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 May 31, 1998 Commission File Number 0-16008
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 May 31, 1998, were 266,629,785. Note: After a
250:1 reverse stock split approved by the Company's shareholders on July 14,
1998, there are currently outstanding 1,066,519 shares of common stock issued
and outstanding.
1
<PAGE>
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
INDEX TO
QUARTERLY REPORT ON
FORM 10-Q
---------
FOR THE QUARTER ENDED
---------------------
May 31, 1998
------------
PART I
Balance sheets as at May 31, 1998, and November 30, 1998 3-4
Statements of Contributed Surplus 5
for the six months ended May 31, 1998
for the six months ended May 31, 1997
Statements of Accumulated Deficit 6
for the six months ended May 31, 1998
for the six months ended May 31, 1997
Statements of Loss 7
for the three months ended May 31, 1998
for the three months ended May 31, 1997
for the six months ended May 31, 1998
for the six months ended May 31, 1997
Statements of Cash Flow 8
for the six months ended May 31, 1998
for the six months ended May 31, 1997
Notes to Financial Statements 9-16
Item 2. Management's discussions and analysis of financial
condition and results of operations 17-20
PART II
SIGNATURES 21
2
<PAGE>
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
BALANCE SHEETS
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
ASSETS
6 Months Ended 12 Months Ended
May 31, 1998 Nov. 30, 1997
------------ -------------
(Unaudited) (Audited)
(Note 2)
<S> <C> <C>
CURRENT ASSETS
Cash $115,596 $185,370
Accounts Receivable (Note 3) 127,647 66,995
Inventory(Notes 2(a) and 4) 217,453 213,811
Prepaid expenses and deposits 78,252 126,205
-------------- --------------
538,948 592,381
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 1,194,098 1,165,921
-------------- --------------
92,379 117,667
-------------- --------------
Patents 3,931,051 3,931,051
Art reproduction rights 441,875 441,875
-------------- --------------
4,372,926 4,372,926
Less: Accumulated amortization 2,140,295 2,014,295
-------------- --------------
2,232,631 2,358,631
-------------- --------------
OTHER
Inventories (Notes 2(a) and 4) 39,001 42,644
-------------- --------------
TOTAL ASSETS $2,902,959 $3,111,323
============== ==============
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
3
<PAGE>
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
BALANCE SHEETS
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
6 Months Ended 12 Months Ended
May 31, 1998 Nov. 30, 1997
------------ -------------
(Unaudited) (Unaudited)
(Note 2)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities $520,908 $464,156
Accounts payable - related party (Note 5) 157,794 159,796
Customers' deposits - -
Current portion of long-term debt 593,209 553,934
-------------- --------------
1,271,911 1,177,886
LONG TERM DEBT
Notes payable (Note 6) 593,209 553,934
Less - current portion due within one year 593,209 553,934
-------------- --------------
- -
-------------- --------------
TOTAL LIABILITIES 1,271,911 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 (18,815,350) (18,512,961)
-------------- --------------
1,631,048 1,933,437
-------------- --------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,902,959 $3,111,323
============== ==============
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
4
<PAGE>
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
STATEMENTS OF CONTRIBUTED SURPLUS
(IN CANADIAN DOLLARS)
6 Months Ended 6 Months Ended
May 31, 1998 May 31, 1997
------------ ------------
(Unaudited) (Unaudited)
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
============ ============
The accompanying notes form an integral part of these consolidated financial
statements.
5
<PAGE>
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
STATEMENTS OF ACCUMULATED DEFICIT
(IN CANADIAN DOLLARS)
6 Months Ended 6 Months Ended
May 31, 1998 May 31, 1997
------------ ------------
(Unaudited) (Unaudited)
Deficit - beginning of period $(18,512,961) $(17,344,701)
Add - net loss (302,389) (464,498)
------------- -------------
Deficit - end of period $(18,815,350) $(17,809,199)
============= =============
The accompanying notes form an integral part of these consolidated financial
statements.
