0.60 per share,
exercisable during the two year period beginning February 6,
2003./(7)/
4.122 Subscription Agreement dated February 3, 2003, between the
Company and Terraco Holding S.A. pursuant to which Terraco
Holding S.A. purchased from the Company in a private placement
500,000 units for $0.40 per unit, each unit consisting of one
share of common stock of the Company and one-half of a warrant
to purchase one share of common stock the Company, exercisable
at $0.60 per share, for an aggregate purchase price of
$200,000./(7)/
4.123 Stock Purchase Warrant issued by the Company to Terraco Holding
S.A. to purchase an aggregate of 250,000 shares of common stock
of the Company for an exercise price of $0.60 per share,
exercisable during the two year period beginning February 6,
2003./(7)/
4.124 Subscription Agreement dated February 3, 2003, between the
Company and Hans Schopper pursuant to which Hans Schopper
purchased from the Company in a private placement 450,000 units
for $0.40 per unit, each unit consisting of one share of common
stock of the Company and one-half of a warrant to purchase one
share of common stock the Company, exercisable at $0.60 per
share, for an aggregate purchase price of $180,000./(7)/
4.125 Stock Purchase Warrant issued by the Company to Hans Schopper
to purchase an aggregate of 225,000 shares of common stock of
the Company for an exercise price of $0.60 per share,
exercisable during the two year period beginning February 6,
2003./(7)/
4.126 Subscription Agreement dated January 27, 2003, between the
Company and Kostas Papakostas pursuant to which Kostas
Papakostas purchased from the Company in a private placement
50,000 units for $0.40 per unit, each unit consisting of one
share of common stock of the Company and one-half of a warrant
to purchase one share of common stock the Company, exercisable
at $0.60 per share, for an aggregate purchase price of
$20,000./(7)/
4.127 Stock Purchase Warrant issued by the Company to Kostas
Papakostas to purchase an aggregate of 25,000 shares of common
stock of the Company for an exercise price of $0.60 per share,
exercisable during the two year period beginning February 6,
2003./(7)/
4.128 Subscription Agreement dated January 16, 2003, between the
Company and Dart Management Corporation pursuant to which Dart
Management Corporation purchased from the Company in a private
placement 600,000 units for $0.40 per unit, each unit
consisting of one share of common stock of the
126
Company and one-half of a warrant to purchase one share of
common stock the Company, exercisable at $0.60 per share, for
an aggregate purchase price of $240,000./(7)/
4.129 Stock Purchase Warrant issued by the Company to Dart Management
Corporation to purchase an aggregate of 300,000 shares of
common stock of the Company for an exercise price of $0.60 per
share, exercisable during the two year period beginning
February 6, 2003./(7)/
4.130 Subscription Agreement dated February 3, 2003, between the
Company and Crystal Overseas Trading Inc. pursuant to which
Crystal Overseas Trading Inc. purchased from the Company in a
private placement 500,000 units for $0.40 per unit, each unit
consisting of one share of common stock of the Company and
one-half of a warrant to purchase one share of common stock the
Company, exercisable at $0.60 per share, for an aggregate
purchase price of $200,000./(7)/
4.131 Stock Purchase Warrant issued by the Company to Crystal
Overseas Trading Inc. to purchase an aggregate of 250,000
shares of common stock of the Company for an exercise price of
$0.60 per share, exercisable during the two year period
beginning February 6, 2003./(7)/
4.132 Subscription Agreement dated February 6, 2003, between the
Company and Bank Sal. Oppenheim jr. & Cie (Schweiz) AG pursuant
to which Bank Sal. Oppenheim jr. & Cie (Schweiz) AG purchased
from the Company in a private placement 200,000 units for $0.40
per unit, each unit consisting of one share of common stock of
the Company and one-half of a warrant to purchase one share of
common stock the Company, exercisable at $0.60 per share, for
an aggregate purchase price of $80,000./(7)/
4.133 Stock Purchase Warrant issued by the Company to Bank Sal.
Oppenheim jr. & Cie (Schweiz) AG to purchase an aggregate of
100,000 shares of common stock of the Company for an exercise
price of $0.60 per share, exercisable during the two-year
period beginning February 6, 2003./(7)/
4.134 Subscription Agreement dated February 6, 2003, between the
Company and Asian Capital Limited pursuant to which Asian
Capital Limited purchased from the Company in a private
placement 500,000 units for $0.40 per unit, each unit
consisting of one share of common stock of the Company and
