SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
FORM 10-K
[ X ] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED November 30, 1998
Commission File No. 0-16008
--------------------------
A.R.T. INTERNATIONAL INC.
(Formerly ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED)
Ontario, Canada 98-0082514
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
5-7100 Warden Avenue, Markham, Ontario, L3R 8B5 Canada (905) 477-0252
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Shares, without par value; Class A Preference Shares, Series 1, without par
value; Class A Preference Shares, Series 2, without par value.
Indicate by check mark whether the registrant (1) has filed 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [X]
As of November 30, 1998, there were 1,066,551 common shares outstanding.
Based on the closing share price, of $0.25 in the forth quarter of fiscal
1998, the Company's market value was $266,638. The closing share price has
been adjusted for the reverse stock split, approved by the shareholders at
the Company's Annual General Meeting dated July 14, 1998, whereby the
Company's common shares were reverse split by 250:1, from 266,629,750 to
1,066,551.
1
<PAGE>
PART I
Item 1. Business.
General
The Company manufactures high quality fine art reproductions of original
paintings using the Company's patented and proprietary technologies and
markets them through a variety of channels and programs. The Company
replicates both the color and brush stroke texture of the original, so that
the resulting works of art are almost indistinguishable, by the average
person, from original paintings. The Company's reproductions on canvas are
marketed using the registered trademark of Artagraph(R) Editions,
(sometimes referred to as "Artagraph(R)" or Artagraphs(R)"), while its
reproductions on paper are marketed as Works of A.R.T.TM
The Artagraph(R) Editions include signed and numbered limited editions by
contemporary artists, as well as editions of works by the great masters,
and have a suggested retail price of between US$399 and US$849. Some
limited edition reproductions of contemporary artists retail considerably
higher, but this is solely due to the Artist's reputation.
The Works of A.R.T.TM product line, which retailed at significantly lower
prices, was originally introduced to allow the Company to broaden its
universe of customers through volume-oriented North American retailers.
Sales from this product line have always been disappointing. Consequently,
while the Company continues to sell Works of A.R.T.(TM) from its current
inventories, it has not introduced any new product or programs.
The majority of the Company's sales represent exports, principally to the
United States, and to a lesser extent, to other countries. The following
table shows the Company's sales to its principal geographic markets for the
last four fiscal years.
<TABLE>
<CAPTION>
Year Ended November 30
----------------------
1998 1997 1996 1995
---- ---- ---- ----
(In Canadian Dollars)
<S> <C> <C> <C> <C>
Canada................................... 54,900 60,046 41,379 170,630
United States............................ 1,080,806 887,833 1,668,104 1,810,427
Overseas................................. 61,933 45,645 847,067 158,214
----------------------------------------------------------------------
1,197,639 993,524 2,556,550 2,139,271
----------------------------------------------------------------------
</TABLE>
Sales outside Canada are invoiced in United States Dollars. Thus, the
Company is at risk to unfavorable changes in the exchange rates between
Canadian and United States dollars.
In the second half of 1994, the Company discovered a product quality
problem with a significant number of Artagraph(R) reproductions previously
shipped to a major customer in the publishing business. After several
months of investigation, including analyses of raw materials and production
processes, the Company modified its operations in an effort to eliminate
repetition of such problems in the future. No subsequent product quality
problems have since come to the Company's attention. As a consequence of
this problem, and the time and resources required to resolve it, the
Company's sales have not returned to the historic levels experienced prior
to fiscal 1994. Replacement of the defective reproductions created severe
financial and cash flow restrictions, which have continued to severely
impact all areas of the Company's business through to 1998.
2
<PAGE>
Library of Titles and Acquisitions of Paintings
Many of the works reproduced by the Company are in the public domain.
Works, which are not in the public domain, are reproduced pursuant to
agreements with various museums or other copyright holders.
The Company manufactures reproductions of Impressionist and
Post-Impressionist paintings as well as paintings by contemporary artists.
The Company does not always create a replication directly from an original
painting. Semi-originals are also created by a contract artist, who is
engaged to replicate the texture and brush strokes of the original artist's
style.
The Company's publishing division, under contracts with art publishers,
produces and sells replications of contemporary works of art for a fixed
price, which are then distributed by the publisher.
As of November 30, 1998, the Company had a library of approximately 150
different Artagraph(R) titles, of which 100 are Impressionist or
Post-Impressionist paintings and 50 are by contemporary artists, some being
limited edition reproductions. These reproductions are of paintings by such
artists as Monet, Manet, Van Gogh, Degas, Renoir, Turner and other
well-known artists. Once the Company has a reproduced title in its library,
it can manufacture as many reproductions from that title as the market will
bear, subject only to limitations imposed by contracts with third parties
that limit the availability of certain Artagraph(R) Editions.
Manufacturing Process
The replication process is a two-stage process. The first stage is
replication of the painting's color. The second stage, which directly
involves the Company's patented process, is the reproduction of texture and
brush strokes. The Company works from transparencies of the original art,
preparing color separations and then printing the image on a specially
designed "paper" called a litho. The Company subcontracts with third
parties to produce the transparencies and printed lithos in accordance with
the Company's proprietary specifications. In the second stage, the Company
produces a bass relief mold from either the original oil painting or, in
cases where the original oil painting is not available, from the
semi-original of the painting.
The final stage of processing involves precise application of heat and
pressure to the bass relief mold, the printed litho and to a specially
coated canvas to create the finished product. Currently, the Company has
three sets of equipment in operation for the production of Artagraphs(R).
Sales and Marketing
The Company markets through specialty retail, overseas distributors, and
direct mail and carries out contract printing for publishers.
In September, 1995, the Company signed a five year Agreement with ART
Atelier ("Atelier") being an exclusive, world-wide marketing and sales
agreement for the contract printing business in the publishing market, and
Atelier is paid a commission of 25% of gross sales. Atelier was responsible
for developing contract printing business with the Company's fine art
publishing customers over 1994 and 1995, worth approximately Cdn$3,000,000
in gross sales. However, subsequent to 1995 the sales revenues from this
source have been very minor and well below the minimum contract requirement
of Cdn$2,000,000 per annum.
3
<PAGE>
Specialty Retailers and Home Furnishings
During fiscal 1998, the Company continued to support existing customers in
these markets. The Company's ability to initiate new opportunities and to
continue to develop its marketing efforts to attract new customers has been
severely limited due to severe cash flow constraints experienced by the
Company since fiscal 1995.
A major customer is The Museum Company, a 90-plus store chain located
principally in the US that specializes in the retailing of high quality
reproductions of museum products.
Overseas Distributors
Since 1994 the Company has been seeking to expand its business in foreign
markets, extending some territories with existing distributors and signing
new agreements with new distributors.
All these agreements are on a best efforts basis and, like all the
Company's distributor agreements, there can be no assurance of future
revenues or profits from the efforts of any of these distributors.
Publishing
There are many publishers who represent contemporary artists engaged in
publishing art reproductions, such as lithographs, serigraphs and posters.
The Company believes that its products offer a unique alternative to these
publishers to add an important new and more accurate reproduction medium to
their existing product lines.
The Company produces custom pieces under fixed price contracts for art
publishers and agents, with product development costs paid by the
publisher. Prices charged vary depending upon the size of the product, the
number of colors and the size of the edition.
In 1996, Company modified its policies for pricing and shipment to
customers in the limited edition contract printing market in order to widen
the potential customer base and to make the Artagraph(R) reproductions more
competitive. Deposits on future contracts now cover only initial process
costs, such as color printing, thereby reducing publisher customers'
initial capital commitments. Under these new policies, the Company
processes the product only through the final texturing phase, on an as
needed basis, in order to more closely match customers' actual sales
orders.
While this new "just-in-time" policy, has stimulated considerable interest
by art publishers in the Artagraph(R) reproductions, such efforts did not
result in significant increased contract printing business for the Company.
