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 May 31, 2000
Commission File Number 0-16008
A.R.T. INTERNATIONAL INC.
98-0082514
5-7100 Warden Avenue, Markham, Ontario, L3R 5M7
Registrant's telephone number: (800) 278-4723
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 May 31, 2000: 4,786,551
<PAGE>
A.R.T. INTERNATIONAL INC.
INDEX TO
QUARTERLY REPORT ON
FORM 10-Q
FOR THE QUARTER ENDED
May 31, 2000
PART I PAGE [S]
Balance sheets:
As at May 31, 2000, and November 30, 1999 3-4
Statements of Accumulated Deficit 5
For the six months ended May 31, 2000
For the six months ended May 31, 1999
Statements of Loss 6
For the three months ended May 31, 2000
For the three months ended May 31, 1999
For the six months ended May 31, 2000
For the six months ended May 31, 1999
Statements of Cash Flow 7
For the six months ended May 31, 2000
For the six months ended May 31, 1999
Notes to Financial Statements 8-15
Item 2.
Management's discussions and analysis of financial
condition and results of operations. 16-19
PART II
SIGNATURES 20
<PAGE>
A.R.T. INTERNATIONAL INC.
BALANCE SHEETS
(IN CANADIAN DOLLARS)
ASSETS
<TABLE>
<CAPTION>
6 Months Ended 12 Months Ended
May 31, 2000 Nov.30, 1999
(Unaudited) (Audited)
(Note 2)
<S> <C> <C>
-------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash $ 59,806 $ 10,861
Accounts receivable 77,423 121,546
Inventory (Notes 2(a) and 3) 174,162 136,994
Loan to affiliate 70,000 0
Prepaid expenses and deposits 13,026 7,905
------------------------------------------------------------------------------------------------------
394,417 277,306
CAPITAL ASSETS
Equipment, furniture & fixtures 642,150 641,821
Molds 150,000 150,000
Leasehold improvements 288,958 288,958
------------------------------------------------------------------------------------------------------
1,081,108 1,080,779
Less: Accumulated depreciation 1,039,467 1,020,148
------------------------------------------------------------------------------------------------------
41,641 60,631
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
Investment in affiliated company
(Note 4) 260,000 0
Inventories (Notes 2(a) and 3) 40,000 38,647
------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 736,059 $ 376,585
======================================================================================================
</TABLE>
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
<TABLE>
<CAPTION>
6 Months Ended 12 Months Ended
May 31, 2000 Nov.30, 1999
(Unaudited) (Audited)
(Note 2)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and
accrued liabilities $ 642,794 $ 564,655
Notes payable (Note 5) 645,716 627,635
------------------------------------------------------------------------------------------------------
1,288,510 1,192,290
------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,288,510 1,192,290
CAPITAL STOCK (Note 6)
Preference "A" 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 2,928,961 2,248,961
------------------------------------------------------------------------------------------------------
9,466,398 8,786,398
CONTRIBUTED SURPLUS 11,775,000 11,775,000
DEFICIT (21,793,849) (21,377,103)
-------------------------------------------------------------------------------------------------------
(552,451) (815,705)
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 736,059 $ 376,585
======================================================================================================
</TABLE>
The accompanying notes form an integral part of these financial statements.
4
<PAGE>
A.R.T. INTERNATIONAL INC.
STATEMENTS OF ACCUMULATED DEFICIT
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
6 Months Ended 6 Months Ended
May 31, 2000 May 31, 1999
(Unaudited) (Unaudited)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deficit - beginning of period $ (21,377,103) $ (21,274,691)
Add - net loss (416,746) (118,254)
-------------------------------------------------------------------------------------------------------
Deficit - end of period $ (21,793,849) $ (21,392,945)
=======================================================================================================
</TABLE>
The accompanying notes form an integral part of these financial statements.
5
<PAGE>
A.R.T. INTERNATIONAL INC.
