Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended February 28, 2003
Commission File Number 0-16008
A.R.T. INTERNATIONAL INC.
98-0082514
5-7100 Warden Avenue, Markham, Ontario, L3R 5M7
Registrant's telephone number: (800) 278-4723
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Common Shares outstanding as at February 28, 2003: 25,516,780.
1
A.R.T. INTERNATIONAL INC.
INDEX TO
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED
February 28, 2003
PART I PAGE [S]
Balance sheets:
As at February 28, 2003, and November 30, 2002 3-4
Statements of Accumulated Deficit 5
For the three months ended February 28, 2003
For the three months ended February 28, 2002
Statements of Loss 6
For the three months ended February 28, 2003
For the three months ended February 28, 2002
Statements of Cash Flow 7
For the three months ended February 28, 2003
For the three months ended February 28, 2002
Notes to Financial Statements 8-13
Item 2.
Management's discussions and analysis of financial
condition and results of operations. 14-16
PART II
SIGNATURES 16
2
A.R.T. INTERNATIONAL INC.
BALANCE SHEETS
(IN CANADIAN DOLLARS)
ASSETS
3 Months Ended 12 Months Ended
February 28,2003 Nov.30, 2002
(Unaudited) (Audited)
(Note 2)
- --------------------------------------------------------------------------------
CURRENT ASSETS
Cash $ 14,690 $ 35,160
Accounts receivable 13,047 17,822
Inventory (Notes 2(a) and 4) 65,262 68,403
Prepaid expenses and deposits 7,905 7,905
- --------------------------------------------------------------------------------
100,904 129,290
CAPITAL ASSETS (Note 5) 26,304 28,080
Patents 3,931,051 3,931,051
Less: Accumulated amortization
- --------------------------------------------------------------------------------
3,931,050 3,931,050
- --------------------------------------------------------------------------------
1 1
TOTAL ASSETS $ 127,209 $ 157,371
================================================================================
The accompanying notes form an integral part of these financial statements.
3
A.R.T. INTERNATIONAL INC.
BALANCE SHEETS
(IN CANADIAN DOLLARS)
LIABILITIES AND STOCKHOLDERS' DEFICIT
3 Months Ended 12 Months Ended
February 28,2003 Nov.30, 2002
(Unaudited) (Audited)
(Note 2)
- --------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and
accrued liabilities $ 752,069 $ 744,925
Loans payable (Note 6) 415,176 354,176
Notes payable (Note 7) 828,291 815,691
- --------------------------------------------------------------------------------
1,995,536 1,914,792
TOTAL LIABILITIES 1,995,536 1,914,792
CAPITAL STOCK (Note 8)
Class C Common 100,001 100,001
Common shares 10,495,217 10,495,217
- --------------------------------------------------------------------------------
10,595,218 10,595,218
CONTRIBUTED SURPLUS 11,775,000 11,775,000
DEFICIT (24,238,545) (24,127,639)
- --------------------------------------------------------------------------------
(1,868,327) (1,757,421)
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $ 127,209 $ 157,371
================================================================================
The accompanying notes form an integral part of these financial statements.
4
A.R.T. INTERNATIONAL INC.
STATEMENTS OF ACCUMULATED DEFICIT(IN
CANADIAN DOLLARS)
3 Months Ended 3 Months Ended
February 28, 2003 February 28, 2002
(Unaudited) (Unaudited)
- --------------------------------------------------------------------------------
Deficit - beginning of period $(24,127,639) $(23,628,359)
Add - net loss (110,906) (128,972)
- --------------------------------------------------------------------------------
Deficit - end of period $(24,238,545) $(23,759,331)
================================================================================
The accompanying notes form an integral part of these financial statements.
5
A.R.T. INTERNATIONAL INC.
