<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended August 31, 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 August 31, 2000: 20,716,780
<PAGE>
A.R.T. INTERNATIONAL INC.
INDEX TO
QUARTERLY REPORT ON
FORM 10-Q
FOR THE QUARTER ENDED
August 31, 2000
PART I PAGE [S]
Balance sheets:
As at August 31, 2000, and November 30, 1999 3-4
Statements of Accumulated Deficit 5
For the nine months ended August 31, 2000
For the nine months ended August 31, 1999
Statements of Loss 6
For the three months ended August 31, 2000
For the three months ended August 31, 1999
For the nine months ended August 31, 2000
For the nine months ended August 31, 1999
Statements of Cash Flow 7
For the nine months ended August 31, 2000
For the nine months ended August 31, 1999
Notes to Financial Statements 8-16
Item 2.
Management's discussions and analysis of financial
condition and results of operations. 17-20
PART II
SIGNATURES 21
2
<PAGE>
A.R.T. INTERNATIONAL INC.
BALANCE SHEETS
(IN CANADIAN DOLLARS)
ASSETS
<TABLE>
<CAPTION>
9 Months Ended 12 Months Ended
August 31,2000 Nov.30, 1999
(Unaudited) (Audited)
(Note 2)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 71,451 $ 10,861
Accounts receivable 173,699 121,546
Inventory (Notes 2(a) and 3) 174,162 136,994
Loan to affiliate 0 0
Prepaid expenses and deposits 10,181 7,905
------------------------------------------------------------------------------------------------------------------------
429,493 277,306
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 1,052,347 1,020,148
------------------------------------------------------------------------------------------------------------------------
28,761 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) 384,183 0
Inventories (Notes 2(a) and 3) 40,000 38,647
------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 867,438 $ 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>
9 Months Ended 12 Months Ended
August 31,2000 Nov.30, 1999
(Unaudited) (Audited)
(Note 2)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and
accrued liabilities $ 645,058 $ 564,655
Notes payable (Note 5) 668,826 627,635
------------------------------------------------------------------------------------------------------------------------
1,313,884 1,192,290
------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,313,884 1,192,290
CAPITAL STOCK (Note 6)
Preference "A" shares
Series 1 0 3,701,809
Series 2 0 2,785,628
Class C Common 150,001 50,000
Common shares 9,481,543 2,248,961
------------------------------------------------------------------------------------------------------------------------
9,631,544 8,786,398
CONTRIBUTED SURPLUS 11,775,000 11,775,000
DEFICIT (21,852,990) (21,377,103)
-------------------------------------------------------------------------------------------------------------------------
(446,446) (815,705)
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 867,438 $ 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>
9 Months Ended 9 Months Ended
August 31, 2000 August 31, 1999
(Unaudited) (Unaudited)
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deficit - beginning of period $ (21,377,103) $ (21,274,691)
Add: - net loss (475,885) (224,789)
- stock dividends (note 7) (2) 0
-------------------------------------------------------------------------------------------------------------------------
Deficit - end of period $ (21,852,990) $ (21,499,480)
=========================================================================================================================
</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 9 Mths Ended 9 Mths Ended
Aug.31, 2000 Aug.31,1999 Aug.31, 2000 Aug.31, 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SALES $ 247,466 $ 202,023 $ 600,939 $ 809,342
COST OF GOODS SOLD 178,373 156,434 477,740 540,359
--------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT (LOSS) 69,093 45,589 123,199 268,983
OPERATING EXPENSES
Selling general
& administrative 149,018 130,065 432,519 345,462
--------------------------------------------------------------------------------------------------------------------------------
Operating loss 79,925 84,477 309,320 76,480
OTHER (INCOME) / EXPENSES
Amortization 7,536 10,411 18,840 26,463
Note interest 11,498 11,647 33,606 33,606
(Profit)/Loss from affiliate (54,183) 0 85,817 0
Other expenses 14,362 0 28,302 75,000
--------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER (INCOME)
/ EXPENSES (20,787) 22,058 166,565 148,309
--------------------------------------------------------------------------------------------------------------------------------
NET LOSS $ 59,138 $ 106,535 $ 475,885 $ 224,789
================================================================================================================================
NET LOSS PER COMMON SHARE $0.007 $0.098 $0.058 $0.207
--------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVE.NUMBER
OF COMMON SHARES 8,091,949 1,086,551 8,091,949 1,086,551
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes form an integral part of these financial statements
6
<PAGE>
7
<PAGE>
A.R.T. INTERNATIONAL INC.
