6-K 1 d6k.txt FORM 6-K FORM 6-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 of the Securities and Exchange Act of 1934 For the month of September, 2002 API ELECTRONICS GROUP INC. (Formerly: Investorlinks.com Inc.) -------------------------------------------------------------------------------- (Translation of registrant's name into English) 505 University Ave., Suite 1400, Toronto, Ontario M5G 1X3 -------------------------------------------------------------------------------- (Address of principal executive offices) Indicate by check mark whether the registrant files or will file annual reports under cover form 20-F or Form 40-F: Form 20-F X Form 40-F ______ --- Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2b under the Securities Exchange Act of 1934: Yes:___ No: X --- If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- _____________ SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. API ELECTRONICS GROUP INC. (Formerly Investorlinks.com Inc.) Date: September 30, 2002 By: /s/ Jason DeZwirek ------------------ ------------------------------- Jason DeZwirek, Chairman of the Board, Executive V.P., Secretary and Director QUARTERLY AND YEAR END REPORT [LOGO BCSC] British Columbia Securities Commission BC FORM 51-901 (previously Form 61) Freedom of Information and Protection of Privacy Act: The personal information requested on this form is collected under the authority of and used for the purpose of administering the Securities Act. Questions about the collection or use of this information can be directed to the Supervisor, Financial Reporting (604-899-6729), PO Box 10142, Pacific Centre, 701 West Georgia Street, Vancouver BC V7Y 1L2. Toll Free in British Columbia 1-800-373-5393 -------------------------------------------------------------------------------------------------------- ISSUER DETAILS DATE OF REPORT NAME OF ISSUER FOR QUARTER ENDED YY MM DD API ELECTRONICS GROUP INC. 2002/05/31 2002 09 26 -------------------------------------------------------------------------------------------------------- ISSUER ADDRESS 505 UNIVERSITY AVENUE, SUITE 1400 -------------------------------------------------------------------------------------------------------- CITY PROVINCE POSTAL CODE ISSUER FAX NO. ISSUER TELEPHONE NO. TORONTO ON M5G 1X3 416-593-4658 416-593-6543 -------------------------------------------------------------------------------------------------------- CONTACT NAME CONTACT POSITION CONTACT TELEPHONE NO. JASON DEZWIREK CHAIRMAN 416-593-6543 -------------------------------------------------------------------------------------------------------- CONTACT EMAIL ADDRESS WEB SITE ADDRESS jason@kaboose.com www.api-electronics.com --------------------------------------------------------------------------------------------------------
CERTIFICATE The three schedules required to complete this Report are attached and the disclosure contained therein has been approved by the Board of Directors. A copy of this Report will be provided to any shareholder who requests it. ----------------------------------------------------------------------------- DIRECTOR'S SIGNATURE PRINT FULL NAME DATE SIGNED . "JASON DEZWIREK" JASON DEZWIREK YY MM DD 2002 09 26 ----------------------------------------------------------------------------- DIRECTOR'S SIGNATURE PRINT FULL NAME DATE SIGNED . "PHILLIP DEZWIREK" PHILLIP DEZWIREK YY MM DD 2002 09 26 ----------------------------------------------------------------------------- 2 SCHEDULE "A" FINANCIAL INFORMATION See attached audited consolidated financial statements of API Electronics Group Inc. (the "Company") for the fiscal years ended May 31, 2002 and 2001. API Electronics Group Inc. Consolidated Financial Statements For the years ended May 31, 2002 and 2001 (Expressed in US Dollars) API Electronics Group Inc. Consolidated Financial Statements For the years ended May 31, 2002 and 2001 (Expressed in US Dollars) Contents --------------------------------------------------------------------------- 2 Auditors' Report Consolidated Financial Statements 3 Balance Sheets 4 Statements of Operations and Deficit 5 Statements of Cash Flows 6 Summary of Significant Accounting Policies 9 Notes to Financial Statements Auditors' Report To the Shareholders of API Electronics Group Inc. We have audited the consolidated balance sheet of API Electronics Group Inc. as at May 31, 2002 and the consolidated statements of operations and deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards applicable in Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at May 31, 2002 and the results of its operations and its cash flows for the year then ended in accordance with generally accepted in Canada. The consolidated financial statements for the year ended May 31, 2001 were audited by another auditor who expressed an opinion without reservation on those statements in his report dated July 14, 2001. (signed) BDO Dunwoody LLP Chartered Accountants Toronto, Ontario August 2, 2002 2 API Electronics Group Inc. Balance Sheets (Expressed in US Dollars)
