SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-K
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED November 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __n/a________ to ___n/a_______
Commission File No. 0-16008
__________________
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
Ontario, Canada 98-0082514
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
5-7100 Warden Avenue, Markham, Ontario, L3R 8B5 Canada (905) 477-0252
_____________________
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Shares, without par value; Class A Preference Shares, Series 1, without par
value; Class A Preference Shares, Series 2, without par value.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ ] NO [X ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ X ]
The aggregate market value of the Common Shares held by non-affiliates based
upon closing price of US$0.001 on November 30, 1996, was approximately
US$16,630, based on the average of the bid and ask per share prices.
As of November 30, 1996 there were 16,629,785 Common Shares outstanding.
Documents incorporated by reference: None.
<PAGE>
PART I
Item 1. Business.
GENERAL
The Company manufactures high quality fine art reproductions of original
paintings using the Company's patented and proprietary technologies and markets
them through a variety of channels and programs, including retail stores, direct
marketing campaigns, art publishers, joint ventures, overseas distributors and
various other sources. The Company replicates both the color and brush stroke
texture of the original, so that the resulting works of art are almost
indistinguishable, by the average person, from original paintings. The Company's
reproductions on canvas are marketed using the registered trademark of
Artagraph(R) Editions, (sometimes referred to as "Artagraph(R)" or
Artagraphs(R)"), while its reproductions on paper are marketed as Works of
A.R.T.TM
The Artagraph(R) Editions include signed and numbered limited editions by
contemporary artists, as well as limited editions of works by the great masters,
and have a suggested retail price of between US$399 and US$849. Some limited
edition reproductions of contemporary artists retail considerably higher, but
this is solely due to the Artist's reputation.
The Works of A.R.T.TM product line, which retailed at significantly lower
prices, was originally introduced to allow the Company to broaden its universe
of customers through volume-oriented North American retailers. Sales from this
product line have always been disappointing. Consequently, while the Company
continues to sell Works of A.R.T.(TM) from its current inventories, it has not
introduced any new product or programs in 1996, and will not likely invest in
such new inventory during 1997.
The majority of the Company's sales represent exports, principally to the United
States, and to a lesser extent, to other countries. The following table shows
the Company's sales to its principal geographic markets for the last four fiscal
years.
Year Ended November 30
----------------------
1996 1995 1994 1993
---- ---- ---- ----
(In Canadian Dollars)
Canada................. 41,379 170,630 278,223 419,425
United States.......... 1,668,104 1,810,427 4,417,669 3,889,444
Overseas............... 847,067 158,214 151,420 497,674
----------------------------------------------------
2,556,550 2,139,271 4,847,312 4,806,543
----------------------------------------------------
Sales outside Canada are invoiced in United States Dollars. Thus, the Company is
at risk to unfavourable changes in the exchange rates between Canadian and
United States dollars.
In the second half of 1994, the Company discovered a product quality problem
with a significant number of ARTAGRAPH(R) reproductions previously shipped to a
major customer in the publishing business. After several months of
investigation, including analyses of raw materials and production processes, the
Company modified its operations in an effort to eliminate repetition of such
problems in the future, and no subsequent product quality problems have since
come to the Company's attention. As a consequence of this problem, and the time
and resources required to resolve it, the Company's sales have not returned to
the historic levels experienced prior to fiscal 1994.
2
<PAGE>
During 1995, the major publishing customer who had distributed the defective
Artagraph(R) reproductions agreed to accept replacement product and also placed
new orders for Artagraphs(R) with the Company. By August, 1995, the Company had
replaced all the returned product. Replacement of the defective reproductions
created severe financial and cash flow restrictions which severely impacted all
areas of the Company's business through 1996 and 1997.
LIBRARY OF TITLES AND ACQUISITIONS OF PAINTINGS
Many of the works reproduced by the Company are in the public domain. Works
which are not in the public domain are reproduced pursuant to agreements with
various museums or other copyright holders. The agreements range from a one time
charge for reproduction rights to royalty payments of up to 10% of the wholesale
unframed price of each Artagraph(R) sold. The types of agreements depend largely
on each Museum's policy for reproductions and the amount of time and assistance
provided to the Company by the museum's staff to reproduce the originals.
The Company manufactures reproductions of Impressionist and Post-Impressionist
paintings as well as paintings by contemporary artists. The Company does not
always create a replication directly from an original painting. Semi-originals
are also created by a contract artist engaged to replicate the texture and brush
strokes of the original artist's style.
Commencing in fiscal 1993, the Company's publishing division, under contracts
with art publishers, has produced and sold replications of contemporary works of
art for a fixed price which are then distributed by the publisher.
As of November 30, 1996, the Company had a library of approximately 172
different Artagraph(R) Edition titles, of which 100 are Impressionist or
Post-Impressionist paintings and 72 are by contemporary artists, some being
limited edition reproductions. These reproductions are of paintings by such
artists as Monet, Manet, Van Gogh, Degas, Renoir, Turner and other well known
artists. Once the Company has a reproduced title in its library, it can
manufacture as many reproductions from that title as the market will bear,
subject only to limitations imposed by contracts with third parties that limit
the availability of certain Artagraph(R) Editions.
MANUFACTURING PROCESS
The replication process is a two-stage process. The first stage is replication
of the painting's color. The second stage, which directly involves the Company's
patented process, is the reproduction of texture and brush strokes. The Company
works from transparencies of the original art, preparing color separations and
then printing the image on a specially designed "paper" called a litho. The
Company subcontracts with third parties to produce the transparencies and
printed lithos in accordance with the Company's proprietary specifications. In
the second stage, the Company produces a relief mold from either the original
oil painting or, in cases where the original oil painting is not available, from
the semi-original of the painting.
The final stage of processing involves precise application of heat and pressure
to the relief mold, the printed litho, and to a specially coated canvas to
create the finished product. Currently, the Company has three sets of equipment
in operation for the production of Artagraphs(R).
SALES AND MARKETING
The Company markets through direct mail, specialty retail, overseas distributors
and carries out contract printing for publishers.
3
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In September, 1995, the Company signed an Agreement with ART ATELIER
("ARTELIER") being an exclusive, world-wide marketing and sales agreement for
the contract printing business in the publishing market and ATELIER is paid a
commission of 25% of gross sales. ATELIER has been responsible for developing
contract printing business with the Company's fine art publishing customers over
1994 and 1995, worth approximately Cdn$3,000,000 in Company gross sales.
However, subsequent to 1995 the sales revenues from this source have not reached
the minimum contract requirement of Cdn$2,000,000 sales revenues for the 16
months ended December 31, 1996.
HOME FURNISHINGS, MASS MERCHANDISING AND SPECIALTY RETAILERS
During fiscal 1996, the Company continued to support existing customers in these
markets. The Company's ability to initiate new opportunities and to continue to
develop its marketing efforts to attract new customers has been severely limited
due to severe cash flow constraints experienced by the Company in fiscal 1996.
A major customer is The Museum Company, a 100-plus store chain located
principally in the US that specializes in the retailing of high quality museum
reproduction products. The Museum Company plans to add further stores this year.
In an effort to boost sales in 1996, the Company provided new point-of-sale
materials, including new catalogues, to all Museum Company stores and, to one of
its flagship stores, provided video materials promoting the Artagraph(R)
product.
DIRECT MARKETING
The Company has marketed its products by direct mail for more than six years.
Revenues in this market were approximately Cdn$Nil in fiscal 1996, Cdn$346,000
in fiscal 1995, Cdn$340,000 in fiscal 1994, and Cdn$1,000,000 in fiscal 1993.
The declines since 1993 are attributable to the reduction in marketing through
American Express, because of the Company's inability to finance new programs due
to its continuing liquidity problems.
OVERSEAS DISTRIBUTORS
The Company's Non-North American sales increased in fiscal 1996 by Cdn$688,853
to Cdn$847,067. Prior to this, sales had declined in recent years, from a peak
of Cdn$1,985,000 in fiscal 1991 to Cdn$158,214 in fiscal 1995, in major part
because of insufficient working capital to support the Company's marketing
efforts. Sales in the earlier periods (through 1992) were attributable to the
efforts of a Japanese distributor that is no longer marketing the Company's
products. Since 1994 the Company has been seeking to expand its business in
foreign markets, extending some territories with existing distributors and
signing new agreements with new distributors. One such new distributor was
successful in creating significant sales into Spain's direct mail markets of
Cdn$653,514 during fiscal 1996. This success was partly attributable to the
discounted selling prices that this Company offered in exchange for cash sales.
However, sales to this customer in 1997 are Cdn$Nil , owing to the lack of new
programs and images.
During the second quarter of 1996, in conjunction with a local Chinese business
partner, the Company participated in an exhibition in Beijing in the Peoples
Republic of China. The Company provided 100 Artagraphs from its inventory of
catalogue products. The Chinese held the exhibition at a national art museum
and, arranged radio and television advertising. The event was attended by
approximately 30,000 visitors, including senior representation from the Chinese
National and Provincial Governments, as well as from several foreign embassies.
4
<PAGE>
Subsequent to the quarter end, based on the success of the exhibition, the
Company and the Chinese business partner signed an exclusive distribution
agreement for the People's Republic of China.
The Chinese distribution agreement is on a best efforts basis and, like all the
Company's distribution agreements, there can be no assurance of future revenues
or profits from the efforts of any of these distributors.
As of September 1997, sales to China have been a very disappointing Cdn$31,000.
The Chinese business partner believes that the lack of success to date is partly
attributable to the undeveloped Art reproduction market in that country.
The Company's international distributors, as of August 31, 1997, 1996, include
the following:
<TABLE>
<CAPTION>
Exclusive Min. Purchase
--------- -------------
Name of Distributor Territory Term Requirement
------------------- --------- ---- -----------
[ New in Caps]
<S> <C> <C> <C>
Gipa Trading SPRL.............. Belgium, Austria November 1, 1996 1000 Units to Dec 1997
Germany, to December 1997 Thereafter 1500 per year
Hungary Target not met
Poland
Beijing Puhe Science and Beijing August 1996 to
Trading Corp. ................. December 1997 2100 Units
January 1998 to 5000 Units
December 1999
Target not met
A.R.T. (Sea) Pte. Ltd.......... Singapore, Expired Month to month
Malaysia, Brunei;
Indonesia,
Philippines
Museo Abierto.................. Luxembourg September 1996 to US$100,000
Switzerland December 1998 Target not met
Spain, Portugal November 1994 to US$200,000
December 1998 Target met
</TABLE>
In addition, the Company signed short-term (6 months trial period) Distribution
Agreements in the following territories: Argentina, Brazil, Chile, Indonesia,
and Uruguay. Also, the Company signed non-exclusive agreements (dealer only) in
Bahrain, Hong Kong, Kuwait, Mexico, Oatar, Oman, Saudi Arabia, Taiwan, and
Thailand. All these agreements are on a best efforts basis and, like all the
Company's distributor agreements, there can be no assurance of future revenues
or profits from the efforts of any of these distributors.
PUBLISHING
There are many publishers who represent contemporary artists engaged in
publishing art reproductions, such as lithographs, serigraphs and posters. The
Company believes that its products offer a unique alternative to these
publishers to add an important new and more accurate reproduction medium to
their existing product lines.
5
<PAGE>
The Company produces custom pieces under fixed price contracts for art
publishers and agents, with product development costs paid by the publisher.
Prices charged vary depending upon the size of the product, the number of colors
and the size of the edition.
Commencing in February, 1994, the Company entered into a series of ten contracts
with a major art publisher to produce a total of ten (10) Artagraphs Editions(R)
depicting marine wildlife. The Company completed shipment of 15,000 reproduction
("pieces") based on these 10 reproduction images. However, due to product
quality problems the Company had to replace approximately 60% of these
reproductions in 1995. The Company secured further orders from this publisher in
fiscal 1995 totalling Cdn$1,317,200, of which Cdn$592,600 was shipped in fiscal
1996.
Also, in late fiscal 1995 the Company received an opening order from another
major publisher to produce a limited edition Artagraph(R) reproduction for an
original painting entitled "Opening the Sacred Bundle". The order was for
approximately Cdn$95,000. The publisher informed the Company that orders from
dealers for this Artagraph Edition(R) were 200% of the publisher's edition size,
a very successful outcome. During fiscal 1996, the customer purchased
Cdn$148,322 of products from A.R.T. and subsequent to the year end, has placed
sales orders of approximately Cdn$290,000 with the Company.
In 1996, Company modified its policies for pricing and shipment to customers in
the limited edition contract printing market in order to widen the potential
customer base and to make the Artagraph(R) reproductions more competitive.
Deposits on future contracts now cover only initial process costs, such as color
printing, thereby reducing publisher customers' initial capital commitments.
