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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, 2002
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 [X] NO [ ]
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, 2002 based upon the
closing price of $US0.01 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, 2002, the
number of shares of Common Stock outstanding was 25,516,780.
A.R.T. INTERNATIONAL INC.
FORM 10-K
NOVEMBER 30, 2002
Table of Contents
PART I
PAGE
----
Item 1. Business 3
Item 2. Property 7
Item 3. Legal Proceedings 8
Item 4. Submissions of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 7a Quantitative and Qualitative Disclosures about Market Risk 21
Item 8. Financial Statements and supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 37
PART III
Item 10. Directors and Executive Officers of the Registrant 38
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management 40
Item 13. Certain Relationships and Related Parties 41
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 42
Signature Page 43
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 one business.
- - 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)").
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.
3
Artagraph - Liquidity Issues
The Company continued to face sever liquidity problems during 2002, which was
due to ongoing losses and falling revenues. 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.
Year Ended November 30
---------------------------------------------
2002 2001 2000 1999
--------- --------- --------- ---------
(In Canadian Dollars)
Canada ................. 17,554 102,934 113,360 39,267
United States .......... 174,266 389,198 626,908 971,569
Overseas ............... 0 28,396 66,876 32,714
---------------------------------------------
191,820 520,528 807,144 1,043,550
---------------------------------------------
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, 2002, 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
4
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).
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 40-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. Currently the Company has not paid
maintenance fees on its US patents and may not be able to maintain its patents
in the foreseeable future because of its cash flow difficulties.
Employees
The Company has approximately 5 employees and consultants, including management,
administrative and production employees at Artagraph.
We believe that the Company has satisfactory relations with our employees.
5
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.
- - 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.
- - 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
6
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 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.
7
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.
8
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
----------- ---- ---
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
2002
----
1st Quarter N/a N/a
2nd Quarter N/a N/a
3rd Quarter N/a N/a
4th Quarter N/a N/a
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 $1,757,421 as of November 30, 2002 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.
9
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 2001 2000 1999 1998
---- ---- ---- ---- ----
Summary of operations:
Sales 191,820 520,528 807,144 1,043,550 1,197,639
Cost of goods sold 332,198 518,946 688,768 685,908 748,683
Gross profit / (loss) (140,378) 1,582 118,376 357,642 448,956
Depreciation and amortization 10,724 9,701 4,888 13,725 295,311
Selling, general and
administrative expenses 321,3/9 435,821 612,142 400,103 623,739
Write-down of Patent Cost 0 0 0 0 2,106,630
Interest and finance expense 31,500 47,699 47,980 46,226 185,006
Operating loss (499,279) (491,639) (546,634) (102,412) (2,761,730)
Interest income -- -- -- -- --
Income taxes -- -- -- -- --
Loss before equity in loss of
affiliated company (499,279) (491,639) (546,634) (102,412) (2,761,730)
Equity in loss of affiliated -- (812,184) (400,798) -- --
company
Net loss (499,279) (1,303,823) (947,432) (102,412) (2,761,730)
Net loss per Common Share (1) (0.02) (0.05) (0.06) (0.09) (2.59)
Weighted average number of Common
shares outstanding 25,516,780 25,516,780 16,096,346 1,146,551 1,066,551
Summary of balance sheet data:
Current assets 129,290 186,684 368,564 277,306 453,610
Total assets 157,371 395,489 517,437 376,585 548,050
Current liabilities 1,914,792 1,653,631 1,449,098 1,192,290 1,326,343
Long-term liabilities -- -- -- -- --
Total liabilities 1,914,792 1,653,631 1,449,098 1,192,290 1,326,343
Contributed surplus 11,775,000 11,775,000 11,775,000 11,775,000 11,775,000
Accumulated deficit (24,127,639) (23,628,360) (22,324,537) (21,377,103) (21,274,691)
Shareholders' (deficit) equity (1,757,421) (1,258,142) (931,661) (815,705) (778,293)
(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.
10
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, 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".
b) Artagraph -- Year ended November 30, 2002, compared with year ended November
30, 2001 Sales
2001 % 2000 % 1999 %
In Canadian Dollars
- -----------------------------------------------------------------------------------
Total Sales $191,820 100% $520,528 100% $807,144 100%
-------- ---- -------- ---- -------- ----
Sales to one Retail Customer $129,494 65% $203,460 39% $442,809 55%
Sales to next ranked Customer $ 10,441 5% $ 64,910 13% $ 26,790 3%
The Company became totally dependant on one retail customer for 65% of its
sales. Sales with all customers fell dramatically due to the lack of cash flow
to support new initiatives in marketing and selling.
