SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 20-F
/X/ REGISTRATION STATEMENT
PURSUANT TO SECTION 12 (b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
_____________________________________
Commission File No. ____________
DIGITAL ROOSTER.COM INC.
(exact name of registrant as specified in its charter)
An Ontario, Canada corporation
(jurisdiction of incorporation)
366 Bay Street, 12th Floor, Toronto, Ontario M5H 4B2
(address of principal executive offices)
Telephone: (416) 815-1771; Fax: (416) 815-1259
With copies to:
Robert D. Axelrod
5300 Memorial Drive, Suite 700 Houston, Texas 77007-8217
Telephone: (713) 861-1996; Fax: (713) 552-0202
______________________________________
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act: Common Shares,
no par value
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
The number of shares outstanding of the Registrant's Common Shares as of March
31, 2001 was 32,830,866 shares.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 12 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 No /X/
Indicate by check mark which financial statement item the registrant has elected
to follow:
Item 17 Item 18 /X/
DIGITAL ROOSTER.COM INC.
FORM 20-F REGISTRATION STATEMENT
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT
AND ADVISORS 1
1A. DIRECTORS AND SENIOR MANAGEMENT 1
1B. ADVISERS 2
1C. AUDITORS 2
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 2
ITEM 3. KEY INFORMATION ABOUT THE COMPANY'S
FINANCIAL CONDITION, CAPITALIZATION
AND RISK FACTORS
3A. SELECTED FINANCIAL DATA 2
3B. CAPITALIZATION AND INDEBTEDNESS 5
3C. REASONS FOR THE OFFER AND USE OF PROCEEDS 5
3D. RISK FACTORS 6
ITEM 4. INFORMATION ABOUT THE CORPORATION
OVERVIEW 10
HISTORY 10
THE WEB-BASED ADULT ENTERTAINMENT INDUSTRY 11
OUR BUSINESS STRATEGY 11
COMPETITION 13
PLAN OF OPERATION 14
PROPERTY AND ASSETS 15
INFORMATION TECHNOLOGY AND ONLINE SYSTEMS OPERATIONS 15
REGULATORY MATTERS 16
INTELLECTUAL PROPERTY 17
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
5A. OPERATING RESULTS 18
5B. LIQUIDITY AND CAPITAL RESOURCES 19
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6A AND 6C. DIRECTORS AND SENIOR MANAGEMENT AND BOARD PRACTICES 21
6B. COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT 23
6E. SHARE OWNERSHIP OF DIRECTORS AND SENIOR MANAGEMENT 24
6D. EMPLOYEES 25
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7A. MAJOR SHAREHOLDERS 25
7B. RELATED PARTY TRANSACTIONS 26
ITEM 8. FINANCIAL INFORMATION
8A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION 27
8B. SIGNIFICANT CHANGES 28
ITEM 9. THE LISTING
COMMON SHARES 28
TRANSFER AGENT 28
TRADING MARKET 28
ITEM 10. ADDITIONAL INFORMATION
10A. SHARE CAPITAL 29
10B. MEMORANDUM AND ARTICLES OF ASSOCIATION 31
10C. MATERIAL CONTRACTS 34
10D. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS 34
10E. TAXATION 35
10H. INSPECTION OF DOCUMENTS 39
ITEM 11: QUANTITATIVE AND QUALITATIVE ASSESSMENT OF MARKET RISK 39
PART III
ITEM 17. FINANCIAL STATEMENTS 39
ITEM 18. FINANCIAL STATEMENTS 39
ITEM 19. EXHIBITS 39
SIGNATURE PAGE 40
IN THIS REGISTRATION STATEMENT REFERENCES TO DIGITAL ROOSTER.COM INC. INCLUDE
REFERENCES TO OUR WHOLLY OWNED SUBSIDIARY WEB DREAM INC. ALL DOLLAR AMOUNTS IN
THIS REGISTRATION ARE EXPRESSED IN UNITED STATES DOLLARS, EXCEPT WHERE WE STATE
OTHERWISE.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
1A. DIRECTORS AND SENIOR MANAGEMENT
NAME POSITION FUNCTION
John Alexander van Arem President, CEO and Overall management of the
366 Bay Street, 12th Floor Director of the Corporation Corporation and its subsidiaries
Toronto, Ontario President and Director of
Canada M5H 4B2 Web Dream Inc.
Brian Usher-Jones(1) Director of the Corporation(2) Member of the Corporate
81 Glengowan Rd. Governance Committee
Toronto, Ontario
Canada M4N 1G5
Hubert Mockler(1) Director of the Corporation(2) Member of the Corporate
216 Degrassi Street, Governance Committee
Toronto Ontario
Canada M4M 2K7
Toronto, Canada
Sean Husvar(1) Director of the Corporation(2) Member of the Corporate
6000 N. Bailey Avenue Governance Committee
Amherst, New York 14226,
United States
Anthony Korculanic Operations Manager Public and investor relations, office
366 Bay Street, 12th Floor management and human resources
Toronto, Ontario
Canada M5H 4B2
(1) Our Corporate Governance Committee performs an independent supervisory
role over the management of the Corporation in accordance with its statutory
obligations and the role of an audit committee. We have no other committees of
the board of directors. See Item 6 "Directors and Senior Management".
(2) See "Item 6 Directors, Senior Management and Employees - Directors and
Senior Management" for a description of our Director's experience and other
business activities.
1
1B. ADVISERS
Our United States legal counsel is Axelrod, Smith & Kirshbaum, 5300
Memorial Drive, Suite 700, Houston, Texas, 77007-8217.
1C. AUDITORS
Our auditors for the purposes of this registration statement are Mintz &
Partners LLP, located at 100-1446 Don Mills Road, North York, Ontario Canada.
Mintz & Partners LLP are members of the Canadian Institute of Chartered
Accountants ("CICA"). The letter of our auditors consenting to the inclusion of
the financial statements in this registration statement is attached as Exhibit
1.2.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION ABOUT THE COMPANY'S FINANCIAL CONDITION,
CAPITALIZATION AND RISK FACTORS
In January 2000 we acquired all of the issued and outstanding common shares
of Web Dream Inc. We originally carried on the business of mineral exploration
under the name Storimin Resources Limited, but those operations were
discontinued prior to the Web Dream acquisition. After we acquired Web Dream,
we changed our name to Digital Rooster.com Inc. The only business that we
currently carry on is through Web Dream, which acquires, develops and
distributes upscale adult entertainment through proprietary Internet web sites.
See Item 4 "Information About the Corporation". Unless otherwise indicated,
this registration statement only contains information relating to the operations
of Web Dream, which was incorporated in February 1998. Information relating to
the historical operations of Storimin Resources Limited is not relevant to an
assessment of an investment in our securities and is therefore not provided.
3A. SELECTED FINANCIAL DATA
WE ARE A CANADIAN COMPANY BUT FOR PURPOSES OF THIS REGISTRATION STATEMENT THE
FINANCIAL STATEMENTS BEGINNING ON PAGE F-1 OF THIS REGISTRATION STATEMENT ARE
PRESENTED IN UNITED STATES DOLLARS. ASSETS AND LIABILITIES DENOMINATED IN
CANADIAN DOLLARS HAVE BEEN TRANSLATED INTO U.S. DOLLARS AT THE EXCHANGE RATE
PREVAILING AT THE BALANCE SHEET DATE OTHER THAN COMMON STOCK THAT HAS BEEN
TRANSLATED AT THE HISTORICAL RATES. RESULTS OF OPERATIONS HAVE BEEN TRANSLATED
AT THE AVERAGE EXCHANGE RATE FOR THE YEAR. CUMULATIVE NET TRANSLATION
ADJUSTMENTS ARE INCLUDED AS A SEPARATE COMPONENT OF SHAREHOLDERS EQUITY.
