SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended February 29. 2004
Commission File Number 0-16008
ART INTERNATIONAL CORPORATION
[formerly A.R.T. INTERNATIONAL INC.]
98-0082514
5-7100 Warden Avenue, Markham, Ontario, L3R 5M7
Registrant's telephone number: (905) 477-0252
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Common Shares outstanding as at February 29. 2004: 8,235,457.
1
Item 1. Financial Statements
ART INTERNATIONAL CORPORATION
BALANCE SHEETS
(IN CANADIAN DOLLARS)
ASSETS
3 Months Ended 12 Months Ended
February 28,2004 Nov.30, 2003
(Unaudited) (Audited)
(Note 2)
- --------------------------------------------------------------------------------
CURRENT ASSETS
Cash $ 1,282 $ 9,102
Accounts receivable 9,280 8,657
Inventory (Notes 2(a) and 5) 43,397 48,446
Prepaid expenses and deposits 10,375 10,375
- --------------------------------------------------------------------------------
64,334 76,580
CAPITAL ASSETS (Note 6) 21,464 22,464
Patents 3,931,051 3,931,051
Less: Accumulated amortization 3,931,050 3,931,050
- --------------------------------------------------------------------------------
1 1
TOTAL ASSETS $ 85,799 $ 99,045
================================================================================
The accompanying notes form an integral part of these financial statements.
2
ART INTERNATIONAL CORPORATION
BALANCE SHEETS
(IN CANADIAN DOLLARS)
LIABILITIES AND STOCKHOLDERS' DEFICIT
3 Months Ended 12 Months Ended
February 28,2004 Nov.30, 2003
(Unaudited) (Audited)
(Note 2)
- --------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and
accrued liabilities $ 769,002 $ 754,069
Loans payable (Note 7) 759,000 675,700
Notes payable (Note 8) 748,770 718,023
- --------------------------------------------------------------------------------
2,276,772 2,147,792
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 2,276,772 2,147,792
CAPITAL STOCK (Note 9)
Class C Common 80,051 93,051
Common shares 10,515,167 10,502,167
- --------------------------------------------------------------------------------
10,595,218 10,595,218
CONTRIBUTED SURPLUS 11,775,000 11,775,000
DEFICIT (24,561,191) (24,418,965)
- --------------------------------------------------------------------------------
(2,190,973) (2,048,747)
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $ 85,799 $ 99,045
================================================================================
The accompanying notes form an integral part of these financial statements.
3
ART INTERNATIONAL CORPORATION
STATEMENTS OF ACCUMULATED DEFICIT
(IN CANADIAN DOLLARS)
CLASS "C" CUMULATIVE
COMMON COMMON CONTRIBUTED TRANSLATION SHAREHOLDERS'
SHARES SHARES SURPLUS ACCOUNT DEFICIT
------------------------------------------------------------------------
BALANCE AT NOVEMBER 30, 2000 $ 9,517,875 $ 100,001 $11,775,000 $ -- $22,324,537
ADD - Shares Issued 470,000 -- -- -- --
- Stock Dividend 507,342 -- -- -- --
- Net Loss -- -- -- -- 1,303,823
- Dividend -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE AT NOVEMBER 30, 2001 10,495,217 100,001 11,775,000 -- 23,628,360
ADD - Net Loss -- -- -- -- 499,279
----------- ----------- ----------- ----------- -----------
BALANCE AT NOVEMBER 30, 2002 10,495,217 100,001 11,775,000 -- 24,127,639
ADD - Conversion 6,950 -- -- -- --
- Net Loss -- -- -- -- 420,494
----------- ----------- ----------- ----------- -----------
10,502,167 100,001 11,775,000 -- 24,548,133
LESS - Conversion -- 6,950 -- -- --
- Unrealized exchange gain -- -- -- 129,168 129,168
----------- ----------- ----------- ----------- -----------
BALANCE AT NOVEMBER 30, 2003 $10,502,167 $ 93,051 $11,775,000 $ 129,168 $24,418,965
ADD - Net Loss - February 29, 2004 -- -- -- -- 121,505
- Conversion 13,000 -- -- -- --
LESS - Conversion -- 13,000 -- -- --
- Unrealized exchange loss -- -- -- 20,721 20,721
----------- ----------- ----------- ----------- -----------
BALANCE AT FEBRUARY 29, 2004 $10,515,167 $ 80,051 $11,775,000 $ 108,447 $24,561,191
=========== =========== =========== =========== ===========
The accompanying notes form an integral part of these financial statements.