Under these new policies, the Company processes the product only through the
final texturing phase , on an as needed basis, in order to more closely match
customers' actual sales orders.
While this new "just-in-time" policy, has stimulated considerable interest by
art publishers in the Artagraph(R) reproductions, such efforts did not result in
significant increased contract printing business for the Company. In fiscal
1996, customer sales to three new contract printing customers were approximately
Cdn$150,000. Again, the results reflect the Company's inability to finance new
initiatives, such as attending trade shows or hiring dedicated sales personnel
to market to potential customers.
PATENTS AND TRADEMARKS
The process for manufacturing Artagraph(R) Editions has been patented in a
number of jurisdictions, including Canada and the United States. An application
for improvements to the Artagraph(R) replication process resulted in the
issuance of a new United States patent in November, 1990. Patents in Europe have
expired owing to the Company's inability to finance renewal fees of
approximately Cdn$50,000. In addition, due to similar financial considerations,
patent applications that are pending in Japan and Korea have been abandoned by
the Company at this time.
The Company believes its patents are valid and would withstand a challenge to
their validity. No assurances can be given, however, that a third party will not
attempt to challenge the validity of the patents. The Company intends to
vigorously defend its patent rights against any such challenge, but no assurance
can be given that the Company will be successful. Loss of protection provided by
the patented process could have a material adverse impact on the Company.
Moreover, there can be no assurance that other companies will not design
competitive processes that do not infringe on such patents.
6
<PAGE>
The Company has a registered trademark for "Artagraph(R)" in the United States
and Canada.
COMPETITION
The Company's reproductions must compete with a variety decorative art products,
including products from other companies which replicate fine art as well as
original artwork from local artists and others. Small vendors can compete
effectively within their marketplace while larger vendors can benefit from
volume discounts. The Company must competitively price its products against both
the large and the small vendors to successfully build sales volume. Many
companies have processes for reproducing oil paintings, including other methods
of texturing their reproductions, and there are also many companies which market
art reproductions such as lithographs and serigraphs. Nevertheless, the Company
believes that no other known reproduction processes compare in quality with the
Company's processes in accurately reproducing brush strokes and texture and the
color intensity and other reproduction characteristics are believed to be at
least equal to any other known reproduction process. The Company's success in
the marketplace will depend upon creating greater awareness of its products, as
well as pricing and delivery policies and success in timely filling customer's
orders. There can be no assurance that the Company will be successful in the art
reproduction markets or that other processes will not provide
successfully-competing products.
SUPPLIERS
The Company purchases frames for its reproductions and obtains its principal raw
materials from several suppliers. The Company also contracts for printing
services principally of lithographs with several companies, including Herzig
Somerville Limited, controlled by a former director of the Company. The Company
believes that the frames and the raw materials are commodity items that can be
obtained from several alternative sources.
EMPLOYEES
As of November 30, 1996, the Company had 13 employees and consultants, including
management, administrative and production employees.
ITEM 2. PROPERTIES.
The Company's executive offices, production facility and gallery are located at
7100 Warden Avenue, Markham, Ontario, Canada L3R 8B5, occupying 26,668 square
feet of space leased through February 1, 1998. The lease provides for a fixed
annual gross rental of Cdn$202,245, including its pro rata share of taxes,
insurance, building maintenance and occupancy costs.
The Company believes its leased facilities are in good operating condition and
adequate for its present and future requirements.
ITEM 3. LEGAL PROCEEDINGS.
The Company in 1995 had a judgment obtained against it by Merrill Corporation, a
financial printer, in the amount of US$71,619.25. However, the Company has
entered into an agreement for the
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<PAGE>
Company to pay off this obligation through an installment payment plan. As of
this end of fiscal year 1996, the Company owed a balance of approximately
US$25,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Subsequent to the year end on May 8, 1997, the Company called a special meeting
of shareholders and elected a Board of Directors. The newly elected directors
are Simon P. Meredith, Roger Scarr, Michel van Herreweghe, Francoise Jacquel and
Roger Kirby.
PART II
ITEM 5. MARKET FOR THE COMPANY'S EQUITY SECURITIES AND RELATED MATTERS.
During fiscal 1995, the Company was advised by NASDAQ that the Company was no
longer in compliance for continued listing on NASDAQ's Small Cap Market. The
Company believes that this was in part due to the discontinuance of marketmaking
activities by the Company's marketmakers. Accordingly, the remaining securities,
including the Class A Preference Shares, Series 1 and 2, were delisted. As noted
in the May 12, 1994, offering prospectus, as a condition to NASDAQ approval of
the Company's application to list the Units, (12% Convertible Redeemable Class A
Preference Share, Series 2, and Redeemable Class C Preference Share Purchase
Warrants) on NASDAQ, the Company agreed to delisting of the Common Shares, Class
A Warrants and Class B Warrants from the NASDAQ Small Cap Market. The Company's
securities are now listed on the NASDAQ sponsored OTC Bulletin Board. The Class
A and B Warrants expired in 1995.
The Company's initial public offering of Common Shares occurred in April 1987.
In a 1992 Secondary Offering, the Company sold 805,000 Units, each consisting of
one Series 1 Preference A Share, one Class A Warrant and one Class B Warrant. In
a 1994 Offering, the Company sold 373,750 Units, each consisting of one Series 2
Preference A Share and two Class C Warrants. As of November 30, 1996 the Company
had approximately 1300, 230, and 180 holders of record of the Common Shares,
Series 1 Preference A Shares, Series 2 Preference A Shares respectively.
The following table sets forth the high and low bid quotations for these
securities, as reported by NASDAQ or the National Quotation Bureau, Inc., for
each quarterly period within the three most recent fiscal years. The quotations
are reported quotations without retail markup, markdown or commission and may
not represent actual transactions.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
In U.S. Series 1 Series 2 Common
Dollars Preference Preference Shares
Shares Shares
- -----------------------------------------------------------------------------------------
Fiscal Year High Low High Low High Low
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1994
1st Quarter 3-1/4 2 -- -- 3/16 3/16
2nd Quarter 2-5/8 1 -- -- .07 .07
3rd Quarter 1-3/8 1/2 13 6-3/4 .01 .01
4th Quarter 1-1/16 7/8 5-1/4 4-1/2 .005 .005
8
<PAGE>
- -----------------------------------------------------------------------------------------
In U.S. Series 1 Series 2 Common
Dollars Preference Preference Shares
Shares Shares
- -----------------------------------------------------------------------------------------
Fiscal Year High Low High Low High Low
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995
1st Quarter -- -- -- -- 0.03 0.001
2nd Quarter -- -- -- -- 0.025 0.005
3rd Quarter -- -- 0.0625 0.0625 0.50 0.005
4th Quarter -- -- -- -- 0.15 0.001
1996
1st Quarter 0.5 0.5 -- -- 0.50 0.001
2nd Quarter -- -- -- -- 0.02 0.001
3rd Quarter -- -- -- -- -- --
4th Quarter -- -- -- -- 0.02 0.00025
1997
1st Quarter No market No market No market
2nd Quarter For Company's For Company's For Company's
3rd Quarter Series 1 Pref. Series 2 Pref. Common
4th Quarter Shares Shares Shares
</TABLE>
To be legally entitled to pay dividends (whether paid in cash or in Common
Shares) on the Series 1 or Series 2 Preference A Shares (collectively, the
"Preference Shares"), the Company is required to have assets in excess of
liabilities and stated capital after any payment of dividends. If the Company
incurs losses and therefore does not meet this standard, it cannot pay dividends
on the Preference Shares (whether in cash or Common Shares).
Except for the initial four quarterly dividends paid on the Series 1 Preference
Shares issued in the 1992 Offering, the Company has never paid cash dividends.
Due to the Company's continuing working capital problems, the Company has failed
to declare and pay US$0.60 per share of dividends on the Series 1 and Series 2
Preference Shares. As a result, the Company has accumulated undeclared dividends
on the Preference Shares of US$1,989,998, as at November 30, 1996. The Company
does not anticipate that it will generate sufficient cash to pay in cash the
initial four quarterly dividends on the Series 2 Preference Shares for at least
several years. Furthermore, it is the Company's present expectation for the
foreseeable future that any additional dividends payable on the Preference
Shares would likely be paid in Common Shares.
The payment of dividends on the Preference Shares or Common Shares will depend
on the Company's future earnings and financial condition and such other factors
as the Board of Directors of the Company may then consider relevant.
The Company currently intends to retain its earnings to assist in financing
business development and operations.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following presents selected consolidated financial data for the Company in
Canadian dollars and in accordance with U.S. Generally Accepted Accounting
Principles (US GAAP"). It should be read in conjunction with the separate
consolidated financial statements of the Company and related notes included
elsewhere herein, which were prepared under Canadian Generally Accepted
Accounting Principles ("GAAP"). This consolidated data should be compared to the
Company's Financial Statements and the reconciliation of the financial
information presented between GAAP and US GAAP. The financial data as of
November 30, 1996, and for the four previous fiscal years has been derived from
financial statements of the Company that have been examined by independent
chartered accountants in Canada.
<TABLE>
<CAPTION>
(Stated in Canadian Dollars under U.S. Generally Accepted Accounting Principles)
Year ended November 30
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Summary of operations:
Sales.................... 2,556,550 2,139,271 $4,847,312 $ 4,806,543 $ 4,142,627
Cost of goods sold....... 1,701,238 1,640,343 2,867,246 2,936,674 2,216,492
Gross profit............. 855,312 498,928 1,919,144 1,797,367 1,926,135
Depreciation and 356,369 324,792 340,047 386,630 376,337
amortization............
Selling, general and
administrative expenses. 887,692 1,178,399 2,286,914 3,726,280 3,494,827
Interest and finance
expense................. 47,804 45,739 47,859 47,863 102,843
Operating loss........... (442,089) (1,050,002) ( 695,384) ( 2,112,802) ( 2,047,872)
Interest income.......... 5,536 2,907 49,571 5,546 4,731
Income taxes............. -- -- -- -- --
Loss before discontinued
operations.............. (436,553) (1,047,095) ( 645,183) ( 2,107.256) ( 2,043,141)
Discontinued operations.. -- -- -- -- --
Net loss................. (436,553) (1,047,095) ( 645,183) ( 2,107,256) ( 2,043,141)
Dividends: Series 1
Preference Shares....... -- -- ( 473,462) (138,000)
Dividends: Series 2
Preference Shares....... -- -- -- -- --
Net loss after dividends on
Series 1 Preference Shares (436,553) (1,047,095) ( 645,183) ( 2,580,718) ( 2,181,141)
Net loss per Common
Share before dividends on
Series 1 & Series 2
Preference Shares....... (0.03) (0.06) ( 0.04) ( 0.13) ( 0.13)
Net loss per Common
Share after dividends
on Preference Shares.... (0.03) (0.06) ( 0.04) ( 0.16) ( 0.14)
Weighted average
number of Common
shares outstanding...... 16,629,785 16,629,785 16,629,785 16,629,785 15,764,112
Summary of balance
sheet data:
Current assets 547,915 869,191 1,761,824 $ 2,328,283 $ 3,350,904
Total assets............. 3,459,221 4,408,070 5,528,932 6,503,470 8,259,519
Current liabilities...... 1,126,573 1,282,925 1,488,522 3,873,479 2,629,574
Long-term liabilities.... -- 355,944 230,329 1,164,580 1,740,762
Total liabilities........ 1,126,573 1,638,869 1,718,851 5,038,059 4,370,336
Contributed surplus...... 11,775,000 11,775,000 11,775,000 11,775,000 11,775,000
Accumulated deficit...... (19,829,005) (19,392,455) ( 18,345,360) ( 17,910,617) ( 15,329,899)
Shareholders' equity..... 2,332,648 2,769,201 3,810,081 1,465,411 3,711,081
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Certain statements contained herein are not based on historical facts, but are
forward-looking statements that are based on numerous assumptions about future
conditions that could prove not to be accurate. Actual events, transactions and
results may materially differ from the anticipated events, transactions or
results described in such statements. The Company's ability to consummate such
transactions and achieve such events or results is subject to certain risks and
uncertainties. Such risks and uncertainties include, but are not limited to, the
existence of demand for and acceptance of the Company's products and services,
regulatory approvals and developments, economic conditions, the impact of
competition and pricing results of financing efforts and other factors affecting
the Company's business that are beyond the Company's control. The Company
undertakes no obligation and does not intend to update, revise or otherwise
publicly release the results of any revisions to these forward-looking
statements that may be made to reflect future events or circumstances.
