================================================================================
Exhibit 1. Financial Statements
PRINTLUX.COM INC.
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003 AND 2002
<page>
[MORGAN & COMPANY CAHARTERED ACCOUNTANTS LOGO]
AUDITORS' REPORT
To the Shareholders of
Printlux.com Inc.
We have audited the consolidated balance sheets of Printlux.com Inc. as at July
31, 2003 and 2002, and the consolidated statements of operations and deficit,
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Canada and the United States. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at July 31, 2003 and
2002, and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles. As
required by the British Columbia Company Act, we report that, in our opinion,
these principles have been applied on a consistent basis.
Vancouver, B.C. "Morgan & Company"
November 3, 2003 Chartered Accountants
COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA -
U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
note 1 to the financial statements. Our report to the shareholders dated
November 3, 2003 is expressed in accordance with Canadian reporting standards
which do not permit a reference to such events and conditions in the auditors'
report when these are adequately disclosed in the financial statements.
Vancouver, Canada "Morgan & Company"
November 3, 2003 Chartered Accountants
Tel: (604) 687-5841 P.O. Box 10007 Pacific Centre
Fax: (604) 687-0075 Suite 1488-700 West Georgia Street
www.morgan-cas.com Vancouver, B.C. V7Y 1A1
-1-
PRINTLUX.COM INC.
CONSOLIDATED BALANCE SHEETS
<table>
<caption>
- -------------------------------------------------------------------------------------------------------------------
JULY 31
2003 2002
- -------------------------------------------------------------------------------------------------------------------
<s> <c> <c>
ASSETS
Current
Cash and cash equivalents $ 20,261 $ 61,084
Accounts receivable 310,023 119,045
GST recoverable - 15,151
Inventory 30,586 31,839
Prepaid expenses - 585
---------------------------------------
360,870 227,704
Due From Associated Company (Note 4) 2,028 56,568
Equipment, Furniture And Leasehold Improvements (Note 5) 258,359 270,533
Goodwill 41,693 41,693
---------------------------------------
$ 662,950 $ 596,498
===================================================================================================================
LIABILITIES
Current
Bank indebtedness (Note 6) $ 61,552 $ 63,962
Accounts payable and accrued liabilities 339,396 262,004
GST payable 9,444 -
Current portion of obligation under capital leases 9,496 26,363
Loans payable to a related party (Note 8) 46,098 -
---------------------------------------
465,986 352,329
Obligation Under Capital Leases (Note 7) 3,410 12,906
Loans Payable To A Related Party (Note 8) - 50,000
---------------------------------------
469,396 415,235
---------------------------------------
SHAREHOLDERS' EQUITY
Share Capital (Note 9) 1,565,091 1,565,091
Deficit (1,371,537) (1,383,828)
---------------------------------------
193,554 181,263
---------------------------------------
$ 662,950 $ 596,498
===================================================================================================================
</table>
Approved by the Board of Directors:
-2-
<page>
PRINTLUX.COM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
<table>
<caption>
- --------------------------------------------------------------------------------------------------------------------
YEARS ENDED JULY 31
2003 2002
- --------------------------------------------------------------------------------------------------------------------
<s> <c> <c>
Revenue $ 1,705,498 $ 801,111
Cost Of Sales (Schedule 1) 1,004,988 589,384
----------------- -----------------
Gross Margin 700,510 211,727
Expenses
General and administrative (Schedule 2) 691,164 937,878
----------------- -----------------
Income (Loss) From Operations 9,346 (726,151)
Other Items
Gain on settlement of debt (Note 12) - 104,791
Miscellaneous income 2,945 4,907
----------------- -----------------
Net Income (Loss) For The Year 12,291 (616,453)
Deficit, Beginning Of Year (1,383,828) (767,375)
----------------- -----------------
Deficit, End Of Year $ (1,371,537) $ (1,383,828)
====================================================================================================================
Basic And Diluted Net Income (Loss) Per Share $ 0.01 $ (0.05)
====================================================================================================================
Weighted Average Number Of Common Shares Outstanding
13,191,624 12,495,851
====================================================================================================================
</table>
-3-
<page>
PRINTLUX.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<table>
<caption>
- ----------------------------------------------------------------------------------------------------------------------
YEARS ENDED JULY 31
2003 2002
- ----------------------------------------------------------------------------------------------------------------------
<s> <c> <c>
Cash Flows From Operating Activities
Net income (loss) for the year $ 12,291 $ (616,453)
Adjustments for:
Amortization 50,724 53,176
Gain on settlement of debt - (104,791)
(Increase) Decrease in accounts receivable (190,978) 13,153
(Increase) Decrease in prepaid expenses 585 1,853
(Increase) Decrease in inventory 1,253 (1,839)
Increase (Decrease) in accounts payable 77,392 (167,361)
Increase (Decrease) in GST payable/receivable 24,595 (23,352)
---------------- ------------------
(24,138) (845,614)
---------------- ------------------
Cash Flows From Financing Activities
Issue of shares for cash - 1,800,000
Decrease in due from associated company 54,540 23,400
Advances from Bentley Capital Corp. - (395,000)
Repayment of obligations under capital lease (26,363) (20,177)
Decrease in loans payable to a related party (3,902) (317,460)
---------------- -------------------
24,275 1,090,763
---------------- -------------------
Cash Flows From Investing Activities
Deferred costs - (126,000)
Purchase of capital assets (38,550) (72,027)
Cash acquired on acquisition of parent company - 3,295
---------------- -------------------
(38,550) (194,732)
---------------- -------------------
Increase (Decrease) In Cash And Cash Equivalents During The Year
(38,413) 50,417
Deficiency In Cash And Cash Equivalents, Beginning Of Year
(2,878) (53,295)
---------------- -------------------
Deficiency In Cash And Cash Equivalents, End Of Year $ (41,291) $ (2,878)
======================================================================================================================
Deficiency In Cash And Cash Equivalents Consists Of:
Cash and cash equivalents $ 20,261 $ 61,084
Bank indebtedness (61,552) (63,962)
---------------- -------------------
$ (41,291) $ (2,878)
======================================================================================================================
</table>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
Effective August 23, 2001, the Company acquired 100% of the issued and
outstanding shares of Graffico Printers & Design Inc. by issuing 7,441,624
common shares at a fair value of $97,370.
-4-
<page>
PRINTLUX.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003 AND 2002
1. NATURE OF OPERATIONS AND GOING CONCERN
a) Nature of Operations
The Company is a full service print company which provides
up-to-the-minute innovations in print, promotional and warehouse
management services. In addition, the Company has developed, and is
continuing to test and improve, technology to deliver online print
services to existing and future clientele that require automated,
customized and fully integrated solutions for their printing needs.
b) Going Concern
The accompanying financial statements have been prepared using Canadian
generally accepted accounting principles applicable to a going concern.
The Company incurred net income of $12,291 for the year ended July 31,
2003, has an accumulated deficit of $1,371,537 as at July 31, 2003, and
has a working capital deficiency of $105,116. The Company's ability to
continue as a going concern is dependent upon successful completion of
additional financing, continuing support of creditors and upon its
ability to attain profitable operations. These consolidated financial
statements do not give effect to any adjustments that would be
necessary should the Company not be able to continue as a going
concern.