The following selected financial data should be read in conjunction with
the consolidated financial statements and the notes thereto attached beginning
at page F-1 of this registration statement and Item 5 "Operating and Financial
Review and Prospects". Information for only the last three fiscal years and for
the three quarters ended December 31, 2000 is provided since Web Dream, the
relevant continuing operating company, was incorporated in February 1998.
Selected financial data for the three quarters ending December 31, 2000 and the
seven-month period from September 1, 1998 to March 31, 1999 that is provided for
comparative purposes is unaudited. Information for the period ended March 31,
2000 on a pro forma consolidated basis is unaudited.
2
Year Year Mar. 31/99 Mar. 31/00 Mar. 31/99 Mar. 31/00 Nine
Ended Ended Aug. (Seven (Seven (Seven (Seven Months
Aug. 31/99 months) months) months) months) Ended
31/98 (Web (Web (Web (pro forma (pro forma Dec.
(Web Dream) Dream) Dream) consoli- consoli- 31/00
Dream) dated) dated) (consoli-
dated)
Audited Audited Unaudited Audited Unaudited Unaudited Unaudited
- ------------- ------------- ----------- ----------- ----------- ----------- ----------- ----------
OPERATIONS
DATA
- ------------- ------------- ----------- ----------- ----------- ----------- ----------- ----------
Sales 155,103 1,209,783 696,312 963,009 696,312 963,009 1,401,747
Cost of 28,000 508,740 268,687 395,012 268,687 395,012 377,931
Sales
Gross Profit 127,103 701,043 427,625 567,997 427,625 567,997 1,023,816
Expenses 123,349 791,347 346,562 837,280 425,732 902,487 1,329,054
Net income 3,754 (90,304) 81,063 (269,283) 1,893 (334,490) (305,238)
(loss)
(Loss) 0.0002 (0.009) 0.047 (0.012) 0.00005 (0.007)
Income Per
Share
Weighted 10,000,000 10,076,712 10,000,000 12,761,523 22,067,994 26,144,464
Average
Number of
Common
Shares
Outstanding
during the
Period
BALANCE
SHEET
INFORMATION
Current 11,074 46,394 26,310 113,801 107,709 164,921 97,323
Assets
Due from 3,776 31,225 31,225
Share-
holders
Capital 28,140 72,551 57,172 86,179 57,172 86,179 124,479
Assets
Goodwill 77,963 60,311 183,842
Due from 154,897 154,897
Jazz
Monkey
Media Inc.
Total Assets 42,990 118,945 114,707 354,877 274,069 466,308 405,644
3
Accounts 24,828 64,334 17,335 97,604 31,854 118,241 168,875
Payable and
Accrued
Liabilities
Income Tax 1,661 1,610
Payable
Deferred 31,884 31,884
Revenue
Loans 11,131 11,664 11,523 11,523
Payable
Due to 3,198 25,895 31,344 31,344 56,799
Shareholder
s
Due to Jazz 3,477
Monkey
Media Inc.
Due to 127,451
Digital
Rooster.com
Inc.
Note 59,589 61,902 59,992
payable
Total 39,157 105,370 28,858 288,283 102,966 245,032 287,276
Liabilities
Capital 694 101,884 694 421,846 163,211 756,809 749,985
Stock
Translation (615) (1,759) 338 581 2,739 4,446 (960)
Adjustment
(Deficit) 3,754 (86,550) 84,817 (355,833) 5,153 (539,979) (630,657)
Retained
Earnings
Total Share- 3,833 13,575 85,849 66,594 171,103 221,276 118,368
Holders
Equity
Liabilities 42,990 118,945 114,707 354,877 274,069 466,308 405,644
and Share-
holder's
Equity
4
3B. CAPITALIZATION AND INDEBTEDNESS
The following table shows our capitalization as of March 31, 2000. This
table should be read in conjunction with our consolidated financial statements
and the notes to those financial statements beginning at page F-1 of this
Registration Statement.
AS OF MARCH 31, 2000
Unsecured debt $245,032
-------
TOTAL DEBT $245,032
-------
Shareholders' equity
Common Stock: no par value; unlimited shares authorized;
30,580,866 shares issued and outstanding (1) $756,809
Accumulated deficit $(535,533)
----------
TOTAL SHAREHOLDERS' EQUITY $221,276
--------
TOTAL CAPITALIZATION $466,308
--------
(1) Does not include, as of March 31, 2000, approximately 3.6 million shares of
common stock issuable upon the exercise of outstanding stock options.
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY COMMON SHARES
SHARES AMOUNT
Balance as of March 31, 2000 30,580,866 $756,809
Stock Options granted net of cancellations 187,500
Issuance of Common Shares 1,250,000 $ 81,946
1,000,000 $ 65,557
Balance as of March 31, 2001 32,830,866 $904,312
3C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
5
3D. RISK FACTORS
When used in this registration statement, the words "may," "will,"
"expect,""anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, regarding events, conditions and financial
trends that may affect the Corporation's future plans of operations, business
strategy, operating results and financial position. Prospective investors are
cautioned that any forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties and that actual results
may differ materially from those included within the forward-looking statements
as a result of various factors, some of which are described in this section. We
have no obligation to update forward-looking statements.
OUR COMMON SHARES ARE CONSIDERED TO BE PENNY STOCK, WHICH MAY ADVERSELY
AFFECT THE LIQUIDITY OF OUR COMMON SHARES. The Securities and Exchange
Commission has adopted regulations that define a penny stock to be any equity
security that has a market price, as defined in those regulations, of less than
U.S. $5.00 per share, subject to certain exceptions. Generally, for any
transaction involving a penny stock, a broker-dealer is required to deliver,
prior to the transaction, a disclosure schedule relating to the penny stock
market as well as disclosure concerning, among other things, the commissions
payable, current quotations for the securities and information on the limited
market in penny stocks. The administration requirements imposed by these rules
may affect the liquidity of our common shares.
THERE IS NO ACTIVE TRADING MARKET FOR COMMON SHARES. There can be no
assurance that an active trading market for our common shares will develop or be
sustained. The trading price of our common shares may be significantly affected
by factors such as actual or anticipated fluctuations in our operating results,
conditions and trends in the adult entertainment and Internet industries,
general market conditions and other factors. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that
have particularly affected the market prices for the shares of Internet
companies, which may materially adversely affect the market price of our common
shares.
IT MAY BE DIFFICULT FOR OUR SHAREHOLDERS TO ENFORCE CIVIL LIABILITIES UNDER
THE U.S. FEDERAL SECURITIES LAWS BECAUSE WE ARE A CANADIAN CORPORATION. We are
incorporated under Canadian law and the majority of our directors and executive
officers are Canadian citizens or residents. All, or a substantial portion, of
these persons' assets and substantially all of our assets are located outside
the United States. It may not be possible for investors to effect service of
process within the United States upon those persons or to enforce against them
judgments of U.S. courts based upon civil liabilities under U.S. federal or
state securities laws.
CHANGES IN LAWS AND REGULATIONS REGARDING THE DISSEMINATION OF ADULT
CONTENT MAY RESTRICT OUR ABILITY TO SELL OR LICENSE OUR PRODUCTS. While we have
not been subject to any enforcement action to prohibit the dissemination of any
of our content to our customers, many territories prohibit the publication of
material defined as "obscene" or in similar terms. If a territory determines
that our content is obscene according to their legal definition of that term, we
may be prohibited from carrying on business in certain jurisdictions, and may be
subject to criminal penalties. There can be no guarantee that we will not be
faced with restrictions on carrying on all or part of our business in the
future.
