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 February 28, 1999
Commission File Number 0-16008
A.R.T. INTERNATIONAL INC.
98-0082514
5-7100 Warden Avenue, Markham, Ontario, L3R 8B5
Registrant's telephone number: (905) 477-0252
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 the number of shares outstanding of each of the issuer's
classes of common stock:
Common Shares outstanding as at February 28, 1999: 1,066,551
1
<PAGE>
A.R.T. INTERNATIONAL INC.
INDEX TO QUARTERLY
REPORT ON
FORM 10-Q
FOR THE QUARTER ENDED
February 28, 1999
<TABLE>
<CAPTION>
<S> <C>
PART I PAGE [S]
Balance sheets:
As at February 28, 1999, and November 30, 1998 3-4
Statements of Accumulated Deficit 5
For the three months ended February 28, 1999
For the three months ended February 28, 1998
Statements of Loss 6
For the three months ended February 28, 1999
For the three months ended February 28, 1998
Statements of Cash Flow 7
For the three months ended February 28, 1999
For the three months ended February 28, 1998
Notes to Financial Statements 8-15
Item 2.
Management's discussions and analysis of financial
condition and results of operations. 16-18
PART II
SIGNATURES 19
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
A.R.T. INTERNATIONAL INC.
BALANCE SHEETS
(IN CANADIAN DOLLARS)
ASSETS
3 Months Ended 12 Months Ended
February 28,1999 Nov.30, 1998
(Unaudited) (Audited)
(Note 2)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 98,369 $ 110,873
Accounts receivable 139,668 147,513
Inventory (Notes 2(a)and 3) 183,990 187,319
Prepaid expenses and deposits 17,044 7,905
------------------------------------------------------------------------------------------------------
439,071 453,610
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 1,217,022 1,209,232
------------------------------------------------------------------------------------------------------
66,566 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 3) 20,000 20,083
------------------------------------------------------------------------------------------------------
TOTAL ASSETS $525,638 $548,050
======================================================================================================
The accompanying notes form an integral part of these financial statements.
3
<PAGE>
A.R.T. INTERNATIONAL INC.
BALANCE SHEETS
(IN CANADIAN DOLLARS)
LIABILITIES AND STOCKHOLDERS' EQUITY
3 Months Ended 12 Months Ended
February 28,1999 Nov.30, 1998
(Unaudited) (Audited)
(Note 2)
------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and
accrued liabilities $ 613,503 $ 627,516
Current portion of long-term debt 700,670 698,827
------------------------------------------------------------------------------------------------------
1,314,174 1,326,343
------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,314,174 1,326,343
CAPITAL STOCK (Note 5)
Preference shares Series 1 3,701,809 3,701,809
Series 2 2,785,628 2,785,628
Class C Common 50,000 50,000
Common shares 2,183,961 2,183,961
------------------------------------------------------------------------------------------------------
8,671,398 8,671,398
CONTRIBUTED SURPLUS 11,775,000 11,775,000
DEFICIT (21,284,933) (21,274,691)
------------------------------------------------------------------------------------------------------
(788,535) (778,293)
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 525,638 $ 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)
3 Months Ended 3 Months Ended
February 28, 1999 February 28, 1998
(Unaudited) (Unaudited)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deficit - beginning of period $(21,274,691) $(18,512,961)
Add - net loss (10,242) (262,341)
-------------------------------------------------------------------------------------------------------
Deficit - end of period $(21,284,933) $ (18,775,302)
=======================================================================================================
</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 Months Ended 3 Months Ended
February 28, 1999 February 28,1998
(Unaudited) Unaudited)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
SALES $426,369 $161,753
COST OF GOODS SOLD 237,301 182,203
------------------------------------------------------------------------------------------------------
GROSS PROFIT (LOSS) 189,067 (20,450)
OPERATING EXPENSES
Selling general & administrative 106,591 152,838
------------------------------------------------------------------------------------------------------
Operating income/(loss) 82,477 (173,288)
OTHER EXPENSES
Amortization of patents 0 63,000
Note interest 17,719 13,053
Other expenses 75,000 13,000
------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 92,719 89,053
------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (10,242) $(262,341)
======================================================================================================
NET LOSS PER COMMON SHARE $0.01 $0.25
------------------------------------------------------------------------------------------------------
WEIGHTED AVE. NUMBER
OF COMMON SHARES 1,066,551 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)
3 Months Ended 3 Months Ended
February 28, 1999 February 28, 1998
(Unaudited) (Unaudited)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash was provided by (applied to):
OPERATING ACTIVITIES
Net loss for period $ (10,242) $ (262,341)
Add: Items not requiring an
outlay of cash
Amortization 0 63,000
Depreciation 7,789 14,091
-------------------------------------------------------------------------------------------------------
(2,453) (185,250)
Accounts receivable 7,845 52,846
Inventories - current & long-term 3,412 11,986
