UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
FORM 20-F
(Mark One)
X REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE
SECURITIES EXCHANGE ACT OF 1934.
OR
_____ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended ______________________________.
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________________ to _________________.
Commission file number 000-30683
Ayotte Music, Inc.
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(Exact name of Registrant as specified in its charter)
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(Translation of Registrant's name into English)
Canada (Federal), under the Canada Business Corporations Act
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(Jurisdiction of incorporation or organization)
2060 Pine Street, Vancouver, British Columbia, Canada V6J 4P8
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
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Securities registered or to be registered pursuant to Section 12(g) of the Act.
Common Stock
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report: 11,694,000 shares common stock.[a/o 8/11/99]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. _____ Yes X No
Indicate by check mark which financial statement item the registrant has elected
to follow.
X Item 17 _____ Item 18
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AYOTTE MUSIC INC.
TABLE OF CONTENTS
Page No.
Item 1. Description of Business.............................................6
Business done and intended to be done by the registrant
and its subsidiaries....................................................6
Products...............................................................10
Services...............................................................11
Markets for and Methods of Distribution of Products.........................11
Distribution - Dealers.................................................11
Distribution - Internet................................................11
Internet Marketing Going Forward.......................................13
Competition and Market Volumes.........................................14
Proprietary Technology.................................................15
Research and Development Policy, and Environmental
Protection Requirements................................................15
Number of Employees.........................................................15
Foreign Operations..........................................................15
Forward Looking Statements and Risk Factors.................................15
Forward Looking Statements.............................................16
Risk Factors...........................................................16
Item 2. Description of Property............................................19
Item 3. Legal Proceedings..................................................19
Legal Proceedings......................................................19
Corporate Cease Trade Orders or Bankruptcies...........................19
Penalties or Sanctions.................................................19
Individual Bankruptcies................................................20
Material Proceedings...................................................20
Item 4. Control of Registrant..............................................20
Item 5. Nature of Trading Market...........................................22
Item 6. Exchange Controls and Other Limitations
Affecting Security Holders.............................................23
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Item 7. Taxation...........................................................23
Canada.................................................................23
United States..........................................................24
Item 8. Selected Financial Data............................................27
Item 9. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................28
Overview...............................................................28
Revenue................................................................29
E-commerce Store.......................................................29
Sales and Marketing....................................................30
Bad Debt Expense.......................................................31
Foreign Exchange.......................................................31
Quantitative and Qualitative Disclosures about Market Risk.............31
Liquidity and Capital Resources
(First Quarter 2001 - May 31, 2000 Compared to May 31, 1999).......31
Liquidity and Capital Resources
(Year Ended February 29, 2000 Compared to May 31, 1999)............32
Results of Operations (First Quarter 2001 - May 31, 2000
Compared to May 31, 1999)
Revenue............................................................32
Cost of Goods Sold...........................................32
Gross Margin.......................................................33
Advertising and Promotion..........................................33
General and Administration Expenses................................33
Other Income.......................................................33
Income Taxes.......................................................33
Results of Operations (Year Ended February 29, 2000 to
Year Ended February 28, 1999.)
Revenue............................................................34
Cost of Goods Sold...........................................34
Advertising and Promotion..........................................34
General and Administration Expenses................................34
Other Income.......................................................35
Income Taxes.......................................................35
Item 9a. Quantitative and Qualitative Disclosures about Market Risk........35
Item 10. Directors and Officers of Registrant..............................36
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Item 11. Compensation of Directors and Officers............................37
Summary Compensation Table.............................................37
Employment Agreements..................................................37
Stock Option Plan......................................................38
Item 12. Options to Purchase Securities from
Registrant or Subsidiaries.............................................38
Options and Warrants Outstanding.......................................38
Options to Employees and Directors.....................................38
Private Placement Warrants.............................................38
Item 13. Interest of Management in Certain Transactions
Market Strategies, Inc.................................................38
Part II
Item 14. Description of Securities to Be Registered........................39
Part III
Item 15. Defaults upon Senior Securities...................................39
Item 16. Changes in Securities, Changes in Security for
Registered Securities and Use of Proceeds...........................39
Part IV
Item 17. Financial Statements..............................................40
Item 18. Financial Statements.............................................N/A
Item 19. Financial Statements and Exhibits.................................40
Signatures..................................................................64
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
(A) Business done and intended to be done by the registrant and its
subsidiaries.
(1) The general development of the business of the registrant, its subsid-
iaries and any predecessor(s) during the past five years.
Ayotte makes and sells drums and drum-related musical instrument
accessories and products. Most of its products are used by professional and
semi-professional musicians, usually in rock-n-roll and jazz venues. Ayotte
considers its "WoodHoop" drums to be a superior high-end product. The drums,
sold under the name "Ayotte," are manufactured out of maple, and handcrafted and
artistically finished; they incorporate certain significant performance features
that are unique to Ayotte.
The performance features that make our drums unique are:
WoodHoops - one of only a very few manufacturers to use woodhoops to secure the
drumheads to the drumshell. We believe the woodhoops improve the sonic
quality of the sound by adding warmth and depth.
Tunelock Tension System - Drumhead tuning / tension system that incorporates
design features that are unique to Ayotte. The system keeps the drum
tuning rods from backing off due to the vibrations caused by playing
thus keeping the drum in tune.
Multi-Ply Snare Drums - Snare drum shell thickness range from 6 ply (1/5 inch
thick) to 50 ply (1- 2/3 inch thick) with a wide variety in between
offering various sound and response characteristics.
Rack & Pinion Snare Throw-Off - Snare throw-off is a mechanism used to apply and
release the wire snares to the bottom head of the snare drum. Ayotte's
Rack & Pinion snare release allows for infinite positioning of the
snare tension by simply moving the handle providing quick and easy
adjustment.
Finishes - Polyester lacquer finishes available in any color. Drums are lacquer
finished on the inside of each drum. The inside finish adds resonance
to the sound.
Hardware - Hardware components used to suspend the drums and secure them to
stands are of Ayotte's design and built with innovative features that
allow for quick head changes and unlimited positioning (the hardware
includes Suspension Bridge, Tom Bracket, Strong Arm Clamp, Turret Tom
Mount).
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Ayotte was founded by Ray Ayotte, who began his career in the music and
percussion business in 1966. He began selling, teaching and repairing drums in
1972, and manufactured drums and other related percussion and musical products
since 1982. Originally, the business of the registrant was incorporated under
the laws of British Columbia on November 28, 1974 under the name "Ray Ayotte's
Drums Only! Inc." The name was changed on February 11, 1993 to "Ayotte Drums
Only Inc." Mr. Ayotte left the company in 1999.
Since the introduction of our products, we have succeeded in
establishing a small but loyal market share for Ayotte Custom Drums. A growing
number of well known percussionists voluntarily endorse Ayotte's products.
"Voluntary endorse" means that the drummer (artist) has approached the Ayotte
with a desire to play our drums for reasons other than financial considerations.
Ayotte does not pay artists to play their drums. Ayotte has 2 levels of
endorsers:
The "A-Level" endorser receives free drums, has access to rental drums
located in many of the major music centers in North America, is featured in some
advertising, and is listed on Ayotte's website.
The second level endorser receives an additional discount off the
purchase price of their drumkit, and has access to rental drums located in many
of the major music centers in North America. The financial impact of these
benefits on our company is minor (we only have a few endorsements but they are
from very popular musicians).
In November 1994, a group of investors led by Louis Eisman, Bruce Allen
and Sam Feldman invested approximately Cdn.$350,000 in Ayotte to assist in
expanding its production facilities and implementing a world-wide marketing
program.
In July 1995, Ayotte raised Cdn.$1,560,000 through Ayotte Music (VCC)
Ltd. (the "VCC"), a company formed under the British Columbia Small Business
Venture Capital program. The funds invested by the VCC were used to expand our
factory and hire new employees including a controller, a general manager, and
several factory employees. Factory capacity was improved and new equipment was
purchased. The product line was expanded to include drumsticks, and our dealer
network was expanded from an initial 11 to more than 200 dealers, approximately
50% of whom were in the United States.
On December 10, 1997 all of the shareholders of Ayotte Drums Only Inc.
tendered their shares under a share exchange takeover bid made by ISI Ventures
Inc., an Alberta Stock Exchange Listed Junior Capital Pool Company ("ISI"), in
exchange for which ISI issued the shares of ISI to then former Ayotte Drums Only
Inc. shareholders representing a controlling interest in ISI. Also in connection
with this reverse takeover transaction, a Cdn.$640,000 cash financing (net of
offering costs and commissions, see below) was effected, for which ISI (renamed
Ayotte Music Inc.) issued 2,000,000 shares of common stock, plus warrants (since
expired, none exercised). ISI then was listed on the Alberta Stock Exchange (now
the Canadian Venture Exchange or CDNX) under the trading symbol "AYO."
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The Cdn.$640,000 was provided through Acumen Capital Finance Partners
Ltd., Suite 200 - 513 - 8 Avenue S.W., Calgary, Alberta, Canada, T2P 1G3 (Alfred
Sailor, associated with Acumen, was instrumental in the capital raising). Acumen
acted as ISI's agent for the $640,000 financing, raising the money from a number
of investors. The money was provided to Ayotte Drums Only Inc. The consideration
received by Acumen was a cash commission equal to 10 percent of the gross
proceeds raised, plus 75,000 shares of Ayotte, plus an option to acquire
warrants and options (since expired without exercise). We don't know how much
Mr. Sailor received from Acumen.
In the reverse takeover transaction, Ayotte Drums Only Inc. became a
wholly owned subsidiary of ISI. On February 27, 1998, Ayotte Drums Only Inc.
continued as a corporation subject to Alberta law and amalgamated (combined into
one entity) under the Alberta Business Corporations Act as Ayotte Music Inc.,
which is our present name.
In late 1999, our shareholders approved (at the annual meeting in
Calgary, Alberta) and we implemented in 2000 the continuation (change of legal
domicile) of our company to the Canadian federal jurisdiction. Therefore, we now
are governed in corporate matters by the Canada Business Corporations Act.
To supplement our traditional products distribution through music
instrument dealers, on November 26, 1999 we commenced a new internet based
"e-commerce initiative" by selling products directly to consumers at significant
discounts. To the best of our knowledge, we are one of the first well-known
musical instrument manufacturers to operate in this manner.
On March 6, 2000 we signed an agreement with Market Strategies, (USA),
Endicott, New York, by which Market Strategies is providing marketing,
promotional and investor relation services for us, and also assisting us in
identifying and reviewing possible acquisitions, joint ventures or partnership
opportunities. We don't now have any agreements of any kind for any acquisition
or other significant business combination transaction, and our current business
model is based on our internet strategy without assumptions of needing to
acquire or combine another business with ours. Our agreement runs through
January 21, 2001 subject to the right of either party to cancel on 30 days
notice. We will pay Market Strategies by issuing to 500,000 shares of common
stock which will be subject to hold periods as required under Canadian law, and
the resale of which would be subject to SEC rule 144 regarding the future sale
of such shares into the United States.
Our manufacturing facility and head office are located in leased
premises at 2060 Pine Street in Vancouver, British Columbia, comprising two
floors totaling approximately 13,000 square feet of mixed office and
manufacturing space. The facility is configured to allow each stage of the
manufacturing process to be conducted in a segregated area. We presently have 15
employees; the 6 senior employees have combined experience of 60 years in the
drum manufacturing industry, almost all of which has been with Ayotte. Our
registered and records office is located at 1500-1055 West Georgia Street,
Vancouver, British Columbia, V6E 4N7.
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Our fiscal year runs from March 1 through February 28. Our financial
statements are stated in Canadian dollars and have been prepared in accordance
with Canadian Generally Accepted Accounting Principles ("Canadian GAAP"). In
some respects financial statements prepared under Canadian GAAP may differ
materially from financial statements prepared under United States Generally
Accepted Accounting Principles ("US GAAP"). As of February 29, 2000 there were
no material differences in result between the two GAAP presentations. Please see
note 10 to the financial statements.
Unless otherwise indicated, all dollar amounts are expressed in
Canadian Dollars, and "Cdn$" or "$" mean Canadian Dollars; "US$" means United
States Dollars.
The Government of Canada permits a floating exchange rate to determine
the value of the Canadian Dollar against the United States Dollar. We anticipate
that a significant portion of sales will continue to be conducted outside
Canada, principally in the United States, and also that we will continue to
import materials from other jurisdictions, especially the United States and
Taiwan. If currency rates fluctuate substantially, our cash flows from
operations could be impacted negatively.
This table shows the exchange rate for the Canadian Dollar for the five
fiscal years ended February 28, 1999 and February 29, 2000. The rate of exchange
means the noon buying rate in New York City for cable transfers in foreign
currencies as certified for customs purposes by the Federal Reserve Bank of New
York. Shown are the average number of Canadian Dollars required under the rate
formula to buy one United States Dollar during the period (using only the
exchange rates on the last day of each month).
PERIOD RATE IN US$
------ -----------
Year ended 2/29/96 1.3728
Year ended 2/28/97 1.3370
Year ended 2/27/98 1.4236
Year ended 2/26/99 1.5090
Year ended 2/28/00 1.4538
At June 29, 2000, US$1.00 equaled Cdn.$1.4823.
(2) Plan of Operations for the rest of fiscal 2000.
Our plan for the rest of this fiscal year is to use cash on hand plus
sales revenues from operations to expand marketing and advertising particularly
in our internet sales activities. Please see "Internet Marketing Going Forward"
below, and also Item 9 "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(3) Principal products produced and services rendered and the principal
markets for and methods of distribution of such products and services.
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PRODUCTS
We make custom "WoodHoop" and "SteelHoop" drums using high quality
maple, which is widely recognized as the most desirable wood for drums. All
drums can be ordered in custom dimensions, colors and finishes. The WoodHoop
drums are unique in the market and produce a product with superior performance
characteristics. Ayotte drums utilize the patented TuneLock Tension System,
incorporating a drum clamp bracket, which is characterized by its ability to
maintain the tuning of a drum over a long period of time and through vigorous
playing. It also reduces the tuning time required after a drumhead has been
changed. We believe that the Wood Hoop, in addition to being aesthetically
pleasing, allows a wider range of sound and superior tonal qualities than our
competitors' products. Our products are at the top end of the market in terms of
price.