STATEMENTS OF LOSS
(IN CANADIAN DOLLARS)
3 Months Ended 3 Months Ended
February 28, 2003 February 28,2002
(Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------
SALES $ 21,166 $ 91,887
COST OF GOODS SOLD 60,284 86,709
- ---------------------------------------------------------------------------------------
GROSS (LOSS) PROFIT (39,118) 5,178
OPERATING EXPENSESSelling general & administrative 60,449 89,666
- ---------------------------------------------------------------------------------------
Operating loss 99,567 84,488
OTHER EXPENSES
Note interest 11,339 12,567
Bad debt expense 0 31,917
- ---------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 11,339 44,484
NET LOSS $ 110,906 $ 128,972
=======================================================================================
NET LOSS PER COMMON SHARE $ 0.005 $ 0.005
- ---------------------------------------------------------------------------------------
WEIGHTED AVE.NUMBER
OF COMMON SHARES 25,516,780 25,516,780
- ---------------------------------------------------------------------------------------
The accompanying notes form an integral part of these financial statements
6
A.R.T. INTERNATIONAL INC.
STATEMENTS OF CASH FLOW
(IN CANADIAN DOLLARS)
3 Months Ended 3 Months Ended
February 28, 2003 February 28, 2002
(Unaudited) (Unaudited)
Cash was provided by (applied to):
OPERATING ACTIVITIES
Net loss for period $(110,906) $(128,972)
Add: Items not requiring an
outlay of cash
Depreciation 1,776 1,940
- ---------------------------------------------------------------------------
(109,130) (127,032)
Accounts receivable 4,775 33,726
Inventories - current & long-term 3,141 10,000
Advances 0 (106,428)
Accounts payable and accrued
liabilities 7,144 11,942
- ---------------------------------------------------------------------------
Cash provided by (used by)
operating activities (94,070) (177,792)
INVESTMENT ACTIVITIES
Investment in affiliate 0 170,000
Acquisition of capital assets 0 0
- ---------------------------------------------------------------------------
Cash provided by (used by)
investment activities 0 170,000
FINANCING ACTIVITIES
Common shares issued 0 0
Loan payable 61,000 0
Notes payable 12,600 28,545
- ---------------------------------------------------------------------------
Cash provided by (used by)
financing activities 73,600 28,545
- ---------------------------------------------------------------------------
INCREASE /(DECREASE) IN CASH (20,470) 20,753
CASH, beginning of period 35,160 15,597
- ---------------------------------------------------------------------------
CASH, end of period $ 14,690 $ 36,350
===========================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid in period $ 0 $ 0
- ---------------------------------------------------------------------------
Income taxes paid in period $ 0 $ 0
- ---------------------------------------------------------------------------
The accompanying notes form an integral part of these financial statements
7
A.R.T. INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
February 28, 2003
(IN CANADIAN DOLLARS)
1. INCORPORATION AND OPERATIONS
The Company was incorporated in Canada on January 24, 1986, under The Ontario
Business Corporations Act. The Company's primary business is the production,
distribution and marketing of fine art reproductions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of preparation of financial statements
The un-audited statements of loss and statements of cash flow of the Company for
the periods ended February 28, 2003, and February 28, 2002 have been prepared in
accordance with Canadian generally accepted accounting principles (GAAP) applied
on a consistent basis. The balance sheet at November 30, 2002 has been prepared
from the audited financial statements at that date but does not include all the
information and footnotes required by GAAP for complete financial statements.
In the opinion of the Company's management, the accompanying financial
statements contain the material adjustments, necessary to present fairly the
financial balance sheets of the Company at February 28, 2003, and November 30,
2002, and the results of their loss and cash flow for the periods ended February
28, 2003, and February 28, 2002, and, should be read in conjunction with the
audited financial statements for the year ended November 30, 2002. All such
adjustments are of a normal recurring nature. Interim period results are not
necessarily indicative of the results to be achieved for the full fiscal year.
(b) Inventories
Inventories, whether classified as current or long-term assets, are valued at
the lower of cost and market value. Cost is determined on a first in, first out
basis.
The Company's policy is to periodically evaluate the inventory levels of each
product in its inventory on an image-by-image basis, both in light of past sales
and estimated future sales of each product and similar products. In addition,
when the Company determines that a product line or market should be
discontinued, the inventory relating to that product line or market is written
down to net realizable value.