STATEMENTS OF LOSS
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
3 Mths Ended 3 Mths Ended 6 Mths Ended 6 Mths Ended
May 31, 2000 May 31,1999 May 31, 2000 May 31, 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SALES $ 176,236 $ 180,950 $ 353,473 $ 607,319
COST OF GOODS SOLD 148,916 146,624 299,367 383,925
-------------------------------------------------------------------------------------------------------------
GROSS PROFIT (LOSS) 27,320 34,326 54,106 223,394
OPERATING EXPENSES
Selling general
& administrative 197,687 114,458 283,501 215,397
-------------------------------------------------------------------------------------------------------------
Operating income/(loss) (185,367) (80,132) (229,395) 7,997
OTHER EXPENSES
Amortization 7,304 10,398 11,304 16,050
Note interest 10,689 17,482 22,108 35,201
Loss from affiliate 140,000 0 140,000 0
Other expenses 939 0 13,939 75,000
-------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 158,932 27,880 187,351 126,251
-------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (344,299) $ (108,012) $ (416,746) $ (118,254)
=============================================================================================================
NET LOSS PER COMMON SHARE $0.14 $0.10 $0.16 $0.11
------------------------------------------------------------------------------------------------------------
WEIGHTED AVE.NUMBER
OF COMMON SHARES 2,536,551 1,086,551 2,536,551 1,086,551
-------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes form an integral part of these financial statements
6
<PAGE>
A.R.T. INTERNATIONAL INC.
STATEMENTS OF CASH FLOW
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
6 Months Ended 6 Months Ended
May 31, 2000 May 31, 1999
(Unaudited) (Unaudited)
<S> <C> <C>
Cash was provided by (applied to):
OPERATING ACTIVITIES
Net loss for period $ (416,746) $ (118,254)
Add: Items not requiring an
outlay of cash
Depreciation 19,320 17,448
------------------------------------------------------------------------------------------------------
(397,426) (100,806)
Accounts receivable 44,123 59,270
Inventories - current & long-term (38,521) 3,412
Loan to affiliate (70,000) 0
Prepaid expenses and deposits (5,121) (8,932)
Accounts payable and accrued
liabilities 78,139 (33,044)
Accounts payable - related party 0 0
Customer deposits 0 0
------------------------------------------------------------------------------------------------------
Cash provided by (used by)
operating activities (388,806) (80,100)
INVESTMENT ACTIVITIES
Investment in affiliated company (net
of affiliate losses $140,000) (260,000) 0
Acquisition of capital assets
and art reproduction rights (330) 0
------------------------------------------------------------------------------------------------------
Cash provided by (used by)
investment activities (260,330) 0
FINANCING ACTIVITIES
Common shares issued 680,000 5,000
Notes payable 18,081 22,200
------------------------------------------------------------------------------------------------------
Cash provided by (used by)
financing activities 688,081 27,200
------------------------------------------------------------------------------------------------------
INCREASE /(DECREASE) IN CASH 48,945 (52,900)
CASH, beginning of period 10,861 110,873
------------------------------------------------------------------------------------------------------
CASH, end of period $ 59,806 $ 57,973
======================================================================================================
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
May 31, 2000
(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 May 31,
2000, and May 31, 1999, have been prepared in accordance with Canadian generally
accepted accounting principles (GAAP) applied on a consistent basis. The balance
sheet at November 30, 1999 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 May 31, 2000, and November 30, 1999, and the results of their operations and
cash flows for the periods ended May 31, 2000, and May 31, 1999, and, should be
read in conjunction with the audited financial statements for the year ended
November 30, 1999. 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. These three-year periods are
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.
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
undiscounted cash flows to recover their carrying cost. 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) 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.
