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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 quarterly period ended Aug 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 Aug 31, 2004: 10,000,457.
ART INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN CANADIAN DOLLARS)
ASSETS
9 Months Ended 12 Months Ended
Aug 31,2004 Nov.30, 2003
(Unaudited) (Audited)
(Note 2)
- --------------------------------------------------------------------------------
CURRENT ASSETS
Cash $ 874 $ 9,102
Accounts receivable 2,275 8,657
Inventory (Notes 2(a) and 5) 34,448 48,446
Prepaid expenses and deposits 10,375 10,375
- --------------------------------------------------------------------------------
47,972 76,580
CAPITAL ASSETS (Note 6) 17,964 22,464
Patents 3,931,051 3,931,051
Less: Accumulated amortization 3,931,050 3,931,050
- --------------------------------------------------------------------------------
1 1
TOTAL ASSETS $ 65,937 $ 99,045
================================================================================
The accompanying notes form an integral part of these financial statements.
2
ART INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN CANADIAN DOLLARS)
LIABILITIES AND STOCKHOLDERS' DEFICIT
9 Months Ended 12 Months Ended
Aug 31,2004 Nov.30, 2003
(Unaudited) (Audited)
(Note 2)
- -------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and
accrued liabilities $ 723,553 $ 754,069
Loans payable (Note 7) 993,400 675,700
Notes payable (Note 8) 763,260 718,023
- -------------------------------------------------------------------------------
2,480,213 2,147,792
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 2,480,213 2,147,792
CAPITAL STOCK (Note 9)
Class C Common 75,638 93,051
Common shares 10,519,580 10,502,167
- -------------------------------------------------------------------------------
10,595,218 10,595,218
CONTRIBUTED SURPLUS 11,775,000 11,775,000
DEFICIT (24,784,494) (24,418,965)
- -------------------------------------------------------------------------------
(2,414,276) (2,048,747)
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $ 65,937 $ 99,045
===============================================================================
The accompanying notes form an integral part of these financial statements.
3
ART INTERNATIONAL CORPORATION
CONSOLIDATED 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 - Aug. 31, 2004 -- -- -- -- 351,154
- Conversion 17,413 -- -- -- --
LESS - Conversion -- 17,413 -- -- --
- Unrealized exchange loss -- -- -- 14,375 14,375
------------- ------------- ------------- ------------- -------------
BALANCE AT AUG 31, 2004 $ 10,519,580 $ 75,638 $ 11,775,000 $ 114,793 $ 24,784,494
============= ============= ============= ============= =============
The accompanying notes form an integral part of these financial statements.
4
ART INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF LOSS
(IN CANADIAN DOLLARS)
3 Mths Ended 3 Mths Ended 9 Mths Ended 9 Mths ended
Aug 31, 2004 Aug 31,2003 Aug 31, 2004 Aug 31, 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------
SALES $ 8,565 $ 24,038 $ 49,238 $ 66,333
COST OF GOODS SOLD 52,028 60,273 161,600 158,036
- --------------------------------------------------------------------------------------
GROSS LOSS 43,463 36,235 112,362 91,703
OPERATING EXPENSES
Selling general
& administrative 100,549 62,308 199,158 191,578
- --------------------------------------------------------------------------------------
Operating loss 144,012 98,543 311,520 286,051
OTHER EXPENSES
Amortization 2,500 2,000 4,500 6,000
Note interest 10,375 11,025 31,849 33,076
Exchange Loss 0 0 3,285 0
Other expenses 0 0 0 430
- --------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 12,875 13,025 39,634 39,506
- --------------------------------------------------------------------------------------
NET LOSS $ 156,887 $ 111,568 $ 351,154 $ 325,557
======================================================================================
NET LOSS PER COMMON SHARE $ 0.017 $ 0.44 $ 0.038 $ 1.27
- --------------------------------------------------------------------------------------
WEIGHTED AVE.NUMBER
OF COMMON SHARES 9,153,705 255,457 9,153,705 255,457
- --------------------------------------------------------------------------------------
The accompanying notes form an integral part of these financial statements
5
ART INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN CANADIAN DOLLARS)
9 Mths Ended 9 Mths Ended
Aug 31, 2004 Aug 31, 2003
(Unaudited) (Unaudited)
- -------------------------------------------------------------------------------
Cash was provided by (applied to):
OPERATING ACTIVITIES
Net loss for period $ (351,154) $ (325,557)
Add: Items not requiring an
outlay of cash
