SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended August 31, 1998 Commission File Number 0-16008
ARTAGRAPH INTERNATIONAL INC.
----------------------------
(Formerly ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED)
ONTARIO, CANADA 98-0082514
5-7100 Warden Avenue, Markham, Ontario L3R 5M7
Registrant's telephone number: (905) 477-0252
Indicate by check mark whether the registrant (1) has filled 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 the number of shares outstanding of each of the issuer's classes of
common stock:
Common Shares Outstanding as at August 31, 1998: 1,066,519
1
<PAGE>
ARTAGRAPH INTERNATIONAL INC.
(formerly ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED)
INDEX TO
QUARTERLY REPORT ON
FORM 10-Q
---------
FOR THE QUARTER ENDED
---------------------
AUGUST 31, 1998
---------------
<TABLE>
<CAPTION>
<S> <C>
PART I
Balance sheets as at August 31, 1998, and November 30, 1997 3-4
Statements of Contributed Surplus 5
at August 31, 1998
at August 31, 1997
Statements of Accumulated Deficit 6
at August 31, 1998
at August 31, 1997
Statements of Loss 7
for the three months ended August 31, 1998
for the three months ended August 31, 1997
for the nine months ended August 31, 1998
for the nine months ended August 31, 1997
Statements of Cash Flow 8
for the nine months ended August 31, 1998
for the nine months ended August 31, 1997
Notes to Financial Statements 9-16
Item 2. Management's discussions and analysis of financial
condition and results of operations 17-19
PART II
SIGNATURES 20
</TABLE>
2
<PAGE>
ARTAGRAPH INTERNATIONAL INC.
BALANCE SHEETS
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
ASSETS
9 Months Ended 12 Months Ended
August 31, 1998 Nov. 30, 1997
--------------- -------------
(Unaudited) (Audited)
(Note 2)
<S> <C> <C>
CURRENT ASSETS
Cash $ 3,100 $ 89,395
Cash in Escrow - 95,975
Accounts Receivable (Note 3) 105,886 66,995
Inventory(Notes 2(a) and 4) 193,329 213,811
Prepaid expenses and deposits 32,611 126,205
----------- ------------
334,926 592,381
CAPITAL ASSETS
Equipment, furniture & fixtures 679,419 676,530
Molds 318,100 318,100
Leasehold improvements 288,958 288,958
Artwork - -
----------- ------------
1,286,477 1,283,588
Less: Accumulated depreciation 1,208,193 1,165,921
----------- ------------
78,284 117,667
----------- ------------
Patents 3,931,051 3,931,051
Art reproduction rights 441,875 441,875
----------- ------------
4,372,926 4,372,926
Less: Accumulated amortization 2,203,295 2,014,295
----------- ------------
2,169,631 2,358,631
----------- ------------
OTHER
Inventories (Notes 2(a) and 4) 33,125 42,644
----------- ------------
TOTAL ASSETS $2,615,966 $3,111,323
=========== ============
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
3
<PAGE>
ARTAGRAPH INTERNATIONAL INC.
BALANCE SHEETS
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
9 Months Ended 12 Months Ended
August 31, 1998 Nov. 30, 1997
--------------- -------------
(Unaudited) (Audited)
(Note 2)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 452,187 $ 464,156
Accounts payable - related party (Note 5) 157,794 159,796
Customers' deposits 14,750 -
Current portion of long-term debt 633,931 553,934
----------- ------------
1,258,662 1,177,886
LONG TERM DEBT
Notes payable (Note 6) 633,931 553,934
Less - current portion due within one year 633,931 553,934
----------- ------------
- -
----------- ------------
TOTAL LIABILITIES 1,258,662 1,177,886
----------- ------------
CAPITAL STOCK (Note 7)
Preference shares
Series 1 3,701,809 3,701,809
Series 2 2,785,628 2,785,628
Common shares 2,183,961 2,183,961
----------- ------------
8,671,398 8,671,398
CONTRIBUTED SURPLUS 11,775,000 11,775,000
DEFICIT (19,089,094) (18,512,961)
----------- ------------
1,357,304 1,933,437
----------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,615,966 $ 3,111,323
=========== ============
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
4
<PAGE>
ARTAGRAPH INTERNATIONAL INC.