YEAR ENDED NOVEMBER 30, 1996, COMPARED WITH YEAR ENDED NOVEMBER 30, 1995
The Company's results for year ended November 30, 1996, under both Canadian and
US GAAP, was a loss of Cdn$436,553, an improvement from the loss of
Cdn$1,047,095 for the 1995 fiscal year. Sales revenues for 1996 of Cdn$2,556,550
were an increase of Cdn$417,279 over 1995 at Cdn$2,139,271. Gross profit for
year increased Cdn$367,934 from Cdn$453,802 in 1995 to Cdn$821,736 in 1996. This
higher gross profit combined with lower operating expenses of Cdn$893,228 in
1996, as compared to Cdn$1,189,975 in 1995, resulted in an improvement of over
all results from operations. Included in 1996's operating expenses was a bad
debt provision, of approximately Cdn$78,000, which was booked in the first
quarter. Operating cash flow for the year was approximately break even, an
improvement over 1995, when the Company recorded a negative cash flow of
Cdn$174,867. Notwithstanding the improvement in operating results, the Company's
working capital balance as at November 30, 1996, remained negative at
Cdn$578,658, a decline of Cdn$164,924 from the negative working capital of
Cdn$413,734 at the end of 1995.
SALES
The Company continues to be very reliant on a few customers for the majority of
its sales revenues. Tabled below are the sales to these major customers, which
are also expressed as a percentage of total sales, for the last three fiscal
years. The loss of any one of these customers would have a serious detrimental
impact on the Company's ability to continue to operate in the future.
<TABLE>
<CAPTION>
1996 % 1995 % 1994 %
---- - ---- - ---- -
In Canadian Dollars
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Sales $2,556,550 100% $2,139,271 100% $4,847,312 100%
- ----------- ---------- ---- ---------- ---- ---------- ----
Sales to One Publishing Customer $592,600 23% $798,000 37% $2,698,000 56%
Sales to One Spanish Customer $653,514 26% $Nil - $Nil -
11
<PAGE>
1996 % 1995 % 1994 %
---- - ---- - ---- -
In Canadian Dollars
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales to One Direct Mail Customer $Nil - $345,917 16% $314,000 6%
Sales to One Retail Customer $305,271 12% $346,000 16% $340,000 7%
</TABLE>
Total sales revenues in 1996 improved over 1995. Sales to customers outside
North America were significantly higher at Cdn$847,067 for 1996, an increase of
Cdn$689,453 over 1995. This increase was offset by a decrease in sales revenues,
for 1996 compared to 1995, to the North American market of Cdn$271,574. This can
be attributed to lower sales of catalogue product in 1996, at approximately
Cdn$431,000 versus Cdn$660,000 in 1995. In addition, sales revenues also
declined because of marginally lower sales to publishing customers, from
Cdn$893,163 in 1995 down to Cdn$841,067 in 1996. The growth in the revenues from
outside North America were driven by sales in the Spanish market, which were to
a single new customer in the direct marketing business. Sales to this customer
were Cdn$653,514 in 1996 compared to Cdn$nil in 1995.
The customer-base in the catalogue business changed from 1995 to 1996. First,
approximately Cdn$85,000 of clear-out catalogue product was sold to a new
customer in the framing business working out of New York State. Second, the
Company sold approximately Cdn$135,000 of surplus inventory in the catalogue
product line for cash to a customer in the Florida market. (The cash proceeds
obtained from the latter sale were used to satisfy certain obligations that were
due to the Company's note holders and other trade creditors.) Both these new
customers are not anticipated to provide repeat business. This business, along
with opening sales orders to certain retail stores off set declines in sales of
catalogue product to the North American direct mail market, principally American
Express. Sales to American Express were $nil in 1996, compared to Cdn$345,917 in
fiscal 1995. Sales to the Company's other major catalogue customer, The Museum
Company, declined in 1996 by Cdn$40,000 to Cdn$305,271.
During 1996 both American Express and The Museum Company have approached the
Company and expressed a desire for new images and programs. In the past American
Express has purchased over one million dollars annually of catalogue product
from A.R.T. Each year the Museum Company has expanded the number of its retail
stores, yet sales to The Museum Company have not grown proportionally. Many of
A.R.T.'s catalogue images have been available for over five years, and no new
images have been introduced in the last three years. Until the Company can raise
additional capital it will not be able to promote new images or programs. In
addition, before it would invest in new programs with American Express the
Company will have to satisfy itself that its share of American Express coop
marketing expenses would be recovered. In the past, these shared coop expenses
have been significant (Cdn$40 -- 110,000 per program).
During the second quarter of 1996, in conjunction with a local Chinese business
partner, the Company participated in an exhibition in Beijing in the Peoples
Republic of China ("PROC"). The Company provided 100 Artagraphs from its
inventory of catalogue product. The Chinese held the exhibition at a national
art museum and, arranged radio and television advertising. The event was
attended by approximately 30,000 visitors, including senior representation from
the Chinese National and Provincial Governments, as well as from several foreign
12
<PAGE>
embassies. Based on the success of the exhibition, the Company and the Chinese
business partner signed an exclusive distribution agreement for the Peoples
Republic of China. However, sales to this market have been disappointing, after
an opening sales order of approximately Cdn$31,000 no further orders have been
forthcoming. The local Chinese business partner attributes the lack of sales
growth to the absence of a reproduction art market in the PROC. This experience
is not unique. The Spanish distributor had conducted marketing activities and
had experienced a similar lack of sales in the first year following the signing
of that distribution agreement.
Subsequent to fiscal 1996, the Company has not received new orders from the
Spanish distributor. Unless the Company raises capital to finance new marketing
and sales initiatives, including new images and programs, there is limited
likelihood that the Company will generate new business in the foreseeable future
from this market. Rather the Company will continue to rely on the sales and
marketing efforts of its overseas distributors.
Sales to the Company's major publishing customer declined from approximately
Cdn$798,000 in 1995 to Cdn$592,600 in 1996. This was partly off-set by opening
orders from three new publishing customers of approximately Cdn$150,000.
Although the Company believes that there is potential for significant revenue
growth in the Company's contract printing business for publishers, the inability
of the Company to attend trade shows or promote Artagraph(R) directly to
potential publishing customers has severely hindered growth opportunities. In
order to succeed the Company will need to raise additional capital, to market
its product line and create greater visibility and awareness of the Artagraph(R)
process.
The Company believes that the Artagraph(R) process is very competitive with
other known canvas- textured products that are available in the market today.
This is in major part due to the Company's new contract pricing and ordering
policies. Customers can now initiate an Artagraph(R) reproduction order for
approximately 20% of the previous initial financial commitment. Further
investment in additional manufacture of Artagraph(R) reproductions for customers
under this new program is directly tied to actual advance sales.
In fiscal 1997 the Company's sales revenues have significantly declined in the
nine month period ending August 31, compared to the same period in fiscal 1996.
Based upon the current fiscal 1997 sales revenue trends, the Company may have
annualized sales of approximately Cdn$800-900,000 in fiscal 1997, compared to
Cdn$2,556,550 in fiscal 1996. This decline in sales revenues is mainly
attributable to the complete absence of sales to the Company's major publishing
customer and to the Spanish customer in fiscal 1997, compared to Cdn$592,600 and
Cdn$653,514 respectively in fiscal 1996.
While the Company is currently negotiating with the major publishing customer to
recommence new business, and the Spanish distributor believes that there are
opportunities with the Spanish customer -- if the Company can offer new images
and programs -- there can be no guarantee that these efforts will be successful
in generating new revenues.
13
<PAGE>
GROSS PROFIT
The gross margin increased in 1996 to 32% from 21% in 1995. The increase of
gross margin, from 1995 to 1996, of 11 percentage points can be partly
attributed to the higher sales revenues reducing the impact of fixed overhead
costs. Second, in 1995 the gross margin was negatively impacted by [1] losses on
liquidation of inventory; [2] charge backs by the Company's major publishing
customer, on account of expenses incurred by this customer in connection with
returns of product from their customers; and, [3] the write-off of the balance
of work-in-progress inventory of certain editions, due to uncertainty that the
Company's same publishing customer would take delivery.
The Company's policy is to periodically evaluate the inventory levels of each
product in its inventory on an image-by-image basis, considering past sales and
estimated future sales of each product and similar products. In addition, when
the Company determines that a product line or market should be discontinued, the
inventory relating to that product line or market is written down to net
realizable value. The purpose of this policy is to attempt to ensure, as
required by Canadian and U.S. GAAP rules, that the Company's inventory balances,
net of reserves, properly excludes excess or obsolete inventory and are valued
at the lower of cost or market value. Historically, the Company has employed
annual physical inventory counts combined with an analysis of each product's
preceding three year's sales record (or for such shorter period that a
particular product may have been in existence) and a review of the Company's
sales expectations for each product, to determine whether the level and value of
the Company's inventory of that product is excessive.
Sales of catalogue product in 1996 reduced the Company's carried inventory
balances and in some instances exhausted all supplies of certain images. A.R.T.
only produced replacement product for images that are turning more than once per
year. The overall reduction in inventory levels, including product that had been
previously written down, resulted in a lower total provision for obsolete and
slow moving inventories by Cdn$209,587.
SELLING, GENERAL AND ADMINISTRATION
These expenses were Cdn$893,228 for 1996, and compare favourably with the higher
costs in 1995 of Cdn$1,189,975. The major savings resulted from lower salaries,
professional and consulting fees, as cuts made in the last six months of 1995
positively impacted the financial results of the Company in 1996.
Included in the 1996 expenses was a bad debt provision of Cdn$78,000 compared to
1995 of Cdn$nil. This loss consisted of Cdn$40,000 owed by a Belgium distributor
that was formally placed into bankruptcy and, Cdn$38,000 being the balance owed
by a former customer in the State of New York. The Company does not anticipate
recovering any monies from the bankrupt Belgium company but is pursuing legal
action against the former customer in New York State.
14
<PAGE>
YEAR ENDED NOVEMBER 30, 1995, COMPARED WITH YEAR ENDED NOVEMBER 30, 1994
GENERAL
The Company's results for fiscal 1995 were adversely impacted by significant
problems with product quality. This problem first came to the Company's
attention in the second half of 1994 and involved a significant percentage of
the 15,000 Artagraph(R) Edition reproductions that had been shipped to the
Company's major publishing customer. As a result, this customer in September,
1994, suspended all orders it then had in progress with the Company and only
reinstated certain orders in fiscal 1995 when the problem had been totally
resolved. By August, 1995, the Company had replaced 60% of the original 15,000
piece shipment (in equivalent sales revenue terms, an outlay for the Company of
approximately Cdn$1,052,250). No further defective product returns have occurred
or are anticipated. Notwithstanding the return to normal operations, including
new orders from the above-mentioned customer, the Company suffered significant
loss of credibility in the market place and as a result all aspects of the
Company's business were negatively impacted in fiscal 1995.
The Company reported a loss of Cdn$1,047,095, under Canadian and United States
GAAP, for fiscal 1995, compared to the loss reported of Cdn$645,183, in fiscal
1994. The principal reason for the increased loss in fiscal 1995, from 1994, was
the drastic reduction in revenues in fiscal 1995 of Cdn$2,708,041 (56%) from
fiscal 1994, contributing Cdn$1,059,000 to the reduction in gross profits.
Further, gross profit margin fell from 40% in fiscal 1994 to 21% in fiscal 1995
as a result of (1) fixed overheads increasing in proportion to total sales; (2)
losses on expedited liquidation of approximately Cdn$90,000 of inventory to
generate cash and offset trade payables (3) charge-backs in the last quarter by
the Company's major publishing customer on account of expenses incurred by this
customer for shipment of the product back from Japan (the major market for the
initial 15,000 reproductions) of approximately Cdn$103,000, and; (4) the
write-off of the balance of 1994's work-in-progress inventory of certain
Artagraph(R) Editions, amounting to Cdn$75,000, due to uncertainty that the
Company's major publishing customer would take delivery. Items (3) and (4) were
additional costs to the Company in excess of the provision of Cdn$388,000
provided for in fiscal 1994.
The gross profit decline of Cdn$1,465,342 was offset by an overall decrease of
Cdn$1,090,607 in selling, general and administration costs in fiscal 1995,
compared to fiscal 1994.
SALES
Sales in the publishing division were Cdn$893,163, a 67% decrease from fiscal
1994 sales of Cdn$1,844,928. The Company's major publishing customer in fiscal
1994 and 1995 accounted for all the decrease, as orders placed in late 1994 for
delivery in fiscal 1995 were all suspended. In the first half of 1995 this
customer resumed limited orders of Artagraphs(R) following resolution of the
product quality problem. In fiscal 1994, sales to this publishing customer
totaled Cdn$2,698,000 (56% of total sales). The loss of sales revenue from this
customer alone contributed to 43% of the decrease in sales in fiscal 1995 over
fiscal 1994. Total orders received from this customer in fiscal 1995 were
Cdn$1,317,200 and the balance of these orders (Cdn$618,300) were shipped in the
first half of fiscal 1996.