(d) Management Representations
In the opinion of management, all adjustments necessary for a fair presentation
of the financial position at May 31, 2000 and November 30, 1999 and the results
of operations, changes in financial position and related note disclosures for
the period ended May 31, 2000 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>
May 31, 2000 November 30, 1999
------------------------------------------ ------------------------------------------
Provision for Provision for
Obsolete and Obsolete and
Gross Slow-Moving Net Gross Slow-Moving Net
Amount Inventories Amount Amount Inventories Amount
------ ----------- ------ ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Finished Goods $ 105,000 $ - $ 105,000 $ 75,583 $ (3,104) $ 72,479
Work-in-Process 60,000 - 60,000 60,517 - 60,517
Raw Materials 49,162 - 49,162 42,645 - 42,645
------------------------------------------ ------------------------------------------
$ 214,162 $ - $ 214,162 $ 178,745 $ (3,104) $ 175,641
======== ======= ========== ========== ========== =========
Current Portion .............................$ 174,162.......................................$ 136,994
Non-current Portion............................. 40,000.................................... 38,647
-------- --------
$ 214,162 $ 175,641
========== =========
</TABLE>
4. INVESTMENT IN AFFILIATE
On December 15, 1999, the Company executed an agreement with 1375400 Ontario
Limited, operating its business as "Buck a Day Company" [hereinafter
collectively referred to as "Buck"] whereby the Company acquired the right to
purchase a 40% interest in Buck for $400,000.
As of May 31, 2000 the Company had paid Buck $400,000. Under the agreement, the
Company has the right to require Buck to repurchase all the shares from the
Company at 120% of the amount originally paid if a third party wishes to
purchase Buck, prior to an IPO.
On May 1, 2000 the Company advanced Buck $70,000 by way of an interest bearing
demand promissory note. At the Company's option, the note is convertible into
10% of the total outstanding common shares of Buck, which would result in the
Company owning 50% of Buck.
In the 5 months period ending May 31, 2000 Buck realized start-up losses of
$350,000. Accordingly, under equity accounting for long-term investments, the
Company has booked its share of these losses, being $140,000. The investment of
$400,000 in Buck is carried net of its share of these losses at $260,000.
5. NOTES PAYABLE
The Company is in default of principal and interest payments on these notes
payable that bear interest at 10%. Consequently, the total amount due, including
accrued interest and principal, has been reflected as a current liability.
<TABLE>
<CAPTION>
2000 1999
------------------------------- ------------------------------
U.S. Dollars Cdn. Dollars U.S. Dollars Cdn. Dollars
<S> <C> <C> <C> <C>
Principal $ 315,000 $ 459,900 $ 315,000 $ 464,625
Accrued Interest 127,422 185,816 110,515 163,010
-----------------------------------------------------------------------------------------------------
$ 442,422 $ 645,716 $ 425,515 $ 627,635
========== ========== ========= =========
</TABLE>
During 1999, certain notes payable were reassigned to new note holders.
Penalties, which were accrued in previous years, were reversed, as the note
holders have agreed to a postponement of payment of interest and repayment of
principal until September 30, 2000.
10
<PAGE>
These notes payable and accrued interest are secured by a general security
agreement over all the assets of the Company.
6. CAPITAL STOCK
(a) The Company is authorized by its Articles of Incorporation to issue an
unlimited number, except where noted, of the following classes of shares:
(i) Non-voting, redeemable, class "A" preference shares, series 1 and series 2;
convertible into common shares and have the right to cumulative dividends, as
and when declared, in the amount of U.S. $0.60 per share per annum, payable
quarterly in the first year of issuance and annually thereafter subject to the
provisions of The Ontario Business Corporations Act. The first year dividends
are to be paid in cash, however, future dividend payments are payable in cash or
common shares at the discretion of the directors.
The directors have authorized 805,000 class "A" preference shares, series 1, of
which 805,000 are issued, each of which is convertible into 0.048 common shares.
The directors have authorized an unlimited number of class "A" preference
shares, series 2, of which 466,941 shares are issued, each of which is
convertible into 0.24 common shares.