Ayotte offers two drum lines. The first or premier line is the Ayotte
Custom Drums which are offered at almost any size, color and with a choice of
hoop type (metal, wood) and are hand made to order.
The second drum line is the "ProMaple" line which is available in
select sizes, colors, are manufactured in advance and are available "in stock".
For comparison purposes, the following shows the pricing in US Dollars
for a standard 5 piece drum kit in ProMaple, Ayotte Custom SteelHoop and Ayotte
Custom WoodHoop.
Ayotte ProMaple $1,600
Ayotte Custom SteelHoop $2,600
Ayotte Custom WoodHoop $3,300
A customer can order more or less pieces and still have it constitute a
drumkit.
The Ayotte Custom Drum Series is manufactured to order based on the
customers specific requirements. The principal raw components of each drum,
including unfinished wood shells in a range of sizes which are outsourced from
external suppliers, are processed and assembled at our Vancouver plant to fill
each product order. Every wood shell is custom finished through labor- intensive
steps to achieve an extremely high degree of finish and color uniformity.
Although we stock a few oft-ordered sizes and colors to have on hand, we also
make different customized colors and finishes as requested by customers, and
keep an exact history of how we make each color so we can make another batch if
needed for replacement or other purposes. We believe that much of our favorable
reputation is due to this amount of personal attention.
Tay-e Corporation, Taipei, Taiwan, is the sole source manufacturer for
the chrome hardware we use on our drums. This hardware is an integral part of
our product line; it would be difficult to find a replacement manufacturer if we
lost the services of Tay-e Corporation. There is no written contract with Tay-e.
The maplewood drums are made to our specifications by an external supplier.
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Other suppliers at comparable prices are available, also in the northeast United
States. All other drum parts are available from numerous manufacturers in North
America.
SERVICES
Our products are sold with lifetime warranty against defects in
manufacture or materials. To date we have spent an immaterial amount to honor
our warranty. We offer no other services.
MARKETS FOR AND METHODS OF DISTRIBUTION OF PRODUCTS
DISTRIBUTION - DEALERS. From the early 1990s until November,
1999 we distributed our products exclusively through musical instrument dealers
and we relied on their sales of our products exclusively. Just prior to starting
our internet web site selling effort in November 1999 we had increased the
number of distribution outlets we were selling through to more than 350 third-
party dealer locations worldwide. About 85% of the dealers were in the United
States; the rest mostly were in Canada and Europe. The majority of the outlets
are small business operations which cater to local musicians. We don't have
written or oral contracts with dealers for any period of time. Orders through
United States dealers must be paid in full before shipment date (Canadian
dealers have 30 days after shipment to pay in full). No down payments are
required on any dealer orders. We request but don't require new dealers to "buy
in" a limited amount of our products for the show room floor.
Sales throughout fiscal 1999 and 2000 have been about 80% to United
States residents, 15% to Canadian residents, and the balance to the United
Kingdom and Europe. This geographic mix of customers did not changed
significantly when we added the internet web site marketing channel, although we
may experience some increase in sales outside North America as the web site
becomes better known. Cash flow never has been seasonally related. Dealer sales
dropped off significantly in the last quarter of fiscal 2000.
In fiscal 1998 and fiscal 1999 (until December, 1998) we supported
dealers through an office in Nashville, Tennessee which created and ran
advertising and promotional demonstrations, attended trade shows, and provided
customer support to dealers and their customers. We closed the Nashville office
in December, 1998 to save money.
DISTRIBUTION - INTERNET. In the third quarter of fiscal 2000
we decided to supplement our selling through dealers, by developing and selling
through an internet site. Since November, 1999, we have been selling directly to
consumers on the site "www.ayottedrums.com."
Our web site provides technical information on our products, a short
history of how we started in business, a worldwide list of dealers, and direct
shopping and order ability (through credit cards) for complete drum sets,
individual drums, and all the components. We also sell clothing items featuring
"Ayotte Drums" etc but these are a minor part of sales revenues.
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The addition of direct sales over the internet has had a significant
impact. Instead of supplementing dealer sales, many of our United States dealers
decided not to actively support the Ayotte product line, because they perceived
that our web site lower prices to customers, compared with prices customers were
paying to buy from dealers, made us compete directly with the dealers for the
same end users. In addition, our founder Ray Ayotte left his positions in fiscal
2000, which many dealers thought signaled our demise. Mr. Ayotte resigned his
positions as President and Director because he was unwilling to carry out the
direction he was given by the Board regarding the management and direction of
Ayotte. Sales through United States dealers dropped dramatically in the period
from December, 1999 to February, 2000, although Canadian dealer unit volumes
have remained intact in part due to our decision to complete all direct sales in
US dollars. Global sales volumes dropped from an average of Cdn.$185,800 per
month to $135,000-$145,000 per month.
The amounts for sales attributed to the internet or direct to customer
by month in Canadian Dollars was:
MONTH INTERNET / DIRECT SALES (CDN$)
----- ------------------------------
December 1999 $66,933.80
January 2000 $86,942.80
February 2000 $92,577.60
March 2000 $91,584.97
April 2000 $106,951.94
May 2000 $104,012.72
Even though sales volumes fell in early calendar 2000, our margins
improved and customers benefitted: We sell our drums for about 14% more than the
price we realize from US dealers, and customers who buy direct from us now are
paying about 38% less for the identical products. There is another important
result of our internet strategy in terms of marketing focus going forward: The
significantly lower price means we can compete for entry level consumers, who
now can buy a high quality product and pay no more than our competitors' prices
for mid-quality product. Internet sales of our products probably will increase
from current levels, but we make no prediction in this respect.
Internet sales give us the opportunity to require those customers to
pay up front in full. Therefore, we process credit cards in real time and
require 100% prepayment. The results have been greatly improved cash flow and
reduced risk of bad debt. Furthermore, we decided not to participate at the
annual dealer-focused NAMM (National Association of Music Merchants) show which
resulted in a significant cost saving compared to prior years.
One possible drawback to our internet strategy is the fact that those
potential customers who would be interested in trying the drums prior to making
a purchase cannot do so now. Many of our customers have tried our drums through
their friends and contacts in the drum community. We have also established our
brand and product as being of high quality, manufactured with attention to
detail and a commitment to the satisfaction of the customer. Also, we offer each
customer a 7 day
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"no questions asked" return policy. We will pick up the drums from the customer
and refund 100% of their money back if they are not satisfied with their
purchase.
As a custom drum manufacturer, the variety of sizes and configurations
of drum kit are so numerous that a customer would rarely be able to play the kit
they wanted within the dealer network. And, prior to our move to the Internet,
many dealers claimed to be active Ayotte Dealers but held little or no stock.
The customer was unable to try the drums in that scenario anyway.
The move to the Internet has opened the size of our market by giving
access to potential customers who are not located near areas where the previous
dealers were located, assuming those dealers actually stock our goods. So, we
concluded that the benefit to the customer of being able to deal directly with
the factory, the savings in price as compared to dealer pricing and the safety
provided through our "no questions asked" return policy would compensate for
inability to try the drums prior to purchasing. We will not reinstate the dealer
network in any event, so we will never be able to quantify in lost sales the
adverse impact, if any, of the "no demo drums" result of our strategy change
over to the internet.
In sum, our addition of internet sales to our traditional dealer
distribution channel overall may show operating profits for fiscal 2001 even if
we sell fewer units compared to the pre-internet era, because we make more per
internet sale than we make per dealer sale. If sales experienced from December,
1999 through April, 2000 continue, we estimate that for fiscal 2001, unit
volumes sold will average about 80% direct through the web site and 20% through
dealers. There have been very few sales through United States dealers so far in
fiscal 2001, although we still have some sales through Canadian dealers. We
expect to pay for business expansion costs (primarily marketing and web site
improvements) in 2001 which will offset some of our operating profits going
forward through at least 2001. Our plans to expand our business and increase our
sales include a number of steps to increase traffic, enhance buying
opportunities to buy from the web site, and embark on an advertising campaign.
INTERNET MARKETING GOING FORWARD. We are increasing traffic to the web
site by purchasing banner advertising on drum and percussion web sites. We are
marketing our various web pages to search engines on a bi-weekly basis.
We have contracted Bayleaf Software to re-design our web site to
improve the commerce opportunities. Presently the customers on our site must
click through numerous pages before a purchase opportunity is presented. The
current site is slow to download and difficult to navigate. The new site will
incorporate purchase opportunities on the home page and offer purchase
opportunities throughout the site. The download times will be greatly enhanced.
There will be opportunities to build an on-line community through a section
called "My Ayotte" where the customer can design and save any number of drum
kits safely in their own password protected secure area. We will have the
opportunity to generate demographic information from our customers. We will add
the ability to stream video to the viewer to provide product information, plant
tours, interviews with our major endorsers, product demonstrations and clinics.
We will also
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be improving our security features to provide a safe shopping experience. The
site is scheduled to launch in September 2000.
We have engaged an advertising company to prepare a series of full-page
ads which will start to run in mid-September in drum and percussion magazines.
The principal partners of this advertising company are widely recognized as
leaders in their field and our intention is to develop a campaign that will be
unique in the industry and build on our brand recognition.
COMPETITION AND MARKET VOLUMES. The identity of the market we
compete in is the drum set component of the percussion area of the musical
instrument market. The world's largest drum manufacturer is Pearl Corporation,
Japan, producing approximately 80,000 drum kits per annum (50% of which are sold
in the United States). According to a music industry census completed by the
industry journal "Music Trades" (April 1997), the value of the market for
musical instruments in the United States was estimated at US$5.6 billion in
1996. It was estimated that the percussion share was US$175 million (3.5%) of
such market. We believe that the United States market represents one-half of the
world market for musical instruments (see below).
The largest musical instrument manufacturer in the world is Yamaha,
which reported 1994 sales in the United States (excluding sporting goods and
home audio) of US$600 million. Peavey, the second largest manufacturer, had
sales of US$353 million, employed 2,370 people and utilized 1.3 million square
feet of manufacturing facilities.
Ayotte competes with the other drum manufacturers on a worldwide basis.
That being said, the market for drum kits is primarily in the Northern
Hemisphere with some pockets in South America, Southeast Asia, Africa and
Australia. The dominant competitors in our industry are Yamaha, Pearl, and Drum
Workshop.
The principal methods of competition are price, brand recognition,
sound, material, quality, manufacturing location (North America vs. Asia),
availability, and customer service.
Drum kit materials are primarily wood with a small use of acrylic and
composite materials. Ayotte competes in the maple drum sector of the wood drum
market. Other woods used for drum kits include birch, bubiniga, and mahogany.
Maple drums are generally the most expensive drums when compared to other
materials.
Positive features regarding our competitive position is that we offer
custom, hand made drums built to suit the specific requirements of the
individual player at a competitive price and delivered in a timely manner. Our
competitors use mass production techniques to a significant extent.
Negative features regarding our competitive position is that we do not
offer a complete line of hardware for the drum kit. Other negative items
affecting our position is that we do not offer a
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low-priced entry level drum kit (where the majority of sales occur), and that
the move to the internet has caused our US dealer network to disappear making it
difficult for potential customers to view our drums in person.
PROPRIETARY TECHNOLOGY. We rely on a combination of patent
law, trademark law, trade secrets, and internal confidentiality procedures to
protect our proprietary rights. However, despite efforts to protect these
rights, unauthorized parties may attempt to copy aspects of our products or to
obtain and use information that we regard as proprietary. Preventing
unauthorized use of our proprietary rights is difficult, time-consuming and
costly. Our current means of protecting proprietary rights may not be adequate,
and our competitors could independently develop similar products.
(6) RESEARCH AND DEVELOPMENT POLICY, AND ENVIRONMENTAL PROTECTION
REQUIREMENTS
In the fiscal years ended February 28, 1998 and 1999 we spent Cdn.$544
and $4,793 on research and development work related to improving our product
lines. We spent nothing in this area in fiscal 2000, and don't expect to spend
any in fiscal 2001 related to our product lines.
There has been no financial or operation effect of environmental
protection on our capital expenditures, earning and competitive position for the
current fiscal year and there is no expected impact on future years.
NUMBER OF EMPLOYEES
We have 15 employees, 6 of whom have a combined experience of 60 years
in the drum manufacturing industry, almost all of which has been with Ayotte.
FOREIGN OPERATIONS
We have no material foreign operations related to manufacturing.
However, in 1996 we entered into a verbal agreement with Tay-E Co. Ltd. of
Taiwan pursuant to which we retained Tay-E Co. Ltd. to manufacture a medium
priced drum line called "drumSmith." Our ability to sell into the medium priced
drum market may be adversely affected should there be any change to this
relationship.
We do have a material amount of foreign sales, i.e. sales outside of
North America. In the six months ended May 31, 2000 foreign sales totaled
$143,356 ( 16.30%) of total sales in that period.
FORWARD LOOKING STATEMENTS AND RISK FACTORS
There are significant risks associated with buying our shares. You
should carefully consider the following elements of risk as you evaluate our
business by reading all of the information in this
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document. As is the case with any business, we are showing you in this document
a picture which is part historical (events which have already happened) and part
predictive (events which we believe will happen).
FORWARD LOOKING STATEMENTS. Except for the historical information, all
of the information which is contained in this document are "forward looking"
statements. Specifically, all statements (other than statements of historical
fact) regarding our financial position, business strategy and plans and
objectives of management for future operations are forward-looking statements.
These forward- looking statements are based on the beliefs of management, as
well as assumptions made by and information currently available to management.
These statements involve known and unknown risks, including the risks resulting
from economic and market conditions, accurately forecasting operating and
capital expenditures and capital needs, successful anticipation of competition
which may not yet be fully developed, the uncertainties of litigation, and other
business conditions. The use in this document of the words "anticipate,"
"believe," "estimate," "expect," "may," "will," "continue" and "intend" and
similar words or phrases, are intended to identify forward -looking statements
(also known as "cautionary statements"). These statements reflect our current
views with respect to future events. They are subject to the realization in fact
of assumptions, but what we now think will happen may be turn out to be
inaccurate or incomplete. We cannot assure you that our expectations will prove
to be correct. Actual operating results and financial performance may prove to
be very different from what we now predict or anticipate. The investment risks
discussed under "Risk Factors" below specifically address some of the factors
that may influence future operating results and financial performance.
