UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 _________________________________________________________
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
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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
PART I
Page No.
Item 1. Description of Business..............................................6
Business done and intended to be done by the registrant
and its subsidiaries.........................................................6
Products.................................................................8
Services.................................................................9
Markets for and Methods of Distribution of Products...........................9
Distribution - Dealers...................................................9
Distribution - Internet..................................................9
Internet Marketing Going Forward........................................10
Competition and Market Volumes..........................................11
Proprietary Technology..................................................11
Research and Development Policy, and Environmental
Protection Requirements......................................................12
Number of Employees..........................................................12
Foreign Operations...........................................................12
Forward Looking Statements and Risk Factors..................................12
Forward Looking Statements..............................................12
Risk Factors............................................................13
Item 2. Description of Property.............................................15
Item 3. Legal Proceedings...................................................15
Legal Proceedings.......................................................15
Corporate Cease Trade Orders or Bankruptcies............................15
Penalties or Sanctions..................................................16
Individual Bankruptcies.................................................16
Material Proceedings....................................................16
Item 4. Control of Registrant...............................................16
Item 5. Nature of Trading Market............................................18
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Item 6. Exchange Controls and Other
Limitations Affecting Security Holders..............................18
Item 7. Taxation............................................................19
Canada..................................................................19
United States...........................................................20
Item 8. Selected Financial Data.............................................23
Item 9. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................23
Overview................................................................23
Revenue.................................................................24
E-commerce Store........................................................24
Sales and Marketing.....................................................24
Foreign Exchange........................................................24
Quantitative and Qualitative Disclosures about Market Risk..............25
Liquidity and Capital Resources.........................................25
Results of Operations (Year Ended February 28, 1998
to Year Ended February 28, 1999.)
Revenue.............................................................25
Cost of Sales.......................................................26
Advertising and Promotion...........................................26
General and Administrative..........................................26
Income Taxes........................................................26
Item 9a. Quantitative and Qualitative Disclosures about Market Risk.........27
Item 10. Directors and Officers of Registrant...............................27
Item 11. Compensation of Directors and Officers.............................28
Summary Compensation Table..............................................29
Employment Agreements...................................................29
Stock Option Plan.......................................................29
Item 12. Options to Purchase Securities from Registrant or Subsidiaries.....29
Options and Warrants Outstanding........................................29
Options to Employees and Directors......................................29
Private Placement Warrants..............................................30
Item 13. Interest of Management in Certain Transactions
Market Strategies, Inc..................................................30
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Part II
Item 14. Description of Securities to Be Registered.........................30
Part III
Item 15. Defaults upon Senior Securities....................................31
Item 16. Changes in Securities, Changes in Security for
Registered Securities and Use of Proceeds........................31
Part IV
Item 17. Financial Statements...............................................31
Item 18. Financial Statements...............................................31
Item 19. Financial Statements and Exhibits..................................31
Signatures...................................................................49
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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 SUBSIDIARIES
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. 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. Ayotte considers its "WoodHoop" drums to be a
superior high-end product.
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.
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 was
effected.
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ISI then was listed on the Alberta Stock Exchange (now the Canadian Venture
Exchange or CDNX) under the trading symbol "AYO."
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, our e- commerce initiative is the first
musical instrument manufacturer to operate in this manner.
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 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.
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 8 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.
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This table shows the exchange rate for the Canadian Dollar for the two
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
Year ended 2/28/99 $1.73
Year ended 2/29/00 $1.46
At May 5, 2000, US$1.00 equaled Cdn.$1.50.
(2) NOT APPLICABLE.
(3) PRINCIPAL PRODUCTS PRODUCED AND SERVICES RENDERED AND THE PRINCIPAL
MARKETS FOR AND METHODS OF DISTRIBUTION OF SUCH PRODUCTS AND SERVICES.
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.
We custom manufacture each drum we sell. 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
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find a replacement manufacturer if we lost the services of Tay-e Corporation.
There is no written contract wuth Tay-e. The maplewood drums are made to our
specifications by a supplier in Vermont. 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
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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.
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. 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.
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.
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.
INTERNET MARKETING GOING FORWARD. We intend to continue aggressive
development of the internet marketing strategy, by striving to increase web-site
traffic and percentage of sales from traffic. Web site traffic may be increased
through a marketing campaign using both print media and on-line methods. Our web
site originally was designed several years ago to support brochure oriented
content. We have used the site successfully to start direct-to-
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consumer sales, but the platform needs to be improved. We will work with our
internet consulting firm to redesign the visual content of the site, streamline
users' ability to custom order their drum kits and enable them to compare online
the costs of different kits they can custom order (sizes and numbers of drums,
etc.), and also enhance the electronic administrative functions of the site
(which will lower the amount of personnel time required to oversee the site).
Also, we are negotiating with manufacturers of complementary products to
sell through our site, thereby increasing the base of potential customers for
our own products. Up to $250,000 out of the $500,000 in gross proceeds (about
$450,000 net) obtained after February 29, 2000 from a private placement of our
securities will be applied to refine the site with hyperlinks to other product
lines offered by others, and to initiate marketing efforts as we seek wider and
more diversified (music related) markets. To achieve our wider name recognition,
much more capital will be required to advertise our internet presence. In
conjunction with these capital needs, we are now (May, 2000) actively seeking
out other web-based business to merge into us with the intent of offering an
even wider variety of products through our web site. Alternatively, we may
recruit internet-experienced personnel. Presently, we have no agreements to
acquire a business, be acquired by someone or something else, or to hire new
management or marketing personnel. If and when we do have such agreements in
place, we will make the appropriate filings with the SEC.
COMPETITION AND MARKET VOLUMES. 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$17.5
million (3.5%) of such market. We believe that the United States market
represents one-half of the world market for musical instruments.
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.
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.
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(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 who have a combined experience of 60 years in the drum
manu- facturing industry, almost all of which has been with Ayotte.
FOREIGN OPERATIONS
We have no foreign operations. 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.
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 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 within the meaning of section 27A of the 1933 Act and section 21E of
the Securities Exchange Act of 1934. 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
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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. These operating losses are expected to continue
at least through the first two quarters of 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. We have only recently had working capital available
to us to keep operations going for a while. At February 29, 2000, we had working
capital of $627,512. However, even with the added capital, our business model
remains unproven.
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 longer. 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, 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.
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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.
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, 569,482 (4%) 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. This percentage includes the 1,250,000
shares sold in the private placement after February 29, 2000 which issuance is
expected to be approved by the CDNX in May or June, 2000. In the event of a
release of such shares from escrow, they will become
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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.
YOUR LEGAL RECOURSE AS A UNITED STATES INVESTOR COULD BE LIMITED. Our
company is incorpo- rated 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 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:
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<PAGE>
(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.
(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 May 20, 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
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<PAGE>
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.
<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, 569,482 shares or 4% are subject to an escrow at Montreal Trust
Company of Canada, which 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 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), and deposited into escrow
in accordance with Canadian provincial securities laws, under an escrow
agreement dated as of October 6, 1997.
Under the terms of the escrow agreement, the deposited shares can be voted
by the owners thereof but otherwise are subject to the direction or
determination of the Albertra Securities 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. The escrow terminates
and all shares remaining will be released on December 4, 2000.
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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 eight fiscal quarters ending
February 29, 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
On May 18, 2000, the closing price of the common shares on the CDNX was
$0.34 per share.
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.
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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 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.
- 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.
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- 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 some, but not
all, provisions of the United States Internal Revenue Code with respect to
information reporting and backup withholding requirements. United States income
tax laws and regulations applicable to investments in foreign entities are
complex. A United States resident should consult a personal tax advisor in these
respects, and not rely on the following summary, which does not cover
substantive tax provisions which will or may apply to a United States resident.
- 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 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
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<PAGE>
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 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.
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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 tat 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 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,
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except as may be provided in regulations, be treated as having made a taxable
disposition of such stock.
Management believes that the company was a PFIC for the year ended February
29, 2000.
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.
FIVE YEAR SUMMARY
<TABLE>
<CAPTION>
Fiscal Years Ended Feb. 28,
------------------------------------------------------------------------
2000 $ 1999 $ 1998 $ 1997 $ 1996 $
(audited) (audited) (audited) (audited) (audited)
--------- --------- --------- --------- ---------
<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) (0.14) (0.12) (0.02) (0.25) (0.21)
Earnings (loss) per common share (fully (0.13) (0.13) (0.02) (0.21) 0.21
diluted)
Total assets 1,037,233 1,525,765 1,781,195 1,175,206 1,001,429
<CAPTION>
<S> <C> <C> <C> <C> <C>
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
</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, possibly through some arrangement with another company
although we are concentrating now on our internal efforts.
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REVENUE
Revenue 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 prior to the product leaving our factory. Customer
acceptance is used as the criterion for revenue recognition when the product
sold does not have an established sales history to allow management to
reasonably estimate returns. Product revenue from sales to distributors is
recognized upon shipment to the distributor.
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.
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.
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.
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
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<PAGE>
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 $773,817 at
February 28, 1999. As soon as our private offering of 1.25 million shares and
warrants is cleared by the CDNX, we will have available another approximately
$450,000 of cash for working capital. We expect clearance in May or June 2000.
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
when the order is taken. 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 (YEAR ENDED FEBRUARY 28, 1998 TO
YEAR ENDED FEBRUARY 28, 1999.)
REVENUE
Total revenue had increased 30.9% to $ 2,633,421 for 1999 from $2,011,739
for 1998 and $1,796,549 for 1997. This increase was due to the expansion of the
dealer network in the United States. 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.
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<PAGE>
COST OF SALES
Cost of sales increased 29.5% to $1,654,166 for 1999 from $ 1,277,729 for
1998 and $1,209,031 for 1997. 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 and 67.3% for 1997. 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. 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, and $191,150, or 10.6% of
total revenue for 1997. This decrease in 1999 was due to cost cutting measures.
GENERAL AND ADMINISTRATION
General and administration expenses decreased 26.48% to $791,685 for fiscal
2000, compared to the $1,076,783 we spent in this category in 1999. A imajor
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, and $796,295, or 44.3% of
total revenue for 1997. The 1999 increase was primarily due to increased
salaries, benefits and rent for the Nashville sales office. Other contributing
areas for the 1999 increases were bad debt costs, bank charges and management
fees.
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
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ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
(a) Quantitative Information About Market Risk
Not applicable.