6
WE HAVE A LIMITED HISTORY OF OPERATIONS AND PROFITABILITY. Web Dream began
operations as a company in February 1998. Our prospects must be considered in
light of the risks, expenses, and difficulties frequently encountered by
companies in their early stages of development. Our historical growth rates
may not be sustainable and are not indicative of future operating results.
There can be no assurance that any of our business strategies will continue to
be successful or that our revenue growth will continue.
CONTROL OF THE CORPORATION IS CONCENTRATED IN A SMALL NUMBER OF
SHAREHOLDERS. Our officers and directors and their affiliates, in the
aggregate, beneficially own approximately 55% of our outstanding common shares.
These shareholders, acting together, would be able to control most matters
requiring approval by shareholders, including the election of directors.
Concentration of large amounts of our shares in the hands of the principal
shareholders may also make more difficult any takeover, buy-out or change of
control of the Corporation not approved by management.
WE MAY NOT BE ABLE TO RAISE ADDITIONAL FINANCING TO SUSTAIN GROWTH. We
believe that our current working capital together with the funds raised in
recent financing activities and funds expected to be generated from operations,
will be sufficient to meet our cash requirements through July 1, 2001 There can
be no assurance that we will not require additional financing prior to that time
or that, if required, additional financing will be available on acceptable terms
or at all. If required, failure to obtain such additional financing would have a
material adverse effect on our business and prospects and could require us to
severely limit or cease our operations.
WE ARE DEPENDENT ON A SMALL NUMBER OF KEY PERSONNEL. We are dependent upon
a limited number of key personnel, particularly Mr. van Arem, our President.
The loss of any of these individuals could have a material adverse effect on our
business. We have no key-man life insurance policies on these individuals.
ACQUISITIONS COULD DILUTE SHAREHOLDERS AND AFFECT ONGOING OPERATIONS. We
may from time to time pursue the acquisition of other companies, assets,
technologies or product lines that would complement or expand our existing
business. Acquisitions involve a number of risks that could adversely affect
our operating results, including potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities, the diversion of
management's attention, the assimilation of the operations and personnel of the
acquired companies, the amortization of acquired intangible assets and the
potential loss of key employees of the acquired companies. Management has no
experience with acquisitions, and there can be no assurance that we will be able
to integrate the operations, products or personnel gained through any
acquisitions without a material adverse effect on our business, financial
condition and results of operations.
WE MAY NOT BE ABLE TO MAINTAIN OUR COMPETITIVE POSITION. The Internet
adult entertainment industry involves rapid technological change and is
characterized by intense and substantial competition. A number of our
competitors are well established, substantially larger and have substantially
greater market recognition, greater resources and broader distribution
capabilities than we have. New competitors are continually emerging. Increased
competition by existing and future competitors could materially and adversely
affect our profitability. There can be no assurance that we will be able to
maintain our high level of name recognition and prestige within the marketplace.
Moreover, our success depends on maintaining a high quality of content.
Competition for quality content in the adult entertainment industry is intense.
The lack of availability of unique quality content could adversely affect our
business.
7
THE ADULT ENTERTAINMENT INDUSTRY IS SENSITIVE TO ECONOMIC CONDITIONS. The
adult entertainment industry is sensitive to economic conditions. When
economic conditions are prosperous, entertainment industry revenues increase;
conversely, when economic conditions are unfavourable, entertainment industry
revenues decline. While management believes that our low pricing strategies,
distribution format, and marketing strategy mitigate, to some degree, the
effects of an economic downturn, any significant decline in general corporate
conditions or the economy that affect consumer spending could have a material
adverse effect on our business.
OUR BUSINESS IS SENSITIVE TO CAPACITY CONSTRAINTS AND SYSTEMS FAILURES. WE
DO NOT HAVE ANY BUSINESS INTERRUPTION INSURANCE. The stability of our online
services is critical to our reputation, customer retention and achieving market
acceptance of our online web sites destinations. Any system failure, including
network, software or hardware failure, that causes interruption or an increase
in response time of our online services could result in decreased usage of our
services and, if sustained or repeated, could reduce the attractiveness of our
online services to our clients. An increase in the volume of queries conducted
through our online services could strain the capacity of the software or the
hardware we employ, which could lead to slower response time or system failures,
thereby adversely affecting our revenues. We also face technical challenges
associated with higher levels of personalization and localization of content
delivered to users of our online services. Our operations are also dependent in
part upon our ability to protect our operating systems against physical damage
from acts of God, power loss, telecommunications failures, physical break-ins
and similar events If our back-up systems fail, the occurrence of any of these
events could result in interruptions, delays or cessations in service to users
of our online services, which could have a material adverse affect on our,
results of operations and financial condition. We do not have any business
interruption insurance.
We are also dependent upon search engines, web browsers, Internet service
providers and online service providers to provide Internet users access to our
web sites. Clients may experience difficulties accessing or using any of our web
sites due to system failures or delays unrelated to our operating systems. Any
sustained failure or delay could reduce the attractiveness of our web sites to
our clients. The occurrence of any of the foregoing events could have a material
adverse effect on our business, results of operations and financial condition.
WE MAY BE VULNERABLE TO ONLINE SECURITY RISKS. Despite the implementation
of security measures, our network may be vulnerable to unauthorized access,
computer viruses and other disruptive problems. We may be required to expend
significant capital or other resources to protect against the threat of security
breaches or to alleviate problems caused by such breaches. Although we intend
to continue to implement industry-standard security measures, there can be no
assurance that such measures will not be circumvented in the future. If our
security systems fail, eliminating computer viruses and alleviating other
security problems may require interruptions, delays or cessation of service to
clients accessing our web sites that could have a material adverse effect on our
business, results of operations and financial condition.
OUR INTELLECTUAL PROPERTY MAY NOT BE ADEQUATELY PROTECTED. Our domain
names, trade secrets and, to a lesser extent our trade marks are critical to our
success. We rely on a combination of copyright and trademark laws, trade secret
protection, confidentiality and non-disclosure agreements and contractual
provisions to protect our intellectual property. There is no guarantee that
these efforts will be adequate; that we will be able to secure appropriate
8
registrations for all of our marks; or that third parties will not infringe upon
or misappropriate our proprietary rights. Future litigation may be necessary to
enforce and protect our intellectual property rights. We may also be subject to
litigation to defend against claims of infringement of the rights of others or
to determine the scope and validity of the intellectual property rights of
others, which could be costly, divert management's attention, result in the loss
of certain of our proprietary rights, require us to seek licenses from third
parties and prevent us from selling our services, any one of which could have a
material adverse effect on our business, results of operations and financial
condition.
WE FACE POTENTIAL LIABILITY FOR INTERNET CONTENT. We face potential
liability for negligence, copyright, patent, trademark infringement, defamation,
indecency, disparagement and other claims based on the nature and content of the
materials that we transmit. In addition, we could be exposed to liability with
respect to the unauthorized duplication or transmission of content. Our
insurance may not cover potential claims of this type or may not be adequate to
indemnify us for all liability that may be imposed. In addition, the
indemnification for such liability that we generally require from our content
providers may be inadequate. Any imposition of liability that is not covered by
insurance, is in excess of insurance coverage or is not covered by an
indemnification by a content provider could have a material adverse effect on
our business, results of operations and financial condition.