2. SIGNIFICANT ACCOUNTING POLICIES
a) Consolidation
These consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Graffico Printers & Design
Inc. These consolidated financial statements are prepared in accordance
with generally accepted accounting principles in Canada. As described
in note 16, these principles differ in certain respects from principles
and practices generally accepted in the United States.
b) Cash and Cash Equivalents
Cash equivalents are defined as highly liquid investments with
maturities at acquisition of three months or less.
c) Inventory
Inventory is valued at the lower of cost and net realizable value.
-5-
<page>
PRINTLUX.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003 AND 2002
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
d) Amortization
Capital assets are recorded at cost and amortization is provided over
their estimated economic lives at the following rates:
Equipment and presses 15% declining balance
Computer hardware 20% declining balance
Computer software 20% declining balance
Web page 50% declining balance
Office furniture 10% declining balance
Leasehold improvements are amortized on a straight line basis over 10
years.
e) Goodwill
The Company has adopted the new requirements of the CICA Handbook
Section 3062, whereby goodwill is no longer amortized but instead is
tested for impairment on an annual basis. Any impairment to goodwill is
charged to earnings during the year. There was no impairment of
goodwill during the year.
f) Revenue Recognition
The Company recognizes revenue at the time the goods are shipped and
title passes to the customer.
g) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
h) Financial Instruments
The Company's financial instruments consist of cash, accounts
receivable, accounts payable and accrued liabilities, and GST payable.
Unless otherwise indicated, it is management's opinion that the Company
is not exposed to significant interest, currency or credit risks
arising from those financial instruments. The fair value of these
financial instruments approximates their carrying values, unless
otherwise noted.
-6-
<page>
PRINTLUX.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003 AND 2002
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
i) Future Income Taxes
The Company follows the liability method of accounting for income
taxes. Under the liability method future income tax assets and
liabilities are computed based on differences between the carrying
amount of assets and liabilities on the balance sheet and their
corresponding tax values, using enacted income tax rates at each
balance sheet date. Future income tax assets also include the benefit
that may be derived from unused loss carryforwards and unclaimed other
deductions. The valuation of future income tax assets is reviewed
annually and adjusted, if necessary, by use of valuation allowance to
reflect the estimated realizable amount.
j) Stock Based Compensation
The Company adopted the new CICA Handbook Section 3870 - "Stock Based
Compensation and Other Stock Based Payments", which recommends a fair
value based method of accounting for compensation costs. The new
section also permits the use of the intrinsic value based method, which
recognizes compensation cost for awards to employees only when the
market price exceeds the exercise price at date of grant, but requires
pro-forma disclosure of earnings and earnings per share as if the fair
value method had been adopted. The Company has elected to adopt the
intrinsic value based method for employees' awards. Any consideration
paid by the option holders to purchase shares is credited to share
capital. The adoption of this accounting policy has no effect on the
financial statements of either the current period or prior periods
presented.
However, Handbook Section 3870, does require additional disclosures for
options granted to employees, including disclosure of pro-forma
earnings and pro-forma earnings per share as if the fair value based
accounting method had been used to account for employee stock options.
k) Net Income (Loss) Per Share
The Company has adopted the new accounting standard for the calculation
of net income (loss) per share which follows the "treasury stock
method" in the calculation of diluted net income (loss) per share, and
requires the presentation of both basic and diluted net income (loss)
per share on the face of the consolidated statement of operations and
deficit regardless of the materiality of the difference between them.
-7-
<page>
PRINTLUX.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003 AND 2002
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
l) Foreign Currency Transactions
Transactions recorded in foreign currencies have been translated into
Canadian dollars as follows:
i) monetary items at the rate prevailing at the balance sheet date;
ii) non-monetary items at the historical exchange rate;
iii) revenue and expense at the average rate in effect during the
applicable accounting period.
Gains and losses arising on translation are included in the results of
operations.
3. ACQUISITION OF SUBSIDIARY
Effective August 23, 2001, Printlux.com Inc. ("Printlux") acquired 100% of
the issued and outstanding common shares of Graffico Printers & Design Inc.
("Graffico") by issuing 7,441,624 common shares (includes 425,000 common
shares issued to an arm's length party as a finders fee). Since the
transaction resulted in the former shareholder of Graffico owning the
majority of the issued common shares of Printlux, the transaction, which is
referred to as a "reverse take-over", has been treated for accounting
purposes as an acquisition by Graffico of the net assets and liabilities of
Printlux. Under this purchase method of accounting, the results of
operations of Printlux are included in these financial statements from
August 23, 2001.
Control of the net assets of Printlux was acquired for total consideration
of $97,370 representing the fair value of the assets of Printlux. Graffico
is deemed to be the purchaser for accounting purposes and, accordingly, its
net assets are included in the balance sheet at their previously recorded
values.
The acquisition is summarized as follows:
<table>
<caption>
<s> <c>
Current assets (including cash of $3,295) $ 7,149
Other assets 206,802
----------------
213,951
Current liabilities 116,581
----------------
$ 97,370
================
Consideration given at fair value
Issue of common shares $ 97,370
================
</table>
-8-
<page>
PRINTLUX.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003 AND 2002
3. ACQUISITION OF SUBSIDIARY (Continued)
Summarized financial information of Printlux.com Inc.
<table>
<caption>
Balance Sheets
AUGUST 23 JULY 31
2001 2001
----------------- -----------------
<s> <c> <c>
Assets
Current
Cash $ 3,295 $ 4,002
Amounts receivable 3,854 3,862
----------------- -----------------
7,149 7,864
Deferred costs 206,289 155,721
Capital assets 513 513
----------------- -----------------
$ 213,951 $ 164,098
================= =================
Liabilities
Current
Accounts payable $ 116,581 $ 66,013
----------------- -----------------
Shareholders' Equity
Share capital 250,947 250,947
Deficit (153,577) (152,862)
----------------- -----------------
97,370 98,085
----------------- -----------------
$ 213,951 $ 164,098
================= =================
</table>
<table>
<caption>
Statements of Loss
AUGUST 23 JULY 31
2001 2001
-------------- ---------------
<s> <c> <c>
Expenses $ (737) $ (27,763)
Interest income 22 2,489
-------------- ---------------
Loss for the period $ (715) $ (25,274)
============== ===============
</table>
-9-
<page>
PRINTLUX.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003 AND 2002
3. ACQUISITION OF SUBSIDIARY (Continued)
<table>
<caption>
Statements of Cash Flows
AUGUST 23 JULY 31
2001 2001
--------------- -----------------
<s> <c> <c>
Cash flows from operating activities
Loss for the period $ (715) $ (25,274)
Amortization - 220
--------------- -----------------
(715) (25,054)
Changes in non-cash working capital 50,576 43,823
--------------- -----------------
49,861 18,769
Cash flows from investing activity
Deferred costs (50,568) (128,219)
--------------- -----------------
Decrease in cash (707) (109,450)
Cash, beginning of period 4,002 113,452
--------------- -----------------
Cash, end of period $ 3,295 $ 4,002
=============== =================
</table>
4. DUE FROM ASSOCIATED COMPANY
Due from associated company consists of the following:
<table>
<caption>
2003 2002
-------------- --------------
<s> <c> <c>
585272 B.C. Ltd. $ 2,028 $ 56,568
============== ==============
</table>
The amount receivable does not bear interest or have fixed terms of
repayment.