Prepaid expenses and deposits (9,138) (10,903)
Accounts payable and accrued liabilities (14,013) 19,976
Accounts payable - related party 0 (3)
Customer deposits 0 (11,200)
-------------------------------------------------------------------------------------------------------
Cash provided by (used by)
operating activities (14,347) (123,334)
INVESTMENT ACTIVITIES
Acquisition of capital assets
and art reproduction rights 0 (2,890)
-------------------------------------------------------------------------------------------------------
Cash provided by (used by)
investment activities 0 (2,890)
FINANCING ACTIVITIES
Notes payable 1,843 10,270
-------------------------------------------------------------------------------------------------------
Cash provided by (used by) financing activities 1,843 10,270
-------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE) IN CASH (12,504) (115,954)
CASH, beginning of period 110,873 185,370
-------------------------------------------------------------------------------------------------------
CASH, end of period $ 98,369 $ 69,416
=======================================================================================================
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
February 28, 1999
(IN CANADIAN DOLLARS)
1. INCORPORATION AND OPERATIONS
The Company was incorporated in Canada on January 24, 1986, under
The Ontario Business Corporations Act. The Company's primary
business is the production, distribution and marketing of fine art
reproductions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The un-audited financial statements of the Company for the periods
ended February 28, 1999, and February 28, 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
February 28, 1999, and November 30, 1998, and the results of their
operations and cash flows for the periods ended February 28, 1999,
and February 28, 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
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.
8
<PAGE>
(b) Capital Assets
Capital assets are recorded at cost and are amortized at rates
sufficient to substantially amortize the cost of the assets over
their estimated useful lives on the following basis:
Equipment, Furniture and Fixtures -- 20 % declining balance.
Leasehold Improvements -- Straight-line over the term of the
lease.
Molds are recorded at cost and are amortized on the
units-of-production basis, which is sufficient to substantially
amortize the cost of the molds over their estimated useful lives.
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 February 28, 1999 and
November 30, 1998 and the results of operations, changes in
financial position and related note disclosures for the period
ended February 28, 1999 and 1998 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.
9
<PAGE>
3.INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
February 28, 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 $ 80,489 $ (2,946) $ 77,543 $ 81,058 $ (2,946) $ 78,112
Work-in-Process 854,046 (805,053) 48,993 855,756 (805,053) 50,703
Raw Materials 77,454 - 77,454 78,587 - 78,587
----------- ----------- ---------- ---------- ----------- ---------
$ 1,011,989 $ (807,999) $ 203,990 $1,015,401 $ (807,999) $ 207,402
=========== =========== ========== ========== =========== =========
Current Portion .....................................$ 183,990.......................................$ 187,319
Non-current Portion............................... 20,000.................................... 20,083
---------- ---------
$ 203,990 $ 207,402
========== =========
</TABLE>
4. 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 $ 466,074 $ 315,000 $ 481,950
Accrued Interest 153,714 123,596 141,750 216,877
----------- ---------- ---------- ----------
$ 468,714 $ 700,670 $ 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.
5. 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.
10
<PAGE>
(ii) Class "B" preference shares
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 0 0 0 0
-------------------------------------------------------------------------------------------------------------
1,066,551 2,183,961 266,629,785 2,183,961
Less - Reverse Stock Split
of 250:1 0 0 265,563,234 0
-------------------------------------------------------------------------------------------------------------
Balance - End of Year 1,066,551 $ 2,183,961 1,066,551 $ 2,183,961
=============================================================================================================
</TABLE>
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
---------------------------------------------
Feb. 28, 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
-------------- -------------
Balance of options and warrants 13,800 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>
6. 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
February 28, 1999 120,750
-----------
Total $2,656,500
===========
(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 $US 0.60 per share
per annum, payable in cash for the first year after issuance and
annually thereafter in cash or common shares at the discretion of
the directors.
The Company anticipates that any dividends declared and payable,
subsequent to the first year, on the preference shares in the
foreseeable future will be paid in common shares.
12
<PAGE>
The dividends payable, but not yet declared by the Company, are as
follows:
Period ended Amount US$
------------ ----------
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
February 28, 1999 70,041
----------
Total 1,330,779
==========
7. 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.