one-half of a warrant to purchase one share of common stock the
Company, exercisable at $0.60 per share, for an aggregate
purchase price of $200,000./(7)/
4.135 Stock Purchase Warrant issued by the Company to Asian Capital
Limited to purchase an aggregate of 250,000 shares of common
stock of the Company for an exercise price of $0.60 per share,
exercisable during the two year period beginning February 6,
2003./(7)/
4.136 Subscription Agreement dated February 6, 2003, between the
Company and 1530403 Ontario Inc. pursuant to which 1530403
Ontario Inc. purchased from the Company in a private placement
300,000 units for $0.40 per unit, each unit consisting of one
share of common stock of the Company and one-half of a
127
warrant to purchase one share of common stock the Company,
exercisable at $0.60 per share, for an aggregate purchase price
of $120,000./(7)/
4.137 Stock Purchase Warrant issued by the Company to 1530403 Ontario
Inc. to purchase an aggregate of 150,000 shares of common stock
of the Company for an exercise price of $0.60 per share,
exercisable during the two year period beginning February 6,
2003./(7)/
4.138 Subscription Agreement dated February 6, 2003, between the
Company and 1057111 Ontario Ltd. pursuant to which 1057111
Ontario Ltd. purchased from the Company in a private placement
100,000 units for $0.40 per unit, each unit consisting of one
share of common stock of the Company and one-half of a warrant
to purchase one share of common stock the Company, exercisable
at $0.60 per share, for an aggregate purchase price of
$40,000./(7)/
4.139 Stock Purchase Warrant issued by the Company to 1057111 Ontario
Ltd. to purchase an aggregate of 50,000 shares of common stock
of the Company for an exercise price of $0.60 per share,
exercisable during the two year period beginning February 6,
2003./(7)/
4.140 Asset Purchase Agreement made as of February 6, 2003, by and
among TM Systems, Inc., TM Systems II, Inc. and API Electronics
Group Inc. pursuant to which API Electronics Group Inc.'s
wholly-owned subsidiary, TM Systems II, Inc. purchased certain
assets of TM Systems, Inc./(7)/
4.141 Letter of Employment dated February 6, 2003, from API
Electronics Group Inc. to Irwin Shuldman, confirming Mr.
Shuldman's employment as an executive officer with TM Systems
II, Inc. for a period of one year./(7)/
4.142 Letter of Employment dated February 6, 2003, from API
Electronics Group Inc. to Walter Weiner, confirming Mr.
Weiner's employment as an executive officer with TM Systems II,
Inc. for a period of one year./(7)/
8. Miscellaneous:
8.1 List of Subsidiaries/(7)/
12. Certifications Under Section 13a-14(a) of the Securities Exchange Act:
12.1 Certification Under Section 13a-14(a) of the Securities
Exchange Act./(7)/
12.2 Certification Under Section 13a-14(a) of the Securities
Exchange Act./(7)/
12.3 Certification Under Section 13a-14(a) of the Securities
Exchange Act./(7)/
128
13. Certifications Pursuant to Section 906 of the Sarbanes Oxley Act of
2002:
13.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002./(7)/
13.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002./(7)/
Footnotes to List of Exhibits:
- -----------------------------
(1) Incorporated by reference from the Company's Registration Statement on Form
20-F, File No. 0-29142, filed on February 3, 1997.
(2) Incorporated by reference from the Company's Annual Report on Form 20-F,
File No. 0-29142, filed on October 31, 1998.
(3) Incorporated by reference from the Company's Annual Report on Form 20-F,
File No. 0-29142, filed on November 1, 1999.
(4) Incorporated by reference from the Company's Annual Report on Form 20-F,
File No. 0-29142, filed on November 14, 2000.
(5) Incorporated by reference from the Company's Annual Report on Form 20-F,
File No. 0-29142, filed on October 31, 2001.
(6) Incorporated by reference from the Company's Annual Report on Form 20-F,
File No. 029142, filed on November 27, 2002.
(7) Filed herewith.
129
Signatures
Pursuant to the requirements of Section 12 of the Securities Act of 1934, the
Registrant certifies that it meets all of the requirements for filing on Form
20-F and has duly caused this Annual Report on Form 20-F to be signed on its
behalf by the undersigned, thereunto authorized.
Dated at Hauppauge, New York, United States of America, this 25th day of
November, 2003.
API ELECTRONICS GROUP INC.
By: /s/ Thomas W. Mills
-----------------------------------
Thomas W. Mills, President
130
As filed with the Securities and Exchange Commission on November 25, 2003
Commission File No.: 0-29142
================================================================================
API ELECTRONICS GROUP INC.