(ii) Class "B" preference shares
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
-----------------------------------------------------------------
2000 1999
-----------------------------------------------------------------
Number of Number of
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance - Beginning of Year 1,386,551 $ 2,248,961 1,066,551 $ 2,183,961
Add - Shares Issued During Year 3,400,000 680,000 320,000 65,000
-------------------------------------------------------------------------------------------------------------
Balance - End of Year 4,786,551 $ 2,928,961 1,386,551 $ 2,248,961
=============================================================================================================
</TABLE>
During the first six months of the 2000 fiscal year the Company issued 3,400,000
common shares for total proceeds of $680,000. The shares were issued pursuant to
11
<PAGE>
the August 1999 Regulation S offering. Proceeds from the offering were used as
follows:
Investment in affiliate (see note 4) $ 400,000
Loan to affiliate 70,000
Direct marketing TV program 100,000
General working capital 110,000
-------
$ 680,000
As of June 30, 2000 the Company still had to issue a treasury order for 500,000
of the 3,400,000 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. Subsequent to the quarter end, the Company
issued an additional 50,000 class "C" common shares on June 15, 2000 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
-------------------------------------------
May 31 2000 Nov. 30 1999
----------- ------------
<S> <C> <C>
Bal. - beginning of period 118,700 13,800
Less - options and warrants expired 0 100
------------------------------------------------------------------------------------------------------
Balance of options and warrants 118,700 13,700
Add - Options issued during the year 119,800 105,000
------------------------------------------------------------------------------------------------------
238,500 118,700
------------------------------------------------------------------------------------------------------
</TABLE>
The options and warrants granted and outstanding as at May 31, 2000 are as
follows:
Common shares
under options
or subject
to warrants Exercise price Expiry date
----------- -------------- -----------
100 $US 375.00 2000
4,800 $US 2.50 2000
4,800 $US 50.00 2000
4,000 $US 62.50 2002
105,000 $US 0.25 2004
119,800 $US 0.25 2005
-------
118,700
=======
During the 2000 year, the Company issued 119,800 common share
stock options, pursuant to an option plan approved by the
shareholders in July 1998. The stock options provide 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 were issued
at an option price of $0.25 per stock option. These stock options
have not been registered.
12
<PAGE>
7. DIVIDENDS
(a) Class "A" Preference Shares, Series 1
The holders of the class "A" preference shares, series 1, are entitled to
receive as when declared by the directors, a fixed preferential cumulative
dividend at the rate of U.S. $0.60 per annum, payable annually in cash or common
shares at the discretion of the directors.
The Company anticipates that any subsequent dividends declared and payable on
the preference shares in the foreseeable future will be paid in common shares.
The dividends payable, but not yet declared by the Company, are as follows:
Period ended Amount US$
------------ ----------
December 1, 1993 $120,750
December 1, 1994 483,000
December 1, 1995 483,000
December 1, 1996 483,000
December 1, 1997 483,000
December 1, 1998 483,000
December 1, 1999 483,000
May 31, 2000 241,500
-------------------------------------------
Total $ 3,260,250
(b) Class "A" Preference Shares, Series 2
The holders of the class "A" preference shares, series 2, are entitled to
receive as and when declared by the directors, a fixed preferential cumulative
dividend at the rate of $US 0.60 per share per annum, payable in cash for the
first year after issuance and annually thereafter in cash or common shares at
the discretion of the directors.
The Company anticipates that any dividends declared and payable, subsequent to
the first year, on the preference shares in the foreseeable future will be paid
in common shares.
The dividends payable, but not yet declared by the Company, are as
follows:
Period ended Amount US$
------------ ----------
December 1, 1994 $140,082
December 1, 1995 280,164
December 1, 1996 280,164
December 1, 1997 280,164
December 1, 1998 280,164
December 1, 1999 280,164
May 31, 2000 140,082
------------------------------------------
Total 1,680,984
8. COMMITMENTS AND CONTINGENT LIABILITIES
(a) Lease obligations
Minimum future annual lease obligations, net of occupancy costs, for office,
showroom and factory premises are approximately $54,000 annually until
13
<PAGE>
13 January 31, 2001, and thereafter approximately $64,000 annually until January
31, 2003.
9. RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The financial statements of the Company are prepared in accordance with Canadian
generally accepted accounting principles (Canadian GAAP). These principles
differ in some respects from United States generally accepted accounting
principles (U.S. GAAP).