Again, the results reflect the Company's inability to finance new
initiatives, such as attending trade shows or hiring dedicated sales
personnel to market to potential customers.
Direct Marketing
In the past, the Company has marketed its products by direct mail. The
declines since 1993 are attributable to the reduction in marketing through
American Express, because of the Company's inability to finance new
programs due to its continuing liquidity problems.
Patents and Trademarks
The process for manufacturing Artagraph(R) Editions has been patented in a
number of jurisdictions, including Canada and the United States. An
application for improvements to the Artagraph(R) replication process
resulted in the issuance of a new United States patent in November 1990.
Patents in Europe have expired owing to the Company's inability to finance
renewal fees. In addition, due to similar financial considerations, the
Company has abandoned patent applications that are pending in Japan and
Korea at this time.
4
<PAGE>
The Company believes its remaining North American patents are valid and
would withstand a challenge to their validity. No assurances can be given,
however, that a third party will not attempt to challenge the validity of
the patents. The Company intends to vigorously defend its patent rights
against any such challenge, but no assurance can be given that the Company
will be successful. Loss of protection provided by the patented process
could have a material adverse impact on the Company. Moreover, there can be
no assurance that other companies will not design competitive processes
that do not infringe on such patents.
Competition
The Company's reproductions must compete with a variety of decorative art
products, including products from other companies which replicate fine art
as well as original artwork from local artists and others. Small vendors
can compete effectively within the marketplace while larger vendors can
benefit from volume discounts. The Company must competitively price its
products against both the large and the small vendors to successfully build
sales volume. Many companies have processes for reproducing oil paintings,
including other methods of texturing their reproductions, and there are
also many companies, which market art reproductions such as lithographs and
serigraphs. Nevertheless, 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 color intensity
and other reproduction characteristics are believed to be at least equal to
any other known reproduction process. The Company's success in the
marketplace will depend upon creating greater awareness of its products, as
well as its pricing and delivery policies. There can be no assurance that
the Company will be successful in the art reproduction markets or that
other processes will not provide successfully competing products.
Suppliers
The Company purchases frames for its reproductions and obtains its
principal raw materials from several suppliers. The Company also contracts
for printing services principally of lithographs with several companies.
The Company believes that the frames and the raw materials and printing
services are commodity items that can be obtained from several alternative
sources.
Employees
As of November 30, 1998, the Company had 10 employees and consultants,
including management, administrative and production employees.
Item 2. Properties.
The Company's executive offices, production facility and gallery are
located at 7100 Warden Avenue, Markham, Ontario, Canada L3R 8B5, occupying
11,668 square feet of space leased through January 31, 2003. The lease
provides for a fixed annual gross rental of Cdn$96,611, including its pro
rata share of taxes, insurance, building maintenance and occupancy costs.
The Company believes its leased facilities are in good operating condition
and adequate for its present and future requirements.
Item 3. Legal Proceedings. None.
Item 4. Submission of Matters to a Vote of Security Holders. None.
5
<PAGE>
PART II
Item 5. Market for the Company's Equity Securities and Related Matters.
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.
As of November 30, 1998 the Company had approximately 1300, 230, and 180
holders of record of the Common Shares, Series 1 Preference A Shares,
Series 2 Preference A Shares respectively.
The following table sets forth the high and low bid quotations for the
Company's securities, as reported by The Nasdaq Stock Market Inc. for each
quarterly period within the three most recent fiscal years. The quotations
are reported quotations without retail markup, markdown or commission and
may not represent actual transactions.
<TABLE>
<CAPTION>
Series 1 Preference Series 2 Common
Shares Preference Shares
Shares (Note 1)
In U.S. Dollars
----------------------------------------------------------------------------
Fiscal Year High Low High Low High Low
----------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C>
1996
1st Quarter 0.5 0.5 -- -- 125.0 0.25
2nd Quarter -- -- -- -- 5.0 0.25
3rd Quarter -- -- -- -- -- --
4th Quarter -- -- -- -- 5.0 0.0625
1997
1st Quarter No Market No Market 2.5 0.0625
2nd Quarter for Company's for Company's N/A N/A
3rd Quarter Series 1 Pref. Series 2 Pref. 0.25 0.25
4th Quarter Shares Shares N/A N/A
1998
1st Quarter No Market No Market 7.5 2.5
2nd Quarter for Company's for Company's -- --
3rd Quarter Series 1 Pref. Series 2 Pref. -- --
4th Quarter Shares Shares 7.5 0.25
1999
1st Quarter No Market No Market 3.25 3.0
Note (1): The common share prices for 1996 through 1998
have been adjusted to reflect a reverse stock split of
250:1. The 1999 prices reflect actual share prices in the
first quarter of fiscal 1999.
</TABLE>
To be legally entitled to pay dividends on the Series 1 or Series 2
Preference A Shares, the Company is required to have assets in excess of
liabilities and stated capital after any payment of dividends. The Company
has a shareholders' deficit of $778,293 as of November 30, 1998 and
therefore it does not meet this standard and cannot pay dividends on its
securities at this time.
The payment of dividends on the Preference Shares or Common Shares will
depend on the Company's future earnings and financial condition and such
other factors, as the Board of Directors of the Company may then consider
relevant.
6
<PAGE>
Item 6. Selected Financial Data.
The following presents selected financial data for the Company in Canadian
dollars and in accordance with Canadian Generally Accepted Accounting
Principles ("CDN-GAAP"). It should be read in conjunction with the separate
financial statements of the Company and related notes included elsewhere
herein, which were prepared under CDN-GAAP. This financial data should be
compared to the Company's Audited Financial Statements and the
reconciliation of the financial information presented between CDN-GAAP and
US-GAAP. The financial data as of November 30, 1998 and for the four
previous fiscal years has been derived from financial statements of the
Company that have been examined by independent chartered accountants in
Canada.
<TABLE>
<CAPTION>
(Stated in Canadian Dollars)
--------------------------------------------------------------------------------------------------------------
Year ended November 30
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Summary of operations:
Sales.................. 1,197,639 993,524 2,556,550 2,139,271 $4,847,312
Cost of goods sold..... 748,683 871,656 1,701,238 1,640,343 2,867,246
Gross profit........... 448,956 121,868 855,312 498,928 1,919,144
Depreciation and 295,311
amortization.......... 298,671 356,369 324,792 340,047
Selling, general and
administrative expenses 623,739 489,335 887,692 1,178,399 2,286,914
Write-down of Patent Cost
2,106,630 0 0 0 0
Interest and finance
expense............... 185,006 65,573 47,804 45,739 47,859
Operating loss......... (2,761,730) (731,711) (442,089) (1,050,002) ( 695,384)
Interest income........ -- -- 5,536 2,907 49,571
Income taxes........... -- -- -- -- --
Loss before discontinued
operations............ (2,761,730) (731,711) (436,553) (1,047,095) ( 645,183)
Discontinued operations -- -- -- -- --
Net loss............... (2,761,730) (731,711) (436,553) (1,047,095) ( 645,183)
Dividends: Series 1
Preference Shares..... -- -- -- --
Dividends: Series 2
Preference Shares..... -- -- -- -- --
Net loss after dividends
on Series 1 Preference
Shares................. (2,761,730) (731,711) (436,553) (1,047,095) ( 645,183)
Net loss per Common
Share before dividends
on Series 1 & Series 2
Preference Shares..(1) (2.59) (4.88) (6.56) (15.74) ( 9.70)
Weighted average
number of Common
shares outstanding.... 1,066,551 149,852 66,519 66,519 66,519
Summary of balance
sheet data:
Current assets......... 453,610 592,381 547,915 869,191 1,761,824
Total assets........... 548,050 3,111,323 3,459,221 4,408,070 5,528,932
Current liabilities.... 1,326,343 1,177,886 1,126,573 1,282,925 1,488,522
Long-term liabilities.. -- -- -- 355,944 230,329
Total liabilities...... 1,326,343 1,177,886 1,126,573 1,638,869 1,718,851
Contributed surplus.... 11,775,000 11,775,000 11,775,000 11,775,000 11,775,000
Accumulated deficit.... (21,274,691) (18,512,961) (17,781,790) (17,345,240) (16,298,145)
Shareholders'
(deficit) equity....... (778,293) 1,933,437 2,332,648 2,769,201 3,810,081
</TABLE>
(1) The weighted average number of shares outstanding for the current
period and prior years have been adjusted to reflect the 250:1
consolidation of shares retroactively. As the Company is in a loss
position, it does not reflect the fully diluted earnings per share, as the
effect would be anti-dilutive.