-10-
<page>
PRINTLUX.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003 AND 2002
5. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
<table>
<caption>
2003 2002
---------------------------------------------------- ----------------
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
---------------- ------------------ ---------------- ----------------
<s> <c> <c> <c> <c>
Equipment and presses $ 311,922 $ 167,792 $ 144,130 $ 143,740
Office furniture 45,962 22,490 23,472 25,459
Computer hardware 119,273 72,093 47,180 43,190
Computer software 52,660 24,337 28,323 35,223
Leasehold improvements 12,467 3,633 8,834 10,081
Web page 32,100 25,680 6,420 12,840
---------------- ------------------ ---------------- ----------------
$ 574,384 $ 316,025 $ 258,359 $ 270,533
================ ================== ================ ================
</table>
Capital assets include equipment and presses acquired under capital lease
with an original cost of $90,388 (2002 - $90,388). Accumulated amortization
provided on this equipment and presses totaled $23,990 (2002 - $12,272).
6. BANK INDEBTEDNESS
Bank indebtedness consists of:
<table>
<caption>
2003 2002
-------------- ---------------
<s> <c> <c>
Business line of credit on which interest is charged at prime plus 1.5%
$ 61,552 $ 62,084
HSBC bank overdraft on which interest is charged at 21% - 1,878
-------------- ---------------
$ 61,552 $ 63,962
============== ===============
</table>
The business line of credit has a limit of $65,000, and is secured by a
registered general assignment of book debt and a floating fixed charge over
all corporate assets.
-11-
<page>
PRINTLUX.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003 AND 2002
7. OBLIGATIONS UNDER CAPITAL LEASES
The Company has acquired certain capital assets under capital lease.
Payments under these leases are as follows:
<table>
<caption>
2003 2002
-------------- ---------------
<s> <c> <c>
2003 $ - $ 29,444
2004 10,303 10,303
2005 3,542 3,542
-------------- ---------------
Total minimum lease payments 13,845 43,289
Less: Amount representing interest (939) (4,020)
-------------- ---------------
Balance of obligation 12,906 39,269
Current portion 9,496 26,363
-------------- ---------------
$ 3,410 $ 12,906
============== ===============
</table>
8. LOANS PAYABLE TO RELATED PARTY
<table>
<caption>
2003 2002
-------------- ---------------
<s> <c> <c>
Unsecured with interest at 9% per annum, compounded monthly, and repayable
on July 27, 2004 $ 26,098 $ 50,000
Unsecured, interest at 12% per annum, with no specific terms of repayment
20,000 -
-------------- ---------------
46,098 50,000
Current portion 46,098 -
-------------- ---------------
$ - $ 50,000
============== ===============
</table>
9. SHARE CAPITAL
a) Authorized
An unlimited number of common shares without nominal or par value.
An unlimited number of preferred shares, without nominal or par value,
issuable in series. The directors are authorized to fix the number of
shares in each series and to determine the designation, rights,
privileges, restrictions and conditions attached to the shares of each
series.
-12-
<page>
PRINTLUX.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003 AND 2002
9. SHARE CAPITAL (Continued)
b) Issued and Outstanding
Common Shares
<table>
<caption>
NUMBER OF
SHARES CONSIDERATION
--------------------------------------
<s> <c> <c>
Balance, July 31, 2001 1,000 $ 10
Adjustment to the number of shares issued and outstanding as a
result of the reverse take-over transaction
Graffico Printers & Design Inc. (1,000) -
Printlux.com Inc. 4,300,000 -
--------------------------------------
4,300,000 10
Consolidation of the share capital on the basis of one
post-consolidation common share for every two pre-consolidation
common shares (2,150,000) -
--------------------------------------
2,150,000 10
Fair value of shares issued in connection with the acquisition of
Graffico Printers & Design Inc.
(Note 3) 7,441,624 97,370
Public offering of common shares for cash (net of share issue costs
of $332,289) 3,600,000 1,467,711
--------------------------------------
Balance, July 31, 2002 and 2003 13,191,624 $ 1,565,091
======================================
</table>
c) Escrowed Shares
Of the issued and outstanding common shares, a total of 6,664,131
common shares are held in escrow to be released as follows:
i) 700,000 common shares to be released from escrow as to one-half on
each of August 23, 2003 and 2004.
ii) 5,964,131 common shares to be released from escrow as to 5% on the
twenty-four month anniversary of the August 23, 2001 transaction
disclosed in Note 3, and as to 10% every six months thereafter.
d) Share Purchase Warrants
In connection with a public offering of common shares, the Company has
issued 1,800,000 Series B share purchase warrants. Each Series B
warrant entitles the holder to acquire one common share at $3.00 per
share to August 23, 2002. These warrants expired unexercised during the
year ended July 31, 2003.
-13-
<page>
PRINTLUX.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003 AND 2002
9. SHARE CAPITAL (Continued)
d) Share Purchase Warrants (Continued)
As additional consideration for their assistance with the public
offering of common shares, the Company has issued 540,000 share
purchase warrants to the agent. Each warrant will entitle the agent to
acquire one common share for a period of two years from August 23, 2001
on the following basis:
i) one-third of the warrants have an exercise price of $0.719 to
August 23, 2003.
ii) one-third of the warrants have an exercise price of $0.8625 to
August 23, 2003.
iii) one-third of the warrants have an exercise price of $1.15 to
August 23, 2003.
These warrants expired unexercised subsequent to July 31, 2003.
e) Stock Options
As at July 31, 2003, the following stock options are outstanding:
<table>
<caption>
NUMBER PRICE
OF SHARES PER SHARE EXPIRY DATE EXERCISABLE
------------------ -------------- --------------------------- ------------------
<s> <c> <c> <c>
1,740,000 $ 0.50 September 20, 2006 1,160,000
</table>
A summary of the changes in stock options for the year ended July 31,
2003 is presented below:
<table>
<caption>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------------------------------
<s> <c> <c>
Balance, July 31, 2001 205,000 $ 0.20
Granted 2,075,000 0.50
Cancelled (425,500) (0.42)
------------------------------
Balance, July 31, 2002 1,854,500 0.49
Expired (87,500) (0.20)
Cancelled (27,000) (0.50)
------------------------------
Balance, July 31, 2003 1,740,000 $ 0.50
==============================
</table>
-14-
<page>
PRINTLUX.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003 AND 2002
9. SHARE CAPITAL (Continued)
Supplemental Information for Stock Based Compensation
Effective August 1, 2002, in accordance with CICA Handbook Section 3870 -
"Stock Based Compensation and Other Stock Based Payments", pro-forma
information regarding net earnings and net earnings per share is to be
determined as if the Company had accounted for its employee's stock
options under the fair value method. The fair value for these options was
estimated at the date of grant date using a Black-Scholes option pricing
model with the following weighted average assumptions: risk-free interest
rate of 3.25%, dividend yield of nil, volatility factor of 155%, and a
weighted average expected life of the options of 3 years. The weighted
average fair value per share of options granted during 2003 was $0.23.
