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, 1997 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 August 31, 1997: 16,629,785
<PAGE>
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
INDEX TO
QUARTERLY REPORT ON
FORM 10-Q
---------
FOR THE QUARTER ENDED
---------------------
AUGUST 31, 1997
---------------
<TABLE>
<CAPTION>
<S> <C>
PART I
Balance sheets as at August 31, 1997, and November 30, 1997 3-4
Statements of Contributed Surplus 5
for the nine months ended August 31, 1997
for the nine months ended August 31,1996
Statements of Accumulated Deficit 6
for the nine months ended August 31, 1997
for the nine months ended August 31, 1996
Statements of Loss 7
for the three months ended August 31, 1997 for the three
months ended August 31, 1996 for the nine months ended August
31, 1997 for the nine months ended August 31, 1996
Statements of Cash Flow 8
for the nine months ended August 31, 1997
for the nine months ended August 31, 1996
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
</TABLE>
2
<PAGE>
ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
BALANCE SHEETS
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
ASSETS
9 Months Ended 12 Months Ended
August 31, 1997 Nov. 30, 1996
--------------- ---------------
(Unaudited) (Audited)
(Note 2)
<S> <C> <C>
CURRENT ASSETS
Cash $35,877 $85,422
Accounts receivable (Note 3) 23,121 149,410
Inventory (Notes 2(a) and 4) 214,787 254,645
Prepaid expenses and deposits 40,156 58,439
------------ ------------
313,941 547,916
CAPITAL ASSETS
Equipment, furniture & fixtures 676,530 676,530
Molds 318,100 318,100
Leasehold improvements 288,958 288,958
Artwork - -
------------ ------------
1,283,588 1,283,588
Less: Accumulated depreciation 1,171,594 1,129,321
------------ ------------
111,994 154,267
------------ ------------
Patents 3,931,051 3,931,051
Art reproduction rights 441,875 441,875
------------ ------------
4,372,926 4,372,926
Less: Accumulated amortization 1,941,225 1,752,225
------------ ------------
2,431,701 2,620,701
------------ ------------
OTHER
Inventories (Notes 2(a) and 4) 85,830 136,337
------------ ------------
TOTAL ASSETS $2,943,466 $3,459,221
============ ============
</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
9 Months Ended 12 Months Ended
August 31, 1997 Nov. 30, 1996
--------------- ----------------
(Unaudited) (Audited)
(Note 2)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities $536,632 $457,303
Accounts payable - related party (Note 5) 157,372 171,411
Customers' deposits - 11,200
Current portion of long-term debt 510,570 486,659
-------------- --------------
1,204,574 1,126,573
LONG TERM DEBT
Notes payable (Note 6) 510,570 486,659
Less - current portion due within one year 510,570 486,659
-------------- --------------
- -
TOTAL LIABILITIES 1,204,574 1,126,573
-------------- --------------
CAPITAL STOCK (Note 7)
Preference shares
Series 1 3,701,809 3,701,809
Series 2 2,785,628 2,785,628
Common shares 1,851,461 1,851,461
-------------- --------------
8,338,898 8,338,898
CONTRIBUTED SURPLUS 11,775,000 11,775,000
DEFICIT (18,375,006) (17,781,250)
-------------- --------------
1,738,892 2,332,648
-------------- --------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,943,466 $3,459,221
============== ==============
</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)
<TABLE>
<CAPTION>
9 Months Ended 12 Months Ended
August 31, 1997 August 31, 1996
----------------- -----------------
(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 REPRODUCTION TECHNOLOGY INCORPORATED
STATEMENTS OF ACCUMULATED DEFICIT
(IN CANADIAN DOLLARS)
9 Months Ended 9 Months Ended
August 31, 1997 August 31, 1996
--------------- ----------------
(Unaudited) (Unaudited)
Deficit - beginning of period $(17,781,251) $(17,344,701)
Add - net loss (593,755) (290,311)
------------- --------------
Deficit - end of period $(18,375,006) $(17,635,012)
============= ==============
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 9 Months Ended 9 Months Ended
August 31, 1997 August 31, 1996 August 31, 1997 August 31, 1996
---------------- --------------- --------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SALES $306,295 $320,471 $644,773 $1,768,248
COST OF GOODS
SOLD 248,619 226,819 626,474 1,089,615
----------- ----------- ------------ ------------
GROSS PROFIT 57,676 93,652 18,299 678,633
OPERATING EXPENSES
Selling 11,032 79,328 58,992 206,750
General & aministrative 97,286 132,904 274,160 461,310