(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 YEAR FIRST YEAR TERM PRINCIPAL OCCUPATION AND OTHER POSITION
MUNICIPALITY OF ELECTED (1) EXPIRES POSITIONS DURING LAST FIVE YEARS OR OFFICE WITH
RESIDENCE THE CORPORATION
<S> <C> <C> <C> <C>
Louis Eisman 1998 2000 Private equity capital investor, 1991 Chairman,
3704 Pine Crescent (Directors to present Interim President
Vancouver, BC Elected and Director
V6M 2N1 Annually)
Michael Fugman 1998 2000 President of Gault Distribution Inc., Director
2355 West 7th Avenue (Directors a wholesale distributor in business
Vancouver, BC Elected for 98 years
V6M 2N1 Annually)
Don Mazankowski 1999 2000 General Manager, Ayotte Music Director,
2745 Trafalgar Street (Directors Inc. General Manager
Vancouver, BC Elected Vice President - Marketing, ETL.
V6K 3T7 Annually) Environmental Technology Ltd
</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.
27
<PAGE>
("ISI"). Prior to the Amalgamation Date, the business presently conducted was
conducted by ADO, a British Columbia company. 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 Amalga- mation Date. See Item 1 above.
Our audit committee consists of Messrs. Eisman and Fugman.
There are 1,850,973 shares directly owned or controlled by officers and
insiders, plus an additional 569,482 shares or 4% held (in escrow) by a venture
capital corporation of which Michael Fugman (Director) is an officer, director
and a minority shareholder of the VCC. This percentage reflects 1,250,000
additional shares issuable for our private placement ($500,000 gross proceeds),
but not 1,250,000 million additional shares issuable on exercise of warrants
sold in the private placement. However, 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.
28
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
--------------------------------------------
FISCAL OTHER ANNUAL
NAME AND POSITION YEAR SALARY BONUSES COMPENSATION
- ----------------- ---- ------ ------- ------------
<S> <C> <C> <C> <C>
Ray Ayotte (resigned) 2000 $ -0- $ -0- $ -0-
1999 $55,000 $ 3,500 $ -0-
1998 $55,000 $ 3,500 $ -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 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
29
<PAGE>
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 (subject to CDNX approval, expected in May or 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 $450,000) 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 13 regarding our agreement
with Market Strategies Inc., we have not agreed to issue any additional
securities.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
MARKET STRATEGIES, INC. 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
acquisitions or other significant business combination transactions. 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.
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 is subject to CDNX
approval expected in May or 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 subject to CDNX
approval along with the shares so sold.
30
<PAGE>
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.
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. As set forth in the notes, all of the financial statements are
presented in accordance with Canadian GAAP, however, as stated in note 8, there
are no material differences between Canadian GAAP and United States GAAP as
applied to our financial statements.
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:
31
<PAGE>
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.
32
<PAGE>
ELLIS FOSTER
CHARTER 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
(see note 8). 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 Charter Accountant
33
<PAGE>
AYOTTE MUSIC INC.
Balance Sheet
February 29, 2000 and February 28, 1999
<TABLE>
<CAPTION>
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
========================================================================================================
LIABILITIES
CURRENT
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>
34
<PAGE>
AYOTTE MUSIC INC.
Statement of Operations and Deficit
Years Ended February 29, 2000 and February 28, 1999
<TABLE>
<CAPTION>
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%; 199 - 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 $ (0.14) $ (0.12)
===============================================================================================================
WEIGHTED AVERAGE SHARES 11,694,000 11,688,247
==============================================================================================================
</TABLE>
35
<PAGE>
AYOTTE MUSIC INC.
Statement of Cash flows
Years Ended February 29, 2000 and February 28, 1999
<TABLE>
<CAPTION>
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)
- -------------------------------------------------------------------------------------------------------------------
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>
36
<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 estimate 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.
d) 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.
e) 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.
37
<PAGE>
AYOTTE MUSIC INC.
Notes to Financial Statements
February 29, 2000 and February 28, 1999
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING PRINCIPLES (cont'd)
f) 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".
g) Advertising Expenses
The Company expenses advertising costs as incurred.
h) 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.
3. CAPITAL ASSETS
<TABLE>
<CAPTION>
Net Book Value
Accumulated -------------------------------
Cost Amortization 2000 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Manufacturing equipment $ 298,259 $ 224,267 $ 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 lease 123,717 59,113 64,604 80,755
----------------------------------------------------------------------------------------------------------
$ 683,595 $ 439,757 $ 243,838 $ 299,275
----------------------------------------------------------------------------------------------------------
</TABLE>
4. OBLIGATIONS UNDER CAPITAL LEASE
The Company is committed to minimum lease payments of $1,337 (1999 -
$46,804) for computer and manufacturing equipment under a capital lease
which expires in February, 2001.
5. SHARE CAPITAL
a) Authorized:
Unlimited Voting common shares without par value
Unlimited Preferred shares
38
<PAGE>
AYOTTE MUSIC INC.
Notes to Financial Statements
February 29, 2000 and February 28, 1999
- --------------------------------------------------------------------------------
5. SHARE CAPITAL (cont'd)
<TABLE>
<CAPTION>
b) Issued:
Common Number of Shares Amount
-----------------------------------------------------------------------------------
<S> <C> <C>
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
-----------------------------------------------------------------------------------
</TABLE>
c) 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.
d) The following stock options were cancelled during the year:
<TABLE>
<CAPTION>
Number Exercise Price Expiry Date
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
300,000 $ 0.30 March 26, 2001
128,000 $ 0.50 March 26, 2001
90,00 $ 0.45 March 26, 2001
</TABLE>
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.
39
<PAGE>
AYOTTE MUSIC INC.
Notes to Financial Statements
February 29, 2000 and February 28, 1999
- --------------------------------------------------------------------------------
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. 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.
9. 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 additions,
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.
40
<PAGE>
ELLIS FOSTER
CHARTER ACCOUNTANTS
1650 West 1st Avenue
Vancouver, B.C., Canada V6J 1G1
Telephone: (604) 734-1112 Facsimile: (604) 714-5916
E-Mail: [email protected]
AUDITORS' REPORT
TO THE SHAREHOLDERS OF
AYOTTE MUSIC INC.
(DBA AYOTTE DRUMS ONLY)
We have audited the balance sheet of AYOTTE MUSIC INC. (DBA Ayotte Drums Only)
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, the statements of operations and deficit and changes in
financial position present fairly, in all material respects, the results of
operations and the changes in financial position of the company for the years
ended February 28, 1999 and 1998.
/s/ Ellis Foster
Vancouver, BC
April 23, 1999 Chartered Accountants
41
<PAGE>
AYOTTE MUSIC INC.
(DBA Ayotte Drums Only)
Balance Sheet
February 28, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------------
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
==================================================================================================================
LIABILITIES
CURRENT
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
==================================================================================================================
COMMITMENTS (note 8)
</TABLE>
42
<PAGE>
AYOTTE MUSIC INC.
(DBA Ayotte Drums Only)
Statement of Operations and Deficit
Years Ended February 28, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------
<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 $ (0.12) $ (0.05)
======================================================================================================
</TABLE>
43
<PAGE>
AYOTTE MUSIC INC.
(DBA Ayotte Drums Only)
Statement of Changes in Financial Position
Years Ended February 28, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------
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>
44
<PAGE>
AYOTTE MUSIC INC.
(DBA Ayotte Drums Only)
Notes to Financial Statements
February 28, 1999 and 1998
- --------------------------------------------------------------------------------
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.
d) 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.
e) 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.
45
<PAGE>
AYOTTE MUSIC INC.
(DBA Ayotte Drums Only)
Notes to Financial Statements
February 28, 1999 and 1998
- --------------------------------------------------------------------------------
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 CAPITAL LEASE
The Company is committed to minimum lease payments for computer and
manufacturing equipment under capital leases, as follows:
2000 $ 43,235
2001 3,569
Less: imputed interest 46,804
(4,589)
Less: current portion (27,649)
--------------------------------------------------
$ 14,566
==================================================
5. SHARE CAPITAL
a) Authorized:
Unlimited Voting common shares without par value
Unlimited Preferred shares
<TABLE>
<CAPTION>
b) Issued:
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 AT FEBRUARY 28, 1998 11,644,000 $ 2,544,257
=================================================================================
</TABLE>
46
<PAGE>
AYOTTE MUSIC INC.
(DBA Ayotte Drums Only)
Notes to Financial Statements
February 28, 1999 and 1998
- --------------------------------------------------------------------------------
5. SHARE CAPITAL (CONT'D)
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
================================================================================
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.
<TABLE>
<CAPTION>
e) The following stock options were outstanding at February 28, 1998:
Number Exercise Price Expiry Date
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
300,000 $ 0.30 March 26, 2001
128,000 $ 0.50 March 26, 2001
90,000 $ 0.45 March 26, 2001
</TABLE>
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
==========================================
47
<PAGE>
AYOTTE MUSIC INC.
(DBA Ayotte Drums Only)
Notes to Financial Statements
February 28, 1999 and 1998
- --------------------------------------------------------------------------------
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. 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.
48
<PAGE>
2. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Page No.
<S> <C> <C> <C>
3.(i) Articles of Incorporation (including continuance
to federal jurisdiction of Canada)..........................................50
3.(ii) By-laws......................................................................54
10.1 Investor relations agreement with Marketing Strategies Inc...................84
99.1 Form of stock certificate....................................................91
</TABLE>
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 registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
Ayotte Music Inc.
Date: May 22, 2000 /s/ Louis Eisman
-------------------------
Louis Eisman, President
49
<TABLE>
<CAPTION>
EXHIBIT 3.(I)
<S> <C> <C>
Industry Canada Industrie Canada FORM 11 FORMULE 11
ARTICLES OF CONTINUANCE CLAUSES DE PROROGATION
Canada Business Loi canadienne sur les (SECTION 187) (ARTICLE 187)
Corporations Actsocietes par actions
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
1 - Name of corporation Denomination de la societe
AYOTTE MUSIC INC.
