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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------------------------
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED November 30, 2001
Commission File No. 000-16008
--------------------------
A.R.T. INTERNATIONAL INC.
Ontario, Canada 98-0082514
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
5-7100 Warden Avenue, Markham, Ontario, L3R 8B5 Canada (800) 278-4723
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Shares, without par value
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 [ ] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K.
YES [X] NO [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $US1,451,673 as of November 30, 2001 based upon the
closing price of $US0.06 on the Nasdaq OTCBB reported on such date. Shares of
common stock held by each executive officers and directors have been excluded in
that such persons may under certain circumstances be deemed to be affiliates.
This determination of executive officer and affiliate status is not necessarily
a conclusive determination for other purposes. As of November 30, 2001, the
number of shares of Common Stock outstanding was 26,108,544.
A.R.T. INTERNATIONAL INC.
FORM 10-K
NOVEMBER 30, 2001
Table of Contents
PART I
PAGE
----
Item 1. Business 3
Item 2. Property 10
Item 3. Legal Proceedings 10
Item 4. Submissions of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 7a Quantitative and Qualitative Disclosures about Market Risk 24
Item 8. Financial Statements and supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 46
PART III
Item 10. Directors and Executive Officers of the Registrant 47
Item 11. Executive Compensation 48
Item 12. Security Ownership of Certain Beneficial Owners and Management 50
Item 13. Certain Relationships and Related Parties 50
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 51
Signature Page 52
2
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward looking statements based on current expectations,
estimates and projections about A.R.T. International Inc.'s businesses,
management's beliefs, and certain assumptions made by management. All
statements, trends, analyses and other information contained in this report
relative to trends in sales, gross margin, anticipated expense levels and
liquidity and capital resources, as well as other statements including, but not
limited to, words such as "anticipate", "believe", "plan", "estimate", "expect",
"seek", "intend" and other similar expressions, constitute forward-looking
statements. These forward-looking statements are not guarantees of future
performance and are subject to certain risks and uncertainties that are
difficult to predict. Accordingly, actual results may differ materially from
those anticipated or expressed in such statements. Potential risks and
uncertainties include, among others, those set forth herein under "Factors That
May Affect the Business", as well as "Management's Discussion and Analysis of
Financial Conditions and Results of Operations". Except as required by law, we
undertake no obligation to update any forward-looking statement, whether as a
result of new information, future events or otherwise. Readers, however, should
carefully review the factors set forth in other reports or documents that we
file from time to time with the Securities and Exchange Commission.
In this Annual Report, "Company", "A.R.T.", "we", "us" and "our" refer to A.R.T.
International Inc. and The Buck a Day Company Inc, unless the context otherwise
dictates.
OVERVIEW
During the year ended November 30, 2001 A.R.T. operated in two disparate
businesses.
- - The Fine Art Reproduction Division ("Artagraph") manufactures high quality
fine art reproductions of original paintings using the Company's patented
and proprietary technologies and markets them through a variety of channels
and programs. The Company's reproductions on canvas are marketed using the
registered trademark of Artagraph(R) Editions, (sometimes referred to as
"Artagraph(R)" or Artagraphs(R)").
- - The Buck a Day Company ("Buck") is a marketing, telesales and financing
operation designed to bring direct response to the next level through an
integration of media, internet and communications technologies. The "Buck A
Day" branding is the basic premise of its business model; specifically that
name brand products are packaged so that the customer can purchase them for
as little as "a dollar a day" with no down payment.
3
Buck - Acquisition and Disposition
Effective December 4, 2001, ART acquired the 50% balance of Buck's share
capital, whereby it owned 100% of the outstanding share capital of Buck. The
letter of intent dated November 27, 2000, issued by the Company to Buck, also
provided that the Company would arrange for a further $500,000 financing for
Buck within 10 to 15 days of A.R.T. having 100% of Buck and further arrange
$500,000 financing on or about March, 2001.
Buck had experienced liquidity problems since the beginning of the first quarter
of fiscal 2001, due to its on going operating losses and negative cash flows,
and the Company's inability to raise additional operating capital of $1,000,000.
By the end of the 1st quarter Buck was seriously delinquent on approximately
$200,000 of sales taxes owed to the Province of Ontario. Without the continuing
support of its secured and unsecured creditors, the Buck A Day Company would
likely have been forced to seek creditor protection.
In this regard, the holders of the $710,000 debenture, including Dennis and Ed
Labuick who were the co-founders and President and CEO of Buck (hereinafter
referred to as "Labuick Group"), threatened to exercise their security rights if
the Company failed to raise the aforementioned $1,000,000, which included the
right to appoint a receiver manager.
In July 2001, Buck executed a Security Agreement with 1483516 Ontario Limited
("1483516"), whereby 1483516 agreed to loan Buck $USD 450,000. The Security
Agreement provided for the conversion of the $USD 450,000 of principal into
3,000,000 Buck common shares and a Series "B" Warrant to purchase 3,000,000 Buck
common shares exercisable at $USD 0.15 per share.
The Labuick Group debenture was amended to add a conversion privilege into Buck
common shares at $0.10 per share for a total aggregate 7,100,000 common shares.
Upon conversion, the holders of the Security Agreement held by the LaBuick Group
also received a Series "A" Warrant for the purchase of up to 1,500,000
additional shares of Buck at $0.10 per share.
In August 2001 Buck allotted and issued 1,999,600 fully paid and non-assessable
common shares to the Company for $1.00, thereby bringing the total Buck common
shares owned by ART to 2,000,000 in the aggregate. The said allotted common
shares are effectively a stock-split of the 400 common shares originally owned
by ART into 2,000,000 common shares. Further, Buck granted ART a Series "C"
Warrant to purchase up to 800,000 common shares of Buck at $0.10 per share,
exercisable for a period of 120 days after the exercise by the LaBuick Group of
its conversion rights. During September and October 2001 further capital
transactions brought the total issued and outstanding common shares of Buck to
20,000,000 in the aggregate.
In September 2001, Buck commenced to file a registration statement with U.S.
Securities and Exchange Commission to become a public company in the United
States. In addition, Buck received approximately $US 1.25 million dollars in
capital investment; consequently, Buck was able to negotiate extended payment
terms with all their preferred and un-secured creditors.
4
The outcome of the aforementioned Buck transactions was that ART's investment in
Buck went from 50%, on December 4, 2000, to 100%, and from 100% to approximately
10%, on October 31, 2001. Consequently, the audited financial statements of the
Company for the year ended November 30, 2001, include the Buck investment on an
equity basis. As a result of the losses recorded by Buck, ART has written-down
its investment in Buck to its realizable value of approximately $170,000.
Subsequent to the year-end, effective February 18, 2002, the Company sold its
remaining interest in Buck common share to Savaran Financial Inc. for $171,428.
At that date, Buck's filing of its registration statement with U.S. Securities
and Exchange Commission to become a public company in the United States was
still not completed. In addition, Buck is raising further pre-IPO capital, which
transaction is likely to dilute the current share prices and place
selling-restrictions on the current shareholders of Buck. At the time of the
sale of remaining Buck investment, the Company believed that there was a limited
market for Buck common shares, and that the longer-term investment strategy
involved significant downside risk. Further, the Company's Artagraph business
was facing sever liquidity problems and the sale of the Buck investment would
give access to immediate working capital.
Artagraph - Liquidity Issues
The Company continued to face sever liquidity problems during 2001, which was
due to ongoing losses and falling revenues. Subsequent to the year-end, on
January 10, 2002, a major-retail customer of Artagraph, which represented
approximately 40% of its 2001 annual revenues, went into Chapter 11. The ongoing
viability of the remaining business of the Company is in serious doubt. The
Company had purchased export insurance for its US customers including the
aforementioned major-retail customer, which lowered the loss on its
trade-receivable bad debt provision for that customer from approximately
$100,000 to $30,000.
Artagraph - Business
Artagraph replicates both the color and brush stroke texture, so that the
resulting works of art are almost indistinguishable, by the average person, from
original paintings. The Artagraph(R) Editions include signed and numbered
limited editions by contemporary artists, as well as editions of works by the
great masters, and have a suggested retail price of between US$299 and US$849.
Some limited edition reproductions of contemporary artists retail considerably
higher, but this is solely due to the Artist's reputation.
The majority of the Company's sales represent exports, principally to the United
States, and to a lesser extent, to other countries. The following table shows
the Company's sales to its principal geographic markets for the last four fiscal
years.
5
Year Ended November 30
---------------------------------------------
2001 2000 1999 1998
--------- --------- --------- ---------
(In Canadian Dollars)
Canada .......................... 102,934 113,360 39,267 54,901
United States.................... 389,198 626,908 971,569 1,083,681
1
Overseas ........................ 28,396 66,876 32,714 59,057
---------------------------------------------
520,528 807,144 1,043,550 1,197,639
---------------------------------------------
Many of the works reproduced by the Company are in the public domain. Works,
which are not in the public domain, are reproduced pursuant to agreements with
various museums or other copyright holders.
The Company manufactures reproductions of Impressionist and Post-Impressionist
paintings as well as paintings by contemporary artists. The Company does not
always create a replication directly from an original painting. A contract
artist, who is engaged to replicate the texture and brush strokes of the
original artist's style, also creates semi-originals.
The Company also contracts with art publishers, and produces and sells
replications of contemporary works of art for a fixed price, which are then
distributed by the publisher.
As of November 30, 2001, the Company had a library of approximately 110
different Artagraph(R) titles, of which the majority are Impressionist or
Post-Impressionist paintings, some being limited edition reproductions. These
reproductions are of paintings by such artists as Monet, Manet, Van Gogh, Degas,
Renoir, Turner and other well-known artists. Once the Company has a reproduced
title in its library, it can manufacture as many reproductions from that title
as the market will bear, subject only to limitations imposed by contracts with
third parties that limit the availability of certain Artagraph(R) Editions.
The replication process is a two-stage process. The first stage is replication
of the painting's color. The second stage, which directly involves the Company's
patented process, is the reproduction of texture and brush strokes. The Company
works from transparencies of the original art, preparing color separations and
then printing the image on a specially designed "paper" called a litho. The
Company subcontracts with third parties to produce the transparencies and
printed lithos in accordance with the Company's proprietary specifications. In
the second stage, the Company produces a bass relief mold from either the
original oil painting or, in cases where the original oil painting is not
available, from the semi-original of the painting.
The final stage of processing involves precise application of heat and pressure
to the bass relief mold, the printed litho and to a specially coated canvas to
create the finished product. Currently, the Company has three sets of equipment
in operation for the production of Artagraphs(R).
6
During 1998, the Company's Artagraph Product won two Benny awards for
Best-of-Category in the Latest Technology Pieces category for its submission of
the limited edition reproduction of Howard Terpning's "Crow Pipe Ceremony", and
in the Poster and Art Prints category for the "Holy Man of the Blackfoot". The
Bennys Awards are the "oldest and largest international printing competition",
which was held in Chicago during October 1998. The Company faced competition
from 874 companies that submitted 4,990 printed products.
The Company markets through specialty retail, overseas distributors, and direct
mail and carries out contract printing for publishers.
A major-retail customer is "The Museum Company", a 90-plus-store chain located
principally in the US that specializes in the retailing of high quality
reproductions of museum products.
The Company has been seeking to expand its business in foreign markets,
extending some territories with existing distributors and signing new agreements
with new distributors.
All these agreements are on a best efforts basis and, like all the Company's
distributor agreements; there can be no assurance of future revenues or profits
from the efforts of any of these distributors.