The following table presents the net earnings and net earnings per share
for the year ended July 31, 2003 had the Company recorded stock options
as compensation expense on a fair value basis:
<table>
<caption>
<s> <c>
Net income for the year $ 12,291
Compensation expense under Section 3870 (138,210)
-------------------
Pro-forma net loss $ (125,919)
===================
Pro-forma basic and diluted loss per share $ (0.01)
===================
</table>
10. RELATED PARTY TRANSACTIONS
a) Commencing on May 1, 2000, the Company entered into a long term lease
agreement regarding its premises with an associated company, 585272
B.C. Ltd. During the year ended July 31, 2003, the rent expense
incurred under the lease agreement totaled $72,625 (2002 - $71,750).
b) As at July 31, 2003, accounts payable included $49,667 (2002 -
$49,126) in unpaid rent incurred under the above noted lease
agreement, and $74,250 (2002 - $40,250) in management fees payable to
directors of the Company.
c) The amount described in Note 6 is due from a company with a director
in common.
d) The amount described in Note 8 is due to a director of the Company.
-15-
<page>
PRINTLUX.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003 AND 2002
11. COMMITMENTS
The Company rents its premises under a long term operating lease from an
associated company, 585272 B.C. Ltd. The minimum annual rental in each of
the next five years is:
2004 $ 75,250
2005 $ 75,250
2006 $ 75,250
2007 $ 78,750
2008 $ 78,750
12. GAIN ON SETTLEMENT OF DEBT
During the year ended July 31, 2002, the Company settled a dispute with
Xerox Canada Ltd. by the payment of $50,000. The settlement of the
dispute resulted in the Company recognizing a gain in its accounts of
$104,791.
13. INCOME TAXES
The reported income tax recovery differs from the amount computed by
applying the federal basic statutory rate to the net loss before income
taxes. The reasons for this difference and the related tax effect are as
follows:
<table>
<caption>
2003 2002
-------------- -----------------
<s> <c> <c>
Federal basic statutory tax rate 38% 40%
-------------- -----------------
Expected income tax recovery (expense) $ (4,600) $ 244,200
Tax losses not recognized in the period that the benefit arose
4,600 (244,200)
-------------- -----------------
Income tax provision $ - $ -
============== =================
</table>
Future income taxes result primarily from temporary differences in the
recognition of certain revenue and expense items for financial and income
tax reporting purposes. The approximate tax effect of each type of
temporary difference that gives rise to the Company's future income tax
assets are as follows:
-16-
<page>
PRINTLUX.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003 AND 2002
13. INCOME TAXES (Continued)
<table>
<caption>
2003 2002
------------------ -----------------
<s> <c> <c>
Future income tax assets:
Net operating tax losses carried forward $ 526,434 $ 569,123
Accumulated cost base differences on assets 241,432 232,096
------------------ -----------------
767,866 801,219
Less: Valuation allowance (767,866) (801,219)
------------------ -----------------
$ - $ -
================== =================
</table>
The realization of income tax benefits related to these future potential
tax deductions is uncertain and cannot be viewed as more likely than not.
Accordingly, no future income tax assets have been recognized for
accounting purposes.
At July 31, 2003, the Company and its subsidiary have $1,502,000 (2002 -
$1,436,000) in non-capital loss carryforwards available for tax purposes.
These loss carryforwards expire between 2004 and 2010 as follows:
2004 $ 4,000
2005 $ 43,000
2006 $ 109,000
2007 $ 277,000
2008 $ 271,000
2009 $ 696,000
2010 $ 102,000
14. CONTINGENT LIABILITY
The Company has been named as a defendant in a Statement of Claim filed
by Telus claiming unpaid amounts of approximately $35,000. The Company
has counterclaimed on the basis that the wares provided were not of
merchantable quality, whereby it has suffered loss and damages. As at
July 31, 2003, no amount has been accrued in the accounts of the Company.
15. COMPARATIVE FIGURES
The comparative figures have been reclassified to conform to the current
year's presentation.
-17-
<page>
PRINTLUX.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003 AND 2002
16. MATERIAL DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLE (GAAP)
The Company prepares its financial statements in accordance with
accounting principles generally accepted in Canada ("Canadian GAAP"),
which differ in certain respects form those principles that the Company
would have followed had its financial statements been prepared in
accordance with accounting principles generally accepted in the United
States ("US GAAP"). There are no major differences between Canadian and
US GAAP which affect the Company's financial statements except as
described below:
a) Stock Based Compensation
Effective August 31, 2002, the Company adopted the new CICA
accounting standard in respect of stock based compensation. This new
standard is substantially identical to United States GAAP. Under
Canadian GAAP, the reporting of pro-forma income (loss) per share was
not required for the year ended July 31, 2002. Under US GAAP, had the
Company elected to recognize stock based compensation based on the
estimated fair value of stock options granted, results would have
been as follows:
<table>
<caption>
2003 2002
------------------ -------------------
<s> <c> <c>
Net income (loss) for the year - US GAAP $ 12,291 $ (616,453)
Add: Fair value of stock based compensation (138,210) (162,301)
------------------ -------------------
Pro-forma loss for the year - US GAAP $ (125,919) $ (778,754)
================== ===================
Loss per share - US GAAP $ (0.01) $ (0.06)
================== ===================
</table>
b) Recent accounting pronouncements - US GAAP
In 2001, the Financial Accounting Standards Board ("FASB") approved
the issuance of Statements of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142
requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. The statement is effective for
fiscal years beginning after December 15, 2001, and is required to be
applied at the beginning of an entity's fiscal year and to be applied
to all goodwill and other intangible assets recognized in its
financial statements at that date. Impairment losses for goodwill and
indefinite-lived intangible assets that arise due to the initial
application of this statement (resulting from a transitional
impairment test) are to be reported as resulting from a change in
accounting principle.
-18-
<page>
PRINTLUX.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003 AND 2002
16. MATERIAL DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLE (GAAP) (Continued)
b) Recent accounting pronouncements - US GAAP (Continued)
In 2002, the Company recorded amortization of goodwill of $3,294. If
the provisions of SFAS 142 which were adopted beginning in 2002, net
loss for US GAAP purposes would have decreased from ($616,453) to
($613,159). Basic and diluted loss per share would have remained
unchanged.
In 2001, FASB issued Statements of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143") that
records the fair value of the liability for closure and removal costs
associated with the legal obligations upon retirement or removal of
any tangible long-lived assets. The initial recognition of the
liability will be capitalized as part of the asset cost and
depreciated over its estimated useful life. The adoption of SFAS 143
on August 1, 2002 had no significant effect on the results of
operations or the financial portion of the Company.