Depreciation 4,500 6,000
Accrued interest 31,849 33,076
- -------------------------------------------------------------------------------
(314,805) (286,481)
Accounts receivable 6,382 7,308
Inventories - current & long-term 13,998 0
Accounts payable and accrued
liabilities (30,516) 19,789
- -------------------------------------------------------------------------------
Cash provided by (used by)
operating activities (324,941) (259,384)
INVESTMENT ACTIVITIES
Disposition/(investment) 0 (10,000)
Acquisition of capital assets 0 0
- -------------------------------------------------------------------------------
Cash provided by (used by)
investment activities 0 (10,000)
FINANCING ACTIVITIES
Loan payable 317,700 239,203
Exchange, notes payable 13,388 0
Unrealized foreign exchange (14,375) 0
- -------------------------------------------------------------------------------
Cash provided by (used by)
financing activities 316,713 239,203
- -------------------------------------------------------------------------------
INCREASE /(DECREASE) IN CASH (8,228) (30,181)
CASH, beginning of period 9,102 35,160
- -------------------------------------------------------------------------------
CASH, end of period $ 874 $ 4,979
===============================================================================
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 CONSOLIDATED FINANCIAL STATEMENTS
Aug 31, 2004
(IN CANADIAN DOLLARS)
1. INCORPORATION AND OPERATIONS
The Company was incorporated in Canada on January 24, 1986, under The Ontario
Business Corporations Act. The Company's primary business is the production,
distribution and marketing of fine art reproductions.
Effective June 16, 2003, the Corporation changed is name from A.R.T.
International Inc. to ART International Corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) Basis of preparation of consolidated financial statements
The consolidated financial statements include those of the Corporation's and its
wholly owed subsidiary, Diamant Film Inc. ("Diamant"). The Corporation
incorporated Diamant April 22, 2004, and Diamant commenced operations in July
2004. The results of its operations are included herein.
The un-audited consolidated statements of loss and consolidated statements of
cash flow of the Company for the nine-month periods ended Aug 31, 2004, and Aug
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 the Company's management, the accompanying consolidated
financial statements contain the material adjustments, necessary to present
fairly the financial consolidated balance sheets of the Company at Aug 31, 2004,
and the balance sheet at November 30, 2003, and the results of their loss and
cash flow for the periods ended Aug 31, 2004, and Aug 31, 2003, and, should be
read in conjunction with the audited financial statements for the year ended
November 30, 2003. All such adjustments are of a normal recurring nature.
Interim period results are not necessarily indicative of the results to be
achieved for the full fiscal year.
(B) Inventories
Inventories, whether classified as current or long-term assets, are valued at
the lower of cost and market value. Cost is determined on a first in, first out
basis.
The Company's policy is to periodically evaluate the inventory levels of each
product in its inventory on an image-by-image basis, both in light of past sales
and estimated future sales of each product and similar products. In addition,
when the Company determines that a product line or market should be
discontinued, the inventory relating to that product line or market is written
down to net realizable value.
7
The purpose of these policies is to ensure that the Company's inventory
balances, net of reserves, exclude slow-moving and obsolete inventory and are
valued at the lower of cost or market value. The Company uses annual physical
inventory counts combined with an analysis of each product's preceding three
years (or for such shorter period that a particular product may have been in
existence) sales and a review of the Company's sales expectations for each
product to determine whether the level and value of the Company's inventory of a
particular product at a given time is excessive. These three-year periods are
deemed to be an appropriate period for evaluating the historical sales of the
Company's products, since such products are not perishable and tend to be
marketed over multi-year periods through intermittent and recurring sales
programs. In no event are amounts carried as a current asset if it is not
probable that they will be sold within one year, nor do amounts carried as
long-term inventory exceed their fair value as determined by the inventory
valuation policies of the Company as described above.