STATEMENTS OF CONTRIBUTED SURPLUS
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
9 Months Ended 9 Months Ended
August 31, 1998 August 31, 1997
--------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C>
Balance - beginning of period $11,775,000 $11,775,000
Add - additions to contributed surplus - -
----------- ------------
Balance - end of period $11,775,000 $11,775,000
=========== ============
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
5
<PAGE>
ARTAGRAPH INTERNATIONAL INC.
STATEMENTS OF ACCUMULATED DEFICIT
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
9 Months Ended 9 Months Ended
August 31, 1998 August 31, 1997
--------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C>
Deficit - beginning of period $(18,512,963) $(17,344,701)
Add - net loss (576,131) (621,206)
------------ -------------
Deficit - end of period $(19,089,094) $(17,965,907)
============ =============
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
6
<PAGE>
ARTAGRAPH INTERNATIONAL INC.
STATEMENTS OF INCOME (LOSS)
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
3 Months Ended 3 Months Ended 9 Months Ended 9 Months Ended
August 31, 1998 August 31, 1997 August 31, 1998 August 31, 1997
--------------- --------------- --------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SALES $256,715 $306,295 $837,499 $644,772
COST OF GOODS
SOLD 216,238 248,619 632,965 626,474
---------- ------------ ------------ ------------
GROSS PROFIT 40,477 57,676 204,534 18,298
EXPENSES
Selling 22,032 11,032 61,018 58,992
General & Administrative 100,466 97,286 240,432 274,160
---------- ------------ ------------ ------------
TOTAL EXPENSES 122,498 108,318 301,450 333,152
Operating income/(loss) (82,021) (50,642) (96,916) (314,854)
OTHER EXPENSES
Amortization of patents 63,000 63,000 189,000 189,000
Depreciation 14,091 9,150 42,273 27,450
Note interest 11,053 11,053 33,160 33,160
Other 103,577 4,564 214,782 56,742
---------- ------------ ------------ ------------
TOTAL OTHER
EXPENSES 191,721 87,767 479,215 306,352
---------- ------------ ------------ ------------
NET INCOME (LOSS) $(273,742) $(138,409) $(576,131) $(621,206)
========== ============ ============ ============
NET LOSS PER
COMMON SHARE $(0.2567) $(0.1298) $(0.0022) $(0.0023)
========== ============ ============ ============
WEIGHTED AVE.NUMBER
OF COMMON SHARES 1,066,519 1,066,519 266,629,785 266,629,785
========== ============ ============ ============
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements
7
<PAGE>
ARTAGRAPH INTERNATIONAL INC.
STATEMENTS OF CASH FLOW
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
9 Months Ended 9 Months Ended
August 31, 1998 August 31, 1997
--------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash was provided by (applied to):
OPERATING ACTIVITIES
Net loss for period $(576,131) $(621,206)
Add: Items not requiring an outlay of cash
Amortization 189,000 189,000
Depreciation 42,273 42,273
----------- ------------
(344,858) (389,933)
----------- ------------
Accounts receivable (38,891) 126,289
Inventories - current & long-term 30,001 90,365
Prepaid expenses and deposits 93,594 18,282
Accounts payable and accrued liabilities (11,970) 54,239
Accounts payable - related party (2,002) -
Customer deposits 14,750 (11,200)
----------- ------------
Cash provided by (used by) operating activities (259,376) (111,958)
----------- ------------
INVESTMENT ACTIVITIES
Acquisition of capital assets and art
reproduction rights (2,889) -
----------- ------------
Cash provided by (used by) investment activities (2,889) -
----------- ------------
FINANCING ACTIVITIES
Notes payable 79,997 34,964
----------- ------------
Cash provided by (used by) financing activities 79,997 34,964
----------- ------------
INCREASE /(DECREASE) IN CASH (182,268) (76,994)
CASH, beginning of period 185,370 85,422
=========== ============
CASH, end of period $ 3,102 $ 8,428
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Interest paid in period $ - $ -
=========== ============
Income taxes paid in period $ - $ -
=========== ============
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements
8
<PAGE>
ARTAGRAPH INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998
(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 fine art reproductions. Effective July 14, 1998,
by articles of amendment, the Company changed its name to Artagraph
International Inc. from Artagraph Reproduction Technology Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The unaudited financial statements of the Company for the periods ended August
31, 1998, and August 31, 1997, have been prepared in accordance with Canadian
generally accepted accounting principles (GAAP) applied on a consistent basis.
