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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 six months ended May 31, 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 May 31, 2004: 9,230,457.
1
Item 1. Financial Statements
ART INTERNATIONAL CORPORATION
BALANCE SHEETS
(IN CANADIAN DOLLARS)
ASSETS
6 Months Ended 12 Months Ended
May 31,2004 Nov.30, 2003
(Unaudited) (Audited)
(Note 2)
- -----------------------------------------------------------------------------
CURRENT ASSETS
Cash $ 28,111 $ 9,102
Accounts receivable 8,826 8,657
Inventory (Notes 2(A) and 5) 38,448 48,446
Prepaid expenses and deposits 10,720 10,375
- -----------------------------------------------------------------------------
86,105 76,580
CAPITAL ASSETS (Note 6) 20,464 22,464
Patents 3,931,051 3,931,051
Less: Accumulated amortization 3,931,050 3,931,050
- -----------------------------------------------------------------------------
1 1
TOTAL ASSETS $ 106,570 $ 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
6 Months Ended 12 Months Ended
Nov.30, 2003 May 31,2004
(Unaudited) (Audited)
(Note 2)
- ------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and
accrued liabilities $ 723,985 $ 754,069
Loans payable (Note 7) 892,900 675,700
Notes payable (Note 8) 779,235 718,023
- ------------------------------------------------------------------------------
2,396,120 2,147,792
- ------------------------------------------------------------------------------
TOTAL LIABILITIES 2,396,120 2,147,792
CAPITAL STOCK (Note 9)
Class C Common 77,563 93,051
Common shares 10,517,655 10,502,167
- ------------------------------------------------------------------------------
10,595,218 10,595,218
CONTRIBUTED SURPLUS 11,775,000 11,775,000
- ------------------------------------------------------------------------------
22,370,218 22,370,218
DEFICIT (24,659,768) (24,418,965)
- ------------------------------------------------------------------------------
(2,289,550) (2,048,747)
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $ 106,570 $ 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 - May 31, 2004 -- -- -- -- 194,265
- Conversion 15,488 -- -- -- --
LESS - Conversion -- 15,488 -- -- --
- Unrealized exchange loss -- -- -- 46,538 46,538
-----------------------------------------------------------------------------
BALANCE AT MAY 31, 2004 $ 10,517,655 $ 77,564 $ 11,775,000 $ 82,630 $ 24,659,768
=============================================================================
The accompanying notes form an integral part of these financial statements.
4
ART INTERNATIONAL CORPORATION
STATEMENTS OF LOSS
(IN CANADIAN DOLLARS)
3 Mths Ended 3 Mths Ended 6 Mths Ended 6 Mths ended
May 31, 2004 May 31, 2003 May 31, 2004 May 31, 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
SALES $ 21,417 $ 20,994 $ 40,673 $ 42,160
COST OF GOODS SOLD 45,167 37,506 109,571 97,790
- ----------------------------------------------------------------------------------------------
GROSS LOSS 23,750 16,512 68,898 55,630
OPERATING EXPENSESSelling general
& administrative 39,282 53,593 98,609 112,041
- ----------------------------------------------------------------------------------------------
Operating loss 63,032 70,105 167,508 167,671
OTHER EXPENSES
Amortization 1,000 2,000 2,000 4,000
Note interest 10,955 9,924 21,473 21,263
Exchange (gain) loss (2,225) 0 3,284 0
Other expenses 0 430 0 430
- ----------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 9,730 12,354 26,757 25,693
- ----------------------------------------------------------------------------------------------
NET LOSS $ 72,762 $ 82,459 $ 194,265 $ 193,364
==============================================================================================
NET LOSS PER COMMON SHARE $ 0.015 $ 0.323 $ 0.041 $ 0.757
- ----------------------------------------------------------------------------------------------
WEIGHTED AVE.NUMBER
OF COMMON SHARES 4,740,910 255,457 4,740,910 255,457
- ----------------------------------------------------------------------------------------------
The accompanying notes form an integral part of these financial statements
5
ART INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOW
(IN CANADIAN DOLLARS)
6 Mths Ended 6 Mths Ended
May 31, 2004 May 31, 2003
(Unaudited) (Unaudited)
Cash was provided by (applied to):
OPERATING ACTIVITIES
Net loss for period $ (194,265) $ (193,364)
Add: Items not requiring an
outlay of cash
Depreciation 2,000 4,000
Accrued interest 21,473 21,263
- -------------------------------------------------------------------------------
(170,792) (168,101)
Accounts receivable (169) 11,307
Inventories 9,998 5,444
Prepaid expenses (345) 0
Accounts payable and accrued
liabilities (30,084) (11,492)
- -------------------------------------------------------------------------------
Cash applied to
operating activities (191,392) (162,842)
FINANCING ACTIVITIES
Foreign exchange on note payable 39,739 0
Loan payable 217,200 142,000
Foreign exchange difference (46,538) 0
- -------------------------------------------------------------------------------
Cash provided by
financing activities 210,401 142,000
- -------------------------------------------------------------------------------
INCREASE /(DECREASE) IN CASH 19,009 (20,842)
CASH, beginning of period 9,102 35,160
- -------------------------------------------------------------------------------
CASH, end of period $ 28,111 $ 14,318
===============================================================================
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 STATEMENTSMay 31. 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 May 31, 2004, and May 31, 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 May 31, 2004 and November 30,
2003 and the results of operations, cash flows and related note disclosures
for the six month periods ended May 31, 2004, and May 31, 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.