15
<PAGE>
In the second half of 1995 the Company received an initial order, of
approximately Cdn$95,000, from a new publishing customer. This order was shipped
in the last quarter of fiscal 1995, and was immediately sold out to the
customer's dealers. This success has resulted in one new order and the potential
for an additional order in fiscal 1996, each order being for a similar value as
the initial order.
Because of the significant financial resources the Company had to commit to
rectifying the product quality problem, and the costs associated with
replacement of returned Artagraph(R) products, the Company unexpectedly was
without the working capital to invest in development of new products, new
customers, or new programs. The Company was unable to effectively follow-up on
progress with several new customers that had commenced initial sales programs in
fiscal 1994, including JC Penny, Bradlees, and the Bombay Company.
Sales to The Museum Company remained at the previous year's level, Cdn$346,000
in 1995, versus Cdn$340,000 in 1994. This customer opened approximately 20 new
stores in 1995, thus real sales per store have declined. In late 1995, the
Company committed to provide new premium catalogues to all the Museum Company
stores, in replacement of the outdated point-of-sale material then on hand. The
promised catalogues were delivered in the first quarter of 1996. In a further
effort to boost sales to this customer, the Company has redesigned the framing
program and offered reduced pricing. The Museum Company is committed to passing
on these savings to its customers. Notwithstanding these efforts, there can be
no assurance that sufficient additional sales will result to the Company to
compensate for its reduced selling prices.
Sales to American Express were Cdn$345,917 in fiscal 1995, compared to
Cdn$314,004 for fiscal 1994.
OVERSEAS DISTRIBUTORS
During fiscal 1995, the Company placed greater emphasis on these markets and
actively sought to expand sales. To accomplish this goal the Company extended
certain territories under existing distributor agreements and signed new
agreements with new distributors. In a change from previous policy, the Company
also gave certain distributors consignment inventory to help boost sales; the
Company's investment is minimal because this inventory had already been
substantially written down and the customers paid for shipping, insurance and
framing costs. The distributors were also offered discounts for bulk orders.
Many of these new arrangements were completed in the first quarter of fiscal
1996 and consequently had little impact on revenues for fiscal 1995. Sales to
Non-North American distributors remained flat at Cdn$220,000; however, a Spanish
distributor has placed an opening order with the Company worth approximately
Cdn$250,000 for delivery through early 1996.
16
<PAGE>
COSTS AND EXPENSES
Cost of goods sold -- provision for inventory writedowns
The major components and causes of gross profit reduction are discussed above,
in Results of Operations, "General". During fiscal 1995, the Company liquidated
some inventory to boost falling cash reserves or to offset trade payables,
including frames, liners and products from discontinued programs of paper and
silk prints.
As a result of these efforts to sell off inventory from discontinued programs,
the Company recognized that inventory remaining from other programs would
possibly remain unsold. Therefore, in order to better streamline its physical
inventory control and tracking, the Company decided to write off certain
inventory which had been fully provided for in previous fiscal years against the
underlying provision. Consequently, gross inventory and provision for obsolete
and slow-moving inventory were adjusted downward by Cdn$397,020.
SELLING, GENERAL AND ADMINISTRATION EXPENSES
Selling expenses were reduced from fiscal 1994 to fiscal 1995, from
Cdn$1,018,345 to Cdn$398,210, respectively. This saving was achieved for two
reasons: the Company benefited from a full year of cost savings, due to new
policies instituted during fiscal 1994 and sales commissions were down due to
lower sales.
General and administration expenses fell by Cdn$470,472 (17%) from fiscal 1994
to fiscal 1995. Savings were achieved in all areas, including professional,
salaries and benefits, and consulting. During 1995 the contract with Gerald
Wilks, previous Company Chairman and CEO, was terminated and the contract with
Robert Forrester (CFO) was also terminated. These remunerated positions have not
been replaced and are resulting in annual savings to the Company of Cdn$150,000.
LIQUIDITY AND CAPITAL RESOURCES
Unless the Company is able to significantly increase sales from the level
experienced in 1995, 1996, and subsequent to November 30, 1996, or raise
additional capital, it may not be able to perform all of its obligations in a
timely manner. Although the Company is seeking additional sales from its major
customers, as well as from other sources, no assurance can be given that the
Company will be successful. The Company does not have sources for loans. Also,
there is no assurance that the Company will be able to obtain addition working
capital from sale of its equity. In the absence of increased sales, the
Company's present inability to obtain additional working capital from loans or
from sale of its equity could have a material adverse effect on the ability of
the Company to continue operations. Additionally, acquisition of loans or
issuance by the Company of additional equity securities could cause substantial
dilution to the interests and voting rights of current security holders.
The Company has not had a functional Board of Directors since October 1995, and
consequently the Company did not have the power to place equity or borrow funds
until such time as a new Board of Directors was elected by the shareholders.
17
<PAGE>
Subsequent to the 1996 fiscal year end the Company called a special meeting of
shareholders on May 8, 1997, and a Board of Directors was elected.
Notwithstanding, the election of a Board or Directors, the Company believes that
until the capital structure of the Company is simplified, including the
elimination of the on-going diluting impact of the Preference A Share cumulative
dividends, the Company's ability to raise additional capital will be severely
restricted.
In May 1994, during the Company's application to list Units (12% Convertible,
Redeemable Class A Preference Shares, Series 2) on NASDAQ, as a condition to
NASDAQ's approval, the Company agreed to cause the Company's common sales to be
removed from the NASDAQ Small-Cap market. In fiscal 1995, the Company was
advised by NASDAQ that the Company's Class A Preference Shares, Series 1 and 2,
were no longer in compliance for continued listing on NASDAQ's Small- Cap
Market. The Company believes this was in part due to discontinuance of market
making activities by market makers. Consequently, the quotation of the Company's
securities is now on the NASDAQ OTC Bulletin Board; however there are no market
makers at this time.
Apart from the first year's dividends paid in cash on the Class A Preference
Shares, Series 1, no dividends have been declared by the Company. Other than the
first year dividends on the Class A Preference Shares, Series 2, which are
payable in cash, dividends in subsequent years are payable in cash or common
shares at the discretion of management. The Company anticipates that any
dividends payable in cash or common shares in the future would be paid in common
shares.
The potential dilution to the existing common shareholders to be expected from
conversion of the Company's outstanding warrants, options, convertible
securities, and cumulative dividends expected to be paid in common shares, is
summarized on the following page.
<TABLE>
<CAPTION>
Name of Security Amount Conversion Rate Underlying Additional
Outstanding Terms Common Information
Shares
<S> <C> <C> <C> <C>
Series 1 Preference 805,000 Convertible into twelve 9,660,000 Cumulative
Shares (12) common shares. dividends payable in
cash or common
shares (see next)
Cumulative Dividends on - n/a - Based on closing price 1,569,750,000 Based on a cum.
Series 1 Preference as at Nov. 30, 1996, of dividend total of
Shares $US0.001. $US1,569,750
Series 2 Preference Share 466,941 Convertible into sixty 28,016,460 Cumulative
(60) common shares. dividends payable in
cash or common
shares (see next)
Cumulative Dividends on - n/a - Based on closing price 420,248,000 Based on a cum.
Series 2 Preference at Feb. 28, 1996, of dividend total of
Shares $US0.001. $US420,248
</TABLE>
The Company's working capital remained negative as at November 30, 1996, at
Cdn$578,658, as compared to the balance at the fiscal 1995 year end of negative
Cdn$413,734. This decline can be attributed to the reclassification of
Cdn$355,944 of long term debt into current liabilities in 1996.
18
<PAGE>
On August 19, 1995, the Company failed to make the scheduled repayment of
one-half of the principal and payment of accrued interest due under the notes.
By letter of agreement, October 12, 1995, the note holders waived the default
and approved a revised schedule of repayments of principal and payment of
interest.
During 1996, the Company was unable to remain current with this revised schedule
and no re-negotiations have been initiated. Consequently, the total amount due,
including interest and principal, has been reclassified as a current liability.
During fiscal 1996, the Company paid approximately Cdn$51,000 of accrued
interest. The notes are secured by a general security agreement over all the
assets of the Company.
There is substantial doubt that the Company has the ability to realize the
carrying value of assets reported in its financial statements which is dependent
upon the attainment of profitable operations and the continued financial support
of its creditors.
ITEM 8. FINANCIAL STATEMENTS
Financial statements together with the auditor's report thereon are attached
following the signature page to this Form 10-K.
PART III
ITEM 9. NOT APPLICABLE.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
On May 8, 1997, the Company held a Special Shareholders Meeting. At that meeting
the shareholders voted in favour of the management slate of directors,
consisting of Simon Meredith, Roger Scarr, Michel van Herreweghe, Francoise
Jacquel and Roger Kirby.
SIMON P. MEREDITH was elected a director of the Company and President and Chief
Operating Officer in November, 1994. Mr. Meredith is a Chartered Accountant and
was Vice President, Finance and Administration of Gormont Limited (a
manufacturer of high voltage electrical products) from April 1991 through
December 1993. He was a consultant for Helix Investments Limited (a private
investment group) from October 1990 through March 1991 and Vice President,
Finance and Administration of Diecut Group, Inc. (an automotive parts supplier)
from June 1987 through September 1990.
ROGER SCARR is President of Zynex Corporation from 1989 to August 1997. He is
also President of HR Capital from 1995 to date.
MICHEL VAN HERREWEGHE is Director of Nickeldale Resources Inc. from 1988 through
1996. He was a Director of Aronos Multinational Inc. From 1991 though 1992;
Director of Xxpert Rental Tool Inc. from 1993 through 1994; CEO Oxford
Securities Corporation (Bahamas) 1993 to present; Director Commonwealth Asset
Managers Limited (Bahamas) 1994 to present; He was appointed State of Florida
Commissioner of Deeds 1994 to present; Director Creditanstalt Bank of
Switzerland, A.G. 1996 to present.
19
<PAGE>
FRANCOISE JACQUEL was Director of Xxpert Rental Tool Inc. from 1993 to 1994;
Director and Vice President of finance of Swiss Capital Funds Corp. from 1994 to
present; Director of First Canadian Securities Corporation (Bahamas) from 1995
to present; Director of Orford Resources Ltd. from 1994 through 1995; Director
of Lignex Inc. 1995; Director of Harrington Financial Inc. from 1995 through
1996.
ROGER KIRBY is President of Enviro-Lite International Inc; General Manager of
Can-Am Teck Inc. 1991; Vice-President Sales for Demax Inc. 1990; President of
Telephony Communications International Inc. from 1987 through 1990; President of
Nickeldale Resources Inc. to November 1996.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
This item is not applicable because the Company is a foreign private issuer
within the meaning of Rule 3b-4 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the Company's securities are therefore
currently exempt from the provisions of Sections 14(a), 14(b), 14(c), 14(f) and
16 of the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the aggregate cash compensation paid for services
rendered to the Company during the last three fiscal years by all individuals
who served as the Company's Officers including C.E.O. during each fiscal year.
<TABLE>
<CAPTION>
(In Canadian Dollars)
____________________________________________________________________________________________________________________
Long-Term
Compensation
Annual Compensation Awards
Name and Year Salary Bonus Other Restricted Securities All
- -------- ---- ------ ----- ----- ---------- ---------- ---
Principal Position ($) ($) Annual Stock Underlying Other
- ------------------ --- --- ------ ----- ---------- -----
Compensation Awards ($) Options (#) Compensation ($)
------------ ---------- ----------- ----------------
($)
---
<S> <C> <C> <C> <C> <C> <C> <C>
Gerald Wilks 1996 -- -- -- -- -- --
Chairman of the Board (1) 1995 -- -- 75,000.00(2) -- 2,400,000(3) --
1994 -- -- 75,000.00(2) -- -- --
Simon Meredith 1996 120,000(5) -- -- --
President and Chief 1995 -- -- 120,000(5) -- -- --
Operating Officer(4) 1994 -- -- 10,000(5) -- -- --
Harvey Kalef 1996 -- -- -- -- -- --
Chief Executive Officer, 1995 -- -- -- -- -- --
President (7) 1994 175,000 -- -- -- 1,000,000(7) 12,000(8)
Norman Dobiesz 1996 -- -- -- -- -- --
President (9) 1995 -- -- -- -- --
1994 -- -- -- -- -- --
20
<PAGE>
Long-Term
Compensation
Annual Compensation Awards
Name and Year Salary Bonus Other Restricted Securities All
- -------- ---- ------ ----- ----- ---------- ---------- ---
Principal Position ($) ($) Annual Stock Underlying Other
- ------------------ --- --- ------ ----- ---------- -----
Compensation Awards ($) Options (#) Compensation ($)
------------ ---------- ----------- ----------------
($)
---
<S> <C> <C> <C> <C> <C> <C> <C>
New Directors (10)
Roger Scarr -- -- -- -- -- -- --
Michel van Herreweghe -- -- -- -- -- -- --
Francoise Jacquel -- -- -- -- -- -- --
Roger Kirby -- -- -- -- -- -- --
(1) Mr.Wilks was appointed Chairman of the Board and Chief Executive Officer in September 1993, and resigned
October 20, 1995.
