-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QDQ96VCM17qlQnfj3ACGiAN6psWHZRQ45xOS4Zz9GcME/yR+TDbVT0KZVVeGo4Tz Gja8ULC938MUaHtxFeMgIw== 0000950131-02-004090.txt : 20021031 0000950131-02-004090.hdr.sgml : 20021031 20021031153009 ACCESSION NUMBER: 0000950131-02-004090 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20021031 FILED AS OF DATE: 20021031 FILER: COMPANY DATA: COMPANY CONFORMED NAME: API ELECTRONICS GROUP INC CENTRAL INDEX KEY: 0001022282 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 000000000 FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-29142 FILM NUMBER: 02804943 BUSINESS ADDRESS: STREET 1: 505 UNIVERSITY AVE. STREET 2: STE 1400 TORONTO CITY: ONTARIO M5G 1X3 STATE: A6 BUSINESS PHONE: 8006062326 MAIL ADDRESS: STREET 1: 505 UNIVERSITY AVE. STREET 2: STE. 1400 TORONTO CITY: ONTARIO M5G 1X3 FORMER COMPANY: FORMER CONFORMED NAME: OPUS MINERALS INC DATE OF NAME CHANGE: 19991102 FORMER COMPANY: FORMER CONFORMED NAME: TNK RESOURCES INC DATE OF NAME CHANGE: 19960905 FORMER COMPANY: FORMER CONFORMED NAME: INVESTORLINKS COM INC DATE OF NAME CHANGE: 20000911 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 October, 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: October 31, 2002 By: /s/ Jason DeZwirek ---------------- ---------------------- Jason DeZwirek, Chairman of the Board, Executive V.P., Secretary and Director QUARTERLY AND YEAR END REPORT BC FORM 51-901 [LOGO] British Columbia Securities Commission (previously Form 61) ================================================================================ Freedom of Information and Protection of Privacy Act: The personal information requested on this form is collected under the authority of and used for the purpose of administering the Securities Act. Questions about the collection or use of this information can be directed to the Supervisor, Financial Reporting (604-899-6729), PO Box 10142, Pacific Centre, 701 West Georgia Street, Vancouver BC V7Y 1L2. Toll Free in British Columbia 1-800-373-5393 - -------------------------------------------------------------------------------- ISSUER DETAILS DATE OF REPORT FOR QUARTER YY MM DD NAME OF ISSUER ENDED 2002 10 30 API ELECTRONICS GROUP INC. 2002/08/31 - -------------------------------------------------------------------------------- ISSUER ADDRESS 505 UNIVERSITY AVENUE, SUITE 1400 - -------------------------------------------------------------------------------- CITY PROVINCE POSTAL ISSUER FAX NO. ISSUER TELEPHONE TORONTO ON CODE 416-593-4658 NO. M5G 1X3 416-593-6543 - ------------------------------------------------------------------ ------------- CONTACT NAME CONTACT POSITION CONTACT TELEPHONE JASON DEZWIREK CHAIRMAN NO. 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 (TM) "Jason DeZwirek" JASON DEZWIREK YY MM DD 2002 10 30 - -------------------------------------------------------------------------------- DIRECTOR'S SIGNATURE PRINT FULL NAME DATE SIGNED (TM) "Phillip DeZwirek" PHILLIP DEZWIREK YY MM DD 2002 10 30 - -------------------------------------------------------------------------------- SCHEDULE "A" FINANCIAL INFORMATION See attached unaudited consolidated financial statements of API Electronics Group Inc. (the "Company") for the three months ended August 31, 2002. API Electronics Group Inc. Consolidated Financial Statements For the three months ended August 31, 2002 (Expressed in US Dollars) The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 1 ================================================================================ API Electronics Group Inc. Balance Sheets (Expressed in US Dollars) August 31 May 31 2002 2002 - -------------------------------------------------------------------------------- Assets Current Cash $ 2,264,999 $ 1,408,637 Marketable securities 62,997 - Accounts receivable 1,064,426 1,073,058 Inventories (Note 2) 1,905,385 1,852,483 Prepaid expenses 56,315 45,358 --------------------------- 5,354,122 4,379,536 Capital assets (Note 3) 2,959,590 2,867,382 Goodwill (Note 4) 962,529 962,529 Intangible assets (Note 5) 309,427 325,712 --------------------------- $ 9,585,668 $ 8,535,159 =============================================================================== Liabilities and Shareholders' Equity Current Bank indebtedness (Note 6) $ 242,146 $ 284,488 Accounts payable 946,959 874,269 Current portion of long-term debt (Note 7) 1,039,672 1,072,706 --------------------------- 2,228,777 2,231,463 Future income tax liability (Note 8) 536,750 530,000 Long term debt (Note 7) 1,278,597 1,299,125 --------------------------- 4,044,124 4,060,588 --------------------------- Shareholders' equity Share capital (Note 10) 5,817,007 4,642,007 Paid in capital 770,790 