May 31 2002 2001 -------------------------------------------------------------------------------------------- Assets Current Cash $ 1,408,637 $ 41,073 Accounts receivable 1,073,058 340,383 Inventories (Note 2) 1,852,483 1,277,399 Prepaid expenses 45,358 13,174 ------------------------------ 4,379,536 1,672,029 Capital assets (Note 3) 2,867,382 881,700 Goodwill (Note 4) 962,529 10,552 Intangible assets (Note 5) 325,712 - ------------------------------ $ 8,535,159 $ 2,564,281 ============================================================================================ Liabilities and Shareholders' Equity Current Bank indebtedness (Note 6) $ 284,488 $ 342,146 Accounts payable 874,269 341,216 Current portion of long-term debt (Note 7) 1,072,706 58,640 ------------------------------ 2,231,463 742,002 Future income tax liability (Note 8) 530,000 - Long term debt (Note 7) 1,299,125 229,550 Convertible promissory note (Note 9) - 902,422 ------------------------------ 4,060,588 1,873,974 ------------------------------ Shareholders' equity Share capital (Note 10) 4,642,007 100 Paid in capital 770,790 770,790 Deficit (938,226) (80,583) ------------------------------ 4,474,571 690,307 ------------------------------ $ 8,535,159 $ 2,564,281 ============================================================================================
On behalf of the Board: (signed) Jason DeZwirek Director ------------------------------------------- (signed) Phillip DeZwirek Director ------------------------------------------- The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 3 API Electronics Group Inc. Consolidated Statements of Operations and Deficit (Expressed in US Dollars)
For the years ended May 31 2002 2001 ---------------------------------------------------------------------------------- Sales $ 2,903,120 $ 2,653,040 Cost of sales 2,255,841 1,930,582 ------------------------------ Gross profit 647,279 722,458 ------------------------------ Expenses Business development 501,583 - Selling 339,048 246,844 General and administrative 685,747 300,598 ------------------------------ 1,526,378 547,442 ------------------------------ Operating income (loss) (879,099) 175,016 Other (income) expenses Other income (75,565) (13,719) Interest on long term debt 37,467 86,342 ------------------------------ (38,098) 72,623 ------------------------------ Income (loss) before income taxes (841,001) 102,393 Income taxes (Note 8) 16,642 292 ------------------------------ Net income (loss) for the year (857,643) 102,101 Deficit, beginning of year (80,583) (182,684) ------------------------------ Deficit, end of year $ (938,226) $ (80,583) ================================================================================== Earnings (loss) per share - basic (Note 14) $ (0.12) $ 0.02 ==================================================================================
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 4 API Electronics Group Inc. Statements of Cash Flows (Expressed in US Dollars)
For the years ended May 31 2002 2001 --------------------------------------------------------------------------------------- Cash was provided by (used in) Operating activities Net income (loss) for the year $ (857,643) $ 102,101 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Amortization 150,138 120,132 Capitalized interest - 38,673 Changes in non-cash working capital balances (Note 11(a)) (103,543) (317,641) -------------------------- (811,048) (56,735) -------------------------- Investing activities Purchase of capital assets (257,217) (187,850) Business acquisition, net of cash acquired (955,374) - -------------------------- (1,212,591) (187,850) -------------------------- Financing activities Cash acquired through reverse take-over, net of acquisition costs 1,178,376 - Issue of share capital 2,296,212 - Bank indebtedness repayments (112,200) (5,083) Repayment of long term debt (58,575) (12,422) Increase in long term debt 87,390 222,000 -------------------------- 3,391,203 204,495 -------------------------- Net increase (decrease) in cash for the year 1,367,564 (40,090) Cash, beginning of year 41,073 81,163 -------------------------- Cash, end of year $ 1,408,637 $ 41,073 =======================================================================================
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 5 API Electronics Group Inc. Summary of Significant Accounting Policies (Expressed in US Dollars) May 31, 2002 and 2001 Nature of Business API Electronics Group Inc.'s ("the Company") business focus is the manufacture and design of high reliability semiconductor and microelectronics circuits for military, aerospace and commercial applications. Through recent acquisitions, the Company has expanded its manufacturing and design of electronic components to include filters, transformers, inductors, and custom power supplies for land and amphibious combat systems, mission critical information systems and technologies, shipbuilding and marine systems, and business aviation. Business Acquisition and Name Change On August 31, 2001, Investorlinks.com Inc. a public company incorporated under the laws of the Province of Ontario, and API Electronics Inc. ("API Electronics"), a private company incorporated under the laws of the State of New York, completed the business combination referred to in Note 1(a) to the financial statements. Pursuant to Articles of Amendment dated September 10, 2001, the Company changed its name from Investorlinks.com Inc. to API Electronics Group Inc. As stated in Note 1(a), the business combination has been accounted for as a reverse take-over of the Company by API Electronics. On May 31, 2002 the Company completed the acquisition of all the outstanding common shares of Filtran Inc. ("Filtran USA"), a private company incorporated under the laws of the State of New York; Filtran Limited ("Filtran Canada"), a private company incorporated under the laws of Ontario; Canadian Dataplex Limited ("CDL"), a private company incorporated under the laws of Canada, Tactron Communications (Canada) Limited ("TCCL"), a private company incorporated under the laws of Ontario. Filtran USA, Filtran Canada, CDL, TCCL are known collectively as the "Filtran Group". The Filtran Group's business focus is similar to that of the Company. The business combination, which has been accounted for using the purchase method, is described in Note 1 (b) to the financial statements. Principles of Consolidation The consolidated financial statements include the accounts of the Company (the legal parent), together with its wholly owned subsidiaries, API Electronics and the Filtran Group. Basis of Presentation These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. All amounts are disclosed in US dollars unless otherwise indicated. 