----------- ----------- ------------ ------------
TOTAL OPERATING EXP. 108,318 212,232 333,152 668,060
Operating income/(loss) (50,642) (118,580) (314,853) 10,573
OTHER EXPENSES
Amortization of patents 63,000 63,000 189,000 189,000
Note interest 11,053 11,053 33,160 33,160
Other expenses 4,564 140 56,742 78,724
----------- ----------- ------------ ------------
TOTAL OTHER
EXPENSES 78,617 74,193 278,902 300,884
----------- ----------- ------------ ------------
NET INCOME (LOSS) $(129,259) $(192,773) $(593,755) $(290,311)
=========== =========== ============ ============
NET LOSS PER
COMMON SHARE $(0.0078) $(0.0116) $(0.0357) $(0.0175)
=========== =========== ============ ============
WEIGHTED AVE.NUMBER
OF COMMON SHARES 16,629,785 16,629,785 16,629,785 16,629,785
=========== =========== ============ ============
</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>
9 Months Ended 9 Months Ended
August 31, 1997 August 31, 1996
--------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash was provided by (applied to):
OPERATING ACTIVITIES
Net loss for period $ (593,755) $(290,311)
Add: Items not requiring an outlay of cash
Amortization 189,000 189,000
Depreciation 42,273 44,118
---------- ---------
(362,482) (57,193)
---------- ---------
Accounts receivable 126,289 213,559
Inventories - current & long-term 90,365 292,204
Prepaid expenses and deposits 18,283 (22,348)
Accounts payable and accrued liabilities 79,328 (239,200)
Accounts payable - related party (14,039) 5,586
Customer deposits (11,200) (175,728)
---------- ---------
Cash provided by (used by) operating activities (73,456) 16,880
---------- ---------
INVESTMENT ACTIVITIES
Acquisition of capital assets and art
reproduction rights - (2,867)
---------- ---------
Cash provided by (used by) investment activities - (2,867)
---------- ---------
FINANCING ACTIVITIES
Notes payable 23,911 (23,539)
---------- ---------
Cash provided by (used by) financing activities 23,911 (23,539)
---------- ---------
INCREASE /(DECREASE) IN CASH (49,545) (9,526)
CASH, beginning of period 85,422 50,549
---------- ---------
CASH, end of period $35,877 $41,023
========== =========
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
AUGUST 31, 1997
(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 August
31, 1997, and August 31, 1996, have been prepared in accordance with Canadian
generally accepted accounting principles (GAAP) applied on a consistent basis.
The balance sheet at November 30, 1996, 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, 1997, and November 30, 1996, and the results of their
operations and cash flows for the periods ended August 31, 1997, and August 31,
1996, and, should be read in conjunction with the audited financial statements
for the year ended November 30, 1996. 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 and 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, 1997
---------------
Trade accounts receivable $32,121
Less allowance for doubtful accounts (9,000)
-----------
$23,121
===========
10
<PAGE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
August 31, 1997 Nov. 30, 1996
--------------------------------------- --------------------------------------------
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 $194,166 $17,737 $176,429 $71,131 $ - $71,131
W.I.P. 778,664 720,656 58,008 942,895 738,393 204,502
Raw materials 66,180 - 66,180 115,349 - 115,349
---------- ---------- ----------- ---------- ---------- ---------
$1,039,010 $738,393 $300,617 $1,129,375 $738,393 $390,982
========== ========== =========== ========== ========== =========
Current portion $214,787 $254,645
Non-current portion 85,830 136,337
=========== =========
$300,617 $390,982
=========== =========
</TABLE>
5. ACCOUNTS PAYABLE - RELATED PARTY - $157,372
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, 1997 (August 31, 1996 - $94,276).
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 1996 and 1997, the company was unable to remain current with this revised
schedule and no re-negotiation has 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 $431,550
Add:interest 57,678 79,020
--------- ---------
Total $372,678 $510,570
========= =========
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 805,000 class "A" preference shares, series 1, of
which 805000 are issued, each of which is convertible into twelve (12) 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 sixty (60) common shares.