STATEMENTS OF CASH FLOW
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
9 Months Ended 9 Months Ended
August 31, 2000 August 31, 1999
(Unaudited) (Unaudited)
<S> <C> <C>
Cash was provided by (applied to):
OPERATING ACTIVITIES
Net loss for period $ (475,885) $ (224,789)
Add: Items not requiring an
outlay of cash
Depreciation 32,200 27,009
------------------------------------------------------------------------------------------------------------------------
(443,685) (197,780)
Accounts receivable (52,153) 89,361
Inventories - current & long-term (23,521) 23,811
Prepaid expenses and deposits (2,276) (6,056)
Accounts payable and accrued
liabilities 80,403 (28,722)
Accounts payable - related party 0 0
Customer deposits 0 0
------------------------------------------------------------------------------------------------------------------------
Cash provided by (used by)
operating activities (441,232) (119,387)
INVESTMENT ACTIVITIES
Investment in affiliated company (net
of affiliate losses $80,817) (384,183) 0
Acquisition of capital assets
and art reproduction rights (331) 0
------------------------------------------------------------------------------------------------------------------------
Cash provided by (used by)
investment activities (384,514) 0
FINANCING ACTIVITIES
Common shares issued (note 6) 845,145 0
Notes payable 41,191 26,488
------------------------------------------------------------------------------------------------------------------------
Cash provided by (used by)
financing activities 886,336 26,488
------------------------------------------------------------------------------------------------------------------------
INCREASE /(DECREASE) IN CASH 60,590 (92,899)
CASH, beginning of period 10,861 110,873
------------------------------------------------------------------------------------------------------------------------
CASH, end of period $ 71,451 $ 17,974
========================================================================================================================
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
8
<PAGE>
A.R.T. INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
August 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 August
31, 2000, and August 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 August 31, 2000, and November 30, 1999, and the results of their
operations and cash flows for the periods ended August 31, 2000, and August 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.
9
<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 August 31, 2000 and November 30, 1999 and the
results of operations, changes in financial position and related note
disclosures for the period ended August 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.
10
<PAGE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
August 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 initial public offering.
On May 1, 2000 the Company advanced Buck $70,000 by way of an interest bearing
demand promissory note, convertible at the Company's option into 10% of the
total outstanding common shares of Buck. On August 8, 2000 the Company exercised
its option, whereby the Company now owns 50% of Buck.
In the 8 months period ending August 31, 2000 Buck realized start-up losses of
$239,873. The Company does not exercise control over the operations of Buck or
control its board of directors. Two parties, who control the day-to-day
operations and the board of directors and are related to each other, own the
other 50% of the common shares of Buck. Accordingly, under equity accounting for
long-term investments, the Company has booked its share of these losses, being
$85,817. The investment of $470,000 in Buck is carried net of its share of these
losses at $384,183. Below, are the summarised operating statements for the three
and eight months ending August 31, 2000 and the balance sheet as at August 31,
2000, for Buck.
OPERATING STATEMENTS (UNAUDITED):
<TABLE>
<CAPTION>
3 Mths Ended 8 Mths Ended
Aug.31, 2000 Aug.31, 2000
(Unaudited) (Unaudited)
<S> <C> <C>
SALES $ 1,896,063 $ 2,481,101
COST OF GOODS SOLD 1,396,733 1,902,801
--------------------------------------------------------------------------------------------------------
GROSS PROFIT (LOSS) 499,330 578,300
--------------------------------------------------------------------------------------------------------
GM % 26 23
Selling general
& administrative 402,006 818,173
---------------------------------------------------------------------------------------------------------
Operating income/(loss) $ 97,324 $ (239,873)
--------------------------------------------------------------------------------------------------------
</TABLE>
Under its accounting policy for revenue recognition, Buck accrues estimated
sales revenues for mailed contracts to supply its products that will be shipped
after the balance sheet date. The accrued revenues allow for estimated returns
of products and an estimated percentage of contracts that may not be fulfilled.
At August 31, 2000, Buck has recorded $778,902 of estimated accrued sales
revenues. Accordingly, Buck has recognized estimated gross profit on future
shipments of its products of approximately $205,000.