770,790 Cumulative foreign exchange translation (16,178) - Deficit (1,030,075) (938,226) --------------------------- 5,541,544 4,474,571 --------------------------- $ 9,585,668 $ 8,535,159 =============================================================================== On behalf of the Board: (signed) Jason DeZwirek Director - ---------------------------------- (signed) Phillip DeZwirek Director - ---------------------------------- The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 2 ================================================================================ API Electronics Group Inc. Consolidated Statements of Operations and Deficit (Expressed in US Dollars) For the three months ended August 31 2002 2001 - -------------------------------------------------------------------------------- Sales $ 1,641,595 $ 925,016 Cost of sales 1,215,288 596,487 --------------------------- Gross profit 426,307 328,529 --------------------------- Expenses Selling 139,629 75,873 General and administrative 361,051 89,956 --------------------------- 500,680 165,829 --------------------------- Operating income (loss) (74,373) 162,700 Other (income) expenses Other income (13,507) (56,921) Interest on long term debt 30,983 11,530 --------------------------- 17,476 (45,391) --------------------------- Income (loss) before income taxes (91,849) 208,091 Income taxes (Note 8) - - --------------------------- Net income (loss) for the year (91,849) 208,091 Deficit, beginning of year (938,226) (80,583) --------------------------- Deficit, end of year $(1,030,075) $ 127,508 =============================================================================== Earnings (loss) per share - basic (Note 13) $ (0.006) $ 0.03 =============================================================================== The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 3 ================================================================================ API Electronics Group Inc. Statements of Cash Flows (Expressed in US Dollars)
For the three months ended August 31 2002 2001 - --------------------------------------------------------------------------------------- Cash was provided by (used in) Operating activities Net income (loss) for the year $ (91,849) $ 208,091 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Amortization 92,519 37,534 Changes in non-cash working capital balances (Note 11(a)) (45,534) (154,759) --------------------------- (44,864) 90,866 --------------------------- Investing activities Purchase of capital assets (168,442) (10,678) --------------------------- (213,306) 80,188 --------------------------- Financing activities Increase in future income tax liability 6,750 - Decrease in cumulative foreign exchange (16,178) - Issue of share capital 1,175,000 - Bank indebtedness repayments (42,342) (53,051) Repayment of long term debt (53,562) (10,742) Increase in long term debt - 51,999 --------------------------- 1,069,668 (11,794) --------------------------- Net increase in cash for the year 856,362 68,394 Cash, beginning of year 1,408,637 41,073 --------------------------- Cash, end of year $ 2,264,999 $ 109,467 =======================================================================================
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 4 ================================================================================ API Electronics Group Inc. Summary of Significant Accounting Policies (Expressed in US Dollars) August 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. 5 ================================================================================ API Electronics Group Inc. Summary of Significant Accounting Policies (Expressed in US Dollars) August 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. Marketable Securities Marketable securities are recorded at the lower of cost and stated market price 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. 6 ================================================================================ API Electronics Group Inc. Summary of Significant Accounting Policies (Expressed in US Dollars) August 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. The foreign exchange translation amount as at August 31, 2002 was $(16,178). 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 $1,803 (2001 - $1,250). 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. 7 ================================================================================ API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) August 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. 