(2) Represents the fees paid in US dollars to a consulting company owned by members of Mr. Wilks' family. See
"Employment and Consulting Agreements".
(3) On March 24, 1994, the Company granted to a consulting company owned by Mr. Wilks' family an option,
exercisable at US$0.20, per share, to purchase 6,000,000 common shares. One-fifth became exercisable at the
completion of the May, 1994, Public Offering; an additional one-fifth vests and becomes exercisable on each of
the first through the fourth anniversaries of the initial grant. Effective with Mr. Wilks resignation,
3,600,000 common shares remain unvested. (See Employment and consulting agreements)
(4) In November, 1994, Mr. Meredith was appointed President and Chief Operating Officer.
(5) Represents the fees paid in Canadian dollars to a consulting company owned by Mr. Meredith. See "Employment and
Consulting Agreements.
(6) Mr. Kalef resigned from his positions as President and Chief Executive Officer of the Company in February,
1993.
(7) On April 20, 1992, the Company granted to Mr. Kalef a ten year option to purchase 1,000,000 Common Shares at
US$0.20 per share. The option became exercisable on April 30, 1993, and was issued to Mr. Kalef in exchange for
his past services to the Company and his agreement to terminate options to purchase an aggregate of 634,000
Common Shares.
(8) Mr. Kalef received an annual automobile allowance of Cdn$12,000 per annum.
(9) Mr. Dobiesz was appointed President and Chief Operating Officer of the Company in September, 1993, and served
as such until his resignation effective April 29, 1994.
(10) Newly elected directors -- Special Shareholders Meeting dated May 8, 1997
</TABLE>
21
<PAGE>
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company and its subsidiary, A.R.T. USA, were under agreement with a Florida
corporation beneficially owned by members of Gerald Wilks' family (the
"Contractor"). The Contractor agreed to provide Mr. Wilks' services as Chairman
of the Board and Chief Executive Officer of the Company and A.R.T. USA for five
years.
For its services under the agreement, the Contractor received an annual
administrative fee of US$75,000. The Contractor was entitled to elect to receive
Common Shares in lieu of all or a portion of each year's fee, with such shares
to be valued for this purpose at their fair market value as of the time of such
election. In addition, on March 24, 1994, the Contractor was granted an option,
exercisable at a price of US$0.20, per share, to purchase 6,000,000 Common
Shares. One-fifth of the option was to become exercisable in 1994 and an
additional one fifth was to become exercisable on each of the first through the
fourth anniversaries of the initial grant.
By agreement dated October 20, 1995, the Company and Gerald Wilks agreed to the
resignation of Mr. Wilks as Chairman of the Board of the Company, and the
termination of the Consulting Agreement between JRB Associates Inc., an entity
affiliated with Wilks through which he served as consultant to the Company. The
termination agreement acknowledges that no termination payment shall be due and
payable; that options to purchase 2,400,000 common shares of the Company have
been vested and become exercisable; and, that the remaining 3,600,000 common
shares are unvested. The options remain exercisable for five years; 1,200,000 at
a price of 20 cents per share; 1,200,000 at a price equal to the close of market
price, multiplied by 120%, as posted October 20, 1995.
In November, 1994, the Company entered into a five-year consulting agreement
with The Merrick Group Limited, a company beneficially owned by Simon Meredith.
Under the terms of the contract, Mr. Meredith provides management services to
the Company for up to 100 hours per month as President and Chief Operating
Officer.
The Company had an employment agreement with Mr. Kalef which was terminated in
August, 1994. Pursuant to the severance agreement, Mr. Kalef received a lump sum
of cash along with a monthly payment through July, 1995. He also retained his
comprehensive medical insurance through that period.
STOCK OPTIONS
In February, 1987, a Stock Option Plan (the "Plan") was approved by the
Shareholders. The Plan was designed to provide an added incentive for effective
service and performance to participating key employees (including officers) and
directors of the Company by affording them an opportunity to increase their
proprietary interest in the Company's success through increased stock ownership.
The maximum number of Common Shares for which options may be granted under the
Plan is 1,000,000 shares (subject to adjustment in the event of a stock
dividend, stock split or other change in corporate structure).
22
<PAGE>
The Plan may be administered by either the Board of Directors or a Stock Option
Committee consisting of three members who shall be appointed by the Board of
Directors (the "Committee"). The Board of Directors or, if acting, the Committee
has the authority to select optionees, to establish the number of shares and
other terms applicable to each option and to construe the provisions of the
Plan. The Plan may be amended or terminated at any time by the Board of
Directors of the Company without further approval of the shareholders.
The option price per share with respect to each option is determined by the
Board of Directors or the Committee. Options may be granted in cumulative
increments over a period of months or years as determined by the Board of
Directors or the Committee. The option price is payable in cash or in part by
the payment for such shares by any other property or in any other form specified
in the applicable option agreement. The period of each option is fixed by the
Board of Directors or the Committee, but in no event may it be longer than 10
years. Options granted under the Plan are nontransferable. No options were
granted in fiscal 1996.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth certain information with respect to unexercised
options held by such individuals at the end of fiscal 1996.
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised in
the
Acquired on Value Realized Underlying Unexercised Money Options/sars at
Name Exercise (#) ($) Options/sars at FY-End (#) FY-End ($) (1)
- ---- ------------ ---------- -------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Harvey Kalef -- -- 1,000,000 -- US$-0- --
Gerald Wilks -- -- -- -- -- --
Norman Dobiesz -- -- -- -- -- --
Simon Meredith -- -- -- -- -- --
Roger Scarr -- -- -- -- -- --
Michel van
Herreweghe -- -- -- -- -- --
Francoise Jacquel -- -- -- -- -- --
Roger Kirby -- -- -- -- -- --
</TABLE>
The calculations of the value of unexercised options are based on the difference
between the closing bid price of the Common Shares on NASDAQ on November 30,
1996 of US$.001, and the exercise price of each option, multiplied by the number
of shares covered by the option.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of the record date of the May 8, 1997 Special
Meeting of Shareholders, certain information with respect to the beneficial
ownership of the Company's Common Shares by: (i) each person known to the
Company to be the beneficial owner of more than five percent of the Common
Shares; (ii) each director and executive officer of the Company; and (iii) all
directors and officers of the Company as a group. In all cases, to the best of
the Company's knowledge, the named person has sole voting power and sole
investment power over such securities unless otherwise indicated.
23
<PAGE>
<TABLE>
<CAPTION>
[All quantities in thousands.]
-------------------------------------------------------------------------
Preferred A Shares
----------------------------------
Common Shares Series One (11) Series Two (12) Fully Diluted (13)
------------- --------------- --------------- ------------------
Quantity % Quantity % Quantity % Quantity %
-------- - -------- - -------- - -------- -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Shares Issued 16,630 100 805 100 467 100 54,306 100
------ --- --- --- --- --- ------ ---
Directors
S. P. Meredith (1) (2) 0 0 0 0 0 0 0 0
M. van Herreweghe (1) 0 0 0 0 0 0 0 0
(2)
Roger Scarr (1) 0 0 0 0 0 0 0 0
F. Jacquel (1) (2) 0 0 0 0 0 0 0 0
Roger Kirby (1) 0 0 0 0 0 0 0 0
Others
GeraldWilks (3) (4) 2,400 14.4 0 0 0 0 2,400 4.4
Edward Stein (5) 0 0 0 0 80 17.1 4,800 8.8
W.L. Securities (6) 0 0 92 11.4 40 8.5 3,496 6.4
Harvey Kalef (7) 1,000 6.0 0 0 0 0 1,000 1.8
Ernest Herzig (8) 1,810 10.9 0 0 0 0 1,810 3.3
Stephens Group,Inc (9) 850 5.1 0 0 0 0 850 1.6
S.D. Simon (10) 0 0 50 6.2 0 0 600 1.1
-----------------------------------------------------------------------------
Total 6,060 36.4 142 17.6 120 25.6 14,956 27.4
-----------------------------------------------------------------------------
(1) Elected Director May 8, 1997, at the Special Shareholders Meeting. c/o A.R.T. Inc. 5 -7100
Warden Ave. Markham, Ont. Canada, L3R 8B5.
(2) Simon P. Meredith, President. General Delivery, Kettleby, Ontario, Canada, L0G 1J0. Michel
van Herreweghe, Vice President. Francoise Jacquel, Secretary.
(3) Former Director: Gerald Wilks, c/o Black Diamond Incentives Ltd., 8 Denison Street,
Markham, Ontario, Canada L3R 5M7.
(4) See "Executive Compensation--Employment and Consulting Agreements".
(5) Edward Stein, 5 Tree Top Terrace, Smithtown, NJ. U.S.A. 11787-1145, is the owner of 80,000
Preference A Series 2 Shares.
(6) W.L. Securities, Att. G. Johnson & F. Miller, P.O. Box 5050, Denver, Colorado, U.S.A. 80217
is the owner of 39,887 Preference A Series 2 Shares and 91,865 Preference A Series 1
Shares.
(7) See Executive Compensation.
(8) Ernest Herzig, 42 Hollinger Road, Toronto, Ontario. Canada, M4B 3G6. Includes 425,000
common shares owned directly by Mr. Herzig as well as 1,000,000 common shares owned by
Herzig Realty Company, a partnership of which Mr. Herzig and his wife are the sole
partners, and 375,000 common shares held by Herzig Sommerville Ltd., an entity of which Mr.
Herzig is a principal shareholder. (See also Item 13.)
(9) Stephens Group, Inc. 114 E Capital Ave. P.O. Box 3507, Little Rock AR 72203
(10) S.D. Simon. P.O. Box 36, Seattle, WA, owner of 50,000 Preference A Series One (1) shares
(11) One (1) Preference A Series 1 Share is freely convertible into 12 common shares.
(12) One (1) Preference A Series 2 Share is freely convertible into 60 common shares.
(13) Represents the number of total common shares if one hundred percent (100%) of the Preferred
A Shares, Series One and Series Two are converted to common shares.
</TABLE>
24
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
At November 30, 1996, amounts due to Herzig Somerville Limited ("HSL"), a
Company controlled by Ernest Herzig, a former member of the Board of Directors
and a significant shareholder of the Company, were Cdn$171,413. During the
fiscal years ended November 30, 1993, 1994, 1995 and 1996, the Company purchased
an aggregate of Cdn$394,094, Cdn$523,388, Cdn$306,806 and Cdn$117,845,
respectively, of printing services from HSL.
It is the Company's policy that transactions between the Company and persons or
entities affiliated with the officers, directors, employees, or shareholders of
the Company, which relate to the operations of the Company, will be on terms no
less favorable to the Company than could have reasonably been obtained in
arm's-length transactions with independent third parties.
See "Executive Compensation--Employment and Consulting Agreements" for a
description of certain employment and consulting arrangements with officers
and/or directors of the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Exhibit
- --------------
3.1(a) Articles of Incorporation, filed as an exhibit to the Company's
Registration Statement on Form S- 18 (No. 33-11587C) and incorporated herein by
reference.
3.1(b) Amendment to Articles of Incorporation, filed as an exhibit to the
Company's Registration Statement on Form S-1 (No. 33-47729) and incorporated
herein by reference.
3.1(c) Revised Designations of Rights and Preferences of the 12% Convertible
Preference Shares, Series 1, filed as an exhibit to the Company's Registration
Statement on Form S-1 (No. 33-47729) and incorporated herein by reference.
3.1(d) Form of Resolution setting conversion rate of the Series 1 Preference
Shares, filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-47729) and incorporated herein by reference.
3.2 By-Laws, as amended, filed as an exhibit to the Company's Registration
Statement on Form S-18 (No. 33-11587C) and incorporated herein by reference.
4.1 Specimen Common Shares Certificate, filed as an exhibit to the Company's
Registration Statement on Form S-18 (No. 33-11587C) and incorporated herein by
reference.
25
<PAGE>
4.2 Form of Underwriter's Warrant to purchase 70,000 units, dated September,
1992, filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-47729) and incorporated herein by reference.
4.3 Form of Warrant for the Class A Warrants, filed as an exhibit to the
Company's Registration Statement in Form S-1 (No. 33-47729) and incorporated
herein by reference.
4.4 Form of Warrant for the Class B Warrants, filed as an exhibit to the
Company's Registration Statement on Form S-1 (No. 33-47729) and incorporated
herein by reference.