4
ART INTERNATIONAL CORPORATION
STATEMENTS OF LOSS
(IN CANADIAN DOLLARS)
3 Months Ended 3 Months Ended
February 29, February 28,
2004 2003
(Unaudited) (Unaudited)
SALES $ 19,256 $ 21,166
COST OF GOODS SOLD 64,405 60,284
- --------------------------------------------------------------------------------
GROSS (LOSS) PROFIT (45,149)
OPERATING EXPENSES
Selling general & administrative 60,327 60,449
- --------------------------------------------------------------------------------
Operating loss 105,476 99,567
OTHER EXPENSES
10% Note interest 10,519 11,339
Foreign exchange loss 5,510 0
- --------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 16,029 11,339
- --------------------------------------------------------------------------------
NET LOSS $ 121,505 $ 110,906
================================================================================
NET LOSS PER COMMON SHARE $ 0.060 $ 0.434
- --------------------------------------------------------------------------------
WEIGHTED AVE.NUMBER
OF COMMON SHARES (Note 2 (I)) 2,025,000 255,457
- --------------------------------------------------------------------------------
The accompanying notes form an integral part of these financial statements
5
ART INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOW
(IN CANADIAN DOLLARS)
3 Months Ended 3 Months Ended
February 29, February 28,
2004 2003
(Unaudited) (Unaudited)
Cash was provided by (applied to):
OPERATING ACTIVITIES
Net loss for period $(121,505) $(110,906)
Add: Items not requiring an
outlay of cash
Depreciation 1,000 1,776
Accrued Interest 10,519 11,339
- --------------------------------------------------------------------------------
(109,986) (97,791)
Accounts receivable (623) 4,775
Inventories - current & long-term 5,049 3,141
Accounts payable and accrued
liabilities 14,933 7,144
- --------------------------------------------------------------------------------
Cash provided by (used by)
operating activities (90,627) (82,731)
Cash provided by (used by)
investment activities 0 0
FINANCING ACTIVITIES
Loan payable 83,300 61,000
Notes payable 20,228 1,261
Foreign exchange difference (20,721) 0
- --------------------------------------------------------------------------------
Cash provided by (used by)
financing activities 82,807 62,261
- --------------------------------------------------------------------------------
INCREASE /(DECREASE) IN CASH (7,820) (20,470)
CASH, beginning of period 9,102 35,160
- --------------------------------------------------------------------------------
CASH, end of period $ 1,282 $ 14,690
================================================================================
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
6
ART INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
February 29. 2004
(IN CANADIAN DOLLARS)
1. INCORPORATION AND NATURE OF 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:
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 29, 2004, and February 28, 2003
have been prepared in accordance with Canadian generally accepted
accounting principles (GAAP) applied on a consistent basis. The
balance sheet at November 30, 2003 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 management, all adjustments necessary for a fair
presentation of the financial position at February 29, 2004 and
November 30, 2003 and the results of operations, cash flows and
related note disclosures for the three month periods ended February
29, 2004, and February 28, 2003 have been made. The preparation of
financial statements in conformity with Canadian 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.
(A) INVENTORIES
Inventories 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 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 tends 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.
7
Art reproduction rights are recorded at cost and are fully amortized.