8 ================================================================================ API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) August 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 August 31 May 31 2002 2002 ------------------------- Inventory for the three months ended August 31, 2002 was estimated based upon gross margin percentage $ 1,905,385 $ 1,852,483 ========================= - -------------------------------------------------------------------------------- 3. Capital Assets August 31, 2002 ---------------------------------------- Cost Accumulated Net Amortization Book Value Land $ 393,283 $ - $ 393,283 Buildings 1,921,175 179,876 1,741,299 Computer equipment 39,108 1,715 37,393 Computer software 50,567 4,496 46,071 Furniture and fixtures 37,946 6,625 31,321 Machinery and equipment 1,521,262 834,268 686,994 Web site development costs 30,826 7,597 23,229 ---------------------------------------- $3,994,167 $1,034,577 $2,959,590 ======================================== 9 ================================================================================ API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollar) August 31, 2002 and 2001 - -------------------------------------------------------------------------------- 3. Capital Assets (continued) May 31, 2002 ---------------------------------------- Cost Accumulated Net Amortization Book Value Land $ 394,12 $ - $ 394,127 Buildings 1,780,573 160,099 1,620,474 Computer equipment 38,063 - 38,063 Computer software 50,322 - 50,322 Furniture and fixtures 40,252 6,751 33,501 Machinery and equipment 1,511,764 806,557 705,207 Web site development costs 30,826 5,138 25,688 ---------------------------------------- $3,845,927 $ 978,545 $2,867,382 ======================================== Included in machinery and equipment is $133,362 (May 31, 2002 - $133,362) of property held under capital leases. Depreciation and amortization expense amounted to $92,519 (2001 - $37,534). Of this amount $36,799 (2001 - $30,027) was included in cost of sales. - -------------------------------------------------------------------------------- 4. Goodwill August 31, 2002 May 31, 2002 --------------------------------- Goodwill $ 1,015,289 $ 1,015,289 Less: Accumulated amortization (52,760) (52,760) ----------------------------- $ 962,529 $ 962,529 ============================= - -------------------------------------------------------------------------------- 5. Intangible Assets August 31, 2002 May 31, 2002 --------------------------------- Non-compete agreement (Note 1 (b)) $ 325,712 $ 325,712 Less: Accumulated amortization (16,285) - ----------------------------- $ 309,427 $ 325,712 ============================= - -------------------------------------------------------------------------------- 6. Bank Indebtedness The Company'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 August 31, 2002, the Company has borrowed $Nil (May 31, 2002 - $42,343) against this line of credit. The line of credit bears interest at prime plus 1/2 percent and is secured by a special assignment of inventory, accounts receivable and unlimited guarantee from TCCL and a guarantee of Cdn $500,000 from CDL. 10 ================================================================================ API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) August 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 $1,925,100 $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% 80,756 95,145 Loan payable, unsecured and non-interest bearing, repayable in monthly instalments of $1,000 (i) 39,000 39,000 Mortgage payable, secured by real estate, repayable in blended monthly instalments of $3,737 at interest rates of 6.75% and 8.75% 160,938 166,262 Various equipment capital leases, with annual lease payments of $26,949 including interest at approximately 9% 97,623 102,089 Due to shareholder, non-interest bearing with no specific terms of repayment 14,852 15,065 ------------------------ 2,318,269 2,371,831 Less: Current portion 1,039,672 1,072,706 ------------------------ $1,278,597 $1,299,125 ========================
(i) On March 16, 2001, the Company entered into a joint venture agreement with a Massachusetts Corporation for the use and sale of semi-conductor equipment. The agreement took effect on April 1, 2001. During the year, the venture partners agreed to mutually end the agreement. The Company returned equipment valued at $120,000 and the Company's indebtedness was reduced by the same amount. As at August 31, 2002 the Company's indebtedness amounted to $39,000. The long term debt repayable over the next five fiscal years is as follows: (Nine 9 months ended) 2003 $ 1,039,672 2004 1,103,332 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. 