In August 2001, FASB issued Statements of Financial Accounting
Standards No. 144, "Accounting for the Impairment on Disposal of
Long-lived Assets" ("SFAS 144"), which supersedes Statements of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be
Disposed of". SFAS 144 requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book value or fair
value less cost to sell. Additionally, SFAS 144 expands the scope of
discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity
and (2) will be eliminated from the ongoing operations of the entity
in a disposal transaction. The adoption of SFAS 144 on August 1, 2002
had no significant effect on the results of operations or the
financial position of the Company.
In 2002, FASB issued Statements of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146") that nullifies Emerging Issues Task Force
No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring)" ("EITF 94-3"). SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, whereby EITF 94-3 had
recognized the liability at the commitment date to an exit plan.
The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption
of SFAS 146 had no significant effect on the results of operations or
the financial position of the Company.
-19-
<page>
PRINTLUX.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003 AND 2002
16. MATERIAL DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLE (GAAP) (Continued)
b) Recent accounting pronouncements - US GAAP (Continued)
In 2002, FASB issued Statements of Financial Accounting Standards No.
147, "Accounting of Certain Financial Institutions - an amendment of
FASB Statements No. 72 and 44 and FASB Interpretation No. 9" ("SFAS
147"). SFAS 147 requires the application of the purchase method of
accounting to all acquisitions of financial institutions, except
transactions between two or more mutual enterprises. SFAS 147 is
effective for acquisitions for which the date of acquisition is on or
after October 1, 2002. The adoption of SFAS 147 had no significant
effect on the results of operations or the financial position of the
Company.
In 2002, FASB issued Statements of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123" ("SFAS 148").
SFAS 148 amends FASB Statement No. 123 to provide alternative methods
of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition,
SFAS 148 amends the disclosure requirements of FASB Statement No. 123
to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
SFAS 148 is effective for fiscal years ending after December 31,
2002.
In 2003, FASB issued Statements of Financial Accounting Standards No.
149 "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"). SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133 "Accounting for
Derivative Instruments and Hedging Activities". SFAS 149 is generally
effective for contracts entered into or modified after June 30,2003.
The adoption of SFAS 149 is expected to have no significant impact on
the results of operations or the financial position of the Company.
In May 2003, FASB issued Statements of Financial Accounting Standards
No. 150 "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS
150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both
liabilities and equity. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003. The adoption
of SFAS 150 is expected to have no significant impact on the results
of operations or the financial position of the Company.
-20-
<page>
Schedule 1
PRINTLUX.COM INC.
SCHEDULE OF COST OF SALES
<table>
<caption>
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED JULY 31
2003 2002
- --------------------------------------------------------------------------------------------------------------------
<s> <c> <c>
Artwork and design $ - $ 144
Colour copier expenses 4,197 465
Computer accessories 9,766 4,598
Courier and freight 74,269 18,910
Direct labour and benefits 268,509 230,614
Equipment leasing 7,374 7,278
Equipment repairs and maintenance 10,664 21,574
Paper expenses 300,043 162,115
Press supplies 18,639 14,478
Printing 34,599 25,968
Printing buyout 173,505 49,042
Sales commissions 91,330 43,099
Shop supplies 12,093 11,099
----------------------------------
$ 1,004,988 $ 589,384
====================================================================================================================
</table>
<page>
Schedule 2
PRINTLUX.COM INC.
SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES
<table>
<caption>
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED JULY 31
2003 2002
- --------------------------------------------------------------------------------------------------------------------
<s> <c> <c>
Accounting and legal $ 22,840 $ 100,879
Administrative wages 157,599 144,443
Advertising and promotion 1,310 43,147
Amortization 50,724 53,176
Automotive 13,451 21,269
Bad debts 29,188 56,352
Bank charges and interest 21,026 21,120
Collocation 24,940 24,940
Consulting 18,566 -
Contract labour 10,636 16,015
Donations 5,070 14,084
Dues and subscriptions 4,636 3,488
Filing fees and transfer agent 10,860 25,859
Foreign exchange loss 18,720 5,102
Insurance 12,653 11,609
Investor relations - 15,238
Management compensation 120,000 187,824
Miscellaneous 2,918 8,014
Office expenses 14,169 16,754
Shop expenses 2,671 2,034
Property taxes 11,918 11,790
Rent expense 72,625 71,750
Repairs and maintenance 29,165 26,877
Telephone 14,519 27,016
Training 373 1,371
Travel 11,828 20,257
Utilities 8,759 7,470
--------------------------------
$ 691,164 $ 937,878
====================================================================================================================
</table>
-21-
<page>
PRINTLUX.COM INC.
INTERIM FINANCIAL STATEMENTS
APRIL 30, 2004 AND 2003
Unaudited
Prepared by Management
-22-
<page>
PRINTLUX.COM INC.
CONSOLIDATED BALANCE SHEETS
<table>
<caption>
- ---------------------------------------------------------------------------------------------------------------------
APRIL 30 JULY 31
2004 2003
- ---------------------------------------------------------------------------------------------------------------------
<s> <c> <c>
ASSETS
Current
Cash and cash equivalents $ 28,501 $ 20,261
Accounts receivable 189,801 310,023
GST recoverable 3,144 -
Inventory 30,586 30,586
-------------------------------------------
252,032 360,870
Due From Associated Company (Note 5) - 2,028
Equipment, Furniture and Leasehold Improvement (Note 6) 256,440 258,359
Goodwill 41,693 41,693
-------------------------------------------
$ 550,165 $ 662,950
====================================================================================================================
LIABILITIES
Current
Bank indebtedness (Note 7) 57,489 61,552
Accounts payable and accrued liabilities (Note 11) $ 422,760 $ 339,396
GST payable - 9,444
Current portion of obligation under capital leases 2,834 9,496
Loans payable to a related party (Note 9) 97,243 46,098
--------------------------------------------
580,326 465,986
--------------------------------------------
Obligation Under Capital Leases (Note 8) 1,974 3,410
--------------------------------------------
582,300 469,396
SHAREHOLDERS' DEFICIENCY
Share Capital (Note 10) 1,565,091 1,565,091
Deficit (1,597,226) (1,371,537)
--------------------------------------------
(32,135) 193,554
--------------------------------------------
$ 550,165 $ 662,950
=====================================================================================================================
</table>
Unaudited
Prepared by Management
-23-
<page>
PRINTLUX.COM INC.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
<table>
<caption>
- --------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended Three months ended Nine months ended
April 30 April 30 April 30 April 30
2004 2004 2003 2003
- --------------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Revenue $ 278,899 $ 1,034,368 $ 437,324 $ 1,266,887
Cost of Sales (Schedule 1) 211,403 729,550 238,189 743,389
----------------------------------------------------------------------------
Gross Margin 67,496 304,818 199,135 523,498
Expenses
General and administrative
(Schedule 2) 159,658 379,062 125,932 388,954
---------------------------------------------------------------------------
Income (Loss) Before Other Items (92,162) (74,244) 73,203 134,544
---------------------------------------------------------------------------
Other Items
Amortization 11,176 33,406 13,164 37,906
Foreign exchange (gain) loss 5,522 19,669 5,846 5,108
Management compensation 33,000 99,000 30,000 90,000
Miscellaneous expense (income) (149) (630) (466) (2,589)
---------------------------------------------------------------------------
49,549 151,445 48,544 130,425
---------------------------------------------------------------------------
Income (loss )For The Period (141,711) (225,689) 24,659 4,119
Deficit, Beginning Of Period (1,455,515) (1,371,537) (1,404,368) (1,383,828)
Deficit, End Of Period $ (1,597,226) $ (1,597,226) $ (1,379,709) $(1,379,709)
=========================================================================================================================
Basic and diluted earnings (loss)
per share $ (0.01) $ (0.02) $ 0.003 $ 0.001
=========================================================================================================================
Weighted average number of