7
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
a) 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.
b) Year ended November 30, 1998, compared with year ended November 30, 1997
The Company's net loss for the year ended November 30, 1998 was $2,761,730
as compared to the net loss of $731,711 in 1997. The loss in 1998 is mainly
attributable to the $2.1 million write-down of the net book value of the
Company's Artagraph patents to one dollar. The write-down is required under
CDN-GAAP, followed by the Company, whereby the Company is not able to
generate sufficient cash flows from its operations to recover the patent's
carrying costs. The patented reproduction process remains core to the
Company's business, and the Company believes its patents have significant
commercial value, and would withstand a challenge to their validity.
Notwithstanding, until the Company could raise sufficient capital to
finance sales growth and reach sustained profitability, there was
substantial doubt that the Company had the ability to realize the carrying
value of assets, including its investment in patents.
The Company's sales revenues increased in 1998 to $1,197,639 from $993,524
in 1997. The increase in revenues is partly due to the strength of the US
dollar relative to the Canadian dollar in 1998. The majority of the
Company's sales represent exports, which the Company invoices in US
dollars. In addition, increases in sales to the Company's main publishing
customer more than offset declines in sales to its specialty retail
customers. Nevertheless, the Company remains very reliant on two customers
for the majority of its sales revenues, which amounted to approximately 77%
of total sales revenues in 1998.
Gross profit increased in 1998 to $413,283 from $97,166 in 1997. The
increase was due to lower production fixed costs and the higher sales
revenues. The higher gross profit was offset by exchange losses on US
dollar trade and debt liabilities, of approximately $87,000, as well as
increased consulting fees, of approximately $150,000, and higher interest
costs, of approximately $53,000. The loss before the write-down of the
patents was approximately $656,000 compared to $731,711, for fiscal 1998
and fiscal 1997 respectively.
The Company's operating cash flow deficit was $269,390, which was
comparable with fiscal 1997. The Company's working capital deficit
increased from $585,505 in fiscal 1997 to $872,733 in fiscal 1998. As a
8
<PAGE>
consequence of the continuing operating losses and the write-down of the
Company's patents the shareholders' equity fell from $$1,933,437 to a
deficit of $788,293.
In summary, the Company's continued existence and ability to operate is
very contingent on maintaining the support of its major trade and financial
creditors.
Sales
Tabled below are the sales to the Company's major customers, which are also
expressed as a percentage of total sales, for the last three fiscal years.
The loss of any one of these customers would have a serious detrimental
impact on its ability to continue to operate in the future.
<TABLE>
<CAPTION>
1998 % 1997 % 1996 %
In Canadian Dollars
-------------------------------------------------------------------------------------------------------------------
Total Sales $1,197,639 100% $993,524 100% $2,556,550 100%
----------- ---------- ---- -------- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Sales to two Publishing Customers $594,564 50% $295,706 27% $724,023 28%
Sales to one Retail Customer $327,629 27% $365.556 37% $305,271 12%
</TABLE>
Sales to the Company's two main customers accounted for 77% of its total
sales revenues for fiscal 1998. The increase in sales revenues of
approximately $204,000 was due to the increased strength of the US dollar
relative to the Canadian dollar and the increase in sales to one major
publishing customer. The Company's sales are mainly exported to the United
States and to a lessor extent overseas and are invoiced in US dollars.
Consequently, the strengthening US dollar resulted in approximately a
$100,000 improvement to the Company sales revenues as reported in Canadian
dollars. The increased sales to the Company's major publisher resulted from
its modified pricing and shipment policy (see page 4 in "Item 1. Business."
-- sub heading "Publishing"). During 1998, the Company produced a prototype
Artagraph for two other major publishing companies in an attempt to
stimulate increased sales in this market. While the prototypes were highly
successful, the Company was not able to generate any new sales orders,
which in part was due to the continued weakness of the Company's financial
status.
Owing to the Company's inability to finance new initiatives, or to attend
trade shows, or to hire dedicated sales personnel to sell in its markets,
the Company continues to achieve limited success in developing new
opportunities to replace the loss of sales revenues from its existing
customers and markets.
The Company believes that 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.
During 1998, the Company's Artagraph Product won two Benny awards for
Best-of-Category in the Latest Technology Pieces category for its
submission of the limited edition reproduction of Howard Terpning's "Crow
Pipe Ceremony", and in the Poster and Art Prints category for the "Holy Man
of the Blackfoot". The Bennys Awards are the "oldest and largest
international printing competition", which was held in Chicago during
October 1998. The Company faced competition from 874 companies that
submitted 4,990 printed products.
9
<PAGE>
Notwithstanding, the Company's success in the marketplace will depend upon
creating greater awareness of its products through aggressive advertising,
attendance at trade shows, as well as updating its library of images and
providing new point-of-sale materials.
Gross Profit
Gross profit for the year ending November 30, 1998, rose to $413,283 from
$97,166 in fiscal 1997. The increase in gross profit resulted from the
increase in sales revenues due to the strengthening US dollar and lower
fixed costs in production. The Company's raw materials and services are
purchased in Canadian dollars, therefore improvements to its revenues
resulting from a higher US dollar will directly improve its gross margin.
In January 1998, the Company was successful in reducing its production and
inventory floor area by 66%, consequently it realized rental cost-savings
of approximately $125,000 in 1998. These savings will continue to accrue to
the Company over the next four years. The reduction in production floor
space will not adversely impact the Company's over all capacity.
Selling General and Administration Expenses
Generally, the level of selling, general and administration expenses in
1998 were comparable to levels in fiscal 1997. Notwithstanding, in the year
ending November 30, 1998, the Company had higher overall expenses due to
increased consulting services. The increased consulting expenses, of
$150,000, resulted from the contract agreement it signed with Creative
Enterprises in October 1997. Other expenses were also higher in fiscal
1998. First, under CDN-GAAP, the weakness of the Canadian dollar resulted
in the Company reporting unrealized exchange losses, of approximately
$87,000, which occur when its US dollar liabilities are translated at a
higher rate of exchange, as at the November 30, 1998 versus 1997 balance
sheet dates. The Company had current liabilities in US dollars of $603,000
and $502,000 for 1998 and 1997 year-end balance sheet dates, respectively.
Second, because the Company remained in default on payments of interest and
repayment of principal on its 10% notes an additional five percent penalty
interest was accrued in fiscal 1998, which increased total interest charge
against revenues to $97,863, as compared to $44,214 in 1997.
c) Year ended November 30, 1997, compared with year ended November 30, 1996
The Company recorded a loss of Cdn$731,711 for the year ended November 30,
1997, a decline from the loss of Cdn$436,553 for the comparable period in
1996. Sales revenues at Cdn$993,524 for the year ended November 30, 1997,
were a sharp decline from 1996's of Cdn$2,556,550. The sales revenue
decline reflected the Company's reliance on two customers for approximately
54% of its total sales revenues, in the previous year. However, in fiscal
1997 there was an almost complete absence of sales to these two customers.
Notably, sales to Lassen International, a major publishing customer, and
sales to its Spanish distributor were Cdn$30,825 and Cdn$nil, year-to-date
in 1997, compared to 1996's revenues of Cdn$596,947 and Cdn$658,319
respectively.