6 API Electronics Group Inc. Summary of Significant Accounting Policies (Expressed in US Dollars) May 31, 2002 and 2001 Revenue Recognition Revenue is recognized when risk and title passes to the customer, which is generally upon shipment of the product. Revenues from contracts are recognized on the percentage of completion basis, measured by the percentage of contract costs incurred to date compared to estimated total contract costs for each contract. Inventory Raw materials are recorded at the lower of cost and net realizable value. Finished goods and work in process are stated at the lower of cost, which includes material, labour and overhead, and net realizable value. Cost is generally determined on a first-in, first-out basis. Capital Assets Capital assets are recorded at cost less accumulated amortization and are amortized using the straight-line basis over the following years: Buildings 20 years Computer equipment 3 years Computer software 3 years Furniture and fixtures 5 years Machinery and equipment Ranging from 5 to 10 years Website development 3 years Goodwill Effective January, 2002, the Canadian Institute of Chartered Accountants issued new accounting standards relating to accounting for goodwill and other intangible assets acquired in business combinations. Goodwill will no longer be required to be amortized, but is now subject to an annual test for impairment. Any impairment in the value of the goodwill is written off against earnings. Prior to 2002, goodwill was amortized on a straight-line basis over 5 years. Intangible Assets Intangible assets which have a finite life are amortized over their estimated useful lives. The non-compete agreement is amortized using the straight-line basis over 5 years. Income taxes The Company accounts for income taxes under the asset and liability method. Under this method, future income tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial reporting and tax bases of assets and liabilities and available loss carryforwards. A valuation allowance is established to reduce tax assets if it is more likely than not that all or some portions of such tax assets will not be realized. 7 API Electronics Group Inc. Summary of Significant Accounting Policies (Expressed in US Dollars) May 31, 2002 and 2001 Foreign Currency Translation The consolidated financial statements are stated in United States dollars, "the reporting currency". The transactions of the Company have been recorded during the period in Canadian dollars. The translation of Canadian dollars into United States dollars have been made at the year end exchange rate for monetary balance sheet items, the historical rate for non-monetary balance sheet items, and the average exchange rate for the year for revenues, expenses, gains and losses. The gains or losses on translation are included in net income (loss) for the year. The Filtran Group is a self-sustaining group which is translated at current rates of exchange. All exchange gains and losses will be accumulated in the foreign exchange translation account on the balance sheet. There was no foreign exchange translation amount at year end as the Filtran Group was acquired May 31, 2002. Accounting Estimates The preparation of these consolidated financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting periods. By their nature, these estimates are subject to uncertainty and the effect on the consolidated financial statements of changes in such estimates in future periods could be material. Advertising Costs The Company's policy is to expense advertising costs as incurred. Advertising expenses included in selling expenses is $14,535 (2001 - $12,767). Stock-Based Compensation Plans The Company has a stock-based compensation plan which is described in Note 8. No compensation expense is recognized for these plans when stock or stock options are issued to employees. Any consideration paid on the exercise of options or purchase of stock is credited to share capital. 8 API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) May 31, 2002 and 2001 1. (a) Business Acquisition, Name Change and Share Consolidation On August 31, 2001, the Company acquired all of the 197 issued and outstanding shares of API Electronics for $2,600,000. The purchase price was satisfied by the issue of 6,500,000 units of the Company at $0.40 per unit. Each unit consists of one common share and 1/2 of one Series A common share purchase warrants exercisable at $0.45 per share expiring February 28, 2003 and 1/2 of one Series B common share purchased warrant exercisable at $ 0.75 expiring August 30, 2003. As a result of the transaction, the original shareholders of API Electronics owned 60% of the issued shares of the Company. The business acquisition resulted in a change in business focus and an introduction of new management for the Company. Accordingly, the Company has accounted for the acquisition as a reverse take-over by API Electronics. Application of reverse take-over accounting