There are many publishers who represent contemporary artists engaged in
publishing art reproductions, such as lithographs, serigraphs and posters. The
Company believes that its products offer a unique alternative to these
publishers to add an important new and more accurate reproduction medium to
their existing product lines.
The Company produces custom pieces under fixed price contracts for art
publishers and agents, with product development costs paid by the publisher.
Prices charged vary depending upon the size of the product, the number of colors
and the size of the edition.
Patents and Trademarks
The process for manufacturing Artagraph(R) Editions has been patented in Canada
and the United States. An application for improvements to the Artagraph(R)
replication process resulted in the issuance of a new United States patent in
November 1990, which patent expires in 2008.
Employees
The Company has approximately 10 employees and consultants, including
management, administrative and production employees at Artagraph.
We believe that the Company has satisfactory relations with our employees.
Factors that may affect the business
IN ADDITION TO OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K, THE
FOLLOWING IMPORTANT FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE
COMPANY, BECAUSE SUCH FACTORS CURRENTLY HAVE A SIGNIFICANT IMPACT OR MAY HAVE
SIGNIFICANT IMPACT ON OUR BUSINESS, PROSPECTS, FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
7
- - If We Are Unable to Achieve Profitability, We Will Continue To Rely On
External Financing - Artagraph operates at a loss. During fiscal 2001 the
Company was able to obtain equity and debt financing. In future, our
inability to raise new capital or achieve profitability could have a
material adverse effect on the ability of the Company to continue
operations.
- - We May Not Be Able to Compete Effectively Against Our Existing or Potential
Customers. -We cannot guarantee that we will be able to compete
successfully against existing or potential competitors.
- - The Success of Our Business Depends Upon Our Ability to Establish Growth in
New Products and Markets. - Based on the Company's historical financial
performance, the Company has no capital to support growth in new markets or
products.
- - Artagraph believes its patents are valid and would withstand a challenge to
their validity. No assurances can be given, however, that a third party
will not attempt to challenge the validity of the patents. The Company
intends to vigorously defend its patent rights against any such challenge,
but no assurance can be given that the Company will be successful. Loss of
protection provided by the patented process could have a material adverse
impact on the Company. Moreover, there can be no assurance that other
companies will not design competitive processes that do not infringe on
such patents.
- - There can be no assurance that we will be successful in the art
reproduction markets or that other processes will not provide successfully
competing products. -- The Artagraph reproductions must compete with a
variety of decorative art products, including products from other
companies, which replicate fine art as well as original artwork from local
artists and others. Small vendors can compete effectively within the
marketplace while larger vendors can benefit from volume discounts.
Artagraph must competitively price its products against both the large and
the small vendors to successfully build sales volume. Many companies have
processes for reproducing oil paintings, including other methods of
texturing their reproductions, and there are also many companies, which
market art reproductions such as lithographs and serigraphs. Nevertheless,
we believe that no other known reproduction processes compare in quality
with the Artagraph processes in accurately reproducing brush strokes and
texture; and the color intensity and other reproduction characteristics are
believed to be at least equal to any other known reproduction process.
Artagraph's success in the marketplace will depend upon creating greater
awareness of its products, as well as its pricing and delivery policies.
8
- - Certain Stockholders Can Exercise Significant Influence Over Our Business
and Affairs and May Have Interests That are Different from the Common
Shareholders. - The Company has 400,000 Class "C" Common shares issued and
outstanding. Each Class "C" Common share entitles the holder to 100 votes.
Therefore the Class "C" Common shares have a total of 40 million votes,
which gives them control over the Board of Directors and operations of the
Company. The Class "C" Common Shares are not traded.
- - The Secured Note Holders of The Company May not Renew and Extend Repayment
Terms. - The Company is in default under its extended repayment terms. In
addition, one Note Holder commenced proceedings against the Company, in
1999 and 2000 in the State of New York and Province of Ontario,
respectively. In both cases the Company had counter-claimed, and in both
cases the plaintiff has filed for discontinuance without prejudice. We
cannot be assured that the Note Holders will agree to further credit
extensions, or that the Company would be able to pay them or in the case of
further actions by the Note Holder(s) to enforce payment, that the Company
could mount a successful defense.
- - We Rely Upon the Continuing Support of Trade Creditors. There is no
assurance that the trade creditors will continue to cooperate with the
Company, which could jeopardize its future ability to obtain products and
services and negatively impact operations in a material way.
- - Fluctuations in Conversion Rate Between The Canadian and United States
Dollars Could Have a Negative Impact on Our Financial Results - The
majority of Artagraph's revenues are exports and its invoicing is in United
States dollars. The Company has enjoyed a strong US dollar in relation to
the Canadian dollar during the current year, which positively impacts gross
margins. There is no guarantee that the US dollar will remain as strong in
relation to the Canadian dollar, and in the event that the Canadian dollar
strengthens that the Company will be able to compensate by increasing its
selling prices.
- - Our Stock Price Has Been Volatile. - The market price of our common stock
has been volatile, for example between January and December, 2001, the
trading prices for our common shares varied between a high of $US0.56 and a
low of $US.01. Fluctuations in trading price of our common stock may
continue in response to a number of events and factors, which may adversely
impact our ability to obtain further equity financing.
- - There Is Significant Doubt That The Company Is A Going Concern -- The
accompanying audited financial statements have been prepared on the basis
of accounting principles applicable to a going concern, meaning that the
Company will be able to realize its assets and discharge its liabilities in
the normal course of operations. However, the use of generally accepted
accounting principles that are applicable to a going concern is potentially
inappropriate because there is significant doubt about the appropriateness
of the going concern assumption. Given the accumulation of operating losses
and the deficiency of working capital, the Company's ability to realize its
9
assets and discharge its liabilities is dependent upon the attainment of
profitable operations and the continued financial support of its creditors.
The financial statements do not reflect adjustments that might be necessary
should profits not be attained, or should the support not be continued.
ITEM 2. PROPERTIES.
The Company's executive offices, Artagraph production facility and gallery are
located at 7100 Warden Avenue, Markham, Ontario, Canada L3R 8B5, occupying
12,000 square feet of space leased through January 31, 2003. The lease provides
for a fixed annual gross rental of Cdn$112,000 including its pro rata share of
taxes, insurance, building maintenance and occupancy costs.
The Company believes its leased facilities are in good operating condition and
adequate for its present requirements.
ITEM 3. LEGAL PROCEEDINGS.
In December 2000, a Note Holder commenced proceedings in Ontario court for
payment of US $45,000, interest and costs, whereby they brought a motion for the
appointment of a private receiver-manager. The Company brought a cross-motion to
dismiss the action for lack of legal capacity to commence the proceedings. In
February 2001 the counsel for the plaintiff delivered a notice of
discontinuance. The same Note Holder had commenced proceedings in New York State
in 1999, however the complaint was also discontinued in September 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY SECURITIES AND RELATED MATTERS.
During fiscal 1995, NASDAQ advised the Company that the Company was no longer in
compliance for continued listing on NASDAQ's Small Cap Market. The Company's
securities are now listed on the NASDAQ sponsored OTC Bulletin Board.
As of November 30, 2001 the Company had approximately 1300 holders of record of
the Common Shares.
The following table sets forth the high and low bid quotations for the Company's
securities, as reported by The NASDAQ Trading & Market Services for each
quarterly period within the two most recent fiscal years. The quotations are
reported quotations without retail markup, markdown or commission and may not
represent actual transactions.
Common
Shares
Fiscal Year High Low
----------- ---- ---
2000
----
1st Quarter 1.0630 1.0630
2nd Quarter 6.2500 0.1250
3rd Quarter 10.5625 1.3750
4th Quarter 4.6250 0.5100
2001
----
1st Quarter 1.15625 0.46875
2nd Quarter 0.53125 0.18000
3rd Quarter 0.19000 0.01100
4th Quarter 0.13000 0.00500
To be legally entitled to pay dividends, the Company is required to have assets
in excess of liabilities and stated capital after any payment of dividends. The
Company has a shareholders' deficit of $1,258,142 as of November 30, 2001 and
therefore it does not meet this standard and cannot pay dividends on its
securities at this time.
The payment of dividends on the Common Shares will depend on the Company's
future earnings and financial condition and such other factors, as the Board of
Directors of the Company may then consider relevant.
11
ITEM 6. SELECTED FINANCIAL DATA.
The following presents selected financial data for the Company in Canadian
dollars and in accordance with Canadian Generally Accepted Accounting Principles
("CDN-GAAP"). It should be read in conjunction with the separate financial
statements of the Company and related notes included elsewhere herein, which
were prepared under CDN-GAAP. This financial data should be compared to the
Company's Audited Financial Statements and the reconciliation of the financial
information presented between CDN-GAAP and US-GAAP. The financial data as of
November 30, 2001 and for the three previous fiscal years has been derived from
financial statements of the Company that have been examined by independent
chartered accountants in Canada.
(Stated in Canadian Dollars)
- -----------------------------------------------------------------------------------------------------------
Year ended November 30
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Summary of operations:
Sales 520,528 807,144 1,043,550 1,197,639 993,524
Cost of goods sold 518,946 688,768 685,908 748,683 871,656
Gross profit / (loss) 1,582 118,376 357,642 448,956 121,868
Depreciation and amortization 9,701 4,888 13,725 295,311 298,671
Selling, general and
administrative expenses 435,821 612,142 400,103 623,739 489,335
Write-down of Patent Cost 0 0 0 2,106,630 0
Interest and finance expense 47,699 47,980 46,226 185,006 65,573
Operating loss (491,639) (546,634) (102,412) (2,761,730) (731,711)
Interest income -- -- -- -- --
Income taxes -- -- -- -- --
Loss before equity in loss of
affiliated company (491,639) (546,634) (102,412) (2,761,730) (731,711)
Equity in loss of affiliated (812,184) (400,798) -- -- --
company
Net loss (1,303,823) (947,432) (102,412) (2,761,730) (731,711)
Net loss per Common Share(1) (0.05) (0.06) (0.09) (2.59) (4.88)
Weighted average number of Common
shares outstanding 26,083,544 16,096,346 1,146,551 1,066,551 149,852
Summary of balance sheet data:
Current assets 186,684 368,564 277,306 453,610 592,381
Total assets 395,489 517,437 376,585 548,050 3,111,323
Current liabilities 1,653,631 1,449,098 1,192,290 1,326,343 1,177,886
Long-term liabilities -- -- -- -- --
Total liabilities 1,653,631 1,449,098 1,192,290 1,326,343 1,177,886
Contributed surplus 11,775,000 11,775,000 11,775,000 11,775,000 11,775,000
Accumulated deficit (23,628,360) (22,324,537) (21,377,103) (21,274,691) (18,512,961)
Shareholders' (deficit) equity (1,258,142) (931,661) (815,705) (778,293) 1,933,437
(1) As the Company is in a loss position, it does not reflect the fully diluted
earnings per share, as the effect would be anti-dilutive.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
a) General
The following should be read in conjunction with our audited financial
statements and the notes thereto, Item 6. "Selected Financial Data" and other
financial information contained elsewhere and incorporated by reference in this
Annual Report. In the following discussions "we" "us" and "our" refer to A.R.T.
International Inc and its wholly owned subsidiary The Buck A Day Company Inc,
unless the context otherwise dictates.
In addition to historical information, the discussions in this section may
contain certain forward-looking statements that involve risks and uncertainties.
The forward-looking statements relate to, among other things, operating results,
trends in sales, gross profit, operating expenses, anticipated expenses and
liquidity and capital resources. Our actual results could differ materially from
those anticipated by forwarded-looking statements due to factors including, but
not limited to, those set out forth under Item 1. Business - "Factors that may
affect the business".