Common shares outstanding 13,191,624 13,191,624 13,191,624 13,191,624
=========================================================================================================================
</table>
Unaudited
Prepared by Management
-24-
<page>
PRINTLUX.COM INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<table>
<caption>
- ----------------------------------------------------------------------------------------------------------------------------------
Three months Nine months Three months Nine months
ended ended ended ended
April 30 April 30 April 30 April 30
2004 2004 2003 2003
- ----------------------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Operating Activities
Net loss for the period $ (141,711) $ (225,689) $ 24,659 $ 4,119
Adjustments for:
Amortization 11,176 33,406 13,164 37,906
(Increase) Decrease in account receivable 129,483 120,221 (28,636) (164,925)
Increase (Decrease) in account payable (538) 83,365 (26,584) 119,313
Increase (Decrease) in GST payable (7,297) (12,588) 6,482 10,524
--------------------------------------------------------------------------
(8,887) (1,285) (10,915) 6,937
--------------------------------------------------------------------------
Financing Activities
(Increase) Decrease in due from associated companies - 2,028 7,000 37,000
Increase (Decrease) in obligation under capital lease (1,358) (8,098) (5,138) (21,085)
Increase (Decrease) in shareholder loan 17,105 51,145 (6,047) (17,727)
--------------------------------------------------------------------------
15,747 45,075 (4,185) (1,812)
--------------------------------------------------------------------------
Investing Activities
Purchase of capital assets - (31,487) (5,666) (32,886)
--------------------------------------------------------------------------
- (31,487) (5,666) (32,886)
Increase (Decrease) In Cash 6,860 12,303 (20,766) (27,761)
Deficiency in Cash and equivalents,
Beginning Of Period (35,848) (41,291) (9,873) (2,878)
--------------------------------------------------------------------------
Deficiency in Cash and equivalents,
End Of Period $ (28,988) $ (28,988) $ (30,639) $ (30,639)
=================================================================================================================================
Cash and equivalents consists of:
Short term deposits $ - $ - $ 16,135 $ 16,135
Operating line (57,489) (57,489) (47,906) (47,906)
Cash 28,501 28,501 1,132 1,132
--------------------------------------------------------------------------
$ (28,988) $ (28,988) $ (30,639) $ (30,639)
=================================================================================================================================
</table>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
Effective August 23, 2001, the Company acquired 100% of the issued and
outstanding shares of Graffico Printers & Design Inc. by issuing 7,441,624
common shares at a fair value of $97,370.
Unaudited
Prepared by Management
-25-
<page>
PRINTLUX.COM INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
AT APRIL 30, 2004
Unaudited - Prepared by Management
1. BASIS OF PRESENTATION
The interim financial statements of Printlux.com Inc. (the "Company") have
been prepared by management in accordance with generally accepted
accounting principles. The interim consolidated financial statements have
been prepared following the same accounting policies and methods of
computation as the financial statements for the fiscal year ended July 31,
2003. The disclosures included below are incremental to those included with
the annual financial statements. The interim financial statements should be
read in conjunction with the consolidated financial statements and the
notes thereto in the Company's annual report for the year ended July 31,
2003.
2. NATURE OF OPERATIONS AND GOING CONCERN
a) Nature of Operations
The Company is a full service print company which provides
up-to-the-minute innovations in print, promotional and warehouse
management services. In addition, the Company has developed, and is
continuing to test and improve, technology to deliver online print
services to existing and future clientele that require automated,
customized and fully integrated solutions for their printing needs.
b) Going Concern
The accompanying financial statements have been prepared using Canadian
generally accepted accounting principles applicable to a going concern.
As at April 30, 2004, the Company has an accumulated deficit of
$1,597,226 and has a working capital deficiency of $328,294. The
Company's ability to continue as a going concern is dependent upon
successful completion of additional financing, continuing support of
creditors and upon its ability to attain profitable operations. These
consolidated financial statements do not give effect to any adjustments
that would be necessary should the Company not be able to continue as a
going concern.
3. SIGNIFICANT ACCOUNTING POLICIES
a) Consolidation
These consolidated financial statement include the accounts of the
Company and its wholly-owned subsidiary, Graffico Printers & Design
Inc.
b) Cash and Cash Equivalents
Cash equivalents are defined as highly liquid investments with
maturities at acquisition of three months or less.
-26-
<page>
PRINTLUX.COM INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
AT APRIL 30, 2004
Unaudited - Prepared by Management
3. SIGNIFICANT ACCOUNTING POLICIES cont'd
c) Inventory
Inventory is valued at the lower of cost and net realizable value.
d) Amortization
Capital assets are recorded at cost and amortization is provided using
the following methods at the following rates:
Equipment and presses 15% declining balance
Computer hardware 20% declining balance
Computer software 20% declining balance
Web page 50% declining balance
Office furniture 10% declining balance
Leasehold improvements are amortized on a straight line basis over 10
years.
e) Goodwill
The Company has adopted the new requirements of the CICA Handbook,
Section 3062, whereby goodwill is no longer amortized but instead is
tested for impairment on an annual basis. Any impairment to goodwill is
charged to earnings during the year. There was no impairment of
goodwill during the year.
f) Revenue Recognition
The Company recognizes revenue at the time the goods are shipped.
g) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
h) Financial Instruments
The Company's financial instruments consist of cash, accounts
receivable, accounts payable and accrued liabilities, and GST
payable/receivable. Unless otherwise indicated, it is management's
opinion that the Company is not exposed to significant interest,
currency or credit risks arising from those financial instruments. The
fair value of these financial instruments approximated their carrying
values, unless otherwise noted.
-27-
<page>
PRINTLUX.COM INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
AT APRIL 30, 2004
Unaudited - Prepared by Management
3. SIGNIFICANT ACCOUNTING POLICIES cont'd
i) Income Taxes
The Company follows the liability method of accounting for income
taxes. Under the liability method future income tax assets and
liabilities are computed based on differences between the carrying
amount of assets and liabilities on the balance sheet and their
corresponding tax values, using enacted income tax rates at each
balance sheet date. Future income tax assets also include the benefit
that may be derived from unused loss carry forwards and unclaimed other
deductions. The value of future income tax assets is reviewed annually
and adjusted, if necessary, by use of valuation allowance to reflect
the estimated realizable amount.
j) Stock Based Compensation
The Company adopted the new CICA Handbook Section 3870 - "Stock Based
Compensation and Other Stock Based Payments", which recommends a fair
value based method of accounting for compensation costs. The new
section also permits the use of the intrinsic value based method, which
recognizes compensation cost for awards to employees only when the
market price exceeds the exercise price at date of grant, but requires
pro-forma disclosure of earnings and earnings per share as if the fair
value method had been adopted. The Company has elected to adopt the
intrinsic value based method for employees' awards. Any consideration
paid by the option holders to purchase shares is credited to share
capital. The adoption of this accounting policy has no effect on the
financial statement of either the current period or prior periods
presented.
k) Net Income (Loss) Per Share
The Company has adopted the new accounting standard for the calculation
of net income (loss) per share which follows the "treasury stock
method" in the calculation of diluted net income (loss) per share and
requires the presentation of both basic and diluted net income (loss)
per share on the face of the consolidated statement of income and
deficit regardless of the materiality of the difference between them.
l) Foreign Currency Transactions
Transactions recorded in foreign currencies have been translated into
Canadian dollars as follows:
i) monetary items at the rate prevailing at the balance sheet
date;
ii) non-monetary items at the historical exchange rate;
iii) revenue and expense at the average rate in effect during the
applicable accounting period.
