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, 1999
Commission File Number 0-16008
A.R.T. INTERNATIONAL INC.
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 _X_ NO__
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Common Shares outstanding as at August 31, 1999: 1,386,551
<PAGE>
<TABLE>
<CAPTION>
A.R.T. INTERNATIONAL INC.
INDEX TO
QUARTERLY REPORT ON
FORM 10-Q
FOR THE QUARTER ENDED
August 31, 1999
PART I PAGE [S]
<S> <C>
Balance sheets:
As at August 31, 1999, and November 30, 1998 3-4
Statements of Accumulated Deficit 5
For the Nine months ended August 31, 1999
For the Nine months ended August 31, 1998
Statements of Loss 6
For the Three months ended August 31, 1999
For the Three months ended August 31, 1998
For the Nine months ended August 31, 1999
For the Nine months ended August 31, 1998
Statements of Cash Flow 7
For the Nine months ended August 31, 1999
For the Nine months ended August 31, 1998
Notes to Financial Statements 8-14
Item 2.
Management's discussions and analysis of financial
condition and results of operations. 15-18
PART II
SIGNATURES 19
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
A.R.T. INTERNATIONAL INC.
BALANCE SHEETS
(IN CANADIAN DOLLARS)
ASSETS
9 Months Ended 12 Months Ended
August 31, 1999 Nov.30, 1998
(Unaudited) (Audited)
(Note 2)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 82,974 $ 110,873
Accounts receivable (Note 3) 58,152 147,513
Inventory (Notes 2(a) and 4) 163,591 187,319
Prepaid expenses and deposits 13,961 7,905
------------------------------------------------------------------------------------------------------
318,678 453,610
CAPITAL ASSETS
Equipment, furniture & fixtures 676,530 676,530
Molds 318,100 318,100
Leasehold improvements 288,958 288,958
------------------------------------------------------------------------------------------------------
1,283,588 1,283,588
Less: Accumulated depreciation 1,236,241 1,209,232
------------------------------------------------------------------------------------------------------
47,347 74,356
Patents 3,931,051 3,931,051
Art reproduction rights 441,875 441,875
------------------------------------------------------------------------------------------------------
4,372,926 4,372,926
Less: Accumulated amortization 4,372,925 4,372,925
------------------------------------------------------------------------------------------------------
1 1
OTHER
Inventories (Notes 2(a) and 4) 20,000 20,083
------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 386,026 $ 548,050
======================================================================================================
</TABLE>
The accompanying notes form an integral part of these financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
A.R.T. INTERNATIONAL INC.
BALANCE SHEETS
(IN CANADIAN DOLLARS)
LIABILITIES AND STOCKHOLDERS' EQUITY
9 Months Ended 12 Months Ended
August 31, 1999 Nov.30, 1998
(Unaudited) (Audited)
(Note 2)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and
accrued liabilities $ 598,794 $ 627,516
Current portion of long-term
debt 725,314 698,827
------------------------------------------------------------------------------------------------------
1,324,108 1,326,343
------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,324,108 1,326,343
CAPITAL STOCK (Note 7)
Preference sharesSeries 1 3,701,809 3,701,809
Series 2 2,785,628 2,785,628
Class C Common 50,000 50,000
Common shares 2,248,961 2,183,961
------------------------------------------------------------------------------------------------------
8,786,398 8,721,398
CONTRIBUTED SURPLUS 11,775,000 11,775,000
DEFICIT (21,499,480) (21,274,691)
-------------------------------------------------------------------------------------------------------
(938,082) (778,293)
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 386,026 $ 548,050
======================================================================================================
</TABLE>
The accompanying notes form an integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
A.R.T. INTERNATIONAL INC.
STATEMENTS OF ACCUMULATED DEFICIT
(IN CANADIAN DOLLARS)
9 Months Ended 9 Months Ended
August 31, 1999 August 31, 1998
(Unaudited) (Unaudited)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deficit - beginning of period $(21,274,691) $(18,512,961)
Add - net loss (224,789) (302,389)
-------------------------------------------------------------------------------------------------------
Deficit - end of period $(21,499,480) $ (18,815,350)
=======================================================================================================
</TABLE>
The accompanying notes form an integral part of these financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
A.R.T. INTERNATIONAL INC.