The balance sheet at November 30, 1997, has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by GAAP for complete financial statements. In the opinion of
the Company's management, the accompanying financial statements contain the
material adjustments, necessary to present fairly the financial position of the
Company at August 31, 1998, and November 30, 1997, and the results of their
operations and cash flows for the periods ended August 31, 1998, and August 31,
1997, and, should be read in conjunction with the audited financial statements
for the year ended November 30, 1997. All such adjustments are of a normal
recurring nature. Interim period results are not necessarily indicative of the
results to be achieved for the full fiscal year.
(a) Inventories
Inventories, whether classified as current or long-term assets, are valued at
the lower of cost or market value. Cost is determined on a first in, first out
basis.
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 or market value. The Company uses annual physical
inventory counts combined with an analysis of each product's preceding three
years (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.
9
<PAGE>
(b) 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 the term of the lease.
Molds are recorded at cost and are amortized on the units-of production basis
which is sufficient to substantially amortize the cost of the molds 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
un-discounted 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.
(c) Translations 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 exchange rates prevailing at the balance sheet
date.
Under Canadian GAAP, 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.
3. ACCOUNTS RECEIVABLE.
Accounts receivable consists of the following:
August 31, 1998
---------------
Trade accounts receivable $114,886
Less- allowance for doubtful accounts (9,000)
------------
$105,886
============
10
<PAGE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
August 31, 1998 Nov. 30, 1997
---------------------------------------- -------------------------------------------
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 $ 75,741 $ - $75,741 $72,065 $ - $72,065
W.I.P. 959,007 851,509 107,498 990,636 851,509 139,127
Raw materials 43,215 - 43,215 45,263 - 45,263
---------- --------- -------- ---------- -------- --------
$1,077,963 $ 851,509 $226,454 $1,107,964 $851,509 $256,455
========== ========= ======== ========== ======== ========
Current portion $193,329 $213,811
Non-current portion 33,125 42,644
-------- --------
$226,454 $256,455
======== ========
</TABLE>
5. ACCOUNTS PAYABLE - RELATED PARTY - $157,794
This amount is with respect to inventory purchases from a company in which a
shareholder has a financial interest. These purchases amounted to $ - during the
nine month period ended August 31, 1998 (August 31, 1997 - $-).
6. 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 note holders waived the default
and approved a revised schedule of repayment of principal and payment of
interest.
During 1997 and 1998, the company was unable to remain current with this revised
schedule and no new negotiations have occurred. Consequently, the total amount
due, including interest and principal, has been shown as a current liability.
U.S. Dollars CDN Dollars
------------ -----------
Future amounts Principal Principal
- -------------- --------- ---------
Total future amounts $315,000 $470,031
Add:interest 110,000 163,900
-------- ---------
Total $425,000 $633,931
======== =========
The payments of principal will be accelerated in the event that the Company
achieves a quarterly net profit, as reported in the Company's future Form-10Q's,
or in the event that the Company raises capital through debt or equity
financing. In these circumstances, 50 percent of the net income reported for any
future quarter, or 50 percent of the amount raised through capital financing
will be applied to the repayment of the principal balances under the notes.
If in default, interest will be payable on these notes at the rate of 15% per
annum on the unpaid principal balance.These notes are secured by a general
security agreement over all assets of the Company.
11
<PAGE>
7. CAPITAL STOCK
(a) 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; convertible
into common shares and have the right to cumulative dividends, as and when
declared, in the amount of U.S. $0.60 per share per annum, payable quarterly in
the first year of issuance and annually thereafter subject to the provisions of
The Ontario Business Corporations Act. The first year dividends are to be paid
in cash, however, 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 875,000 are issued, each of which is convertible into 0.048 common shares.
