The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
(Unaudited) (Dollar Amounts in Thousands, Except Per Share Data)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of Business
API Technologies Corp.
(API, and together with its subsidiaries, the Company) designs, develops, and manufactures systems, subsystems, modules, and components for RF microwave, millimeterwave, electromagnetic, power, and security applications, as
well as provides electronics manufacturing for technically demanding, high-reliability applications.
On February 28, 2016, API entered into an
Agreement and Plan of Merger (the Merger Agreement) with RF1 Holding Company (Parent) and RF Acquisition Sub, Inc., a wholly owned subsidiary of Parent (Merger Sub), providing for the merger of Merger Sub with and
into the Company (the Merger), with API surviving the Merger as a wholly owned subsidiary of Parent (see Note17).
On June 8, 2015 API
completed the acquisition of Aeroflex / Inmet, Inc. (Inmet) and Aeroflex / Weinschel, Inc. (Weinschel) from Cobham plc for a total purchase price of approximately $80,000. Inmet and Weinschel have each been in business for
more than 40 years, and each manufactures and sells RF and microwave products for defense, space, avionics, wireless, and test and measurement applications. The acquisitions of Inmet and Weinschel add breadth to APIs RF, microwave, and
microelectronics product portfolio, extend the Companys subsystems offering, and further APIs reach in key end markets, including defense, space, commercial aviation, and wireless. API financed the acquisition with an $85,000 add-on to
its existing term loan with Guggenheim Corporate Funding LLC (see Note 4 and Note 8a).
The unaudited consolidated financial statements include the
accounts of API and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. There are no other entities controlled by the Company, either directly or indirectly. The
financial statements have been prepared in accordance with the requirements of Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (the SEC).
Accordingly, certain information and footnote disclosures required in financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. In the opinion of the Companys management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal
recurring adjustments) that the Company considers necessary for the fair presentation of the Companys consolidated financial position as of February 29, 2016 and the results of its operations and cash flows for the three month period
ended February 29, 2016. Results for the interim period are not necessarily indicative of results that may be expected for the entire year or for any other interim periods. The unaudited condensed consolidated financial statements should be
read in conjunction with the audited financial statements of the Company and the notes thereto as of and for the year ended November 30, 2015 included in the Companys Form 10-K filed with the SEC on March 2, 2016.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
The preparation of financial
statements in conformity with generally accepted accounting principles in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts in the consolidated financial statements, and the
disclosures made in the accompanying notes. Examples of estimates include the provisions made for bad debts and obsolete inventory, estimates associated with annual goodwill impairment tests, and estimates of deferred income tax and liabilities. The
Company also uses estimates when assessing fair values of assets and liabilities acquired in business acquisitions as well as any fair value and any related impairment charges related to the carrying value of machinery and equipment, other
long-lived assets, fixed assets held for sale and discontinued operations. The Company also uses estimates in determining the remaining economic lives of long-lived assets. In addition, the Company uses assumptions when employing the Black-Scholes
valuation model to estimate the fair value of share options. Despite the Companys intention to establish accurate estimates and use reasonable assumptions, actual results may differ from these estimates.
Inventories
Inventories, which include materials, labor,
and manufacturing overhead, are stated at the lower of cost (on a first-in, first-out basis) or net realizable value. On a quarterly basis, the Company evaluates inventories for potential write-down for identifiable obsolescence and slow moving
items. The evaluation includes analysis of future demand, product mix and possible alternative uses. The Company records a provision that includes excess and obsolete inventory when write-downs or write-offs are identified. Any write-down of
inventory at the close of a fiscal period creates a new cost basis that subsequently would not be marked up based on changes in underlying facts and circumstances. The Company periodically reviews and analyzes its inventory management systems, and
conducts inventory impairment testing on a quarterly basis.
7
Fixed Assets
Fixed assets are recorded at cost less accumulated depreciation and are depreciated using the straight-line method over the following periods:
|
|
|
|
|
Straight line basis
|
|
Buildings and leasehold improvements
|
|
|
5-40 years
|
|
Computer equipment
|
|
|
3-5 years
|
|
Furniture and fixtures
|
|
|
5-8 years
|
|
Machinery and equipment
|
|
|
5-10 years
|
|
Vehicles
|
|
|
3 years
|
|
Betterments are capitalized and amortized by the Company, using the same amortization basis as the underlying assets over the
remaining useful life of the original asset. Betterments include renovations, major repairs and upgrades that increase the service of a fixed asset and extend the useful life. Gains and losses on depreciable assets retired or sold are recognized in
the consolidated statements of operations in the year of disposal. Repairs and maintenance expenditures are expensed as incurred.
Goodwill and
Intangible Assets
Goodwill and intangible assets result primarily from business acquisitions accounted for under the purchase method. Goodwill and
intangible assets with indefinite lives are not amortized but are subject to impairment by applying a fair value based test. The Company completes an annual (or more often if impairment indicators arise under the applicable accounting guidance)
impairment assessment of its goodwill on a reporting unit level. The Companys annual impairment test for goodwill is September 1st.
Intangible
assets that have a finite life are amortized using the following basis over the following periods:
|
|
|
Non-compete agreements
|
|
Straight line over 5 years
|
|
|
Computer software
|
|
Straight line over 3-5 years
|
|
|
Customer related intangibles
|
|
Straight line or the pattern in which the economic benefits are expected to be realized, over an estimated life of 4-15 years
|
|
|
Marketing related intangibles
|
|
The pattern in which the economic benefits are expected to be realized, over an estimated life of 3-10 years
|
|
|
Technology related intangibles
|
|
The pattern in which the economic benefits are expected to be realized, over an estimated life of 10 years
|
Long-Lived Assets
The
Company periodically evaluates the net realizable values of long-lived assets, principally identifiable intangibles and capital assets, for potential impairment when events or changes in circumstances indicate that the carrying amount of such assets
may not be recoverable, as determined based on the estimated future undiscounted cash flows. If such assets were considered to be impaired, the carrying value of the related assets would be reduced to their estimated fair value.
Income Taxes
Deferred 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 net operating loss carry forwards. 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.
The Companys valuation allowance was recorded on
the deferred tax assets to reduce deferred tax assets to the amounts that we estimate are probable to be realized. In determining the adequacy of the valuation allowance, the Company applied the authoritative guidance, and considered such factors as
(i) the reversal of existing temporary differences; (ii) future taxable income exclusive of reversing temporary differences and carryforwards; (iii) taxable income in prior carryback years where carryback is permitted; and
(iv) prudent and feasible tax planning strategies.