RISK FACTORS
YOU COULD LOSE ALL OR A PORTION OF YOUR INVESTMENT IF WE CONTINUE TO
SUFFER RECURRING LOSSES. So far, we have lost money in our business. Except for
fiscal 1996 (when we earned a profit of
approximately $19,000), we have incurred net losses since inception. At February
29, 2000, the total retained deficit was $1,653,371, compared to $1,365,115 at
February 28, 1999. For fiscal 2000, we lost $281,072 from operations. For the
quarter ended May 31, 2000 we realized net income from operations of $24,047,
but lost money for the quarter due to a one time charge. See Item 9,
Management's Discussion and Analysis, First Quarter 2001 - May 31, 2000 Compared
to May 31, 1999. However, operating losses still may recur in fiscal 2001 and
may continue later, depending on our success in growing the internet sales side
of our business.
IF WE ARE UNABLE TO CONTINUE AS A GOING CONCERN, YOU COULD LOSE ALL OR
A PORTION OF YOUR INVESTMENT, AS OUR BUSINESS MODEL WITH THE INTERNET IS NOT YET
PROVEN AND COULD FALTER. We have only recently had working capital available to
us (through our private placement which was cleared by the CDNX in June 2000) to
sustain operations for up to three years (through February 2003). At February
29, 2000, we had working capital of $627,512 (including the private placement
proceeds) ($1,093,253 at May 31, 2000). However, even with the added capital,
our business model remains unproven: our internet strategy may not generate the
cash flow we expect, while our planned expenditures for web site improvement and
advertising would deplete cash reserves.
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IF WE NEED MORE CAPITAL IN FISCAL 2001 BUT CAN'T OBTAIN IT, WE MAY HAVE
TO CUT BACK OR CEASE OPERATIONS, WHICH MEANS YOU COULD LOSE ALL OR PART OF THE
VALUE OF YOUR INVESTMENT. Working capital now on hand and expected revenues from
sales are expected to fund our ongoing operations and plan of business through
at least February 28, 2001 and possibly through February 28, 2003. We anticipate
a small profit from operations through fiscal 2001. But, if we greatly expand
advertising and especially if we acquire new businesses or add on new people,
without generating more business which is profitable, we could need more capital
financing as early as March 2001. We will base our budget on estimates of future
revenue from current and expected new business. In turn, revenue estimates will
depend on sales and the cost of executing (fulfilling) orders in terms of
overhead and inventory expense. There is a risk, therefore, that we could run
out of money while growing our business. We might not be able to raise the money
we would need to stay in business.
IF WE HAVE TO RAISE DEBT FINANCING IN THE FUTURE, OR SELL SECURITIES,
YOUR RIGHTS AND THE VALUE OF YOUR INVESTMENT IN THE COMMON STOCK COULD BE
REDUCED. If we issue debt securities, the lenders would have a claim to our
assets that would be superior to the stockholder rights. Interest on the debt
would increase costs and negatively impact operating results. If we issue more
common stock or issue any preferred stock, your percentage ownership will
decrease and your stock may experience additional dilution, and preferred stock
(called preference securities in Canada) may have rights, preferences and
privileges which are superior to (more favorable) than those of the common
stock.
IF WE LOST THE SERVICES OF ANY OF OUR EXECUTIVES, OUR OPERATIONS COULD
BE MATERIALLY AFFECTED AND THE VALUE OF YOUR INVESTMENT COULD BE REDUCED. We
will continue to depend upon the services of our principal officers for our
future success. Our business would suffer if the services of Louis Eisman
(Chairman and Interim President), and Don Mazankowski (General Manager) were not
available to us. We don't have key person life insurance on these people and it
would be difficult to find replacement personnel if they did not continue to
work for us. We don't have written employment agreements with these people, but
even if we did, such agreements would not prevent them from leaving.
OUR OPERATIONS WOULD BE MATERIALLY AFFECTED, AND THE VALUE OF YOUR
INVESTMENT REDUCED OR ELIMINATED, IF WE ARE UNABLE TO SUCCESSFULLY COMPETE WITH
LARGER COMPANIES. Our principal competitors include Yamaha and Pearl
Corporation, both of Japan. There are approximately 25 more companies in the
industry who sell into North America and Europe. The market is very competitive.
Many of these companies have significant customer relationships and vastly
larger financial, marketing, customer support, technical and other resources
than we do. Therefore, they may be able to respond more quickly to changes in
customer requirements or be able to undertake more extensive marketing
campaigns, adopt more aggressive pricing policies, and make more attractive
offers to potential customers and employees. They also may be able to devote
greater resources to new products and services than we can. Even though we
believe we have a superior product, that advantage could be outweighed by
marketing, pricing, or the other factors where our competitors are stronger.
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IF THE MARKET FOR OUR COMMON STOCK IS ILLIQUID IN THE FUTURE, YOU COULD
ENCOUNTER DIFFICULTY IF YOU TRY TO SELL YOUR STOCK. Our common stock is
currently trading on the CDNX but an active trading market may not be sustained.
If there is no active trading market for our common stock, you may not be able
to resell your shares at any price, if at all. It is possible that the trading
market for the common stock in the future will be "thin" or "illiquid," which
could result in increased volatility in trading prices. These future prices
cannot be predicted, and will be determined by the market. The prices may be
influenced by investors' perceptions of us, general economic conditions, and the
general conditions of the securities markets. Until our financial performance
indicates substantial success in executing our business model, it is unlikely
that significant coverage by stock market analysts will be extended to us.
Without such coverage, institutional investors are not likely to buy our stock.
Until such time, if ever, as such coverage by analysts and wider market interest
develops, the market may have a limited capacity to absorb significant amounts
of trading volumes. You should read the next risk factor in connection with this
discussion.
IF THE HOLDERS OF A SIGNIFICANT AMOUNT OF SHARES OF COMMON STOCK WHICH
ARE CURRENTLY IN ESCROW SELL INTO THE MARKET, THE VALUE OF YOUR INVESTMENT COULD
BE MATERIALLY AFFECTED. Presently, 1,496,748 (11.5%) of the outstanding shares
of common stock as of the date of this document are subject to escrow provisions
that prohibit their sale until they are released from escrow in accordance with
the terms of the applicable escrow agreement. When released, these shares are
eligible for sale into the public market; in the United States, some of these
shares and also the shares held by officers and directors, may be subject to
further resale restrictions which are imposed by SEC rule 144. Until such time,
if ever, as our operations generate significant profits and wider market
interest for our stock develops, the sale of more shares into the present market
for our stock could drive down the market price.
The escrow provisions result from requirements imposed by the Alberta
Stock Exchange on securities issued in connection with a reverse takeover and
also securities held by affiliates of the issuer. The 1,496,081 shares now
subject to escrow, were issued in connection with Ayotte's transactions with ISI
and VCC in 1995 and 1997. See the fifth and sixth paragraphs under the beginning
discussion of Item 1 above, and Item 4 below.
YOUR LEGAL RECOURSE AS A UNITED STATES INVESTOR COULD BE LIMITED. Our
company is incorporated under the laws of the federal jurisdiction of Canada and
a substantial portion of our assets are located in Canada. Our directors and
officers and certain of the experts named in this prospectus are residents of
Canada, and all or a substantial portion of their assets are located outside the
United States. As a result, if any of our shareholders were to bring a lawsuit
against our officers, directors or experts in the United States it may be
difficult for them to effect service of legal process within the united States
upon those people who are not residents of the United States based upon civil
liability under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended (including the rules promulgated thereunder by
the SEC). In addition, we have been advised that a judgment of a United States
court based solely upon civil liability under these laws would probably be
enforceable in Canada if the U.S. court in which the judgment were obtained had
a basis for jurisdiction in the matter. We also have been advised that there is
substantial doubt
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whether an action could be brought successfully in Canada in the first instance
on the basis of liability predicated solely upon such laws.
ITEM 2. DESCRIPTION OF PROPERTY
(a) LOCATION AND GENERAL CHARACTER OF PHYSICAL PLANT.
Our manufacturing facility and head office are located in leased
premises at 2060 Pine Street in Vancouver, British Columbia: 2 floors of
approximately 11,000 square feet of mixed office and manufacturing space. The
facility is configured to allow each stage of the manufacturing process to be
conducted in a segregated area (sanding, staining or painting, bake drying,
assemblage, etc.). The facility is adequate for such increased business we
expect we may have in fiscal 2001.
ITEM 3. LEGAL PROCEEDINGS
(1) LEGAL PROCEEDINGS
We are not a party to any outstanding legal proceedings, and our
directors do not have any knowledge of any contemplated legal proceedings that
will be material to our business and affairs of the company.
(2) CORPORATE CEASE TRADE ORDERS OR BANKRUPTCIES
None of our directors, officers or promoters, or the company, is or
within the five years prior to the date hereof has been:
(a) the subject of a cease trade or similar order or an order that denied
an issuer access to any statutory exemptions for a period of more than
30 consecutive days, or
(b) declared bankrupt or made a voluntary assignment in bankruptcy, made a
proposal under any legislation relating to bankruptcy or insolvency or
was subject to or instituted any proceedings, arrangements or
compromise with creditors or had a receiver, receiver manager or
trustee appointed to hold the assets of that person.
(3) PENALTIES OR SANCTIONS
Within the past five years, none of the directors, officer or
promoters, or the company, has been the subject of any penalties or sanctions by
a court or a securities regulatory authority relating to trading in securities,
the promotion, formation or management of a publicly traded company, or
involving theft or fraud.
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(4) INDIVIDUAL BANKRUPTCIES
None of the directors, officers or promoters has, within the five years
prior to the date hereof, been declared bankrupt or made a voluntary assignment
in bankruptcy, made a proposal under any legislating relating to bankruptcy or
insolvency, or been subject to or instituted any proceedings, arrangement or
compromise with creditors, or had a receive, receiver manager or trustee
appointed to hold the assets of that individual.
(5) MATERIAL PROCEEDINGS
None of the directors, officers or promoters, or any of their
associates, is a party to any material proceedings that is adverse to the
Company or has a material interest adverse to the Company.
ITEM 4. CONTROL OF REGISTRANT
To our knowledge, as of the date of this registration statement, we are
not directly or indirectly owned or controlled by another corporation or by any
foreign government.
To our knowledge, the following are the shareholders who own of record
or beneficially, directly or indirectly, or exercise control or direction over
shares carrying more than 10% of the voting rights attached to all 12,944,000
shares of the Company outstanding as of June 30, 2000, including the 1,250,000
shares sold in the private placement financing in the second quarter of fiscal
2001. We have approximately 49 shareholders of record. The number of
shareholders holding securities beneficially through street name nominees, as
reflected in the record position of CDS & Co. is not known to us. Nearly all our
shareholders we can identify are Canadian residents; approximately 50,000 shares
(0.4% of our outstanding shares) are held by United States residents but we
cannot identify their beneficial owners, and do not know under what
circumstances such persons came to own our stock. There are no restrictions on
non-Canadians owning our shares. We have not engaged in any promotional
activities in the United States as of the date of this registration statement.
There is no United States trading market for the shares as of the date of this
registration statement, and the shares are not listed for trading on any
securities exchange in, or approved for trading in any trading medium in, the
United States.
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<TABLE>
<CAPTION>
No. of Voting Shares Percentage of Outstanding
Name of Shareholder (Common Shares) Owned Voting Shares (Common Shares)
------------------- --------------------- -----------------------------
<S> <C> <C>
CDS & Co.(1) 4,740,051 37%
25 The Esplanade
P. O. Box 1038, Ste. A
Toronto, Ontario M5W 1G5
Ayotte Music (VCC) Ltd. (2) 3,661,692 28%
10891 Bromley Place
Richmond, B.C. V7A 4J5
Louis Eisman 655,754(3) 5%
2060 Pine Street
Vancouver, B.C. V6J 4P8
<FN>
(1) CDS & Co. holds this number of shares in street name for brokerage firms. The identity of
customers for whom such brokers hold the shares is not known to us.
(2) Controlled by Michael Fugman, a director. Mr. Fugman is an officer, director and minor
shareholder of Ayotte Music (VCC) Ltd.
(3) These shares are held by Eisman Holdings Ltd., a private company of which Mr. Eisman is
the principal shareholder.
</FN>
</TABLE>
Of the total outstanding shares as of the date of this registration
statement, 2,162,748 shares at February 28, 2000 were subject to escrow
provisions imposed by the Alberta Securities Exchange (see below) and are in
escrow at Montreal Trust Company of Canada under two separate agreements. The
breakdown of that number of escrowed shares at that date is as follows:
November 29th, 1996 Agreement: 1,000,000 shares
December 4th, 1997 Agreement: 1,162,748 shares
---------------------------------------------------------
2,162,748 shares
Of those shares, 666,666 (2/3rds of the 1,000,000) were eligible for
release after February 29, 2000 and have been so released. The total shares now
in escrow as of the date of this document, until November 17, 2000 is 1,496,081
shares; these shares become free trading November 17, 2000.
569,482 of the escrowed shares are held by a venture capital
corporation of which Michael Fugman (Director) is an officer, director and a
minority shareholder of the VCC. These shares and the remaining escrowed shares
were issued in connection with the VCC's funding transaction with us in 1996 and
the December 1997 reverse takeover transaction with ISI Ventures Inc. (see Item
1 above).
Under the terms of the escrow agreements, the deposited shares can be
voted by the owners thereof but otherwise are subject to the direction or
determination of the Alberta Securities
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Commission or the CDNX, and cannot be traded in or dealt with without the prior
written consent of the Commission or the CDNX. The shares will be released pro
rata at the discretion of the Commission or the CDNX at the rate of one-third
per year.
Separately, shares issued by us in private placements are subject to
trading restrictions during hold periods prescribed by the Commission's
policies, unless there is available to the holder of such shares a statutory or
Commission rule exemption. Based on our filings with the CDNX and applicable
statutory or rule provisions of the Commission, the hold period for the
1,250,000 shares and 1,250,000 warrants sold in our private placement will be
four months from April 11, 2000. The shares issued on exercise of the warrants
will not be subject to a new hold period. Similarly, any additional shares we
issue to consultants and others which are not in connection with a public
financing registered and approved by the CDNX and conducted in compliance with
the Commission's laws and rules, also will be subject to a hold period of four
months.