results in the following: i) API Electronics is deemed to be the acquirer for accounting purposes and its assets and liabilities are included in the consolidated balance sheet at their carrying values. The comparative figures are those of API Electronics. ii) The consolidated balance sheet combines the assets and liabilities of the Company as an acquisition under the purchase method of accounting for business combinations. The net assets of the Company acquired, at fair value, as at August 31, 2001 are as follows: Cash and cash equivalents $1,213,248 Marketable securities 1,848 Other current assets 122,305 Capital assets 3,559 Current liabilities (132,815) ---------- Net assets acquired 1,208,145 Less: Cost of acquisition (34,872) ---------- Consideration attributed to share capital of shares issued $1,173,273 ========== Pursuant to Articles of Amendment dated September 10, 2001, the Company changed its name from Investorlinks.com.Inc. to API Electronics Group Inc. and consolidated the issued and outstanding common shares on the basis of one common share for every three issued and outstanding common share of the Company. (b) Business Acquisition On May 31, 2002, the Company acquired all of the issued and outstanding shares of the Filtran Group of companies for $2,996,547 (Cdn $4,100,000). The purchase price was satisfied through payment of cash in the amount of $1,042,277 and a promissory note given in the amount of $1,954,270 (Cdn $3,000,000). Also incurred were professional fees in connection with the acquisition in the amount of $327,065 giving a total acquisition cost of $3,323,612. The business combination was accounted for using the purchase method, whereby the fair market values of the net assets of the Filtran Group are reflected in the Company's balance sheet as at May 31, 2002. 9 API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) May 31, 2002 and 2001 1. (b) Business Acquisition (continued) The net assets acquired at fair value, as at May 31, 2002 are as follows: Cash $ 101,623 Current assets 1,204,202 Capital assets 1,984,492 Current liabilities (507,256) Long-term liabilities (217,690) Future income tax liabilities (530,000) ----------- Fair value of tangible net assets 2,035,371 Non-compete agreement 325,712 Goodwill 962,529 ----------- Total cost of acquisition $ 3,323,612 =========== 2. Inventories 2002 2001 ------------------------- Finished good $ 1,232,246 $ 866,799 Work-in-process 123,442 151,500 Raw materials 496,795 259,100 ------------------------- $ 1,852,483 $ 1,277,399 ========================= 3. Capital Assets 2002 ---------------------------------------- Cost Accumulated Net Amortization Book Value Land $ 394,127 $ - $ 394,127 Buildings 1,780,573 160,099 1,620,474 Computer equipment 38,063 - 38,063 Computer software 50,322 - 50,322 Furniture and fixtures 40,252 6,751 33,501 Machinery and equipment 1,511,764 806,557 705,207 Web site development costs 30,826 5,138 25,688 ---------------------------------------- $ 3,845,927 $ 978,545 $ 2,867,382 ======================================== 10 API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollar) May 31, 2002 and 2001 3. Capital Assets (continued) 2001 ------------------------------------- Cost Accumulated Net Amortization Book Value Land $ 147,875 $ - $ 147,875 Buildings 465,060 137,320 327,740 Furniture and fixtures 6,751 6,751 - Machinery and equipment 1,101,000 694,915 406,085 ------------------------------------ $ 1,720,686 $ 838,986 $ 881,700 ==================================== Included in machinery and equipment is $ 133,362 (2001 - $42,001) of property held under capital leases. Depreciation and amortization expense amounted to $150,138 (2001 - $120,132). Of this amount $115,979 (2001 - $96,106) was included in cost of sales. 4. Goodwill 2002 2001 ----------------------- Goodwill $1,015,289 $ 52,760 Less: Accumulated amortization (52,760) (42,208) ----------------------- $ 962,529 $ 10,552 ======================= 5. Intangible Assets 2002 2001 ----------------------- Non-compete agreement (Note 1(b)) $ 325,712 $ - Less: Accumulated amortization - - ----------------------- $ 325,712 $ - ======================= 6. Bank Indebtedness API Electronics's bank indebtedness is secured by all of its assets pursuant to a general security agreement and in addition is guaranteed by two of its former major shareholders. The bank indebtedness is due on demand and bears interest at prime plus 1/2%. The Company's wholly owned subsidiary, Filtran Canada has a line of credit of Cdn $1,000,000 with the Bank of Nova Scotia. As at May 31, 2002 the Company has borrowed $42,343 (Cdn $65,000) against this line of credit. The line of credit bears interest at prime plus 1/2 percent and is secured by a special assignment of inventory, accounts receivable and unlimited guarantee from TCCL and a guarantee of Cdn $500,000 from CDL. 11 API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) May 31, 2002 and 2001 7. Long-term Debt
2002 2001 --------------------------- Promissory note payable to former shareholders of the Filtran Group, secured by a collatered mortgage on real property registered in Ontario and the issued and outstanding shares of the Filtran Group, repayable in two equal payment of Cdn $1,500,000 on May 31, 2003 and May 31, 2004 plus interest at 5% per annum $ 1,954,270 $ - Bank term loans, secured by machinery and equipment, repayable in monthly instalments of $4,621 plus interest at rates varying from 7.75% to 10% 95,145 55,917 Loan payable, unsecured and non-interest bearing, repayable in monthly instalments of $1,000 (i) 39,000 174,000 Mortgage payable, secured by real estate, repayable in blended monthly instalments of $3,737 at interest rates of 6.75% and 8.75% 166,262 - Various equipment capital leases, with annual lease payments of $26,949 including interest at approximately 9% 102,089 14,698 Due to shareholder, non-interest bearing with no specific terms of repayment 15,065 43,575 --------------------------- 2,371,831 288,190 Less: Current portion 1,072,706 58,640 --------------------------- $ 1,299,125 $ 229,550 ===========================