10.5 Distribution Agreement, dated December 12, 1985, between Glow Resources,
Inc., and Harvey Kalef & Associates, Inc., filed as an exhibit to the Company's
Registration Statement on Form S-18 (No. 33-11587C) and incorporated herein by
reference.
10.6 Assignment of Distribution Agreement, dated April 1, 1986, between Harvey
Kalef & Associates, Inc. and the Company, filed as an exhibit to the Company's
Registration Statement on Form S-18 (No. 33-11587C) and incorporated herein by
reference.
10.7 Stock Option Plan, filed as an exhibit to the Company's Registration
Statement on Form S-18 (No. 33-11587C) and incorporated herein by reference.
10.8 Distribution Agreement, dated October 1, 1986, between American Express
Travel Related Services Company, Inc. and the Company, filed as an exhibit to
the Company's Registration Statement on Form S-18 (No. 33-11587C) and
incorporated herein by reference.
10.10 Amended and Restated Employment Agreement between the Company and Harvey
Kalef, filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-47729) and incorporated herein by reference.
10.12 Consulting Agreement between the Company and J. Gregory & Company, Inc.,
filed as an exhibit to the Company's Registration Statement on Form S-1 (No.
33-47729) and incorporated herein by reference.
10.13 Warrant Solicitation Fee Agreement, filed as an exhibit to the Company's
Registration Statement on Form S-1 (No. 33-47729) and incorporated herein by
reference.
10.22 License Agreement between the Company and Nihon Keizai, dated August 31,
1991, filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1991, and incorporated herein by reference.
10.23 Amended and Restated Memorandum of Agreement between the Company and
ESSTRA Industries Corp., dated July 8, 1992, filed as an exhibit to the
Company's Registration Statement on Form S-1 (No. 33-47729) and incorporated
herein by reference.
10.25 Amendment No. 1 to Amended and Restated Memorandum of Agreement between
the Company and ESSTRA Industries Corp., dated August 17, 1992, filed as an
exhibit to the Company's Registration Statement on Form S-1 (No. 33-47729) and
incorporated herein by reference.
26
<PAGE>
10.26 Accepted offer to lease premises between the Company and H&R Properties
Limited (successor landlord to Batise Investments et. al., referred to in
Exhibit 10.19), dated December 16, 1992, filed as an exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended November 30, 1992, and
incorporated herein by reference.
10.27 Warrant to Purchase Common Shares, dated March 3, 1993, issued to The
Global Initiatives Fund, filed as an exhibit to the Company's Registration
Statement on Form S-1 (File No. 33-72976) and incorporated herein by reference.
10.28 (a) Form of Non-Negotiable 10% Promissory Note, dated September 8, 1993,
issued by the Company, filed as an exhibit to the Company's Registration
Statement on Form S-1 (File No. 33- 72976) and incorporated herein by reference.
(b) Form of Non-Negotiable 6% Convertible Promissory Note, dated September
8, 1993, issued by the Company, filed as an exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-72976) and incorporated herein
by reference.
(c) Form of Security Agreement, dated as of September 8, 1993, between the
Company and the holders of such notes, filed as an exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-72976) and incorporated herein
by reference.
(d) Form of Amendment dated in May 1994, between the Company and the
holders of such notes, filed as an exhibit to the Company's Registration
Statement on Form S-1 (File No. 33-72976) and incorporated herein by reference.
10.29 (a) Promissory Note, dated September 18, 1992, by the Company to ESSTRA
Industries Corp., filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended November 30, 1993, and incorporated herein by reference.
(b) Letter Agreement, dated November 10, 1993, between ESSTRA Industries
Corp. and the Company, filed as an exhibit to the Company's Registration
Statement on Form S-1 (File No. 33- 72976) and incorporated herein by reference.
(c) Letter Agreement, dated February 14, 1994, between ESSTRA Industries
Corp. and the Company, filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended November 30, 1993, and incorporated herein by
reference.
(d) Letter Agreement, dated March 24, 1994, between ESSTRA Industries
Corp. and the Company, incorporated herein by reference and filed as exhibit to
the Company's Registration Statement on Form S-1 (File No. 33-72976).
(e) Letter Agreement, dated April 28, 1994, between ESSTRA Industries
Corp. and the Company, incorporated herein by reference and filed as an exhibit
to the Company's Registration Statement on Form S-1 (File No. 33-72976).
27
<PAGE>
10.30 Consulting agreement, dated November 1994, between the Company and The
Merrick Group Limited, filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended November 30, 1994, and incorporated herein by
reference.
22.1 Subsidiaries of the Company, filed as an exhibit to the Company's
Registration Statement on Form S-1 (No. 33-47729) and incorporated herein by
reference.
27 Financial Data Schedule (Electronic filing only).
(B) FINANCIAL STATEMENT SCHEDULES.
Not applicable.
(C) REPORTS ON FORM 8-K.
None
28
<PAGE>
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, this 14 day of October, 1997.
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
President, Chief Operating Officer October 14, 1997
/s/ Simon P. Meredith and Director
- ---------------------
Simon P. Meredith
29
<PAGE>
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED NOVEMBER 30, 1996
T A B L E O F C O N T E N T S
PAGE
AUDITORS' REPORT............................................................1
COMMENTS BY AUDITORS FOR U.S. READERS
ON CANADA - U.S. REPORTING CONFLICT......................................1
CONSOLIDATED BALANCE SHEET - ASSETS.........................................2
CONSOLIDATED BALANCE SHEET - LIABILITIES AND
SHAREHOLDERS' EQUITY.....................................................3
CONSOLIDATED STATEMENT OF CONTRIBUTED SURPLUS...............................4
CONSOLIDATED STATEMENT OF DEFICIT...........................................5
CONSOLIDATED STATEMENT OF LOSS..............................................6
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL
POSITION.................................................................7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................8 - 17
<PAGE>
Armstrong Richard H. Armstrong
Szewczyk
Tobias Peter D. Szewczyk
Chartered John R. Tobias
Accountants_____________________________________________________________________
AUDITORS' REPORT
To the Shareholders of
Artagraph Reproduction Technology Incorporated
We have audited the consolidated balance sheet of Artagraph Reproduction
Technology Incorporated as at November 30, 1996 and 1995 and the consolidated
statements of contributed surplus, loss, deficit and changes in financial
position for the years ended November 30, 1996, 1995 and 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at November 30, 1996
and 1995 and the results of its operations and the changes in its financial
position for the years ended November 30, 1996, 1995 and 1994 in accordance with
generally accepted accounting principles in Canada.
/s/ Armstrong Szewczyk & Tobias
Toronto, Canada CHARTERED ACCOUNTANTS
September 9, 1997
COMMENTS BY AUDITORS
FOR U.S. READERS ON CANADA - U.S. REPORTING CONFLICT
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the consolidated
financial statements are affected by significant uncertainties such as that
referred to in the attached balance sheet as at November 30, 1996 and 1995 and
as described in Note 14 to the consolidated financial statements. Our report to
the shareholders dated September 9, 1997 is expressed in accordance with
Canadian reporting standards which do not permit a reference to such an
uncertainty in the auditors report when the uncertainty is adequately disclosed
in the consolidated financial statements.
/s/ Armstrong Szewczyk & Tobias
Toronto, Canada CHARTERED ACCOUNTANTS
September 9, 1997
PAGE 1
<PAGE>
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1996 AND 1995
(STATED IN CANADIAN DOLLARS)
1996 1995
---- ----
ASSETS
CURRENT
Cash $ 85,422 $ 50,549
Accounts Receivable [Note 3] 149,410 338,449
Inventories [Notes 2(b) and 4] 254,645 404,193
Prepaid Expenses and Deposits 58,438 76,000
---------- ----------
547,915 869,191
---------- ----------
CAPITAL [Note 5] 154,267 288,681
---------- ----------
OTHER
Patents 3,931,051 3,931,051
Art Reproduction Rights 441,875 441,875
---------- ----------
4,372,926 4,372,926
Less - Accumulated Amortization 1,752,224 1,449,874
---------- ----------
2,620,702 2,923,052
---------- ----------
Inventories [Notes 2(b) and 4] 136,337 327,146
---------- ----------
TOTAL ASSETS $3,459,221 $4,408,070
========== ==========
PAGE 2
<PAGE>
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1996 AND 1995
(STATED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
LIABILITIES
CURRENT
Accounts Payable and Accrued Liabilities $ 457,303 $ 708,698
Accounts Payable - Related Party [Note 6] 171,411 165,825
Customers' Deposits 11,200 270,946
Current Portion of Long-Term Debt 486,659 137,456
------------ ------------
1,126,573 1,282,925
------------ ------------
LONG-TERM DEBT
Notes Payable [Note 7] 486,659 493,400
Less - Current Portion Due Within One Year 486,659 137,456
------------ ------------
-- 355,944
------------ ------------
TOTAL LIABILITIES 1,126,573 1,638,869
------------ ------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK [Note 8]
PREFERENCE SHARES:
Series 1
805,000 {1995 - 805,000} 3,701,809 3,701,809
Series 2
466,941 {1995 - 466,941} 2,785,628 2,785,628
COMMON SHARES:
16,629,785 {1995 - 16,629,785} 1,851,461 1,851,461
------------ ------------
8,338,898 8,338,898
CONTRIBUTED SURPLUS 11,775,000 11,775,000
DEFICIT (17,781,250) (17,344,697)
------------ ------------
2,332,648 2,769,201
------------ ------------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $ 3,459,221 $ 4,408,070
============ ============
</TABLE>
The accompanying notes form an integral part of
these consolidated financial statements.
APPROVED BY THE BOARD: Director /s/ Simon P. Meredith Director /s/ Signature
---------------------- ----------------
To be read in conjunction with the Auditors' Report attached hereto dated
September 9, 1997.
PAGE 3
<PAGE>
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
CONSOLIDATED STATEMENT OF CONTRIBUTED SURPLUS
FOR THE YEARS ENDED NOVEMBER 30, 1996, 1995 AND 1994
(STATED IN CANADIAN DOLLARS)
1996 1995 1994
---- ---- ----
BALANCE - Beginning of Year $11,775,000 $11,775,000 $11,775,000
ADD - Addition to Contributed Surplus -- -- --
----------- ----------- -----------
BALANCE - End of Year $11,775,000 $11,775,000 $11,775,000
=========== =========== ===========
The accompanying notes form an integral part of
these consolidated financial statements.
PAGE 4
<PAGE>
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
CONSOLIDATED STATEMENT OF DEFICIT
FOR THE YEARS ENDED NOVEMBER 30, 1996, 1995 AND 1994
(STATED IN CANADIAN DOLLARS)
1996 1995 1994
---- ---- ----
BALANCE - Beginning of Year $17,344,697 $16,297,602 $15,652,419
ADD - Net Loss 436,553 1,047,095 645,183
----------- ----------- -----------
17,781,250 17,344,697 16,297,602
ADD - Dividends [Note 9] -- -- --
----------- ----------- -----------
BALANCE - End of Year $17,781,250 $17,344,697 $16,297,602
=========== =========== ===========
The accompanying notes form an integral part of
these consolidated financial statements.
PAGE 5
<PAGE>
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
CONSOLIDATED STATEMENT OF LOSS
FOR THE YEARS ENDED NOVEMBER 30, 1996, 1995 AND 1994
(STATED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
SALES $ 2,556,550 $ 2,139,271 $ 4,847,312
----------- ----------- -----------
COST OF GOODS SOLD AND OTHER
MANUFACTURING COSTS
Cost of Goods Sold and Other Manufacturing
Costs Before the Undernoted: 1,701,238 1,640,343 2,867,246
Amortization of Capital Assets 33,576 45,126 60,922
----------- ----------- -----------
1,734,814 1,685,469 2,928,168
----------- ----------- -----------
GROSS PROFIT 821,736 453,802 1,919,144
----------- ----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES
Selling, General and Administrative Expenses
Before the Undernoted: 893,228 1,189,975 2,280,582
Amortization of Capital Assets 20,443 27,666 27,125
Amortization of Patents 302,350 252,000 252,000
Loan Interest 47,804 45,739 47,859
Royalties (Recovered) -- (11,576) 6,332
----------- ----------- -----------
1,263,825 1,503,804 2,613,898
Less - Interest Earned 5,536 2,907 49,571
----------- ----------- -----------
1,258,289 1,500,897 2,564,327
----------- ----------- -----------
LOSS FROM
OPERATIONS BEFORE TAXES (436,553) (1,047,095) (645,183)
PROVISION FOR INCOME TAXES [Note 13] -- -- --
----------- ----------- -----------
NET LOSS $ (436,553) $(1,047,095) $ (645,183)
=========== =========== ===========
NET LOSS PER COMMON SHARE $(.03) $(.06) $(.04)
==== ==== ====
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 16,629,785 16,629,785 16,629,785
========== ========== ==========
</TABLE>
The accompanying notes form an integral part of
these consolidated financial statements.