(ii) Common shares.
(b) Capital stock.
NON-VOTING, CONVERTIBLE, REDEEMABLE CLASS "A" PREFERENCE SHARES, SERIES 1:
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
August 31, 1997 Nov. 30, 1996
------------------------------- --------------------------------
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>
August 31, 1997 Nov. 30, 1996
------------------------------- --------------------------------
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>
August 31, 1997 Nov. 30, 1996
------------------------------ -------------------------------
Number of Number of
Shares Amount Shares Amount
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Balance - beginning of year 16,629,785 $1,851,461 16,629,785 $1,851,461
Add- shares issued during period - - - -
----------- ------------ ------------- -------------
Balance - end of year 16,629,785 1,851,461 16,629,785 1,851,461
=========== ============ ============= =============
</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
---------------------------------
Aug. 31,1997 Nov. 30, 1996
------------ -------------
<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 - 1,444,000
------------ ------------
Balance - end of period 3,625,000 3,625,000
============ ============
</TABLE>
The options and warrants granted and outstanding as at August 31, 1997, are as
follows:
Common shares
under options
or subject
to warrants Exercise price Expiry date
-------------- -------------- -----------
150,000 $0.35 1997
25,000 $0.35 1998
25,000 $1.50 1999
25,000 $1.50 2000
1,200,000 $0.01 2000
1,200,000 $0.20 2000
1,000,000 $0.25 2002
----------
3,625,000
==========
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 $ 165,428
December 1, 1994 483,000 661,710
December 1, 1995 483,000 661,710
December 1, 1996 483,000 661,710
August 31, 1997 362,250 496,283
----------- ------------
Total $1,932,000 $2,646,841
=========== ============
13
<PAGE>
(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 $191,912
December 1, 1995 280,164 383,825
December 1, 1996 280,164 383,825
August 31, 1997 210,123 287,869
---------- ------------
Total $910,533 $1,247,431
========== ============
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.
(b) Lease obligations
Minimum future annual lease obligations, net of occupancy costs, for office,
showroom and factory premises are approximately $80,000 until January 31, 1998.
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>
August 31, 1997 Nov. 30, 1996
-------------------------------- ------------------------------
Canadian U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Deferred Foreign Exch. Loss $ - $ - $ - $ -
============= ============= ============ ============
Total assets $ 2,943,466 $ 2,943,466 $ 3,459,221 $ 3,459,221
============= ============= ============ ============
Total liabilities $ 1,204,574 $ 1,204,574 $ 1,126,573 $ 1,126,573
============= ============= ============ ============
14
<PAGE>
Capital stock issued $ 8,338,898 $ 10,386,656 $ 8,338,898 $ 10,386,656
============= ============= ============ ============
Contributed surplus $ 11,775,000 $ 11,775,000 $ 11,775,000 $ 11,775,000
============= ============= ============ ============
Accumulated Deficit $ (18,375,006) $ (20,422,764) $(17,781,250) $(19,829,008)
============= ============= ============ ============
Shareholders' Equity $ 1,738,892 $ 1,738,892 $ 2,332,648 $ 2,332,648
============= ============= ============ ============
</TABLE>
(b) Statement of Loss:
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
<S> <C> <C>
Net loss under Canadian & U.S. GAAP $ (593,755) $ (290,311)
Net loss per common share under ============= ==============
U.S. & Canadian GAAP $ (0.036) $ (0.018)
Weighted average number of shares ============= ==============
U.S. & Canadian GAAP 16,629,785 16,629,785
============= ==============
</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 $12,105,000 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
---- -------- ------ ---------
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
============= ============ ============
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 an additional 250,000,000
shares of the Company's common stock. These shares were issued pursuant to an
offering of 500 units of the Company's common stock. Each unit consisting of
1,000,000 of the Company's common stock at an offering price of US$1,000 per
unit.
15
<PAGE>
13. RECLASSIFICATION
Certain figures with respect to the nine month period ended August 31, 1996,
have been reclassified to conform with the presentation adopted for the nine
month period ended August 31, 1997.