Gross profit for the first year fell Cdn$724,570 from Cdn$821,736 in 1996
to Cdn$97,166 in 1997. However, lower operating expenses in 1997 contained
the net loss to Cdn$731,711 compared to the loss in 1996 of Cdn$436,553.
Operating cash flow for the year was negative at Cdn$299,827 a decline
compared to the same period in 1996, when the Company recorded a break-even
cash flow. The Company's working capital balance remained negative at
10
<PAGE>
Cdn$585,505, as at November 30, 1997, compared to negative working capital
of Cdn$578,657 at year end November 30, 1996.
Sales
Tabled below are the sales to the Company's major customers, which are also
expressed as a percentage of total sales, for the last three fiscal years
<TABLE>
<CAPTION>
1997 % 1996 % 1995 %
In Canadian Dollars
-------------------------------------------------------------------------------------------------------------------
Total Sales $993,524 100% $2,556,550 100% $2,139,271 100%
----------- -------- ---- ---------- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Sales to one Publishing Customer $30,825 3% $592,600 23% $798,000 37%
Sales to another Pub. Customer $264,881 27% $149,423 6% $90,950 4%
Sales to one Spanish Customer $Nil - $653,514 26% $Nil -
Sales to one Retail Customer $365.556 37% $305,271 12% $346,000 16%
</TABLE>
The Company was very reliant on a few customers for the majority of its
sales revenues. In the year ended November 30, 1997, the Company recorded
sales to its main retail customer of Cdn$365,556, which represents 37% of
its total sales revenues. Four other customers represented a further 37% of
the Company's annual sales revenues. The decline of sales revenues from
Cdn$2,556,550 in 1996 to Cdn$993,524 in 1997, represents the almost
complete absence of sales, in 1997, to two of its major customers of 1996.
First, the decline of sales to the Spanish market reflects the inability of
the Company to finance new products and new programs to offer to this
customer. Second, one of the Company's publishing customers experienced
significant declining sales in 1997, and has switched emphasis to
paper-based fine art reproductions, as an alternative to the Company's
canvas-based product line.
Gross Profit
Gross profit for the first year fell Cdn$724,570 from Cdn$821,736 in 1996
to Cdn$97,166 in 1997.
The gross margin fell in fiscal 1997 to 10%, from 32% for the comparable
period in 1996. However the gross margin in the Company's 1997 forth
quarter was 23%, an improvement over the earlier quarters of 1997, when the
gross margin was negative for the first two quarters. In the third quarter
gross margins had returned to a positive number at 19%.
The reduction of gross margin, from 1996 to 1997, and the improvement of
gross margin in the third an fourth quarters, is attributable to the
negative impact of fixed overhead costs to sales revenues. Fixed overhead
costs, including rent and plant salaries, as expressed as percentages of
comparable sales revenues were 67%, 60%, 31% and 34% for the respective
quarters of 1997, as compared to 20% for the year to November 30, 1996. In
the last two quarters retail sales finished strongly, as well, the Company
shipped two new orders to a publishing customer.
11
<PAGE>
Selling Expenses
In 1997, selling expenses at Cdn$84,814 were down Cdn$195,137 from
Cdn$279,951 in 1996. The reduction in selling expenses is mainly attributed
to the lower proportion of sales revenues carrying sales commissions in
1997 over 1996.
General and Administration
General and administrative expenses were Cdn$404,521 for 1997, and compare
favourably with the higher administration costs in 1996 of Cdn$549,600. The
major savings resulted from lower salaries, professional and consulting
fees, as well, in 1996 other general and administration expenses included a
one time charge of Cdn$79,000, for a bad-dept provision against accounts
receivable.
d) Liquidity and Capital Resources
In fiscal 1998 there was continuing doubt that the Company had the ability
to realize the carrying value of assets reported in its financial
statements, which was dependent upon the attainment of profitable
operations, and the continued financial support of its creditors.
Consequently, under CDN-GAAP, the Company wrote-down its investment in its
patents to one dollar. The result of the write-down and the ongoing
operating losses in 1998, was that the Shareholders' equity fell from
$1,933,437 to a deficit of $788,293.
As of February 1998, the Company completed an offering of its securities
under Regulation S, whereby a total of 250 million shares of the Company's
common stock were issued in consideration for the receipt of a total of
US$250,000. As a result of the offering, the Company had a total of
266,629,789 shares of common stock issued and outstanding. Subsequently,
effective July 14, 1998, the Shareholders approved a reverse-stock split of
250:1 for the common shares, which reduced the issued and outstanding
number of common shares to 1,066,551.
Effective July 14, 1998, the Company's shareholders authorized two new
securities: an unlimited number of Class B Preference Shares and unlimited
number of Class C Common Shares. The Class B Preference Shares are
non-voting, redeemable at the option of the Company and have a preferred
dividend of $0.10 per share in priority to all other shares of the Company.
No Class B Preference Shares have been issued. The Class C Common Shares
have 100 votes per common share and a dividend right of $0.01 per share,
which is payable only in the event that the annual dividend required in
respect of the senior shares of the Company have been paid. On September 1,
1998, the Company issued 50,000 shares for a total consideration of
$50,000. The Class B Preference Shares and the Class C Common Shares have
not been registered with the SEC.
The Holders of the Class C Common Shares are entitled to 100 votes for
every one share of Class C Common Shares owned. The Holders of the Class C
Common Shares have 5,000,000 votes and the holders of the Common Shares
have 1,065,551 votes. As a result, at any shareholders meeting, the Class C
Shareholders in the aggregate have the power to appoint all of the members
of the Compnay's Board of Directors and approve any matters which may be
brought to a vote of the shareholders.
Effective July 14, 1998, the Company's shareholders approved a stock option
plan for the Company. The maximum number of stock options is limited to 10%
of the outstanding common shares. Subsequent to the year-end, pursuant to
the option plan and subject to and conditional upon any necessary
shareholder or regulatory approval or ruling, 105,000 stock options were
authorized. Each option entitles the holder thereof to purchase one share
of the Company's common stock at an exercise price of $US 0.25 per share.
Each option is for a term commencing December 1, 1998 and expiring December
1, 2004. The Company intends to issue these shares to various employees and
officers of the Company. The number of shares to be granted to any
recipient will be subject to the approval of the Board of Directors. To
date, no stock options have been granted. The shares to be issued under the
stock option plan will be restricted securities as that term is defined
under the Securities Act of 1933, as amended. However, the Company intends
to register the options and the underlying shares which will be issued on
exercise of the option.
12
<PAGE>
The Company's working capital remained negative as at November 30, 1998, at
Cdn$872,733, an increase over the balance at the fiscal 1996 year end of
negative Cdn$585,505. The principal reason for the negative working capital
is the balance of Cdn$698,827 owed to the 10% notes, which has been
classified as a current liability. In addition, certain trade creditors and
the 10% notes are payable in US dollars, and the continued decline of the
Canadian dollar against the US dollar resulted in higher reported Canadian
liabilities at November 30, 1998.
Unless the Company is able to significantly increase sales from the level
experienced in the preceding fiscal years or raise additional capital, it
may not be able to perform all of its obligations in a timely manner.
Although the Company is 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 addition
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.
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 common shares.
The Company is in default under the 10% notes payable. No re-negotiations
have been initiated between the Company and the note holders. Consequently,
the total amount due of $698,827, including accrued interest and the
additional accrued 5% penalty interest and principal, has been reflected as
a current liability. These 10 % notes and accrued interest are secured by a
general security agreement over the assets of the Company.
e) Dividends
The Company has not declared and paid dividends on its class A preference
shares series one since May 1994. In addition, the Company has never
declared and paid any dividends on its class A preference shares series
two. Except for the first year of dividends on the series two shares, which
are payable in cash, the Company can elect to pay dividends in common
shares. As of November 30, 1998, the Company had total dividends payable,
but not yet declared of US$ 2,535,750 and US$ 1,260,742 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 trade price of $US 3.125 would be approximately 1.2
million shares. The Company does not anticipate declaring dividends on any
of its securities for the foreseeable future.
f) 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 February 28, 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 is determining a
capital budget 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
capability 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.