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.
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.
11
Gross Loss
The fall in revenues resulted in the Company reporting a gross loss in fiscal
2002. In addition, sales revenues were less than the fixed overhead costs such
as occupancy and plant salaries.
Net Loss
The operating loss remained at the same level as the previous fiscal at
approximately $0.5 million.
The Company had disposed of its investment, at stated book value, in the Buck A
Day Company in February 2002, and therefore did not continue to record ongoing
losses from its former subsidiary.
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.
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 was raising further pre-IPO capital, which transaction would have
diluted 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.
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
12
terms an additional year. The Company and the note holders did not negotiate any
further extensions during fiscal 2001 and fiscal 2002, 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.
The total amount due to the note holders of $815,691 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 loans payable by the Company increased from $171,367 to $354,176, which
capital was utilized by the Company to cover cash flow shortages from its
ongoing losses. Subsequent to the yearend, these loans have increased to
approximately $400,000. The loans are repayable on demand and carry no interest;
they are convertible into securities of the Company at their market value on the
date of conversion. Based on the market value of the common shares at
approximately $0.01, the conversion of all the loans to securities in the
Company would result in significant dilution, as their said conversion would
cause the issuance of approximately 40,000,000 common shares.
The Company has negative working capital at November 30, 2002, of $1,785,502
compared with negative working capital at November 30, 2001, of $1,466,946.
In the upcoming special and annual general meeting of shareholders in April 2003
the following matters are being voted upon:
Change of Name of the Corporation to ART International Corporation
In view of the proposed consolidation of shares, as noted below,
Management felt it was appropriate to change the name of the
Corporation to ART International Corporation as is customary under
Ontario law.
Consolidation of Shares
It is proposed to consolidate the issued outstanding Common Shares on
the basis of one (1) new Common Share for each 100 old Common Shares so
that the 25,516,780 issued and outstanding Common Shares will be
consolidated into 255,168 Common Shares (New Common). No fractional of
shares of the Corporation will be issued in connection with the
consolidation and in the event that a Shareholder would otherwise be
entitled to receive a fraction of share upon such consolidation, the
number of shares to be received by such shareholder shall be rounded up
to the nearest whole number of shares. The consolidation of the shares
is designed to enhance the Corporation's ability to raise capital by
way of share issuance and to facilitate any potential acquisition by
way of share issuance.
13
Conversion of Class C Common Shares into Common Shares
It is proposed to authorize the conversion of Class C Common Shares
into Common Shares on the basis of 100 new Common Shares for each
former Class C Common Share at the option of the holder. In the event
that all outstanding 400,000 Class C Common Shares are converted into
new Common Shares, there will be 40,255,168 issued and outstanding
Common Shares.
Special Resolutions
The Board of Directors is proposing the resolutions to the shareholders
at the Meeting. The following presents a brief description of the
resolutions. As Management has received approval from more that
two-thirds of the votes to be cast at the meeting, management will not
be soliciting proxies with respect to election of Directors,
appointment of Auditors and the setting of their remuneration, or the
Special Resolutions authorizing an amendment to the Corporation's
Articles of Incorporation to the name change and share restructuring.
Shareholders will be asked to approve Special Resolutions authorizing
an amendment to the Corporation's Articles of Incorporation to effect a
name change and share consolidation. Passage of the Special Resolutions
requires the approval of each respective resolution by at least
two-third (2/3) of the votes cast at the Meeting. The authorizing
resolutions respectively permit the Directors to revoke each resolution
in whole or in part without further approval by the Shareholders at any
time prior to effecting the action so authorized, if in their
discretion it is desirable to do so. A copy of each of the Special
Resolutions is annexed hereto as Schedules "A" and "B".
d) Dividends - Year ended November 30, 2002
None.
e) Artagraph -- Year ended November 30, 2001, compared with year ended November
30, 2000
Sales
2001 % 2000 % 1999 %
In Canadian Dollars
- ---------------------------------------------------------------------------------------------
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%
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,
14
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.
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.
15
f) 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.
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
16
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.
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:
17
The LaBuick Group,
1483516 & other 18,000,000 20%
ART 2,000,000 10%
- -----------------------------------------------------------------
TOTAL 20,000,000 100%
- -----------------------------------------------------------------
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.
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.
P
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.
g) Dividends - Year ended November 30, 2001
None.
h) 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
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
========
18
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.
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.
i) 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.
19
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.
20
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 2002, monthly average translation rates between Canadian and
United States dollars have ranged from a low of: $CAD1.50: $US1.0 to a high of
$CAD1.65: $US1.0.