The Company's audited financial statements for the year ended November 30, 2001,
contained herein, are not consolidated with its affiliated company, The Buck A
Day Company ("Buck"). Buck only became a wholly owned subsidiary of A.R.T.
International Inc on December 4, 2001. Effective from August 31, 2001, the
Company's investment in Buck was diluted down from 100% to approximately 10%,
following the issue of common shares by Buck directly to its new investors.
Accordingly, the investment in Buck has been accounted for by the equity method,
whereby the Company recorded the purchase of Buck at cost less its equity share
of losses.
b) Artagraph -- Year ended November 30, 2001, compared with year ended
November 30, 2000
Sales
In Canadian Dollars 2001 % 2000 % 1999 %
- ------------------------------------------------------------------------------------------------------------------
Total Sales $ 520,528 100% $ 807,144 100% $1,043,550 100%
- ----------- ---------- ---------- ---------- ---------- ---------- ----------
Sales to two Publishing Customers $ -- --% $ 41,916 5% $ 358,786 34%
Sales to one Retail Customer $ 203,460 39% $ 442,809 55% $ 412,638 40%
Sales to next ranked Customer $ 64,910 13% $ 26,790 3% $ 47,650 5%
13
Sales for the year ended November 30, 2001 were $520,528 down $286,616 from
Sales of $807,144 in fiscal 2000.
The Company continues to be very reliant on a few customers for the majority of
its sales revenues. In the year ended November 30, 2001, the Company recorded
sales to its main retail customer of $203,460, which represents 39% of its total
sales revenues in that year. The Company also recorded sales of $64,910 (13%) to
a new customer in the home-show business. In the year ended November 30, 2000,
revenues from the main retail customer were $442,809 (55% of that period total
revenues) which was $239,350 higher than 2001. The reduction in sales to its
main retail customer was a direct result of the Company's decision to suspend
shipments to that customer, pending the customer's refinancing. During the year,
the days outstanding on receivables from that customer deteriorated from 40 to
120 days. In the third quarter, the Company received confirmation that the
retail customer was successful in refinancing its operations and re-commenced
shipments on the backlog of orders from that customer of approximately $125,000.
The interruptions in cash flow had caused the Company to suspend its payments to
frame and packaging suppliers, which caused further shipment delays in the forth
quarter and ultimately led to that customer reducing their order backlog
substantially. As a result of the on-going collection problems with this
customer the company purchased export insurance. On January 10, 2002, the
customer filed a Chapter 11 petition, which resulted in the complete suspension
of payments by that customer to the Company on trade receivables owed of
approximately US$ 65,000. The Company subsequently filed an insurance claim and
has received US$ 45,000.
The aforementioned sales to the new customer in the home show business were a
new initiative by the Company, which had inconsistent results. Following the
round of fall shows that customer has indicated that future sales will be
significantly lower than 2001.
Finally, the shortfall in sales to its main retail customer was also offset by
one-time liquidation sale of approximately $90,000 of original art and excess
inventories to a customer in State of Florida.
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. 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.
14
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 loss of $4,208 in the year ended November 30, 2001,
compared to a gross profit $121,700 for the same period of the previous fiscal
year. As a consequence of the Chapter 11 filing initiated by the Company's
largest customer subsequent to the year-end, the company has charged an
additional inventory write-down at the year-end of approximately $75,000. In
addition, the gross margin remains depressed owing to the low revenue levels
compared to the fixed production-overhead expenses. The Company's production
capacity is currently running at approximately 15%.
Net Loss
Net loss for the year ended November 30, 2001 was $1,303,823 compared to
$947,433 for fiscal 2000. The selling, general and administration expenses in
fiscal 2001 were $422,466 compared to $614,488 in fiscal 2000. In fiscal 2000
the Company had expended approximately $100,000 on the production and running of
a TV commercials to promote its direct sales efforts. This program was abandoned
in the third quarter of fiscal 2000, as the resulting increases to sales were
negligible. The equity loss from the affiliate company, Buck, was $812,184
compared to $400,798 in the previous fiscal year. Buck's losses reflect ongoing
start-up losses due mainly to delays in funding for rollout of its programs.
c) Liquidity and Capital Resources -- Year ended November 30, 2001, compared
with year ended November 30, 2000
Unless the Company is able to significantly increase sales from the level
experienced in 2001, 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.
15
During the 2001 fiscal year, the Company issued 800,000 common shares for a
total cash consideration of $507,342. In addition 2,000,000 shares were issued
in conjunction with the acquisition of Buck at a value of $470,000 as described
in the notes to the financials (see Item 8 Financial Statements).
On December 4, 2000, the Company acquired the balance of 200 common shares of
Buck, thereby owning 100% of Buck. The consideration paid for the remaining 200
common shares was as follows:
Cash ........................................ $500,000
Add - 2,000,000 Common Shares Issued
Fully Paid and Non-assessable ............... 470,000
--------
Total Consideration $970,000
========
The Company attributed the cash value of the 2,000,000 common shares issued of
$470,000 or $0.235 per common share, as the shares are restricted and may not be
traded for three {3} years. The average market price of the common share was
approximately $1.00 in the corresponding period.
The balance sheet of Buck had a shareholders' deficiency of $434,715 and the
stated capital of the shares acquired from the selling shareholders of Buck was
$ 75,000. In the opinion of management, the underlying fair market value of
assets acquired approximates the book value as stated in Buck's audited
financial statements for the year ended November 30, 2000. The consideration has
been allocated as follows:
Total Consideration.................................................$ 970,000
Less - Shares Purchased ............................................. 75,000
--------
Allocated to Goodwill $895,000
========
The Company funded the purchase of the balance of the Buck common shares by
issuing 500,000 of its common shares for $500,000 cash and issuing 2,000,000
fully paid and non-assessable restricted common shares to the vendors. In
addition, the selling shareholders of Buck received 1,000,000 options to
purchase common shares pursuant to the Company's stock option plan. The
1,000,000 common shares are reserved and conditionally allotted to be issued in
respect of share purchase options upon receipt by the Company of the purchase
price per share on the exercise of each such option.
The letter of intent dated November 27, 2000, issued by the Company to Buck,
also provided that the Company would arrange for a further $500,000 financing
for Buck within 10 to 15 days of A.R.T. having 100% of Buck and further arrange
$500,000 financing on or about March, 2001. As of August 2001, the Company had
not arranged the $1,000,000 financing.
16
Buck had experienced liquidity problems since the beginning of the first quarter
of fiscal 2001, due to its on going operating losses and negative cash flows,
and the Company's inability to raise additional operating capital of $1,000,000.
By the end of the 1st quarter Buck was seriously delinquent on approximately
$200,000 of sales taxes owed to the Province of Ontario. Buck had net losses of
$US 1,514,959 for the year ended July 31, 2001. At August 31, 2001, Buck had
negative working capital of $2,385,686. Without the continuing support of its
secured and unsecured creditors, the Buck A Day Company would likely have been
forced to seek creditor protection.
In this regard, the holders of the $710,000 debenture, including Dennis and Ed
Labuick who were the co-founders and President and CEO of Buck (hereinafter
referred to as "Labuick Group"), threatened to exercise their security rights if
the Company failed to raise the aforementioned $1,000,000, which included the
right to appoint a receiver manager.
In July 2001, Buck executed a Security Agreement with 1483516 Ontario Limited
("1483516"), whereby 1483516 agreed to loan Buck $USD 450,000. The Security
Agreement provided for the conversion of the $USD 450,000 of principal into
3,000,000 Buck common shares and a Series "B" Warrant to purchase 3,000,000 Buck
common shares exercisable at $USD 0.15 per share.
The $710,000 Loan held by the Labuick Group was amended to add a conversion
privilege into Buck common shares at $0.10 per share for a total aggregate
7,100,000 common shares. Upon conversion, the holders of the Security Agreement
held by the LaBuick Group also received a Series "A" Warrant for the purchase of
up to 1,500,000 additional shares of Buck at $0.10 per share.
In August 2001 Buck allotted and issued 1,999,600 fully paid and non-assessable
common shares to the Company for $1.00, thereby bringing the total Buck common
shares owned by ART to 2,000,000 in the aggregate. The said allotted common
shares are effectively a stock-split of the 400 common shares originally owned
by ART into 2,000,000 common shares. Further, Buck granted ART a Series "C"
Warrant to purchase up to 800,000 common shares of Buck at $0.10 per share,
exercisable for a period of 120 days after the exercise by the LaBuick Group of
its conversion rights.
As a consequence of the above transactions, plus further common shares issues by
Buck through October 31, 2001, the resulting common share ownership in Buck, on
a fully diluted basis assuming all warrants to purchase Buck common shares are
exercised, was as follows:
The LaBuick Group,
1483516 & other 18,000,000 20%
ART 2,000,000 10%
- ------------------------------------------------------
TOTAL 20,000,000 100%
- ------------------------------------------------------
17
The outcome of the aforementioned Buck transactions was that ART's investment in
Buck went from 50%, on December 4, 2000, to 100%, and from 100% to approximately
10%, on October 31, 2001. Consequently, the audited financial statements of the
Company for the year ended November 30, 2001, include the Buck investment on an
equity basis. As a result of the losses recorded by Buck, ART had written-down
its investment in Buck to its realizable value of approximately $170,000.
Subsequent to the year-end, effective February 18, 2002, the Company sold its
remaining interest in Buck common share to Savaran Financial Inc. for $171,428.
At that date, Buck's filing of its registration statement with U.S. Securities
and Exchange Commission to become a public company in the United States was
still not completed. In addition, Buck is raising further pre-IPO capital, which
transaction is likely to dilute the current share prices and place
selling-restrictions on the current shareholders of Buck. At the time of the
sale of remaining Buck investment, the Company believed that there was a limited
market for Buck common shares, and that the longer-term investment strategy
involved significant downside risk. Further, the Company's Artagraph business
was facing sever liquidity problems and the sale of the Buck investment would
give access to immediate working capital.
From aforementioned transactions, Buck A Day received approximately $US 1.25
million dollars in capital investment. In addition, the secured loan of $710,000
was converted into common shares of Buck. Consequently, Buck's management was
able to negotiate extended payment terms with all their preferred and un-secured
creditors.
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.
During 1999 certain of the Company's 10% note holders demanded full repayment of
principal and interest, and commenced legal proceedings to enforce their demands
including an attempt to appoint a receiver. The Company successfully negotiated
with the majority of the note holders, being 2/3rds, to extend the repayment
terms an additional year. The Company and the note holders did not negotiate any
further extensions during fiscal 2001, however, no demands have been made by the
note holders for payment.
In December 2000, a Note Holder commenced proceedings in Ontario court for
payment of US $45,000, interest and costs, whereby they brought a motion for the
appointment of a private receiver-manager. The Company brought a cross-motion to
dismiss the action for lack of legal capacity to commence the proceedings. In
February 2001 the counsel for the plaintiff delivered a notice of
discontinuance. The same Note Holder had commenced proceedings in New York State
in 1999, however the complaint was also discontinued in September 2000.
18
The total amount due to the note holders of $770,212 including accrued 10%
interest and principal, has been reflected as a current liability. These 10 %
notes and accrued interest are secured by a general security agreement over the
assets of the Company.