(C) Capital Assets
Capital assets are recorded at cost and are amortized at rates sufficient to
substantially amortize the cost of the assets over their estimated useful lives
on the following basis:
Equipment, Furniture and Fixtures -- 20 % declining balance.
(D) Other Assets
Patents are recorded at cost and are amortized on a straight-line basis, based
on the legal life of such intellectual property, which approximates fifteen
years.
At each balance sheet date, the Company reviews the remaining benefit associated
with the Artagraph patents to ensure that the Company will generate sufficient
undiscounted cash flows to recover their carrying cost. In accordance with this
policy, all patents at November 30, 1998 have been written down to $1.
Art reproduction rights are recorded at cost and are amortized over their
estimated useful lives on a straight-line basis over a period of three years.
(E) Fair Valaue
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.
(F) Foreign Currency Translation
These consolidated 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.
8
(G) 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".
(H) Translations of Foreign Currencies
These financial statements are presented in Canadian dollars.
Under Canadian generally accepted accounting principles, the translation gains
or losses arising on translation of long-term monetary items are deferred and
amortized over the lives of the related monetary item
(I) Management Representations
In the opinion of management, all adjustments necessary for a fair presentation
of the financial position at Aug 31, 2004 and November 30, 2003 and the results
of operations, changes in financial position and related note disclosures for
the period ended Aug 31, 2004 and 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
end expenses during the period. Actual results could differ from these
estimates.
3. GOING CONCERN
The accompanying consolidated 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.
9
5. INVENTORIES
Inventories consist of the following:
AUG 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 $ 26,449 $ 0 $ 26,449 $ 62,317 $ (24,870) $ 37,447
Raw Materials 7,999 0 7,999 36,146 (25,147) 10,999
------------- ------------- ------------- ------------- ------------- -------------
$ 34,448 $ 0 $ 34,448 98,463 $ (50,017) $ 48,446
============= ============= ============= ============= ============= =============
6. CAPITAL ASSETS
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
---------------------------------------------------------
Equipment, Furniture and Fixtures $ 356,821 $ 338,857 $ 17,964 $ 24,464
============ ============ ============ ============
7. LOANS PAYABLE - $993,400
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.
AUG 2004 NOV 2003
--------------------------- ---------------------------
U.S. Dollars Cdn. Dollars U.S. Dollars Cdn. Dollars
------------ ------------ ------------ ------------
Principal $ 315,000 $ 414,950 $ 315,000 $ 409,217
Accrued Interest 264,413 348,310 237,708 308,806
---------------------------------------------------------
$ 579,413 $ 763,260 $ 552,708 $ 718,023
=========================================================
The Corporation is in default under the terms of the Notes for failure to pay
interest and repay principal. Notwithstanding, the Note holders have not placed
formal demand on the Corporation to meet its obligations. Under the terms of the
security instrument, attached to the Note, the holders could demand payment (of
all monies owed to them), and or, petition the courts to place the Company into
receivership proceedings. The Company has received no notices from the Note
holders.
Owing to the above noted default, the obligations of the Corporation are
reported as a current liability.
10
9. CAPITAL STOCK
(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) Class "A" preference shares
Non-voting, redeemable, class "A" preference shares, series 1 and series 2;
convertible into common shares and have the right to cumulative dividends as and
if declared in the amount of U.S. $0.60 per share per annum, payable quarterly
in the first year of issuance and annually thereafter, as and when declared,
subject to the provisions of The Ontario Business Corporations Act. The future
dividend payments are payable in cash or common shares at the discretion of the
directors.
The directors have authorized 875,000 class "A" preference shares, series 1,
each of which is convertible into 0.048 common shares. All the 875,000 class A
series 1 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. All
issued class A series 2 preference shares were converted into common shares in
fiscal 2000.
(ii) Class "B" preference shares
Effective July 1998, the shareholders have authorized an unlimited number of
class "B" preference shares. These shares are non-voting, redeemable at the
option of the Company and have a preferential dividend of $0.10 per share in
priority to all other shares of the Company. No class "B" shares have been
issued.
(iii) Class "C" common share
Effective July 1998, the shareholders have authorized an unlimited number of
class "C" common shares. Each class "C" common share has 100 votes and a
dividend right of $0.01 which is payable only in the event that the annual
dividends required in respect of the senior shares of the Company, including
class "A" preference shares, class "B" preference shares and common shares, have
been paid; and
(iv) Common shares.