The directors have authorized an unlimited number of class "A" preference
shares, series 2, of which 466,941 shares are issued, each of which is
convertible into 0.24 common shares.
(ii) The shareholders have authorized an unlimited number of Class B Preference
Shares.The shares are non-voting, retractable at the option of the Company and
have a preferential dividend of $0.10 per share in priority to all other shares
of the Company. No Class B Preference Shares have been issued.
(iii) Common shares. During the fiscal 1997, the Company issued 250,000,000
common shares for a total cash consideration of $332,500 net of issuance costs
of $17,500. On July 14, 1998, the shareholders of the Company approved the
consolidation of the common stock, whereby the common share were consolidated
250:1 resulting in 1,066,519 common shares being issued and outstanding after
the consolidation.
(iv) Class C Common Shares. The shareholders have authorized an unlimited number
of Class C Common Shares. Each Class C Common Share has 100 votes and a dividend
right of $0.01 which is payable only in the event that the annual dividends
required in respect of the senior shares of the Company (Class A Preferred,
Class B Preferred and Common) have been paid. Subsequent to the August 31, 1998,
balance sheet date, the Company issued 50,000 shares for total consideration of
$50,000.
(b) Capital stock.
<TABLE>
<CAPTION>
NON-VOTING, CONVERTIBLE, REDEEMABLE CLASS "A" PREFERENCE SHARES, SERIES 1:
- --------------------------------------------------------------------------
August 31, 1998 Nov. 30, 1997
--------------------------- ---------------------------
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 period - - - -
-------- ----------- -------- ------------
Balance - end of year 805,000 3,701,809 805,000 3,701,809
======== =========== ======== ============
NON-VOTING, CONVERTIBLE, REDEEMABLE CLASS "A" PREFERENCE SHARES, SERIES 2:
- --------------------------------------------------------------------------
August 31, 1998 Nov. 30, 1997
--------------------------- --------------------------
Number of Number of
Shares Amount Shares Amount
------ ------ ------ ------
Balance - beginning of year 466,941 $2,785,628 466,941 $2,785,628
Add- shares issued during period - - - -
-------- ----------- -------- ------------
Balance - end of year 466,941 2,785,628 466,941 2,785,628
======== =========== ======== ============
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
COMMON SHARES:
- --------------
August 31, 1998 Nov. 30, 1997
--------------------------- --------------------------
Number of Number of
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance - beginning of year 266,629,785 $2,183,961 16,629,785 $1,851,461
Add- shares issued during period - - 250,000,000 332,500
----------- --------- ----------- ---------
Total 266,629,785 2,183,961 266,629,785 2,183,961
----------- --------- ----------- ---------
Share consolidation during the year
of 250:1; resulting balance issued 1,066,519 2,183,961
=========== =========
</TABLE>
(c) The Company has issued various stock options for common stock 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 managers of the Company.
The options and warrants are allocated as follows:
<TABLE>
<CAPTION>
Number of shares
--------------------------------------
Aug. 31, 1998 Nov. 30, 1997
------------- -------------
<S> <C> <C>
Balance - beginning of period 13,900 14,500
Add- options and warrants issued during the period - -
-------- ---------
13,900 14,500
Less - options and warrants expired during the period - 600
-------- ---------
Balance - end of period 13,900 13,900
======== =========
</TABLE>
The options and warrants granted and outstanding as at August 31, 1998, are as
follows:
Common shares
Under Options
or subject
to warrants Exercise price Expiry date
----------- -------------- -----------
100 $ 87.50 1998
100 $375.00 1999
100 $375.00 2000
4,800 $ 2.50 2000
4,800 $ 50.00 2000
4,000 $ 62.50 2002
--------
13,900
========
13
<PAGE>
8. DIVIDENDS
(a) Class "A" Preference Shares, Series 1
The holders of the class "A" preference shares, series 1, are entitled to
receive as when declared by the directors, a fixed preferential cumulative
dividend at the rate of U.S. $0.60 per annum, payable annually in cash or common
shares at the discretion of the directors.
The Company anticipates that any subsequent dividends declared and payable on
the preference shares in the foreseeable future will be paid in common shares.