ITEM 5. NATURE OF TRADING MARKET
The Company's Common Shares commenced trading on the Alberta Stock
Exchange (now part of the CDNX) under the symbol AYO in December, 1997 when we
completed the reverse takeover transaction with ISI Ventures Inc. which then was
listed on the Alberta Stock Exchange as a listed junior capital pool company.
The shares are not listed on any other securities exchange. The following table
sets forth the high and low sales prices on the CDNX for the nine fiscal
quarters ending May 31, 2000.
PERIOD ENDING HIGH LOW
------------- ---- ---
1st Quarter 1999 $0.38 $0.31
2nd Quarter 1999 $0.33 $0.25
3rd Quarter 1999 $0.30 $0.08
4th Quarter 1999 $0.30 $0.03
1st Quarter 2000 $0.08 $0.06
2nd Quarter 2000 $0.07 $0.06
3rd Quarter 2000 $0.05 $0.03
4th Quarter 2000 $0.52 $0.03
1st Quarter 2001 $0.59 $0.29
On July 20, 2000 the closing price of the common shares on the CDNX was
$0.28 per share.
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ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING
SECURITY HOLDERS
There are no laws, decrees or regulations in Canada relating to
restrictions on the export or import of capital, or affecting the remittance of
interest, dividends or other payments to non-resident holders of our shares of
common stock. See Item 7 below.
Except under the Investment Canada Act, there are no limitations
specific to the rights of non-Canadians to hold or vote our shares under the
laws of Canada or our charter documents.
The Investment Canada Act ("ICA") requires a non-Canadian making an
investment which would result in the acquisition of control of a Canadian
business, the gross value of the assets of which exceed certain threshold levels
or the business activity of which is related to Canada's cultural heritage or
national identity, to either notify, or file an application for review with,
Investment Canada, the federal agency created by the ICA.
The notification procedure involves a brief statement of information
about the investment on a prescribed form which is required to be filed with
Investment Canada by the investor at any time up to 30 days after implementation
of the investment. It is intended that investments requiring only notification
will proceed without intervention by government unless the investment is in a
specific type of business related to the scope of the Act.
If an investment is reviewable under the Act, an application for review
in the prescribed form normally is required to be filed with Investment Canada
before the investment is made and it cannot be implemented until completion of
review and Investment Canada has determined that the investment is likely to be
of net benefit to Canada. If the agency is not so satisfied, the investment
cannot be implemented if not made, or if made, it must be unwound.
ITEM 7. TAXATION
CANADA. We believe the following general summary fairly describes all
of the substantive Canadian federal income tax consequences which apply to a
shareholder who resides in the United States, is not a resident of Canada, and
who does not use or hold (and is not deemed to use or hold) shares in connection
with carrying on a business in Canada (a "non-resident shareholder").
Nonetheless, we recommend that anyone who considers buying our shares obtain
independent tax advise, as tax implications may affect people differently.
The summary is based on current provisions of the Income Tax Act
(Canada), referred to as the "ITA" and regulations thereunder, and current
administrative and assessing policies of Revenue Canada, Taxation. This
description is not exhaustive and does not consider possible changes in law or
regulations, or provincial or foreign tax matters.
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- DIVIDENDS. Dividends paid on our shares to a non-resident holder will
be subject to withholding tax. The Canada-US Income Tax Convention (1980) as
amended by the March 17, 1985 treaty protocol, provides that the usual 25%
withholding tax rate is reduced to 15% on dividends paid on shares of a
corporation resident in Canada (like us) to residents of the United States, and
also provides for a further reduction of this rate to 5% where the beneficial
owner of the dividends is a United States resident corporation owning 10% or
more of the voting shares of the dividend paying corporation. However, given our
current level of business we don't expect paying dividends in the near future.
- CAPITAL GAINS. A non-resident of Canada is not subject to tax under
the ITA for a capital gain realized on disposition of shares of a public
corporation unless the shares represent "taxable Canadian property" to the
holder. Our shares are listed on the CDNX and therefore will be taxable Canadian
property to a non-resident holder if, at any time during the five years before
disposition, the non-resident holder, either alone or together with affiliates
of the Company, owned 25% or more of the issued shares. However, under the 1985
treaty protocol, a non-resident holder who is a United States resident and for
whom shares represent taxable Canadian property, no Canadian taxes will be due
on a capital gain unless the value of the shares derives from realty or natural
resources in Canada.
UNITED STATES. We believe the following fairly summarizes all material
provisions of the United States Internal Revenue Code with respect to
information reporting and backup withholding requirements. However, it is noted
that United States income tax laws and regulations applicable to investments in
foreign entities are complex. A United States resident should not rely unduly on
the summary, and always should consult a personal tax advisor in these respects.
- DIVIDENDS. Dividends generally are subject to the information
reporting requirements of the Internal Revenue Code (the "Code"). Dividends may
be subject to backup withholding at the rate of 31% unless the holder provides a
taxpayer identification number on a properly completed Form W-9 or otherwise
establishes an exemption. The amount of backup withholding does not constitute
an additional tax and will be allowed as a credit against the United States
investor's federal income tax liability.
- FILING OF INFORMATION RETURNS. Under a number of circumstances, a
United States investor acquiring shares of the company may be required to file
an information return at the Internal Revenue Center where they are required to
file their tax returns with a copy to the Internal Revenue Service Center,
Philadelphia, PA 19255. In particular, any United States investor who become the
owner, directly or indirectly, of 10% or more of the shares of the company will
be required to file such a return. Other filing requirements may apply, and
United States investors should consult their own tax advisors concerning these
requirements.
Certain United States income tax legislation contains rules governing
passive foreign investment companies ("PFICs"), which can have significant tax
effects on U.S. shareholders of foreign corporations. These rules do not apply
to non-U.S. shareholders. Section 1296 of the Code
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<PAGE>
defines a PFIC as a corporation that is not formed in the United States and, for
any taxable year, either (i) 75% or more of its gross income is "passive
income", which includes interest, dividends and certain rents and royalties or
(ii) the average percentage, by fair market value or, if the company is a
controlled foreign corporation or makes an election, by adjusted tax basis, of
its assets that produce or are held for the production of "passive income", is
50% or more.
A U.S. shareholder who holds stock in a foreign corporation during any
year in which such corporation qualifies as a PFIC is subject to U.S. Federal
income taxation under one of two alternative tax regimes at the election of each
such U.S. Shareholder. The following is a discussion of such two alternative tax
regimes applied to such U.S. shareholders of the company.
A U.S. shareholder who elects in a timely manner to treat the company
as a Qualified Electing Fund ("QEF"), as defined in the Code (an "Electing U.S.
Shareholder"), will be subject, under Section 1293 of the Code, to current
federal income tax for any taxable year in which the company qualifies as a PFIC
on his pro-rata share of the company's (i) "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), which will be taxed as
long-term capital gain to the Electing U.S. Shareholder and (ii) "ordinary
earnings" (the excess of earnings and profits over net capital gain), which will
be taxed as ordinary income to the Electing U.S. Shareholder, in each case, for
the shareholder's taxable year in which (or with which) the company's taxable
year ends, regardless of whether such amounts are actually distributed.
The effective QEF election also allows the Electing U.S. Shareholder to
(i) generally treat any gain realized on the disposition of his common shares
(or deemed to be realized on the pledge of his common shares) as capital, (ii)
treat his share of the company's net capital gain, if any, as long-term capital
gain instead of ordinary income, and (iii) either avoid interest charges
resulting from PFIC status altogether, or make an annual election, subject to
certain limitations, to defer payment of current taxes on his share of the
company's annual realized net capital gain and ordinary earnings subject,
however to an interest charge on the deferred taxes. If the Electing U.S.
Shareholder is not a corporation, such an interest charge would be treated
generally as "personal interest" that can be deducted only when it is paid or
accrued. The procedures a U.S. shareholder must comply with in making an
effective QEF election will depend on whether the year of the election is the
first year in the U.S. shareholders' holding period in which the company is a
PFIC. If the U.S. shareholder makes a QEF election in such first year, i.e. a
timely QEF election, the U.S. shareholder may make the QEF election by simply
filing the appropriate documentation at the time the U.S. shareholder files its
tax return for such first year. If, however, the company qualified as a PFIC in
a prior year during such shareholder's holding period, then in addition to
filing documents, the U.S. shareholder must elect to recognize (i) (under the
rules of Section 1291 discussed below) any gain that he would otherwise
recognize if the U.S. shareholder sold his stock on the application date or (ii)
if the company is a controlled foreign corporation, and such shareholder so
elects, his/her allocable portion of the company's post-1986 earnings and
profits.
When a timely QEF election is made, if the company no longer qualifies
as a PFIC in a subsequent year, normal code rules will apply. It is unclear
whether a new QEF election is
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<PAGE>
necessary if the company thereafter re-qualifies as a PFIC. U.S. shareholders
should seriously consider making a new QEF election under those circumstances.
If a U.S. shareholder does not make a timely QEF election in the year
in which it holds (or is deemed to have held) the shares in question and the
company is a PFIC, then special taxation rules under Section 1291 of the Code
will apply to (i) gains realized on disposition (or deemed to be realized by
reason of a pledge) of his/her common shares and (ii) certain "excess
distributions", as specially defined, by the company.
Non-electing U.S. shareholders generally would be required to pro-rata
all gains realized on the disposition of his/her common shares and all excess
distributions over the entire holding period for the common shares. All gains or
excess distributions allocated to prior years of the U.S. holder (other than
years prior to the first taxable year of the company during such U.S. holder's
holding period and beginning after January 1, 1987 for which it was a PFIC)
would be taxed at the highest tax rate for each such prior year applicable to
ordinary income. The Non-electing U.S. Shareholder also would be liable for
interest on the foregoing tax liability for each such prior year calculated as
if such tax liability had be due with respect to each such prior year. A
Non-electing U.S. Shareholder that is not a corporation must treat this interest
charge as "personal interest" which, as discussed above, is partially or wholly
non-deductible. The balance of the gain or the excess distribution will be
treated as ordinary income in the year of the disposition or distribution, and
no interest charge will be incurred with respect to such balance.
If the company is a PFIC for any taxable year during which a
Non-electing U.S. Shareholder holds common shares, then the company will
continue to be treated as a PFIC with respect to such common shares, even if it
is no longer by definition a PFIC. A Non-electing U.S. Shareholder may terminate
this deemed PFIC status by electing to recognize a gain (which will be taxed
under the rules discussed above for Non-electing U.S. Shareholders) as if such
common shares had been sold on the last day of the last taxable year for which
it was a PFIC.
Under Section 1291(f) of the code, the Department of the Treasury has
issued proposed regulations that would treat as taxable certain transfers of
PFIC stock by Non-electing U.S. Shareholders that are generally not otherwise
taxed, such as gifts, exchanges pursuant to corporate reorganizations, and
transfers at death.
Because the company's shares are "marketable" under section 1296(e), if
the company is a PFIC with respect to a U.S. investor, the U.S. investor may
elect to mark the stock to market each year. In general, a PFIC shareholder who
elects under Section 1296 to mark the marketable stock of a PFIC includes in
income each year an amount equal to the excess, if any, of the fair market value
of the PFIC stock as of the close of the taxable year over the shareholder's
adjusted basis in such stock. A shareholder is also generally allowed a
deduction for the excess, if any of the adjusted basis of the PFIC stock over
the fair market value as of the close of the taxable year. Deductions under this
rule, however, are allowable only to the extent of any net mark to market gains
with respect to the stock included be the shareholder for prior taxable years,
while the interest charge
26
<PAGE>
regime under the PFIC rules generally does not apply to distributions from the
dispositions of stock of a PFIC where the U.S. investor has elected to mark the
stock to market, coordination rules for limited application will apply in the
case of a U.S. investor that marks to market PFIC stock later than the beginning
of the shareholder's holding period for the PFIC stock.
Certain special generally adverse rules will apply with respect to the
common shares while the company is a PFIC whether or not it is treated as a QEF.
For example under Section 1297(b)(6) of the code, a U.S. holder who uses PFIC
stock as security for a long (including a margin loan) will, except as may be
provided in regulations, be treated as having made a taxable disposition of such
stock.
Ayotte presently is not, and for fiscal 2001 does not expect to qualify
for status as a PFIC. If Ayotte should in subsequent years in fact qualify for
PFIC status, U.S. investors should take into account the foregoing tax aspects
concerning PFIC matters.
ITEM 8. SELECTED FINANCIAL DATA
The table below provides selected financial information for us covering
the past five financial years. For information about the three fiscal years
ended February 29, 2000 please see the financial statements and the Accountants'
Reports thereon, included in this Form 20-F. Financial statements and
Accountants' Reports for the fiscal years ended February 28, 1997 and 1996 are
not included in this Form 20-F..
<TABLE>
<CAPTION>
FIVE YEAR SUMMARY
Fiscal Years Ended Feb. 28,
-------------------------------------------------------------------------
2000 $ 1999 $ 1998 $ 1997 $ 1996 $
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales, net of excise duties and taxes $2,019,985 $2,633,421 $2,011,739 $1,796,549 $1,015,262
Net earnings (loss) (288,256) (270,347) (220,765) (397,941) (328,811)
Earnings (loss) per common share (basic)* (0.03) (0.02) (0.05) (0.25) (0.26)
Capital lease obligations Nil 14,566 44,742 36,846 Nil
Total assets 1,037,233 1,525,765 1,781,195 1,175,206 1,001,429
Total long-term debt Nil Nil Nil Nil Nil
Dividends per common share Nil Nil Nil Nil Nil
Dividends per preferred share N/A N/A Nil Nil Nil
27
<PAGE>
<FN>
*See Note 9 to the Financial Statements for information on calculation
of this data. The fully diluted amounts are not presented above, as the effects
of including the potential shares is antidilutive.
</FN>
</TABLE>
The table below provides selected unaudited financial information for
us covering the fiscal quarters ended May 31, 2000 and May 31, 1999, and are
derived from the unaudited financial statements included in this Form 20-F.