11
<PAGE>
BALANCE SHEET (UNAUDITED):
CURRENT ASSETS
<TABLE>
<CAPTION>
Aug.31, 2000
------------
<S> <C>
Cash $ 32,748
Accounts receivable 926,728
Prepaid expenses & assets 63,034
------------------------------------------------------------------------------------------------------------------------
1,022,510
CAPITAL ASSETS
Equipment, furniture & fixtures 144,076
Software 26,296
------------------------------------------------------------------------------------------------------------------------
170,372
Less: Accumulated depreciation 12,000
------------------------------------------------------------------------------------------------------------------------
158,372
------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,180,882
------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and
accrued liabilities $ 810,794
------------------------------------------------------------------------------------------------------------------------
810,794
LONG TERM LIABILITIES 140,000
------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 950,794
CAPITAL STOCK
Common shares 470,000
------------------------------------------------------------------------------------------------------------------------
470,000
DEFICIT (239,912)
-------------------------------------------------------------------------------------------------------------------------
230,088
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,180,882
========================================================================================================================
</TABLE>
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 $ 467,869 $ 315,000 $ 464,625
Accrued Interest 135,297 200,957 110,515 163,010
----------------------------------------------------------------------------------------------------------------------
$ 450,297 $ 668,826 $ 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. The Company has not repaid the notes or paid
the accrued interest as of September 30, 2000.
These notes payable and accrued interest are secured by a general security
agreement over all the assets of the Company.
12
<PAGE>
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.
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.
On July 14, 2000, at the Annual, General and Special meeting of Shareholders of
the Company, the Shareholders approved an amendment to the articles of the
Corporation, whereby, effective July 16 2000, all of the issued and outstanding
805,000 Series 1 Class A Preference Shares and all of the issued and outstanding
466,941 Series 2 Class A Preference Shares were converted into and became Common
Shares, at the rate of 0.5837142 and 0.711214 common shares for each Series 1
and Series 2 Class A Preference Shares respectively.
(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 "A" common share
Effective July 1998, the shareholders have authorized an unlimited number of
class "A" common shares. Each class "A" 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
13
<PAGE>
(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:
Regulation S (*) 3,400,000 680,000 320,000 65,000
Options, exercised 238,500 65,144 0 0
Conversion Series 1 469,890 3,701,809 0 0
Conversion Series 2 332,095 2,785,628 0 0
--------------------------------------------------------------------------------------------------------------------------------
5,827,036 9,481,542 320,000 65,000
Three for one (3:1)
Stock Dividend (note 7) 17,481,108 1 0 0
--------------------------------------------------------------------------------------------------------------------------------
Balance - End of Period 23,308,144 $ 9,481,543 1,386,551 $ 2,248,961
================================================================================================================================
</TABLE>
(*) As of September 30, 2000 the Company's Transfer Agent had not delivered
500,000 Common shares (of the 3,400,000 Common shares) for subscriptions of
$100,000 received by the Company prior to the dividend record date. The 500,000
Common shares when delivered are entitled to the three for one stock dividend,
which dilution has been included in the above three for one stock dividend total
of 17,481,108.
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
the August 1999 Regulation S offering. Various officers and employees of the
company exercised their options of 238,500 for a consideration of $65,144.
Proceeds from the offering and exercised options were utilized as follows:
Investment in affiliate (see note 4) $ 470,000
Direct marketing TV program 100,000
General working capital 175,144
------------
$ 745,144
============
As of August 31, 2000 the issued and outstanding common shares were registered
at 20,716,780. The fully diluted, issued and outstanding total common shares,
including the complete conversion of Class A Preference Shares and the
delivery of the 500,000 Common shares for subscriptions of $100,000 received
prior to the dividend record date, are 23,308,144.
Class "A" Common Shares
The Company issued 50,000 class "A" common shares on September 1, 1998, for a
total consideration of $50,000. During the current quarter, the Company issued
an additional 50,000 class "A" common shares, on June 14 and again on August 31
2000, for a total consideration of $100,000. Effective August 15, a three for
one stock dividend was paid, resulting in 450,000 class "A" common shares being
outstanding as of August 31, 2000.