Gains and losses arising on translation are included in the results of
operations.
-28-
<page>
PRINTLUX.COM INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
AT APRIL 30, 2004
Unaudited - Prepared by Management
4. ACQUISITION OF SUBSIDIARY
Effective August 23, 2001, Printlux.com Inc. ("Printlux") acquired 100% of
the issued and outstanding common shares of Graffico Printers & Design Inc.
("Graffico") by issuing 7,441,624 common shares (includes 425,000 common
shares issued to an arm's length party as a finders fee). Since the
transaction resulted in the former shareholder of Graffico owning the
majority of the issued common shares of Printlux, the transaction, which is
referred to as a "reverse take-over", has been treated for accounting
purposes as an acquisition by Graffico of the net assets and liabilities of
Printlux. Under this purchase method of accounting, the results of
operations of Printlux are included in these financial statements from
August 23, 2001.
Control of the net assets of Printlux was acquired for total consideration
of $97,370 representing the fair value of the assets of Printlux. Graffico
is deemed to be the purchaser for accounting purposes and, accordingly, its
net assets are included in the balance sheet at their previously recorded
values.
The acquisition is summarized as follows:
Current assets (including cash of $3,295) $ 7,149
Other assets 206,802
---------------
213,951
Current liabilities 116,581
---------------
$ 97,370
===============
Consideration given at fair value
Issue of common shares $ 97,370
===============
-29-
<page>
PRINTLUX.COM INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
AT APRIL 30, 2004
Unaudited - Prepared by Management
4. ACQUISITION OF SUBSIDIARY cont'd
Summarized financial information of Printlux.com Inc.
<table>
<caption>
Balance Sheets
August 23 July 31
2001 2001
------------------- ------------------
<s> <c> <c>
Assets
Current
Cash $ 3,295 $ 4,002
Accounts receivable 3,854 3,862
---------------- ---------------
7,149 7,864
Deferred costs 206,289 155,721
Capital assets 513 513
---------------- ---------------
$ 213,951 $ 164,098
================ ===============
Liabilities
Current
Accounts payable $ 116,581 $ 66,013
---------------- ---------------
Shareholders' Equity
Share capital 250,947 250,947
Deficit (153,577) (152,862)
---------------- ---------------
97,370 98,085
---------------- ---------------
$ 213,951 $ 164,098
================ ===============
Statements of Loss
August 23 July 31
2001 2001
---------------- ---------------
Expenses $ (737) $ (27,763)
Interest income 22 2,489
---------------- ---------------
Loss for the period $ (715) $ (25,274)
================ ===============
</table>
-30-
<page>
PRINTLUX.COM INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
AT APRIL 30, 2004
Unaudited - Prepared by Management
4. ACQUISITION OF SUBSIDIARY cont'd
<table>
<caption>
Statements of Cash Flows
August 23 July 31
2001 2001
------------------- ------------------
<s> <c> <c>
Cash flows from operating activities
Loss for the period $ (715) $ (25,274)
Amortization - 220
---------------- --------------
(715) (25,054)
Changes in non-cash working capital 50,576 43,823
---------------- ---------------
49,861 18,769
Cash flows from investing activity
Deferred costs (50,568) (128,219)
---------------- ---------------
Decrease in cash (707) (109,450)
Cash, beginning of period 4,002 113,452
---------------- ---------------
---------------- ---------------
Cash, end of period $ 3,295 $ 4,002
================ ===============
</table>
5. DUE FROM ASSOCIATED COMPANY
Due from associated companies consists of the following:
<table>
<caption>
APRIL 30, 2004 JULY 31, 2003
------------------------- --------------------
<s> <c> <c>
585272 B.C. Ltd. $ - $ 2,028
========================= ====================
</table>
This receivable does not bear interest or have fixed terms of repayment.
6. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
<table>
<caption>
APRIL 30, 2004 JULY 31, 2003
------------------------------------------------------ --------------------
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
------------------------------------------------------ --------------------
<s> <c> <c> <c> <c>
Equipment and presses $ 338,472 $ 184,523 $ 153,949 $ 144,130
Office furniture 50,896 24,496 26,400 23,472
Computer hardware 119,273 79,170 40,103 47,180
Computer software 52,660 28,586 24,074 28,323
Leasehold improvements 12,467 4,566 7,901 8,834
Web page 32,100 28,087 4,013 6,420
------------------------------------------------------ --------------------
$ 605,868 $ 349,428 $ 256,440 $ 258,359
====================================================== ====================
</table>
-31-
<page>
PRINTLUX.COM INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
AT APRIL 30, 2004
Unaudited - Prepared by Management
7. BANK INDEBTEDNESS
Bank indebtedness consists of:
<table>
<caption>
APRIL 30, 2004 JULY 31, 2003
------------------------------------------------
<s> <c> <c>
Business line of credit on which interest is charged at
prime plus 1.5% $ 57,489 $ 61,552
------------------ ----------------
$ 57,489 $ 61,552
================== ================
</table>
The business line of credit has a limit of $65,000, and is secured by a
registered general assignment of book debt and a floating fixed charge over
all corporate assets.
8. OBLIGATIONS UNDER CAPITAL LEASES
The Company has acquired certain capital assets under capital lease.
Payments under these leases are as follows:
<table>
<caption>
APRIL 30, 2004 JULY 31, 2003
------------------------- --------------------
<s> <c> <c>
2004 $ 1,521 $ 10,303
2005 3,542 3,542
-------------------------- --------------------
Total minimum lease payments 5,063 13,845
Less: Amount representing interest (255) (939)
------------------------- --------------------
Balance of obligation 4,808 12,906
Current portion 2,834 9,496
------------------------- --------------------
$ 1,974 $ 3,410
========================= ====================
9. LOANS PAYABLE TO RELATED PARTY
APRIL 30, 2004 JULY 31, 2003
------------------------ --------------------
Unsecured with interest at 9% per annum, compounded monthly,
and repayable on July 27, 2004 $ 6,736 $ 26,098
Unsecured, interest at 12% per annum, with no specific terms
of repayment 90,507 20,000
-------------------------- --------------------
$ 97,243 $ 46,098
========================== ====================
</table>
-32-
<page>
PRINTLUX.COM INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
AT APRIL 30, 2004
Unaudited - Prepared by Management
10. SHARE CAPITAL
a) Authorized
An unlimited number of common shares without nominal or par value.