(i) On March 16, 2001, the Company entered into a joint venture agreement with a Massachusetts Corporation for the use and sale of semi- conductor equipment. The agreement took effect on April 1, 2001. During the year, the venture partners agreed to mutually end the agreement. The Company returned equipment valued at $120,000 and the Company's indebtedness was reduced by the same amount. As at May 31, 2002 the Company's indebtedness amounted to $39,000. The long term debt repayable over the next five fiscal years is as follows: 2003 $ 1,072,706 2004 1,117,270 2005 81,141 2006 66,346 2007 19,301 Generally accepted accounting principles require disclosure of fair value of financial instruments. Fair value is the amount at which the instrument could be exchanged in a current transaction. Management has determined that there is no significant difference between the fair value and the carrying value of the long-term debt. 12 API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) May 31, 2002 and 2001 8. Income Taxes As at May 31, 2002 the significant components of future income tax assets consists of the following: Future income tax assets Loss carrying forwards $ 368,000 Capital assets 33,000 ------------- 401,000 ------------- Future income tax liabilities Capital assets (445,000) Non-compete agreement (98,000) ------------- (543,000) ------------- Valuation allowance (388,000) ------------- $ (530,000) ============= A reconciliation between income taxes provided at actual rates and at the basic rate of 40.29% for federal and provincial taxes is as follows: Net loss $ (841,001) ============= Recovery of income tax at statutory rates $ (339,000) Increase in taxes resulting from: Non-deductible items and other 16,000 Tax reassessment 1998 16,642 Change in valuation allowance 323,000 ------------- Provision for income taxes $ 16,642 ============= The Company has non-capital losses of approximately $914,000 to apply against future taxable income. These losses will expire as follows: $114,000 in 2006 and $800,000 in 2009. 9. Convertible Promissory Note One June 1, 1999, the principal shareholder of API Electronics to whom the Company owed $1,128,394 forgave interest due to him on his outstanding principal loan balance for the year ended May 31, 2000. On September 20, 2000 API Electronics signed a demand promissory note with the principal shareholder in the amount of $1,265,492. Under the demand promissory note, interest does not accrue on the unpaid balance unless and until there is an event of default. The principal shareholder assigned the note to a third party payee. 13 API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) May 31, 2002 and 2001 9. Convertible Promissory Note (continued) On April 1, 2001 API Electronics exchanged the demand promissory note for a convertible note. Under the convertible note, the unpaid principal is due and payable April 1, 2006. Interest does not accrue on the unpaid balance unless and until there is an event of default. The outstanding principal, but not unpaid and accrued interest on this convertible note, if any, shall at the option of the payee, convert into that number of common stock that equal, after the issuance, 49% of the then outstanding shares of the share capital of API Electronics on the date specified by the Payee by notice to API Electronics. The principal amount on the convertible note is $1,265,492. A component of the note, amounting to $363,070 has been recorded as other paid in capital and represents the value attributable to the convertibility feature of the note. This resulted in a debt discount in the same amount which is amortized over the term of the note and the amortization is included in interest expense. On July 1, 2001 the note was converted into 49% of the outstanding common shares of API Electronics. 10. Share Capital (a) Authorized Unlimited special shares Unlimited common shares (b) Issued Common Shares
Number of Shares Consideration ---------------------------- (i) Pre-business combination for API Electronics Balance at June 1, 2000 and May 31, 2001 100 $ 100 Issued upon the conversion of Note (Note 9) 97 902,422 ---------------------------- Balance at August 31, 2001 197 $ 902,522 ============================ (ii) Pre-business combination for the Company Balance at April 30, 2001 13,179,020 $ 2,985,416 Share consolidation (Note 1(a)) (8,786,048) - ---------------------------- Balance at August 31, 2001 4,392,972 $ 2,985,416 ============================ (iii) Issued from date of reverse take-over Share capital is comprised of the number of issued and outstanding shares of the Company and the stated capital of API Electronics 4,392,972 $ 902,522 Shares issued upon the reverse take-over (Note 1(a)) 6,500,000 1,173,273 Shares issued upon exercise of stock options 210,000 125,707 Shares issued upon exercise of warrants 3,200,842 1,920,505 Shares issued upon exercise of broker warrants 500,000 250,000 Shares issued as finders fee 100,000 270,000 ---------------------------- 14,903,814 $ 4,642,007 ============================