FIRST QUARTER FISCAL 2000 AND 1999
<TABLE>
<CAPTION>
Fiscal Quarter Ended May 31,
--------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Sales, net of excise duties and taxes $ 379,698 $ 598,529
Net earnings (loss) (27,335) (20,816)
Earnings (loss) per common share (basic)* (0.01) (0.01)
Capital lease obligations Nil 33,441
Total assets 1,523,250 1,565,196
Total long-term debt Nil Nil
Dividends per common share Nil Nil
Dividends per preferred share N/A N/A
<FN>
* The fully diluted amounts are not presented above, as the effects of including
the potential shares is antidilutive.
</FN>
</TABLE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are an industrial company formed in 1974. Our business is the
manufacturing and distribution of high-end drums and other percussion items. We
are an integrated company, with product development, design, manufacturing and
marketing capabilities and expertise. Our principal product is "Ayotte Custom
Drums" handcrafted wood drum line, favored by many leading local and
international artists. Our present business focus is to expand sales through an
internet e- commerce site, increased advertising and promotion, diversification
and increase in products,
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<PAGE>
possibly through some arrangement with another company although we are
concentrating now on our internal efforts.
REVENUE
Revenue (referred to as "Sales" in our financial statements) is derived
from sales of products to direct customers and distributors: drums, drum sticks,
parts and accessories and branded collateral merchandise such as T-Shirts. Sales
revenue for transactions directly with end customers is recognized at the point
of invoicing / shipping / processing of the credit card. The customer is
required to make a minimum 50% deposit prior to the start of production. The
balance is due prior to shipping. The product is paid prior to leaving the
factory.
E-COMMERCE STORE
On November 26th 1999, Ayotte made a significant change in the method
of selling drums and related products to customers by launching an e-commerce
on-line store. Now, customers worldwide can access and order the full line of
products direct from the factory at significant discounts. The move positions
Ayotte Drums as the first major drum manufacturer to sell direct to consumers
over the internet. The location of the site is www.ayottedrums.com.
The change to direct sales over the internet has had a significant
impact. Many of the US dealers have decided not to support the Ayotte line, as
they perceive the concept of direct sales to be a threat to their business. In
the months prior to selling direct to customers on the internet, all sales went
through dealers except for endorsers and some "used or reconditioned" product.
Following the move to the Internet, percentage split between sales to US Dealers
compared to internet/direct sales is:
MONTH US DEALER SALES (%) INTERNET / DIRECT (%)
----- ------------------- ---------------------
December 1999 30.0% 36.3%
January 2000 16.4% 64.5%
February 2000 1.8% 63.7%
March 2000 8.0% 64.8%
April 2000 0.4% 78.6%
May 2000 5.0% 75.6%
The internet /direct sales in the fiscal quarters ending since the
opening of the e-commerce store are:
QUARTER ENDING INTERNET / DIRECT SALES
-------------- -----------------------
February 29, 2000 $246,454 CDN$
May 31, 2000 $302,549 CDN$
29
<PAGE>
The move to the internet has produced significant cost savings. The
ability to process credit cards in real time and the requirement for prepayment
has greatly improved cash flow and reduced the risk of bad debt. The net sale
price to consumers is greater than the net sale price was to dealers therefor
creating a larger margin.
Cost savings have been especially significant in terms of overhead
expenses. Compared overhead expenses from the quarter ending May 1999 to the
quarter ending May 2000 are:
OVERHEAD EXPENSES TOTAL CDN$
----------------- ----------
May 1999 $246,432
May 2000 $195,371
The cash position has been improved significantly. Compared Current
Assets from the Balance Sheet for the quarter ending May 1999 to the quarter
ending May 2000 follow. Please note that we have removed the proceeds from our
private placement (net approximately $500,000) to provide an accurate comparison
of savings realized:
QUARTER ENDING CASH ON HAND
-------------- ------------
May 1999 $ 70,845
May 2000 $906,853
Our margins during the same period have also improved significantly
from:
GROSS Margin % of sales
------------- ----------
May 1999 39.1%
May 2000 42.3%
Our gross margin (as a percentage of sales) for the first quarter ended
May 31, 2000 improved slightly to 42.3% as a percentage of sales, up from 39.1%
in the first quarter of 1999. This net change of 3.2% was due to some improved
efficiencies in buying components inventory and shop floor output per employee.
However, the dollar volume of gross margin declined significantly in the first
quarter ended May 31, 2000 compared to the comparable quarter in 1999. See
"Results of Operations (First Quarter 2001 - May 31, 2000 Compared to May 31,
1999)."
SALES AND MARKETING
Sales and marketing expenses are expected to increase over the short
term in fiscal 2001 as we prepare to launch an aggressive marketing campaign
using traditional print, on-line and direct marketing methods. The look and
design of the advertising will be updated to reflect the move to e-commerce, and
will target customers who are within our demographic and have access to the
internet.
30
<PAGE>
BAD DEBT EXPENSE
The bad debt continued to rise in fiscal 2000 despite the significant
reductions in revenues and in accounts receivable because we had written off
receivables from retail music shops that we had supplied product to prior to our
move to the internet. Many of these retail shops, located in both North America
and Europe, had gone out of business and their debts were deemed "not
collectable".
FOREIGN EXCHANGE
All revenue from direct sales into the United States is received in
United States Dollars. A significant portion of expenses are incurred in
Canadian Dollars. As a result, appreciation in the value of Canadian currency
relative to the United States Dollar could adversely affect our operating
results. Foreign currency translation gains and losses arising from normal
business operations are credited to or charged against other income for the
period incurred. To date, we have not done any currency hedging to minimize the
effect of these gains or losses. As a result, fluctuations in the value of
Canadian Dollars relative to United States Dollars have caused and will continue
to cause currency translation gains and losses.
Our consolidated financial statements are prepared in accordance with
Canadian GAAP.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have a line of credit or loans therefore there is no interest
rate risk at present or in the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
Since 1974, operations have been financed through a combination of
private and public sales of equity securities and cash generated by operations.
As of February 29, 2000 we had $627,512 in working capital, compared to $874,897
at February 28, 1999. Our private offering of 1.25 million shares and warrants
was cleared by the CDNX in June 2000, which resulted in our having available
another approximately $500,000 of cash for working capital (as of May 31, 2000
working capital was $1,093,253, see below).
FIRST QUARTER 2001 - MAY 31, 2000 COMPARED TO MAY 31, 1999
At May 31, 2000 accounts receivable were $128,456, much less than the
$610,470 at May 31, 1999, because payment terms changed for United States dealer
orders in fiscal 2000 from 30 days after shipping to full payment before
shipping, and all our internet sales direct-to-customers require full payment by
the time the product leaves the factory. Similarly, inventories at May 31, 2000
were $244,409 or 42.4 % of the number at May 31, 1999 ($575,927). Part of the
inventory reduction in 2000 was due to reduction in some of our stock. We made
the decision to produce our second drum line in the Vancouver facility instead
of having it made in Taiwan, which reduced the need to carry this finished line
in substantial numbers as shipped over from Taiwan.
31
<PAGE>
Accounts payable and accrued liabilities at May 31, 2000 were $196,431
compared to $391,949 a year earlier. The reduction is due mostly to reduced
sales volumes in the last part of fiscal 2000, and to a lesser extent because of
reduced dealer support activities and related administrative expenses which were
implemented in the last two quarters of fiscal 2000.
As a result of these changes and especially also because we raised
approximately $500,000 in equity financing through a private placement we had
$1,093,253 in working capital at May 31, 2000.
FISCAL YEAR ENDED FEBRUARY 29, 2000 COMPARED TO FEBRUARY 28, 1999
At February 29, 2000 accounts receivable were $183,717, much less than
the $715,492 at February 28, 1999, because payment terms changed for United
States dealer orders in fiscal 2000 from 30 days after shipping to full payment
before shipping, and all our internet sales direct-to- customers require full
payment by the time the product leaves the factory. Similarly, inventories at
February 29, 2000 were $251,700 or 56% of the number at February 28, 1999
($451,657). Part of the inventory reduction in 2000 was due to reduction in some
of our stock. We made the decision to produce our second drum line in the
Vancouver facility instead of having it made in Taiwan, which reduced the need
to carry this finished line in substantial numbers as shipped over from Taiwan.
Accounts payable and accrued liabilities at February 29, 2000 were
$163,530 compared to $322,928 a year earlier. The reduction is due mostly to
reduced sales volumes in the last part of fiscal 2000, and to a lesser extent
because of reduced dealer support activities and related administrative expenses
which were implemented in the last two quarters of fiscal 2000.
RESULTS OF OPERATIONS (FIRST QUARTER 2001 - MAY 31, 2000 COMPARED TO MAY 31,
1999)
REVENUE
Revenue (sales) for the first quarter of fiscal 2001 decreased 36.6%,
down to $379,698 compared to $589,529 in the first quarter of fiscal 2000. The
decrease in 2001 was due to the US dealers defecting en mass and ending their
relationship with Ayotte after we launched our internet site in late November
1999. We would have made a profit in the first quarter of fiscal 2001 but for
the professional fees we recorded in connection with this Form 20-F. See
"General and Administration Expenses" below.
COST OF GOODS SOLD
For the first quarter of fiscal 2001, our cost of goods sold decreased
39.9% to $219,145 from $364,505 in the first quarter of fiscal 1999. This
decrease was primarily due to decreased sales.
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<PAGE>
GROSS MARGIN
The gross margin for the first quarter of fiscal 2001 decreased by
31.4% to $160,553 from $234,024 for the first quarter of fiscal 2000. The
decrease is due to reduced sales, which were a result of the change to direct
sales and the defection of the US dealer network. The gross margin as a
percentage of sales increased 3.2% to 42.3% for the first quarter of 2001 from
39.1% for the first quarter of 2000. This increase is due to better margins
received for direct sales.
ADVERTISING AND PROMOTION
Advertising and promotion expense dropped to $16,931 for the first
quarter of 2001, compared to $46,449 for the same quarter of 1999, because we
stopped dealer support and trade show functions (the annual dealer focused
National Association of Music Merchants show).
GENERAL AND ADMINISTRATION EXPENSES
General and administration expenses (total operating expenses less
advertising and promotion expense) decreased 8.74% to $178,440 for the first
quarter of fiscal 2001, compared to the $199,983 we spent in this category in
the first quarter 2000. The general and administration expenses for the first
quarter of fiscal 2001 include $51,382 in professional fees for legal and audit
costs related to our registration with the SEC. Savings resulted from
discontinuing salary to Ray Ayotte, who left the company in fiscal 2000, and
elimination of bad debt which had to be recorded in 1999 because of filled but
unpaid orders for U.S. dealers.
OTHER INCOME (EXPENSES)
The line item Other Income in our Statement of Operations for the
interim quarters is made up of interest income, foreign exchange gain or loss,
bad debt recovery and income from sources other than usual business operations.
Total Other Income for the first quarter of fiscal 2001 increased $15,891 to
$7,483 compared to ($8,408) for the first quarter of fiscal 2000 (quarter ended
May 31, 1999). Total Other Income in the first quarter of fiscal 2001 included
$3,333 from interest income and $4,150 from a gain in foreign exchange. In the
comparable period in fiscal 2000, this item was an expense, comprised of $361 in
other income and ($8,769) of foreign exchange loss.
INCOME TAXES
We recorded no income tax expense or benefit in fiscal first fiscal
quarters of 2001 or 2000, due to net losses incurred and a valuation allowance
provided on the deferred tax assets.
33
<PAGE>
RESULTS OF OPERATIONS (YEAR ENDED FEBRUARY 29, 2000 to Years ended February 28,
1999 and 1998)
REVENUE
Total revenue (sales) for 2000 decreased 32.5% to $2,019,985, from
$2,633,421 for 1999. The decrease in 2000 was due to the US dealers defecting en
mass and ending their relationship with Ayotte after we launched our internet
site in late November 1999. For fiscal 1999, our total revenue had increased
30.9% to $ 2,633,421, up from $2,011,739 for 1998 and $1,796,549 for 1997. This
increase in 1999 was due to the expansion of the dealer network in the United
States, when two major music retail chains began selling the Ayotte line. The
addition of the "drumSmith" mid-price drum line also contributed to the increase
in sales.
COST OF SALES
For 2000, our cost of sales decreased 17.3% to $1,368,235 from
$1,654,166 in 1999. This decrease was primarily due to decreased sales in 2000.
Cost of sales as a percentage of sales increased in 2000 to 67.8% from 62.8% in
1999. This increase was due to the reduction in margin that occurred when
management moved to liquidate unnecessary inventory and improve the cash
position.
For 1999, we recognized an increase in cost of sales of 29.5% to
$1,654,166 for 1999 from $ 1,277,729 for 1998. This increase was primarily due
to an increase in sales of the same percentage. Cost of sales decreased slightly
as a percentage of total revenue to 62.8% for 1999 from 63.5% for 1998. This
decrease was primarily due to improvements in operations and changes in the
foreign exchange rates.
ADVERTISING AND PROMOTION
Advertising and promotion expense dropped to $167,274 for fiscal 2000,
compared to $216,353 for 1999, because we stopped dealer support and trade show
functions (the annual dealer focused National Association of Music Merchants
show). The decrease would have been larger but we spent about $15,000 in the
last two quarters of fiscal 2000 to set up our internet site. Comparing our
prior two years, advertising and promotion expense decreased 9% to $216,353, or
8.2% of total revenue for 1999 from $237,865, or 11.8% of total revenue for
1998. This decrease in 1999 was due to cost cutting measures.
GENERAL AND ADMINISTRATION EXPENSES
General and administration expenses (total operating expenses less
advertising and promotion expense) decreased 28.9% to $765,548 for fiscal 2000,
compared to the $1,076,783 we spent in this category in 1999. A major savings
resulted from closing the Nashville, Tennessee sales office in December 1998
(late in fiscal 1999), and for discontinuing salary to Ray Ayotte, who left the
company in fiscal 2000. For fiscal 1999, our general and administration expenses
had increased 46.5% to $1,076,783 or 39.9% of total revenue for 1999 from
$734,679, or 36.5% of total revenue for 1998. The 1999 increase was primarily
due to increased salaries, benefits and rent for the
34
<PAGE>
Nashville sales office. Other contributing areas for the 1999 increases were bad
debt costs, bank charges and management fees.
