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 29, 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: (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 29, 2000: 2,886,551
1
<PAGE>
A.R.T. INTERNATIONAL INC.
INDEX TO
QUARTERLY REPORT ON
FORM 10-Q
FOR THE QUARTER ENDED
February 29, 2000
PART I PAGE [S]
Balance sheets:
As at February 29, 2000, and November 30, 1999 3-4
Statements of Accumulated Deficit 5
For the three months ended February 29, 2000
For the three months ended February 28, 1999
Statements of Loss 6
For the three months ended February 29, 2000
For the three months ended February 28, 1999
Statements of Cash Flow 7
For the three months ended February 29, 2000
For the three months ended February 28, 1999
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
2
<PAGE>
A.R.T. INTERNATIONAL INC.
BALANCE SHEETS
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
ASSETS
3 Months Ended 12 Months Ended
February 29,2000 Nov.30, 1999
(Unaudited) (Audited)
(Note 2)
---------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 31,888 $ 10,861
Accounts receivable 68,414 121,546
Inventory (Notes 2(a) and 3) 124,000 136,994
Prepaid expenses and deposits 13,026 7,905
---------------------------------------------------------------------------------------------------
237,328 277,306
CAPITAL ASSETS
Equipment, furniture & fixtures 641,821 641,821
Molds 150,000 150,000
Leasehold improvements 288,958 288,958
---------------------------------------------------------------------------------------------------
1,080,779 1,080,779
Less: Accumulated depreciation 1,024,148 1,020,148
---------------------------------------------------------------------------------------------------
56,631 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 12) 300,000 0
Inventories (Notes 2(a) and 3) 40,000 38,647
---------------------------------------------------------------------------------------------------
TOTAL ASSETS $633,960 $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)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
3 Months Ended 12 Months Ended
February 29,2000 Nov.30, 1999
(Unaudited) (Audited)
(Note 2)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and
accrued liabilities $ 611,720 $ 564,655
Notes payable (Note 4) 625,392 627,635
------------------------------------------------------------------------------------------------------
1,237,112 1,192,290
------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,237,112 1,192,290
CAPITAL STOCK (Note 5)
Preference "A" sharesSeries 1 3,701,809 3,701,809
Series 2 2,785,628 2,785,628
Class C Common 50,000 50,000
Common shares 2,548,961 2,248,961
------------------------------------------------------------------------------------------------------
9,086,398 8,786,398
CONTRIBUTED SURPLUS 11,775,000 11,775,000
DEFICIT (21,464,550) (21,377,103)
-------------------------------------------------------------------------------------------------------
(603,152) (815,705)
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 633,960 $ 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>
3 Months Ended 3 Months Ended
February 29, 2000 February 28, 1999
(Unaudited) (Unaudited)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deficit - beginning of period $(21,377,103) $(21,274,691)
Add - net loss (87,447) (10,242)
-------------------------------------------------------------------------------------------------------
Deficit - end of period $(21,464,550) $ (21,284,933)
=======================================================================================================
</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 Months Ended 3 Months Ended
February 29, 2000 February 28,1999
(Unaudited) (Unaudited)
<S> <C> <C>
SALES $177,237 $426,369
COST OF GOODS SOLD 150,451 237,302
------------------------------------------------------------------------------------------------------
GROSS PROFIT (LOSS) 26,786 189,067
OPERATING EXPENSES
Selling general & administrative 102,814 106,590
------------------------------------------------------------------------------------------------------
Operating income/(loss) (76,028) 82,477
OTHER EXPENSES
Note interest 11,419 17,719
Other expenses 0 75,000
------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 11,419 92,719
NET INCOME (LOSS) $ (87,447) $(10,242)
======================================================================================================
NET LOSS PER COMMON SHARE $0.05 $0.01
-----------------------------------------------------------------------------------------------------
WEIGHTED AVE.NUMBER
OF COMMON SHARES 1,606,551 1,066,551
------------------------------------------------------------------------------------------------------
</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>
3 Months Ended 3 Months Ended
February 29, 2000 February 28, 1999
(Unaudited) (Unaudited)
<S> <C> <C>
Cash was provided by (applied to):
OPERATING ACTIVITIES
Net loss for period $ (87,447) $ (10,242)
Add: Items not requiring an
outlay of cash
Depreciation 4,000 7,789
------------------------------------------------------------------------------------------------------
(83,447) (2,453)
Accounts receivable 53,132 7,845
Inventories - current & long-term 11,641 3,412
Prepaid expenses and deposits (5,121) (9,138)
Accounts payable and accrued
liabilities 47,065 (14,013)
Accounts payable - related party 0 0
Customer deposits 0 0
------------------------------------------------------------------------------------------------------
Cash provided by (used by)
operating activities 23,270 (14,347)
INVESTMENT ACTIVITIES
Investment in affiliated company (300,000) 0
Acquisition of capital assets
and art reproduction rights 0 0
------------------------------------------------------------------------------------------------------
Cash provided by (used by)
investment activities 0 0
FINANCING ACTIVITIES
Common shares issued 300,000 0
Notes payable (2,243) 1,843
------------------------------------------------------------------------------------------------------
Cash provided by (used by)
financing activities (297,757) 1,843
------------------------------------------------------------------------------------------------------
INCREASE /(DECREASE) IN CASH 21,027 (12,504)
CASH, beginning of period 10,861 110,873
------------------------------------------------------------------------------------------------------
CASH, end of period $ 31,888 $ 98,369