WE MAY BE IMPEDED OR PROHIBITED FROM CARRYING ON BUSINESS BY GOVERNMENTAL
REGULATION. Few laws or regulations currently are directly applicable to access
or commerce on the Internet. However, a number of legislative and regulatory
proposals are under consideration by governments in jurisdictions in which we
conduct business, and, as a result, a number of laws or regulations may be
adopted with respect to Internet user privacy, taxation, infringement, pricing,
quality of products and services and intellectual property ownership. It is also
uncertain as to how existing laws will be applied to the Internet in areas such
as property ownership, copyright, trademark, trade secret, obscenity and
defamation. The adoption of new laws or the adaptation of existing laws to the
Internet may decrease the growth in the use of the Internet, which could in turn
decrease the demand for our online services, increase the cost of doing business
or otherwise have a material adverse effect on our business, results of
operations and financial condition.
RISKS ASSOCIATED WITH BRAND DEVELOPMENT. We believe that establishing and
maintaining brand identity of our web site destinations is critical to our
future success. Promotion and enhancement of our brands will depend largely on
our success in continuing to provide high quality online services, which cannot
be assured. In order to attract and retain subscribers and to promote and
maintain its brands in response to competitive pressures, we may find it
necessary to increase substantially our financial commitment to creating and
maintaining a distinct brand loyalty among our clients. If we are unable to
provide high quality online services, or otherwise fail to promote and maintain
our brands, incur excessive expenses in an attempt to improve, or promote and
maintain our brands, our business, results of operations and financial condition
could be materially and adversely affected.
FOREIGN EXCHANGE RISK. We have foreign exchange risk because our
functional currency is Canadian dollars and substantially all of our sales are
made to U.S. consumers. An adverse move in foreign exchange rates between the
Canadian and United States dollar could have an adverse effect on our operating
results. We do not hedge against this risk.
9
ITEM 4. INFORMATION ABOUT THE CORPORATION
OVERVIEW
We currently own and operate upscale adult entertainment Internet web sites
through our wholly owned subsidiary Web Dream Inc. ("Web Dream"). Some of our
live video content is produced exclusively for us under contract. In addition,
we license video, picture and other content from third party distributors, such
as Adults Only Video, Pacific Direct and CV Productions. In addition to
operating our own websites, we license digitized video content to wholesale
customers operating their own adult entertainment web sites.
The Corporation was amalgamated on April 1, 1999 pursuant to the Ontario
Business Corporations Act. We are a reporting issuer in Ontario pursuant to the
Securities Act (Ontario) and in Alberta pursuant to the Securities Act
(Alberta). Our common shares are publicly traded over-the-counter under the
symbol "ROOS". See Item 9 "The Listing".
Our registered and principal office is located at 366 Bay Street, 12th
Floor, Toronto, Ontario M5H 4B2, (phone: (416) 815-1771; fax: (416) 815-1259).
Canadian law does not require us to have an agent for service of process.
HISTORY
In a transaction referred to as a "reverse takeover" which was completed in
the year 2000, we acquired all of the issued and outstanding common shares of
Web Dream. Two of our common shares were issued for every one common share in
Web Dream Inc., for a total of 27,512,872 common shares for a consideration of
$254,093. As a result, Web Dream became a wholly owned subsidiary, with the
shareholders of Web Dream owning approximately 93.12% of our issued and
outstanding common shares. The reverse takeover was executed pursuant to an
acquisition agreement dated November 12, 1999 between the Corporation and Web
Dream, a copy of which is attached to this registration statement as Exhibit
6.2. The acquisition agreement was approved at a meeting of our shareholders
held on December 14, 1999 and closed on January 19, 2000.
We were incorporated under the Canada Business Corporations Act on January
16, 1984 under the name Storimin Explorations Limited and, at the time, we
carried on the business of mineral exploration. By Articles of Amendment dated
April 1, 1997, we amended our Articles, changing our name to Storimin Resources
Limited ("Storimin Resources") and consolidating our common shares on a one for
three basis. By Articles of Continuance dated October 30, 1998 we continued
under the Business Corporations Act Ontario. By Articles of Amalgamation we
amalgamated with our wholly owned subsidiaries, Old Trafford Capital
Corporation, Stamswiss Investments Inc. and 1345969 Ontario Limited.
Information regarding our mineral exploration activities of the Corporation,
which are no longer being carried on, is not provided in this registration
statement because it is not relevant to our current business. Information about
our historical business activities is included in Exhibit 6.1, the Storimin
Resources Limited Notice of Annual and Special Meeting and Management
Information Circular dated November 12, 1999.
Web Dream Inc. was incorporated under the laws of Ontario Canada in
February 1998. Originally operating as an on-line retailer of adult products,
in January 1999 Web Dream launched an on-line internet based adult entertainment
service, believing this business to offer greater potential for growth and
profitability.
10
In addition to Web Dream Inc., we have two wholly owned subsidiaries: (i)
Pizay Investments Inc.; (ii) and 1032142 Ontario Inc. Neither of these
companies currently carries on any business activities.
THE WEB-BASED ADULT ENTERTAINMENT INDUSTRY
Based on informal research, our own business experience and discussions
with others in the adult entertainment business, we believe that the demand for
adult content among Web users worldwide has grown phenomenally throughout the
Internet's brief history. That success is due in large part to the tremendous
volume of content material that adult Internet sites can deliver privately and
conveniently.
Home videos and the VCR revolutionized the adult entertainment industry.
Historically, many consumers were reluctant to attend public theatres
distributing adult entertainment. Once the venue moved from the theatre to the
home, the significant historical constraints on market growth were removed,
although growth was still hampered by the requirement to visit a video store.
This barrier was eliminated with the development of pay-per-view television and
the Internet removed the final barriers.
Satisfying the growth in demand for adult content has involved businesses
not traditionally associated with the adult entertainment industry. For
example, video stores, long distance telephone carriers, satellite providers,
cable companies, and even mutual funds profit from supplying or investing in
companies operating in the adult entertainment industry.
We believe that revenues generated by the adult entertainment market will
continue to grow as more consumers access the Internet and advances in
technology allow greater private and secure adult access to adult themed
material.
OUR BUSINESS STRATEGY
General
Based on our experience, we believe that businesses in the adult
entertainment industry are applying a more corporate approach to management and
operations than was historically the practice. It is also our assessment that
the industry is becoming more mainstream and attractive to a growing number of
consumers. We strive to adhere to high standards of conduct and ethics in
carrying on our business.
We are committed to providing high quality adult content accessible through
the Internet to meet growing international demand. Our web site services are the
focus of our business and the most profitable component of our operations,
generating recurring revenue based on monthly membership fees to access the web
sites. Our main goal is to brand our web sites as the premiere online adult
entertainment destinations and build a worldwide community of loyal clients. We
are currently in the process of translating our websites into four foreign
languages: French, German, Spanish and Dutch. We pride ourselves on the level
of customer service we provide to our members through toll free access and
automated web based customer service that is available twenty-four hours a day.
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We also license our adult content, which includes photographs, streaming
video, video on demand, and video conferencing, to wholesale customers who
distribute it to their own Internet client base under their own brand. We
provide the required infrastructure to these customers, including servers,
bandwidth, customer support and updates, which is included in the monthly
license fee that they pay us. In the past year we have shifted our focus from
this aspect of our business to our web site services because we believe that the
web sites offer greater growth and revenue potential.
We strive to achieve our objectives through building a strong, reliable and
quality brand image through service, promotional activities and the development
of new and innovative services for our customers such as the Sinpass (TM) and
Dream Bucks (TM) programs outlined below. We believe that we are well
positioned to capitalize in the anticipated growth in the Internet adult
entertainment industry based on our innovative promotional activities and our
growing brand awareness.