The effect of such differences on the Company's balance sheet and statement of
loss is as follows:
(a) Balance sheet:
<TABLE>
<CAPTION>
May 31, 1999 November 30, 1999
------------- -----------------
Canadian U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ $ $ $
Capital stock issued 9,466,398 11,507,941 8,786,398 10,827,941
---------------------------------------------------------------------------------------------------------
Accumulated Deficit (21,793,849) (23,851,156) (21,377,103) (23,434,861)
----------------------------------------------------------------------------------------------------------
(b) Statement of Loss:
May 31, 2000 May 31, 1999
------------ ------------
Net loss under Canadian
& U.S. GAAP $ (416,746) $(118,254)
Net loss per common
share under
U.S. & Canadian GAAP $(0.16) $(0.11)
Weighted average number
of shares U.S. & Cdn GAAP 2,536,551 1,086,551
</TABLE>
10. 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 $6,587,180 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>
2000 2,230,000 0 2,230,000
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
2006 88,687 0 88,687
-------------------------------------------------------------------------------------------
$4,657,180 $1,930,000 $6,587,180
</TABLE>
14
<PAGE>
11. GOING CONCERN
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.
12. RECLASSIFICATION
Certain figures with respect to the three-month period ended May 31, 1999 have
been reclassified to conform with the presentation adopted for the three-month
period ended May 31, 2000.
13. SUBSEQUENT EVENT
Subsequent to the balance sheet date the Company issued 50,000 class "C" common
shares for a total consideration of $50,000. The proceeds will be utilized to
pay for the annual general and special shareholder's meeting and other operating
costs.
The meeting is scheduled for July 14, 2000 and includes a special resolution
amending the articles of the Company, whereby effective July 16, 2000 the Class
A Preference Shares, Series 1 and 2, will be converted into and become common
shares, at the rate of 0.5837142 and 0.711214 common shares, for each Series 1
and Series 2 Class A Preference Share respectively.
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 $344,299 for the three-month period ended May
31, 2000, which brought the total losses for the first six months to $416,746.
Sales revenues were $176,598 for the period of three months ended May 31, 2000,
very similar to the first quarter sales of $176,875.
The y-t-d net loss includes the Company's equity-share of losses from start-up
operations of its affiliated company of $140,000.
In addition, the Company's 2nd quarter loss included expenses for its TV
commercial production and initial media bookings of approximately $100,000.
The Company has raised $670,000 in equity financing in the first six months of
fiscal 2000. $400,000 of the proceeds was utilized to purchase a 40% ownership
in a direct marketing company. In addition, the Company has advanced a demand
loan of $70,000 with the same company, which is convertible into securities,
whereby ART would own 50% of the issued and outstanding common shares. The
balance of the proceeds was invested in marketing activities.
Notwithstanding, 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 investors and creditors.
Sales
The Company continues to be very reliant on a few customers for the majority of
its sales revenues. In the six months ended May 31, 2000, the Company recorded
sales to its main retail customer of $209,110, which represented 59% of its
total sales revenues in that period. Sales to its major publishing client were
$nil in the first six months of 2000, compared to $258,830 in the first half of
fiscal 1999. The Company has signed an agreement with this publishing client to
produce two images during fiscal 2000. This future business is approximately
equal to $100 - 150,000 in gross sales revenues.
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Subsequent to the balance sheet date the Company was awarded the first of the
two contracts to reproduce a painting by Alan Bean, an Astronaut from the NASA
Apollo Space Program. The texture and brushstrokes are being exactly reproduced
with the Company's patented technology, whereby the mold was poured directly
onto the original painting. Each reproduction will be further enhanced by the
application, during the Company's production process, of particles from
pulverized material that accompanied Alan Bean to the moon.
During the second quarter the Company produced a TV commercial in order to
market its products directly to consumers. The initial media advertising was
placed on Canadian TV stations, including Report on Business channel. Sales
orders will be taken by the Company's affiliate, which produced the TV
commercial. The Company plans to place media on United States TV stations in the
near future, although the extent of this is dependant on raising additional
capital.
In addition, the Company has contracted with a consultant to produce its first
official web site. The web site will focus its content on raising awareness of
the Company's product and processes.
Owing to the Company's limited resources to finance new initiatives, or to
actively participate in 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 in discussions with several major publishing
customers, there can be no guarantee that these efforts will be successful in
generating new revenues.
The Company believes that no other known reproduction processes compare in
quality with the Company's processes in accurately reproducing brush strokes and
texture, and the colour intensity and other reproduction characteristics are
believed to be at least equal to any other known reproduction process.