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 $593,755 for the nine month period ended August
31, 1997, a decline from the loss of $290,311 for the comparable period in 1996.
Sales revenues at $644,773 for the period of nine months ended August 31, 1997,
were a sharp decline from 1996, at $1,768,248. Sales revenues for the third
quarter in fiscal 1997 were $306,295 (1996 -- $320,471) an improvement over the
first two quarters' sales of $163,239 and $175,305 (1995 -- $756,789 and
$782,543) respectively. The sales revenue decline reflects the Company's
reliance on two customers for approximately 60% of its total sales revenues.
Sales to one of the Company's major publishing customers and its Spanish
customer were $26,373 and $nil, year-to-date in 1997, compared to 1996's
revenues of $591,809 and $472,650 respectively. The decline of sales revenues
was because of the almost complete absence of sales to these two customers, and
demonstrates the Company's reliance on a few major customers.
Gross profit for the first nine months fell $660,334 from $678,633 in 1996 to
$18,299 in 1997. However, lower operating expenses in 1997 contained the
operating loss to $314,853 compared to the small operating profit in 1996 of
$10,573. Other expenses were lower by approximately $22,000 in 1997. Other
expenses in 1996 were attributable to a bad-debt provision against accounts
receivable, whereas in 1997 the other expenses were the aggregate of exchange
losses on US dollar liabilities and interest and penalties charged on unpaid
provincial and municipal taxes. Operating cash flow for the first nine months
was negative at $73,456 a decline compared to the same period in 1996, when the
Company recorded a positive cash flow of $16,880. The Company's working capital
balance remained negative at $890,663, as at August 31, 1997, compared to
negative working capital of $578,657 at year end November 30, 1996. 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.
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, 1997, the Company
recorded sales to its main retail customer of $237,685 which represents 37% of
its total sales revenues. Four other customers represented a further 32% of the
Company's nine month sales revenues. The decline of sales revenues from
$1,768,248 in 1996 to $644,773in 1997, represents the almost complete absence of
sales, in 1997, to two of its major customers of 1996. First, the decline of
sales to the Spanish market reflects the inability of the Company to finance new
products and new programs to offer to this customer. Second, one of the
Company's publishing customers experienced significant declining sales in 1997,
and has switched emphasis to paper-based fine art reproductions, as an
alternative to the Company's canvas-based product line.
The publishing customer's switch to an alternative product partly reflects its
desire to reduce its investment in inventories. In order to re-establish 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, and the Spanish distributor believes that there are opportunities
in the European market -- if the Company can offer new images, programs and
point-of-sale materials -- 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 fell in the first nine months of 1997 to 3%, from 35% for the
comparable period in 1996. However the gross margin in the Company's 1997 third
quarter was 19%, an improvement over the previous two quarters when the gross
margin was negative.
18
<PAGE>
The reduction of gross margin, from 1996 to 1997, and the improvement of gross
margin in the third quarter, is attributable to the negative impact of fixed
overhead costs to sales revenues. Fixed overhead costs, including rent and plant
salaries, as expressed as percentages of comparable sales revenues were 67%, 60%
and 31% for first, second, third quarters of 1997, as compared to 20% for the
nine month period to August 31, 1996, respectively.
Selling Expenses
In the first nine months of 1997, selling expenses at $58,992 were down $147,758
from $206,750 for the same period in 1996. The reduction in selling expenses is
mainly attributed to the lower proportion of sales revenues carrying sales
commissions in 1997 over 1996.
General and Administration
These expenses were $274,160 for the first nine months of 1997, and compare
favourably with the higher administration costs in 1996 of $461,310. The major
savings resulted from lower salaries, professional and consulting fees.
Other Expenses
Other expenses year to date were approximately $22,000 higher in 1996 than in
1997. Other expenses in 1996 were attributable to a bad-debt provision against
accounts receivable, whereas in 1997, the other expenses were the aggregate
of:(a) exchange losses on US dollar liabilities, owed to one major trade payable
and the note holders; and,(b) interest and penalties charged on unpaid
provincial and municipal taxes.