Distribution Strategy
Business to consumer
- ----------------------
Offering adult entertainment products through membership sites is our core
business and the most profitable component of our business, generating a
recurring revenue stream. We currently own and operate seven web sites. The
largest in terms of traffic are: www.sinvision.com, www.freesexlounge.com, and
www.manrush.com.
Our customers pay monthly membership fees, ranging from $9.95 to $34.95
depending on the web site subscribed to, which allows them to access a
particular web site. Products offered include pictures, streamed videos, live
interactive shows, voyeur shows, stories, e-zines, games and personal ads. We
continually update our sites with new material.
We believe this aspect of our business has significant growth potential. To
attract and expand our targeted Internet-based audience, it is critical for us
to establish and maintain the brand identity of our web site destinations. We
believe that the importance of brand recognition will increase due to the
growing number of Internet online services. The promotion and enhancement of
our brands will depend largely on our success in continuing to provide high
quality online services, which cannot be assured. If users do not perceive our
existing online services to be of high quality, or if we introduce online
services or enter into new business ventures that are not favorably received by
users, we risk diluting our brand and decreasing the attractiveness of our
audiences to advertisers. We may also need to increase substantially our
financial commitment to creating and maintaining a distinct brand loyalty among
our clients in order to attract and retain subscribers and to promote and
maintain our brands in response to competitive pressures. If we are unable to
provide high quality online services, or otherwise fail to promote and maintain
our brands, incur excessive expenses in an attempt to improve, or promote and
maintain our brands, our business and financial condition could be materially
and adversely affected. Accordingly, we continuously monitor trends in our
clients' tastes and entertainment preferences and technological developments
and, if necessary, change our operations and services to accommodate such trends
and developments.
We have recently launched a new distribution program, Sinpass (TM),
involving the sale of prepaid access cards for our web sites. These cards will
be distributed through complementary retail outlets, such as bars, restaurants,
video stores and fitness clubs. Our retail partners will receive a portion of
the proceeds from the sale of the cards and a percentage of any recurring
revenue generated by purchasers of cards.
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We generate traffic through our innovative DreamBucks(TM) partnership
program developed in 1998. This program provides promotional material to other
web site operators (referred to as webmasters), and pays a commission equal to
65% of revenues generated by referrals to our sites from webmasters plus 5% of
revenue generated by referred webmasters. Through a visually rich and efficient
website, this program offers a much more lucrative pay out plan than previously
available in the adult entertainment industry, and we believe that DreamBucks
has one of the highest conversion ratios in the industry. We also generate
traffic by purchasing it from third parties and the purchase of "key word"
searches from Internet search engines.
Business-to-business
- --------------------
Content sales provide us with a steady income stream. We license content to
over one thousand top name webmasters, creating substantial traffic in the
millions per month through our server network. We license adult content to
webmasters at a flat-rate based on bandwidth usage. However, we are shifting
our focus from content sales to our web site services because we believe that
further growth in content sales is limited. As discussed below under
"Competition", we anticipate industry consolidation and the disappearance of a
number of small web site operators to whom we currently license content.
Further, the size of this market is limited, compared to the vast consumer
market.
We also generate revenue by selling traffic from our own websites to other
adult websites. Since not every visitor to our websites purchases a membership,
we seek to maximize our return on traffic by promoting other websites where
opportunities exist. In doing so, we generate revenue from affiliate Webmaster
programs on a routing or click-through basis or revenue sharing basis.
Our business is not seasonal in nature, although we have noticed a slow
down in membership sales during the summer months of mid-June to mid-September.
Despite the implementation of security measures, our network may be
vulnerable to unauthorized access, computer viruses and other disruptive
problems. For example, given the content of our web sites, there is an
incentive for users ("hackers") to penetrate our network security. A party who
is able to circumvent security measures could cause interruptions in our
operations. We may be required to expend significant capital or other resources
to protect against the threat of security breaches or to alleviate problems
caused by such breaches. Although we intend to continue to implement
industry-standard security measures, there can be no assurance that such
measures will not be circumvented in the future. Eliminating computer viruses
and alleviating other security problems may require interruptions, delays or
cessation of service to clients accessing our web sites that could have a
material adverse effect on our business, results of operations and financial
condition.
COMPETITION
Our primary competition is from other web-based providers of adult content,
although we do compete with other formats, such as video, CD ROM and print, for
the delivery of adult content. In an even broader context, we compete with any
product or service that occupies leisure time and disposable income.
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The Internet adult entertainment industry is intensely competitive,
characterized by low barriers to entry. An Internet presence can be established
for as little as $5,000-$10,000 and relatively inexpensive adult content is
readily available. In the past three years, a large number of companies have
developed web sites that promote and distribute adult content in response to the
recent growth in the market for adult oriented content. We believe that there
are tens of thousands of web sites operating in competition with our web sites,
and that the number of new adult websites has increased substantially over the
past five years. However, we believe that this growth rate has begun to slow
down, and we expect a further slowdown over the next year or two. We believe
that this slowdown is partly due to over-saturation of the market, the emergence
of strong, larger companies setting a higher competitive standard and the
increased costs that major credit card companies such as VISA and MasterCard
began to impose last year on charge backs to customer's credit cards. We also
believe that smaller competitors will either exit the market or be acquired by
larger companies.
Our significant competitors include Interactive Gallery, Babenet, Python Video,
Private Media Group and NuWeb. Private Media Group is a publicly listed
company based in Spain. Rick's Cabaret International, Inc., another publicly
listed company based in the United States, is poised to expand its presence in
the market. Playboy Enterprise Inc. is also publicly listed and operates an
adult entertainment destination website.
The Internet based adult entertainment industry is highly competitive and
service-oriented. Business generation is based primarily on customer
satisfaction with reliability, timeliness, quality and price. We believe that
our name, image and reputation provide a significant competitive advantage over
many of our current and future competitors.
PLAN OF OPERATION
We believe that our current working capital together with the funds raised
in recent financing activities and funds expected to be generated from
operations, will be sufficient to meet our cash requirements through July 1,
2001. There can be no assurance that we will not require additional financing
prior to that time or that, if required, additional financing will be available
on acceptable terms or at all. If required, failure to obtain such additional
financing would have a material adverse effect on our business and prospects and
could require us to severely limit or cease our operations.
We expect to increase gross revenue in the next twelve months by
implementing new projects designed to attract additional customers to our
web-sites, increasing collections by reducing credit card chargebacks, and
through the sale of new products, including a new concept web-site. In order to
generate additional sales, we are projecting a significant increase in
advertising and promotional expenditures in the next twelve months targeted to
North American and European markets. Other operating expenses will also
increase to support our projected growth. We anticipate hiring six or seven new
employees in the next twelve months, which will increase our salary expense and
related overhead. We plan to upgrade our computer and communications structure
to keep pace with technological advances and remain competitive, but do not
anticipate any significant expenditure out of the ordinary course of business
during the next 12 months. However, we do not have the financial resources that
some of our competitors do and we may not be able to maintain our relative
competitive position if we cannot match their technology upgrades.
14
We will continue to develop innovative products and marketing strategies to
foster growth. Customers who frequent adult web sites generally follow trends in
personal preferences. We will continuously monitor trends in our clients' tastes
and entertainment preferences and, if necessary, change our operations and
services to accommodate such trends.
We are continually developing and licensing new sources of content for
placement on our websites and for distribution to wholesale customers.
Obtaining new, high quality adult content is an ongoing challenge. If we cannot
license sufficient quality content to meet our ongoing needs, it may be
necessary to generate content ourselves. While we currently contract with
production companies to supply exclusive content, reliance on this source of
supply is expensive. If we are unable to obtain or generate economically
feasible content, we may lose customers and our revenues and result of
operations will be adversely affected. Our supply contracts for content include
an indemnity from the supplier against claims for unauthorized duplication or
transmission of material provided to us under such contracts. However,
indemnities from content providers may be inadequate and our insurance may not
cover potential claims of this type. Any imposition of liability not covered by
our insurance or indemnities from content providers could materially affect our
financial condition.