======================================================================================================
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 29, 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
February 29, 2000, and February 28, 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 February 29, 2000, and November 30, 1999, and the results of their
operations and cash flows for the periods ended February 29, 2000, and February
28, 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 February 29, 2000 and November 30, 1999 and the
results of operations, changes in financial position and related note
disclosures for the period ended February 29, 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>
February 29, 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 $ 65,000 $ - $ 65,000 $ 75,583 $ (3,104) $ 72,479
Work-in-Process 60,000 - 60,000 60,517 - 60,517
Raw Materials 39,000 - 39,000 42,645 - 42,645
--------------------------------------- -------------------------------------------
$ 164,000 $ - $ 164,000 $ 178,745 $ (3,104) $ 175,641
======== ======= ========== ========== ========== =========
Current Portion ..................................$ 124,000.......................................$ 136,994
Non-current Portion............................ 40,000.................................... 38,647
---------- --------
$ 164,000 $ 175,641
========== =========
</TABLE>
4. 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 $ 453,600 $ 315,000 $ 464,625
Accrued Interest 119,245 171,792 110,515 163,010
-----------------------------------------------------------------------------------------------------
$ 434,245 $ 625,392 $ 425,515 $ 627,635
=========== ========== ========== ==========
</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.
(ii) Class "B" preference shares
10
<PAGE>
Effective July 1998, the shareholders have authorized an unlimited number of
class "B" preference shares. These shares are non-voting, redeemable at the
option of the Company and have a preferential dividend of $0.10 per share in
priority to all other shares of the Company. No class "B" shares have been
issued.
(iii) Class "C" common share
Effective July 1998, the shareholders have authorized an unlimited number of
class "C" common shares. Each class "C" common share has 100 votes and a
dividend right of $0.01 which is payable only in the event that the annual
dividends required in respect of the senior shares of the Company, including
class "A" preference shares, class "B" preference shares and common shares, have
been paid; and
(iv) Common shares.
(b) Capital stock.
<TABLE>
<CAPTION>
COMMON SHARES
------------------------------------------------------------------
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 1,500,000 300,000 320,000 65,000
-------------------------------------------------------------------------------------------------------------
Balance - End of Year 2,886,551 $ 2,548,961 1,386,551 $ 2,248,961
=============================================================================================================
</TABLE>
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. 29, 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 0 105,000
------------------------------------------------------------------------------------------------------
118,700 118,700
------------------------------------------------------------------------------------------------------
The options and warrants granted and outstanding as at February
29, 2000 are as follows:
</TABLE>
11
<PAGE>
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
-------
118,700
During the 1999 year, the Company issued 105,000 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.
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
December 1, 1999 483,000
February 29, 2000 120,750
---------------------------------------------
Total $ 3,139,500
(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 $US 0.60 per share per annum, payable in cash for the
first year after issuance and annually thereafter in cash or common shares at
the discretion of the directors.
12
<PAGE>
The Company anticipates that any dividends declared and payable, subsequent to
the first year, on the preference shares in the foreseeable future will be paid
in common shares.
The dividends payable, but not yet declared by the Company, are as follows:
Period ended Amount US$
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
February 29, 2000 70,041
--------------------------------------------------
Total 1,610,943
7. 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 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 29, 1999 November 30, 1999
------------------ -----------------
Canadian U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital stock issued $ 9,086,398 $ 11,127,941 $ 8,786,398 $ 10,827,941
---------------------------------------------------------------------------------------------------------
Accumulated Deficit (21,464,550) (23,522,308) (21,377,103) (23,434,861)
----------------------------------------------------------------------------------------------------------
(b) Statement of Loss:
February 29, 2000 February 28, 1999
----------------- -----------------
Net loss under Canadian
& U.S. GAAP $(87,447) $(10,242)
Net loss per common
share under
U.S. & Canadian GAAP $(0.05) $(0.01)
Weighted average number
of shares U.S. & Cdn GAAP 1,606,551 1,066,551
</TABLE>
13
<PAGE>
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 $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:
Year Canadian U.S. Total
--------------------------------------------------------------------
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
10. 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.
11. RECLASSIFICATION
Certain figures with respect to the three-month period ended February 28, 1999
have been reclassified to conform with the presentation adopted for the
three-month period ended February 29, 2000.
12. INVESTMENT IN AFFILIATE COMPANY & SUBSEQUENT EVENT
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 February 29, 2000 the Company had paid Buck $300,000, being the minimum
capital to secure the investment. 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.
Subsequent to the balance sheet date the Company issued 1,000,000 common shares
for a total consideration of $200,000. $100,000 was utilized to complete the
Buck investment. The balance of $100,000 was used for general working capital.