- ------------------------------------------------------------------------------------------------------------------------------------
2 - The place in Canada where the registered office is to be situated Lieu au Canada ou doit etre situe le siege social
GREATER VANCOUVER REGIONAL DISTRICT, BRITISH COLUMBIA
- ------------------------------------------------------------------------------------------------------------------------------------
3 - The classes and any maximum number of shares that the Categories et tout nombre maximal d'actions qua la
corporation is authorized to issue societe est autorisee a emettre
SEE SCHEDULE "A"
- ------------------------------------------------------------------------------------------------------------------------------------
4 - Restrictions, if any, on share transfers Restrictions sur le transfert des actions, s'il y a lieu
NONE
- ------------------------------------------------------------------------------------------------------------------------------------
5 - Number (or minimum and maximum number) of directors Nombre (ou nombre minimal et maximal) d'administrateurs
MINIMUM OF ONE (1) AND A MAXIMUM OF FIFTEEN (15)
- ------------------------------------------------------------------------------------------------------------------------------------
6 - Restrictions, if any, on business the corporation may carry on Limites imposees a l'activite commercial de la societe,
NONE s'il y a lieu
- ------------------------------------------------------------------------------------------------------------------------------------
7 - (1) If change of name effected, previous name (1) S'il y a changement de denomination, denomination
n/a anterieure
(2) Details of incorporation (2) Details de la constitution
AMALGAMATION UNDER THE ALBERTA BUSINESS CORPORATIONS ACT
OF ISI VENTURES INC. (207037144) AND AYOTTE MUSIC INC.
(207731340) ON FEBRUARY 27, 1998.
- ------------------------------------------------------------------------------------------------------------------------------------
8 - Other provisions, if any Autre dispositions, s'il y a lieu
SEE SCHEDULE "B"
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Date Signature Title - Titre
DIRECTOR
- ------------------------------------------------------------------------------------------------------------------------------------
FOR DEPARTMENTAL USE ONLY - A L'USAGE DU MINISTERE SEULEMENT Filed - Deposee
Corporation No. - N de la societe
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
SCHEDULE "A"
TO ARTICLES OF CONTINUANCE OF
AYOTTE MUSIC INC.
The Corporation is authorized to issue and unlimited number of shares designated
as Common shares and an unlimited number of shares designated as Preferred
shares.
1 COMMON SHARES B The Common shares shall have attached to them the rights,
privileges, restrictions and conditions hereafter set forth.
Except for meetings at which only holders of another specified class
or series of shares of the Corporation are entitled to vote
separately as a class or series, each holder of a Common share
is entitled to receive notice of, to attend and to vote at all
meeting of the shareholders of the Corporation.
Subject to the rights of the holders of the Preferred shares, the
holders of the Common shares are entitled to receive dividends
if, as and when declared by the directors of the Corporation;
Subject to the rights, privileges, restrictions and conditions
attached to any other class of shares of the Corporation, the
holders of the Common shares are entitled to share equally in
the remaining property of the Corporation upon liquidation,
dissolution or winding-up of the Corporation.
PREFERRED SHARES - The Common shares shall have attached to them the rights,
privileges, restrictions and conditions hereafter set forth.
The Preferred shares may from time to time be issued in one or more
series and, subject to the following provisions, and subject
to the sending of Articles of Amendment in prescribed form and
the issuance of a Certificate of Amendment in respect thereof,
the director may fix from time to time and before issued of a
series of Preferred shares, the number of share which are to
comprise that series and the designation, rights, privileges,
restrictions and conditions to be attached to that series of
Preferred shares including, without limiting the generality of
the foregoing, the rate of amount of dividends or the method
of calculating dividends, the dates of payment of dividends,
the redemption, purchase and/or conversion prices and terms
and conditions of redemption, purchase and/or conversion, and
any sinking fund or other provisions.
The Preferred shares of each series shall, with respect to the payment
of dividends and the distribution of assets or return of
capital in the event of liquidation, dissolution or winding-up
of the Corporation, whether voluntary or involuntary, or any
other return of capital or distribution of the assets of the
Corporation among its shareholders for
51
<PAGE>
the purpose of winding-up its affairs, rank on a parity with
the Preferred shares of every other series and be entitled to
preference over the Common shares and over any other shares of
the Corporation ranking junior to the Preferred shares. The
Preferred shares of any series may also be given other
preferences, not inconsistent with these articles, over the
Common shares and any other shares of the corporation ranking
junior to the Preferred shares of a series as may be fixed in
accordance with clause 2(a).
If any cumulative dividends or amounts payable on return of capital
in respect of a series of Preferred shares are not paid in
full, all series of Preferred shares shall participate
rateably in respect of accumulated dividends and return of
capital.
Unless the directors otherwise determine in the Articles of Amendment
designating a series of Preferred shares, the holder of each
share of a series of Preferred shares shall not, as such, be
entitled to receive notice of or vote at any meeting of
shareholders, except as otherwise specifically provided in the
Canada Business Corporations Act.
52
<PAGE>
SCHEDULE "B"
TO ARTICLES OF CONTINUANCE OF
AYOTTE MUSIC INC.
The directors may, between annual general meetings, appoint 1 (one) or more
additional directors of the Corporation to serve until the next annual general
meeting, but the number of additional directors shall not at any time exceed 1/3
of the number of directors who held office at the expiration of the last annual
meeting of the Corporation.
53
EXHIBIT 3.(ii)
BY-LAW NUMBER 1
A BY-LAW RELATING GENERALLY
TO THE TRANSACTION OF THE
BUSINESS AND AFFAIRS OF
ISI VENTURES INC.
54
<PAGE>
CONTENTS
Note - Page numbers correspond to those in this Form 20-F
not the original By-laws
SECTION 1
DEFINITIONS AND INTERPRETATION
(1) Definitions...........................................................58
(2) Interpretation........................................................59
(3) Headings..............................................................59
(4) By-laws Subject to the ABCA...........................................59
SECTION 2
BUSINESS OF THE CORPORATION
(1) Execution of Dcouments................................................60
(2) Cheques, Drafts and Notes.............................................60
(3) Corporate Seal........................................................60
(4) Banking Arrangements..................................................60
(5) Voting Rights in Other bodies Corporate...............................60
(6) Withholding Information from Shareholders.............................61
(7) Divisions.............................................................61
SECTION 3
BORROWING
(1) Borrowing Power.......................................................61
SECTION 4
DIRECTORS
(1) Management of Business................................................62
(2) Qualification.........................................................62
(3) Number of Directors...................................................62
(4) Increase Number.......................................................63
(6) Election and Term.....................................................63
(8) Consent...............................................................63
(9) Ceasing to Hold Office................................................64
(10) Filling Vacancies.....................................................64
(11) Delegation to a Managing Director or Committee........................64
(12) Remuneration and Expenses.............................................65
(13) Annual Financial Statements...........................................65
SECTION 5
MEETINGS OF DIRECTORS
(1) Calling Meetings......................................................65
(2) Notice................................................................66
(3) Notice of Adjourned Meeting...........................................66
(4) Meetings Without Notice...............................................66
(5) Waiver of Notice......................................................67
(6) Quorum................................................................67
(7) Regular Meetings......................................................67
(8) Chairperson of Meetings...............................................67
(9) Decision on Questions.................................................67
(10) Meeting by Telephone..................................................67
(11) Resolution in Lieu of Meeting.........................................68
55
<PAGE>
SECTION 6
OFFICERS AND APPOINTEES OF THE BOARD
(1) Appointment of Officers...............................................68
(2) Term of Office........................................................68
(3) Duties of Officers....................................................68
(4) Remuneration..........................................................68
(5) Chairperson of the Board..............................................69
(6) Managing Director.....................................................69
(7) President.............................................................69
(8) Vice-President........................................................69
(9) Secretary.............................................................69
(10) Treasurer.............................................................69
(11) Agents and Attorneys..................................................70
SECTION 7
CONFLICT OF INTEREST
(1) Disclosure of Interest................................................70
(2) Approval and Voting...................................................70
(3) Effect of Conflict of Interest........................................71
SECTION 8
LIABILITY AND INDEMNIFICATION
(1) Limitation of Liability...............................................71
(2) Indemnity.............................................................72
(3) Insurance.............................................................72
SECTION 9
SECURITIES
(1) Shares................................................................72
(2) Options and Other Rights to Acquire Securities........................73
(3) Commissions...........................................................73
(4) Securities Register...................................................73
(6) Dealings with Registered Holders......................................74
(7) Transfers of Securities...............................................74
(8) Registration of Transfers.............................................74
(9) Lien..................................................................74
(10) Security Certificates.................................................75
(11) Entitlement to a Security Certificate.................................75
(12) Securities Held Jointly...............................................75
(13) Replacement of Security Certificates..................................75
(14) Fractional Shares.....................................................75
SECTION 10
MEETINGS OF SHAREHOLDERS
(1) Annual Meeting of Shareholders........................................76
(2) Special Meetings of Shareholders......................................76
(3) Special Business......................................................76
(4) Place and Time of Meetings............................................76
(5) Notice of Meetings....................................................76
(6) Notice of Adjourned Meetings..........................................77
(7) Waiver of Notice......................................................77
56
<PAGE>
(8) Shareholder List......................................................77
(9) Persons Entitled to Vote..............................................78
(10) Chairperson of Meetings...............................................78
(11) Scrutineer............................................................78
(12) Procedure at Meetings.................................................79
(13) Persons Entitled to be Present........................................79
(14) Quorum................................................................79
(15) Loss of Quorum........................................................79
(16) Proxy Holders and Representatives.....................................80
(17) Time for Deposit of Proxies...........................................80
(18) Revocation of Proxies.................................................80
(19) Joint Shareholders....................................................81
(20) Decision on Questions.................................................81
(21) Voting by Show of Hands...............................................81
(22) Voting by Ballot......................................................81
(23) Number of Votes.......................................................81
(24) Meeting by Telephone..................................................81
(25) Resolution in Lieu of Meeting.........................................82
SECTION 11
NOTICES
(1) Method of Notice......................................................82
(2) Notice to Joint Shareholders..........................................82
(3) Notice to Successors..................................................82
(4) Non-Receipt of Notices................................................82
(5) Failure to Give Notice................................................83
(6) Execution of Notices..................................................83
57
<PAGE>
SECTION 1
DEFINITIONS AND INTERPRETATION
(1) Definitions
In the By-law, unless the context otherwise requires:
(a) "ABCA" means the Business Corporations Act (Alberta), as amended,
(b) "appoint" includes elect and vice versa;
(c) "Articles" includes the original or restated articles of incorporation,
articles of amendment, articles of amalgamation, articles of
continuance, articles of reorganization, articles of arrangement,
articles of dissolution and articles of revival of the Corporation, and
any amendment to any of them;
(d) "board" means the board of directors of the Corporation;
(e) "By-laws" means this by-law and all other by-laws of the Corporation
from time to time in force;
(f) "Corporation" means ISI Ventures Inc.;
(g) "Director" means an individual who is elected or appointed as a
director of the Corporation;
(h) "Indemnified Party" has the meaning set out in section 8 for purposes
of that section;
(i) "Officer" means an officer of the Corporation appointed by the board;
(j) "Record Date" means, for the purpose of determining Shareholders
entitled to receive notice of a meeting of Shareholders:
i) the date fixed in advance by the Board for that determination which
precedes the date on which the meeting is to be held y not more than 50
days and not less than 21 days,
ii) if no date is fixed by the Board, at the close of business on the
last business day which precedes the day on which the notice is sent,
or
iii) if no notice is sent, the day on which the meeting is held;
58
<PAGE>
(k) "Recorded Address" means:
i) in the case of a Shareholder, the Shareholder's latest address as
shown in the Corporation's records or those of its transfer agent,
ii) in the case of joint Shareholders, the latest address as shown in
the Corporation's records or those of its transfer agent in respect of
those joint holders, or the first address appearing if there is more
than one address,
iii) in the case of a Director, the Director's latest address as shown
in the Corporation's records or in the last notice of directors filed
with the Registrar, and
iv) in the case of an Officer or auditor of the Corporation, that
person's latest address as shown in the Corporation's records;
(l) "Registrar" means the Registrar of Corporations or a Deputy Registrar
of Corporations appointed under the ABCA;
(m) "Regulations" means the Regulations, as amended, in force from time to
time under the ABCA; and
(n) "Shareholder" means a shareholder of the Corporation.