14 API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) May 31, 2002 and 2001 10. Share Capital (continued) (c) Warrants Common shares purchase warrants ("Warrants") As at May 31, 2002 the following Warrants are outstanding and exercisable:
Number Share for Exercise Expiry Outstanding Warrants Price Date ------------------------------------------------------------------ 226,667 1 for 1 $9.00 August 8, 2002 1,649,579 1 for 1 0.45 February 28, 2003 1,649,579 1 for 1 0.75 August 30, 2003 The continuity of common share purchase warrants is as follows: Warrants outstanding, April 30, 2001 226,667 Issued - pursuant to advisory services 250,000 - pursuant to business acquisition (Note 1a) - Series A 3,250,000 - Series B 3,250,000 - Series A - broker warrants 125,000 - Series B - broker warrants 125,000 Exercised - Re: Advisory services (250,000) - Series A (1,600,421) - Series B (1,600,421) - Series A - broker warrants (125,000) - Series B - broker warrants (125,000) ------------ Warrants outstanding, May 31, 2002 3,525,825 ============
(d) Stock Options As at May 31, 2002 the following options are exercisable, except as indicated, and outstanding:
Number Exercise Expiry Issued to Outstanding Price Date ------------------------------------------------------------------ Directors 150,000 $0.45 August 31, 2006 Directors 150,000 0.75 August 31, 2006 Directors 25,000 (i) 2.35 April 1, 2007
(i) 5,000 vest July 2002 and 5,000 vest each year thereafter. 15 API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) May 31, 2002 and 2001 10. Share Capital (continued) (d) Stock Options (continued)
The continuity of stock options is as follows: Weighted Number of Average Options Price ---------------------- Options outstanding, April 30, 2001 123,667 $ 7.08 Cancelled (113,667) 7.65 Granted- August 2001 500,000 0.60 - April, 2002 25,000 2.35 Exercised (210,000) 0.60 ---------------------- Options outstanding, May 31, 2002 325,000 $ 0.73 ======================
11. Cash Flow Information (a) Changes in non-cash working capital are as follows:
2002 2001 ---------------------- Accounts receivable $ 9,726 $ (74,096) Inventory (107,685) (304,473) Prepaid expenses 86,370 (5,215) Accounts payable (91,954) 66,143 ---------------------- $ (103,543) $ (317,641) ======================
(b) Supplemental Cash Flow Information
2002 2001 ---------------------- (i) Non-cash transaction Convertible promissory note converted into common stock $ 902,422 $ - Disposal of capital assets in settlement of equipment loan 120,000 - Finders fee paid through issue of common shares 270,000 - Shares issued on business acquisition (Note 1(a)) 1,173,273 - (ii) Cash paid for interest $ 37,467 $ 86,342
16 API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) May 31, 2002 and 2001 12. Related party Transactions (a) Included in capital assets are web site development costs in the amount of $30,826 (2001 - $NIL) paid to a company of which a shareholder of the company is a director. (b) Included in consulting expenses are fees of $27,522 (2001 - $NIL) paid to an individual who is a director and officer of the Company. (c) On July 1, 2001 the convertible promissory note held by a principal shareholder of API Electronics was converted into common shares of API Electronics (Note 9) These related party transactions were in the normal course of operations and are recorded at the exchange amount agreed to by the related parties. 13. Segmented Information (a) The Company's operations are conducted in two reportable segments which are distinguished by geographic location in Canada and United States. Both segments design and manufacture electronic components. Since the Canada segment was acquired May 31, 2002 all revenues are derived from the United States segment. 2002 2001 ----------------------- Total Assets Property and equipment United States $1,209,281 $ 881,700 Canada 1,658,101 - Goodwill United States - 10,552 Canada 962,529 - Other assets United States 2,104,140 1,672,029 Canada 2,558,765 - ---------------------- $8,492,816 $2,564,281 ====================== (b) Major Customer 2002 2001 ----------------------- Revenue U.S. Department of Defence 20% 22% U.S. Department of Defence subcontractors 50% 44% 17 API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) May 31, 2002 and 2001 14. Per Share Data The weighted average number of shares issued and outstanding for the year ended May 31, 2002 was 7,447,517. The number of shares outstanding for the period from the beginning of the fiscal year to the date of the reverse takeover is deemed to be the number of shares issued by the legal parent to the shareholders of the legal subsidiary as described in note 1(a). For the period from the date of the reverse takeover to the end of the fiscal year, the actual weighted average of shares issued during the period is used. The effect of the exercise of outstanding options and warrants would be anti-dilutive. For comparative purposes, the May 31, 2001 weighted average number of shares is 6,500,000, the actual number of shares issued to the legal subsidiary in the reverse takeover described in note 1(a). 