14
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS (All figures in Canadian dollars)
General
Certain statements contained herein are not based on historical facts, but are
forward-looking statements that are based on numerous assumptions about future
conditions that could prove not to be accurate. Actual events, transactions and
results may materially differ from the anticipated events, transactions or
results described in such statements. The Company's ability to consummate such
transactions and achieve such events or results is subject to certain risks and
uncertainties. Such risks and uncertainties include, but are not limited to, the
existence of demand for and acceptance of the Company's products and services,
regulatory approvals and developments, economic conditions, the impact of
competition and pricing results of financing efforts and other factors affecting
the Company's business that are beyond the Company's control. The Company
undertakes no obligation and does not intend to update, revise or otherwise
publicly release the results of any revisions to these forward-looking
statements that may be made to reflect future events or circumstances.
The Company recorded a net loss of $87,447 for the three-month period ended
February 29, 2000, which was a higher net loss compared to the first quarter in
1999 of $10,242.
Sales revenues fell to $177,237 for the period of three months ended February
29, 2000, compared to fiscal 1999, at $426,369.
The Company reported a gross profit of $26,786 for the first quarter in fiscal
2000, down from the comparable quarter in fiscal 1999 at $189,067.
In the first quarter of fiscal 2000, total overhead expenses fell to $114,000
from $198,000 in fiscal 1999. The higher expenses, in 1999 are mainly
attributable to a bad debt provision of $75,000 against accounts receivable and
operating income, recorded by the Company in that quarter.
Operating cash flow for the first three months was positive at $23,270, an
improvement compared to the same period in 1999, when the Company recorded a
negative cash flow of $14,347. The Company's working capital balance remained
negative at $999,783, as at February 29, 2000 compared to negative working
capital of $914,984 at year-end November 30, 1999.
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.
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 29, 2000, the Company
recorded sales to its main retail customer of $111,858, which represents 63% of
its total sales revenues in that period. Sales to its major publishing client
were $nil in the first three months of 2000, compared to $253,619 in the first
quarter of fiscal
15
<PAGE>
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.
Owing to the Company's inability 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 negotiating with several major publishing
customers, there can be no guarantee that these efforts will be successful in
generating new revenues.
The Company believes that no other known reproduction processes compare in
quality with the Company's processes in accurately reproducing brush strokes and
texture, and the colour intensity and other reproduction characteristics are
believed to be at least equal to any other known reproduction process.
The Company's success in the marketplace will depend upon raising additional
capital, creating greater awareness of its products through 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 $26,786 in the first quarter of 2000.
This was a reduction over the previous fiscal year and is mainly attributable to
the lower sales revenues.
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 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.
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
16
<PAGE>
cumulative dividends, the Company's ability to raise additional capital will be
severely restricted. The Company continues to seek alternative ways to mitigate
the impact of the preferential share cumulative dividends.
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 February
29, 2000, the Company had total dividends payable, but not yet declared of
US$3,139,500 and US$1,610,943 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.
In August 1999 the Company's Board of Directors approved a third offering of its
common stock under Regulation S. As of February 29, 2000, the Company has issued
1,300,000 shares for total proceeds of $260,000 and, received $100,000 in
subscriptions for an additional 500,000 shares. Proceeds of $300,000 were
invested in a capital investment venture, whereby the Company has an agreement
to purchase up to 40% of The Buck A Day Company ("Buck") for $400,000. The
balance of $60,000 was utilized for working capital. As of March 30, 2000 the
Company has raised an additional $200,000 through the Regulation S by issuing
1,000,000 shares. Of the total proceeds, $100,000 was used to complete the
purchase of the 40% interest in Buck and the balance for general working
capital.
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 3,886,551 common shares. However, the Class C Common Shares
represent a total of 5,000,000 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.
17
<PAGE>
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 February 29, 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: March 30, 2000
/s/ Michel van Herreweghe
- -------------------------------------
By: Michel van Herreweghe
Chairman
/s/ Simon Meredith
- -------------------------------------
By: Simon Meredith
President
18
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> CANADIAN
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-2000
<PERIOD-START> DEC-1-1999
<PERIOD-END> FEB-29-2000
<EXCHANGE-RATE> 1.45
<CASH> 31,888
<SECURITIES> 0
<RECEIVABLES> 68,414
<ALLOWANCES> 0
<INVENTORY> 124,000
<CURRENT-ASSETS> 237,328
<PP&E> 1,080,779
<DEPRECIATION> (1,024,147)
<TOTAL-ASSETS> 633,960
<CURRENT-LIABILITIES> 1,237,112
<BONDS> 0
0
6,487,437
<COMMON> 2,598,961
<OTHER-SE> 11,775,000
<TOTAL-LIABILITY-AND-EQUITY> 633,960
<SALES> 177,237
<TOTAL-REVENUES> 0
<CGS> 150,451
<TOTAL-COSTS> 102,814
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,419
<INCOME-PRETAX> (87,447)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (87,447)
<EPS-BASIC> (0.500)
<EPS-DILUTED> (0.500)
</TABLE>