(D) FAIR VALUES
The carrying amounts of all financial instruments approximate their
respective fair values at year end. The recorded amounts of other
financial instruments in these financial statements approximate their
fair values.
(E) FOREIGN CURRENCY TRANSLATION
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 included in the Income Statement, whereas
unrealized gains and losses arising on translation are recorded as a
separate component of shareholders' equity.
(F) REVENUE RECOGNITION
Revenues and cost of sales are recognized as title to products and
material passes to the customer. Title passes when the product is
shipped to the customer and all sales invoices stipulate the terms and
conditions, i.e. "free on board" and "at the Company's premises".
(G) INCOME TAXES
The Company follows the liability method of accounting for income
taxes in accordance with the Canadian Institute of Chartered
Accountants' new income tax standard and SFAS #109 {Accounting for
Income Taxes}. Under this method, income tax liabilities and assets
are recognized for the estimated tax consequences attributable to
differences between the amounts reported in the financial statements
and their respective tax bases, using enacted income tax rates. The
effect of a change in income tax rates on future income tax
liabilities and assets is recognized in income in the period that the
change occurs.
(H) COMPARATIVE FIGURES
The comparative figures for common shares issued have been restated to
reflect a 1 for 100 reverse stock-split.
3. 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 substantial 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.
4. CURRENCY RISK
The Company is exposed, in its normal course of business, to foreign
exchange risks. The foreign exchange rate may change from that of the
balance sheet date.
8
5. INVENTORIES
Inventories consist of the following:
FEB 29, 2004 NOV 30, 2003
-------------------------------- --------------------------------
Provision for Provision for
Obsolete and Obsolete and
Gross Slow-Moving Net Gross Slow-Moving Net
Amount Inventories Amount Amount Inventories Amount
-------- -------- -------- -------- -------- --------
Finished Goods $ 58,710 $(24,870) $ 33,840 $ 62,317 $(24,870) $ 37,447
Work-in-Process -- -- -- -- -- --
Raw Materials 34,704 (25,147) 9,557 36,146 (25,147) 10,999
-------- -------- -------- -------- -------- --------
$ 93,414 $(50,017) $ 43,397 98,463 $(50,017) $ 48,446
6 CAPITAL ASSETS 2004 2003
-----------------------------------------
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
-----------------------------------------
Equipment, Furniture and Fixtures $358,821 $337,357 $ 21,464 $ 22,464
======== ======== ======== ========
7. LOANS PAYABLE - $759,000
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. These loans are payable to seven {7} parties, of
which five {5} are shareholders of the Company and represent more than 50%
of the loan.
8. 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.
FEB 2004 NOV 2003
-------- --------
U.S. Dollars Cdn. Dollars U.S. Dollars Cdn. Dollars
-------------------------- --------------------------
Principal $315,000 $420,745 $315,000 $409,217
Accrued Interest 245,583 328,025 237,708 308,806
$560,583 $748,770 $552,708 $718,023
9. SHARE CAPITAL
(A) AUTHORIZED
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
9
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. All the 875,000 class A preference shares were issued and
fully converted into common shares in fiscal 2000.
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) ISSUED
Common Shares
2004 2003
----------------------- -----------------------
Number of Number of
Shares Amount Shares Amount
--------- ----------- --------- -----------
Balance - End of Year 8,235,457 $10,515,167 3,035,457 $10,502,167
========= =========== ========= ===========
During the 2003 fiscal year, the Company had a 100 to 1 reverse stock
split on common shares. In addition, 27,800 of the class "C" common
shares were converted to common shares at a rate of 1 to 100. The cash
consideration of $6,950 was transferred from class "C" common shares
to common shares.
During the quarter ended February 29, 2004 the Company converted
52,000 class "C" common shares to 5,200,000 common shares. The cash
consideration of $13,000 was transferred from class "C" common shares
to common shares.