Approximately $176,000 (92%) of the Company's sales revenues are transacted in
US dollars. In addition the Company has principal and interest owing of
US$521,208 on its 10% Notes.
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
weakening of the Canadian dollar relative the United Sates dollar would likely
have permanent negative impact.
21
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, 2002 and 2001 and the statements of loss, deficit and cash flows for the
years ended November 30, 2002, 2001 and 2000. 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, 2002 and 2001
and the results of its operations and its cash flows for the years ended
November 30, 2002, 2001 and 2000 in accordance with Canadian generally accepted
accounting principles.
Armstrong, Szewczyk & Tobias, LLP
Toronto, Canada CHARTERED ACCOUNTANTS
February 20, 2003
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, 2002 and 2001 and as described in
Note 13 to the financial statements. Our report to the shareholders dated
February 20, 2003 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.
Armstrong, Szewczyk & Tobias, LLP
Toronto, Canada CHARTERED ACCOUNTANTS
February 20, 2003
22
BALANCE SHEET
NOVEMBER 30, 2002 AND 2001
(STATED IN CANADIAN DOLLARS)
2002 2001
---------- ----------
ASSETS
CURRENT
Cash $ 35,160 $ 15,597
Accounts Receivable 17,822 52,920
Inventories [Notes 2(a) and 3] 68,403 110,262
Prepaid Expenses and Deposits 7,905 7,905
---------- ----------
129,290 186,684
---------- ----------
INVESTMENT IN AFFILATED COMPANY -- 170,000
---------- ----------
CAPITAL [Note 4] 28,080 38,804
---------- ----------
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
---------- ----------
TOTAL ASSETS $ 157,371 $ 395,489
========== ==========
23
BALANCE SHEET
NOVEMBER 30, 2002 AND 2001
(STATED IN CANADIAN DOLLARS)
2002 2001
------------ ------------
LIABILITIES
CURRENT
Accounts Payable and Accrued Liabilities $ 744,925 $ 712,052
Loans Payable [Note 5] 354,176 171,367
Notes Payable [Note 6] 815,691 770,212
------------ ------------
TOTAL LIABILITIES 1,914,792 1,653,631
------------ ------------
SHAREHOLDERS' DEFICIENCY
SHARE CAPITAL [Note 7]
COMMON SHARES
26,108,544 10,495,217 10,495,217
CLASS "C" COMMON SHARES
400,000 100,001 100,001
------------ ------------
10,595,218 10,595,218
CONTRIBUTED SURPLUS 11,775,000 11,775,000
DEFICIT (24,127,639) (23,628,360)
------------ ------------
(1,757,421) (1,258,142)
------------ ------------
TOTAL LIABILITIES
LESS SHAREHOLDERS' DEFICIENCY $ 157,371 $ 395,489
============ ============
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
February 20, 2003.
24
STATEMENT OF DEFICIT
FOR THE YEARS ENDED NOVEMBER 30, 2002, 2001 AND 2000
(STATED IN CANADIAN DOLLARS)
2002 2001 2000
----------- ----------- -----------
BALANCE - Beginning of Year $23,628,360 $22,324,537 $21,377,103
ADD - Net Loss 499,279 1,303,823 947,432
----------- ----------- -----------
24,127,639 23,628,360 22,324,535
ADD - Dividends -- -- 2
----------- ----------- -----------
BALANCE - End of Year $24,127,639 $23,628,360 $22,324,537
=========== =========== ===========
The accompanying notes form an integral part of these financial statements.
25
STATEMENT OF LOSS
FOR THE YEARS ENDED NOVEMBER 30, 2002, 2001 AND 2000
(STATED IN CANADIAN DOLLARS)
2002 2001 2000
------------ ------------ ------------
SALES $ 191,820 $ 520,528 $ 807,144
------------ ------------ ------------
COST OF GOODS SOLD AND OTHER
MANUFACTURING COSTS
Cost of Goods Sold and Other Manufacturing
Costs Before the Undernoted: 327,566 518,946 681,530
Amortization of Capital Assets 4,632 5,790 7,238
------------ ------------ ------------
332,198 524,736 688,768
------------ ------------ ------------
GROSS PROFIT (LOSS) (140,378) (4,208) 118,376
------------ ------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES
Selling, General and Administrative Expenses
Before the Undernoted: 312,734 422,466 614,488
Foreign Exchange Loss (Gain) 8,575 13,355 (2,346)
Amortization of Capital Assets 6,092 3,911 4,888
Loan Interest 31,500 47,699 47,980
------------ ------------ ------------
358,901 487,431 665,010
------------ ------------ ------------
LOSS FROM OPERATIONS
BEFORE UNDERNOTED ITEM (499,279) (491,639) (546,634)
EQUITY IN LOSS OF AFFILIATED COMPANY -- (812,184) (400,798)
------------ ------------ ------------
LOSS BEFORE TAXES (499,279) (1,303,823) (947,432)
PROVISION FOR INCOME TAXES [Note 12] -- -- --
------------ ------------ ------------
NET LOSS $ (499,279) $ (1,303,823) $ (947,432)
============ ============ ============
NET LOSS PER COMMON SHARE [Note 11(b)] $ (0.02) $ (0.05) $ (0.06)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES [Note 11(d)] 26,083,544 26,083,544 16,096,346
============ ============ ============
The accompanying notes form an integral part of these financial statements.