STATEMENTS OF LOSS
(IN CANADIAN DOLLARS)
3 Mths Ended 3 Mths Ended 9 Mths Ended 9 Mths Ended
Aug.31, 1999 Aug.31, 1998 Aug.31, 1999 Aug.31, 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES $ 202,023 $ 256,715 $ 809,343 $ 837,499
COST OF GOODS SOLD 156,434 216,238 540,360 632,965
-------------------------------------------------------------------------------------------------------------
GROSS PROFIT (LOSS) (45,589) 40,477 268,983 204,534
OPERATING EXPENSES
Selling general
& administrative 130,066 122,498 345,463 301,450
-------------------------------------------------------------------------------------------------------------
Operating loss 84,477 82,021 76,480 96,916
OTHER EXPENSES
Amortization 0 63,000 0 189,000
Depreciation 10,411 14,091 26,461 42,273
Note interest 11,647 11,053 46,848 33,160
Other expenses 0 103,577 75,000 214,782
-------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 22,058 191,721 148,309 479,215
-------------------------------------------------------------------------------------------------------------
NET LOSS $ 106,535 $ 273,742 $ 224,789 $ 576,131
=============================================================================================================
NET LOSS PER COMMON SHARE $0.08 $0.26 $0.16 $ 0.54
-------------------------------------------------------------------------------------------------------------
NUMBER
OF COMMON SHARES 1,386,551 1,066,551 1,386,551 1,066,551
-------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes form an integral part of these financial statements
6
<PAGE>
<TABLE>
<CAPTION>
A.R.T. INTERNATIONAL INC.
STATEMENTS OF CASH FLOW
(IN CANADIAN DOLLARS)
9 Months Ended 9 Months Ended
August 31, 1999 August 31, 1998
(Unaudited) (Unaudited)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash was provided by (applied to):
OPERATING ACTIVITIES
Net loss for period $ (224,789) $ (576,131)
Add: Items not requiring an
outlay of cash
Amortization 27,009 231,273
------------------------------------------------------------------------------------------------------
(197,780) (344,858)
Accounts receivable 89,361 (38,891)
Inventories - current & long-term 23,811 30,001
Prepaid expenses and deposits (6,057) 93,594
Accounts payable and accrued liabilities (28,722) (13,972)
Customer deposits 0 14,750
------------------------------------------------------------------------------------------------------
Cash provided by (used by)
operating activities (119,387) (259,376)
INVESTMENT ACTIVITIES
Acquisition of capital assets
and art reproduction rights 0 (2,889)
-------------------------------------------------------------------------------------------------------
Cash provided by (used by)
investment activities 0 (2,889)
FINANCING ACTIVITIES
Share capital 65,000 0
Notes payable 26,488 79,997
------------------------------------------------------------------------------------------------------
Cash provided by (used by)
financing activities 91,488 79,997
------------------------------------------------------------------------------------------------------
INCREASE /(DECREASE) IN CASH (27,899) (182,268)
CASH, beginning of period 110,873 185,370
------------------------------------------------------------------------------------------------------
CASH, end of period $ 82,974 $ 3,102
======================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Interest paid in period $0 $0
------------------------------------------------------------------------------------------------------
Income taxes paid in period $0 $0
------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes form an integral part of these financial statements
7
<PAGE>
A.R.T. INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
August 31, 1999
(IN CANADIAN DOLLARS)
1. 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.
2. INCORPORATION AND OPERATIONSThe 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 canvas
reproductions.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The un-audited financial statements of the Company for the periods
ended August 31, 1999, and August 31, 1998, have been prepared in
accordance with Canadian generally accepted accounting principles
(GAAP) applied on a consistent basis. The balance sheet at
November 30, 1998 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, 1999, and November 30, 1998, and the results of their
operations and cash flows for the periods ended August 31, 1999,
and August 31, 1998, and, should be read in conjunction with the
audited financial statements for the year ended November 30, 1998.
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
8
<PAGE>
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.
(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.
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.
(d) Management Representations
In the opinion of management, all adjustments necessary for a fair
presentation of the financial position at August 31, 1999 and
November 30, 1998 and the results of operations, changes in
financial position and related note disclosures for the period
ended August 31, 1999 and 1998 have been made. The preparation of
financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the reported amounts of revenues end
expenses during the period. Actual results could differ from these
estimates.