(2) Interpretation
(a) words and expressions defined or used in the ABCA have the meaning or
use given to them in the ABCA;
(b) words importing the singular include the plural and vice versa;
(c) words importing gender include masculine, feminine and neuter genders;
and
(d) words importing persons include bodies corporate.
(3) Headings
The headings used in the By-laws are inserted for convenience of reference only.
The headings are not to be considered or taken into account in construing the
terms of the By-laws nor are they to be deemed in any way to clarify, modify or
explain the effect of any term of the By-laws.
(4) By-laws Subject to the ABCA
59
<PAGE>
The By-laws are subject to the ABCA and the Regulations, to any unanimous
shareholder agreement and to the Articles, in that order.
SECTION 2
BUSINESS OF THE CORPORATION
(1) Execution of Dcouments
Documents may be executed on behalf of the Corporation in the manner and by the
persons the Board may designate by resolution.
(2) Cheques, Drafts and Notes
Cheques, drafts or orders for the payment of money, notes acceptances and bills
of exchange must be signed in the manner and by the persons the Board may
designate by resolution.
(3) Corporate Seal
The Board may, by resolution, adopt a corporate seal containing the name of the
Corporation as the corporate seal. A document issued by or executed on behalf of
the Corporation is not invalid only because the corporate seal is not affixed to
that document. A document requiring authentication by the Corporation does not
need to be under seal.
(4) Banking Arrangements
The Board may open any bank accounts the Corporation may require at a financial
institution designated by the resolution of the Board. The Board may adopt,
authorize, execute or deposit any document furnished or required by the
financial institution and may do any other thing as may be necessarily
incidental to the banking and financial arrangements of the Corporation.
(5) Voting Rights in Other bodies Corporate
The persons designated by the Board to execute documents on behalf of the
Corporation may execute and deliver instruments of proxy and arrange for the
issue of voting certificates or other evidence of the right to exercise voting
rights attached to any securities held by the Corporation in another body
corporate. The instruments, certificates or other evidence shall be in favour of
the person that is designated by the persons executing the instruments of proxy
or arranging for the issue of voting certificates or other evidence of the right
to exercise voting rights. In addition, the Board may direct the manner in which
and the person by whom any particular voting right or class of voting rights may
be exercised.
60
<PAGE>
(6) Withholding Information from Shareholders
No Shareholder is entitled to obtain any information respecting any detail or
conduct of the Corporation's business which, in the opinion of the Board, would
not be in the best interests of the Shareholders or the Corporation to
communicate to the public.
The Board may determine whether and under what conditions the accounts, records
and documents of the Corporation are open to inspection by the Shareholders. No
Shareholder has a right to inspect any account, record or document of the
Corporation except as conferred by the ABCA or authorized by resolution of the
Board or by resolution passed at a meeting of Shareholders.
(7) Divisions
The Board may cause any part of the business and operations of the Corporation
to be segregated or consolidated into one or more divisions upon the basis the
Board considers appropriate. Any division may be designated by the name the
Board determines and may transact business under that name. The name of the
Corporation must be set out in legible characters in and on all contracts,
invoices, negotiable instruments and orders for goods or services issued or made
by or on behalf of any division of the Corporation.
SECTION 3
BORROWING
(1) Borrowing Power
Without limiting the borrowing power of the Corporation provided by the ABCA,
the Board may, without authorization of Shareholders:
(a) borrow money on the credit of the Corporation;
(b) issue, reissue, sell or pledge debt obligations of the Corporation;
(c) subject to section 42 of the ABCA, give a guarantee on behalf of the
Corporation to secure performance of an obligation of any person; and
(d) mortgage, hypothecate, pledge or otherwise create a security interest
in all or any property of the Corporation, owned or subsequently
acquired, to secure any obligation of the Corporation.
The Directors may, by resolution, delegate to a Director, a committee of
Directors or an Officer all or any of the powers conferred on them by this
section.
61
<PAGE>
SECTION 4
DIRECTORS
(1) Management of Business
The Board shall manage the business and affairs of the Corporation. Every
Director must comply with the ABCA, the Regulations, the Articles and By-laws.
(2) Qualification
A person is disqualified for election as a Director if that person:
(a) is less than 18 years of age;
(b) is
i) a dependant adult as defined in the Dependent Adults Act (Alberta)
or the subject of a certificate of incapacity under that Act,
ii) a formal patient as defined in the Mental Health Act (Alberta),
iii) the subject of an order under The Mentally Incapacitated Persons
Act (Alberta) appointing a committee of his or her person, estate or
both, or
iv) a person who has been found to be of unsound mind by a court
elsewhere than in Alberta;
(c) is not an individual; or
(d) has the status of bankrupt.
A Director is not required to hold shares issued by the Corporation.
(3) Number of Directors
The Board is to consist of that number of Directors permitted by the Articles.
In the event the Articles permit a minimum and maximum number of Directors, the
Board is to consist of the number of Directors the Shareholders determine by
ordinary resolution. The number of Directors at any one time may not be less
than the minimum or more than the maximum number permitted by the Articles.
62
<PAGE>
(4) Increase Number
The Shareholders may amend the Articles to increase the number, or the minimum
or maximum number, of Directors. Upon the adoption of an amendment increasing
the number or minimum number of Directors, the Shareholders may, at the meeting
at which they adopt the amendment, elect the additional number of Directors
authorized by the amendment. Upon the issue of a certificate of amendment, the
Articles are deemed to be amended as of the date the Shareholders adopted the
amendment.
(5) Decrease Number
The Shareholders may amend the Articles to decrease the number, or the minimum
or maximum number, of Directors. No decrease shortens the term of an incumbent
Director.
(6) Election and Term
Each Director named in the notice of directors filed at the time of
incorporation holds office from the issue of the certificate of incorporation
until the first meeting of Shareholders. The Shareholders are to elect Directors
by ordinary resolution at the first meeting of Shareholders and at each
succeeding annual meeting at which an election of Directors is required. The
elected Directors are to hold office for a term expiring not later than the
close of the next annual meeting of Shareholders following the election. A
Director not elected for an expressly stated term ceases to hold office at the
close of the first annual meeting of Shareholders following the Director's
election. If Directors are not elected at a meeting of Shareholders, the
incumbent Directors continue in office until their respective successors are
elected.
(7) Removal of Directors
The Shareholders may by ordinary resolution passed at a special meeting of
Shareholders remove a Director from office. Any vacancy created by the removal
of a Director may be filled at the meeting at which the Director was removed,
failing which the vacancy may be filled by a quorum of Directors.
(8) Consent
No election or appointment of an individual as a Director is effective unless:
(a) the individual was present at the meeting when elected or appointed and
did not refuse to act as Director; or
(b) if the individual was not present at the meeting when elected or
appointed as a Director, the individual
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i) consented in writing to act as a Director before the individual's
election or appointment or within 10 days after it, or
ii) has acted as a Director pursuant to the election or appointment.
(9) Ceasing to Hold Office
A Director ceases to hold office when:
(a) the Director dies or resigns;
(b) the Director is removed from office by the Shareholders who elected the
Director; or
(c) the Director ceases to be qualified for election as a Director under
subsection (2).
A Director's resignation is effective at the time a written resignation is sent
to the Corporation, or at the time specified in the resignation, whichever is
later.
(10) Filling Vacancies
A quorum of Directors may fill a vacancy in the Board, except a vacancy
resulting from an increase in the number or minimum number of Directors or from
a failure to elect the number or minimum number of Directors required by the
Articles. If there is not a quorum of Directors, or if there has been a failure
to elect the number or minimum number of Directors required by the Articles, the
Directors then in office must immediately call a special meeting of Shareholders
to fill the vacancy. If the Directors fail to call a meeting, or if there are no
Directors then in office, the meeting may be called by any Shareholder.
(11) Delegation to a Managing Director or Committee
The Directors may appoint from their number a Managing Director or a committee
of Directors. At least half of the members of a committee of Directors must be
resident Canadians. A Managing Director must be a resident Canadian. The
Directors may delegate to a Managing Director or a committee of Directors any of
the powers of the Directors. However, no Managing Director and no committee of
Directors has authority to:
(a) submit to the Shareholders any question or matter requiring approval of
the Shareholders;
(b) fill a vacancy among the Directors or in the office of auditor;
(c) issue securities, except in the manner and on the terms authorized by
the Directors;
(d) declare dividends;
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(e) purchase, redeem or otherwise acquire shares issued by the Corporation,
except in the manner and on the terms authorized by the Directors;
(f) pay a commission in connection with the sale of shares of the
Corporation;
(g) approve a management proxy circular;
(h) approve any financial statements; or
(i) adopt, amend or repeal By-laws.
(12) Remuneration and Expenses
The Directors are entitled ro receive remuneration for their services in the
amount the Board determines. Subject to the Board's approval, the Directors are
also entitled to be reimbursed for traveling and other expenses incurred by them
in attending meetings of the Board or any committee of Directors or in the
performance of their duties as Directors.
Nothing contained in the By-laws precludes a Director from serving the
Corporation in another capacity and receiving remuneration for acting that other
capacity.