8
The Company follows the guidance concerning accounting for uncertainty in income taxes, which clarifies the
accounting and disclosure for uncertainty in tax positions. The guidance requires that the Company determine whether it is more likely than not that a tax position will not be sustained upon examination by the appropriate taxing authority. If a tax
position does not meet the more likely than not recognition criterion, the guidance requires that the tax position be measured at the largest amount of benefit greater than 50 percent not likely of being sustained upon ultimate settlement.
Based on the Companys evaluation, management has concluded that there are no significant uncertain tax positions requiring recognition in the
consolidated financial statements. Open tax years include the tax years ended January 21, 2011 through November 30, 2015.
The Company from time
to time has been assessed interest or penalties by major tax jurisdictions, however such assessments historically have been minimal and immaterial to our financial results. If the Company receives an assessment for interest and/or penalties, it
would be classified in the consolidated financial statements as general and administrative expense.
Revenue Recognition
The Company recognizes non-contract revenue when it is realized and earned. The Company considers non-contract revenue realized or realizable and earned when
it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Delivery is not considered to have occurred until products have been shipped and risk of loss
and ownership has transferred to the client. Revenue from production-type contracts, which represents less than one per cent of total revenue, 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. A 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. Revenue from contracts under the percentage of completion method is not significant to the financial
statements.
Deferred Revenue
The Company defers
revenue when payment is received in advance of the service or product being shipped or delivered.
Research and Development
Research and development costs are expensed when incurred.
Stock-Based Compensation
The Company follows the
authoritative guidance for accounting for stock-based compensation. The guidance requires that new, modified and unvested stock-based payment transactions with employees, such as grants of stock options, restricted stock units (RSUs) and
restricted stock, be recognized in the financial statements based on their fair value at the grant date and recognized as compensation expense on a straight-line basis over the requisite service period for each separately vesting portion of the
award. Stock-based compensation cost for RSUs is measured based on the closing fair market value of the Companys common stock on the date of grant. The fair value of each option granted is estimated on the grant date using the Black-Scholes
option pricing model which takes into account as of the grant date the exercise price and expected life of the option, the current price of the underlying shares and its expected volatility, expected dividends on the shares and the risk-free
interest rate for the term of the option.
Foreign Currency Translation and Transactions
The Companys functional currency is U.S. dollars and the consolidated financial statements are stated in U.S. dollars, the reporting
currency. Integrated operations have been translated from various foreign currencies (British Pounds Sterling, Canadian dollars, Chinese Yuan, Euros, and Mexican Pesos) into U.S. dollars at the period-end exchange rate for monetary balance
sheet items, the historical rate for fixed assets and shareholders equity, and the average exchange rate for the year for revenues, expenses, gains and losses. The gains or losses on translation are included as a component of other
comprehensive income (loss) for the period.
9
Financial Instruments
The fair values of financial instruments including cash and cash equivalents, accounts receivable, accounts payable, and short-term borrowings approximate
their carrying values due to the short-term nature of these instruments. Unless otherwise noted, it is managements opinion that the Company is not exposed to significant interest rate, currency or credit risks arising from its financial
instruments. The recorded value of long-term debt approximates the fair value of the debt as the terms and rates approximate market rates.
In the
ordinary course of business, the Company carries out transactions in various foreign currencies (British Pounds Sterling, Canadian Dollars, Chinese Yuan, Euros, and Mexican Pesos) included in the Companys cash, accounts receivable, accounts
payable, bank indebtedness, as well as a mortgage loan. The translation adjustments related to these accounts have been reflected as a component of comprehensive loss. Currently, the Company does not maintain a foreign currency hedging program.
Debt Issuance Costs and Long-term Debt Discounts
Fees
paid to obtain debt financing or amendments under such debt financing are treated as debt issuance costs and are capitalized and amortized over the life of the debt using the effective interest method. These payments are shown as a financing
activity on the consolidated statement of cash flows and are shown as net against long-term debt in the consolidated balance sheets.
The Company may
record debt and equity discounts in connection with raising funds through the issuance of convertible notes or equity instruments. These discounts may arise from (i) the receipt of proceeds less than the face value of convertible notes or
equity instruments, (ii) beneficial conversion features and/or (iii) recording derivative liabilities related to embedded features. These costs are amortized over the life of the debt to interest expense utilizing the effective interest
method. If a conversion of the underlying debt occurs, a proportionate share of the unamortized discount is immediately expensed.
Concentration of
Credit Risk
The Company maintains cash balances, at times, with financial institutions, which are in excess of amounts insured by the Federal Deposit
Insurance Corporation (FDIC), Canadian Deposit Insurance Corporation (CDIC) and Financial Services Compensation Scheme (FSCS in the United Kingdom). Management monitors the soundness of these institutions and has not experienced any collection
losses with these institutions.
The U.S., U.K. and Canadian Governments Departments of Defense (directly and through subcontractors) accounts for
approximately 41%, 12% and 3% of the Companys revenues for the three months ended February 29, 2016 (41%, 11% and 1% for the three months ended February 28, 2015), respectively. A loss of a significant customer could adversely impact
the future operations of the Company.
Earnings (Loss) per Share of Common Stock
Basic earnings per share of common stock is computed by dividing income (loss) by the weighted average number of shares of common stock outstanding during the
period. Diluted earnings per share of common stock gives effect to all dilutive potential shares of common stock outstanding during the period. The computation of diluted earnings per share does not assume conversion, exercise or contingent exercise
of securities that would have an anti-dilutive effect on earnings per share (Note 12).
Comprehensive Income (Loss)
Comprehensive income (loss), which includes foreign currency translation adjustments, is shown in the Consolidated Statement of Operations and Comprehensive
Income (Loss).
3. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
Recently Issued Accounting Pronouncements
In May 2014,
the FASB issued guidance which affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other
standards (e.g., insurance contracts or lease contracts). The new guidance will supersede the existing revenue recognition requirements, and most industry-specific guidance. Following the announcement of a one year deferral in July 2015, for a
public entity, the amendments in this guidance are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. The guidance permits
companies to either apply the requirements retrospectively to all prior periods presented or apply the requirements in the year of adoption, through a cumulative adjustment. The Company has not yet selected a transition method nor has it determined
the impact of adoption on its consolidated financial statements.