Art reproduction rights are recorded at cost and are fully amortized.
7
(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:
MAY 31, 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 $ 29,549 $ 0 $ 29,549 $ 62,317 $ (24,870) $ 37,447
Raw Materials 8,899 0 8,899 36,146 (25,147) 10,999
------------- ------------- ------------- ------------- ------------- -------------
$ 38,448 $ 0 $ 38,448 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 $ 338,357 $ 20,464 $ 22,464
============ ============ ============ ============
7. LOANS PAYABLE - $882,900
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.
MAY 2004 NOV 2003
--------------------------- ---------------------------
U.S. Dollars Cdn. Dollars U.S. Dollars Cdn. Dollars
------------ ------------ ------------ ------------
Principal $ 315,000 $ 429,471 $ 315,000 $ 409,217
Accrued Interest 256,538 349,764 237,708 308,806
------------ ------------ ------------ ------------
$ 571,538 $ 779,235 $ 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
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.
9
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
5.31.2004 11.30.2003
-----------------------------------------------------
Number of Number of
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Balance - May 31, 2004 9,230,457 $10,517,655 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 six months ended May 31, 2004 the Company converted 61,950
class "C" common shares to 6,195,000 common shares. The cash
consideration of $15,488 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 61,950 class C common
shares, the balance of 310,250 class C common shareholders
representing 31,025,000 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 period --
Add - Options and Warrants Issued --
--
--
Less - Options and Warrants Expired --
--
Balance - End of period --
==========
During the first six months 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:
DOMESTIC SALES - Canada $14,720
INTERNATIONAL EXPORT SALES:
U.S.A 23,430
European Economic Community --
Other 2,523
-------
$40,673
=======
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 gross rent paid in 2003 was $98,176, and the gross rent paid for the
first 6 months of fiscal 2004 was $59,818.
11
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 of $2,047,758, are treated as an expense
in the period.
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 12,642,976 $ 10,595,218 $ 12,642,976
============ ============ ============ ============
Accumulated
Deficit (24,659,768) (26,707,526) $(24,418,965) $(26,466,723)
============ ============ ============ ============
2004 2003
------------ -----------
(B) STATEMENT OF LOSS:
Net Loss per Common Share under U.S. G.A.A.P. $ (0.041) $ (.757)
============ ============
(C) WEIGHTED AVERAGE NUMBER OF SHARES
- U.S. G.A.A.P. [Note 12(e)] 4,740,910 255,457
============ ============
(D) WEIGHTED AVERAGE NUMBER OF SHARES
- CANADIAN G.A.A.P. 4,740,910 255,457
============ ============
(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.
12
13. INCOME TAXES
There are no current or future income taxes payable in Canada or the United
States.
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 $ 85,477 $ 85,080
Less - Valuation Allowance $ 85,477 $ 85,080
-------- --------
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.) 55% 55% 57% 60%
15. SUPPLEMENTAL DISCLOSURE - STATEMENT OF CASH FLOWS
There were no interest or income tax payments made during the quarter ended
May 31, 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 $40,673 and comparable to the corresponding
six months in fiscal 2003 of $42,160.
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 $68,898 in the first six months of 2004,
which was a 24% increase over the loss reported in the first quarter of 2003 of
$55,630. 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 six months 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 six months of fiscal 2004 was $194,265 as compared to
$193,364 loss for the first quarter of fiscal 2003.
Liquidity and Capital Resources
Artagraph division
As of May 31, 2004, the Company had minimal cash and possessed a substantial
working capital deficit. For the six months ended at May 31, 2004, the Company
was able to sustain its operations primarily from a series of loan advances
totaling $217,200, 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 61,950 class C common shares
converted to 6,195,000 common shares. As at May 31, 2004, the remaining issued
and outstanding convertible class C common shares of 310,250 represent
31,025,000 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 six months ended May 31, 2004, the loans payable to third parties
increased by approximately $217,200 from $675,700 to $892,900, 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
$0.70 (OTCBB range US$0.25 - 1.2 prior six months) the conversion of all loans
into common stock of the Company would result in dilution, as approximately
1,275,000 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 May 31, 2004, the corporation reported negative working capital of $2,310,015
representing an increase from November 30 2003 of negative $229,803, which was
due to increased current liabilities. The Corporation is reporting a
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shareholders' deficit at the quarter-end of $2,289,550 that resulted from the
Corporation's on-going losses. In the first six months of fiscal 2004, operating
cash flows were negative $191,392, driven by its operating losses and compared
with negative $162,842 in fiscal 2003. In 2004 the additional current loan
advances of $217,200 financed the shortfall of cash, and in 2003 loan advances
of $141,000 financed the cash short fall.