The Company's success in the marketplace will depend upon raising additional
capital, creating greater awareness of its products through aggressive
advertising, participation 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 $54,106 in the first quarter of 2000.
This was a reduction over the previous fiscal year's gross profit of $223,394
and is mainly attributable to the lower sales revenues. Gross sales revenues for
the first six months were $35l,473 versus $607,319 in fiscal 1999.
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Selling, General and Administration expenses
These expenses were higher in the second quarter, at a $197,687 compared to the
first quarter's at $85,814. The increase is attributable to the direct marketing
costs producing the TV commercials and running them on Canadian TV stations.
Liquidity and Capital Resources
Unless the Company is able to significantly increase sales from the level
experienced year to date in 2000, or continue to 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 continue to obtain additional working
capital from sale of its equity. If the Company is unable to increased sales, or
obtain additional working capital from loans or from sale of its equity, it
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 shares.
The Company believes that until the capital structure of the Company is
simplified, including the elimination of the on-going diluting impact of the
Class "A" Preference Share cumulative dividends, the Company's ability to raise
additional capital will be severely restricted.
The Company has not declared and paid dividends on its `Class A preference
shares Series One' since May 1994. In addition, the Company has never declared
and paid any dividends on its `Class "A" preference shares Series Two'. Except
for the first year of dividends on the `Series Two' shares, which are payable in
cash, the Company can elect to pay dividends in common shares. As of May 31,
2000, the Company had total dividends payable, but not yet declared of
US$3,260,250 and US$1,680,984 on its `Series One and Two Class A preference
shares' respectively. The Company does not anticipate declaring dividends on any
of its securities for the foreseeable future.
The Company has scheduled an annual general and special meeting of shareholders
on July 14, 2000, whereby the shareholders are requested to vote on approving a
special resolution amending the articles of the corporation. If approved by the
required majority, effective July 16, 2000 the issued and outstanding Class A
Preference Shares, series 1 and 2, will be converted into and become common
shares at the rate 0.5837142 and 0.711214 common shares for each Class A
Preference share, series 1 and 2 respectively. This will result in the expiry of
the undeclared dividends of US$4,941,234.
In August 1999 the Company's Board of Directors approved a third offering of its
common stock under Regulation S. As of May 31, 2000, the Company had issued
2,900,000 shares for total proceeds of $580,000 and, received $100,000 in
subscriptions for an additional 500,000 shares. Proceeds of $400,000 were
invested in a capital investment venture, whereby the Company has purchased a
40% holding of The Buck A Day Company ("Buck") for $400,000. $70,000 was
advanced to Buck under an
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interest bearing demand promissory note. $100,000 was expended on the TV
commercial production and initial placement of media on Canadian TV channels.
The balance of $110,000 was utilized for working capital. As of June 30, 2000
the Company has raised an additional $50,000 through the sale of class "C"
common shares. The total proceeds were used to complete the arrangements of the
annual general and special shareholder's meeting, scheduled for July 14, 2000.
Under the agreement with Buck, the Company has the right to require Buck to
repurchase the shares sold to the Company for 120% of its original investment,
equal to $500,000, provided the Company exercises its rights in this regard, and
only in the event that a third party wishes to purchase Buck, prior to Buck
filing its IPO.
Upon the completion of the above noted transactions the Company will have issued
and outstanding 4,786,551 common shares. However, the Class C Common Shares,
including the June 14 issuance of 50,000 shares, represent a total of 10,000,000
votes. Therefore, the Class C Common shareholders have control of the Company in
aggregate, including the power to appoint its Board of Directors and control the
Company's operations.
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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, 1999, and incorporated herein by reference.
(ii) Dividends. As reported in this Company's Quarterly Report on Form
10-Q for the quarter ended May 31, 2000, in the section on Liquidity and Capital
Resources under Management's Discussion and Analysis, and incorporated herein by
reference.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
A.R.T. INTERNATIONAL INC.
Dated: June 30, 2000
/s/ Michel van Herreweghe
-------------------------------------
By: Michel van Herreweghe
Chairman
/s/ Simon Meredith
-------------------------------------
By: Simon Meredith
President
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