Class C Common Shares
The Company has issued 400,000 class C common shares. After adjusting
for the above noted conversions of 27,800 and 52,000 class C common
shares, the balance of 320,200 class C common shareholders
representing 32,020,000 votes and therefore they control the election
of its directors, and the operations of the Company.
(C) STOCK OPTIONS AND WARRANTS TO PURCHASE COMMON SHARES
The Company has issued various stock options for common shares of the
Company's share capital. The stock options provide for the granting of
options to key employees, including officers, directors and
independent contractors of the Company. No option may be granted with
a term exceeding ten years. In addition, the Company has granted
warrants from time to time to lenders of the Company.
10
The options and warrants are allocated as follows:
NUMBER OF SHARES
2004
------
Balance - Beginning of Year --
Add - Options and Warrants Issued --
------
--
Less - Options and Warrants Expired --
------
Balance - End of Year --
======
During the first quarter, the Company issued Nil common stock options
[2003 - Nil], 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.
10. SEGMENTED INFORMATION
The Company operates in one business segment, the production, distribution
and marketing of replications of oil paintings.
Operations and identifiable assets by geographic segments are as follows:
2004 2003
------- -------
DOMESTIC SALES - Canada $ 6,977 $ 5,050
INTERNATIONAL EXPORT SALES:
U.S.A 9,756 16,116
European Economic Community -- --
Other 2,523 --
------- -------
$19,256 $21,166
======= =======
All significant identifiable assets and amortization relate to assets
situated in Canada.
11. LEASE COMMITMENT
Under a long-term lease expiring January 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
------------------ ------
2004........................$67,091
2005.........................71,953
2006.........................75,356
The rent paid in 2003 was $98,176.
12. RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The financial statements of the Company are prepared in accordance with
Canadian generally accepted accounting principles ("Canadian G.A.A.P."),
which state that issue costs of the shares are treated as a reduction of
capital. These principles differ in some respects from United States
generally accepted accounting principles ("U.S. G.A.A.P."), which state
that the issue costs of the shares are treated as an expense in the period.
11
The effect of such differences on the Company's balance sheet and statement
of loss is as follows:
2004 2003
----------------------- -----------------------
CANADIAN U.S. CANADIAN U.S.
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
Accumulated ============ ============
Deficit (24,561,191) (26,608,949) $(24,418,965) $(26,466,723)
============ ============
2004 2003
--------- ---------
(B) STATEMENT OF LOSS:
Net Loss per Common Share under U.S. G.A.A.P $ (0.060) $ (.434)
========= =========
(C) WEIGHTED AVERAGE NUMBER OF SHARES
- U.S. G.A.A.P. [Note 12(e)] 2,025,000 255,457
========= =========
(D) WEIGHTED AVERAGE NUMBER OF SHARES
- CANADIAN G.A.A.P. 2,025,000 255,457
========= =========
(E) The Financial Accounting Standards Board {FAS 128} 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.
(G) STATEMENT OF CASH FLOW
For U.S. GAAP purposes, the bad debt and inventory reserves are non-cash
adjustments to net loss rather than adjustments to working capital
13. INCOME TAXES
There are no current or future income taxes payable in Canada or the United
States.
12
The Company has sustained net operating losses. Realization of the income
tax benefits of these losses is dependant on generating sufficient taxable
income prior to expiration of any net operating loss carry-forwards
{NOL's}. Realization is not assured and management believes that a
valuation allowance equal to the deferred income tax asset should be set
up. 100% of the NOL's were generated in Canada and expire as follows:
YEAR CANADIAN U.S. TOTAL
---- -------- ---- -----
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
2010........... 414,879 -- 414,879
$3,325,294 $ -- $ 3,325,294
========== ========== ===========
There were no reportable temporary differences between income for financial
statement purposes and taxable income.