26
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 2002, 2001 AND 2000
(STATED IN CANADIAN DOLLARS)
2002 2001 2000
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (499,279) $(1,303,823) $ (947,432)
Adjustments for:
Amortization of Capital Assets 10,724 9,701 12,126
Accrued Interest and Penalties on
Notes Payable 45,479 66,405 76,172
----------- ----------- -----------
(443,076) (1,227,717) (859,134)
Net Changes in Working Capital Balances:
Accounts Receivable 35,098 43,363 25,263
Inventories - Current and Long-Term 41,859 74,590 (9,211)
Prepaid Expenses and Deposits -- 9,000 (9,000)
Accounts Payable and Accrued Liabilities 32,873 26,761 120,636
----------- ----------- -----------
(333,246) (1,074,003) (731,446)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans Payable 182,809 111,367 60,000
Notes Payable -- -- --
Issuance of Share Capital for Cash {Net} -- 977,342 831,478
Dividends -- -- (2)
----------- ----------- -----------
182,809 1,088,709 891,476
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Affiliated Company 170,000 (100,798) (69,202)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 19,563 (86,092) 90,828
CASH - Beginning of Year 15,597 101,689 10,861
----------- ----------- -----------
CASH - End of Year $ 35,160 $ 15,597 $ 101,689
=========== =========== ===========
The accompanying notes form an integral part of these financial statements.
27
FOR THE YEARS ENDED NOVEMBER 30, 2002, 2001 AND 2000
(STATED IN CANADIAN DOLLARS)
NOTES TO THE FINANCIAL STATEMENTS
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 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 balance, 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.
(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
(C) OTHER ASSETS
Patents are recorded at cost and are fully amortized.
In the past, 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 were written down to $1.
28
(C) OTHER ASSETS [Continued]
Art reproduction rights are recorded at cost and are fully amortized.
(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, 2002 and 2001
and the results of operations, cash flows and related note disclosures
for the fiscal years ended November 30, 2002, 2001 and 2000 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:
2002 2001
----------------------------------------- --------------------------
Provision for Provision for
Obsolete and Obsolete and
Gross Slow-Moving Net Gross Slow-Moving Net
Amount Inventories Amount Amount Inventories Amount
----------- ----------- ----------- ----------- ----------- -----------
Finished Goods $ 60,840 $ (19,460) $ 41,380 $ 67,107 $ -- $ 67,107
Work-in-Process -- -- -- 48,827 (48,827) --
Raw Materials 44,910 (17,887) 27,023 43,155 -- 43,155
----------- ----------- ----------- ----------- ----------- -----------
$ 105,750 $ (37,347) $ 68,403 $ 159,089 $ (48,827) $ 110,262
=========== =========== =========== =========== =========== ===========
29
4. CAPITAL ASSETS 2002 2001
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
---------------------------------------------------------
Equipment, Furniture and Fixtures $ 358,821 $ 330,741 $ 28,080 $ 38,804
============ ============ ============ ============
5. LOANS PAYABLE - $354,176
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.
6. 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.
2002 2001
--------------------------- ---------------------------
U.S. Dollars Cdn. Dollars U.S. Dollars Cdn. Dollars
--------------------------- ---------------------------
Principal $ 315,000 $ 492,975 $ 315,000 $ 495,432
Accrued Interest 206,208 322,716 174,708 274,780
------------ ------------ ------------ ------------
$ 521,208 $ 815,691 $ 489,708 $ 770,212
============ ============ ============ ============
7. 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.
The directors have authorized 875,000 class "A" preference
shares, series 1, each of which is convertible into 0.048 common
shares.
30
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) COMMON SHARES
2002 2001
------------------------- -------------------------
Number of Number of
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Balance - Beginning of Year 26,108,544 $10,495,217 23,308,544 $ 9,517,875
Add - Shares Issued Post
Stock Dividend -- -- 2,800,000 977,342
----------- ----------- ----------- -----------
Balance - End of Year 26,108,544 $10,495,217 26,108,544 $10,495,217
=========== =========== =========== ===========
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.