OTHER INCOME (EXPENSES)
The line item Other Income in our Statement of Operations for fiscal
2000 and 1999 is made up of interest income, foreign exchange gain or loss, bad
debt recovery and income from sources other than usual business operations.
Total Other Income for fiscal 2000 decreased $50,718 to ($7,184) from
$43, 534 for fiscal 1999. Total Other Income for fiscal 2000 was made up of
$2,889 from other income and ($10,073) loss due to foreign exchange.
Total Other Income for fiscal 1999 increased $25,767 to $43,534 from
$17,767 for fiscal 1998. The fiscal 1999 Other Income was made up of $7,883
other income, $37,806 gain resulting from foreign exchange and ($2,155) loss on
sale of assets.
Total Other Income for fiscal 1998 increased $15,781 to $17,767
compared to $1,986 for fiscal 1997. The fiscal 1998 Other Income was made up of
$4,496 other income and $13,271 gain from foreign exchange.
INCOME TAXES
At February 29, 2000, we had estimated non-capital losses of $1,797,300
which may be used to offset taxable income of future years. If unused, the
losses will expire as follows:
2002 $218,300
2003 $275,400
2004 $317,000
2005 $178,000
2006 $398,000
2007 $418,700
We recorded no income tax expense or benefit in fiscal 2000, 1999 or
1998 due to net losses incurred and a valuation allowance provided on the
deferred tax assets.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
(a) Quantitative Information About Market Risk
Not applicable.
35
<PAGE>
(b) Qualitative Information About Market Risk
Not applicable.
(c) Interim Periods
Not applicable.
(d) Safe Harbor
Not applicable.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The following table sets forth the name, municipality of residence,
positions with us and principal occupation of each of our directors and
officers:
<TABLE>
<CAPTION>
NAME AND OTHER POSITION
MUNICIPALITY OF YEAR FIRST YEAR TERM PRINCIPAL OCCUPATION AND POSITIONS OR OFFICE WITH
RESIDENCE ELECTED (1) EXPIRES DURING LAST FIVE YEARS THE CORPORATION
--------- ----------- ------- ---------------------------------- ---------------
<S> <C> <C> <C> <C>
Louis Eisman 1998 2000 Private equity capital investor, 1991 to Chairman,
3704 Pine Crescent (Directors present Interim President
Vancouver, BC Elected and Director
V6M 2N1 Annually)
Michael Fugman 1998 2000 President of Gault Distribution Inc., a Director
2355 West 7th Avenue (Directors wholesale distributor in business for 98
Vancouver, BC Elected years
V6M 2N1 Annually)
Don Mazankowski 1999 2000 General Manager, Ayotte Music Inc. Director,
2745 Trafalgar Street (Directors Vice President - Marketing, ETL. General Manager
Vancouver, BC Elected Environmental Technology Ltd
V6K 3T7 Annually)
</TABLE>
NOTES:
(1) We were amalgamated under the laws of Alberta on February 27, 1998 (the
"Amalgamation Date"). The amalgamating companies were Ayotte Drums Only Inc.
("ADO") and ISI Ventures Inc. ("ISI"). Prior to the Amalgamation Date, the
business presently conducted was conducted by ADO, a British Columbia company.
Two of the present directors became directors on the Amalgamation Date, although
each was a director of one or more of the companies which amalgamated on the
Amalgamation Date. See Item 1 above.
Our audit committee consists of Messrs. Eisman and Fugman.
There are 1,850,973 shares owned by officers and directors. An
additional 3,259,869 shares are held by a venture capital corporation of which
Michael Fugman (Director) is an officer, director
36
<PAGE>
and a minority shareholder of the VCC. Therefore, a total of 5,110,842 shares
(39.4%) are owned or controlled by our officers and directors. This percentage
reflects 1,250,000 additional shares issued for our private placement ($500,000
proceeds), but not 1,250,000 million additional shares issuable on exercise of
warrants sold in the private placement. Under SEC rules, all of the VCC's shares
are deemed controlled and beneficially owned by Mr. Fugman. As of the date of
this registration statement, based on information known to management, our
directors and senior officers, as a group, beneficially hold (control) under SEC
rules a total of 5,110,842 shares, directly or indirectly. The number of shares
held by officers and insiders does not reflect options held by the directors to
purchase another 350,000 shares. See Item 4 above. Resale of all of these shares
will be subject to SEC rule 144.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
In fiscal 2000 we paid a total of $108,000 to all our officers and
directors as a group, for services in all capacities, including the salary paid
to Mr. Mazankowski as General Manager .
The following table sets forth certain information regarding the
compensation we paid or accrued to or for the account of the Chairman of the
board of directors (and Interim President and Chief Executive Officer) and the
General Manager for services rendered in all capacities to us during each of the
fiscal years ended February 28, 1998 and 1999 and February 29, 2000. Information
in the table also is included for Ray Ayotte, who was President and Chief
Executive Officer until his resignation on August 23, 1999. No other executive
officer received total annual salary and bonus in excess of $100,000. We do not
have any long term compensation plan, other than stock options.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------------------------------
FISCAL OTHER ANNUAL
NAME AND POSITION YEAR SALARY BONUSES COMPENSATION
----------------- ---- ------ ------- ------------
<S> <C> <C> <C> <C> <C>
Ray Ayotte (resigned) 2000 $34,615 $ 3,000 $ -0-
1999 $72,000 $ 6,000 $ -0-
1998 $72,000 $ 6,000 $ -0-
Louis Eisman, Chairman
and Interim President 2000 $48,000 $ -0- $ -0-
1999 $48,000 $ -0- $ -0-
1998 $48,000 $ -0- $ -0-
Don Mazankowski, General Manager 2000 $60,000 $ -0- $ -0-
1999 $60,000 $ -0- $ -0-
1998 $60,000 $ -0- $ -0-
</TABLE>
EMPLOYMENT AGREEMENTS
We don't have written employment agreements with Louis Eisman or Don
Mazankowski, and did not have one with Ray Ayotte (former President and Chairman
of the board or directors who
37
<PAGE>
resigned 1999). We pay Mr. Eisman $4,000 per month and Mr. Mazankowski $60,000
per year under verbal employment agreements. Each employment agreement is
terminable at the will of the employee or the Company. We owe no severance or
pension to Mr. Ayotte.
STOCK OPTION PLAN
We have adopted an incentive stock option plan for the issuance of
shares of common stock. To date, we have issued to our employees (other than
officers) options to purchase 330,000 shares of common stock; options to
purchase another 350,000 shares are held by three directors. All of these
options have been issued with the approval of the CDNX. See Item 12 for more
information about options. There is no formal written plan, but the issuance of
options is subject to approval by the CDNX.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT
OR SUBSIDIARIES
OPTIONS AND WARRANTS OUTSTANDING
OPTIONS TO EMPLOYEES AND DIRECTORS. As the date of this initial
registration on Form 20-F, there were options granted and outstanding to
purchase 680,000 shares of common stock at $0.10 per share; all options expire
October 17, 2003. Of these options, 330,000 are held by employees, 100,000 are
held by Louis Eisman (an officer and director), 150,000 are held by Michael
Fugman (a director), and 100,000 are held by Don Mazankowski (General Manager
and a director). Not included are options to purchase 100,000 shares which have
been granted to a consultant for media and advertising (Giovanni Ruscitti), at
an exercise price of $0.42 per share, expiring February 22, 2004. The options to
Mr. Ruscitti are subject to approval by the CDNX, now pending. We don't have a
written agreement with Mr. Ruscitti but issued the options for his consulting
services related to setting up our computer systems for the internet
direct-to-customers project implemented in fiscal 2000. All of the preceding are
options to buy common stock from us; we have no subsidiaries.
PRIVATE PLACEMENT WARRANTS. As of the date of this initial registration
on Form 20-F, we have issued (with CDNX approval, received in June 2000) in a
private financing warrants to buy 1,250,000 shares of common stock. The warrant
exercise price is $0.60 until April 11, 2001 and $0.80 after that date until
April 11, 2002, after which all unexercised warrants will expire. The warrants
were sold with a like number of shares of common stock in a private financing
(net proceeds of approximately $500,000) completed shortly after our fiscal year
end of February 29, 2000. All these securities were sold to Canadian residents.
Except as disclosed above, and also under Item 1 regarding our
agreement with Market Strategies Inc., we have not agreed to issue any
additional securities.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Not Applicable.
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<PAGE>
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Our authorized consists of an unlimited number of shares of common
stock without par value, of which 12,944,000 are outstanding as of the date of
this registration statement (including 1,250,000 shares issued in our private
placement in fiscal 2001, the formal issuance of which was approved by the CDNX
in June 2000, and an unlimited number of preference shares (none outstanding).
In addition, there are 1,250,000 warrants to purchase shares of common stock,
also issued in our private placement and approved by the CDNX in June 2000 along
with the shares so sold. A total of 780,000 shares are reserved for issuance on
exercise of stock options presently outstanding. See Item 12 above.
Each common share is entitled to one vote on all matters to be voted on
by the holders of common shares, and to receive such dividends as may be
declared upon them. Each common share also carries the right to participate on a
pro-rata basis in the remaining property of the Company on any liquidation,
dissolution or winding up.
The warrants have no voting rights.
We have no debt securities presently outstanding.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED
SECURITIES AND USE OF PROCEEDS
Not applicable.
39
<PAGE>
PART IV
ITEM 17. FINANCIAL STATEMENTS
See the audited financial statements of the company for the fiscal
years ended February 28, 1998 and 1999, and February 29, 2000, the notes
thereto, and the auditors' reports thereon, which are included in this
registration statement. Also included in this registration statement are the
Company's unaudited balance sheets and statements of operations for the quarters
ended May 31, 2000 and 1999. As set forth in the notes to the audited financial
statements, all of the financial statements are presented in accordance with
Canadian GAAP, however, as stated in note 10, there are no material differences
between Canadian GAAP and United States GAAP as applied to our financial
statements. Similarly, our unaudited financial statements are presented in
accordance with Canadian GAAP, and there are no material differences between
Canadian GAAP and United States GAAP as applied to those financial statements.
In the opinion of management, all adjustments necessary for a fair
presentation of the interim unaudited financial statements have been included
and are of a normal recurring nature. The interim financial statements should be
read in conjunction with our audited financial statements. Interim results are
not necessarily indicative of results for a full year.
ITEM 18. FINANCIAL STATEMENTS
Not applicable.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
The following financial statements and exhibits are filed as a part of
this registration statement:
1. FINANCIAL STATEMENTS
Auditor's reports by Ellis Foster, Chartered Accountants,
Vancouver, B.C., Canada on financial statements as at February
29, 2000 and for the two years then ended, and on financial
statements as at February 28, 1999 and for the two years then
ended.
Financial statements as at February 29, 2000 and for the two
years then ended, and on financial statements as at February
28, 1999 and for the two years then ended.
Notes to the financial statements.
Unaudited balance sheets and statements of operations as at
May 31, 2000 and 1999.
40
<PAGE>
ELLIS FOSTER
CHARTERED ACCOUNTANTS
1650 West 1st Avenue
Vancouver, B.C., Canada V6J 1G1
Telephone: (604) 734-1112 Facsimile: (604) 714-5916
E-Mail: [email protected]
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF
AYOTTE MUSIC INC.
We have audited the balance sheet of Ayotte Music Inc. as at February 29, 2000
and February 28, 1999 and the statements of operations and deficit and cash
flows for the years then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion these financial statements present fairly, in all material
respects, the financial position of the Company as at February 29, 2000 and
February 28, 1999 and the results of its operations and cash flows for the years
then-ended in accordance with generally accepted accounting principles in
Canada. As disclosed in Note 10, the application of Canadian generally-accepted
accounting principles results in no material differences from the application of
United States generally accepted accounting principles. As required by the
Company Act of British Columbia, we report that, in our opinion, these
principles have been applied on a basis consistent with that of the preceding
year.
/s "ELLIS FOSTER"
Vancouver, Canada
March 23, 2000 Chartered Accountants
41
<PAGE>
<TABLE>
<CAPTION>
AYOTTE MUSIC INC.
Balance Sheet
February 29, 2000 and February 28, 1999
----------------------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------------------
(Canadian Dollars)
----------------------------
ASSETS
CURRENT
<S> <C> <C>
Cash and term deposits $ 348,742 $ 43,625
Accounts receivable 183,717 715,492
Inventories 251,700 451,657
Prepaid expenses 8,220 14,700
----------- -----------
792,379 1,225,474
CAPITAL ASSETS (note 3) 243,838 299,275
PATENT 1,016 1,016
----------- -----------
$ 1,037,233 $ 1,525,765
<CAPTION>
=========== ===========
LIABILITIES
CURRENT
<S> <C> <C>
Accounts payable and accrued liabilities $ 163,530 $ 322,928
Current portion of obligations under capital leases (note 4) 1,337 27,649
----------- -----------
164,867 350,577
OBLIGATIONS UNDER CAPITAL LEASES (note 4) -- 14,566
----------- -----------
164,867 365,143
----------- -----------
SHARE CAPITAL & DEFICIT
SHARE CAPITAL (note 5) 2,525,737 2,525,737
DEFICIT (1,653,371) (1,365,115)
----------- -----------
872,366 1,160,622
----------- -----------
$ 1,037,233 $ 1,525,765
=========== ===========
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
AYOTTE MUSIC INC.