The following sets forth the differences between the provision for income
taxes computed at the federal statutory income tax rate of 35% and that
reported for financial statement purposes:
2004 2003
--------- ---------
Provision Computed at the
Canadian Federal and Provincial
Statutory Income Tax Rates $ 42,527 $ 38,817
Less - Valuation Allowance $ 42,527 $ 38,817
--------- ---------
NET TAX BENEFIT RECOGNIZED $ -- $ --
========= =========
14. MAJOR CUSTOMER
Sales to specific major customers of the Company were as follows:
2004 2003
% % of Accts % % of Accts
of Sales Receivable of Sales Receivable
---------- ---------- ---------- ----------
SALES THROUGH TWO RETAIL
COMPANIES (U.S.) 48% 50% 57% 60%
15. SUPPLEMENTAL DISCLOSURE - STATEMENT OF CASH FLOWS
There were no interest or income tax payments made during the quarter ended
February 29, 2004 [2003: interest - $ Nil; income taxes - $ Nil].
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, 2003, 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 ART International
Corporation 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, 2003, 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", "Corporation", "A.R.T.", "we", "us" and "our" refer
to ART International Corporation, unless the context otherwise dictates.
Sales
Artagraph Division
Sales revenues remained depressed at $19,256 and comparable to the corresponding
quarter in fiscal 2003 of $21,166.
The Company continues to be very reliant on a few core customers 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.
The Company believes that only one other known reproduction processes compares
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.
14
Gross Loss
Artagraph Division
The Company reported a gross loss of $45,149 in the first quarter of 2004, which
was a 15% increase over the loss reported in the first quarter of 2003 of
$39,118. The increase is attributable to higher rents and the timing of the
Company's periodic temporary labour lay off programs. The latter resulted in
more paid work hours in the first quarter of 2004. Owing to the low capacity
that its plant operates at and the consequent high amount of fixed costs in
relation to its total revenues the Company is unable to generate gross profits
at its present revenue levels.
Net Loss
Artagraph Division
The net loss in the first quarter of fiscal 2004 was $121,505 as compared to
$110,906 loss for the first quarter of fiscal 2003.
Liquidity and Capital Resources
Artagraph division
As of the quarter ended February 29, 2004, the Company had minimal cash and
possessed a substantial working capital deficit. For the quarter ended at
February 29, 2004, the Company was able to sustain its operations primarily from
a series of loan advances totaling $83,300, which loans were received from a
total of 7 persons including several shareholders. As noted by our chartered
accountants in their financial report for the year ended November 30, 2003
(incorporated herein by reference to the Company's Form 10-K for the year ended
November 30, 2003) substantial doubt exists that the Company will be able to
continue as a going concern. The Company can provide no assurance that it will
be able to obtain additional working capital from the sale of its equity, or
borrow funds from traditional lending sources or from any person who has
advanced, or may be interested in advancing, unsecured, demand funds to the
Company. If additional loans are received or the Company is able to raise
additional funds from the sale of its equity, substantial dilution to the
interests and voting rights of current equity holders may occur. Additionally,
the Company is not aggressively seeking further sales of its products from its
major customers or from any other sources. If the Company is unable to
substantially increase sales from the level experienced in 2004/3, or obtain
additional working capital from loans or from the sale of its equity, this could
have a material adverse effect on the ability of the Company to continue its
operations. In this event, we may have to re-evaluate all aspects of our
business.
During the first quarter shareholders owning 52,000 class C common shares
converted to 5,200,000 common shares. As at March 1, 2004, the remaining issued
and outstanding convertible class C common shares of 320,200 represent
32,020,000 new common shares or 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. The class C common
shares are not listed.