10
In February 2016, the FASB issued guidance, which replaces the existing guidance for leases. The new standard
establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition in the income statement. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and requires retrospective
application. The Company will adopt in fiscal 2020 and is currently evaluating the impact of the guidance on its consolidated financial statements.
In
July 2015, the FASB issued guidance that requires an entity to measure inventory at the lower of cost and net realizable value when the FIFO or average cost method is used. Net realizable value is the estimated selling price in the ordinary course
of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and should be applied
prospectively. Earlier adoption is permitted. The Company is currently assessing the impact the adoption of the amended guidance will have on its consolidated financial statements but the adoption is not expected to have a significant impact on the
Companys consolidated financial statements.
4. ACQUISITIONS
Inmet and Weinschel
On June 8, 2015
API completed the acquisition of Inmet and Weinschel for a total purchase price of $79,392, which included a payment of $80,000 partially offset by a working capital adjustment of $608. Inmet and Weinschel have each been in business for more than 40
years, and each manufactures and sells RF and microwave products for defense, space, avionics, wireless, and test and measurement applications. The acquisitions of Inmet and Weinschel add breadth to APIs RF, microwave, and microelectronics
product portfolio, extend the Companys subsystems offering, and further APIs reach in key end markets, including defense, space, commercial aviation, and wireless. API financed the acquisition with an $85,000 add-on to its existing term
loan with Guggenheim Corporate Funding LLC (see Note 8). The acquisition expands the Companys RF and Microwave capabilities and the Company believes that additional revenue opportunities will be generated through cross selling. These factors
contributed to a purchase price resulting in the recognition of goodwill.
The Company has accounted for the acquisition using the
purchase method of accounting in accordance with the guidance on business combinations. The Company also incurred legal costs, reorganization charges and professional fees in connection with the acquisition of approximately $1,129 as of
November 30, 2015. These expenses have been accounted for as operating expenses. The results of operations of Inmet and Weinschel have been included in the Companys results of operations beginning on June 8, 2015 in the Systems,
Subsystems & Components (SSC) segment.
Accounting guidance requires that identifiable assets acquired and liabilities assumed be
reported at fair value as of the acquisition date of a business combination. The purchase consideration was preliminarily allocated to assets acquired and liabilities assumed as follows:
|
|
|
|
|
|
|
(in thousands)
|
|
Accounts receivable and other current assets
|
|
$
|
6,854
|
|
Inventory
|
|
|
12,655
|
|
Fixed assets
|
|
|
5,365
|
|
Customer, marketing and technology related intangible assets
|
|
|
28,179
|
|
Goodwill
|
|
|
32,469
|
|
Current liabilities
|
|
|
(6,130
|
)
|
|
|
|
|
|
Total purchase consideration
|
|
$
|
79,392
|
|
|
|
|
|
|
The purchase consideration for Inmet and Weinschel exceeded the underlying fair value of the net assets
acquired, giving rise to the goodwill. The resulting goodwill will be deductible for tax purposes. Customer, marketing and technology related intangibles are amortized based on the pattern in which the economic benefits are expected to be realized,
over estimated lives of four to twelve years. The purchase accounting is preliminary subject to the completion of the fair value assessment of the accounting for income taxes. Material adjustments, if any, to provisional amounts in subsequent
periods, will be reflected as required.
Revenues and net loss of Inmet and Weinschel combined, for the three month period ended
February 29, 2016 were approximately $10,583 and $632, respectively.
11
Fixed assets acquired in this transaction consist of the following:
|
|
|
|
|
|
|
(in thousands)
|
|
Land
|
|
$
|
385
|
|
Buildings and leasehold improvements
|
|
|
3,397
|
|
Computer equipment
|
|
|
15
|
|
Furniture and fixtures
|
|
|
207
|
|
Machinery and equipment
|
|
|
1,361
|
|
|
|
|
|
|
Total fixed assets acquired
|
|
$
|
5,365
|
|
|
|
|
|
|
The following unaudited pro forma summary presents the combined results of operations as if the Inmet and Weinschel
acquisitions described above had occurred at the beginning of the three month period ended February 28, 2015.
|
|
|
|
|
|
|
Three months ended
February 28,
|
|
|
|
2015
|
|
Revenues
|
|
$
|
62,045
|
|
Net loss
|
|
$
|
130
|
|
Net loss per sharebasic and diluted
|
|
$
|
0.00
|
|
5. INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
February 29,
2016
|
|
|
November 30,
2015
|
|
Raw materials
|
|
$
|
34,624
|
|
|
$
|
34,222
|
|
Work in progress
|
|
|
19,257
|
|
|
|
19,355
|
|
Finished goods
|
|
|
10,104
|
|
|
|
11,666
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
63,985
|
|
|
$
|
65,243
|
|
|
|
|
|
|
|
|
|
|
At February 29, 2016 and November 30, 2015, inventories are presented net of inventory reserves of $8,169 and
$9,343, respectively.
6. SHORT-TERM DEBT
The
Company has a credit facility in place for certain of its U.K. subsidiaries for approximately $347 (250 GBP), which renews in July 2016. This line of credit is tied to the prime rate in the United Kingdom and is secured by the subsidiaries
assets. This facility was undrawn as of February 29, 2016 and November 30, 2015.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
February 29,
2016
|
|
|
November 30,
2015
|
|
Trade accounts payable
|
|
$
|
19,843
|
|
|
$
|
22,493
|
|
Accrued expenses
|
|
|
13,204
|
|
|
|
12,551
|
|
Wage and vacation accrual
|
|
|
4,697
|
|
|
|
6,751
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,744
|
|
|
$
|
41,795
|
|
|
|
|
|
|
|
|
|
|
12
8. LONG-TERM DEBT
The Company had the following long-term debt obligations:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
February 29,
2016
|
|
|
November 30,
2015
|
|
Term loans, due February 6, 2018, base rate plus 7.50% interest or LIBOR plus 8.50%,
(a)
|
|
$
|
193,690
|
|
|
$
|
193,690
|
|
Mortgage loan, due 2027, 1.35% above Barclays fixed bank rate (b)
|
|
|
864
|
|
|
|
956
|
|
Capital leases payable (c)
|
|
|
5,361
|
|
|
|
5,380
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
199,915
|
|
|
$
|
200,026
|
|
Less: Current portion of long-term debt
|
|
|
(27,200
|
)
|
|
|
(21,816
|
)
|
Discount and deferred financing charges on term loans
|
|
|
(2,161
|
)
|
|
|
(2,480
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
170,554
|
|
|
$
|
175,730
|
|
|
|
|
|
|
|
|
|
|
a)
|
On February 6, 2013, the Company refinanced its credit facilities and entered into (i) a credit agreement (the Term Loan Agreement) with various lenders and Guggenheim Corporate Funding, LLC, as
agent (the Agent) that provided for a $165,000 term loan facility and (ii) a credit agreement with various lenders and Wells Fargo Bank, National Association (the Revolving Loan Agreement) that provided for a $50,000
asset-based revolving borrowing base credit facility, with a $10,000 subfacility (or the Sterling equivalent) for certain of our United Kingdom subsidiaries, a $10,000 subfacility for letters of credit and a $5,000 subfacility for swingline loans.