Statement of Operations and Deficit
Years Ended February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
2000 1999
------------------------------
(Canadian Dollars)
------------------------------
<S> <C> <C>
SALES $ 2,019,985 $ 2,633,421
COST OF GOODS SOLD 1,368,235 1,654,166
------------ ------------
GROSS MARGIN (2000 - 32.27%; 1999 - 37.18%) 651,750 979,255
------------ ------------
EXPENSES
Advertising and promotion 167,274 216,353
Amortization 59,919 81,390
Auto 1,208 2,419
Bad debts 65,352 54,953
Bank charges and interest 30,867 30,922
Computer 20,608 9,574
Insurance 20,659 20,876
Legal and accounting 71,055 57,507
Management fees (see note 7 - Related Party) 48,000 78,000
Office 27,370 86,973
Rent 102,157 122,647
Repairs and maintenance 7,346 11,606
Research and development -- 4,793
Salaries and employee benefits 272,521 456,484
Telephone and fax 16,282 36,752
Utilities 22,204 21,887
------------ ------------
932,822 1,293,136
------------ ------------
LOSS FROM OPERATIONS (281,072) (313,881)
OTHER INCOME (EXPENSES)
Other income 2,889 7,883
Gain (loss) on foreign exchange (10,073) 37,806
Loss on sale of assets -- (2,155)
------------ ------------
(7,184) 43,534
------------ ------------
NET LOSS FOR THE YEAR (288,256) (270,347)
DEFICIT, beginning of year (1,365,115) (1,094,768)
------------ ------------
DEFICIT, end of year $ (1,653,371) $ (1,365,115)
============ ============
LOSS PER SHARE (note 9) $ (0.03) $ (0.02)
============ ============
WEIGHTED AVERAGE SHARES 11,694,000 11,688,247
============ ============
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
AYOTTE MUSIC INC.
Statement of Cash Flows
Years Ended February 29, 2000 and February 28, 1999
---------------------------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------------------
Canadian Dollars
------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss for the year $(288,256) $(270,347)
Adjustments for:
Amortization of capital assets 59,919 81,390
Loss on sale of assets -- 2,155
--------- ---------
(228,337) (186,802)
--------- ---------
CHANGES IN NON-CASH WORKING CAPITAL
Decrease (increase) in accounts receivable 531,775 (118,013)
Decrease (increase) in inventories 199,957 (75,749)
Decrease (increase) in prepaid expenses 6,480 (9,923)
Increase (decrease) in accounts payable and accrued liabilities (159,398) 70,218
--------- ---------
578,814 (133,467)
--------- ---------
350,477 (320,269)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (net of disposals) (4,482) (16,537)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of share capital -- 15,000
Share issue costs -- (33,520)
Capital leases (40,878) (36,781)
--------- ---------
(40,878) (55,301)
--------- ---------
NET INCREASE (DECREASE) IN CASH 305,117 (392,107)
CASH, beginning of year 43,625 435,732
--------- ---------
CASH, end of year $ 348,742 $ 43,625
========= =========
</TABLE>
44
<PAGE>
AYOTTE MUSIC INC.
Notes to Financial Statements
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
The financial statements are presented in accordance with Canadian GAAP.
1. OPERATIONS
Ayotte Music Inc. ("Ayotte" or the "Company") is a British Columbia
corporation in the business of manufacturing drums for the music
entertainment industry. The Company distributes its product on an
international basis.
2. SIGNIFICANT ACCOUNTING POLICIES
a) Inventories
Inventories are valued at the lower of cost and net realizable
value. Cost is determined under the specific identification
method.
b) Capital Assets
Capital assets are recorded at cost. Amortization is provided
on a declining-balance basis over the estimated useful lives
of the assets at an annual rate of 20%. Computer software is
amortized at 100%. One-half of the amortization is provided
for in the year of acquisition.
c) Foreign Exchange
Assets and liabilities denominated in foreign currencies are
translated into Canadian dollars at the exchange rates in
effect at year-end. Revenues and expenses are translated at
the exchange rate prevailing at the time of the transactions.
Transaction gains or losses are reflected in operations.
All revenue from direct sales into the United States are
received in US dollars. As the Company's main operations are
located in Canada, a significant portion of expenses are
incurred in Canadian dollars, therefore, the Canadian dollar
is considered the functional currency for measuring
transactions. Foreign currency translation gains and losses
arising from normal business operations are credited to or
charged against other income for the period incurred.
d) Revenue Recognition
The Company earns revenue from internet and direct sales, as
well as sales to dealers.
(i) Dealers
Revenue from sales to dealers is recognized and recorded upon shipment
of the completed product. The product is invoiced upon shipment, as
this is a requirement for cross-border transactions.
45
<PAGE>
AYOTTE MUSIC INC.
Notes to Financial Statements
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING PRINCIPLES (cont'd)
(ii) Internet and Direct Sales
Revenues from sales on the internet and direct sales
are received, recognized and recorded upon shipment
of the completed product. Shipping occurs upon
receipt of full payment for product.
e) Financial Instruments
The Company's financial instruments consist of cash and term
deposits, accounts receivable, accounts payable and accrued
liabilities and obligations under capital leases. Unless
otherwise noted, it is management's opinion that the Company
is not exposed to significant interest, currency or credit
risks arising from these financial instruments. The fair value
of these financial instruments approximate their carrying
values, unless otherwise noted.
f) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amount of assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses
during the period. Actual results may differ from those
estimates.
g) Loss Per Share
Loss per share is computed using the weighted average number
of shares outstanding during the year. Effective for the year
ended February 28, 1998, the Company adopted SFAS No. 128
"Earnings per Share".
h) Advertising Expenses
The Company expenses advertising costs as incurred.
i) Cash and Cash Equivalents
Cash equivalents are comprised of certain highly liquid
instruments with a maturity of three months or less when
purchased. As at February 29, 2000 and February 28, 1999, cash
and cash equivalents consisted of cash only.
46
<PAGE>
AYOTTE MUSIC INC.
Notes to Financial Statements
February 29, 2000 and February 28, 1999
3. CAPITAL ASSETS
<TABLE>
<CAPTION>
Net Book Value
Accumulated ----------------------------
Cost Amortization 2000 1999
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Manufacturing equipment $ 298,259 $ 24,267 $ 73,992 $ 89,318
Furniture and office equipment 52,660 31,398 21,262 24,226
Leasehold improvements 178,218 104,311 73,907 92,384
Automobile 30,741 20,668 10,073 12,592
Assets acquired under capital leases 123,717 59,113 64,604 80,755
-----------------------------------------------------------------------------------------------------------
$ 683,595 $ 439,757 $ 243,838 $ 299,275
===========================================================================================================
</TABLE>
4. OBLIGATIONS UNDER LEASE
a) Capital
The Company is committed to current annual lease payments of
$1,337 (1999 - $46,804) for equipment under a capital lease.
The lease expires in February, 2001, at which time the Company
will retain ownership of the equipment.
b) Premises
The Company's lease has expired and, until such time as a new
lease is negotiated, the Company and their landlord will carry
on in good faith on a month-to-month basis until such time as
the lease is renewed. The current monthly payment is $9,850
(including all operating costs).
5. SHARE CAPITAL
a) Authorized:
Unlimited Voting common shares without par value
Unlimited Preferred shares
Issued:
Common Number of Shares Amount
------ ---------------- ------
BALANCE FEBRUARY 28, 1998 11,644,000 $ 2,544,257
Issued for Cash 50,000 15,000
Share Issue Costs - (33,520)
BALANCE FEBRUARY 29, 2000 AND
FEBRUARY 28, 1999 11,694,000 $ 2,525,737
=============================================================================
b) 2,162,748 of the issued share capital is held in escrow,
releasable on the basis of 1/3 thereof, on each of the
anniversaries of the date of December 4, 1997.
47
<PAGE>
AYOTTE MUSIC INC.
Notes to Financial Statements
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
5. SHARE CAPITAL (cont'd)
c) The following stock options were cancelled during the year:
Number Exercise Price Expiry Date
-----------------------------------------------------------
300,000 $ 0.30 March 26, 2001
128,000 $ 0.50 March 26, 2001
90,000 $ 0.45 March 26, 2001
6. INCOME TAXES
The Company is not subject to current taxes because of operating
losses. As at February 29, 2000, the Company has estimated
non-capital losses of $1,797,300 which may be used to offset taxable
income of future years. If unused, the losses will expire as follows:
2002 $ 218,300
2003 275,400
2004 317,100
2005 178,200
2006 389,600
2007 418,700
------------------------------------
$ 1,797,300
====================================
A deferred tax asset of $654,702 at February 29, 2000 and $468,320 at
February 28, 1999 are offset by an allowance of the same amount.
7. RELATED PARTY TRANSACTIONS
Included in expenses is $48,000 (1999: $78,000) of consulting and
management fees paid to a shareholder of the Company and another
company owned by a director.
8. SUBSEQUENT EVENT
On April 16, 2000, the Company completed a private placement of
1,250,000 units at a price of $0.40 per unit for a total of $500,000.
Each unit consists of one common share and a purchase warrant for
one-half of one common share. Each full share purchase warrant can be
exercised at a price of $0.60 for a period of 12 months from the date
of issue, and then at a price of $0.80 after 12 months and prior to 24
months from the date of issue.
As a result, the potential fully-diluted amount of common shares
outstanding is 1,875,000 common shares with respect to the private
placement.
48
<PAGE>
AYOTTE MUSIC INC.
Notes to Financial Statements
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
9. LOSS PER SHARE
The loss per share figures are calculated using the weighted average
number of shares outstanding during the year. Fully diluted loss per
share is not calculated, as the effect on loss per share is
anti-dilutive.
<TABLE>
<CAPTION>
2000 1999
----------------------------------------
<S> <C> <C>
Net loss for year $ (288,256) $ (270,347)
Weighted average shares outstanding 11,694,000 11,688,247
-------------- ---------------
Loss per share $ (0.03) $ (0.02)
=============== ================
</TABLE>
10. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These financial statements have been prepared in accordance with
generally accepted accounting principles in Canada ("Canadian GAAP"),
which may differ, in certain respects, from accounting principles
generally accepted in the United States (U.S. "GAAP"). As at February
29, 2000 there are no material differences between Canadian GAAP and
U.S. GAAP.
11. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition,
similar problems may arise in some systems which use certain dates in
1999 to represent something other than a date. Although the change in
date has occurred, it is not possible to conclude that all aspects of
the Year 2000 Issue that may affect the entity, including those related
to customers, suppliers, or other third parties, have been fully
resolved.
49
<PAGE>
<TABLE>
<CAPTION>
AYOTTE MUSIC INC.
ACCOUNTING SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
FEBRUARY 29, 2000
------------------------------------------------------------------------------------------------------------------------------------
COLUMN C - ADDITIONS
-----------------------------------
(1) (2)
Column B - Charged to Charged to other Column D - Column E -
BALANCE AT BEGINNING costs and accounts Deductions Balance at end
Column A - Description of period expenses (describe) (describe) of period
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. Allowance for doubtful $ 2,114.00 29,093.31 - 31,207.31 (1) $ -
accounts
------------------------------------------------------------------------------------------------------------------------------------
2. Warranty expense $ - - - -(2) $ -
------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) The Company charges a percentage to bad debt on a monthly basis (Column
C(1)); they then reverse out the allowance and charge actual uncollectible
amounts to bad debt expense.
(2) The Company does not record warranty expense as a separate line item as the
amount is nominal. Warranty expense, if any, is included in the Company's
Cost of Goods Sold.
</FN>
</TABLE>
50
<PAGE>
ELLIS FOSTER
CHARTERED ACCOUNTANTS
1650 West 1st Avenue
Vancouver, B.C., Canada V6J 1G1
Telephone: (604) 734-1112 Facsimile: (604) 714-5916
E-Mail: [email protected]
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF
AYOTTE MUSIC INC.
We have audited the balance sheet of AYOTTE MUSIC INC. as at February 28, 1999
and 1998 and the statements of operations and deficit and changes in financial
position for the years then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion these financial statements present fairly, in all material
respects, the financial position of the Company as at February 28, 1999 and 1998
and the results of its operations and cash flows for the years then-ended in
accordance with generally accepted accounting principles in Canada. As disclosed
in Note 10, the application of Canadian generally-accepted accounting principles
results in no material differences from the application of United States
generally-accepted accounting principles. As required by the Company Act of
British Columbia, we report that, in our opinion, these principles have been
applied on a basis consistent with that of the preceding year.
/s "ELLIS FOSTER"
Vancouver, BC
April 23, 1999 Chartered Accountants
51
<PAGE>
<TABLE>
<CAPTION>
AYOTTE MUSIC INC.
Balance Sheet
February 28, 1999 and 1998
----------------------------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------------------------
Canadian Dollars
ASSETS ----------------------------
CURRENT
<S> <C> <C>
Cash and term deposits $ 43,625 $ 435,732
Accounts receivable 715,492 597,479
Inventories 451,657 375,908
Prepaid expenses 14,700 4,777
----------- -----------
1,225,474 1,413,896
CAPITAL (note 3) 299,275 366,283
PATENT 1,016 1,016
----------- -----------
$ 1,525,765 $ 1,781,195
=========== ===========
<CAPTION>
LIABILITIES
CURRENT
<S> <C> <C>
Accounts payable and accrued liabilities $ 322,928 $ 252,710
Current portion of obligations under capital leases (note 4) 27,649 34,254
----------- -----------
350,577 286,964
OBLIGATIONS UNDER CAPITAL LEASES (note 4) 14,566 44,742
----------- -----------
365,143 331,706
----------- -----------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (note 5) 2,525,737 2,544,257
DEFICIT (1,365,115) (1,094,768)
----------- -----------
1,160,622 1,449,489
----------- -----------
$ 1,525,765 $ 1,781,195
=========== ===========
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
AYOTTE MUSIC INC.
Statement of Operations and Deficit
Years Ended February 28, 1999 and 1998
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
Canadian Dollars
-----------------------------
<S> <C> <C>
SALES $ 2,633,421 $ 2,011,739
COST OF GOODS SOLD 1,654,166 1,277,727
------------ ------------
GROSS MARGIN (1999 - 37.18%; 1998 - 36.49%) 979,255 734,012
------------ ------------
EXPENSES
Advertising and promotion 216,353 237,865
Amortization 81,390 79,234
Auto 2,419 5,899
Bad debts 54,953 11,622
Bank charges and interest 30,922 14,946
Computer 9,574 8,897
Insurance 20,876 20,564
Legal and accounting 57,507 44,732
Management fees 78,000 44,000
Office 86,973 80,037
Rent 122,647 108,605
Repairs and maintenance 11,606 4,876
Research and development 4,793 544
Salaries and employee benefits 456,484 255,298
Telephone and fax 36,752 25,986
Utilities 21,887 29,439
------------ ------------
1,293,136 972,544
------------ ------------
LOSS FROM OPERATIONS (313,881) (238,532)
OTHER INCOME (EXPENSES)
Other income 7,883 4,496
Gain on foreign exchange 37,806 13,271
Loss on sale of assets (2,155) --
------------ ------------
43,534 17,767
------------ ------------
NET LOSS FOR THE YEAR (270,347) (220,765)
DEFICIT, beginning of year (1,094,768) (874,003)
------------ ------------
DEFICIT, end of year $ (1,365,115) $ (1,094,768)
============ ============
LOSS PER SHARE (note 9) $ (0.02) $ (0.05)
============ ============
WEIGHTED AVERAGE SHARES 11,688,247 4,411,000
============ ============
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
AYOTTE MUSIC INC.