Liquidity and Capital Resources
Unless the Company is able to significantly increase sales from the level
experienced year to date in 1997, 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 did not have a functional Board of Directors from October 1995 to
May 1997, and consequently the Company did not have the power to place equity or
borrow funds. On May 8, 1997, the Company held a special meeting of shareholders
and a Board of Directors was elected. Notwithstanding the election of a Board
of 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 shares to be
removed from the NASDAQ
19
<PAGE>
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, convertible securities, and cumulative
dividends expected to paid in common shares, is summarized below
<TABLE>
<CAPTION>
Name of Security Amount Conversion Rate Underlying Additional
- ---------------- ------ --------------- ---------- ----------
Outstanding Terms Common Information
----------- ----- ------ -----------
Shares
------
<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 $1,932,000 Based on clsg. price 1,932,000,000 Common Shares
Series 1 Pref. as at August 31, 1997
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 $ 910,535 Based on clsg. price 910,535,000 Common Shares
Series 2 Pref. as at August 31, 1997
of $0.001
</TABLE>
The Company's working capital remained negative as at August 31, 1997, at
$795,768, an increase of $217,111 from the balance at the fiscal 1996 year end
of negative $578,657. This decline is attributable to the reductions in trade
accounts receivables, current inventories and cash balances which were utilized
to fund operations.
Post Balance Sheet Event -- 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 consisting 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 has 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. The company intends
to use the proceeds derived from the offering for working capital purposes.
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, 1996, 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, 1997, 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: March 31, 1998
- -------------------------------------
By: Simon Meredith
President
21
<PAGE>
<TABLE>
<CAPTION>
Exchange rate US / CDN $1.3700
GAAP DIFFERENCE $2,047,758
==========
<S> <C> <C> <C> <C>
Dividend Workings
No. of Preference Shares, Series 1 805,000
No. of Preference Shares, Series 2 466,941
Dividend Rate/Share Series 1 $ 0.60
Dividend Rate/Share Series 2 $ 0.60
Years Div not paid Series 1 4.00
Years Div not paid Series 2 3.25
Div. payable in common S1 $1,932,000
Div. payable in common S2 $ 910,535
Rate of conv. to Common S1 12
Rate of conv. to Common S2 60
Common shares closing price $ 0.001
Working Capital (890,633) (578,657) $(311,976)
NOTE HOLDERS INTEREST
ACCRUED INTEREST OWED BEFORE MAY 1996 56,210
OF THIS - AMOUNT PAID IN MAY 1996 34,533
--------
BAL OF ACCRUED INTEREST OWED 21,677 CHK! 21,675
FUTURE INTEREST PAYMENTS FOR 1996 15,750
--------
TOTAL INTEREST PAYMENTS SCHED. FOR BAL OF 1996 37,427
--------
TOTAL INTEREST SCHED. FOR 1997 21,658
--------
TOTAL INTEREST SCHED. FOR 1998 5,908
--------
PAYMENTS OF PRINCIPAL 1996 39,375
PAYMENTS OF PRINCIPAL 1997 157,500
PAYMENTS OF PRINCIPAL 1998 118,125
CURRENT PORTION OF NOTE - PRIN. ONLY 118,125 CDN$ 163,013
CURRENT PORTION OF ACCRUED INT. 21,677 CDN$ 29,914
TOTAL CURRENT PRINCIPAL AND INTEREST MAY 96 139,802 CDN$ 192,927
TOTAL CURRENT PRINCIPAL AND INTEREST NOV 95 109,095 CDN$ 150,551
22
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 35,877
<SECURITIES> 0
<RECEIVABLES> 32,121
<ALLOWANCES> 9,000
<INVENTORY> 300,617
<CURRENT-ASSETS> 313,941
<PP&E> 5,656,514
<DEPRECIATION> 3,112,819
<TOTAL-ASSETS> 2,343,466
<CURRENT-LIABILITIES> 694,004
<BONDS> 0
0
6,487,437
<COMMON> 1,851,461
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,943,466
<SALES> 306,295
<TOTAL-REVENUES> 0
<CGS> 248,619
<TOTAL-COSTS> 108,318
<OTHER-EXPENSES> 78,617
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,053
<INCOME-PRETAX> (129,259)
<INCOME-TAX> 0
<INCOME-CONTINUING> (129,259)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (129,259)
<EPS-PRIMARY> 0.008
<EPS-DILUTED> 0.008
</TABLE>