|
On March 21, 2014, the Company entered into Amendment No. 2 to the Term Loan Agreement (the Amendment
No. 2), to provide for an incremental term loan facility in an aggregate principal amount equal to $55,000 (the Incremental Term Loan Facility), which Incremental Term Loan Facility is subject to substantially the same terms
and conditions, including the applicable interest rate and the maturity date of February 6, 2018, as the $165,000 term loan facility provided upon the initial closing of the Term Loan Agreement. In addition, Amendment No. 2 amended the
Term Loan Agreement to reduce the minimum interest coverage ratio and increase the maximum leverage ratio, among other things.
The
proceeds of the Incremental Term Loan Facility were used (i) to pay in full and terminate the Companys Revolving Loan Agreement; (ii) to redeem all 26,000 shares of the Companys Series A Preferred Stock that were outstanding;
(iii) to pay fees, costs and expenses associated with the Incremental Term Loan Facility and related transactions; and (iv) for general corporate purposes. This resulted in the write-off of approximately $10,212 of deferred financing costs
and note discounts in the quarter ended May 31, 2014.
On June 8, 2015, the Company entered into Amendment No. 3 to the Term
Loan Agreement (the Amendment No. 3), to provide for an incremental term loan facility in an aggregate principal amount equal to $85,000 (the Second Incremental Term Loan Facility), increased the margins applicable to
the outstanding term loans to 7.50% in the case of base rate loans and 8.50% in the case of LIBOR loans, beginning December 2015, amended the prepayment premiums that the Company is required to pay upon voluntary prepayments or certain mandatory
prepayments of the term loans, permitted certain additional adjustments to the Companys consolidated EBITDA for cost savings in connection with the acquisition Inmet and Weinschel and reduced the minimum interest coverage ratio and increased
the maximum leverage ratio for certain compliance periods. The proceeds of the Second Incremental Term Loan Facility were primarily used to fund the purchase price for the Inmet and Weinschel acquisition.
On February 28, 2016, the Company entered into Amendment No. 4 to the Term Loan Agreement ( Amendment No. 4), by and
among the Company, the lenders party thereto and the Agent.
Term Loan Agreement
The term loans incurred pursuant to the Term Loan Agreement, as amended through Amendment No. 2, bore interest, at the Companys
option, at the base rate plus 6.50% or an adjusted LIBOR rate (based on one, two or three-month interest periods) plus 7.50% for the first year and at the base rate plus 7.50% or an adjusted LIBOR rate (based on one, two or three-month interest
periods) plus 10.75% thereafter, with a LIBOR floor of 1.50%. Amendment No. 3 increased the margins applicable to the outstanding term loans to 7.50% in the case of base rate loans and 8.50% in the case of LIBOR loans, beginning December 2015.
For purposes of the Term Loan Agreement, the base rate means the highest of Wells Fargo Bank, National Associations prime rate, the federal funds rate plus a margin equal to 0.50% and the adjusted LIBOR rate for a 3-month interest
period plus a margin equal to 1.00%.
Interest is due and payable in arrears monthly for term loans bearing interest at the base rate and
at the end of an interest period (or at each three month interval in the case of term loans with interest periods greater than three months) in the case of term loans bearing interest at the adjusted LIBOR rate. Principal payments of the term loans
are paid at the end of each of the Companys fiscal quarters, with the balance of any outstanding term loans due and payable in full on February 6, 2018. The quarterly principal payments amortized at 1.25% for the fiscal quarters through
the end of the Companys 2014 fiscal year, at 1.875% for the fiscal quarters through the end of the Companys 2015 fiscal year and will amortize at 2.50% for each of the fiscal quarters thereafter.
13
Under certain circumstances, the Company is required to prepay the term loans upon the receipt of
cash proceeds of certain asset sales, cash proceeds of certain extraordinary receipts and cash proceeds of certain debt or equity financings, and based on a calculation of annual excess cash flow. Mandatory prepayments resulting from assets sales or
certain debt financings may require the payment of certain prepayment premiums.
The term loans are secured by a first priority security
interest in accounts receivable, inventory, machinery, equipment and certain other personal property relating to the foregoing, and any proceeds from any of the foregoing, subject to certain exceptions and liens, and a first priority security
position on substantially all other real and personal property, in each case that are owned by the Company and the subsidiary guarantors.
The Term Loan Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its
subsidiaries ability to, among other things, incur indebtedness, grant liens, dispose of assets and pay dividends or make distributions to stockholders. The Term Loan Agreement has the financial covenants of a minimum interest coverage ratio
and maximum leverage ratio. On February 28, 2016, in connection with transactions contemplated by the Merger Agreement (see Note 17), the Company entered into Amendment No. 4. Amendment No. 4 amends the Term Loan Agreement to add
additional mandatory prepayment events upon the occurrence of a change of control (as defined in the Term Loan Agreement) and/or receipt of any termination fees under the Merger Agreement and decreases the prepayment premiums that the Company is
required to pay upon a voluntary or mandatory prepayment of any of the outstanding term loans. Upon consummation of the transactions contemplated by the Merger Agreement, the Company will be required to pay a prepayment premium in an amount equal to
1% of the amount of the term loans prepaid. Amendment No. 4 also amends the amortization schedule applicable to future term loan payments made by the Company by removing the Companys obligation to make an amortization payment for the
fiscal quarters ending February 29, 2016 and May 31, 2016 and requiring the Company to make an amortization payment in an amount equal to 5.0% of the original aggregate term loan amount on the earlier of (a) May 27, 2016 and
(b) the date of termination of the Merger Agreement.