15. Financial Instruments As at May 31, 2002 and 2001 there were no significant differences between the carrying amounts and the fair values of these instruments. It is management's opinion that the Company is not exposed to significant interest rate, currency, or credit risk. Accounts receivable consist principally of amounts due from the US Department of Defence, US Department of Defence subcontractors, and commercial/industrial users. Although, the U.S. Department of Defence (directly and through subcontractors) accounts for a significant portion of the Company's revenue (Note 13), management has determined that the Company is not economically dependent on this business as, if necessary, it could re-deploy resources to further service the commercial/industrial user. 16. Commitments and Contingencies (a) Rent The following is a schedule by years of approximate future minimum rental payments under operating leases that have remaining non-cancelable lease terms in excess of one year as of May 31, 2002. 2003 $ 30,822 2004 22,243 2005 9,889 18 API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) May 31, 2002 and 2001 16 Commitments and Contingencies (Continued) (b) 401(k) Plan During 1998, the Company adopted a 401(k) deferred compensation arrangement. Under the provision of the plan, the Company is required to match 50% of employee contributions up to a maximum of 3% of the employee's eligible compensation. Employees may contribute up to a maximum of 15% of eligible compensation. The Company may also make discretionary contributions up to a total of 15% of eligible compensation. During the year ended May 31, 2002, the Company incurred $30,157 (2001 - $17,425) as its obligation under the terms of the plan. Of this amount $30,157 (2001 - $17,425) has been charged to general and administrative expenses. 17. Comparative Figures Comparative figures have been reclassified to conform with current year presentation. 18. Subsequent Events On June 19, 2002, the Company completed a $1,175,000 private placement offering of 500,000 units at a price of $2.35 per unit. Each unit consists of one common share and one warrant. The warrants expire on June 30, 2004 and entitles the holders to purchase one additional common share at a price of $3.00 per share. Proceeds from the private placement will be used for general working capital purposes and to fund ongoing acquisition activities. 19 Schedule "B" See attached consolidated financial statements of the Company for the fiscal years ended May 31, 2002 and 2001. 20 SCHEDULE "C" Management's discussion and analysis of financial condition and results of operations Results of Operations Summary API Electronics Group Inc. ("API" or "Company") is a leading manufacturer of electronic components and microelectronic circuits with precisely defined functional capabilities for advanced military, industrial, commercial, automotive and medical applications. The Company is a leading supplier of defence electronic components to the U.S. Department of Defence and its subcontractors as well as having a strong commercial user base. API's business strategy has been to strengthen its leadership position for its components through continued emphasis on technological advances, operational efficiencies, cost reductions, competitiveness and acquisitions. To this end, on May 31, 2002, API acquired all the outstanding shares of the privately-held "Filtran Group" (Filtran Inc. of Ogdensburg, New York; Filtran Limited, Canadian Dataplex Limited and Tactron Communications (Canada) Limited all of Nepean, Ontario, Canada). Filtran Group is a leading global supplier of superior quality electronic components to major producers of communications equipment, military hardware, computer peripherals, process control equipment and instrumentation. In business since 1969, Filtran Group is ISO 9001 registered and offers off-the-shelf and custom designed products and regularly ships components to clients in more than 34 countries. The acquisition broadens API's product offerings for current and potential customers as well as providing synergies in the areas of engineering and technological capabilities. For the nine months ended May 31, 2002, the Filtran Group posted sales revenue of $3.34 million. Sales Revenue The Company continued to record strong sales growth during the fiscal year ended May 31, 2002. Revenues increased by 9.4% to $2.9 million from $2.65 million the previous year. The growth during the period was led by the performance of core product lines and accelerated by favourable market conditions for the Company's products in the military industry. Cost of Goods Sold and Gross Margin The cost of products sold as a percentage of sales increased during 2002 period compared to 2001. The cost of goods sold was 77.7% of sales in 2002 compared to 72.8% of sales in 2001. Accordingly, the gross margin for 2002 period decreased to 22.3% from the 27.2% gross margin in the 2001 period. The decrease is attributed mainly to increased competitive pricing in the market. Selling Expenses Selling expenses increased from $246,844 for the year ended May 31, 2001 to $339,048 for the year ended May 31, 2002. As a percentage of sales the 2002 selling expenses came in at 11.7% compared to 9.3% for 2001. The increase was primarily attributed to the addition of one sales person to support increased product sales levels. General and Administrative Expenses General and administrative expenses increased substantially from $300,598 for the 2001 year to $685,747 incurred during the 2002 year. Several components of general and administrative expenses saw increases as a direct result of API's new status as a public company. Investor relations of $108,758 (2001 - $0), professional services of $94,747 (2001 - $9,000), shareholder information of $9,070 (2001 - $0), transfer agent fees of $10,382 (2001 - $0) 21 all increased substantially and were attributable to increased costs that are inherent with public company compliance. Management continues to emphasize efficiencies and control of overheads. There are several areas where certain