ANNUAL REPORT
On
FORM 20-F
----------
EXHIBIT INDEX
----------
131
API ELECTRONICS GROUP INC.
ANNUAL REPORT ON FORM 20-F
FILED EXHIBIT INDEX
-------------------
Exhibit
Number Description
- --------------------------------------------------------------------------------
1.7 Restated Bylaws effective October 8, 2003.
2.7 2003 Stock Option Plan.
4.104 Subscription Agreement dated January 31, 2003, between the Company
and Eusibio Mario Lopez Perez pursuant to which Eusibio Mario Lopez
Perez purchased from the Company in a private placement 125,000
units for $0.40 per unit, each unit consisting of one share of
common stock of the Company and one-half of a warrant to purchase
one share of common stock the Company, exercisable at $0.60 per
share, for an aggregate purchase price of $50,000.
4.105 Stock Purchase Warrant issued by the Company to Eusibio Mario Lopez
Perez to purchase an aggregate of 62,500 shares of common stock of
the Company for an exercise price of $0.60 per share, exercisable
during the two year period beginning February 6, 2003.
4.106 Subscription Agreement dated February 3, 2003, between the Company
and Thomas Christen pursuant to which Thomas Christen purchased
from the Company in a private placement 650,000 units for $0.40 per
unit, each unit consisting of one share of common stock of the
Company and one-half of a warrant to purchase one share of common
stock the Company, exercisable at $0.60 per share, for an aggregate
purchase price of $260,000.
4.107 Stock Purchase Warrant issued by the Company to Thomas Christen to
purchase an aggregate of 325,000 shares of common stock of the
Company for an exercise price of $0.60 per share, exercisable
during the two year period beginning February 6, 2003.
4.108 Subscription Agreement dated February 6, 2003, between the Company
and Les Immeubles Desco Inc. pursuant to which Les Immeubles Desco
Inc. purchased from the Company in a private placement 125,000
units for $0.40 per unit, each unit consisting of one share of
common stock of the Company and one-half of a warrant to purchase
one share of common stock the Company, exercisable at $0.60 per
share, for an aggregate purchase price of $50,000.
132
4.109 Stock Purchase Warrant issued by the Company to Les Immeubles Desco
Inc. to purchase an aggregate of 62,500 shares of common stock of
the Company for an exercise price of $0.60 per share, exercisable
during the two year period beginning February 6, 2003.
4.110 Subscription Agreement dated February 3, 2003, between the Company
and Ming Capital Enterprises Inc. pursuant to which Ming Capital
Enterprises Inc. purchased from the Company in a private placement
650,000 units for $0.40 per unit, each unit consisting of one share
of common stock of the Company and one-half of a warrant to
purchase one share of common stock the Company, exercisable at
$0.60 per share, for an aggregate purchase price of $260,000.
4.111 Stock Purchase Warrant issued by the Company to Ming Capital
Enterprises Inc. to purchase an aggregate of 325,000 shares of
common stock of the Company for an exercise price of $0.60 per
share, exercisable during the two year period beginning February 6,
2003.
4.112 Subscription Agreement dated February 3, 2003, between the Company
and Partner Marketing AG pursuant to which Partner Marketing AG
purchased from the Company in a private placement 500,000 units for
$0.40 per unit, each unit consisting of one share of common stock
of the Company and one-half of a warrant to purchase one share of
common stock the Company, exercisable at $0.60 per share, for an
aggregate purchase price of $200,000.
4.113 Stock Purchase Warrant issued by the Company to Partner Marketing
AG to purchase an aggregate of 250,000 shares of common stock of
the Company for an exercise price of $0.60 per share, exercisable
during the two year period beginning February 6, 2003.
4.114 Subscription Agreement dated February 3, 2003, between the Company
and Seloz Gestion & Finance SA, Switzerland pursuant to which Seloz
Gestion & Finance SA, Switzerland purchased from the Company in a
private placement 450,000 units for $0.40 per unit, each unit
consisting of one share of common stock of the Company and one-half
of a warrant to purchase one share of common stock the Company,
exercisable at $0.60 per share, for an aggregate purchase price of
$180,000.
4.115 Stock Purchase Warrant issued by the Company to Seloz Gestion &
Finance SA, Switzerland to purchase an aggregate of 225,000 shares
of common stock of the Company for an exercise price of $0.60 per
share, exercisable during the two year period beginning February 6,
2003.