13
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Item 8. Financial Statements
A.R.T. INTERNATIONAL INC.
[FORMERLY ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED]
BALANCE SHEET
NOVEMBER 30, 1998 AND 1997
(STATED IN CANADIAN DOLLARS)
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT
Cash $ 110,873 $ 89,395
Cash in Escrow - 95,975
Accounts Receivable 147,513 66,995
Inventories [Notes 2(a) and 3] 187,319 213,811
Prepaid Expenses and Deposits 7,905 126,205
------------ ------------
453,610 592,381
------------ ------------
CAPITAL [Note 4] 74,356 117,667
------------ ------------
OTHER
Patents 3,931,051 3,931,051
Art Reproduction Rights 441,875 441,875
------------ ------------
4,372,926 4,372,926
Less - Accumulated Amortization [Note 2(b)] 4,372,925 2,014,295
------------ ------------
1 2,358,631
Inventories [Notes 2(a) and 3] 20,083 42,644
------------ ------------
TOTAL ASSETS $ 548,050 $ 3,111,323
============ ============
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
A.R.T. INTERNATIONAL INC.
[FORMERLY ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED]
BALANCE SHEET
NOVEMBER 30, 1998 AND 1997
(STATED IN CANADIAN DOLLARS)
1998 1997
---- ----
<S> <C> <C>
LIABILITIES
CURRENT
Accounts Payable and Accrued Liabilities $ 627,516 $ 464,156
Accounts Payable - Related Party [Note 5] - 159,796
Notes Payable [Note 6] 698,827 553,934
----------- -----------
TOTAL LIABILITIES 1,326,343 1,177,886
----------- -----------
CAPITAL DEFICIENCY
CAPITAL STOCK [Note 7]
CLASS "A" PREFERENCE SHARES:
805,000 [Series 1] 3,701,809 3,701,809
466,941 [Series 2] 2,785,628 2,785,628
COMMON SHARES:
1,066,551 2,183,961 2,183,961
50,000 [Class "C"] 50,000 -
----------- -----------
2,233,961 2,183,961
CONTRIBUTED SURPLUS 11,775,000 11,775,000
DEFICIT (21,274,691) (18,512,961)
----------- -----------
(778,293) 1,933,437
----------- -----------
TOTAL LIABILITIES
LESS CAPITAL DEFICIENCY $ 548,050 $ 3,111,323
=========== ===========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
A.R.T. INTERNATIONAL INC.
[FORMERLY ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED]
STATEMENT OF DEFICIT
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
(STATED IN CANADIAN DOLLARS)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
BALANCE - Beginning of Year $18,512,961 $17,781,250 $17,344,697
ADD - Net Loss 2,761,730 731,711 436,553
----------- ----------- ------------
BALANCE - End of Year $21,274,691 $18,512,961 $17,781,250
=========== =========== ============
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
A.R.T. INTERNATIONAL INC.
[FORMERLY ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED]
STATEMENT OF LOSS
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
(STATED IN CANADIAN DOLLARS)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
SALES $ 1,197,639 $ 993,524 $ 2,556,550
------------- ------------ ------------
COST OF GOODS SOLD AND OTHER
MANUFACTURING COSTS
Cost of Goods Sold and Other Manufacturing
Costs Before the Undernoted: 748,683 871,656 1,701,238
Amortization of Capital Assets 35,673 24,702 33,576
------------- ------------ ------------
784,356 896,358 1,734,814
------------- ------------ ------------
GROSS PROFIT 413,283 97,166 821,736
------------- ------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES
Selling, General and Administrative Expenses
Before the Undernoted: 623,739 489,335 904,028
Foreign Exchange Loss (Gain) 87,143 21,359 (16,336)
Amortization of Capital Assets 7,638 11,898 20,443
Amortization of Patents 2,358,630 262,071 302,350
Loan Interest 97,863 44,214 47,804
------------- ------------ ------------
3,175,013 828,877 1,258,289
------------- ------------ ------------
LOSS FROM
OPERATIONS BEFORE TAXES (2,761,730) (731,711) (436,553)
PROVISION FOR INCOME TAXES [Note 12] - - -
------------- ------------ ------------
NET LOSS $(2,761,730) $ (731,711) $ (436,553)
============= ============ ============
NET LOSS PER COMMON SHARE [Note 11] $(2.59) $(4.88) $(6.56)
===== ===== =====
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES [Note 11] 1,066,551 149,852 66,519
========== ======== ===========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
A.R.T. INTERNATIONAL INC.
[FORMERLY ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED]
STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
(STATED IN CANADIAN DOLLARS)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS
WERE PROVIDED BY (APPLIED TO):
OPERATING ACTIVITIES
Net Loss $(2,761,730) $ (731,711) $ (436,553)
Add - Items not Affecting Cash:
Amortization of Capital Assets 43,311 36,600 54,019
Amortization of Patents 2,358,630 262,071 302,350
Loss on Disposal of Capital Assets - - 38,536
------------- ------------- -----------
(359,789) (433,040) (41,648)
Accounts Receivable (80,518) 82,415 189,039
Inventories - Current and Long-Term 49,053 134,527 340,357
Prepaid Expenses and Deposits 118,300 (67,767) 17,561
Accounts Payable and Accrued Liabilities 163,360 6,853 (251,395)
Accounts Payable - Related Party (159,796) (11,615) 5,586
Customers' Deposits - (11,200) (259,746)
------------- ------------- -----------
(269,390) (299,827) (246)
------------- ------------- -----------
FINANCING ACTIVITIES
Notes Payable 144,893 67,275 (6,741)
Issuance of Capital Stock for Cash {Net} 50,000 332,500 -
------------- ------------- -----------
194,893 399,775 (6,741)
------------- ------------- -----------
INVESTING ACTIVITIES
Conversion of Capital Assets to Inventory - - 41,860
------------- ------------- -----------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS POSITION (74,497) 99,948 34,873
CASH AND CASH EQUIVALENTS - Beginning of Year 185,370 85,422 50,549
------------- ------------- -----------
CASH AND CASH EQUIVALENTS - End of Year $ 110,873 $ 185,370 $ 85,422
============= ============= ===========
</TABLE>
18
<PAGE>
A.R.T. INTERNATIONAL INC.
[FORMERLY ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED]
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1998
(STATED IN CANADIAN DOLLARS)
1. INCORPORATION AND OPERATIONS
The Company was incorporated in Canada on January 24, 1986 under The
Ontario Business Corporations Act. The Company's primary business is the
production, distribution and marketing of replications of oil paintings.
By articles of amendment, dated July 14, 1998, the name of the Company
was changed from Artagraph Reproduction Technology Incorporated to
A.R.T. International Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) Inventories
(i) 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.
(ii) 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 and market value. The Company uses
annual physical inventory counts combined with an analysis of each
product's preceding three year's (or for such shorter period that
a particular product may have been in existence) sales and a
review of the Company's sales expectations for each product to
determine whether the level and value of the Company's inventory
of a particular product at a given time is excessive. This
three-year period has been deemed to be an appropriate period for
evaluating the historical sales of the Company's products since
such products are not perishable and tend to be marketed over
multi-year periods through intermittent and recurring sales
programs. In no event are amounts carried as a current asset if it
is not probable that they will be sold within one year, nor do
amounts carried as long-term inventory exceed their fair value as
determined by the inventory valuation policies of the Company as
described above.
(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:
<TABLE>
<CAPTION>
<S> <C>
Equipment, Furniture and Fixtures...............................20% Declining Balance
Leasehold Improvements..........................................Straight-line over Term
of the Lease
</TABLE>
Moulds are recorded at cost and are amortized on the
units-of-production basis which is sufficient to substantially amortize the
cost of the moulds over their estimated useful lives.