The dividends payable, but not yet declared by the Company, are as follows:
Period ended Amount US$ Amount CDN$
------------ ---------- -----------
December 1, 1993 $120,750 $179,918
December 1, 1994 483,000 719,670
December 1, 1995 483,000 719,670
December 1, 1996 483,000 719,670
December 1, 1997 483,000 719,670
August 31, 1998 362,250 539,753
------------ -----------
Total $2,415,000 $3,598,351
============ ===========
(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 $US 0.60 per share per annum, payable in cash for the
first year after issuance and annually thereafter in cash or common shares at
the discretion of the directors.
The Company anticipates that any dividends declared and payable, subsequent to
the first year, on the preference shares in the foreseeable future will be paid
in common shares.
The dividends payable, but not yet declared by the Company, are as follows:
Period ended Amount US$ Amount CDN$
------------ ---------- -----------
December 1, 1994 $140,082 $208,722
December 1, 1995 280,164 417,444
December 1, 1996 280,164 417,444
December 1, 1997 280,164 417,444
August 31, 1998 210,123 313,083
----------- -----------
Total $1,190,697 $1,774,137
=========== ===========
14
<PAGE>
9. COMMITMENTS AND CONTINGENT LIABILITIES
(a) Management Services Agreement
On November 30, 1994, the Company entered into a five year agreement with The
Merrick Group Limited to provide the services of Mr. Simon Meredith 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 installments on the 30th
and 60th day following such termination.
(ii) The Company entered into a one year agreement commencing October 1, 1997
with Creative Enterprises Inc. to provide consulting services for a pre-paid
retainer fee of $140,000 U.S.
In the nine months to August 31, 1998, $105,000 U.S. was charged to the
Company's income statement.
(b) Lease obligations
Under a long-term lease expiring January 31, 2003, the Company is obligated for
minimum future lease payments, net of occupancy costs, for office, showroom and
factory premises for the fiscal years listed below:
1999 $ 58,340
2000 58,340
2001 58,340
2002 64,174
2003 64,174
10. 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 GAAP). these principles
differ in some respects from United States generally accepted accounting
principles (U.S. GAAP).
The effect of such differences on the Company's balance sheet and statement of
loss is as follows:
<TABLE>
<CAPTION>
(a) Balance sheet:
August 31, 1998 Nov. 30, 1997
--------------- -------------
Canadian U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
---- ---- ---- ----
<S> <C> <C> <C> <C>
Deferred Foreign Exch. Loss $ - $ - $ - $ -
============ ============ ============ ============
Total assets $ 2,615,966 $ 2,615,966 $ 3,111,323 $ 3,111,323
============ ============ ============ ============
Total liabilities $ 1,258,662 $ 1,258,662 $ 1,177,886 $ 1,177,886
============ ============ ============ ============
Capital stock issued $ 8,671,398 $ 10,719,156 $ 8,671,398 $ 10,719,156
============ ============ ============ ============
Contributed surplus $ 11,775,000 $ 11,775,000 $ 11,775,000 $ 11,775,000
============ ============ ============ ============
Accumulated Deficit $(19,089,094) $(21,136,852) $(18,512,961) $(20,560,719)
============ ============ ============ ============
Shareholders' Equity $ 1,357,304 $ 1,357,304 $ 1,933,437 $ 1,933,437
============ ============ ============ ============
</TABLE>
15
<PAGE>
(b) Statement of Loss:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net loss under Canadian & U.S. GAAP $(576,131) $ (621,206)
========= ===========
Net loss per common share under
U.S. & Canadian GAAP $ (0.002) $ (0.002)
========= ===========
Weighted average number of shares
U.S. & Canadian GAAP 1,066,519 266,629,785
========= ===========
</TABLE>
11. 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 $8,752,000 available for deduction against future years' earnings,
the benefit of which has not been recognized in these financial statements, as
there can be no reasonable certainty that the deferred tax asset will ever be
realized.
These losses, as expressed in Canadian dollars expire as follows:
Year Canadian U.S. Total
---- -------- ---- -----
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
2004 433,000 - 433,000
---------- ----------- -----------
$6,822,000 $1,930,000 $8,752,000
========== =========== ===========
12. FUTURE OPERATIONS
The accompanying 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 financial statements which is dependent upon the attainment of
profitable operations and the continued support of its creditors. The financial
statements do not reflect adjustments that might be necessary should profits not
be attained, or should the support not be continued.