(b) Capital stock.
COMMON SHARES
-----------------------------------------------------
AUG 2004 NOV 2003
------------------------- -------------------------
Number of Number of
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Balance - Beginning of Year 10,000,457 $10,519,580 3,635,457 $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.
11
During the nine months ended August 31, 2004 the Company converted 69,650 class
"C" common shares to 6,965,000 common shares. The cash consideration of $17,413
was transferred from class "C" common shares to common shares.
Class C Common Shares
The Company had initially issued 400,000 class C common shares. After adjusting
for the conversions of 27,800 and 69,650 class C common shares, the balance of
302,550 class C common shareholders represents 30,255,000 votes, and therefore,
the class C common share holders control the Company, the election of its
directors, and the operations of the Company.
(c) Stock Options to Purchase Common Shares
2004
-----------
Balance - Beginning of Year 0
Add - Options and Issued 0
-----------
0
Less - Options and Expired 0
-----------
Balance - End of Year 0
-----------
During the nine months ended August 31, 2004, 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, respectively:
Canada $ 18,025
U.S.A 28,690
Other 2,523
-----------
$ 40,673
===========
All significant identifiable assets and amortization relate to assets situated
in Canada.
10. COMMITMENTS
Lease obligations - 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:
2005............................................ 71,953
2006............................................ 75,356
The gross rent paid in 2003 was $98,176, and the gross rent paid for the first 9
months of fiscal 2004 was $90,213.
12
11. RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The financial statements of the Company are prepared in accordance with Canadian
generally accepted accounting principles (Canadian GAAP). These principles
differ in some respects from United States generally accepted accounting
principles (U.S. GAAP) 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:
(a) Balance sheet:
Aug 31, 2004 November 30, 2003
-------------------------- --------------------------
Canadian U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
----------- ----------- ----------- -----------
$ $ $ $
Capital stock issued 10,595,218 12,642,976 10,595,218 12,642,976
----------- ----------- ----------- -----------
Accumulated Deficit (24,784,494) (26,832,252) (24,418,965) (26,466,723)
----------- ----------- ----------- -----------
(b) Statement of Loss:
Aug 31, 2004 Aug 31, 2003
------------ ------------
Net loss under Canadian
& U.S. GAAP 351,154 $ 325,557
Net loss per common
share under
U.S. & Canadian GAAP .038 $ 1.27
Weighted average number
of shares U.S. & Cdn GAAP 9,153,705 255,457
(c) 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.
(d) 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 class C common shares, as the effect would be anti-dilutive.
(e) EARNINGS PER SHARE
As the Company is in a loss position, it does not reflect the fully diluted
earnings per share, as the effect would be anti-dilutive.
13
(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. 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 0 924,031
2005 395,462 0 395,462
2006 88,687 0 88,687
2007 531,742 0 531,742
2008 481,938 0 481,938
2009 488,555 0 488,555
2010 414,879 0 414,879
- -----------------------------------------------------------------
$3,325,294 $ 0 $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 $ 122,904 $ 113,945
Less - Valuation Allowance $ 122,904 $ 113,945
---------- ----------
NET TAX BENEFIT RECOGNIZED $ -- $ --
========== ==========
14. RECLASSIFICATION
Certain figures with respect to the nine-month period ended Aug 31, 2003 have
been reclassified to conform with the presentation adopted for the nine-month
period ended Aug 31, 2004.
14
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, 2002, under Item 1. Business - "Factors that may affect the business" and
incorporated by reference in this Quarterly Report.
Except as required by law, we undertake no obligation to update any
forward-looking statement, whether as a result of new information, future events
or otherwise. Readers, however, should carefully review the factors set forth in
other reports or documents that we file from time to time with the Securities
and Exchange Commission.
In this Report, "Company", "ART", "we", "us" and "our" refer to ART
INTERNATIONAL CORPORATION, unless the context otherwise dictates.