Amendment No. 4 reduces the minimum interest coverage ratio and increases
the maximum leverage ratio for the November 30, 2015 compliance period and the fiscal 2016 compliance periods, and adds additional events of default upon either (a) the termination of the Merger Agreement or (b) the Companys
failure to consummate the transactions contemplated by the Merger Agreement on or prior to May 27, 2016. At February 29, 2016, the Company was in compliance with these amended financial covenants.
Pursuant to the Term Loan Agreement, the Company is also required to limit its annual capital expenditures to $4,000 per fiscal year (subject
to carry-over rights).
Revolving Loan Agreement
On March 21, 2014, approximately $25,136 of the proceeds of the Incremental Term Loan Facility was used to pay in full and terminate the
Companys Revolving Loan Agreement.
b)
|
A subsidiary of the Company in the United Kingdom entered into a 20 year term mortgage agreement in 2007, under which interest is charged at a margin of 1.35% over Barclays Fixed Base Rate of 0.5% at November 30,
2015. The mortgage is secured by the subsidiarys assets.
|
c)
|
On December 31, 2013, the Company completed the sale and leaseback (the Sale/Leaseback) of the Companys facility located in State College, Pennsylvania. The Company sold the facility to an
unaffiliated third party for a gross purchase price of approximately $15,500 and will lease the property from the buyer for approximately $1,279 per year, subject to annual adjustments. As a result of this transaction the Company initially recorded
a capital lease obligation of $5,225. The gain on the sale has been deferred and is being recognized over the 15 year lease term.
|
9.
SHAREHOLDERS EQUITY
On January 20, 2010 the Company agreed to issue 800,000 shares of API common stock payable as part of the compensation
to Kuchera Defense Systems, Inc. (KDS), KII, Inc. (KII) and Kuchera Industries, LLC (KI Industries and collectively with KDS and KII, the KGC Companies) or their designees. 250,000 shares were issued
and delivered at closing, an additional 250,000 shares were to be issued and delivered on the first anniversary of the closing and 300,000 shares were to be issued and delivered on the second anniversary of the closing. The Company issued 126,250
shares in escrow from the originally deferred 550,000 shares. The unissued shares were initially accounted for as common shares subscribed but not issued. Following the Kuchera settlement in October 2015, the Company issued the remaining 423,750
shares. In addition, on January 20, 2010 and January 22, 2010, we issued warrants to purchase an aggregate of 892,862 shares of common stock with an exercise price of $5.60 per share, which expired on January 20, 2015 and
January 22, 2015.
14
In connection with the Plan of Arrangement that occurred on November 6, 2006, the Company was obligated to
issue 2,354,505 shares of either API common stock or exchangeable shares of API Nanotronics Sub, Inc. in exchange for the API Electronics Group Corp. common shares previously outstanding. As of February 29, 2016, API is obligated to issue a
remaining approximately 63,886 shares of its common stock under the Plan of Arrangement either directly for API common shares or in exchange for API Nanotronics Sub, Inc. exchangeable shares not held by API or its affiliates. There are 22,617
exchangeable shares outstanding (excluding exchangeable shares held by the Company) as of February 29, 2016. Exchangeable shares are substantially equivalent to our common shares.
On November 6, 2006, API amended its certificate of incorporation to allow it to issue one special voting share. This special voting share was issued to
a trustee in connection with a Plan of Arrangement and allows the trustee to have at meetings of stockholders of API the number of votes equal to the number of exchangeable shares not held by API or subsidiaries of API. (The trustee is charged with
obtaining the direction of the holders of exchangeable shares on how to vote at meetings of API stockholders.) The API Nanotronics Sub, Inc. exchangeable shares are convertible into shares of API common stock at any time at the option of the holder.
API may force the conversion of API Nanotronics Sub., Inc. exchangeable shares into shares of API common stock on the tenth anniversary of the date of the Plan of Arrangement or sooner upon the happening of certain events.
The Company issued 661,250 options and 217,500 RSUs during the three months ended February 29, 2016 (no options or RSUs during three months ended
February 28, 2015) (Note 10). The Company values its option grants using the Black-Scholes option-pricing model.
10. STOCK-BASED
COMPENSATION
Of the 5,875,000 shares authorized under the Equity Incentive Plan, 2,341,534 shares are available for issuance pursuant to options,
RSUs, or stock as of February 29, 2016. Under the Companys Equity Incentive Plan, incentive options and non-statutory options may have a term of up to ten years from the date of grant. The stock option exercise prices are equal to at
least 100 percent of the fair market value of the underlying shares on the date the options are granted.
As of February 29, 2016 there was $641 of
total unrecognized compensation related to non-vested stock options, which are not contingent upon attainment of certain milestones. The cost is expected to be recognized over the remaining periods of the options, which are expected to vest from
2015 to 2019.
During the three months ended February 29, 2016 and February 28, 2015, $348 and $79, respectively, has been recognized as
stock-based compensation expense in general and administrative expense.