11 ================================================================================ API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) August 31, 2002 and 2001 - -------------------------------------------------------------------------------- 8. Income Taxes As at August 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 (394,750) --------- $(536,750) ========= As at May 31, 2002, 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. 12 ================================================================================ API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) August 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 Shares issued upon private placement 500,000 1,175,000 ---------------------------- Balance at August 31, 2002 15,403,814 $ 5,817,007 ============================
13 ================================================================================ API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) August 31, 2002 and 2001 - -------------------------------------------------------------------------------- 10. Share Capital (continued) (c) Warrants Common shares purchase warrants ("Warrants") As at August 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 500,000 1 for 1 $3.00 June 30, 2004 The continuity of common share purchase warrants is as follows: Warrants outstanding, April 30, 2001 226,667 Issued - pursuant to advisory services 250,000 - pursuant to business acquisition (Note 1a) - Series A 3,250,000 - Series B 3,250,000 - Series A - broker warrants 125,000 - Series B - broker warrants 125,000 - Private Placement 500,000 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, August 31, 2002 4,025,825 ========== (d) Stock Options As at August 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. 14 ================================================================================ API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) August 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, August 31, 2002 325,000 $ 0.73 =======================
- -------------------------------------------------------------------------------- 11. Cash Flow Information (a) Changes in non-cash working capital are as follows:
2002 2001 ----------------------- Accounts receivable $ 8,632 $(261,398) Marketable securities (62,997) - Inventory (52,902) 12,999 Prepaid expenses (10,957) 7,746 Accounts payable 72,690 85,894 ----------------------- $ (45,534) $(154,759) =======================
(b) Supplemental Cash Flow Information
2002 2001 ----------------------- Cash paid for interest $ 30,983 $ 11,530
15 ================================================================================ API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) August 31, 2002 and 2001 - -------------------------------------------------------------------------------- 12. Related party Transactions (a) Included in consulting expenses are fees of $11,632 (2001 - $NIL) paid to an individual who is a director and officer of the Company. (b) 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. Per Share Data The weighted average number of shares issued and outstanding for the three months ended August 31, 2002 was 15,304,913. 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 August 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. Financial Instruments As at August 31, 2002 and May 31, 2002 there were no significant differences between the carrying amounts and the fair values of these instruments. It is management's opinion that the Company is not exposed to significant interest rate, currency, or credit risk. 16 API Electronics Group Inc. Notes to Consolidated Financial Statements (Expressed in US Dollars) August 31, 2002 and 2001 - -------------------------------------------------------------------------------- 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, 2002. (Nine months ended) 2003 $ 23,117 2004 22,243 2005 9,889 (b) 401(k) Plan During 1998, the Company adopted a 401(k) deferred compensation arrangement. Under the provision of the plan, the Company is required to match 50% of employee contributions up to a maximum of 3% of the employee's eligible compensation. Employees may contribute up to a maximum of 15% of eligible compensation. The Company may also make discretionary contributions up to a total of 15% of eligible compensation. During the three months ended August 31, 2002, $6,301 (2001 - $13,155) has been charged to general and administrative expenses. - -------------------------------------------------------------------------------- 16. Comparative Figures Comparative figures have been reclassified to conform with the current period presentation. 