6
<PAGE>
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
STATEMENTS OF INCOME (LOSS)
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
3 Months Ended 3 Months Ended 6 Months Ended 6 Months Ended
May 31, 1998 May 31, 1997 May 31, 1998 May 31, 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SALES $419,031 $175,239 $580,784 $338,478
COST OF GOODS
SOLD 234,524 182,053 416,727 359,554
----------- ------------ ------------- ------------
GROSS PROFIT 184,507 (6,814) 164,057 (21,076)
EXPENSES
Selling 14,287 13,625 38,986 47,961
General & Administrative 70,623 83,263 139,966 176,875
----------- ------------ ------------- ------------
TOTAL EXPENSES 84,910 96,888 178,952 224,836
Operating income/(loss) 99,597 (103,702) (14,895) (245,912)
OTHER EXPENSES
Amort. & depreciation 77,091 72,150 154,182 144,300
Note interest 11,053 11,053 22,107 22,107
Other 51,500 26,090 111,205 52,179
----------- ------------ ------------- ------------
TOTAL OTHER
EXPENSES 139,644 109,293 287,494 218,586
----------- ------------ ------------- ------------
NET INCOME (LOSS) $(40,047) $(212,995) $(302,389) $(464,498)
=========== ============ ============= ============
NET LOSS PER
COMMON SHARE $(0.0002) $(0.0008) $(0.0011) $(0.0017)
=========== ============ ============= ============
WEIGHTED AVE.NUMBER
OF COMMON SHARES 266,629,785 266,629,785 266,629,785 266,629,785
=========== ============ ============= ============
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements
7
<PAGE>
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
STATEMENTS OF CASH FLOW
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
6 Months Ended 6 Months Ended
May 31, 1998 May 31, 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash was provided by (applied to):
OPERATING ACTIVITIES
Net loss for period $(302,389) $(464,498)
Add: Items not requiring an outlay of cash
Amortization 126,000 126,000
Depreciation 28,182 28,182
----------- ------------
(148,207) (310,316)
----------- ------------
Accounts receivable (60,652) 48,371
Inventories - current & long-term 1 64,282
Prepaid expenses and deposits 47,953 (12,296)
Accounts payable and accrued liabilities 56,747 113,865
Accounts payable - related party (2,002) -
Customer deposits - (11,200)
----------- ------------
Cash provided by (used by) operating activities (106,160) (107,294)
----------- ------------
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 39,275 21,872
----------- ------------
Cash provided by (used by) financing activities 39,275 21,872
----------- ------------
INCREASE /(DECREASE) IN CASH (69,774) (85,422)
CASH, beginning of period 185,370 85,422
----------- ------------
CASH, end of period $115,596 $ -
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Interest paid in period $ - $ 52,000
=========== ============
Income taxes paid in period $ - $ -
=========== ============
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements
8
<PAGE>
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
NOTES TO FINANCIAL STATEMENTS
May 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The unaudited financial statements of the Company for the periods ended May 31,
1998, and May 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 May 31, 1998, and November 30, 1997, and the results of their operations and
cash flows for the periods ended May 31, 1998, and May 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:
May 31, 1998
------------
Trade accounts receivable $136,647
Less- allowance for doubtful accounts (9,000)
----------
$127,647
==========
10
<PAGE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
May 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 $ 47,500 $ - $ 47,500 $ 72,065 $ - $72,065
W.I.P. 950,123 834,996 115,127 990,636 851,509 139,127
Raw materials 93,827 - 93,827 45,263 - 45,263
---------- ---------- ----------- ---------- ---------- ----------
$1,091,450 $ 834,996 $256,454 $1,107,964 $ 851,509 $256,455
========== ========== =========== ========== ========== ==========
Current portion $217,453 $213,811
Non-current portion 39,001 42,644
----------- ----------
$256,454 $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
six month period ended May 31, 1998 (May 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 been initiated. 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 $450,450
Add:interest 100,128 142,759
---------- ----------
Total $415,128 $593,209
========== ==========
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 twelve (12) common
shares (on the old basis -- see Common Shares below).
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 sixty (60) common shares (old basis -- see Common Share below).
(ii) Common Shares. After a 250:1 reverse stock split approved by the Company's
shareholders on July 14, 1998 there are currently outstanding 1,066,519 shares
of common stock issued and outstanding. Prior to this action, there were
266,629,785 shares of common stock issued and outstanding.
(b) Capital stock.
NON-VOTING, CONVERTIBLE, REDEEMABLE CLASS "A" PREFERENCE SHARES, SERIES 1:
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
May 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
========= =========== ========== ============
</TABLE>
NON-VOTING, CONVERTIBLE, REDEEMABLE CLASS "A" PREFERENCE SHARES, SERIES 2:
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
May 31, 1998 Nov. 30, 1997
------------ -------------
Number of Number of
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance - beginning of year 466,941 $2,785,628 466,941 $2,785,628
Add- shares issued during period - - - -
--------- ----------- ---------- ------------
Balance - end of year 466,941 $2,785,628 466,941 $2,785,628
========= =========== ========== ============
</TABLE>
COMMON SHARES:
- -------------
<TABLE>
<CAPTION>
May 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 $2,183,961 266,629,785 $2,183,961
Add- shares issued during period - - - -
------------ ----------- ------------- ------------
Balance - end of year 266,629,785 $2,183,961 266,629,785 $2,183,961
============ =========== ============= ============
</TABLE>
12
<PAGE>
7. CAPITAL STOCK (Continued)
(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 (old basis see above)
--------------------------------------
May 31,1998 Nov. 30, 1997
----------- -------------
<S> <C> <C>
Balance - beginning of period 3,625,000 5,069,000
Add- options and warrants issued during the period - -
------------ -------------
3,625,000 5,069,000
Less - options and warrants expired during the period 150,000 1,444,000
------------ -------------
Balance - end of period (old basis see above(a)(ii) 3,475,000 3,625,000
============ =============
Balance - end of period (new basis see above (a)(ii)) 13,900 13,900
------------ -------------
</TABLE>
The options and warrants granted and outstanding as at May 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
=========
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. $0.60 per annum (old basis see Note 7(a)(ii) above)
payable annually in cash or common shares at the discretion of the directors.