13. POST BALANCE SHEET EVENT
Subsequent to the quarter end, the Company has issued 50,000 Class C Common
Shares. These shares were issued pursuant to a subscription agreement dated
September 1, 1998, and the proceeds of $50,000 will be utilized for general
working capital purposes.
13. RECLASSIFICATION
Certain figures with respect to the nine month period ended August 31, 1997,
have been reclassified to conform with the presentation adopted for the nine
month period ended August 31, 1998.
16
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS (All figures in Canadian dollars except where otherwise stated)
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.
The Company recorded a loss of $576,131 for the nine month period ended August
31, 1998, a slight improvement from the loss of $621,206 for the comparable
period in 1997.
Sales revenues at $837,499 for the period of nine months ended August 31, 1998,
were significantly higher than 1997, at $644,772. Sales revenues for the third
quarter in fiscal 1998 were $256,715 (1997 -- $306,295). The higher nine month
sales revenues reflects increased sales volumes from two key customers, The
Museum Company and Greenwich Workshop. In addition, the increase revenues also
reflect the relative strength of the US dollar to the Canadian dollar, as all
the Company's exports are invoiced in US dollars. Notwithstanding the improved
sales picture, the Company continues to place reliance on a few major customers
for the majority of its revenues. In the nine month period to August 31, 1998,
approximately 68% of total sales revenues were from these two customers.
Gross profit for the first nine months rose to $204,534 from $18,298 in 1997.
However, higher other expenses in 1998, which are attributable to fees of
$155,000 paid to Creative Enterprises, under a consulting agreement, and a
$40,000 exchange loss, resulted in a similar net loss of $576,131, as compared
to the 1997 net loss of 621,206. The exchange loss arose from the weakening
Canadian dollar and the Company's liabilities of approximately $US650,000, owed
to its note holders and two trade creditors. Operating cash flow for the first
nine months was negative at $259,376, a decline compared to the same period in
1997, when the Company recorded a negative cash flow of $111,958. The Company's
working capital balance remained negative at $923,737, as at August 31, 1998,
compared to negative working capital of $890,633 at year end November 30, 1997.
There is substantial doubt that the Company has the ability to realize the
carrying value of its assets reported in the consolidated financial statements
which is dependant upon the attainment of profitable operations and the
continued financial support of its creditors.
17
<PAGE>
Sales
The Company continues to be very reliant on a few customers for the majority of
its sales revenues. In the nine months ended August 31, 1998, the Company
recorded sales to its main retail customer of $306,628 which represents 37% of
its total sales revenues. Four other customers represented a further 36% of the
Company's nine month sales revenues. The increase in sales revenues is
attributable to increase sales to the two principal customers, The Museum
Company and Greenwich Workshop. The Company shipped $266,621to Greenwich
Workshop in the first nine months, as compared to $113,546 in the same period in
1997. Sales to The Museum Company in 1998 were $306,628, up from $237,685 in
1997. A portion of the higher sales revenues reflects the favourable $US to $CDN
exchange rates in 1998, as the Company invoices all its exports in US dollars.
Owing to the Company's inability to finance new initiatives, or to attend trade
shows, or to hire dedicated sales personnel to sell in its markets, the Company
continues to achieve limited success in developing new opportunities.
The Company believes that the Artagraph process is very price-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. The customers can now initiate an Artagraph reproduction order for
approximately 20% of the previous initial financial commitment. Further
investment in additional manufacture of Artagraph reproductions for customers
under this new program is directly tied to actual sale orders.
While the Company is currently negotiating with several major publishing
customers, there can be no guarantee that these efforts will be successful in
generating new revenues.
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 colour 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 through aggressive advertising, attendance at trade shows, as
well as updating its library of images and providing new point-of-sale
materials.
Gross Profit
The gross margin rose in the first nine months of 1998 to 24%, from 3% for the
comparable period in 1997.