19
<PAGE>
(B) Capital Assets [Continued]
Patents are recorded at cost and are amortized on a straight-line basis,
based on the legal life of such intellectual property, which approximates
fifteen years.
At each balance sheet date, the Company reviews the remaining benefit
associated with the Artagraph patents to ensure that the Company will
generate sufficient un-discounted cash flows to recover their carrying
costs. In accordance with this policy, all patents at November 30, 1998
have been written down to $1.
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) Translation 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 the exchange rate prevailing at the
balance sheet date.
Under Canadian generally accepted accounting principles, 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 November 30, 1998 and 1997 and
the results of operations, changes in financial position and related note
disclosures for the fiscal years ended November 30, 1998, 1997 and 1996
have been made. 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 and the reported amounts of revenues end expenses during the
period. Actual results could differ from these estimates.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------- --------------------------------------------
Provision for Provision for
Obsolete and Obsolete and
Gross Slow-Moving Net Gross Slow-Moving Net
Amount Inventories Amount Amount Inventories Amount
------ ----------- ------ ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Finished Goods $ 81,058 $ ( 2,946) $ 78,112 $ 72,065 $ - $ 72,065
Work-in-Process 855,756 (805,053) 50,703 990,636 (851,509) 139,127
Raw Materials 78,587 - 78,587 45,263 - 45,263
----------- ------------- ----------- ----------- ------------- -----------
$ 1,015,401 $ 807,999 $ 207,402 $ 1,107,964 $ (851,509) $ 256,455
=========== ============= =========== =========== ============= ===========
Current Portion .......................................... $ 187,319 .................................. $ 213,811
Non-current Portion....................................... 20,083 .................................. 42,644
---------- -----------
$ 207,402 $ 256,455
========== ===========
</TABLE>
20
<PAGE>
4. CAPITAL ASSETS
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------- ------------
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Equipment, Furniture and Fixtures $ 676,530 $ 602,174 $ 74,356 $ 96,748
Moulds 318,100 318,100 - 20,919
Leasehold Improvements 288,958 288,958 - -
----------- ----------- ------------ ------------
$ 1,283,588 $ 1,209,232 $ 74,356 $ 117,667
=========== =========== ============ ============
</TABLE>
5. ACCOUNTS PAYABLE - RELATED PARTY
This amount is with respect to inventory purchases from a company in which
a shareholder has a financial interest. These purchases amounted to $ Nil
(1997 - $ Nil; 1996 - $117,845).
6. 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>
1998 1997
----------------------------- -------------------------------
U.S. Dollars Cdn. Dollars U.S. Dollars Cdn. Dollars
<S> <C> <C> <C> <C>
Principal $ 315,000 $ 481,950 $ 315,000 $ 448,497
Accrued Interest 141,750 216,877 74,053 105,437
----------- ----------- ----------- -----------
$ 456,750 $ 698,827 $ 389,053 $ 553,934
=========== =========== =========== ===========
</TABLE>
These notes payable and accrued interest are secured by a general security
agreement over all the assets of the Company.
7. CAPITAL STOCK
(A)Share Capital
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 and
series 2; convertible into common shares and have the right to cumulative
dividends as and if declared in the amount of U.S. $0.60 per share per
annum, payable quarterly in the first year of issuance and annually
thereafter, as and when declared, subject to the provisions of The Ontario
Business Corporations Act. The future dividend payments are payable in
cash or common shares at the discretion of the directors.
21
<PAGE>
The directors have authorized 875,000 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 were issued on May 19, 1994
for a cash consideration of $2,779,413, each of which is convertible commencing
November 13, 1995, into 0.24 common shares;
(ii) 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) 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
--------------------------------------------------------------------
1998 1997
Number of Number of
Shares Amount Shares Amount
--------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance - Beginning of Year 266,629,785 $ 2,183,961 16,629,785 $ 1,851,461
Add - Shares Issued During Year - - 250,000,000 332,500
-------------- --------------- ------------- -------------
266,629,785 2,183,961 266,629,785 2,183,961
Less - Reverse Stock Split
of 250:1 265,563,234 - - -
-------------- --------------- ------------- -------------
Balance - End of Year 1,066,551 $ 2,183,961 266,629,785 $ 2,183,961
============== =============== ============= =============
</TABLE>
During the 1997 fiscal year, the Company issued 250,000,000 common
shares for a total cash consideration of $350,000 less issuance
costs of $17,500. 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.
22
<PAGE>
<TABLE>
<CAPTION>
CLASS "C" COMMON SHARES
-----------------------------------------------------------------
1998 1997
------------------------------- ----------------------
Number of Number of
Shares Amount Shares Amount
-------------- --------------- ------ ------
<S> <C> <C> <C> <C>
Balance - Beginning of Year - $ -
Add - Shares Issued During Year 50,000 50,000
-------------- ---------------
Balance - End of Year 50,000 $ 50,000 Nil $ Nil
============== =============== === =====
</TABLE>
The Company issued 50,000 class "C" common shares on September 1,
1998, for a total consideration of $50,000. The Company intends to
use the proceeds for working capital.
(C) Stock Options and Warrants to Purchase Common Shares
The Company has issued various stock options for common shares 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 The options are allocated
as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Balance - Beginning of Year 3,475,000 3,625,000
Less - Reverse Stock Split 250:1 3,461,100 -
------------ ------------
13,900 3,625,000
Less - Options and Warrants Expired During Year 100 150,000
------------ ------------
Balance - End of Year 13,800 3,475,000
============ ============
</TABLE>
The options and warrants granted and outstanding as at November 30,
1998 are as follows:
<TABLE>
<CAPTION>
Common Shares
Under Option
or Subject
to Warrants Exercise Price Expiry Date
----------- -------------- -----------
<S> <C> <C> <C>
100 Cdn. $ 375.00 1999
100 U.S. $ 375.00 2000
4,800 U.S. $ 2.50 2000
4,800 U.S. $ 50.00 2000
4,000 U.S. $ 62.50 2002
------------
13,800
============
</TABLE>
23
<PAGE>
(D) Subsequent Event
Subsequent to the balance sheet date, the Company issued 105,000
common stock options, pursuant to a new option plan approved by the
shareholders in July 1998. The stock option plan provides for the
granting of options to directors, officers and employees of the
Company, subject to a maximum limit of ten {10} percent of the total
common shares issued and outstanding at the date of the issuance of
the stock options. No stock option may be granted with a term
exceeding ten years. The 105,000 stock options have been issued at an
option price of US $0.25 per stock option. The stock options are not
yet registered under the regulations of the Securities Exchange
Commission.
8. DIVIDENDS
(a) Class "A" Preference Shares, Series 1
The holders of the class "A" preference shares, series 1, are
entitled to receive as and 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 does not anticipate that any dividends will be declared
and payable on the preference shares in the foreseeable future.
The dividends payable, but not yet declared by the Company are as
follows:
<TABLE>
<CAPTION>
PERIOD ENDED U.S. AMOUNT CDN. AMOUNT
------------ ----------- -----------
<S> <C> <C> <C>
December 1, 1993 $ 120,750 $ 184,747
December 1, 1994 483,000 738,990
December 1, 1995 483,000 738,990
December 1, 1996 483,000 738,990
December 1, 1997 483,000 738,990
December 1, 1998 483,000 738,990
----------- -----------
$ 2,535,750 $ 3,879,697
=========== ===========
</TABLE>
(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 U.S. $0.60 per
annum, payable quarterly in cash for the first year after issuance
and annually thereafter in cash or common shares at the discretion
of the directors.
The Company does not anticipate that any dividends will be declared
and payable on the preference shares in the foreseeable future.