During the quarter ended February 29, 2004, the loans payable to third parties
increased by approximately $83,300 from $675,700 to $759,000, which monies were
utilized by the Company for working capital purposes. The current loans payable
are due and payable to a total of 7 persons, including 5 persons who are
shareholders as well as Michel Van Herreweghe, officer and director of the
Company. The loans are repayable on demand, are non-interest bearing and are
convertible into common shares of the Company at the market rate on the date of
conversion. Based on the market value of the common shares at approximately
$0.30, the conversion of all loans into common stock of the Company would result
in dilution, as approximately 2,225,000 common shares would be issued. During
the current year, the Company anticipates that it will attempt to re-negotiate
the demand, non-interest bearing loans into more acceptable term notes
containing stated maturity date(s) with nominal interest and a prescribed
conversion based on an established market value of the common shares. No
assurances can be provided that we will be able to successfully negotiate all or
any substantial portion of the existing demand loans into acceptable term notes.
At February 29, 2004, the corporation reported negative working capital of
$2,212,438 representing an increase from November 30 2003 of negative $141,226,
which was due to increased current liabilities. The Corporation is reporting a
15
shareholders' deficit at the quarter-end of $2,190,973 that resulted from the
Corporation's on-going losses. In the first quarter of fiscal 2004, operating
cash flows were negative $90,627, driven by its operating losses and compared
with negative $82,731 in fiscal 2003. In 2004 the additional current loan
advances of $83,300 financed the shortfall of cash, and in 2003 loan advances of
$61,000 financed the cash short fall.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Corporation has exposure to exchange risk from its United States dollar debt
and trade liabilities. The table below summarizes the principle USD$ debt
arising from its notes and trade payables. In addition the Corporation has not
paid any interest on its USD$ notes, which accrues annually at 10%. The total
exposure to USD$ debt has increased from $559,000 to $712,000, from 1999 to 2004
respectively. The exchange rate between CAD / USD $'s has been somewhat volatile
ranging from a high to low of 1.6 / 1.0 to 1.29 / 1.0 correspondingly; in the
current fiscal year ended November 30, 2003, the Canadian dollar has
strengthened significantly against the US dollar, generating the reported
unrealized exchange gain of approximately $130,000. During the first quarter of
2004 the Canadian dollar dropped slightly against the US dollar, consequently
the unrealized exchange gain was lowered to $108,000. Currently the
Corporation's USD$ assets are negligible, its sales revenues, which are mainly
USD$ have dived in recent years, resulting in only minor USD$ trade receivables.
In the past five years the Corporation had a maximum trade receivable in USD$ of
approximately $100,000.
- -----------------------------------------------------------------------------------------------------------------------------
Feb 29 04 Nov 30 03 Nov 30 02 Nov 30 01 Nov 30 00 Nov 30 99
Fixed Interest
10% USD Notes
Principle (USD $) 315,000 315,000 315,000 315,000 315,000 315,000
Accrued Interest (USD $) 245,583 237,708 206,208 174,708 143,208 111,708
Total US debt & unpaid interest 560,583 552,708 521,208 489,708 458,208 426,708
US$ Trade Payables 149,750 149,823 132,750 132,750 132,750 132,750
Total US liabilities 710,333 702,531 653,958 622,458 590,958 559,458
Exchange Rate USD:CAD $* 1.3357 1.299 1.565 1.573 1.536 1.471
948,79 1912,588 1,023,444 979,002 907,711 822,907
*Exch. Rate Increase (Decrease) 2.8% (17.0)% (0.0)% 2.4% 4.4% --
- -----------------------------------------------------------------------------------------------------------------------------
Conversely, a strengthening Canadian dollar has a detrimental impact on the
Corporation's profitability. The table below illustrates the impact based on the
previous tables actual exchange rates.