The Company has negative working capital at November 30, 2001, of $1,466,946
compared with negative working capital at November 30, 2000, of $1,080,535.
d) Dividends - Year ended November 30, 2001
None.
e) Artagraph -- Year ended November 30, 2000, compared with year ended
November 30, 1999
The financial information discussions herein this sub-section will principally
relate to the fine art reproduction business. However, certain overhead
expenses, primarily investor relation costs, which were reported in the
Company's audited financial statements, are related to both the Artagraph and
Buck businesses.
The Company reported sales revenues from its Artagraph division of $807,144 in
fiscal 2001, down $236,406 from $1,043,550 in fiscal 1999. The reason for the
reduction in sales revenues was the loss of business from the Company's major
publishing customer, which had significantly cutback its orders in 2001,
following its own financial restructuring in 1999.
Consequently, with the loss of sales revenues from its major publishing customer
the Company is reliant for 55% of its total annual revenues from one retail
customer. The table below illustrates the dependency of the Company on one major
customer.
In Canadian Dollars 2000 % 1999 % 1998 %
- -------------------------------------------------------------------------------------------------------------------
Total Sales $ 807,144 $1,043,550 100% $1,197,639 100%
- ----------- ---------- ---------- ---------- ---------- ----------
Sales to two Publishing Customers $ 41,916 5% $ 358,786 34% $ 594,564 50%
Sales to one Retail Customer $ 442,809 55% $ 412,638 40% $ 327,629 27%
Sales to next ranked Customer $ 26,790 3% $ 47,650 5% $ 32,723 3%
Gross profit fell by $229,050 to $118,376 in fiscal 2001 from $357,426 in fiscal
1999. Gross Margin was 15% for the year ended November 30, 2001, which compares
unfavourably to the 34% gross margin in 1999. The lower margin can be attributed
to the change in sales mix, the negative impact of fixed plant costs on the
lower sales revenues and material purchase price increases.
19
Selling, General and Administration expenses were $614,488 for the year ended
November 30, 2001, an increase of $223,460 from the previous year, which was in
part due to higher consulting fees, advertising costs and professional fees
associated with the Company's investor relation costs.
The net loss for fiscal 2001 was $947,432, which also included the Company's
equity share of the losses from its affiliated company of $400,798.
Fiscal 2001 operating cash flows were negative $731,446 and compare unfavourably
with the previous years at negative $135,012. The cash shortfall was financed
from the issuance of capital stock.
Sales Revenues
The decline in sales from the prior year is attributable to the reduction in
sales to the Company's major publishing customer, which occurred after that
customer went into financial restructuring. The reduction in sales to this
customer has, and will continue in the future to have a serious detrimental
impact on its ability to continue to operate.
During fiscal 2000, the Company produced video commercials and ran advertising
on several Paid-TV stations in Canada. In addition, the Company engaged two
sales and marketing associates in an effort to promote sales. In both cases
results were mixed or disappointing.
Owing to the Company's inability to finance other initiatives, or to attend
trade shows, or to hire dedicated sales personnel to sell in its markets, the
Company continues to achieve limited success in developing new opportunities to
replace the loss of sales revenues from its existing customers and markets.
The Company believes that no other known reproduction processes compare in
quality with the Company's processes in accurately reproducing brush strokes and
texture, and the colour intensity and other reproduction characteristics are
believed to be at least equal to any other known reproduction process.
The Company's success in the marketplace will depend upon raising capital in
order to create greater awareness of its products through aggressive
advertising, attendance at trade shows, as well as updating its library of
images and providing new point-of-sale materials.
Gross Profit / Margin
Gross margin declined by 20% and gross profits fell by $229,050, which was
attributable to the following:
20
o Lower sales revenues due to the reduction of sales to the Company's major
publishing customer;
o The negative impact of fixed plant costs, including rent, maintenance and
insurance, on lower sales revenues; and,
o The sales-mix changed, as sales of framed products increased 30% in
relationship to total sales revenues; framed products, principally
catalogue items, have a lower mark-up than unframed product, which are
mainly overseas and publishing customer based.
Selling, general and administrative expenses
Selling, general and administrative expenses increased for the following
reasons:
o The Company produced several video commercials and ran television
advertising of approximately $120,000;
o During fiscal 2000 the Company engaged two sales and marketing associates
in an effort to promote sales; the Company was responsible for their
out-of-pocket expenses, which were approximately $70,000;
o During fiscal 2000, the Company's consulting and investor relationship
costs increased by $25,000, which was related the administrative and
communication activities of the conversion of the Class "A" Preference
Series 1 and 2 into common shares and the "three for one" dividend declared
on the common shares;
o Legal costs also increased by $20,000 because the Company had to defend
against two actions brought against the Company by one of the 10% Note
holders; and,
o The Company issued 200,000 common shares, fully paid non-assessable and
restricted, to a consultant, being an introduction and arrangement fee
associated with the Buck acquisition; the value of the issued shares of
$47,000 was charged to consultation expenses.
f) Buck A Day -- Year ended November 30, 2000, the company's first year in
operation.
The financial information and discussions herein this sub-section principally
relate to the Buck A Day business. However, certain overhead expenses, primarily
investor relation costs, which were reported in the Company's audited financial
statements, are related to both the Artagraph and Buck businesses.
Sales revenues for the first 11 months in operation were $3,563,171, and gross
profit was $1,080,054. Selling, general and administrative costs were
$2,037,069; the major components being salaries and commissions $772,513, media
and printing $594,839, telemarketing $125,113 and communication 114,557. The net
loss was $979,715.
Operating cash flow was a negative $564,390 and the company spent $196,873 on
capital assets. The cash losses and capital expenditures were financed by share
capital issuances totaling $545,000 and the balance by shareholders' loans
totaling $296,412.
21
At November 30, 2000, the company had negative working capital of $312,476 and a
shareholders' deficiency of $434,715.
The company's start-up expenditures in relationship to initial sales revenues
were high during the first eight months of operation. In addition fixed
overheads were disproportionately high compared to underlying revenues, as the
company built its infrastructure and franchise. Typical of any start-up
business, the company suffered from operating inefficiencies, giving rise to
losses. By the end of November, the Buck a Day name brand was highly visible,
and its business model was successfully launched. We believe that we could have
capitalized a minimum of $400,000 of our expenses against future earnings as an
investment in building the franchise. However under Canadian and United States
GAAP these start-up costs and non-recurring expenses have been written-off. The
net loss of $979,000 will be carried forward as tax losses to be offset against
future taxable income.
Sales Revenues
Sales revenues for the first eight months, January to August, were $1.6 million
or an average of $205,000 per month. September, October & November sales were
$1.92 million dollars, which is an average of $640,031 per month, which
represents an increase of over 300% in average monthly sales. This triple digit
sales growth is attributable to two major factors. First, the growing brand
awareness in "Buck a Day" promoted through the Company's aggressive media
advertising campaign. Second, the Company's ability and success in forming
strategic relationships with its business partners, IBM Canada and The
Associates Finance Group, has enabled it to supply competitively priced name
brand consumer products and reliable retail financing.
In the first two months of fiscal 2001, sales revenues were $1.8 million with
profit before taxes of approximately $80,000. This is an average monthly volume
of $900,000, an increase of 140%. Notwithstanding the computer industry's
sluggish sales, the Company's unique brand of marketing has enabled it to carve
a growing revenue niche in a competitive marketplace.
The Company has forecasted its fiscal 2001 sales revenues will be $23 million.
This forecast does not make any allowance for US sales; the company is planning
a fourth quarter launch of its business model into the USA.
Gross Profit
The gross margin was 30% in fiscal 2000, approximately twice the margin the
company typically earns on the basic package, which was attributable to the
company aggressive up-sells strategy.
22
Notwithstanding the competitive industry that the company operates within, and
the potential for falling gross margins, the company anticipates it can maintain
its 30% gross margin, owing to the up-sells it can generate through offering its
customers the convenience of pre-approved credit.
Selling, General and Administrative Expenses - start-up challenges
In the first four months of operations, the company unsuccessfully partnered
with several financing brokers and organizations that had given us their
assurances of their ability to provide reliable retail financing, specifically
with acceptable rates of consumer approval. Unfortunately, we achieved only an
average of 10%, which was uneconomical for us, given our infrastructure; media
and staff investments were geared to a minimum approval rate of 20 to 25%.
On April 20th, we concluded an agreement with The Associates Finance Group for
its retail consumer financing. The approval rate began at 22% and has grown to
its current rate of 25% to 35%.
During its first eight months, the Company was plagued by a shortage of computer
and peripherals inventory availability from its contracted distribution source,
Beamscope, which led to substantial lost opportunity for revenues to offset
ongoing operating costs. The company has refused to pay Beamscope $234,000 in
order to offset against its losses, and the resultant litigation between the two
companies is ongoing. Beamscope has since filed for protection from its
creditors under the bankruptcy act.
On September 1, 2000, the Company signed a direct distributor agreement with
IBM, whereby the Company became a full IBM Business Partner Reseller.
Our media and commercial production investment of $595,000 generated in excess
of 9,800 national 60-second TV spots promoting the Company's brand and products.
Our advertising has aired on most national cable networks including: TWN
(Weather), CMT, Discovery, ATN, ROB-TV, Bravo, Space, Showcase, OLN, CTS, Star,
Much More Music, CLT, Headline Sports, CP24, CityTV, CITV, BCTV, and ATV.
We have made a substantial investment in our employees. Our management team has
substantial experience in our industry and we have hired and trained over fifty
telephone sales staff. This investment in our infrastructure was necessary
before we could service the calls from prospective customers.
g) Liquidity and Capital Resources
In August 1999 the Company's Board of Directors approved a third offering of its
common stock under Regulation S. During the 2000 fiscal year, the Company issued
13,400,000 common shares (on a post stock dividend basis) for a total cash
consideration of $670,000. In addition, 200,000 shares were issued as
23
consideration for finders' fees valued at $47,000. Various officers and
employees of the Company exercised options for 238,500 shares for a cash
consideration of $64,476. In addition, the Company issued a further 50,000 Class
"C" Common shares for proceeds of $50,000.
Proceeds of $470,000 were invested in the acquisition of The Buck A Day Company
Inc ("Buck"), which in turn utilized the capital for start-up requirements.
$120,000 of the proceeds was invested in a television marketing campaign for
Artagraph. The balance was mainly utilized to fund on going corporate expenses
relating to the Company's financial reorganizations (as detailed herein under).
On July 14, 2000, at the Annual, General and Special meeting of shareholders of
the Company, the shareholders approved an amendment to the articles of the
Corporation, whereby effective July 16, 2000, all of the issued and outstanding
805,000 class "A" preference shares, series 1, and all of the issued and
outstanding 466,941 class "A" preference shares, series 2, were converted into
and became common shares at the effective rate of 0.5837142 and 0.7114282 common
shares for each series 1 and series 2 class "A" preference shares, respectively.
The effective rate was higher than the actual stated conversion rate of 0.048
and 0.24 as specified to the series 1 and series 2 preference shares,
respectively, to give credit for accumulated undeclared dividends (as detailed
in sub-section e) "Dividends").
As of November 30, 2000, the Company had issued and outstanding 23,308,544
common shares. However, the total Class C Common Shares issued and outstanding
are 400,000 (on a post stock dividend basis) and represent a total of 40,000,000
votes. Therefore, the Class C Common shareholders have control of the Company in
aggregate, including the power to appoint its Board of Directors and control the
Company's operations.