The purpose of these policies is to ensure that the Company's inventory
balances, net of reserves, exclude slow-moving and obsolete inventory and are
valued at the lower of cost or market value. The Company uses annual physical
inventory counts combined with an analysis of each product's preceding three
years (or for such shorter period that a particular product may have been in
existence) sales and a review of the Company's sales expectations for each
product to determine whether the level and value of the Company's inventory of a
particular product at a given time is excessive. These three-year periods are
deemed to be an appropriate period for evaluating the historical sales of the
Company's products, since such products are not perishable and tend to be
marketed over multi-year periods through intermittent and recurring sales
programs. In no event are amounts carried as a current asset if it is not
probable that they will be sold within one year, nor do amounts carried as
long-term inventory exceed their fair value as determined by the inventory
valuation policies of the Company as described above.
8
(c) 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.
(d) Other Assets
Patents are recorded at cost and are amortized on a straight-line basis, based
on the legal life of such intellectual property, which approximates fifteen
years.
At each balance sheet date, the Company reviews the remaining benefit associated
with the Artagraph patents to ensure that the Company will generate sufficient
undiscounted cash flows to recover their carrying cost. In accordance with this
policy, all patents at November 30, 1998 have been written down to $1.
Art reproduction rights are recorded at cost and are amortized over their
estimated useful lives on a straight-line basis over a period of three years.
(e) Translations 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 February 28, 2003 and November 30, 2002 and the
results of operations, changes in financial position and related note
disclosures for the period ended February 28, 2003 and 2002 have been made. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the reported amounts
of revenues end expenses during the period. Actual results could differ from
these estimates.
9
3. INVENTORIES
Inventories consist of the following:
February 28, 2003 November 30, 2002
--------------------------------------- ---------------------------------------
Provision for Provision for
Obsolete and Obsolete and
Gross Slow-Moving Net Gross Slow-Moving Net
Amount Inventories Amount Amount Inventories Amount
----------- ----------- ----------- ----------- ----------- -----------
Finished Goods $ 61,840 $ (19,460) $ 42,380 $ 60,840 $ (19,460) $ 42,380
Work-in-Process 0 -- 0 -- -- --
Raw Materials 40,769 (17,887) 22,882 44,910 (17,887) 27,023
----------- ----------- ----------- ----------- ----------- -----------
$ 102,609 $ (37,347) $ 65,262 $ 105,750 $ (37,347) $ 68,403
----------- ----------- ----------- ----------- ----------- -----------
5. CAPITAL ASSETS
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
------------ ------------ ------------ ------------
Equipment, Furniture and Fixtures $ 358,821 $ 332,517 $ 26,304 $ 28,080
============ ============ ============ ============
6. LOANS PAYABLE - $415,176
Loans are unsecured, repayable on demand, non-interest bearing and convertible
into common shares of the Company at the market price per share on the date of
conversion.
7. NOTES PAYABLE
The notes payable bear interest at 10% and are secured by a general security
agreement over all the assets of the Company.
The note holders agreed to postpone the right to enforce their security or
collect upon the notes payable until October 12, 2002.
2003 2002
--------------------------- ---------------------------
U.S. Dollars Cdn. Dollars U.S. Dollars Cdn. Dollars
Principal 315,000 $ 494,550 $ 315,000 $ 492,975
Accrued Interest 214,083 333,741 206,208 322,716
- ----------------------------------------------------------------------------
$ 529,083 $ 828,291 $ 521,208 $ 815,691
============ ============ ============ ============
During 2000, a certain note holder commenced an action against the Company,
including 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 March 2001, the plaintiff delivered a notice of
discontinuance, thereby abandoning their legal action. Under the Rules of Civil
Procedure the note holder is obligated to pay the Company's costs.
8. CAPITAL STOCK
(a) The Company is authorized by its Articles of Incorporation to issue an
unlimited number, except where noted, of the following classes of shares:
10
(i) Class "B" preference shares
Effective July 1998, the shareholders have authorized an unlimited number of
class "B" preference shares. These shares are non-voting, redeemable at the
option of the Company and have a preferential dividend of $0.10 per share in
priority to all other shares of the Company. No class "B" shares have been
issued.