The fair value of each option grant is estimated at the grant
date using the Black-Scholes option-pricing model based on the assumptions detailed below:
|
|
|
|
|
|
|
Year ended
February 29, 2016
|
|
Expected volatility
|
|
|
70.8
|
%
|
Expected dividends
|
|
|
0
|
%
|
Expected term
|
|
|
9.3 years
|
|
Risk-free rate
|
|
|
1.7
|
%
|
The summary of the common stock options granted, cancelled, exchanged or exercised under the Plan:
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Stock Options outstandingNovember 30, 2014
|
|
|
1,328,310
|
|
|
$
|
4.52
|
|
Less forfeited
|
|
|
(33,183
|
)
|
|
$
|
4.60
|
|
Issued
|
|
|
707,500
|
|
|
$
|
1.98
|
|
|
|
|
|
|
|
|
|
|
Stock Options outstandingNovember 30, 2015
|
|
|
2,002,627
|
|
|
$
|
3.62
|
|
Less forfeited
|
|
|
(414,925
|
)
|
|
$
|
3.21
|
|
Issued
|
|
|
661,250
|
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
|
Stock Options outstandingFebruary 29, 2016
|
|
|
2,248,952
|
|
|
$
|
2.97
|
|
|
|
|
|
|
|
|
|
|
Stock Options exercisableFebruary 29, 2016
|
|
|
850,202
|
|
|
$
|
5.24
|
|
|
|
|
|
|
|
|
|
|
15
Restricted stock unit activity under the 2006 Equity Compensation Plan is presented below:
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
RSUs outstandingNovember 30, 2014
|
|
|
48,334
|
|
|
$
|
3.30
|
|
Issued
|
|
|
273,381
|
|
|
$
|
1.96
|
|
VestedStock issued
|
|
|
(43,334
|
)
|
|
$
|
3.72
|
|
|
|
|
|
|
|
|
|
|
RSUs outstandingNovember 30, 2015
|
|
|
278,381
|
|
|
$
|
1.96
|
|
Issued
|
|
|
217,500
|
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
|
RSUs outstandingFebruary 29, 2016
|
|
|
495,881
|
|
|
$
|
1.61
|
|
|
|
|
|
|
|
|
|
|
RSUs vestedFebruary 29, 2016
|
|
|
5,000
|
|
|
$
|
2.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs and Options Outstanding
|
|
|
RSUs Vested and Options Exercisable
|
|
Range of
Exercise Price
|
|
Number of
Outstanding
at Feb. 29,
2016
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
|
Number
Vested or
Exercisable
at Feb. 29,
2016
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
$0.00 $3.55
|
|
|
2,149,631
|
|
|
$
|
1.45
|
|
|
|
7.92
|
|
|
$
|
1,530
|
|
|
|
260,000
|
|
|
$
|
3.41
|
|
|
$
|
10
|
|
$3.56 $4.99
|
|
|
17,084
|
|
|
$
|
3.56
|
|
|
|
4.65
|
|
|
$
|
|
|
|
|
17,084
|
|
|
$
|
3.56
|
|
|
$
|
|
|
$5.00 $6.99
|
|
|
572,284
|
|
|
$
|
5.98
|
|
|
|
4.73
|
|
|
$
|
|
|
|
|
572,284
|
|
|
$
|
5.98
|
|
|
$
|
|
|
$7.00 $20.00
|
|
|
5,834
|
|
|
$
|
14.07
|
|
|
|
1.24
|
|
|
$
|
|
|
|
|
5,834
|
|
|
$
|
14.07
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,744,833
|
|
|
|
|
|
|
|
7.22
|
|
|
$
|
1,530
|
|
|
|
855,202
|
|
|
|
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The price of the RSUs for purposes of Weighted Average Exercise Price is zero. The intrinsic value is calculated as the excess
of the market value as of February 29, 2016 over the exercise price of the options and over an amount of zero with respect to the RSUs. The market value as of February 29, 2016 was $1.95 as reported by the NASDAQ Stock Market.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
Three months ended
|
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
636
|
|
|
$
|
220
|
|
Cash paid for interest
|
|
$
|
4,627
|
|
|
$
|
2,792
|
|
12. EARNINGS PER SHARE OF COMMON STOCK
The following table sets forth the computation of weighted-average shares outstanding for calculating basic and diluted earnings per share (EPS):
|
|
|
|
|
|
|
|
|
|
|
Three months ended
February 29 and February 28
|
|
|
|
2016
|
|
|
2015
|
|
Weighted average shares-basic
|
|
|
55,914,633
|
|
|
|
55,461,217
|
|
Effect of dilutive securities
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Weighted average sharesdiluted
|
|
|
55,914,633
|
|
|
|
55,461,217
|
|
|
|
|
|
|
|
|
|
|
Basic EPS and diluted EPS for the three months ended February 29, 2016 and February 28, 2015 have been computed by
dividing the net income (loss) by the weighted average shares outstanding. The weighted average numbers of shares of common stock outstanding includes exchangeable shares and shares to be issued under the Plan of Arrangement.
16
*
|
Outstanding options and RSUs aggregating 2,744,833 February 29, 2016 (1,363,961 February 28, 2015) incremental shares have been excluded from the February 29, 2016 and February 28, 2015
computation of diluted EPS as they are anti-dilutive due to the losses generated in each respective period.
|
13. COMMITMENTS AND
CONTINGENCIES
On September 15, 2011, Currency, Inc., KII Inc., Kuchera Industries, LLC, William Kuchera and Ronald Kuchera (the
Plaintiffs) filed a lawsuit against API and three API subsidiaries (the API Pennsylvania Subsidiaries) in the Court of Chancery of the State of Delaware in relation to the Asset Purchase Agreement by and among API, the API
Pennsylvania Subsidiaries, the KGC Companies, William Kuchera, and Ronald Kuchera dated January 20, 2010. Plaintiffs complaint alleges claims for breach of contract and unjust enrichment based on their contention that API and the API
Pennsylvania Subsidiaries violated the Agreement by failing to issue certain shares of stock to Plaintiffs and by failing to cooperate with Plaintiffs in the filing of a final general and administrative overhead rate with the Defense Contracting
Audit Agency. API and the API Pennsylvania Subsidiaries filed an answer to the complaint denying all liability and a counterclaim for breach of contract against Plaintiffs. Of the 550,000 shares that had not been delivered under the Asset Purchase
Agreement, 126,250 were placed in escrow and the remaining 423,750 shares were previously accounted for as common shares subscribed but not issued with a value of $2,373.
In October 2015, the Company settled the Kuchera litigation described above for a $2,500 note payable to the plaintiffs and the delivery of the remaining
550,000 shares under the Asset Purchase Agreement to the plaintiffs. If the net proceeds resulting from the sale of the 550,000 shares do not, in the aggregate, yield at least $1,000, API will issue additional shares of common stock until the net
proceeds of all such shares is $1,000. To the extent net proceeds from the sale of the 550,000 shares exceed $1,000, such excess will be credited against amounts due under the note. As of February 29, 2016 the shares have been issued and
delivered, but have not been sold. The closing price of the Companys stock as of February 29, 2016 was $1.95 per share, as reported by the NASDAQ Stock Market. The note (recorded in Accounts payable and accrued expenses) will bear
interest at the rate of 12% until April 1, 2016 and 18% thereafter. Monthly payments of interest only are required until April 1, 2016, and thereafter equal monthly payments of interest and principal will be amortized and payable over a 48
month period. All amounts due under the note will accelerate and become due and payable if the Term Loan Agreement is refinanced. There is no prepayment penalty.