An unlimited number of preferred shares, without nominal or par value,
issuable in series. The directors are authorized to fix the number of
shares in each series and to determine the designation, rights,
privileges, restrictions and conditions attached to shares of each
series.
b) Issued and Outstanding
<table>
<caption>
Number Of
Shares Consideration
---------------- -------------------
<s> <c> <c>
Balance, July 31, 2001 1,000 $ 10
Adjustment to the number of shares issued and outstanding as a result
of the reverse takeover transaction
Graffico Printers & Design Inc. (1,000) -
Printlux.com Inc. 4,300,000 -
---------------- ----------------
4,300,000 10
Consolidation of the share capital on the basis of one
post-consolidation common share for every two pre-consolidation
common shares (2,150,000) -
---------------- ----------------
2,150,000 10
---------------- ----------------
Fair value of shares issued in connection with the acquisition of
Graffico Printers & Design Inc. (Note 4) 7,441,624 97,370
Public offering of common shares for cash (net of share issue costs of
$332,289) 3,600,000 1,467,711
Balance, April 30, 2004 and July 31, 2003 13,191,624 $ 1,565,091
---------------- -----------------
</table>
c) Escrowed Shares
Of the issued and outstanding common shares, a total of 5,261,638
common shares are held in escrow to be released as follows:
i) 350,000 common shares to be released from escrow on August 23, 2004.
ii) 4,911,638 common shares to be released from escrow as to 10% every six
months after twenty-four month anniversary of August 23, 2001
transaction disclosed in Note 4.
-33-
<page>
PRINTLUX.COM INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
AT APRIL 30, 2004
Unaudited - Prepared by Management
10. SHARE CAPITAL cont'd
d) Share Purchase Warrants
A total of 540,000 share purchase warrants expired unexercised during
the period.
e) Stock Options
As at April 30, 2004, the following stock options are outstanding:
Number of shares Price per share Expiry Date
---------------- --------------- -----------
1,675,000 $0.50 September 20, 2006
Subsequent to the quarter end, the Company amended the exercise price
of the above options to $0.15 per share.
f) Private Placement
On March 23, 2004, the Company announced that it had arranged a
non-brokered private placement of up to 1,000,000 units at a price of
$0.10 per unit. Each unit will consist of one common share and one 12
month non-transferable share purchase warrant exercisable at a $0.12.
11. RELATED PARTY TRANSACTIONS
a) Commencing on May 1, 2000, the Company entered into a long term lease
agreement regarding its premises with an associated company, 585272
B.C. Ltd. During the nine months ended April 30, 2004, the rent expense
incurred under the lease agreement totalled $56,437 (2003 - $53,813).
b) As at April 30, 2004, accounts payable included $46,915 (2003 -
$52,538) in unpaid rent incurred under the above noted lease agreement,
and $76,297 (2003 - $74,250) in management fees payable to directors of
the Company.
c) The amount described in Note 5 is due from a company with a director in
common.
d) The amount described in Note 9 is due to a director of the Company.
-34-
<page>
PRINTLUX.COM INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
AT APRIL 30, 2004
Unaudited - Prepared by Management
12. COMMITMENTS
The Company rents its premises under a long term operating lease from an
associated company, 585272 B.C. Ltd. The minimum annual rental in each of
the next five years is:
2004 $ 75,250
2005 $ 75,250
2006 $ 75,250
2007 $ 78,250
2008 $ 78,750
13. INCOME TAXES
At July 31, 2003, the Company and its subsidiary have $1,502,000
non-capital loss carryforwards available for tax purposes. These losses
expire as follows:
2004 $ 4,000
2005 43,000
2006 109,000
2007 277,000
2008 271,000
2009 696,000
2010 102,000
---------------
$ 1,502,000
===============
14. SUBSEQUENT EVENTS
The Company received regulatory approval for amending the exercise price
for a total of 1,675,000 options expiring September 20, 2006 to $0.15. The
Company also received approval for the granting 700,000 options to
purchase common shares at $0.15 to certain directors, officers and
employees. These new options expire in 2009.
-35-
<page>
Schedule 1
PRINTLUX.COM INC.
SCHEDULE OF COST OF GOODS SOLD
<table>
<caption>
- --------------------------------------------------------------------------------------------------------------------------------
Three months Nine months Three Nine months
ended April 30 ended April months ended ended April 30
2004 30 April 30 2003
2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Artwork and design $ - $ - $ 561 $ 561
Colour copier expenses 1,158 3,723 3,409 13,077
Computer accessories 3,249 9,464 869 11,513
Courier and freight 29,818 86,614 16,097 40,194
Direct labour and benefits 44,187 144,126 21,519 156,865
Equipment leasing 1,894 5,695 1,824 5,473
Equipment repairs and maintenance 609 1,812 2,656 9,820
Paper expenses 80,934 236,084 83,924 262,982
Press supplies 4,214 11,510 5,714 16,306
Printing 4,408 18,904 - -
Printing buyout 18,992 137,055 72,088 146,064
Sales commissions 20,031 65,910 27,763 71,691
Shop supplies 1,909 8,653 1,765 8,843
---------------------------------------------------------------------------
$ 211,403 $ 729,550 $ 238,189 $ 743,389
================================================================================================================================
</table>
Unaudited
Prepared by Management
-36-
<page>
Schedule 2
PRINTLUX.COM INC.
SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES
<table>
<caption>
- --------------------------------------------------------------------------------------------------------------------------------
Three months Nine months Three months Nine months
ended April 30 ended April 30 ended April 30 ended April 30
2004 2004 2003 2003
- --------------------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Accounting and legal $ 1,166 $ 9,042 $ $2,265 $ 17,539
Administrative wages 54,560 150,518 73,860 156,352
Advertising and promotion 21,138 21,138 310 1,310
Automotive 3,952 10,853 979 10,484
Bad debts 657 657 - 17,707
Bank charges and interest 2,438 10,980 4,986 15,144
Colocation 18,705 18,705 - -
Consulting - - - 12,566
Contract labour 5,660 14,597 3,904 8,925
Donations 3,147 3,547 - 5,000
Dues and subscriptions 645 1,788 810 3,154
Filing fees and transfer agent 5,240 11,235 4,245 9,882
Insurance 1,982 8,200 1,982 7,329
Miscellaneous 41 446 (142) 3,145
Office expenses 192 1,978 32 4,511
Shop expenses 774 1,039 1,103 2,517
Property taxes 3,498 10,494 3,540 10,620
Rent expense 18,813 56,437 17,938 53,813
Repairs and maintenance 6,941 20,138 1,977 19,582
Telephone 2,888 9,645 3,496 11,750
Training - 242 355 595
Travel 5,599 11,718 2,120 9,796
Utilities 1,622 5,665 2,172 7,233
----------------------------------------------------------------------------
$ 159,658 $ 379,062 $ 125,932 $ 388,954
=================================================================================================================================
</table>
Unaudited
Prepared by Management
-37-
<page>