24
<PAGE>
The dividends payable, but not yet declared by the Company are as
follows:
<TABLE>
<CAPTION>
PERIOD ENDED U.S. AMOUNT CDN. AMOUNT
------------ ----------- -----------
<S> <C> <C> <C>
December 1, 1994 $ 140,082 $ 214,325
December 1, 1995 280,165 428,652
December 1, 1996 280,165 428,652
December 1, 1997 280,165 428,652
December 1, 1998 280,165 428,652
----------- -----------
$ 1,260,742 $ 1,928,933
=========== ===========
</TABLE>
9. SEGMENTED INFORMATION
The Company operates in one business segment, the production, distribution
and marketing of replications of oil paintings.
Operations and identifiable assets by geographic segments are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
DOMESTIC SALES - CANADA $ 54,901 $ 60,046 $ 41,379
INTERNATIONAL EXPORT SALES:
- U.S.A. 1,083,681 857,357 1,668,104
EUROPEAN ECONOMIC COMMUNITY 35,655 3,178 729,600
OTHER 23,402 72,943 117,467
----------- ------------ -----------
$ 1,197,639 $ 993,524 $ 2,556,550
=========== ============ ===========
</TABLE>
All significant identifiable assets and amortization relate to assets
situated in Canada.
10. COMMITMENTS AND CONTINGENT LIABILITIES
(a) Management Services Agreement
The Company entered into a five year agreement in 1994 with The
Merrick Group Limited and Mr. Simon Meredith to provide management
services as President and Chief Operating Officer of the Company at
a maximum monthly fee of $10,000 Cdn.
If this agreement is terminated by either party, the Company shall
be obligated to pay a termination fee of $20,000 Cdn. payable in two
instalments on the 30th and 60th day following such termination.
(b) Lease Obligations
Under a long-term lease expiring January 31, 2003, the Company is
obligated for minimum future lease payments, net of occupancy costs,
for office, showroom and factory premises as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING AMOUNT
------------------ ------
<S> <C> <C>
1999.............................................$ 58,340
2000.............................................. 58,340
2001.............................................. 58,340
2002.............................................. 64,174
2003.............................................. 64,174
2004.............................................. 10,695
</TABLE>
25
<PAGE>
11. RECONCILIATION BETWEEN CANADIAN AND UNITED STATED GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The financial statements of the Company are prepared in accordance with
Canadian generally accepted accounting principles ("Canadian G.A.A.P.").
These principles differ in some respects from United States generally
accepted accounting principles ("U.S. G.A.A.P.").
The effect of such differences on the Company's balance sheet and
statement of loss is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- --------------------------- -----------------------------
Canadian U.S. Canadian U.S. Canadian U.S.
G.A.A.P. G.A.A.P. G.A.A.P. G.A.A.P. G.A.A.P. G.A.A.P.
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(A) BALANCE SHEET:
Capital Stock
Issued $ 8,721,398 $ 10,762,941 $ 8,671,398 $ 10,712,941 $ 8,338,898 $ 10,380,441
============ ============ ============ ============ ============ ============
Accumulated
Deficit $(21,274,691) $(23,322,449) $(18,512,961) $(20,560,719) $(17,781,250) $(19,829,008)
============ ============ ============ ============ ============ ============
</TABLE>
(B) STATEMENT OF LOSS:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Loss per Common Share under U.S. G.A.A.P. $(2.59) $(4.88) $(6.56)
===== ===== ===
(C) WEIGHTED AVERAGE NUMBER OF SHARES
- U.S. G.A.A.P. [Note 11(e)] 1,066,551 149,852 66,519
=========== ========= ===========
(D) WEIGHTED AVERAGE NUMBER OF SHARES
- CANADIAN G.A.A.P. 1,066,551 1,066,551 66,519
=========== =========== ===========
</TABLE>
(E) Opinion 15 of the Accounting Principles Board requires that for U.S.
G.A.A.P. purposes the Company follow the "Treasury Stock Method" in
determining the weighted average number of shares. This method could
result in a difference in the weighted average number of shares as
determined in accordance with Canadian G.A.A.P.
26
<PAGE>
For U.S. G.A.A.P. purposes the "Treasury Stock Method" increases the
weighted average number of shares by a factor which takes into
consideration the number of stock options outstanding, the exercise
price of these stock options and the quoted market price for the
Company's shares. No similar calculation is required under Canadian
G.A.A.P. to determine the weighed average number of shares.
As the Company is in a loss position, the weighted average number
shares for U.S. G.A.A.P. purposes does not take in to account the
potential conversion of the preference shares or the stock options,
as the effect would be anti-dilutive.
(F) Earnings per Share
Earnings per share have been calculated recognizing the new
sub-division of share capital as a result of the July 14, 1998
reverse split as though it had occurred at the beginning of the year.
The earnings per share of the preceding years have also been adjusted
to reflect the change retroactively.
The weighted average number of shares outstanding for the current and
prior years have been adjusted to reflect this sub-division of shares
retroactively.
As the Company is in a loss position, it does not reflect the fully
diluted earnings per share, as the effect would be anti-dilutive.
12. INCOME TAXES
There are no current or deferred income taxes payable in Canada or the
United States.
The Company has combined tax losses for Canadian and U.S. income tax
purposes of approximately $7,079,031 (1997 - $8,752,000) available for
deduction against future years' earnings, the benefit of which has not
been recognized in these financial statements.
These losses expire as follows:
<TABLE>
<CAPTION>
YEAR CANADIAN U.S. TOTAL
---- -------- ---- -----
<S> <C> <C> <C> <C>
1999........................... $ 976,000 $ - $ 976,000
2000............................ 2,230,000 - 2,230,000
2001............................ 302,000 - 302,000
2002............................ 717,000 400,000 1,117,000
2003............................ - 1,530,000 1,530,000
2004............................ 924,031 - 924,031
2005............................ 395,462 - 395,462
----------- ----------- -------------
$ 5,544,493 $ 1,930,000 $ 7,474,493
=========== =========== =============
</TABLE>
27
<PAGE>
13. FUTURE OPERATIONS
The accompanying financial statements have been prepared on the basis of
accounting principles applicable to a going concern, meaning that the
Company will be able to realize its assets and discharge its liabilities
in the normal course of operations. However, the use of generally accepted
accounting principles that are applicable to a going concern, is
potentially inappropriate because there is significant doubt about the
appropriateness of the going concern assumption. 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 financial 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.
14. MAJOR CUSTOMER
Sales to specific major customers of the Company were as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ---------------------------
Percentage Percentage
Percentage of Accounts Percentage of Accounts
of Sales Receivable of Sales Receivable
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
SALES THROUGH ONE RETAIL
COMPANY (U.S.) [1997 - TWO] 28 32 38 79
== == == ==
SALES THROUGH ONE ART
PUBLISHING AGENT (U.S.) 50 41 27 -
== == ==
</TABLE>
15. COMPARATIVE FIGURES
Certain comparative figures have been reclassified and restated, where
necessary, to conform with the presentation adopted for 1998.
16. 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 may
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.
28
<PAGE>
PART III
Item 9. Not applicable.
Item 10. Directors and Executive Officers of the Registrant.
On July 14, 1998, the Company held a Special Shareholders Meeting. At that
meeting the shareholders voted in favour of the management slate of
directors, consisting of Simon Meredith, Roger Scarr, Michel van
Herreweghe, Francoise Jacquel and Roger Kirby.
Simon P. Meredith was elected a director of the Company and President and
Chief Operating Officer in November, 1994. Mr. Meredith is a Chartered
Accountant and was Vice President, Finance and Administration of Gormont
Limited (a manufacturer of high voltage electrical products) from April
1991 through December 1993. He was a consultant for Helix Investments
Limited (a private investment group) from October 1990 through March 1991
and Vice President, Finance and Administration of Diecut Group, Inc. (an
automotive parts supplier) from June 1987 through September 1990.
Roger Scarr is President of Zynex Corporation from 1989 to August 1997. He
is also President of HR Capital from 1995 to date.