(ii) Class "C" common share
Effective July 1998, the shareholders have authorized an unlimited number of
class "C" common shares. Each class "C" common share has 100 votes and a
dividend right of $0.01 which is payable only in the event that the annual
dividends required in respect of the senior shares of the Company, including
class "A" preference shares, class "B" preference shares and common shares, have
been paid; and
(iii) Common shares.
(b) Capital stock.
COMMON SHARES
-----------------------------------------------------
2003 2002
-----------------------------------------------------
Number of Number of
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Balance - Beginning of Year 25,516,780 $10,495,217 25,516,780 $10,495,217
Shares issued 0 0 0 0
- -----------------------------------------------------------------------------------
Balance - End of Year 25,516,780 $10,495,217 25,516,780 $10,495,217
- -----------------------------------------------------------------------------------
Class "C" Common Shares
2003 2002
---------------------------------------------
Number of Number of
Shares Amount Shares Amount
--------- --------- --------- ---------
Balance - Beginning of Year 400,000 $ 100,001 400,000 $ 100,001
Add - Shares Issued During Year 0 0 0 0
--------- --------- --------- ---------
Balance - End of Year 400,000 $ 100,001 400,000 $ 100,001
========= ========= ========= =========
(c) The Company has issued various stock options for common stock of the
Company's capital stock. The stock options provide for the granting of options
to key employees, including officers, directors and independent contractors of
the Company. No option may be granted with a term exceeding ten years. In
addition, the Company has granted warrants from time to time to managers of the
Company. The options and warrants are allocated as follows:
11
NUMBER OF SHARES
2003 2002
--------- ---------
Balance - Beginning of Year 0 1,016,000
Add - Options and Issued 0 0
--------- ---------
0 1,016,000
Less - Options and Expired 0 1,016,000
--------- ---------
Balance - End of Year 0 0
--------- ---------
The options and granted and outstanding as at February 28, 2002 are as follows:
Common shares
under options
or subject
to warrants Exercise price Expiry date
------------- -------------- -----------
- NIL -
9. DIVIDENDS
- - NIL -
10. COMMITMENTS AND CONTINGENT LIABILITIES
(a) Lease obligations
Minimum future annual lease obligations, net of occupancy costs, for office,
showroom and factory premises are approximately $108,000 annually until January
31, 2005.
11. RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The financial statements of the Company are prepared in accordance with Canadian
generally accepted accounting principles (Canadian GAAP). These principles
differ in some respects from United States generally accepted accounting
principles (U.S. GAAP).
The effect of such differences on the Company's balance sheet and statement of
loss is as follows: (a) Balance sheet:
February 28, 2003 November 30, 2002
-------------------------- --------------------------
Canadian U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
----------- ----------- ----------- -----------
$ $ $ $
Capital stock issued 10,595,218 12,636,761 10,595,218 12,636,761
- -------------------------------------------------------------------------------
Accumulated Deficit (24,238,545) (26,286,303) (24,127,639) (26,175,397)
- -------------------------------------------------------------------------------
(b) Statement of Loss:
February 28, 2003 February 28, 2002
----------------- -----------------
Net loss under Canadian
& U.S. GAAP $ 110,906 $ 128,972
Net loss per common
share under
U.S. & Canadian GAAP $ 0.005 $ 0.005
Weighted average number
of shares U.S. & Cdn GAAP 25,516,780 25,516,780
12
12. INCOME TAXES
There is no current or deferred income taxes payable in Canada or the United
States.
The Company has combined tax losses for Canadian and U.S. income tax purposes of
approximately $5,068,860 available for deduction against future years' earnings,
the benefit of which has not been recognized in these financial statements.