17 SCHEDULE "B" See attached unaudited consolidated financial statements of the Company for the three months ended August 31, 2002. SCHEDULE "C" MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - Three months ended August 31, 2002 compared to August 31, 2001 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. Sales Revenue The Company continued to record strong sales growth during the three months ended August 31, 2002. Revenues increased by 77.5% to $1,641,595 from $925,016 for the three months ended August 31, 2001. The growth during the period was attributed to the Filtran Group's sales revenue in the amount of $910,061 reflected in API's operations for the first time. Cost of Goods Sold and Gross Margin The cost of goods sold was 74.0% of sales in 2002 compared to 64.5% of sales in 2001. Accordingly, the gross margin for 2002 period decreased to 26.0% from the 35.5% gross margin in the 2001 period. The decrease in the gross margin is attributed mainly to increased competitive pricing in the market. Overall, the 74% cost of sales ratio is comparable to the fiscal 2002 cost of sales of 77.7% and the fiscal 2001 figure of 72.8%. Selling Expenses Selling expenses increased from $75,873 for the three months ended August 31, 2001 to $139,629 for the three months ended August 31, 2002. As a percentage of sales the 2002 selling expenses came in at 8.5% and is in line with the 8.2% posted for 2001. The 84% increase in selling expenses is consistent with the 77.5% increase in sales revenue. General and Administrative Expenses General and administrative expenses increased substantially from $89,956 for the 2001 year to $361,051 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 $35,739 (2001 - $NIL), professional fees of $50,408 (2001 - $5,805), public relations of $3,034 (2001 - $NIL), transfer agent fees of $2,384 (2001 - $NIL) all increased substantially and were attributable to increased costs that are inherent with public company compliance. In addition, the August 31, 2001 reverse take-over transaction and the May 31, 2002 acquisition of the Filtran Group (note 1a and 1b respectively in the notes to the consolidated financial statements) resulted in increased general and administrative expenses for API. Several components saw increases as follows: Office salaries - $88,446 (2001 - $15,795), consulting - $23,967 (2001 - - $4,431), rent - $9,664 (2001 - $NIL), telephone - $11,527 (2001 - $7,389). Management continues to emphasize efficiencies and control of overheads. Other Income and Expense Other income decreased substantially from $56,921 for the year ended August 31, 2001 to $13,507 for the year ended May 31, 2002. Other expense relates to interest on long-term debt and the Company saw a substantial increase from $11,530 in 2001 to $30,983 in 2002. The increase is attributed to the addition of debt in the form of a promissory note issued in connection with the Filtran Group acquisition. Net Income / Loss The Company incurred a net loss for the three months ended August 31, 2002 year of $91,849 compared to a net income of $208,091 for the 2001 period. Liquidity and Capital Resources Summary At August 31, 2002, the Company had cash reserves of $2,264,999 compared to $1,408,637 as at May 31, 2002. At August 31, 2002 working capital, the excess of current assets over current liabilities totalled $3,125,345 compared to $2,148,073 at May 31, 2002. The current ratio at August 31, 2002 was 2.4:1 compared to 2.0:1 at May 31, 2002. The quick ratio (which excludes inventory and prepaid expenses from current assets) is 1.3:1 at August 31, 2002 compared with 1.1:1 as at May 31, 2002. The increase in the current and quick ratio is attributed primarily to the increased sales level and cash received from a private placement. Inventory rose 3% from $1,852,483 as at May 31, 2002 to $1,905,385 as at August 31, 2002. Accounts payable rose 8% from $874,269 at May 31, 2002 to $946,949 as at August 31, 2002. Long-term debt (current and long-term portion) decreased from $2,371,831 at May 31, 2002 to $2,318,269 at August 31, 2002. The debt to equity ratio was 0.42 as at August 31. 2002 compared to 0.53 as at May 31. 2002. Cash Flow Cash generated (used) in operating activities decreased from $90,866 for the three months ended August 31, 2001 to $(44,864) for three months ended August 31, 2002. This increase is attributed primarily to the 2002 loss of $91,849. The major source of cash in 2002 was provided by the issue of 500,000 units of share capital that provided $1,175,000 in cash. The major use of cash during 2002 was the purchase of capital assets in the amount of $168,442 and the repayments of bank indebtedness ($42,342) and long-term debt repayments of ($53,562). 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. -----END PRIVACY-ENHANCED MESSAGE-----