On December 4, 2000, the Company acquired the balance of 200 common shares of
Buck, thereby owning 100% of Buck. The consideration paid for the remaining 200
common shares was as follows:
Cash...........................................................$ 500,000
Add - 2,000,000 Common Shares Issued
Fully Paid and Non-assessable ...................... 470,000
--------
Total Consideration ....... $970,000
The Company funded the purchase of the balance of the Buck common shares by
issuing 500,000 of its common shares for $500,000 cash and issuing 2,000,000
fully paid and non-assessable restricted common shares to the vendors. In
addition, the selling shareholders of Buck received 1,000,000 options to
purchase common shares pursuant to the Company's stock option plan. The
1,000,000 common shares are reserved and conditionally allotted to be issued in
respect of share purchase options upon receipt by the Company of the purchase
price per share on the exercise of each such option.
24
Shareholder loans to Buck in the amount of $296,000 are secured against the
assets of Buck under a general security agreement.
The Letter of Intent dated November 27, 2000, issued by the Company to Buck,
also provided that: the Company "will arrange for a further $500,000 financing
for Buck within 10 to 15 days of A.R.T. having 100% of Buck and further arrange
$500,000 financing on or about March 2001".
Effective July 14, 1998, the Company's shareholders approved a stock option plan
for the Company. In 1999, pursuant to the option plan and subject to and
conditional upon any necessary shareholder or regulatory approval or ruling,
238,500 stock options were granted to employees, directors and officers of the
Company. The stock options, which commence December 1, 1998 and expire December
1, 2004, are exercisable at various option exercise prices ranging from $0.20 to
$ 0.37 per share. Effective July 31, all 238,500 options were exercised. As the
stock options were not formally registered with the SEC, any common shares
issued pursuant to the exercise of stock options are restricted shares.
The Company's working capital remained negative as at November 30, 1999, at
Cdn$1,080,534, an increase over the balance at the fiscal 1999 year end of
negative Cdn$914,984.
h) Dividends - Year Ending November 2000.
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 the Class "A" preference
shares, series 1 and series 2 were converted into common shares. At November 30,
1999, the Class "A" preference shares had cumulative undeclared dividends
amounting to U.S. $3,018,750 and U.S. $1,540,907 on the series 1 shares and
series 2 shares respectively. The shareholders approved a bonus of 0.5357142
common shares per series 1 share, and 0.4714282 common shares per series 2
share. As a result of the aforementioned amendment, the dividends payable but
not yet declared by the Company were effectively cancelled.
On July 14, 2000, the Company declared a stock dividend, whereby on August 15,
2000, common shareholders of record received 3 common shares for each common
share owned on the record date of August 2, 2000. Based on 5,277,136 shares
outstanding as of the record date, the stock dividend was 15,831,408 common
shares.
25
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 the provisions of the Ontario Business
Corporation Act restricting its ability to issue dividends, as no assets of the
Company have been actually distributed.
On July 14, 2000, the Company declared a stock dividend, whereby effective
August 15, 2000, class "C" common shareholders of record received 3 common
shares for each common share owned on the record date of August 2, 2000. On a
fully diluted basis, the stock dividend was 300,000 common shares. 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 the
provisions of the Ontario Business Corporations Act restricting its ability to
issue dividends, as no assets of the Company have been actually distributed.
26
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to variety of risks, indirectly by changes in interest rates
affecting consumer-purchasing habits and directly affected by currency
fluctuations between the Canadian and US dollars. The Company does not purchase
forward foreign exchange contracts.
The Company has no debt or credit subject to variable interest rates. During
fiscal 2001, monthly average translation rates between Canadian and United
States dollars have ranged from a low of: $CAD1.50: $US1.0 to a high of
$CAD1.59: $US1.0.
The Artagraph division F2001 sales revenues outside Canada are invoiced in
United States dollars. Such sales revenues represent approximately $400,000 or
approximately $US 260,000. At any given date the Company may be owed $US40,000
based upon the current revenue levels. A strengthening of the Canadian dollar
against the United States dollar, assuming a shift in rates within 30 days of
the magnitude above, would result in an exchange loss of $3,600. A more
permanent shift, i.e. extended over 12 months, in exchange rates, whereby the
rate of exchange Canadian/United Sates dollars returned to an historical level
of $CAD1.36: $US1.0, could result in loss of revenue of approximately $46,000.
Conversely, the Company owes $US 489,708 of principal and accrued interest to
its 10% Note Holders. A weakening Canadian dollar will negatively impact by
increasing losses. However, a strengthening Canadian dollar, along the same
lines above, could decrease the Company's debt by an amount of $95,000.
The exchange gains and losses that the Company may be impacted by from time to
time will depend on the levels of US dollar monetary assets and liabilities as
well as their corresponding collection and payment events. Long term trends of a
strengthening Canadian dollar relative the United Sates dollar would likely have
permanent negative impact.
27
ITEM 8. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
AUDITORS' REPORT
To the Shareholders of
A.R.T. International Inc.
We have audited the balance sheet of A.R.T. International Inc. as at November
30, 2001 and 2000 and the statements of loss, deficit and cash flows for the
years ended November 30, 2001, 2000 and 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at November 30, 2001 and 2000
and the results of its operations and its cash flows for the years ended
November 30, 2001, 2000 and 1999 in accordance with Canadian generally accepted
accounting principles.
Toronto, Canada CHARTERED ACCOUNTANTS
March 4, 2002
COMMENTS BY AUDITORS
FOR U.S. READERS ON CANADA - U.S. REPORTING CONFLICT
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by significant uncertainties such as that referred to in
the attached balance sheet as at November 30, 2001 and 2000 and as described in
Note 14 to the financial statements. Our report to the shareholders dated March
4, 2002 is expressed in accordance with Canadian reporting standards which do
not permit a reference to such an uncertainty in the auditors report when the
uncertainty is adequately disclosed in the financial statements.
Toronto, Canada CHARTERED ACCOUNTANTS
March 4, 2002
28
A.R.T. INTERNATIONAL INC.
BALANCE SHEET
NOVEMBER 30, 2001 AND 2000
(STATED IN CANADIAN DOLLARS)
2001 2000
---------- ----------
CURRENT
Cash $ 15,597 $ 101,689
Accounts Receivable 52,920 96,283
Inventories [Notes 2(a) and 3] 110,262 153,687
Prepaid Expenses and Deposits 7,905 16,905
---------- ----------
186,684 368,564
---------- ----------
INVESTMENT IN AFFILATED COMPANY [Note 4] 170,000 69,202
---------- ----------
CAPITAL [Note 5] 38,804 48,505
---------- ----------
OTHER
Patents 3,931,051 3,931,051
Art Reproduction Rights 441,875 441,875
---------- ----------
4,372,926 4,372,926
Less - Accumulated Amortization [Note 2(c)] 4,372,925 4,372,925
---------- ----------
1 1
---------- ----------
Inventories [Notes 2(a) and 3] -- 31,165
---------- ----------
TOTAL ASSETS $ 395,489 $ 517,437
========== ==========
The accompanying notes form an integral part of these financial statements.
29
A.R.T. INTERNATIONAL INC.
BALANCE SHEET
NOVEMBER 30, 2001 AND 2000
(STATED IN CANADIAN DOLLARS)
2001 2000
------------ ------------
CURRENT
Accounts Payable and Accrued Liabilities $ 712,052 $ 685,291
Loans Payable [Note 6] 171,367 60,000
Notes Payable [Note 7] 770,212 703,807
------------ ------------
TOTAL LIABILITIES 1,653,631 1,449,098
------------ ------------
SHAREHOLDERS' DEFICIENCY
SHARE CAPITAL [Note 8]
COMMON SHARES
26,108,544 {2000 - 23,308,544} 10,495,217 9,517,875
CLASS "C" COMMON SHARES
400,000 100,001 100,001
------------ ------------
10,595,218 9,617,876
CONTRIBUTED SURPLUS 11,775,000 11,775,000
DEFICIT(23,628,360) (22,324,537)
------------ ------------
(1,258,142) (931,661)
------------ ------------
TOTAL LIABILITIES
LESS SHAREHOLDERS' DEFICIENCY $ 395,489 $ 517,437
============ ============
The accompanying notes form an integral part of these financial statements.
APPROVED BY THE BOARD: Director _______________ Director _______________
To be read in conjunction with the Auditors' Report attached hereto dated March
4, 2002.
30
A.R.T. INTERNATIONAL INC.
STATEMENT OF DEFICIT
FOR THE YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
(STATED IN CANADIAN DOLLARS)
2001 2000 1999
----------- ----------- -----------
BALANCE - Beginning of Year $22,324,537 $21,377,103 $21,274,691
ADD - Net Loss 1,303,823 947,432 102,412
----------- ----------- -----------
23,628,360 22,324,535 21,377,103
ADD - Dividends [Note 9] -- 2 --
----------- ----------- -----------
BALANCE - End of Year $23,628,360 $22,324,537 $21,377,103
=========== =========== ===========
The accompanying notes form an integral part of these financial statements.
31
A.R.T. INTERNATIONAL INC.
STATEMENT OF LOSS
FOR THE YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
(STATED IN CANADIAN DOLLARS)
2001 2000 1999
------------ ------------ ------------
SALES $ 520,528 $ 807,144 $ 1,043,550
------------ ------------ ------------
COST OF GOODS SOLD AND OTHER
MANUFACTURING COSTS
Cost of Goods Sold and Other Manufacturing
Costs Before the Undernoted:518,946 681,530 685,908
Amortization of Capital Assets 5,790 7,238 10,216
------------ ------------ ------------
524,736 688,768 696,124
------------ ------------ ------------
GROSS PROFIT (LOSS) (4,208) 118,376 347,426
------------ ------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES
Selling, General and Administrative Expenses
Before the Undernoted: 422,466 614,488 391,028
Foreign Exchange Loss (Gain) 13,355 (2,346) 9,075
Amortization of Capital Assets3,911 4,888 3,509
Loan Interest 47,699 47,980 46,226
------------ ------------ ------------
487,431 665,010 449,838
------------ ------------ ------------
LOSS FROM OPERATIONS
BEFORE UNDERNOTED ITEM (491,639) (546,634) (102,412)
EQUITY IN LOSS OF AFFILIATED COMPANY (812,184) (400,798) --
------------ ------------ ------------
LOSS BEFORE TAXES (1,303,823) (947,432) (102,412)
PROVISION FOR INCOME TAXES [Note 13] -- -- --
------------ ------------ ------------
NET LOSS $ (1,303,823) $ (947,432) $ (102,412)
============ ============ ============
NET LOSS PER COMMON SHARE [Note 12(b)] $ (0.05) $ (0.06) $ (0.09)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES [Note 12(d)] 26,083,544 16,096,346 1,146,551
============ ============ ============
The accompanying notes form an integral part of these financial statements.
32
A.R.T. INTERNATIONAL INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
(STATED IN CANADIAN DOLLARS)
2001 2000 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(1,303,823) $ (947,432) $ (102,412)
Adjustments for:
Amortization of Capital Assets 9,701 12,126 13,725
Accrued Interest and Penalties on
Notes Payable (Reversed) 66,405 76,172 (41,192)
----------- ----------- -----------
(1,227,717) (859,134) (129,879)
Net Changes in Working Capital Balances:
Accounts Receivable 43,363 25,263 25,967
Inventories - Current and Long-Term 74,590 (9,211) 31,761
Prepaid Expenses and Deposits 9,000 (9,000) --
Accounts Payable and Accrued Liabilities 26,761 120,636 (62,861)
----------- ----------- -----------
(1,074,003) (731,446) (135,012)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans Payable 111,367 60,000 --
Notes Payable -- -- (30,000)
Issuance of Share Capital for Cash {Net} 977,342 831,478 65,000
Dividends -- (2) --
----------- ----------- -----------
1,088,709 891,476 35,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Affiliated Company (100,798) (69,202) --
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (86,092) 90,828 (100,012)
CASH - Beginning of Year 101,689 10,861 110,873
----------- ----------- -----------
CASH - End of Year $ 15,597 $ 101,689 $ 10,861
=========== =========== ===========
The accompanying notes form an integral part of these financial statements.