Michel van Herreweghe is Director of Nickeldale Resources Inc. from 1988
through 1996. He was a Director of Aronos Multinational Inc. From 1991
though 1992; Director of Xxpert Rental Tool Inc. from 1993 through 1994;
CEO Oxford Securities Corporation (Bahamas) 1993 to present; Director
Commonwealth Asset Managers Limited (Bahamas) 1994 to June 1997. He was
appointed State of Florida Commissioner of Deeds 1994 to March 1998;
Director Creditanstalt Bank of Switzerland, A.G. 1996 to present.
Francoise Jacquel was Director of Xxpert Rental Tool Inc. from 1993 to
1994; Director and Vice President of Finance of Swiss Capital Funds Corp.
from 1994 to present; Director of First Canadian Securities Corporation
(Bahamas) from 1995 to June 1997; Director of Orford Resources Ltd. from
1994 through 1995; Director of Lignex Inc. 1995; Director of Harrington
Financial Inc. from 1995 through 1996.
Roger Kirby is President of Enviro-Lite International Inc; General Manager
of Can-Am Teck Inc. 1991; Vice-President Sales for Demax Inc. 1990;
President of Telephony Communications International Inc. from 1987 through
1990; President of Nickeldale Resources Inc. to November 1996.
Compliance With Section 16(a) of the Exchange Act
This item is not applicable because the Company is a foreign private issuer
within the meaning of Rule 3b-4 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the Company's securities are therefore
currently exempt from the provisions of Sections 14(a), 14(b), 14(c), 14(f)
and 16 of the Exchange Act.
29
<PAGE>
Item 11. Executive Compensation.
The following table sets forth the aggregate cash compensation paid for
services rendered to the Company during the last three fiscal years by all
individuals who served as the Company's Officers including C.E.O.
during each fiscal year.
<TABLE>
<CAPTION>
(In Canadian Dollars)
- -------------------------------------------------------------------------------------------------------------------
Long-Term
Compensation
Annual Compensation Awards
Name and Year Salary Bonus Other Annual Restricted Securities All
-------- ---- ------- ------ ------------ ---------- ---------- ---
Principal Position ($) ($) Compensation Stock Underlying Other
------------------ --- --- ------------- ----- ---------- -----
($) Awards ($) Options (#) Compensation ($)
--- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Simon Meredith 1998 -- -- 85,000(1) -- -- --
President 1997 -- -- 75,000(1) -- -- --
1996 -- -- 120,000(1) -- -- --
Roger Scarr -- -- -- -- -- -- --
Michel van Herreweghe -- -- -- -- -- -- --
Francoise Jacquel -- -- -- -- -- -- --
Roger Kirby -- -- -- -- -- -- --
</TABLE>
(1) Represents the fees paid in Canadian dollars to a consulting company
owned by Mr. Meredith. See "Employment and Consulting Agreements.
Employment and Consulting Agreements
In November 1994, the Company entered into a five-year consulting agreement
with The Merrick Group Limited, a company beneficially owned by Simon
Meredith. Under the terms of the contract, Mr. Meredith provides management
services to the Company for up to 100 hours per month as President and
Chief Operating Officer.
On October 1, 1997, the Company signed a one-year consulting agreement with
Creative Enterprises Inc. (hereinafter referred to as the "Consultant").
The Consultant is to provide consulting services in foreign countries
excluding Canada, including international managerial services,
distribution, sales and promotion, contract negotiations, financial
services, advertising and such other consulting services in the
international forum from time to time as agreed upon. In consideration for
the services rendered by the Consultant the Company paid a retainer to the
Consultant of US$105,000. A further consulting fee was paid December 18,
1997, of US$35,000 for a total of US$140,000. Either party may terminate
the Agreement by giving the party ninety (90) days written notice.
Stock Options
In July 1998, a Stock Option Plan (the "Plan") was approved by the
Shareholders. The Plan was designed to provide an added incentive for
effective service and performance to participating key employees (including
officers) and directors of the Company by affording them an opportunity to
increase their proprietary interest in the Company's success through
increased stock ownership.
30
<PAGE>
The maximum number of Common Shares for which options may be granted under
the Plan is 10% of the total common shares outstanding (subject to
adjustment in the event of a stock dividend, stock split or other change in
corporate structure).
The Plan may be administered by either the Board of Directors or a Stock
Option Committee consisting of three members who shall be appointed by the
Board of Directors (the "Committee"). The Board of Directors or, if acting,
the Committee has the authority to select optionees, to establish the
number of shares and other terms applicable to each option and to construe
the provisions of the Plan. The Plan may be amended or terminated at any
time by the Board of Directors of the Company without further approval of
the shareholders.
The Board of Directors or the Committee determines the option price per
share with respect to each option and fixes the period of each option, but
in no event may the option period be longer than 10 years. Options granted
under the Plan are nontransferable. No options were granted in fiscal 1998.
Subsequent to the year-end, pursuant to the option plan, subject to and
conditional upon any necessary regulatory approval or ruling, the Company
authorized the issue of up to 105,000 stock options to employees, officers
and directors. The number of options that may be granted to anyone is
subject to the approval of the Board of Directors. To date, no stock
options have been granted to any employee, officer or director. The options
commence December 1, 1998 and expire December 1, 2004, and at the option
exercise price of $US 0.25 per share.
Aggregate Option/SAR Exercises In Last Fiscal Year And Fiscal Year-End
Option/SAR Values
None.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
No one shareholder, including directors, officers and employees own more
than 5% of the common shares.
Item 13. Certain Relationships and Related Transactions.
It is the Company's policy that transactions between the Company and
persons or entities affiliated with the officers, directors, employees, or
shareholders of the Company, which relate to the operations of the Company,
will be on terms no less favorable to the Company than could have
reasonably been obtained in arm's-length transactions with independent
third parties.
See "Executive Compensation--Employment and Consulting Agreements" for a
description of certain employment and consulting arrangements with officers
and/or directors of the Company.
31
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) Exhibits
(b) Financial Statement Schedules.
Not applicable.
(c) Reports on Form 8-K.
1) Filing dated November 7, 1997, reporting that the Company's Board of
Directors had authorized the preparation of a Regulation S Offering,
whereby the Company offered, in a private placement transaction exempt
from registration under Regulation S, a total of 500 units, each unit
consisting of 1,000,000 shares of the Company's common stock at an
offering price of US$1,000 per unit. The first sale took place on
October 2, 1997.
2) Filing dated February 11, 1998, reporting the Company's recently
completed offering of its Securities under Regulation S, whereby a
total of 250,000,000 shares of the Company's Common Stock were issued
in consideration for the total gross receipt of US$250,000.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused to be signed on its behalf by the undersigned
thereunto duly authorized.
A.R.T INTERNATIONAL INC.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/
- ---------------------
Michel van Herreweghe Chairman of the Board Date 28 Feb. 1999
/s/
- ---------------------
Simon P. Meredith President Date 28 Feb. 1999
33
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> CDN
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> NOV-30-1998
<EXCHANGE-RATE> .65
<CASH> 110,873
<SECURITIES> 0
<RECEIVABLES> 147,516
<ALLOWANCES> 0
<INVENTORY> 207,402
<CURRENT-ASSETS> 453,610
<PP&E> 5,656,514
<DEPRECIATION> 5,582,157
<TOTAL-ASSETS> 548,050
<CURRENT-LIABILITIES> 1,326,343
<BONDS> 0
0
6,487,437
<COMMON> 2,233,961
<OTHER-SE> 11,775,000
<TOTAL-LIABILITY-AND-EQUITY> 548,050
<SALES> 1,197,639
<TOTAL-REVENUES> 1,197,639
<CGS> 784,356
<TOTAL-COSTS> 623,739
<OTHER-EXPENSES> 2,453,411
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97,863
<INCOME-PRETAX> (2,761,730)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,761,730)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,761,730)
<EPS-PRIMARY> (2.59)
<EPS-DILUTED> (2.59)
</TABLE>