The Company anticipates that any subsequent dividends declared and payable on
the preference shares in the foreseeable future will be paid in common shares.
The dividends payable, but not yet declared by the Company, are as follows:
13
<PAGE>
Period ended Amount US$ 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
May 31, 1998 241,500 359,835
---------- ----------
Total $2,294,250 $3,418,433
========== ==========
(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
May 31, 1998 140,082 208,722
---------- -----------
Total $1,120,656 $1,669,776
========== ===========
9. COMMITMENTS AND CONTINGENT LIABILITIES
(a) Management Services Agreement
(i) 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
fee-retainer of $140,000 U.S.
At the quarter ended May 31, 1998, the Company had approximately $47,000 U.S.
remaining in prepaids, and consequently had expended $93,000 U.S.
14
<PAGE>
(b) Lease obligations
Under a long-term lease expiring January 31, 2003, the Company is obligated for
a minimum future lease payments, net of occupancy costs, for office, showroom
and factory premises for the fiscal years listed below as follows:
1999 $ 58,340
2000 58340
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:
(a) Balance sheet:
<TABLE>
<CAPTION>
May 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 $ 2,902,959 $ 2,902,959 $ 3,111,323 $ 3,111,323
============ ============= ============= =============
Total liabilities $ 1,271,911 $ 1,271,911 $ 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 $(18,815,350) $ (20,863,108) $ (18,512,961) $ (20,560,719)
============ ============= ============= =============
Shareholders' Equity $ 1,631,048 $ 1,631,048 $ 1,933,437 $ 1,933,437
============ ============= ============= =============
</TABLE>
(b) Statement of Loss:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net loss under Canadian & U.S. GAAP $ (302,389) $ (464,498)
=========== ============
Net loss per common share under
U.S. & Canadian GAAP $ (0.001) $ (0.002)
=========== ============
Weighted average number of shares
U.S. & Canadian GAAP 266,629,785 266,629,785
=========== ============
</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.
15
<PAGE>
These losses, as expressed in Canadian dollars expire as follows:
<TABLE>
<CAPTION>
Year Canadian U.S. Total
---- -------- ---- -----
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
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
After a 250:1 reverse stock split approved by the company's shareholders on July
14, 1998 there are currently outstanding 1,066,519 shares of common stock issued
and outstanding.
13. RECLASSIFICATION
Certain figures with respect to the six month period ended May 31, 1997, have
been reclassified to conform with the presentation adopted for the six month
period ended May 31, 1998.
16
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS (All figures in Canadian dollars)
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 $302,389 for the six month period ended May 31,
1998, an improvement from the loss of $464,498 for the comparable period in
1997. Sales revenues at $580,784 for the period of six months ended May 31,
1998, were up from 1997, at $338,478. Sales revenues for the second quarter in
fiscal 1998 were $419,031, a solid improvement over the first quarter's sales of
$175,239. The sales revenues year to date in 1998 reflect the Company's reliance
on two customers for approximately 80% of its total sales revenues.
The Company recorded a gross profit of $164,057 for the first six months,
compared to a gross loss of $21,076 for the comparable period in 1997 . In
addition, lower operating expenses in 1998 contained the operating loss to
$14,895 compared to the operating loss in 1997 of $245,912. However, other
expenses were higher by approximately $70,000 in 1998. The increase in other
expenses in 1998 was attributable to the fees associated with the Company's
consulting agreement with Creative Enterprises. Operating cash flow for the
first six months was negative at $106,160, a slight improvement compared to the
same period in 1997. The Company's working capital balance remained negative at
$732,963, as at May 31, 1998, compared to negative working capital of $585,505
at year end November 30, 1997. This decline in working capital reflects the
reduction of cash balances, receivables and inventories to fund on-going
operations.
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.
Sales
The Company continues to be very reliant on a few customers for the majority of
its sales revenues. In the six months ended May 31, 1998, the Company recorded
sales to its main retail customer of $203,608 which represents 35% of its total
sales revenues. Another publishing customer represented a further 36% of the
Company's six month sales revenues. The increase of sales revenues from $338,478
in 1997 to $580,784 in 1998, represents the increase of sales to one publishing
customer in the first six month of 1998.