PAGE 6
<PAGE>
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED NOVEMBER 30, 1996, 1995 AND 1994
(STATED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH WAS PROVIDED BY (APPLIED TO):
OPERATING ACTIVITIES
Net Loss $ (436,553) $(1,047,095) $ (645,183)
Add - Items not Affecting Cash:
Amortization of Capital Assets 54,019 72,792 88,047
Amortization of Patents 302,350 252,000 252,000
Loss on Disposal of Capital Assets 38,536 -- 53,078
----------- ----------- -----------
(41,648) (722,303) (252,058)
Accounts Receivable 189,039 90,242 403,276
Inventories - Current and Long-Term 340,357 454,582 169,004
Prepaid Expenses and Deposits 17,561 115,337 (39,955)
Deferred Foreign Exchange Loss -- -- 210,440
Accounts Payable and Accrued Liabilities (251,395) (508,848) (389,793)
Accounts Payable - Related Party 5,586 125,177 (285,387)
Customers' Deposits (259,746) 270,946 --
Dividends Accrued on Class "A" Preference Shares,
Series 1 -- -- (322,524)
----------- ----------- -----------
(246) (174,867) (506,997)
----------- ----------- -----------
FINANCING ACTIVITIES
Loan Payable - Esstra Industries Corp. -- -- (70,876)
Notes Payable (6,741) 32,743 62,482
Repayment of Note Payable - Esstra Industries Corp. -- -- (2,313,110)
Issuance of Capital Stock for Cash -- 6,215 2,779,413
----------- ----------- -----------
(6,741) 38,958 457,909
----------- ----------- -----------
INVESTING ACTIVITIES
Conversion of Capital Assets to Inventory 41,860 -- --
Acquisition of Capital Assets -- (32,758) (65,069)
----------- ----------- -----------
41,860 (32,758) (65,069)
----------- ----------- -----------
INCREASE (DECREASE)
IN CASH POSITION 34,873 (168,667) (114,157)
CASH - Beginning of Year 50,549 219,216 333,373
----------- ----------- -----------
CASH - End of Year $ 85,422 $ 50,549 $ 219,216
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest Paid $ 35,150 $ 45,739 $ 47,859
=========== =========== ===========
Income Taxes Paid $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The accompanying notes form an integral part of
these consolidated financial statements.
PAGE 7
<PAGE>
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
(STATED IN CANADIAN DOLLARS)
1. INCORPORATION AND OPERATIONS
The Company was incorporated in Canada on January 24, 1986 under The Ontario
Business Corporations Act. The Company's primary business is the production,
distribution and marketing of replications of oil paintings.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the consolidation of
Artagraph Reproduction Technology Incorporated with its wholly-owned
subsidiaries as follows:
Artagraph Reproduction Technology (USA) Corporation;
Artagraph Reproduction Technology Corporation; and
Artagraph Reproduction Technology Direct Corporation
The wholly-owned subsidiaries have been inactive since November 30,
1988.
(b) INVENTORIES
(i) Inventories, whether classified as current or long-term assets, are
valued at the lower of cost and market value. Cost is determined on
a first-in, first-out basis.
(ii) The Company's policy is to periodically evaluate the inventory
levels of each product in its inventory on an image-by-image basis,
both in light of past sales and estimated future sales of each
product and similar products. In addition, when the Company
determines that a product line or market should be discontinued,
the inventory relating to that product line or market is written
down to net realizable value. The purpose of these policies is to
ensure that the Company's inventory balances, net of reserves,
exclude slow-moving and obsolete inventory and are valued at the
lower of cost and market value. The Company uses annual physical
inventory counts combined with an analysis of each product's
preceding three year's (or for such shorter period that a
particular product may have been in existence) sales and a review
of the Company's sales expectations for each product to determine
whether the level and value of the Company's inventory of a
particular product at a given time is excessive. This three year
period has been deemed to be an appropriate period for evaluating
the historical sales of the Company's products since such products
are not perishable and tend to be marketed over multi-year periods
through intermittent and recurring sales programs. In no event are
amounts carried as a current asset if it is not probable that they
will be sold within one year, nor do amounts carried as long-term
inventory exceed their fair value as determined by the inventory
valuation policies of the Company as described above.
PAGE 8
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: [Continued]
(c) CAPITAL ASSETS
Capital assets are recorded at cost and are amortized at rates
sufficient to substantially amortize the cost of the assets over their
estimated useful lives on the following basis:
Equipment, Furniture and Fixtures........20% Declining Balance
Leasehold Improvements...................Straight-line over Term
of the Lease
Moulds are recorded at cost and are amortized on the units-of-production
basis which is sufficient to substantially amortize the cost of the
moulds over their estimated useful lives.
Patents are recorded at cost and are amortized on a straight-line basis,
based on the legal life of such intellectual property, which
approximates fifteen years.
At each balance sheet date, the Company reviews the remaining benefit
associated with the Artagraph patents to ensure that the Company will
generate sufficient undiscounted cash flows to recover their carrying
costs.
Art reproduction rights are recorded at cost and are amortized over
their estimated useful lives on a straight-line basis over a period of
three years.
(d) TRANSLATION OF FOREIGN CURRENCIES
These financial statements are presented in Canadian dollars.
Transactions in foreign currencies are translated into Canadian dollars
at exchange rates prevailing at the transaction date. Monetary assets
and monetary liabilities are translated at the exchange rate prevailing
at the balance sheet date.
Under Canadian generally accepted accounting principles, the translation
gains or losses arising on translation of long-term monetary items are
deferred and amortized over the lives of the related monetary item.
(e) MANAGEMENT REPRESENTATIONS
In the opinion of management, all adjustments necessary for a fair
presentation of the financial position at November 30, 1996 and 1995 and
the results of operations, changes in financial position and related
note disclosures for the fiscal years ended November 30, 1996, 1995 and
1994 have been made.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
1996 1995
---- ----
Trade Accounts Receivable $ 168,410 $ 352,652
Less - Allowance for Doubtful Accounts 19,000 14,203
----------- -----------
$ 149,410 $ 338,449
========== ==========
PAGE 9
<PAGE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------------------------------- -------------------------------------
Provision for Provision for
Obsolete and Obsolete and
Gross Slow-Moving Net Gross Slow-Moving Net
Amount Inventories Amount Amount Inventories Amount
------ ----------- ------ ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Finished Goods $ 71,131 $ - $ 71,131 $ 25,950 $ - $ 25,950
Work-in-Process 942,895 (738,393) 204,502 1,497,451 (947,980) 549,471
Raw Materials 115,349 - 115,349 155,918 - 155,918
----------- ----------- --------- ---------- ----------- ---------
$ 1,129,375 $ (738,393) $ 390,982 $ 1,679,319 $ (947,980) $ 731,339
========== =========== ========= ========== =========== =========
Current Portion ................................ $ 254,645 ......................... $ 404,193
Non-current Portion............................. 136,337 ......................... 327,146
--------- ---------
$ 390,982 $ 731,339
========= =========
During the year, inventories that were previously provided for have been sold and, consequently,
the provision for slow-moving inventories has been reduced by $209,587.
5. CAPITAL ASSETS
1996 1995
- ---------------------------------------------------------------------------------------------
Accumulated Net Book Net Book
Cost Amortization Value Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equipment, Furniture and Fixtures $ 676,530 $ 552,147 $ 124,383 $ 170,851
Moulds 318,100 288,216 29,884 42,692
Leasehold Improvements 288,958 288,958 -- 2,602
Artwork -- -- -- 72,536
---------- ---------- ---------- ----------
$1,283,588 $1,129,321 $ 154,267 $ 288,681
========== ========== ========== ==========
</TABLE>
6. ACCOUNTS PAYABLE - RELATED PARTY - $171,411
This amount is with respect to inventory purchases from a company in which a
shareholder has a financial interest. These purchases amounted to $117,845
(1995 - $306,806; 1994 - $523,388).
7. NOTES PAYABLE
On August 19, 1995, the Company failed to make the scheduled repayment of
one-half of the principal and payment of accrued interest due under the
notes. By letter of agreement, October 12, 1995, the noteholders waived the
default and approved a revised schedule of repayment of principal and
payment of interest.
During 1996, the Company was unable to remain current with this revised
schedule and no renegotiations have been initiated. Consequently, the total
amount due, including interest and principal, has been shown as a current
liability.
PAGE 10
<PAGE>
7. NOTES PAYABLE [Continued}
During the year, the Company paid approximately $51,000 Cdn. of accrued
interest:
1996 1995
U.S. Dollars Cdn. Dollars U.S. Dollars Cdn. Dollars
-------------------------- --------------------------
Principal $315,000 $428,400 $315,000 $427,770
Interest 42,940 58,259 48,715 65,630
-------- -------- -------- --------
$357,940 $486,659 $363,715 $493,400
======== ======== ======== ========
These notes are secured by a general security agreement over all the assets
of the Company.
8. CAPITAL STOCK
(a) SHARE CAPITAL
The Company is authorized by its Articles of Incorporation to issue an
unlimited number, except where noted, of the following classes of
shares:
(i) Non-voting, redeemable, class "A" preference shares, series 1 and
series 2; convertible into common shares and have the right to
cumulative dividends as and if declared in the amount of U.S. $0.60
per share per annum, payable quarterly in the first year of
issuance and annually thereafter, as and when declared, subject to
the provisions of The Ontario Business Corporations Act. The future
dividend payments are payable in cash or common shares at the
discretion of the directors.
The directors have authorized 875,000 class "A" preference shares,
series 1, of which 805,000 are issued, each of which is convertible
into twelve common shares.
The directors have authorized an unlimited number of class "A"
preference shares, series 2 of which 466,941 shares were issued on
May 19, 1994 for a cash consideration of $2,779,413, each of which
is convertible commencing November 13, 1995, into 60 common shares;
and
(ii) Common shares
(b) CAPITAL STOCK
<TABLE>
<CAPTION>
NON-VOTING, CONVERTIBLE, REDEEMABLE CLASS "A" PREFERENCE SHARES, SERIES 1:
--------------------------------------------------------------------------
1996 1995
---------------------- ----------------------
Number of Number of
Shares Amount Shares Amount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance - Beginning of Year 805,000 $3,701,809 805,000 $3,701,809
Add - Shares Issued During Year -- -- -- --
---------- ---------- ---------- ----------
Balance - End of Year 805,000 $3,701,809 805,000 $3,701,809
========== ========== ========== ==========
</TABLE>
PAGE 11
<PAGE>
8. CAPITAL STOCK [Continued]
(b) CAPITAL STOCK [Continued]
<TABLE>
<CAPTION>
NON-VOTING, 12% CONVERTIBLE, REDEEMABLE CLASS "A" PREFERENCE SHARES, SERIES 2:
-----------------------------------------------------------------------------
1996 1995
------------------------ ------------------------
Number of Number of
Shares Amount Shares Amount
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balance - Beginning of Year 466,941 $ 2,785,628 466,941 $ 2,779,413
---------- ---------- ----------- ----------
Issued During Year:
Public Offering - - - -
Adjustment to Underwriting Costs - - - 6,215
Conversion of Bridge Notes - - - -
---------- ---------- ----------- ----------
- - - 6,215
------------------------ ------------- -----------
Balance - End of Year 466,941 $ 2,785,628 466,941 $ 2,785,628
========== ========== =========== ==========
COMMON SHARES:
1996 1995
------------------------ ------------------------
Number of Number of
Shares Amount Shares Amount
---------- ---------- ----------- ----------
Balance - Beginning of Year 16,629,785 $ 1,851,461 16,629,785 $ 1,851,461
Add - Shares Issued During Year - - - -
---------- ---------- ----------- ----------
Balance - End of Year 16,629,785 $ 1,851,461 16,629,785 $ 1,851,461
========== ========== ========== ==========
</TABLE>
(c) STOCK OPTIONS AND WARRANTS TO PURCHASE COMMON SHARES
The Company has issued various stock options for common shares of the
Company's capital stock. The stock options provide for the granting of
options to key employees, including officers, directors and independent
contractors of the Company. No option may be granted with a term
exceeding ten years. In addition, the Company has granted warrants from
time to time to lenders of the Company.