8. 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>
February 28, 1998 November 30, 1998
----------------- -----------------
Canadian U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
---- ---- ---- ----
<S> <C> <C> <C> <C>
Capital stock issued $ 8,721,398 $ 10,762,941 $ 8,721,398 $ 10,762,941
---------------------------------------------------------------------------------------------------------
Accumulated Deficit (21,284,933) (23,332,691) (21,274,691) (23,322,449)
----------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
(b) Statement of Loss:
<TABLE>
<CAPTION>
February 28, 1999 February 28, 1998
----------------- -----------------
<S> <C> <C>
Net loss under Canadian
& U.S. GAAP $(10,242) $(262,341)
Net loss per common
share under
U.S. & Canadian GAAP $(0.01) $(0.25)
Weighted average number
of shares U.S. & Cdn GAAP 1,066,551 1,066,551
</TABLE>
9. INCOME TAXES
There is 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 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>
1998 976,000 0 976,000
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
-------------------------------------------------------------------------------------------
$5,544,493 $1,930,000 $7,474,493
===========================================================================================
</TABLE>
10. 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.
11. RECLASSIFICATION
Certain figures with respect to the three-month period ended
February 28, 1998 have been reclassified to conform with the
presentation adopted for the three-month period ended February 28,
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 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
14
<PAGE>
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.
15
<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 $10,242 for the three month period
ended February 28, 1999, which was an improvement to the net loss of
$262,341 for the same period in 1998.
Sales revenues at $426,369 for the period of three months ended
February 28, 1999, were also an improvement over fiscal 1998, at
$161,753.
The Company reported a gross profit of $189,067 for the first quarter
in fiscal 1999, which was attributable to the higher revenues and lower
fixed costs in the cost of sales. In the comparable quarter of 1998 the
Company reported a gross loss, resulting from the lower sales revenues
for that period.
In 1998, higher expenses contributed to a net loss of $262,341 compared
to the net loss in 1999 of $10,242. The higher expenses, in 1998, are
attributable to increased consulting fees and amortization charges on
the Company's patents of approximately $120,000 in aggregate. In the
first quarter of 1999, there were no consulting fees or amortization;
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 accounts receivable from its largest
customer, who is experiencing significant cash flow problems and has
had its credit rating down-graded by Dun and Bradstreet.
Operating cash flow for the first three months was negative at $14,347,
but an improvement compared to the same period in 1998, when the
Company recorded a negative cash flow of $123,334. The Company's
working capital balance remained negative at $875,103, as at February
28, 1999 compared to negative working capital of $872,733 at year-end
November 30, 1998.
There is substantial doubt that the Company has the ability to realize
the carrying value of its assets reported in the financial statements
which is dependant upon the attainment of profitable operations and the
continued financial support of its creditors.
16
<PAGE>
Sales
The Company continues to be very reliant on a few customers for the
majority of its sales revenues. In the three months ended February 28,
1999, the Company recorded sales to its two main retail and publishing
customers of $94,024 and 253,619 respectively, which represents 81% of
its total sales revenues in that period.
Subsequent to the 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, 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
addition capital, creating greater awareness of its products through
aggressive advertising, attendance at trade shows, as well as updating
its library of images and providing new point-of-sale materials.
Gross Profit
The Company reported a gross profit of $189,067 in the first quarter of
1999. This was an improvement over the previous fiscal year and is
mainly attributable to the higher sales revenues.
Liquidity and Capital Resources
Unless the Company is able to significantly increase sales from the
level experienced year to date in 1998, or raise additional capital, it
may not be able to perform all of its obligations in a timely manner.
Although the Company is aggressively seeking additional sales from its
major customers, as well as from other sources, no assurance can be
given that the Company will be successful. The Company does not have
sources for loans. Also, there is no assurance that the Company will be
able to obtain additional working capital from sale of its equity. In
the absence of increased sales, the Company's present inability to
obtain additional working capital from loans or from sale of its equity
could have a material adverse effect on the ability of the Company to
17
<PAGE>
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 November 30, 1998, the Company had
total dividends payable, but not yet declared of US$2,656,500 and
US$1,330,779 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 1.275 million shares.
The Company does not anticipate declaring dividends on any of its
securities for the foreseeable future.
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 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.
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 February 28, 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: April 1, 1999
/s/ Michel van Herreweghe
-------------------------------------
By: Michel van Herreweghe
Chairman
/s/ Simon Meredith
-------------------------------------
By: Simon Meredith
President
19
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<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> FEB-28-1999
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6,487,437
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