33
A.R.T. INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2001
(STATED IN CANADIAN DOLLARS)
1. INCORPORATION AND OPERATIONS
The Company was incorporated in Canada on January 24, 1986 under The
Ontario Business Corporations Act. The Company's primary business is the
production, distribution and marketing of replications of oil paintings.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) INVENTORIES
(i) Inventories, whether classified as current or long-term assets,
are valued at the lower of cost and market value. Cost is
determined on a first-in, first-out basis.
(ii) The Company's policy is to periodically evaluate the inventory
levels of each product in its inventory on an image-by-image
basis, both in light of past sales and estimated future sales of
each product and similar products. In addition, when the Company
determines that a product line or market should be discontinued,
the inventory relating to that product line or market is written
down to net realizable value. The purpose of these policies is to
ensure that the Company's inventory balances, net of reserves,
exclude slow-moving and obsolete inventory and are valued at the
lower of cost and market value. The Company uses annual physical
inventory counts combined with an analysis of each product's
preceding three year's (or for such shorter period that a
particular product may have been in existence) sales and a review
of the Company's sales expectations for each product to determine
whether the level and value of the Company's inventory of a
particular product at a given time is excessive. This three year
period has been deemed to be an appropriate period for evaluating
the historical sales of the Company's products since such
products are not perishable and tend to be marketed over
multi-year periods through intermittent and recurring sales
programs. In no event are amounts carried as a current asset if
it is not probable that they will be sold within one year, nor do
amounts carried as long-term inventory exceed their fair value as
determined by the inventory valuation policies of the Company as
described above. In light of the Chapter 11 filing by the
Company's major customer [See Note 16], the work-in-process
inventory at year end has been written down to Nil.
(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
34
(C) OTHER ASSETS
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
costs. In accordance with this policy, all patents at November 30,
1998 have been written down to $1.
Art reproduction rights are recorded at cost and are amortized over
their estimated useful lives on a straight-line basis over a period of
three years.
(D) FAIR VALUES
The Company determines the fair value of its financial instruments
based on quoted market values or discounted cash flow analysis. The
fair value of the accounts payable, loans payable and the notes
payable, based on current estimated borrowing rates, is significantly
less than the stated carrying values at year end. The recorded amounts
of other financial instruments in these financial statements
approximate their fair values.
(E) TRANSLATION OF FOREIGN CURRENCIES
These financial statements are presented in Canadian dollars. Under
Canadian generally accepted accounting principles, the translation
gains or losses arising on translation of long-term monetary items are
deferred and amortized over the lives of the related monetary item.
(F) MANAGEMENT REPRESENTATIONS
In the opinion of management, all adjustments necessary for a fair
presentation of the financial position at November 30, 2001 and 2000
and the results of operations, cash flows and related note disclosures
for the fiscal years ended November 30, 2001, 2000 and 1999 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 and expenses
during the reporting period. Actual results could differ from these
estimates.
3. INVENTORIES
Inventories consist of the following:
2001 2000
----------------------------------------------- ------------------------------
Provision for Provision for
Obsolete and Obsolete and
Gross Slow-Moving Net Gross Slow-Moving Net
Amount Inventories Amount Amount Inventories Amount
------------- ------------- ------------- ------------- ------------- -------------
Finished Goods $ 67,107 $ -- $ 67,107 $ 61,900 $ -- $ 61,900
Work-in-Process 48,827 (48,827) -- 48,825 -- 48,825
Raw Materials 43,155 -- 43,155 74,127 -- 74,127
------------- ------------- ------------- ------------- ------------- -------------
$ 159,089 $ (48,827) $ 110,262 $ 184,852 $ -- $ 184,852
============= ============= ============= ============= ============= =============
Current Portion $ 110,262 $ 153,687
Non-current Portion -- 31,165
------------- -------------
$ 110,262 $ 184,852
============ =============
35
4. INVESTMENT IN AFFILIATED COMPANY - $170,000
(A) ACQUISITION OF THE BUCK-A-DAY COMPANY INC.
On December 15, 1999, the Company executed an agreement with The
Buck-a-Day Company Inc. (formerly 1375400 Ontario Limited),
hereinafter collectively referred to as "Buck". Buck is in the direct
response telemarketing and sales business. In addition, Buck offers
third party retail financing services, utilizing its "Buck a Day"
credit card, whereby customers can purchase computers and other
consumer products for as little as "a dollar a day" with no down
payment. Initially, A.R.T. International Inc. had the right to
purchase a 44% interest in Buck for $400,000. By March 30, 2000, the
Company had paid Buck $400,000 for 160 common shares, representing
44.44% of the total issued share capital of Buck. On April 27, 2000,
the Company loaned Buck $70,000 under an agreement which allowed the
Company the right to convert an additional 40 common shares,
representing an additional 5.56% of the total issued share capital.
Effective August 8, 2000, the Company exercised its option and
converted its loan into equity, thereby bringing its ownership in Buck
up to 50%. On December 4, 2000, the Company acquired the balance of
200 common shares to own 100% of Buck. The consideration paid for the
remaining 200 common shares was as follows:
Cash $ 500,000
Add - 2,000,000 Common Shares Issued
Fully Paid and Non-assessable 470,000
------------
TOTAL CONSIDERATION $ 970,000
=============
The Company attributed the cash value of the 2,000,000 common shares
issued at $470,000 or $0.235 per common share, as the shares are
restricted and may not be traded for three {3} years. The average
market price per common share was approximately $1.00 in the
corresponding period.
The balance sheet of Buck had a shareholders' deficiency of $434,715
and the stated capital of the shares acquired from the selling
shareholders of Buck was $75,000. In the opinion of management, the
underlying fair market value of assets acquired approximates the book
value as stated in Buck's audited financial statements for the year
ended November 30, 2000. The consideration has been allocated as
follows:
Total Consideration $ 970,000
Less - Shares Purchased 75,000
-------------
ALLOCATED TO GOODWILL $ 895,000
=============
The Company funded the purchase of the initial 50% of Buck's shares
from the sale of its common shares under the Regulation S Offering
[See Note 8(b)]. In total, the Company paid $470,000 for 200 common
shares, representing 50% of Buck's total share capital. The 200 common
shares were issued from treasury.
The Company funded the purchase of the balance of the Buck common
shares by issuing 500,000 of its common shares for $500,000 cash and
issuing 2,000,000 fully paid and non-assessable restricted common
shares to the vendors. In addition, the selling shareholders of Buck
received 1,000,000 options to purchase common shares pursuant to the
Company's stock option plan.
36
(A) ACQUISITION OF THE BUCK-A-DAY COMPANY INC. [Continued]
The letter of intent dated November 27, 2000, issued by the Company to
Buck, also provided that the Company would arrange for a further
$500,000 financing for Buck within 10 to 15 days of A.R.T. having 100%
of Buck and further arrange $500,000 financing by March, 2001. The
Company was unable to arrange said financings. Consequently, the
senior management of Buck, Ed LaBuick, C.E.O. and Dennis LaBuick,
President, as the co-founders of Buck (hereinafter referred to as
"LaBuick Group") secured an agreement with a third party, subject to
the Company's shareholders' approval in a special meeting, to invest
directly into the Buck subsidiary.
(B) DILUTION IN OWNERSHIP OF BUCK
In July, 2001, Buck executed a Security Agreement with 1483516 Ontario
Limited ("1483516"), whereby 1483516 agreed to loan Buck U.S.
$450,000. The Security Agreement provided for the conversion of the
U.S. $450,000 of principal into 3,000,000 Buck common shares and a
Series "B" warrant to purchase 3,000,000 Buck common shares
exercisable at U.S. $0.15 per share.
A $710,000 loan held by the LaBuick Group in Buck was amended to add a
conversion privilege into Buck common shares at $0.10 per share for a
total aggregate of 7,100,000 common shares. Upon conversion, the
holders of the Security Agreement held by the LaBuick Group also
received a Series "A" warrant for the purchase of up to 1,500,000
additional shares of Buck at $0.10 per share.
In August, 2001, Buck allotted and issued 1,999,600 fully paid and
non-assessable common shares to the Company for $1.00, thereby
bringing the total Buck common shares owned by A.R.T. to 2,000,000 in
the aggregate. The said allotted common shares are effectively a
stock-split of the 400 common shares originally owned by A.R.T. into
2,000,000 common shares. Further, Buck granted A.R.T. a Series "C"
warrant to purchase up to 800,000 common shares of Buck at $0.10 per
share, exercisable for a period of 120 days after the exercise by the
LaBuick Group of its conversion rights. Subsequent to year end these
warrants expired.
Henceforth, after August 31, 2001 A.R.T. shall not prepare
consolidated financial statements including Buck financial operating
results. Its investment in Buck common shares will be accounted for at
cost as adjusted by its equity-prorated share of the Buck financial
operating results.
At year end, the Company's ownership in Buck was diluted to 10% of the
issued common shares as a result of the issuance of shares and
exercise of warrants.
(C) SUBSEQUENT EVENT - DISPOSITION OF BUCK
Effective February 18, 2002, the Company sold its remaining investment
in Buck to a third party. The 2,000,000 common shares of Buck were
37
sold at the aggregate price of $171,428. The proceeds were used to
partially repay the loans payable and for on-going working capital
purposes.
5. CAPITAL ASSETS 2001 2000
----------------------------------------
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
----------------------------------------
Equipment, Furniture and Fixtures $358,821 $320,017 $ 38,804 $ 48,505
======== ======== ======== ========
6. LOANS PAYABLE - $191,367
These loans are unsecured, repayable on demand, non-interest bearing and
convertible into common shares of the Company at the market price per share
on the date of conversion.
7. NOTES PAYABLE
The notes payable bear interest at 10% and are secured by a general
security agreement over all the assets of the Company. As the Company has
not made timely principal or interest payments, the notes are considered to
be in default. Under the terms of the original security agreement, the
notes payable shall, at the option of the lenders, become immediately due
and payable with notice or demand.
2001 2000
---- ----
U.S. Dollars Cdn. Dollars U.S. Dollars Cdn. Dollars
--------------------------- ---------------------------
Principal $ 315,000 $ 495,432 $ 315,000 $ 483,840
Accrued Interest 174,708 274,780 143,208 219,967
------------ ------------ ------------ ------------
$ 489,708 $ 770,212 $ 458,208 $ 703,807
============ ============ ============ ============
8. SHARE CAPITAL
(A) SHARE CAPITAL
The Company is authorized by its Articles of Incorporation to issue an
unlimited number, except where noted, of the following classes of
shares:
(i) Non-voting, redeemable, class "A" preference shares, series 1 and
series 2; convertible into common shares and have the right to
cumulative dividends as and if declared in the amount of U.S.
$0.60 per share per annum, payable quarterly in the first year of
issuance and annually thereafter, as and when declared, subject
to the provisions of The Ontario Business Corporations Act. The
future dividend payments are payable in cash or common shares at
the discretion of the directors.
38
The directors have authorized 875,000 class "A" preference
shares, series 1, each of which is convertible into 0.048 common
shares.