We also intend to continue our strategy of competitive pricing, coupled
with aggressive advertising. In order to execute this strategy, we will need to
continue to increase advertising expenditures, technical and office staff.
We are in the final testing phase of alternative and innovative online
billing solutions. We anticipate revenue growth beginning in mid 2001 due to
higher collection rates.
In addition to internal expansion of Internet activities, management
believes that it can increase market share by acquiring selected businesses in
complementary markets, thereby achieving economies of scale that will provide a
competitive advantage. In particular, we will consider any company that has
Internet traffic that can be converted for our business purposes. We also
believe that the acquisition of such businesses will enable us to establish a
presence in new markets, creating future opportunities for growth.
PROPERTY AND ASSETS
We lease office space in Toronto, Ontario. Our lease expires on June 30,
2001. Management believes that this lease will be renewed at the current rates.
Our annual gross rental payments are approximately $38,000, payable in monthly
installments of approximately $3,200.
INFORMATION TECHNOLOGY AND ONLINE SYSTEMS OPERATIONS
The stability of our online services is critical to our reputation,
customer retention and achieving market acceptance of our online web sites
destinations. Difficulties in accessing our services could result in a loss of
customers, which could have an adverse effect on our revenues and financial
condition. Any system failure, whether due to physical damage from acts of God,
power loss, telecommunications failures, physical break-ins and similar events,
including network, software or hardware failure, that causes interruption or an
increase in response time of our online services could, if sustained or
repeated, reduce the attractiveness of our online services. Our customer
15
retention could also be affected if we experience a greater than anticipated
volume of queries through our online with the result that response times slow
down considerably or we experience temporary system failures. We also face
technical challenges associated with higher levels of personalization and
localization of content delivered to users of our online services.
We rely on a number of techniques to manage our traffic and prevent or
minimize any disruptions to our service. We employ both internal and licensed
third party inventory management and analysis systems. We back up our customer
data and product inventory to an off-site location. We are also establishing a
second source of bandwidth at an off-site facility to minimize disruptions in
our connection to the Internet that will be fully in place in the next four to
six months. Our back-up systems are economically efficient and we are confident
that they will protect us from damage to our primary system from fire, flood,
power loss, telecommunications failure, Internet breakdowns, break-ins,
tornadoes and similar events with minimum disruption to our service. However,
if our back-up system fails, we do not have sufficient business interruption
insurance to compensate for losses that may occur.
We are also dependent upon search engines, web browsers, Internet service
providers and online service providers to provide Internet users access to our
web sites. Customers may experience difficulties accessing or using any of our
web sites due to system failures or delays unrelated to our systems. These
difficulties may negatively affect audio and video quality or result in
intermittent interruption in programming. Any sustained failure or delay could
reduce the attractiveness of our web sites. We have no way to prevent the
occurrence of any of the foregoing events, any of which could have a material
adverse effect on our business, results of operations and financial condition.
REGULATORY MATTERS
The regulatory environment in which we operate is constantly changing. Few
laws or regulations currently are directly applicable to access or commerce on
the Internet. However, a number of legislative and regulatory proposals are
under consideration by federal, provincial, local and foreign governmental
organizations and, as a result, laws or regulations have recently been and may
in the future be adopted with respect to Internet user privacy, taxation,
infringement, pricing, quality of products and services and intellectual
property ownership. However, enforcement of a state's laws against companies
operating businesses over the Internet located outside that state is uncertain.
The manner in which legislation governing the Internet and the distribution
of adult entertainment products may be interpreted and enforced cannot be fully
determined, and future legislation and the development of effective
international enforcement mechanisms could subject us to potential liability.
Such laws could also damage the growth of the Internet generally and decrease
the demand for our products and services. These factors could adversely affect
our business, results of operations and financial condition. The adult
entertainment industry has been in some countries a target for legislation. It
is possible that governments may enact laws or take action under current laws
that adversely affect our ability to carry on our business.
We strive to carry on business in a reputable manner. Of particular
concern to us is the distribution of adult content to minors. Customers are
required to provide credit card information before entering our membership
websites, which enables us to verify their age. We are also registered with
protection programs for minors through which adults can prevent access by minors
to our web sites.
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INTELLECTUAL PROPERTY
Our domain names are our brands and the key to our continued success. We
have registered approximately 80 domain names, none of which have been
challenged. Some of our well-recognized names are www.webdream.com,
www.digitalrooster.com, www.sinvision.com, www.freesexlounge.com,
www.sinpass.com, www.sinusa.com, and www.manrush.com. We will continue to
expend significant effort and resources to develop strong brands.
We applied in July 1999 for registration of the trademark "WEBDREAM" with
the United States Patent and Trademark Office. We have opposed an earlier filed
application for the trademark "WEB OF DREAMS" based on our prior use of
"WEBDREAM". We are in the process of determining whether this matter can be
amicably settled, but if settlement is not possible, we intend to vigorously
defend our rights in the "WEBDREAM" mark. In any event, our customer services
are associated with our domain names, not the WEBDREAM mark.
We rely on a combination of copyright and trademark laws, trade secret
protection, confidentiality and non-disclosure agreements and contractual
provisions to protect our intellectual property. There is no guarantee that
these efforts will be adequate; that we will be able to secure appropriate
trademark registrations for all of our marks; or that third parties will not
infringe upon or misappropriate our copyrights, trademarks, service marks and
similar proprietary rights. In addition, effective copyright and trademark
protection may be unenforceable or limited in certain countries, and the global
nature of the Internet makes it impossible to control the ultimate destination
of our web site content. Since trademark and copyright protections are not
"self-enforcing", future litigation may be necessary to enforce and protect our
trade secrets, copyrights and other intellectual property rights.
We may also be subject to litigation to defend against claims of
infringement of the rights of others or to determine the scope and validity of
the intellectual property rights of others, which could result in substantial
costs. An adverse outcome could require us to license disputed rights from
third parties or to cease using such materials. Any litigation regarding our
proprietary rights could be costly and divert management's attention, result in
the loss of certain of our proprietary rights, require us to seek licenses from
third parties and prevent us from selling our services, any one of which could
have a material adverse effect on our business, results of operations and
financial condition.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
When used in this registration statement, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, regarding events, conditions and financial
trends that may affect the Corporation's future plans of operations, business
strategy, operating results and financial position. Prospective investors are
cautioned that any forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties and that actual results
may differ materially from those included within the forward-looking statements
as a result of various factors, some of which are described in "Risk Factors" in
Item 1(b) of this registration statement. We have no obligation to update
forward-looking statements.
17
Our financial statements have been prepared in accordance with Canadian and
United States Generally Accepted Accounting Principles. We are a Canadian
company but for purposes of this registration statement the financial statements
beginning on page F-1 of this registration statement are presented in United
States dollars. Assets and liabilities denominated in Canadian dollars have
been translated into U.S. dollars at the exchange rate prevailing at the balance
sheet date other than common stock that has been translated at the historical
rates. Results of operations have been translated at the average exchange rate
for the year. Cumulative net translation adjustments are included as a separate
component of shareholders equity.