- --------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000 1999
Assumed sales revenues in USD 100,000 100,000 100,000 100,000 100,000 100,000
Canadian equivalents per $US 100,000 133,570 129,900 156,500 157,300 153,600 147,100
COGS, apprx. (annual 2.5% RM price-inc.) 50,914 49,672 48,460 47,278 46,125 45,000
Gross Profit (GP) 82,656 80,228 108,040 110,022 107,475 102,100
(Loss) contribution vs highest GP (27,366) (1,982) -- (2,547) (7,922)
- --------------------------------------------------------------------------------------------------------------
During fiscal 2003, monthly average translation rates between Canadian and
United States dollars have ranged from a low of: $CAD1.29: $US1.0 to a high of
$CAD1.60: $US1.0
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. 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 from the balance
sheet perspective, as the Corporation would become more exposed to its net USD
liabilities. Conversely, a strengthening Canadian dollar reduces the gross
profits of the Corporation.
16
Item 4. Controls and Procedures
The Corporation is a foreign private issuer within the meaning of Rule 3b-4
under the Securities Act of 1934 and its full compliance with the requirements
under Regulation S-K is not mandated until 2005.
(a) Evaluation of disclosure control and procedures. Based on Management's
evaluation as of a date within 90 days of the filing date of this Annual Report
on Form 10-K, the Company's principal executive officer and principal financial
officer have concluded that the designed and operation of the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934, as amended ("Exchange Act")) are
effective to ensure that information required to be disclosed by the Company in
its reports filed and submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to the
Company's management, including the principal executive officer and the
principal financial officer, as appropriate, to allow timely decisions regarding
required disclosures.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
the internal controls subsequent to the date of their evaluation, nor were there
been any corrective actions with regard to significant deficiencies or material
weaknesses.
PART II
Item 1. Legal Proceedings
While the Company is not currently involved as defendant in any litigation, in
the last three years certain 10% Note Holders have commenced litigations in two
jurisdictions. The underlying default, that the Company has failed to make
payments of principal or interest, remains ongoing and therefore the very real
possibility exists that one or more of the Note holders may commence action
against the Company, including the petitioning of the Corporation into
bankruptcy. Developments in the last three years are summarized below.
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.
In December 2000, one 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.
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 from
fiscal 2001 through fiscal 2003; however, the note holders have made no payment
demands.
Item 2. Changes in Securities and Use of Proceeds
As noted in "Management's Discussion and Analysis of Financial Conditions and
Results of Operations - Liquidity and Capital Resources" shareholders
representing 52,000 of the class C common converted into 5,200,000 common
shares. As at March 1, 2004, the remaining issued and outstanding convertible
class C common shares of 320,200 represent 32,020,000 new common shares or
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. The class C common shares are not listed.
17
Item 3. Default Upon Senior Securities
As reported in "PART II Item 1. Legal Proceedings" herein, the Corporation is in
default under its terms and conditions of the 10% Notes. As reported in the
Company's Annual Report on Form 10-K for the year ended November 30, 2003, and
incorporated herein by reference. The amount owed to the 10% Note holders at
February 29, 2004, is reported as a current liability.
Item 4. Submissions of Matters to a Vote of Security Holders
No matters to report.
Item 5. Other Information
No matters to report.
Item 6. Exhibits and Reports on Form 8-K
As reported and included herein by reference:
Form 8-K -- on March 23, 2004 "ART International Corporation Defines
Revolutionary Food Stretch Film and Market"
Form 8-K -- on March 15, 2004 "ART International Corporation Acquires
Revolutionary Food Stretch Film License".
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.
ART INTERNATIONAL CORPORATION
Dated: Mar 25, 2004
- -------------------------------------
By: Michel van Herreweghe
Chairman
- -------------------------------------
By: Simon Meredith
President
18
Exhibit 31.1
CERTIFICATIONS*
---------------
I, Simon Meredith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ART
International Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and
we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls' and
6. The registrant's other certifying office and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
March 25, 2004
Simon Meredith
President
19
Exhibit 31.2
CERTIFICATIONS*
---------------
I, Michel van Herreweghe certify that:
1. I have reviewed this quarterly report on Form 10-Q of ART
International Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and
we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls' and
6. The registrant's other certifying office and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
March 25, 2004
Michel van Herreweghe
Chairman
20