9
<PAGE>
4. INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following:
August 31, 1999 November 30, 1998
---------------------------------------------- --------------------------------------------
Provision for Provision for
Obsolete and Obsolete and
Gross Slow-Moving Net Gross Slow-Moving Net
Amount Amount Inventories Amount Amount Inventories
------ ------ ----------- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Finished Goods $ 72,735 $ (2,946) $ 69,789 $ 81,058 $ (2,946) $ 78,112
Work-in-Process 849,147 (805,053) 44,094 855,756 (805,053) 50,703
Raw Materials 69,708 - 69,708 78,587 - 78,587
------------------------------------------- ------------------------------------------
$ 991,590 $ (807,999) $ 183,591 $1,015,401 $ (807,999) $ 207,402
========= ============ =========== ========== ============ =========
Current Portion ....................................$ 163,591.......................................$ 187,319
Non-current Portion................................. 20,000....................................... 20,083
----------- ---------
$ 183,591 $ 207,402
=========== =========
</TABLE>
5. NOTES PAYABLE
The Company is in default of principal and interest payments on
these notes payable that bear interest at 10%. No renegotiations
have been initiated between the Company and its note holders.
Consequently, the total amount due, including accrued interest and
the additional accrued 5% penalty interest and principal, has been
reflected as a current liability.
<TABLE>
<CAPTION>
1999 1998
----------------------------- ------------------------------
U.S. Dollars Cdn. Dollars U.S. Dollars Cdn. Dollars
<S> <C> <C> <C> <C>
Principal $ 315,000 $ 466,200 $ 315,000 $ 481,950
Accrued Interest 173,328 259,114 141,750 216,877
-----------------------------------------------------------------
$ 488,328 $ 725,314 $ 456,750 $ 698,827
=========== =========== ========== ==========
</TABLE>
These notes payable and accrued interest are secured by a general
security agreement over all the assets of the Company.
6. 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 805,000 are issued, each of which is
convertible into 0.048 common shares.
The directors have authorized an unlimited number of class "A"
preference shares, series 2, of which 466,941 shares are issued,
each of which is convertible into 0.24 common shares.
(ii) Class "B" preference shares
10
<PAGE>
Effective July 1998, the shareholders have authorized an unlimited
number of class "B" preference shares. These shares are
non-voting, redeemable at the option of the Company and have a
preferential dividend of $0.10 per share in priority to all other
shares of the Company. No class "B" shares have been issued;
(iii) Class "C" common share
Effective July 1998, the shareholders have authorized an unlimited
number of class "C" common shares. Each class "C" common share has
100 votes and a dividend right of $0.01 which is payable only in
the event that the annual dividends required in respect of the
senior shares of the Company, including class "A" preference
shares, class "B" preference shares and common shares, have been
paid; and
(iv) Common shares.
(b) Capital stock.
<TABLE>
<CAPTION>
COMMON SHARES
-----------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
Number of Number of
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance - Beginning of Year 1,066,551 $ 2,183,961 266,629,785 $ 2,183,961
Add - Shares Issued During Year 320,000 65,000 0 0
-------------------------------------------------------------------------------------------------------------
1,386,551 2,248,961 266,629,785 2,183,961
Less - Reverse Stock Split
of 250:1 0 0 265,563,234 0
-------------------------------------------------------------------------------------------------------------
Balance - End of Year 1,386,551 $ 2,248,961 1,066,551 $ 2,183,961
-------------------------------------------------------------------------------------------------------------
</TABLE>
Effective April 8, 1999, the Company's Board of Directors approved
a second Regulation S Offering. As of August 31, 1999, the Company
had sold 320,000 shares for total proceeds of $65,000.
On July 14, 1998, the Company effected a 250 for 1 reverse stock
split. To effect the reverse stock split the Company's outstanding
shares were decreased from 266,662,985 common shares to 1,066,551
common shares.
Class "C" Common Shares
The Company issued 50,000 class "C" common shares on September 1,
1998, for a total consideration of $50,000.