In connection with the Merger, three purported class action complaints have been filed on behalf of the stockholders against the Company, members of the board
of directors, J.F. Lehman & Company, Parent and Merger Sub in the Circuit Court for the Ninth Judicial Circuit in and for Orange County, Florida. The three complaints are captioned as follows:
Smith v. API Technologies Corp.
et. al.,
2016-CA-001988-O (Cir. Ct. Fl.);
Marcus v. API Technologies Corp. et. al.
, 2016-CA-002257-O (Cir. Ct. Fl.);
Strougo v. API Technologies Corp. et. al.
, 2016-CA-002629-O (Cir. Ct. Fl.) (actions filed March 2, 2016,
March 14, 2016, and March 24, 2016, respectively). The complaints generally allege, among other things, that the board of directors of the Company breached its fiduciary duties to the stockholders by failing to ensure that Company
stockholders received adequate and fair value for their shares. The complaints also generally assert that the Company, J.F. Lehman & Company and Parent aided and abetted the board of directors breach of its fiduciary duties. The
lawsuits seek, among other things, to enjoin the consummation of the Merger, rescission of the Merger Agreement (to the extent the Merger has already been consummated), damages, and attorneys fees and costs. The parties have engaged in
discovery and litigation activities in advance of the finalization of the Merger. All three actions are currently pending, a motion to consolidate the three actions is also pending, and the Merger has not yet been finalized.
The Company is also a party to lawsuits in the normal course of its business. Litigation can be unforeseeable, expensive, lengthy and disruptive to normal
business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material adverse effect on the Companys business, operating results, or financial
condition.
In accordance with required guidance, the Company accrues for litigation matters when losses become probable and reasonably estimable. The
Company has no recorded accrual relating to its outstanding legal matters as of February 29, 2016 (November 30, 2015$0). As of the end of each applicable reporting period, or more frequently, as necessary, the Company reviews each
outstanding matter and, where it is probable that a liability has been incurred, it accrues for all probable and reasonably estimable losses. Where the Company is able to reasonably estimate a range of losses with respect to such a matter, it
records an accrual for the amount within the range that constitutes its best estimate. If the Company can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, it will use the amount that is the
low end of such range. Because of the uncertainty, the complexity and the many variables involved in litigation, the actual costs to the Company with respect to its legal matters may differ from our estimates, could result in a significant
difference and could have a material adverse effect on the Companys financial position, liquidity, or results of operations. If we determine that an additional loss in excess of our accrual is probable but not estimable, the Company will
provide disclosure to that effect. The Company expenses legal costs as they are incurred.
Upon closing the contemplated Merger as referenced in Note 17,
the Company is liable to pay fees and expenses to its investment banking firm in the amount of approximately $4,300. Other Merger related costs yet to be incurred, such as additional legal, accounting and certain investment banking fees, must
be paid even if the Merger is not completed. Under certain circumstances specified in the Merger Agreement, the Company may be required to pay Parent a termination fee of approximately $3,500.
14. INCOME TAXES
For the three month periods ended
February 29, 2016 and February 28, 2015, the Companys effective income tax rates were (12.0)% and (14.3)% for continuing operations, respectively compared to an applicable U.S. federal statutory income tax rate of 34%. The difference
between the effective tax rate and U.S. statutory tax as of February 29, 2016 and February 28, 2015 is primarily due to the existence of a valuation allowance recorded against deferred tax assets including net operating losses, as well as,
the income of foreign subsidiaries being taxed at rates lower than the U.S. statutory rate. For the three months ended February 29, 2016, the Company recorded valuation allowances on deferred tax assets relating to current year losses. The
Company also recorded non-cash deferred tax expense in connection with the tax amortization of indefinite-lived intangible assets, which cannot be used as a source of future taxable income in calculating the current year valuation allowance.
17
As of February 29, 2016, the Company had no significant unrecognized tax benefits.
The Company records interest and penalties related to tax matters within general and administrative expenses on the accompanying Consolidated Statement of
Operations. These amounts are not material to the consolidated financial statements for the periods presented. The Companys U.S. tax returns are subject to examination by federal and state taxing authorities. Generally, tax years 2011-2015
remain open to examination by the Internal Revenue Service or other tax jurisdictions to which the Company is subject. The Companys Canadian tax returns are subject to examination by federal and provincial taxing authorities in Canada.
Generally, tax years 2011-2015 remain open to examination by Canada Revenue Agency or other tax jurisdictions to which the Company is subject.
15.
RESTRUCTURING CHARGES RELATED TO CONSOLIDATION OF OPERATIONS
In accordance with accounting guidance for costs associated with asset exit or disposal
activities, restructuring costs are recorded as incurred. Restructuring charges for employee workforce reductions are recorded upon employee notification.
During the three months ended February 29, 2016 and February 28, 2015 the Company has reflected within the consolidated statement of operations
restructuring charges of $596 and $872, respectively. These restructuring charges included lease impairment and legal charges, workforce reductions and other expenses related to consolidating certain operations, and costs related to the change in
the Companys Chief Executive Officer. The actions taken as part of these restructuring activities are intended to realize synergies from our combined SSC operations, contain costs and streamline our operations. Management continues to evaluate
whether other related assets have been impaired, and has concluded that there should be no additional impairment charges as of February 29, 2016.
As
of February 29, 2016, the Company has also recorded a lease impairment accrual of approximately $1,516 related to one of the facilities of its EMS business and $241 related to one of the facilities of its SSC business.
16. SEGMENT INFORMATION
The Company follows the
authoritative guidance on the required disclosures for segments which establish standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises
report selected information about operating segments in financial reports. The guidance also establishes standards for related disclosures about products, geographic areas and major customers.
The Companys operations are conducted in three principal business segments: Systems, Subsystems & Components (SSC), Secure Systems &
Information Assurance (SSIA) and Electronic Manufacturing Services (EMS). Inter-segment sales are presented at their market value for disclosure purposes. Corporate includes general and administrative functions and unallocated costs of our shared
service operations/management, administrative and other shared corporate services functions such as information technology, legal, finance, human resources, and marketing. These administrative and other shared services costs have been allocated in
the adjusted EBITDA measure based on a percent of revenue for each respective operating segment.