4.116 Subscription Agreement dated February 3, 2003, between the Company
and Shangri-La Investments Inc. pursuant to which Shangri-La
Investments Inc. purchased from the Company in a private placement
650,000 units for $0.40 per unit, each unit consisting of one share
of common stock of the Company and one-half of a warrant to
purchase one share of common stock the Company, exercisable at
$0.60 per share, for an aggregate purchase price of $260,000.
133
4.117 Stock Purchase Warrant issued by the Company to Shangri-La
Investments Inc. to purchase an aggregate of 325,000 shares of
common stock of the Company for an exercise price of $0.60 per
share, exercisable during the two year period beginning February 6,
2003.
4.118 Subscription Agreement dated January 20, 2003, between the Company
and Stick Capital Inc. pursuant to which Stick Capital Inc.
purchased from the Company in a private placement 125,000 units for
$0.40 per unit, each unit consisting of one share of common stock
of the Company and one-half of a warrant to purchase one share of
common stock the Company, exercisable at $0.60 per share, for an
aggregate purchase price of $50,000.
4.119 Stock Purchase Warrant issued by the Company to Stick Capital Inc.
to purchase an aggregate of 62,500 shares of common stock of the
Company for an exercise price of $0.60 per share, exercisable
during the two year period beginning February 6, 2003.
4.120 Subscription Agreement dated February 3, 2003, between the Company
and Syrah Invest Corp. pursuant to which Syrah Invest Corp.
purchased from the Company in a private placement 450,000 units for
$0.40 per unit, each unit consisting of one share of common stock
of the Company and one-half of a warrant to purchase one share of
common stock the Company, exercisable at $0.60 per share, for an
aggregate purchase price of $180,000.
4.121 Stock Purchase Warrant issued by the Company to Syrah Invest Corp.
to purchase an aggregate of 225,000 shares of common stock of the
Company for an exercise price of $0.60 per share, exercisable
during the two year period beginning February 6, 2003.
4.122 Subscription Agreement dated February 3, 2003, between the Company
and Terraco Holding S.A. pursuant to which Terraco Holding S.A.
purchased from the Company in a private placement 500,000 units for
$0.40 per unit, each unit consisting of one share of common stock
of the Company and one-half of a warrant to purchase one share of
common stock the Company, exercisable at $0.60 per share, for an
aggregate purchase price of $200,000.
4.123 Stock Purchase Warrant issued by the Company to Terraco Holding
S.A. to purchase an aggregate of 250,000 shares of common stock of
the Company for an exercise price of $0.60 per share, exercisable
during the two year period beginning February 6, 2003.
4.124 Subscription Agreement dated February 3, 2003, between the Company
and Hans Schopper pursuant to which Hans Schopper purchased from
the Company in a private placement 450,000 units for $0.40 per
unit, each unit consisting of one share of common stock of the
Company and one-half of a warrant to purchase one share of common
stock the Company, exercisable at $0.60 per share, for an aggregate
purchase price of $180,000.
4.125 Stock Purchase Warrant issued by the Company to Hans Schopper to
purchase an aggregate of 225,000 shares of common stock of the
Company for an exercise price of $0.60 per share, exercisable
during the two year period beginning February 6, 2003.
134
4.126 Subscription Agreement dated January 27, 2003, between the Company
and Kostas Papakostas pursuant to which Kostas Papakostas purchased
from the Company in a private placement 50,000 units for $0.40 per
unit, each unit consisting of one share of common stock of the
Company and one-half of a warrant to purchase one share of common
stock the Company, exercisable at $0.60 per share, for an aggregate
purchase price of $20,000.
4.127 Stock Purchase Warrant issued by the Company to Kostas Papakostas
to purchase an aggregate of 25,000 shares of common stock of the
Company for an exercise price of $0.60 per share, exercisable
during the two year period beginning February 6, 2003.
4.128 Subscription Agreement dated January 16, 2003, between the Company
and Dart Management Corporation pursuant to which Dart Management
Corporation purchased from the Company in a private placement
600,000 units for $0.40 per unit, each unit consisting of one share
of common stock of the Company and one-half of a warrant to
purchase one share of common stock the Company, exercisable at
$0.60 per share, for an aggregate purchase price of $240,000.
4.129 Stock Purchase Warrant issued by the Company to Dart Management
Corporation to purchase an aggregate of 300,000 shares of common
stock of the Company for an exercise price of $0.60 per share,
exercisable during the two year period beginning February 6, 2003.