(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
----------------------------------------------
August 31, 1999 Nov. 30, 1998
--------------- -------------
<S> <C> <C>
Bal. - beginning of period 13,800 3,625,000
Less - reverse stock split 0 3,461,100
Less - options and warrants expired 0 100
Add - options granted during the year 105,000 0
------------------------------------------------------------------------------------------------------
Balance of options and warrants 118,800 13,800
</TABLE>
11
<PAGE>
The options and warrants granted and outstanding as at February
28, 1999 are as follows:
<TABLE>
<CAPTION>
Common shares
under options
or subject
to warrants Exercise price Expiry date
----------- -------------- -----------
<S> <C> <C> <C>
100 $US 375.00 1999
100 $US 375.00 2000
4,800 $US 2.50 2000
4,800 $US 50.00 2000
4,800 $US 62.50 2002
105,000 $US 0.25 2004
-------
118,800
=======
</TABLE>
7. 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. $0.60 per
annum, payable annually in cash or common shares at the discretion
of the directors.
The Company anticipates that any subsequent dividends declared and
payable on the preference shares in the foreseeable future will be
paid in common shares.
The dividends payable, but not yet declared by the Company, are as
follows:
Period ended Amount US$
---------------- -----------
December 1, 1993 $ 120,750
December 1, 1994 483,000
December 1, 1995 483,000
December 1, 1996 483,000
December 1, 1997 483,000
December 1, 1998 483,000
August 31, 1999 362,250
-------------------------------------------
Total $ 2,898,000
(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 $US 0.60 per share
per annum, payable in cash for the first year after issuance and
annually thereafter in cash or common shares at the discretion of
the directors.
The Company anticipates that any dividends declared and payable,
subsequent to the first year, on the preference shares in the
foreseeable future will be paid in common shares.
The dividends payable, but not yet declared by the Company, are as
follows:
Period ended Amount US$
------------ ----------
December 1, 1994 $ 140,082
December 1, 1995 280,164
December 1, 1996 280,164
December 1, 1997 280,164
December 1, 1998 280,164
August 31, 1999 210,123
-------------------------------------------
Total $ 1,470,861
12
<PAGE>
8. 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
$54,000 annually until January 31, 2001, and thereafter
approximately $64,000 annually until January 31, 2003.
9. 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, 1998 November 30, 1998
--------------- -----------------
Canadian U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
---------------------------------------------------------------------------------------------------------
$ $ $ $
<S> <C> <C> <C> <C>
Capital stock issued 8,786,398 10,827,941 8,721,398 10,762,941
---------------------------------------------------------------------------------------------------------
Accumulated Deficit (21,499,480) (23,547,238) (21,274,691) (23,322,449)
----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(b) Statement of Loss:
August 31, 1999 August 31, 1998
--------------- ---------------
<S> <C> <C>
Net loss under Canadian
& U.S. GAAP $224,789 $576,131
Net loss per common
share under
U.S. & Canadian GAAP $0.16 $0.54
Number of shares U.S. &
Cdn GAAP(i) 1,386,551 1,066,551
</TABLE>
(i) The number of shares is the total issued, as the
weighted-average number of shares would be anti-dilutive.
10. INCOME TAXES
There is no current or deferred income taxes payable in Canada or
the United States.
13
<PAGE>
The Company has combined tax losses for Canadian and U.S. income
tax purposes of approximately $8,474,493 available for deduction
against future years' earnings, the benefit of which has not been
recognized in these financial statements.
These losses, as expressed in Canadian dollars expire as follows:
<TABLE>
<CAPTION>
Year Canadian U.S. Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 2,313,000 0 2,313,000
2000 1,993,000 0 1,993,000
2001 302,000 0 302,000
2002 717,000 400,000 1,117,000
2003 0 1,530,000 1,530,000
2004 924,031 0 924,031
2005 395,462 0 395,462
-------------------------------------------------------------------------------------------
$6,544,493 $1,930,000 $8,474,493
</TABLE>
11. RECLASSIFICATION
Certain figures with respect to the three-month period ended
August 31, 1998 have been reclassified to conform to the
presentation adopted for the three-month period ended August 31,
1999.
12. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use
two digits rather than four to identify a year. Date-sensitive
systems August recognize the year 2000 as 1900 or some other date,
resulting in errors when information-using year 2000 dates is
processed. In addition, similar problems may arise in some
systems, which use certain dates in 1999 to represent something
other than a date. The effects of the Year 2000 Issue may be
experienced before, on, or after January 1, 2000, and if not
addressed, the impact on operations and financial reporting may
range from minor errors to significant systems failure, which
could affect an entity's ability to conduct normal business
operations. It is not possible to be certain that all aspects of
the Year 2000 Issue affecting the entity, including those related
to the efforts of customers, suppliers or other third parties,
will be fully resolved.
14
<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 net loss of $106,535 for the third quarter,
bringing its year-to-date loss for the 9 months ended August 31, 1999,
to $224,789. This was an improvement over the corresponding period in
fiscal 1998 when the loss was $576,131. Although the financial results
from operations were very similar for the first nine months in both
fiscal years, in fiscal 1998 other expenses were $479,215 compared to
$148,309 in fiscal 1999.
Sales revenues at $809,343 for the period of nine months ended August
31, 1999, were slightly lower than fiscal 1998, at $837,499. Sales in
the third quarter of fiscal 1999 were $202,023, down considerably from
the first quarter's sales revenues of $426,369. However, 1999 third
quarter sales revenues were a slight improvement over the 1999 second
quarter's revenues of $180,950. Conversely, in fiscal 1998, second
quarter sales at $419,031 were the highest; compared to the third
quarter sales of $256,715 and first quarter sales revenues of $161,753.
The significant changes in sales revenues from quarter to quarter are a
result of the Company's reliance on a few customers. In both years
approximately 75% of the total sales revenues were from two customers.
In the first quarter of fiscal 1999, sales to The Greenwich Workshop, a
fine art publisher, were approximately $258,000. That company has
informed ART that it is in default with its secured creditors and is
not likely to pay the balance of $75,000 owed to ART. Consequently, the
potential loss of Greenwich as a source of revenues to the Company
could have a serious impact on ART's ability to continue to operate,
unless the Company is able to secure sales to alternative sources.
The Company reported a gross profit of $268,983 for the first nine
months in fiscal 1999, compared to $204,534 in fiscal 1998. The gross
margin was 33% in fiscal 1999, which compares favourably to the gross
margin in fiscal 1998 of 24%. This is attributable to the higher
revenues and lower fixed costs in the cost of sales during the 9 month
period ending August 31, 1999.
In 1998, higher expenses contributed to a net loss of $576,131 compared
to the net loss in 1999 of $224,789. The higher other expenses, in
1998, are attributable to higher consulting fees and amortization
charges on the Company's patents of approximately $403,000 in
aggregate. In the first three quarters of 1999, there were no
15
<PAGE>
consulting fees or amortization charges on its patents; however, the
Company has recorded a bad debt provision of $75,000 against accounts
receivable and operating income. The Company booked the bad debt
provision against the trade-receivable from its largest customer, The
Greenwich Workshop.
Operating cash flow for the first nine months was negative at $119,387,
but an improvement compared to the same period in 1998, when the
Company recorded a negative cash flow of $259,376. The Company's
working capital balance remained negative at $1,065,430, as at August
31, 1999 compared to negative working capital of $872,733 at year-end
November 30, 1998.
The Company has a shareholders deficit of $998,082 as at August 31,
1999. Unless the Company can raise additional capital, or return to
profitability, there is substantial doubt that the Company has the
ability to realize the carrying value of its assets as reported in its
financial statements. In addition, the Company is reliant on the
continued support of its secured and unsecured creditors.
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,
1999, the Company recorded sales to its two main customers, in the
retail and fine art publishing markets, of $295,196 and $258,830
respectively, which represents 68% of its total sales revenues in that
period.
Subsequent to the first quarter-end, the Company has not received any
orders from Greenwich Publishing. In addition, Greenwich has informed
the Company that it is experiencing significant cash flow problems and
is in default under its secured creditors and, as a result, is unable
to pay $75,000 owed to the Company from the first quarter sales.
Owing to the Company's inability to finance new initiatives, or to
attend trade shows, or to hire dedicated sales personnel to sell to its
markets, the Company continues to achieve limited success in developing
new opportunities, with new or 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% [or
approximately $10,000] of the previous initial financial commitment.
Further investment in additional manufacture of Artagraph reproductions
for customers under this new program is directly tied to actual advance
sales.
While the Company is currently negotiating with several major
publishing customers, there can be no guarantee that these efforts will
be successful in generating new revenues.