The Directors must disclose to the Shareholders the aggregate remuneration paid
to the Directors. The disclosure must be in a written document to be placed
before the Shareholders at every annual meeting of Shareholders and must relate
to the same time period as the financial statements required to be presented at
the meeting relate to.
(13) Annual Financial Statements
The Board must place before the Shareholder at every annual meeting of
Shareholders financial statements which have been approved by the Board as
evidenced by the signature of one or more of the Directors, the report of the
auditor and any further information respecting the financial position of the
Corporation and the results of its operations that is required by the ABCA, the
Regulations, the Articles, the By-laws or any unanimous shareholder agreement.
SECTION 5
MEETINGS OF DIRECTORS
(1) Calling Meetings
The Chairperson of the Board, the Managing Director or any Director may call a
meeting of Directors. A meeting of Directors or of a committee of Directors may
be held within or outside of Alberta at the time and place indicated in the
notice referred to in subsection (2).
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(2) Notice
Notice of the time and place of a meeting of Directors or any committee of
Directors must be given to each Director or each Director who is a member of a
committee not less than 48 hours before the time fixed for that meeting. Notice
must be given in the manner prescribed in section 11. A notice of a meeting of
Directors need not specify the purpose of the business to be transacted at the
meeting except when the business to be transacted deals with a proposal to:
(a) submit to the Shareholders any question or matter requiring the
approval of the Shareholders;
(b) fill a vacancy among the Directors or in the office of auditor;
(c) issue securities;
(d) declare dividends;
(e) purchase, redeem or otherwise acquire shares issued by the Corporation;
(f) pay a commission in connection with the sale of shares of the
Corporation;
(g) approve a management proxy circular;
(h) approve any financial statements; or
(i) adopt, amend or repeal By-laws.
(3) Notice of Adjourned Meeting
Notice of an adjourned meeting of Directors is not required if a quorum is
present at the original meeting and if the time and place of the adjourned
meeting is announced at the original meeting. If a meeting is adjourned because
a quorum is not present, notice of the time and place of the adjourned meeting
must be given as for the original meeting. The adjourned meeting may proceed
with the business to have been transacted at the original meeting, even though a
quorum is not present at the adjourned meeting.
(4) Meetings Without Notice
No notice of a meeting of Directors or of a committee of Directors needs to be
given:
(a) to a newly elected Board following its election at an annual or special
meeting of Shareholders; or
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(b) for a meeting of Directors at which a Director is appointed to fill a
vacancy in the Board, if a quorum is present.
(5) Waiver of Notice
A Director may waive, in any manner, notice of a meeting of Directors or of a
committee of Directors. Attendance of a Director at a meeting of Directors or of
a committee of Directors is a waiver of notice of the meeting, except when the
Director attends the meeting for the express purpose of objecting to the
transaction of any business on the grounds that the meeting is not lawfully
called.
(6) Quorum
The Directors may fix the quorum for meetings of Directors or of a committee of
Directors, but unless so fixed, a majority of the Directors or of a committee of
Directors constitutes a quorum. No business may be transacted unless at least
half of the Directors present are resident Canadians.
(7) Regular Meetings
The Board may by resolution establish one or more day in a month for regular
meetings of the Board at a time and place to be named in the resolution. No
notice is required for a regular meeting.
(8) Chairperson of Meetings
The chairperson of any meeting of Directors is the first mentioned of the
following Officers (if appointed) who is a Director and is present at the
meeting: Chairperson of the Board, Managing Director, or President. If none of
the foregoing Officers are present, the Directors present may choose one of
their number to be chairperson of the meeting.
(9) Decision on Questions
Every resolution submitted to a meeting of Directors or of a committee of
Directors must be decided by a majority of votes cast at the meeting. In the
case of an equality of votes, the chairperson does not have a casting vote.
(10) Meeting by Telephone
If all the Directors consent, a Director may participate in a meeting of
Directors or of a committee of Directors by means of telephone or other
communication facilities that permit all persons participating in the meeting to
hear each other. A Director participating in a meeting by means of telephone or
other communication facilities is deemed to be present at the meeting.
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(11) Resolution in Lieu of Meeting
A resolution in writing signed by all the Directors entitled to vote on that
resolution at a meeting of Directors or committee of Directors is as valid as if
it had been passed at a meeting of Directors or committee of Directors. A
resolution in writing takes effect on the date it is expressed to be effective.
A resolution in writing may be singed in one or more counterparts, all of which
together constitute the same resolution. A counterpart signed by a Director and
transmitted by facsimile or other device capable of transmitting a printed
message is as valid as an originally signed counterpart.
SECTION 6
OFFICERS AND APPOINTEES OF THE BOARD
(1) Appointment of Officers
The Directors may designate the offices of the Corporation, appoint as officers
individuals of full capacity, specify their duties and delegate to the powers to
manage the business and affairs of the Corporation, except those powers referred
to in section 4 which may not be delegated to a Managing Director or to a
committee of Directors. Unless required by the By-laws, an Officer does not have
to be a Director. The same individual may hold two or more office of the
Corporation.
(2) Term of Office
An Officer holds office from the date of the Officer's appointment until a
successor is appointed or until the Officer's resignation or removal. An officer
may resign by giving written notice to the Board. all Officers are subject to
removal by the Board, with or without cause.
(3) Duties of Officers
An Officer has all the powers and authority and must perform all the duties
usually incident to, or specified in the By-laws or by the Board for, the office
held.
(4) Remuneration
The Officers are entitled to receive remuneration for their services in the
amount the Board determines. The Directors must disclose to the Shareholders the
aggregate remuneration paid to the five highest Officers. The disclosure must be
in a written document to be placed before the Shareholders at every annual
meeting of Shareholders and must relate to the same time period as the financial
statements required to be presented at the meeting relate to.
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(5) Chairperson of the Board
If appointed and present a the meeting, the Chairperson of the Board presides at
all meetings of Directors, committees of Directors and, in the absence of the
President, at all meetings of Shareholders. The Chairperson of the Board must be
a Director.
(6) Managing Director
If appointed, the Managing Director is responsible for the general supervision
of the affairs of the Corporation. During the absence or disability of the
Chairperson of the Board, or if no Chairperson of the Board has been appointed,
the Managing Director exercises the functions of that office. Subject to section
4, the Board may delegate to the Managing Director any of the powers of the
Board.
(7) President
If appointed, the President is the chief executive officer of the Corporation
responsible for the management of the business and affairs of the Corporation.
During the absence or disability of the Managing Director, or if no Managing
Director has been appointed, the President also exercises the functions of that
office. The President may not preside as chairperson at any meeting of the
Directors or of any committee of Directors unless the President is a Director.
(8) Vice-President
During the absence or disability of the President, or if no President has been
appointed, the Vice- President or, if there is more than one, the Vice-President
designated by the Board, exercises the functions of the office of the President.
(9) Secretary
If appointed, the Secretary shall call meetings of the Directors or of a
committee of Directors at the request of a Director. The Secretary shall attend
all meetings of Directors, of committees of Directors and of Shareholders and
prepare and maintain a record of the minutes of the proceedings. The Secretary
is the custodian of the corporate seal, the minute book and all records,
documents and instruments belonging to the Corporation.
(10) Treasurer
If appointed, the Treasurer is responsible for the preparation and maintenance
of proper accounting records, the deposit of money, the safe-keeping of
securities and the disbursement of funds of the Corporation. The Treasurer must
render to the Board an account of all financial transactions of the Corporation
upon request.
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(11) Agents and Attorneys
The Board has the power to appoint agents or attorneys for the Corporation in or
outside of Canada with any power the Board considers advisable.
SECTION 7
CONFLICT OF INTEREST
(1) Disclosure of Interest
A Director or Officer who:
(a) is a party to a material contract or proposed material contract with the
Corporation, or
(b) is a director or an officer of or has a material interest in any person
who is a party to a material contract or proposed material contract with
the Corporation,
must disclose in writing to the Corporation or request to have entered in the
minutes of meetings of the Directors the nature and extent of the Director's or
Officer's interest.
(2) Approval and Voting
A Director or Officer must disclose in writing to the Corporation, or request to
have entered in the minutes of meetings of Directors, the nature and extent of
the Director's or Officer's interest in a material contract or proposed material
contract if the contract is one that in the ordinary course of the Corporation's
business would not require approval by the Board or the Shareholders. The
disclosure must be made immediately after the Director or Officer becomes aware
of the contract or proposed contract. A Director who is required to disclose an
interest in a material contract or proposed material contract may not vote on
any resolution to approve the contract unless the contract is:
(a) an arrangement by way of security for money lent to or obligations
undertaken by the Director, or by a body corporate in which the Director
has an interest, for the benefit of the Corporation or an affiliate;
(b) a contract relating primarily to the Director's remuneration as a
Director or Officer, employee or agent of the Corporation or as a
director, officer, employee or agent of an affiliate;
(c) a contract for indemnity or insurance under the ABCA; or
(d) a contract with an affiliate.
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(3) Effect of Conflict of Interest
If a material contract is made between the Corporation and a Director or
Officer, or between the Corporation and another person of which a Director or
Officer is a director or officer or in which the Director or Officer has a
material interest:
(a) the contract is neither void nor voidable by reason only of that
relationship, or by reason only that a Director with an interest in the
contract is present at or is counted to determine the presence of a
quorum at a meeting of Directors or committee of Directors that
authorized the contract; and
(b) a Director or Officer or former Director or Officer to whom a profit
accrues as a result of the making of the contract is not liable to
account to the Corporation for that profit by reason only of holding
office as a Director or Officer,
if the Director or Officer disclosed the Director's or Officer's interest in the
contract in the manner prescribed by the ABCA and the contract was approved by
the Board or the Shareholders and was reasonable and fair to the Corporation at
the time it was approved.
SECTION 8
LIABILITY AND INDEMNIFICATION
(1) Limitation of Liability
Every Director and Officer in exercising the powers and discharging the duties
of office must act honestly and in good faith with a view to the best interests
of the Corporation and must exercise the care, diligence and skill that a
reasonably prudent person would exercise in comparable circumstances. No
Director or Office is liable for:
(a) the acts, omissions or defaults of any other Director or Officer or an
employee of the Corporation;
(b) any loss, damage or expense incurred by the Corporation through the
insufficiency or deficiency of title to any property acquired for or on
behalf of the Corporation;
(c) the insufficiency or deficiency of any security in or upon which any of
the money of the Corporation is invested;
(d) any loss or damage arising from the bankruptcy, insolvency or tortious
or criminal acts of any person with whom any of the Corporation's money
is, or securities or other property are, deposited;
(e) any loss occasioned by any error of judgment or oversight; or
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(f) any other loss, damage or misfortune which occurs in the execution of
the duties of office or in relation to it,
unless occasioned by the wilful neglect or default of that Director or Officer.