(c) The Company has issued various stock options for common stock of the
Company's capital stock. The stock options provide for the granting of options
to key employees, including officers, directors and independent contractors of
the Company. No option may be granted with a term exceeding ten years. In
addition, the Company has granted warrants from time to time to managers of the
Company. The options and warrants are allocated as follows:
<TABLE>
<CAPTION>
Number of shares
-------------------------------------------------
August 31 2000 Nov. 30 1999
-------------- ------------
<S> <C> <C>
Bal. - Beginning of period 118,700 13,800
Add - Options issued during the year 133,500 105,000
-------------------------------------------------------------------------------------------------------------------------------
252,200 118,800
Less - options and warrants expired 238,500 100
-------------------------------------------------------------------------------------------------------------------------------
Balance of options and warrants 13,700 118,700
Three for one stock dividend 41,100 0
-------------------------------------------------------------------------------------------------------------------------------
54,800 118,700
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
The options and warrants granted and outstanding as at August 31, 2000 are as
follows:
<TABLE>
<CAPTION>
Common shares
under options
or subject
to warrants Exercise price Expiry date
----------- -------------- -----------
<S> <C> <C>
400 $US 375.00 2000
19,200 $US 2.50 2000
19,200 $US 50.00 2000
16,000 $US 62.50 2002
---------
54,800
---------
</TABLE>
The Company issued a total of 238,500 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. These stock options have
not been registered.
7. DIVIDENDS
(a) Class "A" Preference Shares, Series 1 and Series 2
As a result of the aforementioned amendment to the Company's Articles of
Incorporation the dividends payable, but not yet declared by the Company, were
effectively cancelled.
(b) Common Shares
On July 14, 2000 the Company declared a stock dividend, whereby effective August
15, 2000, common share holders of record receive 3 common shares for each share
common share owned on the record date of August 2, 2000. On a fully diluted
basis, the stock dividend was 17,481,108 common shares.
The stock dividend was only issued to existing common shareholders of the record
date, August 2, 2000. Effectively, this transaction was mechanically similar to
a 4:1 stock split. Therefore, only a nominal value of $1 (one dollar) was added
to the stated share capital and attributed to the dividend. While the Company
had a shareholders' deficit on the dividend distribution date, it was for
practical purposes exempt from provisions of the Ontario Business Corporation
Act restricting its ability to issue dividends, as no assets of the Company have
been actually distributed.
(c) Common "A" shares
On July 14, 2000 the Company declared a stock dividend, whereby effective August
15, 2000, common "A" shareholders of record receive 3 common "A" shares for each
share common "A" share owned on the record date of August 2, 2000. On a fully
diluted basis, the stock dividend was 300,000 common "A" shares.
15
<PAGE>
The stock dividend was only issued to existing common "A" shareholders of the
record date, August 2, 2000. Effectively, this transaction was mechanically
similar to a 4:1 stock split. Therefore, only a nominal value of $1 (one dollar)
was added to the stated share capital and attributed to the dividend. While the
Company had a shareholders' deficit on the dividend distribution date, it was
for practical purposes exempt from provisions of the Ontario Business
Corporation Act restricting its ability to issue dividends, as no assets of the
Company have been actually distributed.
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
January 31, 2001, and thereafter approximately $64,000 annually until
January 31, 2003.
9. RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The financial statements of the Company are prepared in accordance with Canadian
generally accepted accounting principles (Canadian GAAP). These principles
differ in some respects from United States generally accepted accounting
principles (U.S. GAAP).
The effect of such differences on the Company's balance sheet and statement of
loss is as follows:
(a) Balance sheet:
<TABLE>
<CAPTION>
August 31, 1999 November 30, 1999
--------------- -----------------
Canadian U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
---------------------------------------------------------------------------------------------------------------------------
<S> <C>
$ $ $ $
Capital stock issued 9,631,543 11,673,087 8,786,398 10,827,941
---------------------------------------------------------------------------------------------------------------------------
Accumulated Deficit (21,847,989) (23,905,294) (21,377,103) (23,434,861)
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(b) Statement of Loss:
<TABLE>
<CAPTION>
August 31, 2000 August 31, 1999
--------------- ---------------
<S> <C> <C>
Net loss under Canadian
& U.S. GAAP $ (470,885) $(224,789)
Net loss per common
share under
U.S. & Canadian GAAP $(0.058) $(0.11)
Weighted average number
of shares U.S. & Cdn GAAP 8,091,949 1,086,551
</TABLE>
16
<PAGE>
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>
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 August 31, 1999
have been reclassified to conform with the presentation adopted for the
three-month period ended August 31, 2000.
17
<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 $59,138 for the three-month period ended
August 31, 2000, which brought the total losses for the first nine months to
$475,885. The current operating losses compare unfavourably to the first nine
months of fiscal 1999, when operating losses were only $224,789.