The Companys chief operating decision maker
evaluates segment performance based primarily on revenues and Adjusted EBITDA. The accounting policies of each of the operating segments are the same as those described in the summary of significant accounting policies in Note 2. Adjusted EBITDA
represents income from continuing operations excluding depreciation and amortization, stock-based compensation expense and other items as described below. Management views adjusted EBITDA as an important measure of segment performance because it
removes from operating results the impact of items that management believes do not reflect the Companys core operating performance. Adjusted EBITDA is a measure which is also used in calculating financial ratios in material debt covenants in
the Companys credit facilities.
Management does not evaluate the performance of its operating segments using asset measures. The identifiable
assets by segment disclosed in this note are those assets specifically identifiable within each segment and include cash, accounts receivable, inventory, goodwill and intangible assets.
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended February 29, 2016
(in thousands)
|
|
SSC
|
|
|
SSIA
|
|
|
EMS
|
|
|
Corporate
|
|
|
Inter
Segment
Eliminations
|
|
|
Total
|
|
Revenue from external customers
|
|
$
|
42,701
|
|
|
$
|
5,261
|
|
|
$
|
6,465
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
54,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA:
|
|
|
5,142
|
|
|
|
1,528
|
|
|
|
(475
|
)
|
|
|
|
|
|
|
|
|
|
|
6,195
|
|
Acquisition related charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183
|
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
596
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,322
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,326
|
|
Amortization of note discounts and deferred financing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
343
|
|
Other adjustments *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assetsas at February 29, 2016
|
|
$
|
296,168
|
|
|
$
|
12,017
|
|
|
$
|
20,793
|
|
|
$
|
5,834
|
|
|
$
|
|
|
|
$
|
334,812
|
|
Goodwill included in assetsas at Feb. 29, 2016
|
|
$
|
146,770
|
|
|
$
|
|
|
|
$
|
2,469
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
149,239
|
|
Purchase of fixed assets, to February 29, 2016
|
|
$
|
255
|
|
|
$
|
1
|
|
|
$
|
15
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
271
|
|
|
|
|
|
|
|
|
Three months ended February 28, 2015
(in thousands)
|
|
SSC
|
|
|
SSIA
|
|
|
EMS
|
|
|
Corporate
|
|
|
Inter
Segment
Eliminations
|
|
|
Total
|
|
Revenue from external customers
|
|
$
|
38,386
|
|
|
$
|
4,258
|
|
|
$
|
8,206
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA:
|
|
|
5,242
|
|
|
|
755
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
6,047
|
|
Acquisition related charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
872
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,459
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,127
|
|
Amortization of note discounts and deferred financing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
Other adjustments *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assetsas at November 30, 2015
|
|
$
|
305,267
|
|
|
$
|
11,089
|
|
|
$
|
21,024
|
|
|
$
|
7,645
|
|
|
$
|
|
|
|
$
|
345,025
|
|
Goodwill included in assetsas at Nov. 30, 2015
|
|
$
|
146,770
|
|
|
$
|
|
|
|
$
|
2,469
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
149,239
|
|
Purchase of fixed assets, to February 28, 2015
|
|
$
|
144
|
|
|
$
|
12
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
159
|
|
*
|
Other adjustments primarily include non-cash inventory provisions, stock based compensation, franchise taxes, financing and other adjustments, lease payments for the State College, Pennsylvania facility, and foreign
exchange losses.
|
17. AGREEMENT AND PLAN OF MERGER
On February 28, 2016, API entered into the Merger Agreement with Parent and Merger Sub, providing for the merger of Merger Sub with and into API, with API
surviving the Merger as a wholly owned subsidiary of Parent.
At the effective time of the Merger, each share of common stock, par value $0.001 per share,
of API (the API Common Stock) issued and outstanding as of immediately prior to the effective time, other than certain excluded shares, will be cancelled and automatically converted into the right to receive $2.00 cash, without interest
(the Per Share Price). API RSUs and API options will be cancelled and converted into the right to receive the Per Share Price, less, with respect to API options, the exercise price per share underlying such API options, if any.
Consummation of the Merger is subject to certain conditions, including, without limitation, (i) the receipt of the necessary approval of the Merger from
APIs stockholders, which was obtained by written consent on February 29, 2016; (ii) the absence of any law or order restraining, enjoining or otherwise prohibiting the Merger; and (iii) the expiration or termination of any
waiting periods applicable to the consummation of the Merger under applicable antitrust and competition laws.
API has made customary representations and
warranties in the Merger Agreement and has agreed to customary covenants regarding the operation of the business of API prior to the consummation of the Merger.
19
The Merger Agreement contains certain termination rights for API and Parent. Upon termination of the Merger
Agreement under specified circumstances (principally in connection with terminating the Merger Agreement to accept a superior proposal, as defined in the Merger Agreement), API will be required to pay Parent a termination fee of $3,500.
Upon termination of the Merger Agreement under specified circumstances, Parent will be required to pay API a termination fee of $5,000. This reverse
termination fee is payable if the Merger Agreement is terminated by API if Parent and Merger Sub fail to consummate the Merger under certain circumstances or if Parent or Merger Sub have willfully breached their respective representations,
warranties, covenants or other agreements in the Merger Agreement in certain circumstances and have failed to cure such breach within a certain period. A private equity fund affiliated with J.F. Lehman & Company has provided API with a
limited guaranty guaranteeing the payment of the reverse termination fee and certain other monetary obligations that may be owed by Parent pursuant to the Merger Agreement. The Merger Agreement also provides that either party may, under certain
circumstances, specifically enforce the other partys obligations under the Merger Agreement.
In addition to the foregoing termination rights, and
subject to certain limitations, API or Parent may terminate the Merger Agreement if the Merger is not consummated by May 27, 2016.
On
February 29, 2016, Vintage Albany Acquisition, LLC (Vintage), the record and beneficial owner of 22,000,000 shares of API Common Stock, and Steel Excel Inc. (Steel), the record and beneficial owner of 11,377,192 shares
of API Common Stock, approved the Merger and adopted the Merger Agreement by written consent. Together, Vintage and Steel hold over a majority of the outstanding shares of API Common Stock. The approval by Vintage and Steel constitutes the required
approval of the Merger and adoption of the Merger Agreement by APIs stockholders under Delaware General Corporation Law and the charter.
20