expenses could be classified as non-recurring in nature. Website maintenance of $7,434 and IL Data expenses (expenses of InvestorLinks.com - a predecessor company) of $7,156 are such non-recurring expenses. In addition, professional services expense was higher than normal as additional fees were incurred in API's first year audit as a public company. Management estimates that going forward these expenses should see a decrease of least $20,000. Also, investor relations expense was higher than normal as additional fees were incurred to launch the profile of API in the investment community. These fees were necessary in API's first year as a public company but management estimates that going forward investor relations should see a decrease of approximately $50,000. Business Development These costs increased from $0 in 2001 to $501,583 in 2002. These costs relate primarily to business plan development to help create market awareness for products and investors and to help provide support for any future financing and acquisitions. The Company believes that spending in this area was critical to assist the company gain exposure in the competitive public company environment and ultimately to increase shareholder value. Although benefits from these expenditures will continue in the future, management has determined that the $501,583 is a non-recurring expense going forward. Other Income and Expense Other income increased substantially from $13,719 for the year ended May 31, 2001 to $75,568 for the year ended May 31, 2002. The increase was attributed to rental income realized during the year. Other expense relates to interest on long-term debt and the Company saw a substantial decrease from $86,342 in 2001 to $37,467 in 2002. Net Income/Loss The Company incurred a net loss for the 2002 year of $857,643 compared to a net income of $102,101 for the 2001 year. The loss is largely attributed to the business development costs of $501,583 as described above. Liquidity and Capital Resources Summary At May 31, 2002, the Company had cash reserves of $1,366,294 compared to $41,073 as at May 31, 2001. At May 31, 2002 working capital, the excess of current assets over current liabilities totalled $2,148,073 compared to $930,027 at May 31, 2001. The current ratio at May 31, 2002 was 2.0:1 compared to 2.25:1 at May 31, 2001. The quick ratio (which excludes inventory and prepaid expenses from current assets) is 1.1:1 at May 31, 2002 compared with .51:1 as at May 31, 2001. The increase in the current and quick ratio is attributed primarily to the increased sales level, cash received from the exercise of warrants, and a favourable working capital position of the Filtran Group at acquisition. Specific working capital components saw large increases as at May 31, 2002. Accounts receivable rose 215% from $340,383 at May 31, 2001 to $1,073,058 (the 2002 addition of the Filtran Group accounts receivable of $790,029 substantially explains the increase). Accounts payable rose 156% from $341,216 at May 31, 2001 to $874,269 at May 31, 2002 (the 2002 addition of the Filtran Group accounts payable of $492,191 substantially explains the increase). 22 Long-term debt (current and long-term portion) increased from $570,766 in 2001 to $2,371,831 in 2002. The increase is attributed largely to the promissory note in the amount of $1,954,270 issued in connection with the acquisition of the Filtran Group. The debt to equity ratio improved to 0.53 in 2002 compared to 1.74 in 2001. Cash Flow Cash used in operating activities increased from $(56,735) for the year ended May 31, 2001 to $(811,048) for year ended May 31, 2002. This increase is attributed primarily to the 2002 loss of $857,643. The major source of cash in 2002 was provided by the exercise of warrants and options. This exercise of securities added cash totalling $2,296,212 during the year. The other significant source of cash was $1,178,376 acquired via the reverse take-over transaction as described in note 1(a) of these consolidated financial statements. The major uses of cash during 2002 were the Filtran Group acquisition in the amount of $997,717 and the purchase of capital assets in the amount of $257,217. On June 19, 2002, the Company completed a $1,175,000 private placement offering of 500,000 units at $2.35 per unit. Each unit consists of one common share and one warrant. The warrants expire on June 30, 2004 and entitles the holders to purchase one additional common share at a price of $3.00 per share. Proceeds from the private placement will be used for general working capital purposes and to fund ongoing acquisition activities. Capital Assets and Intangibles The acquisition of the Filtran Group substantially improved API's design and manufacturing capabilities. The addition of machinery and equipment in the amount of $312,841 and land & building in the amount of $1,577,094 brought API's state-of-the-art facilities to 48,500 square feet. API also acquired Filtran Group's thousands of engineered designs, a blue-chip customer base, an excellent management team and workforce, and a first-rate quality control system anchored by their ISO 9001 registration. These values are reflected as goodwill in the amount of $962,529. Furthermore, API acquired a non-compete agreement in the amount of $325,712 to help ensure all the benefits and synergies of the acquisition can be realized in the future. Risks The Company is exposed to a variety of risks in its operations. These include operational, currency, foreign operations, credit, and interest rate. Steps have been taken in all areas to mitigate these risks. 23