The directors have authorized an unlimited number of class "A"
preference shares, series 2, each of which is convertible into
0.24 common shares;
(ii) The shareholders authorized an unlimited number of class "B"
preference shares. These shares are non-voting, retractable at
the option of the Company at the amount paid up thereon and have
a non-cumulative preferential dividend of $0.10 per share in
priority to all other shares of the Company. In the event of
dissolution, these shares are entitled to receive the greater of
$1.00 per share or the amount paid up thereon in priority to all
other shares of the Company. No class "B" shares have been
issued;
(iii)The shareholders authorized an unlimited number of class "C"
common shares. Each class "C" common share has 100 votes and a
non-cumulative 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. In the event of dissolution, these shares are entitled to
receive the greater of $0.01 per share or the amount paid up
thereon in priority to the common shares and no share of any
further distribution; and
(iv) Common shares
(B) SHARE CAPITAL
CLASS "A" PREFERENCE SHARES, SERIES 1
-------------------------------------------------
2001 2000
-------------------------------------------------
Number of Number of
Shares Amount Shares Amount
---------- ---------- ---------- ----------
Balance - Beginning of Year -- -- 805,000 $3,701,809
Less - Shares Converted to
Common Shares -- -- 805,000 3,701,809
---------- ---------- ---------- ----------
Balance - End of Year -- $ -- -- $ --
========== ========== ========== ==========
CLASS "A" PREFERENCE SHARES, SERIES 2
-------------------------------------------------
2001 2000
-------------------------------------------------
Number of Number of
Shares Amount Shares Amount
---------- ---------- ---------- ----------
Balance - Beginning of Year -- -- 466,941 $2,785,628
Less - Shares Converted to
Common Shares -- -- 466,941 2,785,628
---------- ---------- ---------- ----------
Balance - End of Year -- $ -- -- $ --
========== ========== ========== ==========
39
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 class "A" preference shares,
series 1, and all of the issued and outstanding 466,941 class "A"
preference shares, series 2, were converted into and became common
shares at the effective rate of 0.5837142 and 0.7114282 common shares
for each series 1 and series 2 class "A" preference shares,
respectively. The effective rate was higher than the actual stated
conversion rate of 0.048 and 0.24 as specified to the series 1 and
series 2 preference shares, respectively, to give credit for
accumulated undeclared dividends, as detailed in Note 9(a).
COMMON SHARES
-----------------------------------------------------
2001 2000
-----------------------------------------------------
Number of Number of
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Add:
Shares Issued Pre Stock Dividend -- -- 2,850,000 570,000
Options Exercised -- -- 238,500 64,476
Conversion of Class "A"
Preference Shares, Series 1 -- -- 469,890 3,701,809
Conversion of Class "A"
Preference Shares, Series 2 -- -- 332,195 2,785,628
----------- ----------- ----------- -----------
23,308,544 9,517,875 5,277,136 9,370,874
Add:
3 for 1 Stock Dividend -- -- 15,831,408 1
Shares Issued Post Stock
Dividend 2,800,000 977,342 2,200,000 147,000
----------- ----------- ----------- -----------
Balance - End of Year 26,108,544 $10,495,217 23,308,544 $ 9,517,875
=========== =========== =========== ===========
During the 2001 fiscal year, the Company issued 800,000 common shares
(on a post-stock dividend basis) for a total cash consideration of
$507,342. In addition, 2,000,000 shares were issued in conjunction
with the acquisition of The Buck-A-Day Company Inc. at a value of
$470,000 as described in Note 4(a).
During the 2000 fiscal year, the Company issued 13,400,000 common
shares (on a post stock dividend basis) for a total cash consideration
of $670,000. In addition, 200,000 shares were issued as consideration
for finders' fees valued at $47,000. The shares were issued pursuant
to the August, 1999 Regulation S offering, which restricts the shares
from being offered to United States residents or traded in the United
States. Various officers and employees of the Company exercised
options for 238,000 shares for a cash consideration of $64,476.
40
CLASS "C" COMMON SHARES
---------------------------------------------
2001 2000
---------------------------------------------
Number of Number of
Shares Amount Shares Amount
--------- --------- --------- ---------
Balance - Beginning of Year 400,000 $ 100,001 50,000 $ 50,000
Add - Shares Issued During Year -- -- 50,000 50,000
--------- --------- --------- ---------
400,000 100,001 100,000 100,000
Add - 3 for 1 Stock Dividend -- -- 300,000 1
--------- --------- --------- ---------
Balance - End of Year 400,000 $ 100,001 400,000 $ 100,001
========= ========= ========= =========
During the 2000 fiscal year, the Company issued 50,000 class "C"
common shares for a total cash consideration of $50,000. Effective
August 15, 2000, a three for one stock dividend was paid resulting in
400,000 shares being outstanding at year end.
(C) STOCK OPTIONS AND WARRANTS TO PURCHASE COMMON SHARES
The Company has issued various stock options for common shares of the
Company's share capital. 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 lenders of the Company.
The options and warrants are allocated as follows:
NUMBER OF SHARES
---------------------
2001 2000
--------- ---------
Balance - Beginning of Year 16,000 118,700
Add - Options and Warrants Issued 1,000,000 133,500
--------- ---------
1,016,000 252,200
Less - Options and Warrants Exercised -- 238,500
--------- ---------
1,016,000 13,700
Add - 3 for 1 Stock Dividend -- 41,100
--------- ---------
1,016,000 54,800
Less - Options and Warrants Expired -- 38,800
--------- ---------
Balance - End of Year 1,016,000 16,000
========= =========
41
The options and warrants granted and outstanding as at November 30,
2001 are as follows:
COMMON SHARES
UNDER OPTION OR
SUBJECT TO WARRANTS EXERCISE PRICE EXPIRY DATE
-------------------- -------------- -----------
16,000 U.S. $15.625 Fiscal 2002
1,000,000 Cdn. $1.00 Fiscal 2002
(C) STOCK OPTIONS AND WARRANTS TO PURCHASE COMMON SHARES [Continued]
During the year, the Company issued 1,000,000 [2000 - 133,500] common
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
1,000,000 stock options were issued at an option price of $1.00 per
stock option, with an expiry date of December 4, 2001, which may be
extended at the discretion of the Company provided that such extension
complies with the stock option plan.
9. DIVIDENDS
(A) CLASS "A" PREFERENCE SHARES, SERIES 1 AND SERIES 2
The holders of the class "A" preference shares, series 1 and series 2,
were entitled to receive as and when declared by the directors, a
fixed preferential cumulative dividend at the rate of U.S. $0.60 per
annum, payable annually in cash or common shares at the discretion of
the directors.
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
the Class "A" preference shares, series 1 and series 2 were converted
into common shares. At November 30, 1999, the class "A" preference
shares had cumulative undeclared dividends amounting to U.S.
$3,018,750 and U.S. $1,540,907 on the series 1 shares and series 2
shares respectively. The shareholders approved a bonus of 0.5357142
common shares per series 1 share, and 0.4714282 common shares per
series 2 share. As a result of the aforementioned amendment, 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 shareholders of record received 3
common shares for each common share owned on the record date of August
2, 2000. Based on 5,277,136 shares outstanding as of the record date,
the stock dividend was 15,831,408 common shares.
42
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 the provisions of the Ontario Business
Corporation Act restricting its ability to issue dividends, as no
assets of the Company have been actually distributed.
(C) CLASS 'C' COMMON SHARES
On July 14, 2000, the Company declared a stock dividend, whereby
effective August 15, 2000, class "C" common shareholders of record
received 3 common shares for each common share owned on the record
date of August 2, 2000. On a fully diluted basis, the stock dividend
was 300,000 common shares. 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 the provisions of the Ontario Business
Corporations Act restricting its ability to issue dividends, as no
assets of the Company have been actually distributed.
10. SEGMENTED INFORMATION
The Company operates in one business segment, the production, distribution
and marketing of replications of oil paintings.
Operations and identifiable assets by geographic segments are as follows:
2001 2000 1999
---------- ---------- ----------
DOMESTIC SALES - Canada $ 102,934 $ 113,360 $ 39,267
INTERNATIONAL EXPORT SALES:
U.S.A 389,198 626,907 971,569
European Economic Community 7,930 19,160 3,035
Other 20,466 47,717 29,679
---------- ---------- ----------
$ 520,528 $ 807,144 $1,043,550
========== ========== ==========
All significant identifiable assets and amortization relate to assets
situated in Canada.
11. LEASE COMMITMENT
Under a long-term lease expiring January 31, 2003, the Company is obligated
for minimum future lease payments, net of occupancy costs, for office,
showroom and factory premises as follows:
43
FISCAL YEAR ENDING AMOUNT
------------------ ----------
2002.............................................$ 64,174
2003 ............................................. 20,790
12. 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 G.A.A.P.").
These principles differ in some respects from United States generally
accepted accounting principles ("U.S. G.A.A.P.").
The effect of such differences on the Company's balance sheet and statement of
loss is as follows:
2001 2000 1999
-------------------------------- ------------------------------- -------------------------------
CANADIAN U.S. CANADIAN U.S. CANADIAN U.S.
G.A.A.P. G.A.A.P. G.A.A.P. G.A.A.P. G.A.A.P. G.A.A.P.
-------------- -------------- -------------- -------------- -------------- --------------
(A) BALANCE SHEET:
Share Capital
Issued $ 10,595,218 $ 12,636,761 $ 9,617,876 $ 11,659,419 $ 8,786,398 $ 10,827,941
============== ============== ============== ============== ============== ==============
Accumulated
Deficit $ (23,628,360) $ (25,676,118) $ (22,324,537) $ (24,372,295) $ (21,377,103) $ (23,434,861)
============== ============== ============== ============== ============== ==============
2001 2000 1999
-------------- -------------- --------------
(B) STATEMENT OF LOSS:
Net Loss per Common Share under U.S. G.A.A.P. $ (0.05) $ (0.06) $ (0.09)
============== ============== ==============
(C) WEIGHTED AVERAGE NUMBER OF SHARES
- U.S. G.A.A.P. [Note 12(e)] 26,083,544 16,096,346 1,146,551
============== ============== ==============
(D) WEIGHTED AVERAGE NUMBER OF SHARES
- CANADIAN G.A.A.P. 6,083,544 16,096,346 1,146,551
============== ============== ==============
(E) Opinion 15 of the Accounting Principles Board requires that for U.S.
G.A.A.P. purposes the Company follow the "Treasury Stock Method" in
determining the weighted average number of shares. This method could result
in a difference in the weighted average number of shares as determined in
accordance with Canadian G.A.A.P.
For U.S. G.A.A.P. purposes the "Treasury Stock Method" increases the
weighted average number of shares by a factor which takes into
consideration the number of stock options outstanding, the exercise price
of these stock options and the quoted market price for the Company's
shares. No similar calculation is required under Canadian G.A.A.P. to
determine the weighed average number of shares.
44
As the Company is in a loss position, the weighted average number of shares
for U.S. G.A.A.P. purposes does not take into account the potential
conversion of the preference shares or the stock options, as the effect
would be anti-dilutive.
(F) EARNINGS PER SHARE
As the Company is in a loss position, it does not reflect the fully diluted
earnings per share, as the effect would be anti-dilutive.
13. INCOME TAXES
There are no current or future 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 $5,068,860 (2000 - $4,888,922) available for
deduction against future years' earnings, the benefit of which has not been
recognized in these financial statements.