Sales
Artagraph Division
Sales revenues remained depressed at $49,238 and compared unfavourably to the
prior fiscal year's revenues of $66,333. The shortfall is directly attributable
to the declines in the third quarter as sales revenues fell from $24,038 in
fiscal 2003 to $8,568 in fiscal 2004. The decline in third quarter revenues is
because of lower sales volumes; sales prices have remained fixed for the last
five years.
Owing to the Company's inability to finance new initiatives, or to actively
participate in trade shows, or to hire dedicated sales personnel to sell to its
markets, the Company continues to achieve limited success in developing new
opportunities, with new or existing customers and markets.
The Company believes that the Artagraph process is very price-competitive with
other known canvas-textured products that are available in the market today.
This is in major part due to the Company's new contract pricing and ordering
policies. The customers can now initiate an Artagraph reproduction order for
15
approximately 20% [or approximately $5,000] of the previous initial financial
commitment. Further investment in additional manufacture of Artagraph
reproductions for customers under this new program is directly tied to actual
advance sales.
The Company believes that no other known reproduction processes compare in
quality with the Company's processes in accurately reproducing brush strokes and
texture, and the colour intensity and other reproduction characteristics are
believed to be at least equal to any other known reproduction process.
The Company's success in the marketplace will depend upon raising additional
capital, creating greater awareness of its products through aggressive
advertising, participation at trade shows, as well as updating its library of
images and providing new point-of-sale materials.
The Corporation's newly formed subsidiary had no sales revenues. The subsidiary
is in a start-up phase and is running per-operational and marketing studies and
providing potential customers with samples.
Gross Profit
Artagraph Division
The Company reported a gross loss of $112,362 for nine months of fiscal 2004,
which is higher than the gross loss of $91,703 from the comparable fiscal period
in 2003. The increase in the loss is attributable to the lower revenues as COGS
remained fairly even.
The third quarter gross loss was $43,463 was higher than fiscal 2003 of $36,235,
as the lower revenues in the current quarter were partially offset by lower
COGS. The Company's gross margin remained depressed owing to the low capacity
that its plant operates at and the consequent high level of fixed costs in
relation to its total revenues.
Net Loss
Artagraph Division
The net loss in the nine months of fiscal 2004 was $351,154 as compared to
$325,557 loss for the nine months of fiscal 2003.
While the regular corporate running costs were lower, including selling, general
and administration expenses than the prior fiscal year's, the newly formed
subsidiary incurred approximately $50,000 in start-up costs. As reported on the
selling, general and administrative line item in the Corporation's consolidated
statement of loss, these expenses were approximately $40,000 higher in the
fiscal 2004 period than the comparable quarter in the prior fiscal year.
16
Liquidity and Capital Resources
Artagraph division
As of August 31, 2004, the Company had minimal cash and possessed a substantial
working capital deficit. For the nine months ended at August 31, 2004, the
Company was able to sustain its operations primarily from a series of loan
advances totaling $317,700, 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 nine months ended August 31, 2004, shareholders owning 69,650 class C
common shares converted to 6,965,000 common shares. As at August 31, 2004, the
remaining issued and outstanding convertible class C common shares of 302,550
represent 30,255,000 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 nine months ended August 31, 2004, the loans payable to third parties
increased by approximately $317,700 from $675,700 to $993,400, which monies were
utilized by the Company for working capital purposes and start-up costs for its
new subsidiary. 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 12
months) the conversion of all loans into common stock of the Company would
result in dilution, as approximately 1,420,000 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 August 31, 2004, the corporation reported negative working capital of
$2,432,241 representing an increase from November 30 2003 of negative $361,029
which was due to increased current liabilities. The Corporation is reporting a
shareholders' deficit at the quarter-end of $2,414,276 that resulted from the
17
Corporation's on-going losses. In the first nine months of fiscal 2004,
operating cash flows were negative $324,941, driven by its operating losses and
compared with negative $259,384 in fiscal 2003. In 2004 the additional current
loan advances of $317,700 financed the shortfall of cash, and in 2003 loan
advances of $239,000 financed that cash short fall.
Other events:
Newly formed, wholly owned subsidiary, Diamant Film Inc. and related business
during start-up.