The following selected financial data should be read in conjunction with
the consolidated financial statements and the notes thereto attached beginning
at page F-1 of this registration statement. Information for only the last three
fiscal years and for the three quarters ended December 31, 2000 is provided
since Web Dream, the relevant continuing operating company, was only
incorporated in February 1998. This part discusses the results of operations for
Web Dream. Historical financial information for Storimin Resources is not
discussed since it is not relevant. Selected financial data for the nine months
ending December 31, 2000, the nine months ended December 31, 1999 and the
seven-month period from September 1, 1998 to March 31, 1999 that is provided for
comparative purposes is unaudited. Information for the Year ended March 31, 2000
on a consolidated basis is unaudited.
5A. OPERATING RESULTS
Nine Months Ended December 31, 2000
For the nine months ended December 31, 2000, we had total revenues of
$1,401,747, an increase of 43% or $424,021 compared to revenues of $ 977,546 for
the same period in 1999. Cost of sales were $377,931 for the nine months ended
December 31, 2000 representing 27% of sales, compared to $478,035 for the same
period in 1999, representing 49% of sales. Administrative expenses, selling
expenses, and bandwidth and computer expenses represented 44%, 31% and 15% of
total revenues for the nine months ended December 31, 2000, compared to 52%, 17%
and 14% over the same period in 1999. Administrative expenses increased by
$106,107 from $511,114 for the nine months ended December 31, 1999 compared to
$617,221 for the same period in 2000. This increase is attributable to an
increase in payroll for designers and programmers. Selling expenses increased by
$269,621 from $166,489 for the nine months ended December 31, 1999 compared to
$436,110 for the same period in 2000. This increase is attributable to increased
expenditures for advertising and promotion. Computer expenses increased by $
73,568 from $136,057 for the nine months ended December 31, 1999 compared to
$209,625 for the same period in 2000. This increase is attributable to
additional bandwidth and system development to support increased sales. Interest
expenses increased by $3,022 in the nine months ended December 31, 2000 over the
same period in 1999, attributable to the need for short term financing.
Amortization of goodwill was $34,225 for the nine months ended December 31,
2000. We experienced a net loss of $305,238 for the nine months ended December
31, 2000 compared to a net loss of $336,653 for the same period in 1999.
Seven months ended March 31, 2000 Compared to the Seven Months ended March 31,
1999
18
For the seven months ended March 31, 2000 we had total revenues of
$963,009, $266,697 or 43% more than our revenues of $696,312 for the same period
in 1999. Cost of sales for the seven months ended March 31, 2000 was $395,012,
representing 40% of total revenues, compared to $268,687 for the same period in
1999, which represented 39% of total revenues. For the seven months ended March
31, 2000 administrative expenses were $488,123, or 49% of total revenues,
compared to $204,913, or 29% of total revenues for the same period in 1999.
This increase is primarily attributable to an increase in payroll for designers
and programmers. On a pro forma consolidated basis, administrative expenses for
for the seven months ended March 31, 2000 were $543,033, $54,910 higher on a pro
forma consolidated basis than on a non-consolidated basis, attributable to
administrative expenses charged to Digital Rooster. For the seven months ended
March 31, 1999 administrative expenses were $273,786, $68,873 higher on a pro
forma consolidated basis than on a non-consolidated basis, the difference being
attributable to expenses incurred by Storimin Resources. For the seven months
ended selling expenses were $167,655, or 17% of total revenues, compared to
$100,480, or 14% of total revenues for the same period in 1999. This increase
is primarily attributable to increased expenditures for advertising and
promotion. Computer expenses increased by $122,808, to $151,003 or 13% of total
revenues for the seven months ended March 31, 2000 compared to $29,195 or 4% of
total revenues for the same period in 1999. This increase was due to the
acquisition of additional bandwidth to support increased sales. Interest
expenses increased by $8,360 in 2000 over 1999, attributable to the need for
short term financing. In addition, on a pro forma consolidated basis, Digital
Rooster charged amortization of $10,297 attributable to goodwill acquired on the
reverse takeover. We experienced a net loss of $269,283 for the seven months
ended March 31, 2000 compared to net income of $81,063 for the same period in
1999. On a consolidated pro forma basis, our net loss for the seven months
ended March 31, 2000 was $334,490 and our net income for the same period in 1999
was $1,893.
Year ended August 31, 1999 Compared to Year ended August 31, 1998
For the 1999 fiscal year, Web Dream had total revenues of $1,209,783, an
increase of more than 680% or $1,054,680 above fiscal 1998 revenues of $155,103.
Cost of sales was $508,740 compared to $28,000 in 1998, representing 42% of
total revenues in 1999 compared to 18% in 1998. Administrative expenses,
selling expenses and computer expenses represented approximately 41%, 12% and
11% of 1999 total revenues, respectively, compared to 41%, 13% and 22%,
respectively for the fiscal 1998 period. Administrative expenses increased by
$427,033 largely due to increased payroll obligations. Selling expenses
increased by $122,382 as a result of increased advertising and promotion.
Computer and bandwidth costs increased by $95,800 due to the need for additional
bandwidth and equipment to support increased sales. Administrative, selling and
computer expenses also increased in fiscal 1999 compared to fiscal 1998 because
our 1999 fiscal year was 12 months while our 1998 fiscal year was only seven
months. Interest expense increased by $9,724, from $1,403 in fiscal 1998 to
$11,127 in fiscal 1999, due to the need for short term financing. We charged
amortization of $17,862 in fiscal 1999 compared to $4,803 in 1998. We
experienced a net loss of $90,304 for fiscal 1999 compared to a net profit of
$3,754 for fiscal 1998.
5B. LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended December 31, 2000
Cash used in operating activities was $174,981 for the nine months ended
December 31, 2000, primarily attributable to a net loss of $305,237 and an
increase in prepaid expenses and sundry receivables of $51,017, partially offset
by a decrease in accounts receivable of $43,191 and an increase in accounts
payable and accrued liabilities of $82,500. Cash used in operating activities
for the same period in 1999 was $341,767, primarily attributable to loss of
$336,653 and an increase in accounts receivable of $35,771, partially offset by
a increase in accounts payable of $34,523.
Cash provided by financing activities in the year ended December 31, 2000
was $175,160 consisting of $26,527 in advances from shareholders and the
repayment in full of our $148,633 advance to Jazz Monkey Media Inc. Cash
provided by financing activities in the nine month period ended December 31,
1999 was $383,412, representing an advance of $33,302 from shareholders and cash
proceeds of $429,595 from the issuance of common shares, partially offset an
advance to Jazz Monkey Media Inc. of $79,485.
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Cash used in investing activities for the nine months ended December 31,
2000 was $66,903, attributable to the purchase of capital assets, primarily
consisting of computer hardware, in the amount of $63,557. Cash used in
investing activities in the nine months ended December 31, 1999 was $43,065
attributable the purchase of capital assets, primarily consisting of computer
hardware, in the amount of $63,557.
Seven Months ended March 31, 2000 Compared to the Seven Months ended March 31,
1999
Cash used in operating activities was $190,990 for our fiscal year 2000,
primarily attributable to a net loss of $269,283 and an increase in accounts
receivable of $49,113, partially offset by an increase in accounts payable of
$33,270 and an increase in deferred revenue of $31,884. Cash generated from
operating activities for the same period in 1999 was $80,726, primarily
attributable to net income of $81,063, partially offset by an increase in
accounts receivable of $3,898 and a decrease in accounts payable of $7,493.
Cash provided by financing activities for the seven months ended March 31,
2000 totaled $241,796 consisting of $278,934 in net proceeds from the issuance
of common shares pursuant to a private placement, an advance of $127,451 from
Digital Rooster, and $5,449 in advances from shareholders. Cash provided by
financing activities was partially offset by a $158,374 advance to Jazz Monkey
Media Inc. and a decrease in loans payable of $11,664. The balance of the
advance to Jazz Monkey Media Inc. at March 31, 2000 was $154,897. It was repaid
in full by December 31, 2000. Cash used in financing activities in the seven
month period ended March 31, 1999 was $30,255, representing an advance of
$30,647 to shareholders offset by an increase in loans payable of $392.