Other events:
Pursuant to a letter of intent between the Corporation and Diamant Plastics
Corp., whereby the Corporation would acquire the exclusive rights to
manufacture, market and distribute a non-PVC based plastic product (Form 8-K
filings dated March 11 and 23 2004, and incorporated herein by reference) the
Corporation has incorporated a 100% owned subsidiary company, in Ontario Canada,
called Diamant Film Inc. (herein after referred to as "Diamant Film"
"Subsidiary" or collectively "Corporation"). On June 14, 2004, Diamant Film
executed an exclusive Distribution Agreement ("Agreement") with Diamant Plastics
Corp. for the distribution rights for Diamant Plastics' products throughout
Canada; for a five (5) year term with an option for a similar renewal period,
provided full and satisfactory compliance.
The Corporation continues to negotiate under the said letter of intent for the
rights to manufacturing and similar rights for the United States markets. In
addition, the Corporation continues to invest resources to acquire samples of
the product from Diamant Plastics Corp., for the purpose of testing its
application to the food packaging industry in the Canadian market. To date, the
Corporation has expended approximately $30,000 in this regard.
Under the Agreement, and commencing July 1, 2004, the Subsidiary agrees to
purchase the Diamant products from Diamant Plastics, subject to a minimum
quarterly purchase of 100,000 pounds (approximately $310,000). The Corporation
intends to fund the purchases of Diamant Products by leveraging purchase orders
from major food packaging companies in the Canadian market place. Despite
intensive marketing and testing efforts by the Subsidiary, in this regard, there
is no certainty that the Corporation will be successful in acquiring purchase
orders, or necessary working capital or be able to meet its minimum purchase
commitment under the Agreement. In the event that the Corporation does not meet
its minimum commitments, Diamant Plastics Corp can terminate the Agreement for
cause, provided it gives the Corporation 90 days prior written notice.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Corporation has exposure to exchange risk from its United States dollar debt
and trade liabilities. The table below summarizes the principle USD$ debt
arising from its notes and trade payables. In addition the Corporation has not
paid interest on its USD$ notes, which accrues annually at 10%, in the aggregate
of $256,538. The total exposure to USD$ debt has increased from $559,000 to
$706,000, 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 preceding 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 six months of 2004 the Canadian dollar dropped against the US dollar,
consequently the unrealized exchange gain was lowered to $82,630. Currently the
Corporation's USD$ 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.
- -----------------------------------------------------------------------------------------------------
May 31 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 $) 256,538 237,708 206,208 174,708 143,208 111,708
Total US debt & unpaid interest 571,538 552,708 521,208 489,708 458,208 426,708
US$ Trade Payables 134,282 149,823 132,750 132,750 132,750 132,750
Total US liabilities 705,820 702,531 653,958 622,458 590,958 559,458
Exchange Rate USD:CAD $* 1.3634 1.299 1.565 1.573 1.536 1.471
962,315 912,588 1,023,444 979,002 907,711 822,907
*Exch. Rate Increase (Decrease) 5.0% (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.
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- ---------------------------------------------------------------------------------------------------------------
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 100,000 136,340 129,900 156,500 157,300 153,600 147,100
COGS, apprx. (annual 2.5% RM price-inc.) 50,914 49,672 48,460 47,278 46,125 45,000
Gross Profit (GP) 85,426 80,228 108,040 110,022 107,475 102,100
(Loss) contribution vs highest GP (24,596) (29,793) (1,982) -- (2,547) (7,922)
- ---------------------------------------------------------------------------------------------------------------
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.
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 30 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.
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Under the situation of the discontinuance in the Ontario Courts, any future
continuance of this action (in the Ontario Courts) by the same plaintiff would
likely require them to post bonds to cover the Corporation's estimated legal
court costs, at a minimum.
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 61,950 of the class C common converted into 6,195,000 common
shares. As at March 1, 2004, the remaining issued and outstanding convertible
class C common shares of 310,250 represent 31,025,000 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.
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 May
31, 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".
CEO and CFO signed and executed Certifications Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
attached hereto the Form 10-Q.
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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.
ART INTERNATIONAL CORPORATION
Dated: June 16, 2004
By: /s/ Michel van Herreweghe
- -------------------------------------
By: Michel van Herreweghe
Chairman
By: /s/ Simon Meredith
- -------------------------------------
By: Simon Meredith
President
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