Diamant Film Inc. was incorporated April 22, 2004, under the Corporations Act of
Ontario. It is a wholly owned subsidiary of ART. Authorized share capital is an
unlimited number of common shares without nominal or par value and an unlimited
number of special shares without nominal or par value. Issued capital is 100
common shares for $1, which ART owns. Directors of the subsidiary are: Stefan
Gudmundsson, director and president, and Michel van Herreweghe, director and
secretary/treasurer. Diamant was formed to pursue opportunities in the clear
film plastic packaging markets, including film wrapping for meat products
running on automated food packaging lines. It offers an alternative to the
PVC-based cling-film wrap; consequently being non-PVC based, it is considered
environmentally responsive.
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 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 testing its application to the food
packaging industry in the Canadian market. To date, the Corporation has expended
approximately $70,000 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 $310,000). The Corporation
intends to fund the purchases of Diamant Products by leveraging purchase orders
from major food packaging companies in the Canadian market place. Despite
intensive marketing and testing efforts by the Subsidiary, in this regard, there
is no certainty that the Corporation will be successful in acquiring purchase
orders, or necessary working capital or be able to meet its minimum purchase
commitment under the Agreement. In the event that the Corporation does not meet
its minimum commitments, Diamant Plastics Corp can terminate the Agreement for
cause, provided it gives the Corporation 90 days prior written notice.
18
Subsequent Event - Conversion of class C common shares to common
Effective September 7, 2004, holders of 116,200 class C common shares converted
to 11,620,000 common shares.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Corporation has increasing exposure to exchange risk from its United States
dollar debt. The table below summarizes the principle USD$ 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 $714,000, 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 year ended
November 30, 2003, the Canadian dollar has strengthened significantly generating
an unrealized exchange gain of approximately $100,000. Currently the
Corporation's USD$ 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.
- -------------------------------------------------------------------------------------------------------------------------
Aug 30 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 $) 264,413 237,708 206,208 174,708 143,208 111,708
- -------------------------------------------------------------------------------------------------------------------------
Sub-total 552,708 521,208 489,708 458,208 426,708
- -------------------------------------------------------------------------------------------------------------------------
US$ Trade Payables 134,256 149,823 132,750 132,750 132,750 132,750
- -------------------------------------------------------------------------------------------------------------------------
Total US$ liabilities 713,669 702,531 653,958 622,458 590,958 559,458
- -------------------------------------------------------------------------------------------------------------------------
Exchange Rate USD:CAD $* 1.3105 1.299 1.5650 1.5728 1.5360 1.4709
- -------------------------------------------------------------------------------------------------------------------------
935,263 912,588 1,023,444 979,002 907,711 822,907
- -------------------------------------------------------------------------------------------------------------------------
*Exch. Rate Increase (Decrease) 0.9% (17.0)% (0.0)% 2.4% 4.4% --
- -------------------------------------------------------------------------------------------------------------------------
Conversely, a strengthening Canadian dollar has a detrimental impact on the
Corporation's profitability. The table below illustrates the impact based on the
previous tables actual exchange rates.
- -------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Assumed sales revenues in USD$ 100,000 100,000 100,000 100,000 100,000
- -------------------------------------------------------------------------------------------------------------
Canadian equivalents 129,900 156,500 157,800 153,600 147,090
- -------------------------------------------------------------------------------------------------------------
COGS, approximately (annual 2.5% RM price increase) 49,672 48,460 47,278 46,125 45,000
- -------------------------------------------------------------------------------------------------------------
Gross Profit (GP) 80,228 108,040 110,522 107,475 102,090
- -------------------------------------------------------------------------------------------------------------
(Loss) contribution vs highest GP (29,793) (2,482) 0 (3,047) (8,432)
- -------------------------------------------------------------------------------------------------------------
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.
19
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 the Annual Report
on Form 10-K, dated November 30,2003,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 four 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.
20
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 69,650 of the class C common converted into 6,965,000 common
shares. As at September 1, 2004, the remaining issued and outstanding
convertible class C common shares of 302,550 represent 30,255,000 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
August 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/A.
21
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.
Dated: September 16, 2004
ART INTERNATIONAL CORPORATION
/s/ Michel van Herreweghe
- -------------------------------------
By: Michel van Herreweghe
Chairman
/s/ Simon Meredith
- -------------------------------------
By: Simon Meredith
President
22