The options and warrants are allocated as follows:
NUMBER OF SHARES
-----------------------
1996 1995
---- ----
Balance - Beginning of Year 5,069,000 8,719,000
Less - Options and Warrants Expired During Year 1,444,000 3,650,000
---------- ----------
Balance - End of Year 3,625,000 5,069,000
========== ==========
PAGE 12
<PAGE>
8. CAPITAL STOCK [Continued]
(c) STOCK OPTIONS AND WARRANTS TO PURCHASE COMMON SHARES [Continued]
The options and warrants granted and outstanding as at November 30, 1996
are as follows:
Common Shares
Under Option
or Subject
to Warrants Exercise Price Expiry Date
----------- -------------- -----------
150,000 U.S. $0.35 1997
25,000 U.S. $0.35 1998
25,000 Cdn. $1.50 1999
25,000 U.S. $1.50 2000
1,200,000 U.S. $0.01 2000
1,200,000 U.S. $0.20 2000
1,000,000 U.S. $0.25 2002
----------
3,625,000
=========
(d) PUBLICLY TRADED WARRANTS TO PURCHASE PREFERENCE SHARES
In connection with the Company's May 19, 1994 public offering, the
Company has issued 933,882 class "C" warrants which entitle the holder
to purchase one (1) series 2 preference share of the Company at an
exercise price of U.S. $9.60. Each of the warrants is redeemable at U.S.
$0.02 at any time prior to its expiration, thirty-six (36) months after
the closing of the recent public offering, only if the closing bid price
of the series 2 preference shares for any preceding period of 20
consecutive trading days exceeded 120% of such warrant's exercise price.
(e) OTHER WARRANTS AND CONVERTIBLE SECURITIES
In May, 1994, the Company issued to its underwriter in a public offering
of class "A" preference shares, series 2, warrants to purchase 32,500
units at a price of U.S. $9.60 per unit, each consisting of:
(i) One (1) 12% non-voting, convertible, redeemable class "A"
preference share, series 2, without par value; and
(ii) Two (2) redeemable class "C" preference share purchase warrants.
9. DIVIDENDS
(a) CLASS "A" PREFERENCE SHARES, SERIES 1
The holders of the class "A" preference shares, series 1, are entitled
to receive as and when declared by the directors, a fixed preferential
cumulative dividend at the rate of U.S. $0.60 per annum, payable
annually in cash or common shares at the discretion of the directors.
The Company anticipates that any subsequent dividends declared and
payable on the preference shares in the foreseeable future will be paid
in common shares.
PAGE 13
<PAGE>
9. DIVIDENDS [Continued]
(a) CLASS "A" PREFERENCE SHARES, SERIES 1 [CONTINUED]
The quarterly dividends payable December 1, 1993 of $120,750 U.S.
($164,220 Cdn.); the dividends payable December 1, 1994 of $483,000 U.S.
($656,880 Cdn.); the dividends payable December 1, 1995 of $483,000 U.S.
($656,880 Cdn.); and the dividends payable December 1, 1996 of $483,000
U.S. ($656,880 Cdn.) have not yet been declared by the Company.
(b) Class "A" Preference Shares, Series 2
The holders of the class "A" preference shares, series 2, are entitled
to receive as and when declared by the directors, a fixed preferential
cumulative dividend at the rate of U.S. $0.60 per annum, payable
quarterly in cash for the first year after issuance and annually
thereafter in cash or common shares at the discretion of the directors.
The quarterly dividends for the first year have not been declared and
any subsequent dividends declared in the foreseeable future will be paid
in common shares.
10. SEGMENTED INFORMATION
The Company operates in one business segment, the production, distribution
and marketing of replications of oil paintings.
Operations and identifiable assets by geographic segments are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
DOMESTIC SALES - CANADA $ 41,379 $ 170,630 $ 278,223
INTERNATIONAL EXPORT SALES - U.S.A. 1,668,104 1,810,427 4,417,669
EUROPEAN ECONOMIC COMMUNITY 729,600 111,215 110,894
- OTHER 117,467 46,999 40,526
---------- ----------- -----------
$ 2,556,550 $ 2,139,271 $ 4,847,312
========== =========== ==========
SEGMENT OPERATING LOSS $ (177,771) $ (603,217) $ (96,956)
---------- ----------- ----------
EXPENSES:
General Corporate 210,978 398,139 500,368
Interest and Financing Costs Unallocated
to a Segment 35,150 45,739 47,859
---------- ----------- ----------
246,128 443,878 548,227
---------- ----------- ----------
NET LOSS $ (423,899) $ (1,047,095) $ (645,183)
========== =========== ===========
</TABLE>
All significant identifiable assets and amortization relate to assets
situated in Canada.
PAGE 14
<PAGE>
11. COMMITMENTS AND CONTINGENT LIABILITIES
(a) MANAGEMENT SERVICES AGREEMENT
The Company entered into a five year agreement in 1995 with The Merrick
Group Limited and Mr. Simon Meredith to provide management services as
President and Chief Operating Officer of the Company at a maximum
monthly fee of Cdn. $10,000.
If this agreement is terminated by either party, the Company shall be
obligated to pay a termination fee of Cdn. $20,000 payable in two
instalments on the 30th and 60th day following such termination.
Consulting fees for 1996 of U.S. $88,235 were set up in the financial
statements.
(b) LEASE OBLIGATIONS
Minimum future lease obligations, net of occupancy costs, for office,
showroom and factory premises are $131,423 until January 31, 1998.
12. RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The financial statements of the Company are prepared in accordance with
Canadian generally accepted accounting principles ("Canadian G.A.A.P.").
These principles differ in some respects from United States generally
accepted accounting principles ("U.S. G.A.A.P.").
The effect of such differences on the Company's consolidated balance sheet
and consolidated statement of loss is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- --------------------------- --------------------------
Canadian U.S. Canadian U.S. Canadian U.S.
G.A.A.P. G.A.A.P. G.A.A.P. G.A.A.P. G.A.A.P. G.A.A.P.
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(a) CONSOLIDATED
BALANCE
SHEET:
Deferred Foreign
Exchange Loss $ -- $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============ ============
Total Assets $ 3,459,221 $ 3,459,221 $ 4,408,070 $ 4,408,070 $ 5,528,932 $ 5,528,932
============ ============ ============ ============ ============ ============
Total Liabilities $ 1,126,573 $ 1,126,573 $ 1,638,869 $ 1,638,869 $ 1,718,851 $ 1,718,851
============ ============ ============ ============ ============ ============
Capital Stock
Issued $ 8,338,898 $ 10,380,441 $ 8,338,898 $ 10,380,441 $ 8,332,683 $ 10,380,441
============ ============ ============ ============ ============ ============
Contributed
Surplus $ 11,775,000 $ 11,775,000 $ 11,775,000 $ 11,775,000 $ 11,775,000 $ 11,775,000
============ ============ ============ ============ ============ ============
Accumulated
Deficit $(17,781,250) $(19,829,008) $(17,344,697) $(19,392,455) $(16,297,602) $(18,345,360)
============ ============ ============ ============ ============ ============
Shareholders'
Equity $ 2,332,648 $ 2,332,648 $ 2,769,201 $ 2,769,201 $ 3,810,081 $ 3,810,081
============ ============ ============ ============ ============ ============
</TABLE>
PAGE 15
<PAGE>
12. RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES [Continued]
(b) CONSOLIDATED STATEMENT OF LOSS:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net Loss under Canadian G.A.A.P. $ (436,553) $ (1,047,095) $ (645,183)
Add - Compensation under Stock Option Plan - - -
Expense of Deferred Foreign Exchange Losses - - -
----------- ----------- -----------
(436,553) (1,047,095) (645,183)
Less - Recovery of Deferred Foreign Exchange Losses - - 210,440
---------- ----------- -----------
Net Loss under U.S. G.A.A.P. $ (436,553) $ (1,047,095) $ (434,743)
=========== =========== ==========
Net Loss per Common Share under U.S. G.A.A.P.
(after Deduction of the Class "A" Preference
Share Dividends [Note 9]) $(.03) $(.06) $(.03)
==== ==== ====
(c) WEIGHTED AVERAGE NUMBER OF SHARES
- U.S. G.A.A.P. [Note 12(g)] 16,629,785 16,629,785 16,629,785
=========== =========== ===========
(d) WEIGHTED AVERAGE NUMBER OF SHARES
- CANADIAN G.A.A.P. 16,629,785 16,629,785 16,124,224
=========== =========== ===========
</TABLE>
(e) Opinion 25 of the Accounting Principles Board requires that an employer
recognize compensation costs for stock issued through non-variable
employee stock option plans as the difference between the quoted market
price of the stock at the measurement date (the date of the grant of the
option) less the amount the employee is required to pay. In Canada, such
costs are not recognized. Compensation costs relating to stock options
issued to employees were recognized under U.S. G.A.A.P. during the year
in the amount of $ Nil (1995 - $ Nil; 1994 - $ Nil).
Under U.S. G.A.A.P. the compensation cost is recorded by increasing the
dollar value of the shares under option to the market value of these
shares, to the extent the option price is granted below market. Earnings
are charged, in the period the option is granted, with the expense for
compensation costs equal to the excess of the market value of the option
over the option price granted.
(f) For U.S. G.A.A.P. foreign exchange losses that related to long-term
monetary items must be expensed in the year accrued. Under Canadian
G.A.A.P. these losses are deferred and amortized as disclosed in Note
2(d).
(g) Opinion 15 of the Accounting Principles Board requires that for U.S.
G.A.A.P. purposes the Company follow the "Treasury Stock Method" in
determining the weighted average number of shares. This method could
result in a difference in the weighted average number of shares as
determined in accordance with Canadian G.A.A.P.
For U.S. G.A.A.P. purposes the "Treasury Stock Method" increases the
weighted average number of shares by a factor which takes into
consideration the number of stock options outstanding, the exercise
price of these stock options and the quoted market price for the
Company's shares. No similar calculation is required under Canadian
G.A.A.P. to determine the weighed average number of shares.
(h) Under U.S. G.A.A.P., accrued dividends on class "A" preference shares
are not considered to be either an operating activity or a financing
activity. Consequently, dividends accrued on class "A" preference shares
would be deleted from operating activities and dividends would be
reduced under financing activities. The cash position remains the same.
PAGE 16
<PAGE>
13. INCOME TAXES
There are no current or deferred income taxes payable in Canada or the
United States.
The Company has combined tax losses for Canadian and U.S. income tax
purposes of approximately $12,105,000 (1995 - $13,117,000) available for
deduction against future years' earnings, the benefit of which has not been
recognized in these financial statements.
These losses expire as follows:
Year Canadian U.S. Total
---- -------- ---- -----
1997...............$ 3,786,000 $ - $ 3,786,000
1998............. 976,000 - 976,000
1999............... 2,313,000 - 2,313,000
2000............... 1,993,000 - 1,993,000
2001............. 302,000 - 302,000
2002.............. 717,000 400,000 1,117,000
2003.............. 88,000 1,530,000 1,618,000
----------- ---------- ----------
$10,175,000 $ 1,930,000 $12,105,000
========== ========== ==========
14. FUTURE OPERATIONS
The accompanying consolidated financial statements have been prepared on the
basis of accounting principles applicable to a going concern. There is
substantial doubt that the Company has the ability to realize the carrying
value of assets reported in the consolidated financial statements which is
dependent upon the attainment of profitable operations and the continued
financial support of its creditors. The consolidated financial statements do
not reflect adjustments that might be necessary should profits not be
attained, or should the support not be continued.
15. MAJOR CUSTOMER
Sales to specific major customers of the Company were as follows:
1996 1995
---------------------- ----------------------
Percentage Percentage
Percentage of Accounts Percentage of Accounts
of Sales Receivable of Sales Receivable
---------- ----------- ---------- -----------
SALES THROUGH ONE DIRECT
MAIL MARKETING FIRM (U.S.) - - 16 -
==
SALES THROUGH TWO RETAIL
COMPANIES (U.S.) 38 44 16 25
== == == ==
SALES THROUGH ONE ART
PUBLISHING AGENT (U.S.) 23 - 37 34
== == ==
PAGE 17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED FOR THE
fISCAL YEAR ENDED NOVEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<CASH> 85,422
<SECURITIES> 0
<RECEIVABLES> 168,410
<ALLOWANCES> 19,000
<INVENTORY> 254,645
<CURRENT-ASSETS> 547,915
<PP&E> 1,283,588
<DEPRECIATION> 1,129,321
<TOTAL-ASSETS> 3,459,221
<CURRENT-LIABILITIES> 1,126,573
<BONDS> 0
0
6,487,437
<COMMON> 1,851,461
<OTHER-SE> 6,006,250
<TOTAL-LIABILITY-AND-EQUITY> 3,459,221
<SALES> 2,556,550
<TOTAL-REVENUES> 2,556,550
<CGS> 1,701,238
<TOTAL-COSTS> 33,576
<OTHER-EXPENSES> 1,258,289
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,804
<INCOME-PRETAX> (436,553)
<INCOME-TAX> 0
<INCOME-CONTINUING> (436,553)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (436,553)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