Nothing in this By-law relieves any Director or Officer of any liability imposed
by the ABCA or otherwise by law.
(2) Indemnity
The Corporation shall indemnify a Director or Officer, a former Director or
Officer and a person who acts or acted at the Corporation's request as a
director or officer of a body corporate of which the Corporation is or was a
shareholder or creditor (the "Indemnified Parties") and the heirs and legal
representatives of each of them, against all costs, charges and expenses, which
includes, without limiting the generality of the foregoing, the fees, charges
and disbursements of legal counsel on an as-between-a-solicitor-and-the
solicitor's-own-client basis and an amount paid to settle an action or satisfy a
judgment, reasonably incurred by an Indemnified Party, or the heirs or legal
representatives of an Indemnified Party, or both, in respect of any action or
proceeding to which any of them is made a party by reason of an Indemnified
Party being or having been a Director or Officer or a director or officer of
that body corporate, if:
(a) the Indemnified Party acted honestly and in good faith with a view to
the best interest of the Corporation; and
(b) in the case of a criminal or administrative action or proceeding that
is enforced by a monetary penalty, the Indemnified Party had reasonable
grounds for believing that the Indemnified Party's conduct was lawful.
The Corporation shall indemnify an Indemnified Party and the heirs and legal
representatives of an Indemnified Party in any other circumstances that the ABCA
permits or requires. Nothing in this By-law limits the right of a person
entitled to indemnity to claim indemnity apart from the provisions of this
By-law.
(3) Insurance
The Corporation may purchase and maintain insurance for the benefit of a person
referred to in subsection (2) against the liabilities and in the amounts the
ABCA permits and the Board approves.
SECTION 9
SECURITIES
(1) Shares
Shares of the Corporation may be issued at the times, to the persons and for the
consideration the Board determines. No share may be issued until the
consideration for the share is fully paid in
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money or in property or past service that is not less in value than the fair
equivalent of the money that the Corporation would have received if the share
had been issued for money.
(2) Options and Other Rights to Acquire Securities
The Corporation may issue certificates, warrants or other evidence of conversion
privileges, options or rights to acquire securities of the Corporation. The
conditions attached to the conversion privileges, options and rights must be set
out in the certificates, warrants or other evidences or in certificates
evidencing the securities to which the conversion privileges, options or rights
are attached.
(3) Commissions
The Board may authorize the Corporation to pay a reasonable commission to any
person in consideration of that person purchasing or agreeing to purchase shares
of the Corporation from the Corporation or from any other person, or procuring
or agreeing to procure purchasers for shares of the Corporation.
(4) Securities Register
The Corporation shall maintain at its records office a securities register in
which it records the securities issued by it in registered form, showing with
respect to each class or series of securities:
(a) the names, alphabetically arranged and the latest known address of each
person who is or has been a security holder;
(b) the number of securities held by each security holder; and
(c) the date and particulars of the issue and transfer of each security.
The Corporation shall keep information relating to a security holder that is
entered in the securities register for at least seven years after the security
holder ceases to be a security holder.
(5) Transfer Agents and Registrars
The Corporation may appoint one or more trust corporations as its agent to
maintain a central securities register and one or more agents to maintain a
branch securities register. An agent may be designated as a transfer agent or a
branch transfer agent, and a registrar, according to the agent's function. An
agent's appointment may be terminated at any time. The Board may provide for the
registration or transfer of securities by a transfer agent, branch transfer
agent or registrar.
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(6) Dealings with Registered Holders
The Corporation may treat the registered owner of a security as the person
exclusively entitled to vote, to receive notices, to receive any interest,
dividend or other payments in respect of the security, and otherwise to exercise
all the rights and powers of an owner of the security.
(7) Transfers of Securities
Securities of the Corporation may be transferred in the form of a transfer
endorsement on the security certificates issued in respect of the securities of
the Corporation, or in any form of transfer endorsement which may be approved by
resolution of the Board.
(8) Registration of Transfers
If a security in registered form is presented for registration of transfer, the
Corporation must register the transfer if:
(a) the security is endorsed by the person specified by the security or by
special endorsement to be entitled to the security or by the person's
successor, fiduciary, survivor, attorney or authorized agent, as the
case may be;
(b) reasonable assurance is given that the endorsement is genuine and
effective;
(c) the Corporation has no duty in inquire into adverse claims, or has
discharged its duty to do so;
(d) any applicable law relating to the collection of taxes has been
complied with;
(e) the transfer is rightful or is to a bonafide purchaser; and
(f) the fee prescribed by the Board for a security certificate issued in
respect of a transfer has been paid.
(9) Lien
If the Articles provide that the Corporation has a lien on a share registered in
the name of a Shareholder or the Shareholder's legal representative for a debt
of the Shareholder to the Corporation, and the Shareholder is indebted to the
Corporation, the Corporation may refuse to register any transfer of the holder's
shares pending enforcement of the lien.
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(10) Security Certificates
Security certificates and acknowledgments of a security holder's right to obtain
a security certificate must be in a form the Board approves by resolution. A
security certificate must be signed by at least one Director or Officer. Unless
the Board otherwise determines, security certificates representing securities in
respect of which a transfer agent or registrar has been appointed are not valid
unless countersigned by or on behalf of the transfer agent or registrar. Any
signature may be printed or otherwise mechanically reproduced on a security
certificate. If a security certificate contains a printed or mechanically
reproduced signature of a person, the Corporation may issue the security
certificate, notwithstanding that the person has ceased to be a Director or
Officer, and the security certificate is as valid as if the person were a
Director or Officer at the date of issue.
(11) Entitlement to a Security Certificate
A security holder is entitled at the holder's option to a security certificate
or to a non-transferable written acknowledgment of the holder's right to obtain
a security certificate from the Corporation in respect of the securities of the
Corporation held by that holder.
(12) Securities Held Jointly
The Corporation is not required to issue more than one security certificate in
respect of securities held jointly by several persons. Delivery of a certificate
to one of the joint holders is sufficient delivery to all of them. Any one of
the joint holders may give effectual receipts for the certificate issued in
respect of the securities or for any dividend, bonus, return of capital or other
money payable or warrant issuable in respect of the security.
(13) Replacement of Security Certificates
The Board or an Officer or agent designated by the Board may in its or the
Officer's or agent's discretion direct the issue of a new security certificate
in place of a certificate that has been lost, destroyed or wrongfully taken. A
new security certificate may be issued only on payment of a reasonable fee and
on any terms as to indemnify, reimbursement of expenses and evidence of loss of
title as the Board may prescribe.
(14) Fractional Shares
The Corporation may issue a certificate for a fractional share or may issue in
its place scrip certificates in a form that entitles the holder to receive a
certificate for a full share by exchanging scrip certificates aggregating a full
share. The Directors may attach conditions to any scrip certificates issued by
the Corporation, including conditions that:
(a) the scrip certificates become void if they are not exchanged for a
share certificate representing a full share before a specified date;
and
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(b) any shares for which those scrip certificates are exchangeable may,
notwithstanding any pre- emptive right, be issued by the Corporation to
any person and the proceeds of those shares distributed rateably to the
holders of the scrip certificates.
SECTION 10
MEETINGS OF SHAREHOLDERS
(1) Annual Meeting of Shareholders
The Board must call an annual meeting of Shareholders to be held to later than
18 months after the date of incorporation and subsequently, not later than 15
months after holding the last preceding annual meeting. A annual meeting is to
be held for the purposes of considering the financial statements and auditor's
report, fixing the number of Directors for the following year, electing
Directors, appointing an auditor and transacting any other business that may
properly be brought before the meeting.
(2) Special Meetings of Shareholders
The Board may at any time call a special meeting of Shareholders.
(3) Special Business
All business transacted at a special meeting of Shareholders and all business
transacted at an annual meeting of Shareholders, except consideration of the
financial statements and auditor's report, fixing the number of Directors for
the following year, election of Directors and reappointment of the incumbent
auditor, is deemed to be special business.
(4) Place and Time of Meetings
Meetings of Shareholders may be held at the place within Alberta and at the time
the Board determines. A meeting of Shareholders may be held outside Alberta if
all the Shareholders entitled to vote at that meeting agree to holding the
meeting outside Alberta. A Shareholder who attends a meeting of Shareholders
held outside Alberta is deemed to have agreed to holding the meeting outside
Alberta, except when the Shareholder attends the meeting for the express purpose
of objecting to the transaction of any business on the grounds that the meeting
is not lawfully held.
(5) Notice of Meetings
Notice of the time and place of a meeting of Shareholders must be sent not less
than 21 days and not more than 50 days before the meeting to:
(a) each Shareholder entitled to vote at the meeting;
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(b) each Director; and
(c) the auditor of the Corporation.
Notice of a meeting of Shareholders called for the purpose of transacting any
business other than consideration of the financial statements and auditor's
report, fixing the number of Directors for the following year, election of
Directors and reappointment of the incumber auditor must state the nature of the
business to be transacted in sufficient detail to permit a Shareholder to form a
reasoned judgment on that business and must state the text of any special
resolution to be submitted to the meeting.
(6) Notice of Adjourned Meetings
With the consent of the Shareholders present at a meeting of Shareholders, the
chairperson may adjourn that meeting to another fixed time and place. If a
meeting of Shareholders is adjourned by one or more adjournments for an
aggregate of less than 30 days, it is not necessary to give notice of the
adjourned meeting, other than by verbal announcement at the time of the
adjournment. If a meeting of Shareholders is adjourned by one or more
adjournments for an aggregate of 30 days or more, notice of the adjourned
meeting must be given as for the original meeting. The adjourned meeting may
proceed with the business to have been transacted at the original meeting, even
though a quorum is not present at the adjourned meeting.
(7) Waiver of Notice
A Shareholder and any other person entitled to attend a meeting of Shareholders
may waive in any manner notice of a meeting of Shareholders. Attendance of a
Shareholder or other person at a meeting of Shareholders is a waiver of notice
of the meeting, except when the Shareholder or other person attends the meeting
for the express purpose of objecting to the transaction of any business on the
grounds that the meeting is not lawfully called.