These losses, as expressed in Canadian dollars expire as follows:
Year Canadian U.S. Total
- --------------------------------------------------------------------------------
2003 0 1,530,000 1,530,000
2004 924,031 0 924,031
2005 395,462 0 395,462
2006 88,687 0 88,687
2007 531,742 0 531,742
2008 481,938 0 481,938
2009 488,555 0 488,555
- --------------------------------------------------------------------------------
$2,910,415 $1,530,000 $4,440,415
13. GOING CONCERN
The accompanying financial statements have been prepared on the basis of
accounting principles applicable to a going concern. There is substantial doubt
that the Company has the ability to realize the carrying value of assets
reported in the financial statements, which is dependent upon the attainment of
profitable operations and the continued support of its creditors. The financial
statements do not reflect adjustments that might be necessary should profits not
be attained, or should the support not be continued.
14. RECLASSIFICATION
Certain figures with respect to the three-month period ended February 28, 2002
have been reclassified to conform with the presentation adopted for the
three-month period ended February 28, 2003.
13
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS (All figures in Canadian dollars, unless stated otherwise)
General
The following should be read in conjunction with our Form 10K for the year ended
November 30, 2002, including: the audited financial statements and the notes
thereto, Item 6. "Selected Financial Data" and other financial information
contained elsewhere and incorporated by reference in this Quarterly 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 in our Form 10K for the year ended November
30, 2002, under Item 1. Business - "Factors that may affect the business" and
incorporated by reference in this Quarterly Report.
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 Report, "Company", "A.R.T.", "we", "us" and "our" refer to A.R.T.
International Inc., unless the context otherwise dictates.
Sales
Artagraph Division
The Company continues to be very reliant on one customer for the majority of its
sales revenues. The fall in total revenues is attributable to the complete
absence of sales programs and new marketing initiatives.
Owing to the Company's inability to finance new initiatives, or to actively
participate in trade shows, or to hire dedicated sales personnel to sell to its
markets, the Company continues to achieve limited success in developing new
opportunities, with new or existing customers and markets.
The Company believes that the Artagraph process is very price-competitive with
other known canvas-textured products that are available in the market today.
This is in major part due to the Company's new contract pricing and ordering
policies. The customers can now initiate an Artagraph reproduction order for
approximately 20% [or approximately $5,000] of the previous initial financial
commitment. Further investment in additional manufacture of Artagraph
reproductions for customers under this new program is directly tied to actual
advance sales.
14
The Company believes that no other known reproduction processes compare in
quality with the Company's processes in accurately reproducing brush strokes and
texture, and the colour intensity and other reproduction characteristics are
believed to be at least equal to any other known reproduction process.
The Company's success in the marketplace will depend upon raising additional
capital, creating greater awareness of its products through aggressive
advertising, participation at trade shows, as well as updating its library of
images and providing new point-of-sale materials.
Gross Profit
Artagraph Division
The Company reported a gross loss of $39,118 in the first quarter of 2002, which
was owing to the low capacity that its plant operates at and the consequent high
level of fixed costs in relation to its total revenues.
Net Loss
Artagraph Division
The net loss in the first quarter of fiscal 2003 was $110,906 as compared to
$128,972 loss for the first quarter of fiscal 2002.
Liquidity and Capital Resources
Artagraph division
Unless the Company is able to significantly increase sales from the level
experienced year to date in 2003, 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 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 guaranteed sources for loans. Also, there
is no assurance that the Company will be able to obtain additional working
capital from sale of its equity. If the Company is unable to increased sales, or
obtain additional working capital from loans or from sale of its equity, it
could have a material adverse effect on the ability of the Company to continue
operations. Additionally, acquisition of loans or issuance by the Company of
additional equity securities could cause substantial dilution to the interests
and voting rights of current security holders.
15
PART II
Nothing to report unless specifically included herein by reference.
Item (3) Default under Senior Securities:
(i) As reported in the Company's Annual Report on form 10-K for the
year ended November 30, 2002, and incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
A.R.T. INTERNATIONAL INC.
Dated: Mar 31, 2003
/s/ Michel van Herreweghe
- -------------------------------------
By: Michel van Herreweghe
Chairman
/s/ Simon Meredith
- -------------------------------------
By: Simon Meredith
President
16