The Company believes that no other known reproduction processes compare
in quality with the Company's processes in accurately reproducing brush
strokes and texture, and the colour intensity and other reproduction
characteristics are believed to be at least equal to any other known
reproduction process.
The Company's success in the marketplace will depend upon raising
additional capital, creating greater awareness of its products through
16
<PAGE>
aggressive advertising, attendance at trade shows, as well as updating
its library of images and providing new point-of-sale materials.
Gross Profit
The Company reported a gross profit of $268,983 in the first quarter of
1999. This was an improvement over the previous fiscal year, of
204,534, and is mainly attributable to the lower fixed costs,
consisting of rent and salaries.
Liquidity and Capital Resources
Unless the Company is able to significantly increase sales from the
level experienced year to date in 1999, or raise additional capital, it
may not be able to perform all of its obligations in a timely manner.
Although the Company is aggressively seeking additional sales from its
major customers, as well as from other sources, no assurance can be
given that the Company will be successful. The Company does not have
sources for loans. Also, there is no assurance that the Company will be
able to obtain additional working capital from sale of its equity. In
the absence of increased sales, the Company's present inability to
obtain additional working capital from loans or from sale of its equity
could have a material adverse effect on the ability of the Company to
continue operations. Additionally, acquisition of loans or issuance by
the Company of additional equity securities could cause substantial
dilution to the interests and voting rights of current security
holders.
The Company believes that until the capital structure of the Company is
simplified, including the elimination of the on-going diluting impact
of the Preference A Share cumulative dividends, the Company's ability
to raise additional capital will be severely restricted.
During fiscal 1995, NASDAQ advised the Company that the Company was no
longer in compliance for continued listing on NASDAQ's small Cap
Market. The Company's securities are now listed on the NASDAQ sponsored
OTC Bulletin Board. There is a limited market for the Company's shares.
The Company has not declared and paid dividends on its class A
preference shares series one since May 1994. In addition, the Company
has never declared and paid any dividends on its class A preference
shares series two. Except for the first year of dividends on the series
two shares, which are payable in cash, the Company can elect to pay
dividends in common shares. As of May 31, 1999, the Company had total
undeclared dividends of US$2,898,000 and US$1,470,861 on its series one
and two class A preference shares respectively. If these dividends were
paid in common shares, the potential dilution to the common shares
based on the recent average range of bid and ask on its common share
prices of US$3 would be approximately 1.275 million shares. The Company
does not anticipate declaring dividends on any of its securities for
the foreseeable future.
Under the Rule 903 of Regulation S, issuers of shares under a
Regulation S offering must report the sales on an aggregate basis on
form 10Q for reporting periods commencing after Jan 1, 1999. The Board
of Directors approved the Company's second Regulation S offering of its
common shares on April 8, 1999. As of the balance sheet date the
Company had sold 320,000 shares for proceeds of $65,000. The proceeds
have been applied to working capital requirements.
17
<PAGE>
Year 2000 Compliance Readiness.
The Company is fully aware of the Year 2000 problem. A project was
setup within the Company in January 1999, staffed by senior members of
the Company. At August 31, 1999, the Company had completed testing of
its primary production and internal office systems, which were
confirmed as being Year 2000 compliant. Some non-key reporting and
administration systems are not Year 2000 compliant and the Company has
determined a program to purchase replacement systems where necessary.
The Company intends to seek assurances from critical suppliers, that
they too are Year 2000 compliant and where possible the Company will
integrate a test of such suppliers' compliance. The Company is
confident that its production capabilities to supply its products will
not be adversely affected by the Year 2000 issue, and if critical
suppliers are determined to be non-compliant or are not forthcoming the
Company believes it can find alternative suppliers. Based upon systems
that are not Y2K compliant the Company estimates it will need to
purchase new compliant systems of approximately $15,000.
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, 1998, 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, 1999, in the section on
Liquidity and Capital Resources under Management's Discussion and
Analysis, and incorporated herein by reference.
18
<PAGE>
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.
A.R.T. INTERNATIONAL INC.
Dated: September 27, 1999
/s/ Michel van Herreweghe
-------------------------------------
By: Michel van Herreweghe
Chairman
/s/ Simon Meredith
-------------------------------------
By: Simon Meredith
President
19
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