(8) Shareholder List
If the Corporation has more than 15 Shareholders entitled to vote at a meeting
of Shareholders, the Corporation must prepare a list of Shareholders entitled to
receive notice of the meeting, arranged in alphabetical order and showing the
number of shares held by each Shareholder,
(a) if a Record Date is fixed, not later than 10 days after that date; or
(b) if no Record Date is fixed,
i) at the close of business on the last business day preceding the day
on which the notice is given, or
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ii) if no notice is given, on the day on which the meeting is held.
A Shareholder may examine the list of Shareholders:
(c) during usual business hours at the Corporation's records office or at
the place where its central securities register is maintained; and
(d) at the meeting of Shareholders for which the list was prepared.
(9) Persons Entitled to Vote
A person named in a list of Shareholders is entitled to vote the shares shown
opposite the person's name at the meeting to which the list relates, except to
the extent that:
(a) i) if a Record Date is fixed, the person transfers ownership of any
of the person's shares after the Record Date, or
ii) if no Record Date is fixed, the person transfers ownership of any
of the person's shares after the date on which the list of Shareholders
is prepared; and
(b) provided that the transferee of those shares
i) produces properly endorsed share certificates, or
ii) otherwise establishes ownership of the shares,
and demands, not later than 10 days before the meeting, that the
transferee's name be included in the list before the meeting,
then the transferee is entitled to vote the shares.
(10) Chairperson of Meetings
The chairperson of any meeting of Shareholders is the first mentioned of the
following Officers (if appointed) who is present at the meeting: President,
Chairperson of the Board or Managing Director. If none of the foregoing Officers
are present, the Shareholders present and entitled to vote at the meeting may
choose a chairperson from among those individuals present.
(11) Scrutineer
If desired, one or more scrutineers, who need not be Shareholders, may be
appointed by resolution or by the chairperson of the meeting with the consent of
the meeting.
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(12) Procedure at Meetings
The chairperson of any meeting of Shareholders shall conduct the proceedings at
the meeting in all respects. The chairperson's decision on any matter or thing
relating to procedure, including, without limiting the generality of the
foregoing, any question regarding the validity of any instrument of proxy or
other evidence of authority to vote, is conclusive and binding upon the
Shareholders.
(13) Persons Entitled to be Present
The only persons entitled to be present at a meeting of Shareholders are:
(a) the Shareholders entitled to vote at the meeting;
(b) the Directors;
(c) the auditor of the Corporation; and
(d) any others who, although not entitled to vote, are entitled or required
under any provision of the ABCA, any unanimous shareholder agreement,
the Articles or the By-laws to be present at the meeting.
Any other person may be admitted only on the invitation of the chairperson of
the meeting or with the consent of the meeting.
(14) Quorum
A quorum of Shareholders is present at a meeting of Shareholders if a holder or
holders of not less than 5% of the shares entitled to vote at a meeting of
shareholders are present in person or by proxy. If any share entitled to be
voted at a meeting of Shareholders is held by two or more persons jointly, the
persons or those of them who attend the meeting of Shareholders constitute only
one Shareholder for the purpose of determining whether a quorum of Shareholders
is present.
(15) Loss of Quorum
If a quorum is present at the opening of a meeting of Shareholders, the
Shareholders present or represented by proxy may proceed with the business of
the meeting, even if a quorum is not present throughout the meeting. If a quorum
is not present at the opening of a meeting of Shareholders, the Shareholders
present or represented by proxy may adjourn the meeting to a fixed time and
place but may not transact any other business.
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(16) Proxy Holders and Representatives
A Shareholder entitled to vote at a meeting of Shareholders may by means of a
proxy appoint a proxy holder and one or more alternate proxy holders, who are
not required to be Shareholders, to attend and act at the meeting in the manner
and to the extent authorized by the proxy and with the authority conferred by
the proxy. A proxy must be executed by the Shareholder or by the Shareholder's
attorney authorized in writing and be in the form prescribed by the Regulations.
A proxy is valid only at the meeting in respect of which it is given or any
adjournment of that meeting.
A Shareholder that is a body corporate or association may, by resolution of its
directors or governing body, authorize an individual to represent it in person
at a meeting of Shareholders. That individual's authority may be established by
depositing with the Corporation prior to the commencement of the meeting a
certified copy of the resolution passed by the Shareholder's directors or
governing body or other evidence of the individual's authority to vote. A
resolution or other evidence of authority to vote is valid only at the meeting
in respect of which it is given or any adjournment of that meeting.
(17) Time for Deposit of Proxies
The Board may specify in a notice calling a meeting of Shareholders a time not
exceeding 48 hours, excluding Saturdays and holidays, preceding the meeting or
an adjournment of the meeting before which proxies to be used at the meeting
must be deposited with the Corporation or its agent. If no time for the deposit
of proxies has been specified in a notice calling a meeting of Shareholders, a
proxy to be used at the meeting must be deposited with the Secretary of the
Corporation or the chairperson of the meeting prior to the commencement of the
meeting.
(18) Revocation of Proxies
A Shareholder may revoke a proxy:
(a) by depositing an instrument in writing executed by the Shareholder or
by the Shareholder's attorney authorized in writing:
i) at the registered office of the Corporation at any time up to and
including the last business day preceding the day of the meeting, or an
adjournment of that meeting, at which the proxy is to be used, or
ii) with the chairperson of the meeting on the day of the meeting or an
adjournment of the meeting; or
(b) in any other manner permitted by law.
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(19) Joint Shareholders
If two or more persons hold shares jointly, one of those holders present at a
meeting of Shareholders may, in the absence of the others, vote the shares. If
two or more of those persons are present in person or by proxy, they must vote
as one on the shares jointly held by them.
(20) Decision on Questions
At every meeting of Shareholders, all questions proposed for the consideration
of Shareholders must be decided by the majority of votes, unless otherwise
required by the ABCA or the Articles. In the case of an equality of votes, the
chairperson of the meeting does not, either on a show of hands or verbal poll or
on a ballot, have a casting vote in addition to the vote or votes to which the
chairperson may be entitled as a Shareholder or proxy holder.
(21) Voting by Show of Hands
Subject to subsection (22), voting at a meeting of Shareholders shall be by a
show of hands of those present in person or represented by proxy or by a verbal
poll of those present by telephone or other communication facilities. When a
vote by show of hands has been taken upon a question, a declaration by the
chairperson of the meeting that the vote has been carried, carried by particular
majority or not carried, an entry to that effect in the minutes of the meeting
is conclusive evidence of the fact without proof of the number of votes recorded
in favour of or against any resolution or other proceeding in respect of the
question.
(22) Voting by Ballot
If a ballot is required by the chairperson of the meeting or is demanded by a
Shareholder or proxy holder entitled to vote at the meeting, either before or on
the declaration of the result of a vote by a show of hands or verbal poll,
voting must be by ballot. A demand for a ballot may be withdrawn at any time
before the ballot is taken. If a ballot is taken on a question, a prior vote on
that question by show of hands or verbal poll has no effect.
(23) Number of Votes
At every meeting a Shareholder present in person or represented by proxy or
present by telephone or other communication facilities and entitled to vote has
one vote for each share held.
(24) Meeting by Telephone
Any person described in subsection (13) may participate in a meeting of
Shareholders by means of telephone or other communication facilities that permit
all persons participating in the meeting to hear each other. A Shareholder
participating in a meeting by means of telephone or other communication
facilities is deemed to be present at the meeting.
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(25) Resolution in Lieu of Meeting
A resolution in writing signed by all the Shareholders entitled to vote on that
resolution at a meeting of Shareholders is as valid as if it had been passed at
a meeting of Shareholders. A resolution in writing takes effect on the date it
is expressed to be effective.
A resolution in writing may be signed by one or more counterparts, all of which
together constitute the same resolution. A counterpart signed by a Shareholder
and transmitted by facsimile or other device capable of transmitting a printed
message is a valid as an originally signed counterpart.
SECTION 11
NOTICES
(1) Method of Notice
A notice or document required to be sent to a Shareholder, Director, Officer or
auditor of the Corporation may be given by personal delivery, prepaid
transmitted or recorded communication or prepaid mail addressed to the recipient
at the recipient's Recorded Address. A notice or document sent by personal
delivery is deemed to be given when it is actually delivered. A notice or
document sent by means of prepaid transmitted or recorded communication is
deemed to be given when dispatched or delivered to the appropriate communication
company or agency or its representative for dispatch. A notice or document sent
by mail is deemed to be given when deposited at a post office or in a public
letter box.
(2) Notice to Joint Shareholders
If two or more persons are registered as joint holders of any share, a notice or
document may be sent or delivered to all of them, but notice given to any one
joint Shareholder is sufficient notice to the others.
(3) Notice to Successors
Every person who, by operation of law, transfer, death of a Shareholder or any
other means becomes entitled to any share, is bound by every notice in respect
of the share which is sent or delivered to the Shareholder prior to the person's
name and address being entered in the Corporation's securities register and
prior to the person furnishing proof of authority or evidence of entitlement as
prescribed by the ABCA. This subsection applies whether the notice was given
before or after the event which resulted in the person becoming entitled to the
share.
(4) Non-Receipt of Notices
If a notice or document is sent to a Shareholder, Director, Officer or auditor
of the Corporation in accordance with subsection (1) and the notice or document
is returned on three consecutive
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occasions, the Corporation is not required to give any further notice or
documents to the person until that person informs the Corporation in writing of
the person's new address.
(5) Failure to Give Notice
The accidental failure to give a notice to a Shareholder, Director, Officer or
auditor of the Corporation, the non-receipt of a notice by the intended
recipient or any error in a notice not affecting its substance does not
invalidate any action taken at the meeting to which the notice relates.
(6) Execution of Notices
Unless otherwise provided, the signature of any person designated by resolution
of the Board to sign a notice or document on behalf of the Corporation may be
written, stamped, typewritten or printed.
MADE by the Directors as evidenced by the signature of the following
Directors effective August 23, 1996.
/s/ James Robert Yeates
James Robert Yeates - President
CONFIRMED by the Shareholders as evidenced by the signature of the
following Shareholder effective August 23, 1996.
TMH Capital Corp. per /s/ Terry M. Holland
- ---------------------------------- ----------------------------------
Printed Name of Shareholder Signature of Shareholder
83
EXHIBIT 10.1
INVESTOR RELATIONS AGREEMENT
THIS AGREEMENT dated for reference the 6th day of March, 2000.