(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
31
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
---------------------
2002 2001
--------- ---------
Balance - Beginning of Year 1,016,000 16,000
Add - Options and Warrants Issued -- 1,000,000
--------- ---------
1,016,000 1,016,000
Less - Options and Warrants Expired 1,016,000 --
--------- ---------
Balance - End of Year -- 1,016,000
========= =========
Duringthe year, the Company issued $ Nil [2001 - 1,000,000] 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.
8. DIVIDENDS
(A) 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.
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.
(B) 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
32
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.
9. 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:
2002 2001 2000
-------- -------- --------
DOMESTIC SALES - Canada $ 17,554 $102,934 $113,360
INTERNATIONAL EXPORT SALES:
U.S.A 174,266 389,198 626,907
European Economic Community -- 7,930 19,160
Other -- 20,466 47,717
-------- -------- --------
$191,820 $520,528 $807,144
======== ======== ========
All significant identifiable assets and amortization relate to assets
situated in Canada.
10. LEASE COMMITMENT
Under a long-term lease expiring March 31, 2006, the Company is obligated
for minimum future lease payments, net of occupancy costs, for office,
showroom and factory premises as follows:
FISCAL YEAR ENDING AMOUNT
------------------ ---------
2003............................................$ 66,595
2004............................................ 71,950
2005............................................ 75,354
2006............................................ 25,280
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:
33
2002 2001 2000
---------------------------- ---------------------------- ----------------------------
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 $ 10,595,218 $ 12,636,761 $ 9,617,876 $ 11,659,419
============ ============ ============ ============ ============ ============
Accumulated
Deficit $(24,127,639) $(26,175,397) $(23,628,360) $(25,676,118) $(22,324,537) $(24,372,295)
============ ============ ============ ============ ============ ============
2002 2001 2000
------------ ------------ ------------
(B) STATEMENT OF LOSS:
Net Loss per Common Share under U.S. G.A.A.P $ (0.02) $ (0.05) $ (0.06)
============ ============ ============
(C) WEIGHTED AVERAGE NUMBER OF SHARES
- U.S. G.A.A.P. [Note 11(e)] 26,083,544 26,083,544 16,096,346
============ ============ ============
(D) WEIGHTED AVERAGE NUMBER OF SHARES
- CANADIAN G.A.A.P. 26,083,544 26,083,544 16,096,346
============ ============ ============
34
(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.
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.
12. 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 $4,440,415 [2001 - $5,068,860] 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
---- -------- ---- -----
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
2009 ..................... 488,555 -- 488,555
---------- ---------- ----------
$2,910,415 $1,530,000 $4,440,415
========== ========== ==========
35
13. 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, 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.
14. MAJOR CUSTOMER
Sales to specific major customers of the Company were as follows:
2002 2001
---------------------- ----------------------
Percentage Percentage
Percentage of Accounts Percentage of Accounts
of Sales Receivable of Sales Receivable
SALES THROUGH ONE RETAIL
COMPANY (U.S.) 65% 29% 40% 67%
== == == ==
15. SUPPLEMENTAL DISCLOSURE - STATEMENT OF CASH FLOWS
There were no interest or income tax payments made during the year 2002
[2001: interest - $ Nil; income taxes - $ Nil] [2000: interest - $ Nil;
income taxes - $ Nil].
36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
37
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. Dennis Labuick resigned effective
August 31 2001.
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.
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.
38
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 2002 -- -- 60,000(1) -- -- --
President 2001 -- -- 120,000(1) -- 200000 --
2000 -- -- 120,000(1) -- -- --
Marc Bielby, Director 2001 -- -- -- -- -- --
Michel van Herreweghe, 2001 -- -- -- -- -- --
Chairman 2000 -- -- -- -- 360000 --
Roger Kirby, Director 2001 -- -- -- -- -- --
2000 -- -- -- -- 10000 --
Ed La Buick 2001 -- -- -- -- 500000 --
2000 -- -- -- -- -- --
Dennis La Buick 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.
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.
39
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 Expred 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
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As At November 30, 2002, 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 (ex.) 1000000
- ------------------------- ------------
Ed Labuick (ex.) 1000000
- ------------------------- ------------
(1) Includes common shares beneficially owned by spouse.
40
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.
41
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.
42
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. 2003
/s/ Simon P. Meredith
- -------------------------
Simon P. Meredith President Date 28 Feb. 2003
43