Sales revenues were $247,466 for the period of three months ended August 31,
2000, an improvement over the sales revenues in the first and second quarters by
$70,000. Sales revenues for the current nine-months ending August 31, were down
by $209,000 compared to fiscal 1999 nine-month sales revenues of $809,342.
The y-t-d net loss includes the Company's equity-share of losses from start-up
operations of its affiliated company, The Buck A Day Company ("Buck"), of
$85,817. In addition, the y-t-d losses include $100,000 of production and media
advertising expenses.
The Company has raised $845,000 in equity financing in the first nine months of
fiscal 2000. $470,000 of the proceeds was utilized to purchase a 50% ownership
in Buck. The balance of the proceeds was invested in marketing and shareholders'
meeting activities.
Buck recorded its first quarter profit in the third quarter. Coming off the
quarter's sales of $1,896,063 the company's pre tax profit was $97,324.
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.
18
<PAGE>
Sales
The Company continues to be very reliant on a few customers for the majority of
its sales revenues. In the nine months ended August 31, 2000, the Company
recorded sales to its main retail customer of $336,104, which represented 56% of
its total sales revenues in that period. Sales to its major publishing client
were $42,000 in the first nine months of 2000, compared to $258,830 in the first
nine months 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 $50 - 100,000 in gross sales revenues.
During the third quarter 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 was 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 were taken by the Company's affiliate, which produced the TV commercial.
Results from the promotion were disappointing; as a result the Company cancelled
the planned US commercials.
The Company has contracted with a consultant to produce its first official web
site; see its contents at www.art-artagraph.com/. 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 $5,000] 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.
19
<PAGE>
Gross Profit
The Company reported a gross profit of $123,199 in the first nine months of
2000. This was a reduction over the previous fiscal year's gross profit of
$268,983 and is mainly attributable to the lower sales revenues. Gross sales
revenues for the first nine months were $600,939 versus $809,939 in fiscal 1999.
Selling, General and Administration expenses
These expenses were higher in the nine months to August 31, at a $432,519
compared to fiscal 1999 at $345,462. 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.
At the Company's Annual, General and Special meeting of shareholders on July 14,
2000, the shareholders approved a special resolution amending the articles of
the corporation. Effective July 16, 2000 the issued and outstanding Class A
Preference Shares, series 1 and 2, were converted into and became Common shares
at the rate 0.5837142 and 0.711214 common shares for each Class A Preference
share, series 1 and 2 respectively. This resulted in the expiry of the
undeclared dividends of US$4,941,234 on the Class A Preference shares.
In August 1999 the Company's Board of Directors approved a third offering of its
common stock under Regulation S. As of August 31, 2000, the Company's Transfer
Agent had delivered 2,900,000 Common shares from proceeds of $580,000 and,
received $100,000 in subscriptions for an additional 500,000 Common shares that
the Transfer Agent has not yet delivered. The total subscriptions of $680,000
were received prior to the three-for-one stock dividend record date and
therefore qualify for said dividend.
On July 14, the shareholders approved a dividend on the Common and Class "A"
Common shares of the corporation. The dividend of three (3) fully paid Common
and Class "A" Common shares was effective for shareholders of record on August
2, 2000, and paid August 15, 2000.
The total Common and Class "A" Common shares issued and outstanding was
20,716,780 and 450,000 respectively as at August 31, 2000. The fully diluted
issued and outstanding Common shares, assuming the conversion of all Class "A"
Preference shares series 1 and 2, is 23,308,144.
Notwithstanding, the Class "A" Common Shares represent a total of 45,000,000
votes. Therefore, the Class "A" Common shareholders have control of the Company
in aggregate, including the power to appoint its Board of Directors and control
the Company's operations.
20
<PAGE>
From the share issue proceeds, $470,000 was invested in 50% of Buck. $100,000
was expended on the TV commercial production and initial placement of media on
Canadian TV channels. The balance was utilized for working capital. As of August
31, 2000 the Company has raised an additional $100,000 through the sale of
common "A" shares. The proceeds were utilized to fund ongoing 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,
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.
Buck, a marketing, tele-sales and financing entity, focuses on bringing the
direct response marketing services through the integration of media, internet
and communication technologies. Buck has an exclusive response agreement with
BellExpressVu offering digital satellite services. Buck is also a partner with
IBM with the objective to utilize its unique marketing strategy to "put a
computer into every home, school and library at a price and payment structure
tailored to individual needs".
21
<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.
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
-------------------------------------
By: Michel van Herreweghe
Chairman
-------------------------------------
By: Simon Meredith
President