BETWEEN:
AYOTTE MUSIC INC., a company amalgamated under the laws of
the Province of Alberta, having its principal office at 2060 Pine
Street, Vancouver, B.C., V6J 4P8
(hereinafter referred to as the "Company")
OF THE FIRST PART
AND:
MARKET STRATEGIES (USA)., a company incorporated under the
laws of the State of New York, having an office address of 1472
Sandra Avenue, Endicott, NY 13760
(hereinafter referred to as "Market Strategies")
OF THE SECOND PART
WHEREAS:
A. The Company is engaged in the business of Internet commerce and the
manufacturing and distribution of drums and drum products (the "Business").
B The Company is an "exchange issuer" under the securities laws of the
Province of British Columbia and the common shares of the Company are
listed and posted for trading on the Canadian Venture Exchange (the "CDNX")
under the trading symbol AYO and
C. Market Strategies is engaged in the business of providing marketing,
promotional and investor relation services to listed companies and has
agreed to provide such services to the Company on the terms and conditions
set forth herein.
D. The Company has nominated Don Mazankowski to be its representative and
contact person in dealings with Market Strategies, and Market Strategies
has nominated Duncan McKay to be its representative and contact person in
dealings with the Company.
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2
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the premises
and of the mutual covenants and agreements herein set forth, the parties
covenant and agree as follows:
1. INTERPRETATION
This Agreement and all matters arising hereunder will be governed by, construed
and enforced in accordance with the laws of the Province of British Columbia and
all disputes arising under this Agreement will be referred to the Courts of the
Province of British Columbia.
2. ENGAGEMENT
The Company hereby engages Market Strategies to provide investor relations and
marketing services to the Company including, but not limited to, the following:
a) contacting persons registered to trade in securities pursuant to the
provisions of the Securities Act or of the securities legislation of the
jurisdiction where such persons reside and informing them of the
particulars of the development of the Company's projects and business, and
the potential of the Company's shares as an investment;
b) assisting the Company's Board of Directors in coordinating any advertising
and other public relations program being implemented by the Company;
c) acting in a liaison capacity between the directors and senior officers of
the Company, the persons referred to in Section 2(a) and the shareholders
of the Company;
d) assisting in identifying and reviewing possible acquisitions, joint
ventures or partnership opportunities for the development of the Company's
business;
e) circulating to the persons referred to in Section 2(a) such as the
quarterly reports and other material financial or information documentation
as may be reasonably requested by such persons;
f) using its expertise, contacts and resources to generally increase the value
of the Company through expansion into new business opportunities; and
g) such other services as may be agreed upon by the Company's Board of
Directors and Market Strategies, including assistance in arranging desired
equity financing from time to time.
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3
TERM
a) Subject to prior termination in accordance with Section 9, this Agreement
will be effective January 21, 2000 and will remain in full force and effect
for a one year period up to and including the close of business on January
21, 2001; and
b) If the Company wishes to engage Market Strategies after the term of this
Agreement has expired, all work performed will be completed on a month to
month basis.
3. REMUNERATION
In consideration of Market Strategies having rendered services to the Company,
the Company will pay to Market Strategies a fee to be satisfied on the Company
issuing 500,000 common shares upon the execution of this Agreement. All shares
issued to Market Strategies will be subject to such hold periods as may be
imposed by applicable securities laws or the policies of the CDNX, and the
issuance of such shares will in all circumstances be subject to the prior
approval of the CDNX, which the Company agrees to diligently seek to obtain, but
which the Company does not represent or warrant will be granted in a timely
manner or at all.
4. EXPENSES
a) The Company will pay Market Strategies reasonable expenses and
disbursements in connection with the performance of Market Strategies
duties hereunder, only upon prior approval the Company.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby presents and warrants to Market Strategies that:
a) The Company is a duly amalgamated company pursuant to the provisions of the
Business Corporations Act (Alberta) and is in good standing in the office
of the Corporations branch in the Province of Alberta with respect to the
filing of annual returns.
b) The common shares in the capital of the Company are listed and posted for
trading on the CDNX.
c) The Company is not in default of any of the terms and conditions of the
listing agreement made between the Company and the CDNX and, to the best of
the Company's knowledge, information and belief, the Company has complied
with all of the rules and policies of the CDNX.
d) The Company is an "exchange issuer" under the securities laws of the
Provinces of Alberta and British Columbia.
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4
e) To the best of the Company's knowledge, information and belief, the Company
has complied with the continuous disclosure requirements of the securities
laws of the Provinces of Alberta and British Columbia.
f) The execution and delivery of this Agreement has been duly authorized by
all required corporate action on behalf of the Company.
6. REPRESENTATIONS AND WARRANTIES OF MARKET STRATEGIES
Market Strategies hereby represents and warrants to the Company that:
a) Market Strategies is duly incorporated pursuant to the laws of the State of
New York;
b) the execution and delivery of this Agreement has been duly authorized by
all required corporate action on behalf of Market Strategies; and
c) Market Strategies is not registered in accordance with the securities laws
of British Columbia or Alberta to trade in securities nor to act as an
advisor to such actions.
7. COVENANTS OF THE COMPANY
The Company hereby covenants and agrees with Market Strategies that:
a) during the term of this Agreement, the Company will promptly advise Market
Strategies of:
(i) any material change in the business or affairs of the Company;
(ii) any cease trade order or trading halt made or imposed upon the
Company, any of the directors, senior officers or insiders of
the Company by any commission, exchange, governmental or
self-regulatory body having jurisdiction over the Company and
its affairs.
b) the Company will advise its directors, senior officers and senior employees
not to disclose to Market Strategies any confidential information
pertaining to the Company's business and affairs until the Company has
complied with any applicable continuous disclosure requirements in force.
8. COVENANTS OF MARKET STRATEGIES
Market Strategies covenants and agrees with the Company that:
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5
a) in performing their duties hereunder, they will comply with all applicable
securities legislation and regulations;
b) no use may be made of confidential Information relating to the Company's
business and affairs until the Company has complied with the continuous
disclosure requirements applicable to them;
c) Market Strategies will not disclose the private affairs of the Company or
any secrets of the Company to any persons other than the Board of Directors
of the Company or as may be required by the laws of Canada or any province
therein;
d) Market Strategies will act in the best interests of the Company and will
not make any misrepresentations whatsoever with respect to the Company's
business and affairs; and
e) Market Strategies will provide any documentation that it intends to forward
to potential or existing shareholders to the Company for its review and
approval prior to distribution.
9. TERMINATION OF AGREEMENT
a) This Agreement will terminate on the earlier of January 21, 2001 or upon a
date which is thirty (30) days after either the Company or Market
Strategies give written notice to the other party that no termination of
this Agreement shall operate to relieve either party of any obligation on
the part of that party which arose before the date of notice of
termination.
10. RETURN OF MATERIALS
Upon the expiration of the term of this Agreement or earlier termination of this
Agreement in accordance with Section 10 hereof, Market Strategies will return to
the Company all materials in their possession which have been delivered to them
by the Company.
11. GENERAL
a) Time of Essence
Time is hereby expressly made of the essence of this Agreement with respect to
the performance by the parties of their respective obligations under this
Agreement.
b) Enurement
This Agreement will enure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, personal
representatives, successors and assigns.
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6
c) Entire Agreement
This Agreement constitutes the entire agreement between the parties and
supersedes all previous expectations, understandings, communications,
representations and agreements, whether verbal or written between the parties
with respect to the subject matter hereof.
d) Further Assurances
Each of the parties hereto hereby covenants and agrees to execute such further
and other documents and instruments and do such further and other things as may
be necessary to implement and carry out the intent of this Agreement.
e) Notices
All notices, requests, demands and other communications hereunder will be in
writing and will be deemed to have been duly given if delivered by hand or
mailed, postage prepaid, addressed to the parties at their addresses first set
forth above or to such other address as may be given in writing by the Company
or the Consultant and will be deemed to have been received, if delivered on the
date of delivery and if mailed as aforesaid within Canada, then on the fifth
business day following the posting thereof provided that if there will be,
between the time of mailing, and the actual receipt of the notice a mail strike,
slowdown or other labour dispute which might affect the delivery of the notice
by the mails, then the notice will only be effective if actually delivered.
f) Severability of Clauses
In the event that any provisions of this Agreement or any part thereof is
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions will not in any way be affected or impaired thereby.
g) Assignment
This Agreement will not be assignable by either of the parties hereto.
h) Execution by Facsimile and in Counterpart
This Agreement may be executed by facsimile and in counterpart, and of which
such facsimile copies and counterparts, notwithstanding the date or dates upon
which this Agreement is executed and delivered by any of the parties, shall
collectively be deemed to be an original and will constitute one and the same
agreement, effective as of the reference date given above.
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7
IN WITNESS WHEREOF, the parties hereto have hereunder executed this Agreement as
of the day and year first above written.
AYOTTE MUSIC INC.
/s/ Louis Eisman
- -----------------------------
Authorized Signatory
MARKET STRATEGIES (USA)
/s/ Duncan McKay
- -----------------------------
Authorized Signatory
90
<TABLE>
<CAPTION>
EXHIBIT 99.1
COMPANY AYOTTE MUSIC INC. CERTIFICATE RECEIVED
---------------------------------------------------------------
<S> <C> <C> <C>
NUMBER OF SHARES REGISTERED HOLDER TRANSFER (OR ALLOTMENT) FROM DATE 20
------------------------ ------------------- ----
CERTIFICATE NUMBER COMMON (1) Allotment from Treasury
----------------------
CLASS NPV
-----------------------------------
PAR VALUE
-------------------------------
DATE OF ISSUE
---------------------------
<CAPTION>
INCORPORATED IN THE PROVINCE OF BRITISH COLUMBIA
<S> <C> <C> <C> <C>
CERTIFICATE NUMBER CLASS PAR VALUE DATE OF ISSUE NUMBER OF SHARES
</TABLE>
TRANSFER OF THESE SHARES IS RESTRICTED
AYOTTE MUSIC INC.
THIS CERTIFIES THAT
is the registered holder of the number and class of shares
described hereon, such shares being fully paid up and
non-assessable in the Capital of the Company, and subject to
the Memorandum and Articles of the Company, transferable on
the books of the Company by the registered holder in person,
or by Attorney duly authorized in writing, upon surrender of
this Certificate properly endorsed.
IN WITNESS WHEREOF the Company has
caused this Certificate to be signed
by its duly authorize officers (s),
and, where required, to be sealed
with its common seal, on the date of
issue.
AYOTTE MUSIC INC.
------------------------------------
------------------------------------
Director (Title)
91