17
<PAGE>
In order to stimulate new orders from this customer and other customers in the
limited edition contract printing market, the Company has modified its policies
for pricing and shipment. Deposits on contracts now cover only initial process
costs, such as colour 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.
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 to replace
the loss of sales revenues from its existing customers and markets.
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 advance sales.
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 Company reported a gross profit of $164,157 for the first six months of
1998, a significant improvement from the gross loss of $21,076 reported for the
first six months of 1997.
In 1997 the gross loss was attributable to the negative impact of fixed overhead
costs on the lower level of sales revenues experienced for the first six months.
Selling Expenses
In the first six months of 1998, selling expenses at $38,986 were down slightly
from $47,961 for the same period in 1997. The reduction in selling expenses is
mainly attributed to the lower proportion of sales revenues carrying sales
commissions in 1998 over 1997.
General and Administration
These expenses were $139,966 for the first six months of 1998, and compare
favourably with the higher administration costs in 1997 of $176,875. The major
savings resulted from lower salaries, and professional fees. Other Expenses
18
<PAGE>
Other expenses year to date were approximately $70,000 higher in 1998 than in
1997. The increase in other expenses in 1998 was attributable to the fees
associated with the Company's consulting agreement with Creative Enterprises.
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, the Company's ability to raise
additional capital will be severely restricted.
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 Common Information
----------- ----- ------ -----------
Shares
------
(all underlying common share quantities reflect the pre-consolidation numbers
prior to the herein mentioned reverse common stock split of 250:1 -- see post
balance sheet event as discussed below)
<S> <C> <C> <C> <C>
Series 1 Pref. 805,000 Convertible into 12 9,660,000 Cum. Div. payable
Shares common shares in cash or common
shares (see next)
Cum. Div. on US $2,294,250 Based on clsg. price 2,294,250,000 Common Shares
Series 1 Pref. as at May 31, 1998
of $0.001
Series 2 Pref. 466,941 Convertible into 60 28,016,460 Cum. Div. payable
Shares common shares in cash or common
shares (see next)
Cum. Div. on US $1,120,656 Based on clsg. price 1,120,656,000 Common Shares
Series 2 Pref. as at May 31, 1998
of $0.001
</TABLE>
The Company's working capital balance remained negative at $732,963, as at May
31, 1998, compared to negative working capital of $585,505 at year end November
30, 1997. This decline in working capital reflects the reduction of cash
balances, receivables and inventories to fund on-going operations.
19
<PAGE>
During September 1997, the Company's Board of Directors authorized the
preparation of a Regulation S Offering, whereby the Company offered, in a
private placement transaction exempt from registration under Regulation S, a
total of 500 Units. Each unit consists of 1,000,000 shares of the Company's
common stock at an offering price of $1,000 per unit. The first sale took place
on October 2, 1997. As of February 1998, the Company completed an offering of
its securities under Regulation S, whereby a total of 250 million shares of the
Company's common stock were issued in consideration for the receipt of a total
of $250,000. As a result of the offering, the Company now has a total of
266,629,789 shares of common stock issued and outstanding (see post balance
sheet event discussed below). The Company used the proceeds derived from the
offering for working capital purposes.
Post balance sheet event -- After a 250:1 reverse stock split approved by the
company's shareholders on July 14, 1998 there are currently outstanding
1,066,519 shares of common stock issued and outstanding.
20
<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 May 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: September 15, 1998
/s/ Simon Meredith
- -------------------------------------
By: Simon Meredith
President
21
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> CANADIAN DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Nov-30-1998
<PERIOD-START> Mar-1-1998
<PERIOD-END> May-31-1998
<EXCHANGE-RATE> 1.4450
<CASH> 115,596
<SECURITIES> 0
<RECEIVABLES> 136,647
<ALLOWANCES> (9,000)
<INVENTORY> 217,453
<CURRENT-ASSETS> 538,948
<PP&E> 5,658,403
<DEPRECIATION> (3,334,383)
<TOTAL-ASSETS> 2,902,858
<CURRENT-LIABILITIES> 1,271,911
<BONDS> 0
0
6,487,437
<COMMON> 2,183,961
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,902,968
<SALES> 419,031
<TOTAL-REVENUES> 0
<CGS> 234,524
<TOTAL-COSTS> 84,910
<OTHER-EXPENSES> 128,591
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,053
<INCOME-PRETAX> (40,047)
<INCOME-TAX> 0
<INCOME-CONTINUING> (40,047)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,047)
<EPS-PRIMARY> (0)
<EPS-DILUTED> (0)
</TABLE>