The increase of gross margin, from 1997 to 1998, is attributable to the relative
impact of fixed overhead costs to sales revenues. Fixed overhead costs,
including rent and plant salaries, as expressed as percentages of comparable
sales revenues averaged 50% for the first nine months of 1997, as compared to
30% for the nine month period to August 31, 1998. In part this reflects the
reduction in monthly rent from $19,000 to $8,500 commencing February 1998.
Other Expenses
Other expenses year to date were approximately $158,040 higher in 1998 than in
1997. This was attributable to consulting costs paid to Creative Enterprises
totalling approximately $155,000. In addition the Company recorded an unrealized
loss of $40,000 on exchange translations of its US$600,000 liabilities to
Canadian dollars.
18
<PAGE>
Liquidity and Capital Resources
Unless the Company is able to significantly increase sales from the level
experienced year to date in 1998, or raise additional capital, it may not be
able to perform all of its obligations in a timely manner. Although the Company
is aggressively 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 additional 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 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, and the repayment of the secured Note
Holders, the Company's ability to raise additional capital will be severely
restricted.
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, convertible securities, and cumulative
dividends expected to paid in common shares, is summarized on the following
page.
<TABLE>
<CAPTION>
Name of Security Amount Conversion Rate Underlying Additional
- ---------------- ------ --------------- ---------- ----------
Outstanding Terms/Price Common Information
----------- ----------- ------ -----------
Shares
------
<S> <C> <C> <C>
Series 1 Pref. 805,000 Convertible into 0.048 38,640 Cum. Div. payable
Shares common shares in cash or common
shares (see next)
Cum. Div. on US $2,415,000 Based on $0.001 (note 1) 9,660,000 Common Shares
Series 1 Pref.
Series 2 Pref. 466,941 Convertible into 0.24 112,066 Cum. Div. payable
Shares common shares in cash or common
shares (see next)
Cum. Div. on US $1,190,697 Based on $0.001 (note 1) 4,762,788 Common Shares
Series 2 Pref.
</TABLE>
Note 1 -- the most recent trading date for the Company's common shares was
12/18/96. On this date the price closed at $0.001. The" underlying common
shares" computation includes the impact of the 250:1 common share consolidation.
Post balance sheet event -- Subsequent to the quarter end, the Company has
issued 50,000 Class C Common Shares. These shares were issued pursuant to a
subscription agreement dated September 1, 1998, and the proceeds of $50,000 will
be utilized for general working capital purposes. These securities have not been
registered under the Securities Act of 1933, as amended, the Ontario Securities
Act or any applicable state or provincial law. The shares cannot be transferred
to a USA citizen or resident without an affective registration statement or an
opinion of counsel satisfactory to the Company that these shares may be resold
without registration.
19
<PAGE>
PART II
Nothing to report unless specifically included herein by reference.
Item (3) Default Under Senior Securities:
(i) As reported in the Company's Annual Report on form 10-K for the year
ended November 30, 1997, and incorporated herein by reference.
(ii) Dividends. As reported in this Company's Quarterly Report on Form
10-Q for the quarter ended August 31, 1998, in the section on Liquidity
and Capital Resources under Management's Discussion and Analysis, and
incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
Dated: November 30, 1998
/s/ Simon Meredith
- -------------------------------------
By: Simon Meredith
President
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Nov-30-1998
<PERIOD-START> Jun-01-1998
<PERIOD-END> Aug-31-1998
<CASH> 3,100
<SECURITIES> 0
<RECEIVABLES> 114,886
<ALLOWANCES> (9,000)
<INVENTORY> 226,454
<CURRENT-ASSETS> 334,926
<PP&E> 5,659,403
<DEPRECIATION> 3,411,488
<TOTAL-ASSETS> 2,615,966
<CURRENT-LIABILITIES> 1,258,662
<BONDS> 0
0
6,487,437
<COMMON> 2,183,961
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,615,966
<SALES> 256,715
<TOTAL-REVENUES> 0
<CGS> 216,238
<TOTAL-COSTS> 122,498
<OTHER-EXPENSES> 191,721
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,053
<INCOME-PRETAX> (273,742)
<INCOME-TAX> 0
<INCOME-CONTINUING> (273,742)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (273,742)
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0
</TABLE>