4.130 Subscription Agreement dated February 3, 2003, between the Company
and Crystal Overseas Trading Inc. pursuant to which Crystal
Overseas Trading Inc. purchased from the Company in a private
placement 500,000 units for $0.40 per unit, each unit consisting of
one share of common stock of the Company and one-half of a warrant
to purchase one share of common stock the Company, exercisable at
$0.60 per share, for an aggregate purchase price of $200,000.
4.131 Stock Purchase Warrant issued by the Company to Crystal Overseas
Trading Inc. to purchase an aggregate of 250,000 shares of common
stock of the Company for an exercise price of $0.60 per share,
exercisable during the two year period beginning February 6, 2003.
4.132 Subscription Agreement dated February 6, 2003, between the Company
and Bank Sal. Oppenheim jr. & Cie (Schweiz) AG pursuant to which
Bank Sal. Oppenheim jr. & Cie (Schweiz) AG purchased from the
Company in a private placement 200,000 units for $0.40 per unit,
each unit consisting of one share of common stock of the Company
and one-half of a warrant to purchase one share of common stock the
Company, exercisable at $0.60 per share, for an aggregate purchase
price of $80,000.
4.133 Stock Purchase Warrant issued by the Company to Bank Sal. Oppenheim
jr. & Cie (Schweiz) AG to purchase an aggregate of 100,000 shares
of common stock of the Company for an exercise price of $0.60 per
share, exercisable during the two-year period beginning February 6,
2003.
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4.134 Subscription Agreement dated February 6, 2003, between the Company
and Asian Capital Limited pursuant to which Asian Capital Limited
purchased from the Company in a private placement 500,000 units for
$0.40 per unit, each unit consisting of one share of common stock
of the Company and one-half of a warrant to purchase one share of
common stock the Company, exercisable at $0.60 per share, for an
aggregate purchase price of $200,000.
4.135 Stock Purchase Warrant issued by the Company to Asian Capital
Limited to purchase an aggregate of 250,000 shares of common stock
of the Company for an exercise price of $0.60 per share,
exercisable during the two year period beginning February 6, 2003.
4.136 Subscription Agreement dated February 6, 2003, between the Company
and 1530403 Ontario Inc. pursuant to which 1530403 Ontario Inc.
purchased from the Company in a private placement 300,000 units for
$0.40 per unit, each unit consisting of one share of common stock
of the Company and one-half of a warrant to purchase one share of
common stock the Company, exercisable at $0.60 per share, for an
aggregate purchase price of $120,000.
4.137 Stock Purchase Warrant issued by the Company to 1530403 Ontario
Inc. to purchase an aggregate of 150,000 shares of common stock of
the Company for an exercise price of $0.60 per share, exercisable
during the two year period beginning February 6, 2003.
4.138 Subscription Agreement dated February 6, 2003, between the Company
and 1057111 Ontario Ltd. pursuant to which 1057111 Ontario Ltd.
purchased from the Company in a private placement 100,000 units for
$0.40 per unit, each unit consisting of one share of common stock
of the Company and one-half of a warrant to purchase one share of
common stock the Company, exercisable at $0.60 per share, for an
aggregate purchase price of $40,000.
4.139 Stock Purchase Warrant issued by the Company to 1057111 Ontario
Ltd. to purchase an aggregate of 50,000 shares of common stock of
the Company for an exercise price of $0.60 per share, exercisable
during the two year period beginning February 6, 2003.
4.140 Asset Purchase Agreement made as of February 6, 2003, by and among
TM Systems, Inc., TM Systems II, Inc. and API Electronics Group
Inc. pursuant to which API Electronics Group Inc.'s wholly-owned
subsidiary, TM Systems II, Inc. purchased certain assets of TM
Systems, Inc.
4.141 Letter of Employment dated February 6, 2003, from API Electronics
Group Inc. to Irwin Shuldman, confirming Mr. Shuldman's employment
as an executive officer with TM Systems II, Inc. for a period of
one year.
4.142 Letter of Employment dated February 6, 2003, from API Electronics
Group Inc. to Walter Weiner, confirming Mr. Weiner's employment as
an executive officer with TM Systems II, Inc. for a period of one
year.
8.1 List of Subsidiaries.
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12.1 Certification Under Section 13a-14(a) of the Securities Exchange
Act.
12.2 Certification Under Section 13a-14(a) of the Securities Exchange
Act.
12.3 Certification Under Section 13a-14(a) of the Securities Exchange
Act.
13.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
13.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
137