These losses expire as follows:
YEAR CANADIAN U.S. TOTAL
---- ---------- ---------- ----------
2002...........................$ 717,000 $ 400,000 $1,117,000
2003 ........................... -- 1,530,000 1,530,000
2004 ........................... 924,031 -- 924,031
2005 ........................... 395,462 -- 395,462
2006 ........................... 88,687 -- 88,687
2007 ........................... 531,742 -- 531,742
2008 ........................... 481,938 -- 481,938
---------- ---------- ----------
$3,138,860 $1,930,000 $5,068,860
========== ========== ==========
14. GOING CONCERN
The accompanying financial statements have been prepared on the basis of
accounting principles applicable to a going concern, meaning that the
Company will be able to realize its assets and discharge its liabilities in
the normal course of operations. However, the use of generally accepted
accounting principles that are applicable to a going concern, is
potentially inappropriate because there is significant doubt about the
appropriateness of the going concern assumption. Given the accumulation of
operating losses and the deficiency of working capital and the Chapter 11
filing of the Company's major customer [See Note 16], the Company's ability
to realize its assets and discharge its liabilities is dependent upon the
attainment of profitable operations and the continued financial support of
its creditors. The financial statements do not reflect adjustments that
might be necessary should profits not be attained, or should the support
not be continued.
45
15. MAJOR CUSTOMER
Sales to specific major customers of the Company were as follows:
2001 2000
------------------------- -------------------------
Percentage of Accounts Percentage of Accounts
Percentage of Accounts Percentage of Accounts
of Sales Receivable of Sales Receivable
----------- ----------- ----------- -----------
SALES THROUGH ONE RETAIL
COMPANY (U.S.) 40% 67% 55% 59%
=========== =========== =========== ===========
16. SUBSEQUENT EVENT
On January 10, 2002, the Company's major retail customer filed a Chapter 11
petition, which placed the payment of approximately U.S. $65,000 of trade
receivables owed by that customer to the Company, in jeopardy. The Company
was able to mitigate the potential loss by U.S. $45,000 through placing a
claim on its export insurance, however, the on-going viability of that
customer and its ability to reorganize and successfully emerge from Chapter
11 proceedings cannot be ascertained at this time. As of the balance sheet
date, the major customer continued to operate and sales and shipments were
continuing, although in a limited capacity. In the event that the customer
continues into bankruptcy proceedings, the Company will lose approximately
40% of its annual revenues. Unless the Company can replace such a loss of
business with other customers, the loss will place further burden on its
existing liquidity problems. In the absence of replacement revenues, the
Company will be further reliant on the cooperation of its creditors and
short-term capital infusions from its shareholders and lenders.
17. SUPPLEMENTAL DISCLOSURE - STATEMENT OF CASH FLOWS
There were no interest or income tax payments made during the year 2001
(2000 - interest - $ Nil; income taxes - $ Nil) (1999 - interest - $30,000;
income taxes - $ Nil).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON F
INANCIAL DISCLOSURE
None.
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
On May 1, 2001, the Company held a Annual and General Special Shareholders
Meeting. At that meeting the shareholders voted in favour of the management
slate of directors, consisting of Simon Meredith, Roger Kirby, Michel van
Herreweghe, Dennis Labuick and Marc Bielby.
Simon P. Meredith was elected a director of the Company and President and Chief
Operating Officer in November 1994. Mr. Meredith is a Chartered Accountant and
was Vice President, Finance and Administration of Gormont Group Limited from
April 1991 through December 1993. He was a consultant for Helix Investments
Limited (a private investment group) from October 1990 through March 1991 and
Vice President, Finance and Administration of Diecut Group, Inc from June 1987
through September 1990.
Marc Bielby is vice president of Computer Stop Limited, 1994 to the present.
Michel van Herreweghe, Chairman. -- Is Director of Nickeldale Resources Inc.
from 1988 through 1996. He was a Director of Aronos Multinational Inc. From 1991
though 1992; Director of Xxpert Rental Tool Inc. from 1993 through 1994; CEO
Oxford Securities Corporation (Bahamas) 1993 to present; Director Commonwealth
Asset Managers Limited (Bahamas) 1994 to June 1997. He was appointed State of
Florida Commissioner of Deeds 1994 to March 1999; Director Creditanstalt Bank of
Switzerland, A.G. 1996 to present;
Roger Kirby, Director. -- Is President of Enviro-Lite International Inc; General
Manager of Can-Am Teck Inc. 1991; Vice-President Sales for Demax Inc. 1990;
President of Telephony Communications International Inc. from 1987 through 1990;
President of Nickeldale Resources Inc. to November 1996.
Ed LaBuick. - Co-founder, CEO and Director of The Buck A Day Company Inc. Mr.
LaBuick is a marketing entrepreneur with over 30 years of management experience
in Direct Response Television, Radio and Print, Retail distribution in Canada
and the United States, working with North American Phillips, Silver Eagle
Records, Time Life, National Geographic, Capital, EMI, MCA, and Warner Bros.
Dennis LaBuick. - Co-founder, President and Director of The Buck A Day Company
Inc. Fifteen years experience in Direct Response Television, Radio and Print,
Media Planning and Buying, Creative Writing and Television Production, working
with DCNL Corporation as VP Media, General Manager for Quality Music & Video,
and prior to that as director of media at Silver Eagle Records.
Effective August 31, 2002, Dennis Labuick and Ed Labuick resigned as director
and officer respectively, of the Corporation.
47
Compliance With Section 16(a) of the Exchange Act
This item is not applicable because the Company is a foreign private issuer
within the meaning of Rule 3b-4 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the Company's securities are therefore
currently exempt from the provisions of Sections 14(a), 14(b), 14(c), 14(f) and
16 of the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the aggregate cash compensation paid for services
rendered to the Company during the last three fiscal years by all individuals
who served as the Company's Officers and Directors during each fiscal year.
(In Canadian Dollars)
- -------------------------------------------------------------------------------------------------------------------
Long-Term
Compensation
Annual Compensation Awards
Name and Year Salary Bonus Other Annual Restricted Securities All
- -------- ---- ------- ------ ------------ ------------ ---------- ---
Principal Position ($) ($) Compensation Stock Underlying Other
- ------------------ --- --- ------------- ----- ---------- -----
($) Awards ($) Options (#) Compensation ($)
--- ---------- ----------- ----------------
Simon Meredith 2001 -- -- 120,000(1) -- -- --
President 2000 -- -- 120,000(1) -- 200000 --
1999 -- -- 85,000(1) -- -- --
Marc Bielby, Director 2001 -- -- -- -- -- --
Michel van Herreweghe, 2001 -- -- -- -- -- --
Chairman 2000 -- -- -- -- 360000 --
Francoise Jacquel, Director 2000 -- -- -- -- 344000 --
Roger Kirby, Director 2001 -- -- -- -- -- --
2000 -- -- -- -- 10000 --
Roger Scarr, Director 2001 -- -- -- -- -- --
Ed La Buick, CEO 2001 -- -- -- -- 500000 --
2000 -- -- -- -- -- --
Dennis La Buick, Director 2001 -- -- -- -- 500000 --
2000 -- -- -- -- -- --
(1) Represents the fees paid in Canadian dollars to a consulting company owned
by Mr. Meredith (See "Employment and Consulting Agreements").
Employment and Consulting Agreements
In November 1994, the Company entered into a consulting agreement with The
Merrick Group Limited, a company beneficially owned by Simon Meredith. Under the
terms of the contract, Mr. Meredith provides management services to the Company
for up to 100 hours per month as President and Chief Operating Officer.
48
Stock Options
In July 1998, a Stock Option Plan (the "Plan") was approved by the Shareholders.
The Plan was designed to provide an added incentive for effective service and
performance to participating key employees (including officers) and directors of
the Company by affording them an opportunity to increase their proprietary
interest in the Company's success through increased stock ownership.
The Plan may be administered by either the Board of Directors or a Stock Option
Committee consisting of three members who shall be appointed by the Board of
Directors (the "Committee"). The Board of Directors or, if acting, the Committee
has the authority to select optionees, to establish the number of shares and
other terms applicable to each option and to construe the provisions of the
Plan. The Plan may be amended or terminated at any time by the Board of
Directors of the Company without further approval of the shareholders.
The Board of Directors or the Committee determines the option price per share
with respect to each option and fixes the period of each option, but in no event
may the option period be longer than 10 years. Options granted under the Plan
are nontransferable. Up to and including March 1, 2000, pursuant to the option
plan, subject to and conditional upon any necessary regulatory approval or
ruling, the Company authorized the issue of 238,500 stock options to employees,
officers and directors at option prices ranging from $ 0.20 to $ 0.37 per share
option. On July 31, all 238,500 options were exercised.
Subsequent to the year-end, effective December 4, 2000, pursuant to the
acquisition of 100% of Buck, the Company granted 1,000,000 options to purchase
common shares of the Company to the selling shareholders of Buck, whereby the
options expire December 1, 2001, or such other extended date set by the Company
in accordance with the Stock Option Plan, and at a price of $1.0.
Aggregate Option Exercises In Last Fiscal Year And Fiscal Year-End Option Values
- ---------------------------------------------------------------------------------------
Name Open Options Options Close
Options Granted Exercised Options
- ------------------ ----------- ------------------ ---------------- --------------------
Qty $ Qty $Price Qty $ Qty $
/sh.
- ------------------ ------- --- --------- -------- ------------- -- -------------- -----
Simon
Meredith -- - -- -- -- --
- ------------------ ------- --- --------- -------- ------------- -- -------------- -----
Michel van
Herreweghe -- - -- -- -- --
- ------------------ ------- --- --------- -------- ------------- -- -------------- -----
Roger
Kirby -- - -- -- -- --
- ------------------ ------- --- --------- -------- ------------- -- -------------- -----
Roger
Scarr -- - -- -- -- --
- ------------------ ------- --- --------- -------- ------------- -- -------------- -----
Marc
Bielby -- - -- -- -- --
- ------------------ ------- --- --------- -------- ------------- -- -------------- -----
Ed
LaBuick (1) -- - 500,000 1.0 -- 500,000 1.0
- ------------------ ------- --- --------- -------- ------------- -- -------------- -----
Dennis
La Buick(2) -- - 500,000 1.0 -- 500,000 1.0
- ------------------ ------- --- --------- -------- ------------- -- -------------- -----
(1) 500,000 options beneficially owned by a related party
(2) Includes 250,000 options beneficially owned by a related party
49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As At November 30, 2000, no one shareholder, including directors, officers and
employees own more than 5% of the common shares.
- ------------------------- --------------
# Common
Name Shares Owned
- ------------------------- --------------
Simon Meredith
President 200000
- ------------------------- --------------
Michel van Herreweghe
Chairman
360000
- ------------------------- --------------
Roger Kirby
Director 10000
- ------------------------- --------------
Dennis Labuick
Director (1) 1000000
- ------------------------- --------------
Ed Labuick
CEO (1) 1000000
- ------------------------- --------------
(1) Includes common shares beneficially owned by spouse.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
It is the Company's policy that transactions between the Company and persons or
entities affiliated with the officers, directors, employees, or shareholders of
the Company, which relate to the operations of the Company, will be on terms no
less favorable to the Company than could have reasonably been obtained in
arm's-length transactions with independent third parties.
See "Executive Compensation--Employment and Consulting Agreements" for a
description of certain employment and consulting arrangements with officers
and/or directors of the Company.
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits
(b) Financial Statement Schedules.
Incorporated herein.
(c) Reports on Form 8-K.
None.
51
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused to be signed on its behalf by the undersigned
thereunto duly authorized.
A.R.T INTERNATIONAL INC.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ Michel van Herreweghe
- --------------------------
Michel van Herreweghe Chairman of the Board Date 28 Feb. 2002
/s/ Simon P. Meredith
- --------------------------
Simon P. Meredith President Date 28 Feb. 2002
52