Statement of Changes in Financial Position
Years Ended February 28, 1999 and 1998
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
Canadian Dollars
------------------------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES
<S> <C> <C>
Net loss for the year $(270,347) $(220,765)
Items not involving cash:
Amortization 81,390 79,234
Loss on sale of assets 2,155 --
--------- ---------
(186,802) (141,531)
Net change in non-cash working capital (133,467) (281,476)
--------- ---------
(320,269) (423,007)
--------- ---------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
Issuance of share capital 15,000 910,126
Share issue costs (33,520) --
Capital leases (36,781) 23,442
--------- ---------
(55,301) 933,568
--------- ---------
CASH USED FOR INVESTING ACTIVITIES
Purchase of capital assets (net of disposals) (16,537) (99,888)
--------- ---------
INCREASE (DECREASE) IN CASH POSITION (392,107) 410,673
CASH POSITION, beginning of year 435,732 25,059
--------- ---------
CASH POSITION, end of year $ 43,625 $ 435,732
========= =========
</TABLE>
54
<PAGE>
AYOTTE MUSIC INC.
Notes to Financial Statements
February 28, 1999 and 1998
--------------------------------------------------------------------------------
The financial statements are presented in accordance with Canadian GAAP.
1. OPERATIONS
Ayotte Music Inc. ("Ayotte") is a British Columbia corporation in the
business of manufacturing drums for the music entertainment industry.
2. SIGNIFICANT ACCOUNTING POLICIES
a) Inventories
Inventories are valued at the lower of cost and net realizable
value.
b) Capital Assets
Capital assets are recorded at cost. Amortization is provided
on a declining-balance basis over the estimated useful lives
of the assets at an annual rate of 20%. Computer software is
amortized at 100%. One-half of the amortization is provided
for in the year of acquisition.
c) Foreign Exchange
Assets and liabilities denominated in foreign currencies are
translated into Canadian dollars at the exchange rates in
effect at year-end. Revenues and expenses are translated at
the exchange rate prevailing at the time of the transactions.
Transaction gains or losses are reflected in operations.
All revenue from direct sales into the United States are
received in US dollars. As the Company's main operations are
located in Canada, a significant portion of expenses are
incurred in Canadian dollars, therefore, the Canadian dollar
is considered the functional currency for measuring
transactions. Foreign currency translation gains and losses
arising from normal business operations are credited to or
charged against other income for the period incurred.
d) Revenue Recognition
The Company earns revenue from sales to dealers. Revenue from
sales to dealers is recognized and recorded upon shipment of
the completed product. The product is invoiced upon shipment,
as this is a requirement for cross-border transactions.
55
<PAGE>
AYOTTE MUSIC INC.
Notes to Financial Statements
February 28, 1999 and 1998
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
e) Financial Instruments
The Company's financial instruments consist of cash and term
deposits, accounts receivable, accounts payable and accrued
liabilities. Unless otherwise noted, it is management's
opinion that the company is not exposed to significant
interest, currency or credit risks arising from these
financial instruments. The fair value of these financial
instruments approximate their carrying values, unless
otherwise noted.
f) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amount of assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses
during the period. Actual results may differ from those
estimates.
3. CAPITAL ASSETS
<TABLE>
<CAPTION>
Net Book Value
Accumulated ---------------------------
Cost Amortization 1999 1998
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Manufacturing equipment $ 295,721 $ 206,403 $ 89,318 $ 106,925
Furniture and office equipment 50,715 26,489 24,226 28,507
Leasehold improvements 178,218 85,834 92,384 114,168
Computer software 13,490 13,490 - -
Automobile 30,741 18,149 12,592 15,740
Assets acquired under capital leases 123,717 42,962 80,755 100,943
$ 692,602 $ 393,327 $ 299,275 $ 366,283
==========================================================================================================
</TABLE>
4. OBLIGATIONS UNDER LEASE
a) Capital
The Company is committed to minimum lease payments for
computer and manufacturing equipment under capital leases, as
follows:
2000 $ 43,235
2001 3,569
------------------------------------------------------
46,804
Less: imputed interest (4,589)
Less: current portion (27,649)
------------------------------------------------------
$ 14,566
======================================================
56
<PAGE>
AYOTTE MUSIC INC.
Notes to Financial Statements
February 28, 1999 and 1998
--------------------------------------------------------------------------------
4. OBLIGATIONS UNDER LEASE (CONT'D)
b) Premises
The Company's lease has expired and, until such time as a new lease is
negotiated, the Company and their landlord will carry on in good faith
on a month-to-month basis until such time as the lease is renewed. The
current monthly payment is $9,850 (including all operating costs).
5. SHARE CAPITAL
a) Authorized:
Unlimited Voting common shares without par value
Unlimited Preferred shares
b) Issued:
<TABLE>
<CAPTION>
Common Number of Shares Amount
-----------------------------------------------------------------------------
<S> <C> <C>
BALANCE FEBRUARY 28, 1997 1,569,760 $ 368,480
Share Split, 1:2.84515 2,896,442 -
Share Exchange:
- Class A preferred shares, 1:2.8 3,508,736 1,253,120
- Class B preferred shares, 1:0.02 25,062 12,531
Issued for Cash 1,644,000 752,500
Issued on Reverse Takeover 2,000,000 361,910
Share Issue Costs - (204,284)
------------------------------------------------------------------------------
BALANCE FEBRUARY 28, 1998 11,644,000 2,544,257
Issued for Cash 50,000 15,000
Share Issue Costs - (33,520)
------------------------------------------------------------------------------
BALANCE FEBRUARY 28, 1999 11,694,000 $ 2,525,737
==============================================================================
</TABLE>
c) 2,325,496 of the issued share capital is held in escrow,
releasable on the basis of 1/3 thereof, on each of the
anniversaries of the date of December 4, 1997. During the year
2,162,747 shares were released from escrow.
d) 784,500 warrants were issued and outstanding as of February
28, 1999. Each warrant is exercisable into a common share at
$0.75 up to May 7, 1999.
e) The following stock options were outstanding at February 28,
1998:
Number Exercise Price Expiry Date
--------------------------------------------------------------
300,000 $ 0.30 March 26, 2001
128,000 $ 0.50 March 26, 2001
90,000 $ 0.45 March 26, 2001
57
<PAGE>
AYOTTE MUSIC INC.
Notes to Financial Statements
February 28, 1999 and 1998
--------------------------------------------------------------------------------
5. SHARE CAPITAL (CONT'D)
Included in the above stock options are 290,000 options held by
directors and employees of the Company.
6. INCOME TAXES
As at February 28, 1999, the Company has estimated non-capital losses
of $1,386,700 which may be used to offset taxable income of future
years. If unused, the losses will expire as follows:
2002 $ 218,300
2003 275,400
2004 317,000
2005 178,000
2006 398,000
----------------------------------------
$ 1,386,700
========================================
7. RELATED PARTY TRANSACTIONS
Included in expenses is $78,000 (1998: $44,000) of consulting and
management fees paid to a shareholder of the Company and another
company owned by a director.
8. COMMITMENTS
Subsequent to year-end, the Company received a repayable grant from the
federal government under the Program for Export Market Development in
the amount of $38,800. The grant is repayable based on the Company
reaching a certain level of export revenues.
9. LOSS PER SHARE
The loss per share figures are calculated using the weighted average
number of shares outstanding during the year. Fully diluted loss per
share is not calculated, as the effect on loss per share is
anti-dilutive.
<TABLE>
<CAPTION>
1999 1998
-------------------------------------
<S> <C> <C>
Net loss for year $ (270,347) $ (220,765)
Weighted average shares outstanding 11,688,247 4,411,000
-------------- -------------
Loss per share $ (0.02) $ (0.05)
============== ==============
</TABLE>
58
<PAGE>
AYOTTE MUSIC INC.
Notes to Financial Statements
February 28, 1999 and 1998
--------------------------------------------------------------------------------
10. UNITED STATES GENERALLY-ACCEPTED ACCOUNTING PRINCIPLES
These financial statements have been prepared in accordance with
generally accepted accounting principles in Canada ("Canadian GAAP"),
which may differ, in certain respects, from accounting principles
generally accepted in the United States (U.S. "GAAP"). As at February
28, 1999 there are no material differences between Canadian GAAP and
U.S. GAAP.
11. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition,
similar problems may arise in some systems which use certain dates in
1999 to represent something other than a date. The effects of the Year
2000 Issue may be experienced before, on, or after January 1, 2000,
and, if not addressed, the impact on operations and financial reporting
may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is
not possible to be certain that all aspects of the Year 2000 Issue
affecting the Company, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
59
<PAGE>
<TABLE>
<CAPTION>
AYOTTE MUSIC INC.
ACCOUNTING SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
FEBRUARY 28, 1999
------------------------------------------------------------------------------------------------------------------------------------
COLUMN C - ADDITIONS
-------------------------------
(1) (2)
Column B - Charged to Charged to other Column D - Column E -
BALANCE AT BEGINNING costs and accounts Deductions Balance at end
Column A - Description of period expenses (describe) (describe) of period
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Allowance for doubtful $ 2,114.00 - - - (1) $ 2,114.00
accounts
------------------------------------------------------------------------------------------------------------------------------------
2. Warranty expense $ - - - - (2) $ -
------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) The Company charges a percentage to bad debt on a monthly basis (Column
C(1)); they then reverse out the allowance and charged actual
uncollectible amounts to bad debt expense.
(2) The Company does not record warranty expense as a separate line item as the amount is nominal. Warranty expense, if any,
is included in the Company's Cost of Goods Sold.
</FN>
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
AYOTTE MUSIC INC.
Balance Sheet
May 31, 2000
--------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------
Canadian Dollars
----------------------------
ASSETS
CURRENT
<S> <C> <C>
Cash and term deposits $ 906,853 $ 70,845
Accounts receivable 128,456 610,470
Inventories 244,409 575,927
Prepaid expenses 9,966 21,864
1,289,684 1,279,106
----------- -----------
CAPITAL 232,550 285,074
PATENT 1,016 1,016
----------- -----------
$ 1,523,250 $ 1,565,196
=========== ===========
<CAPTION>
LIABILITIES
CURRENT
<S> <C> <C>
Accounts payable and accrued liabilities $ 196,431 $ 391,949
OBLIGATIONS UNDER CAPITAL LEASES 33,441
----------- -----------
196,341 425,390
----------- -----------
SHAREHOLDERS' EQUITY
SHARE CAPITAL 3,019,737 2,525,737
DEFICIT (1,692,918) (1,385,931)
----------- -----------
1,326,819 1,139,806
----------- -----------
$ 1,523,250 $ 1,565,196
=========== ===========
</TABLE>
APPROVED BY THE DIRECTORS: MICHAEL FUGMAN LOUIS EISMAN
--------------- ------------
DIRECTOR DIRECTOR
61
<PAGE>
<TABLE>
<CAPTION>
AYOTTE MUSIC INC.
Statement of Operations and Deficit
First Quarter ended May 31, 2000
----------------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------------
Canadian Dollars
------------------------------
<S> <C> <C>
SALES $ 379,698 $ 598,529
COST OF GOODS SOLD 219,145 364,505
------------ ------------
GROSS MARGIN 160,553 234,024
------------ ------------
EXPENSES
Advertising and promotion 16,931 46,449
Amortization 15,000 14,971
Auto 347 518
Bad debts -- 15,381
Bank charges and interest 10,696 4,591
Computer 1,568 2,675
Insurance 4,019 5,638
Internet and website 1,572 --
Legal and accounting 12,572 8,322
Management fees 12,000 12,000
Office 2,842 9,791
Rent 3,560 27,536
Repairs and maintenance 1,497 1,658
Salaries and employee benefits 54,792 87,181
Telephone and fax 5,997 4,029
Utilities 596 5,692
Professional fees - U.S. security registration costs 51,382 --
-- --
195,371 246,432
------------ ------------
INCOME (LOSS) FROM OPERATIONS (34,818) (12,408)
OTHER
Other income 3,333 361
Gain (loss) on foreign exchange 4,150 (8,769)
------------ ------------
NET INCOME FOR THE PERIOD (27,335) (20,816)
LOSS PER SHARE (0.01) (0.01)
Shares Issued 12,944,000 11,694,000
DEFICIT, beginning of period (1,665,583) (1,365,115)
------------ ------------
DEFICIT, end of period $ (1,692,918) $ (1,385,931)
============ ============
</TABLE>
62
<PAGE>
2. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Page No.
<S> <C> <C>
3.(i) Articles of Incorporation (including continuance
to federal jurisdiction of Canada).........................................[1]
3.(ii) By-laws.....................................................................[1]
4.1 Stock Option Plan dated August 30, 1996.....................................[2]
4.2 Form of Stock Option Agreement dated October 18, 1999.......................[2]
10.1 Investor relations agreement with Marketing Strategies Inc..................[1]
99.1 Form of stock certificate...................................................[1]
99.2 Form of escrow agreement with Montreal Trust
Company of Canada dated November 29, 1996...................................[2]
99.3 Escrow Share Transfer Agreement dated October 6, 1997.......................[2]
99.4 Form of escrow agreement with Montreal Trust
Company of Canada dated December 4, 1997....................................[2]
[1] Incorporated by reference to the like-numbered exhibit in the
Registrant's initial filing of Form 20-F (SEC File No. 0-30683, filed
5/22/2000).
[2] Incorporated by reference to the like-numbered exhibit in the
Registrant's filing of Form 20-F, Amendment No. 1 (SEC File No.
0-30683, filed 7/7/2000).
</TABLE>
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this Amendment No. 3 registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized.
Ayotte Music Inc.
Date: August 23, 2000 /s/ Louis Eisman
-----------------------------------
Louis Eisman, President
64