Cash used in investing activities for the seven months ended March 31, 2000
was $33,983, attributable to the purchase of capital assets, primarily computer
hardware, in the amount of $32,087. Cash used in investing activities for the
seven month period ended March 31, 1999 was $39,222, attributable to the
purchase of capital assets, primarily computer hardware, in the amount of
$37,260.
As of March 31, 2000 we had commitments under non-cancelable operating
leases for our principal facilities to March 31, 2001 in the approximate amount
of $38,214 per year.
Year ended August 31, 1999 Compared to Year ended August 31, 1998
Cash used in operating activities was $70,703 in the year ended August 31,
1999, attributable primarily to a net loss of $90,304 and an increase in
accounts receivable of $35,938, partially offset by an increase in accounts
payable of $39,506. Cash from operating activities in the year ended August 31,
1998 was $23,944 attributable primarily to net income of $3,754 and an increase
in accounts payable of $24,828, partially offset by an increase in prepaid
expenses of $2,495 and an increase in accounts receivable of $6,331.
20
Cash provided by financing activities in the year ended August 31, 1999 was
$131,673 and included gross proceeds of $101,190 from the issuance of common
shares pursuant to a private placement and $26,473 in advances from shareholders
(which are unsecured, bear no interest and have no fixed terms of repayment).
There was no significant financing activity in the year ended August 31, 1998.
Cash used in investing activities in the year ended August 31, 1999 was
$62,323 for the purchase of capital assets. Cash used in investing activities
in the year ended August 31, 1998 was $32,943 attributable to additions to
capital assets, primarily computer equipment.
We believe that our cash and cash equivalents as at March 28, 2001 of
$31,334 together with the funds raised in recent financing activities and funds
expected to be generated from operations, will be sufficient to meet our cash
requirements through July 1, 2001. There can be no assurance that we will not
require additional financing prior to that time or that, if required, additional
financing will be available on acceptable terms or at all. If required, failure
to obtain such additional financing would have a material adverse effect on our
business and prospects and could require us to severely limit or cease our
operations. If necessary, we will seek to raise additional amounts to meet our
working capital requirements through private or public financings, strategic
relationships or other arrangements. However, additional funding may not be
available on terms attractive to us, or at all.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6A AND 6C. DIRECTORS AND SENIOR MANAGEMENT AND BOARD PRACTICES
Each of our four directors was re-elected at the Corporation's Annual
General Meeting of Shareholders held on September 29, 2000. They will hold
office until the next Annual General Meeting or until their successors are
elected. We do not maintain insurance for the benefit of our directors and
officers against liabilities incurred by them in their capacity as directors or
officers. We do not maintain key man life insurance. There is no family
relationship between or among any of our directors and executive officers. None
of our directors has a contract with us providing for benefits upon termination
of his position as a director.
The following discusses the business experience, history and functions of
our directors and senior officers.
Hubert Mockler, 67, has been a Director since April 1997. He is an
independent Director and a Member of our Corporate Governance Committee. Mr.
Mockler has been the President and a Director of Canuc Resources Corporation, a
mineral exploration corporation, since 1994 He was the Director of Esquisure
Financial Network until November 2000.
Sean HusVar, 31, has been a Director since December 1999. He is an
independent Director and a member of our Corporate Governance Committee. Mr. Hus
Var is currently the CEO of TagFX a digital printing and marketing solutions
company. Mr. Hus Var is a co-founder of Chek, Inc. now CKMP, Inc., a provider of
business and consumer e-mail outsourcing solutions. From 1995 until 2000 he was
Chairman and CEO of EdgeNet, Inc. a web design and hosting firm that was
acquired by Choice One Communications (Nasdaq: CWON) in January of 2000.
21
Brian Usher-Jones, 55, has been a Director since December 1999. He is an
independent Director and a member of our Corporate Governance Committee. From
1995 to the present, Mr. Usher-Jones has been involved in merchant banking
activities. He is a Director of Xplore Technologies Inc., a company engaged in
the development and sale of rugged wireless computer solutions, a position he
has held since September 1996. He is also a director and the Chairman of
Traveller's Mall.com Ltd., a company that develops and sells software for the
travel industry, an appointment he has held since November 2000. From November
1997 to April 2000, he was the Chairman and a director of Avenza Global
Technologies Corp., a company engaged in the development and sale of mapping
software. In March 1996, he was appointed a director of Advantex Marketing Inc.,
a position he held until September 1998. Since April 1997, he has been a
director of Cal Valley Petroleum Inc., an oil and gas exploration company, and
from March 1994 he has been a director of Triax Gold Corp., which is engaged in
mining exploration activities.
John A. van Arem, 43, became the President, Director and Chairman of the
Board of the Corporation in December 1999. He has been the President of Web
Dream, Inc. since February 1998. Mr. Van Arem is responsible for overall
management of the Corporation and its subsidiaries. From 1992 to the present,
Mr. van Arem has been operating the adult entertainment business that was
incorporated as Web Dream Inc. in 1998. From 1986 to 1992, Mr. van Arem owned
and operated a successful framing contracting company in Ontario, Canada. Mr.
van Arem also has an ownership interest in and operates a private company, Jazz
Monkey Media Inc. that provides web-marketing solutions for clients.
Anthony Korculanic, 34, is our Operations Manager, responsible for public
and investor relations, office management and human resources. From January to
May 2000, he was our Executive Vice President and Secretary. While Mr.
Korculanic is no longer an executive officer, he is a key person. Mr. Korculanic
received an architectural diploma in 1988 and served as CAD Manager for Brisbin
Brook Beynon Architects from 1988 to 1992. From 1992 to the present, Mr.
Korculanic has been operating the adult entertainment business that was
incorporated as Web Dream Inc. in 1998. Mr. Korculanic also has an ownership
interest in and operates a private company, Jazz Monkey Media Inc. that provides
web-marketing solutions for clients.
Our Corporate Governance Committee performs an independent supervisory role
over the management of the Corporation in accordance with its statutory
obligations and the role of an audit committee. We have no other committees of
the board of directors. Our Corporate Governance Policy requires that 2/3 of
our Directors be independent of management and free of any business or other
relationship that could materially interfere with the independent discharge of
their duties. The Directors and management are responsible for considering new
appointees for recommendation to the shareholders. The Board is charged with
managing our affairs with delegation of day-to-day activities to our President.
The Board is responsible for overseeing approval of our financial statements,
business plans, major capital expenditures, raising capital and other major
financial activities, executive hiring, compensation, assessment and succession,
granting of stock options, decisions to devote resources to new lines of
business, organizational restructurings, acquisitions and divestitures. All
directors are required to declare their interests in transactions or matters
affecting the Corporation and refrain from voting with respect to such matters.
22
6B. COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT
Our directors do not receive any cash compensation from the Corporation for
acting as directors. They receive stock options periodically as determined by
the board and senior management, but there is no formal policy regarding such
grants. All such grants are subject to the terms of our stock option plan,
discussed under "Employees" below. In February 2000, each of Sean Husvar, Hubert
Mockler and Brain Usher-Jones was granted an option to purchase 100,000 of our
common shares at the exercise price of CDN$0.25. 50% of these options vest and
are exercisable after February 18, 2001 and the remaining 50% vest and are
exercisable after February 18, 2002. The options expire on February 18, 2003.
The following table and notes show the compensation paid by us to John
Alexander van Arem and to Anthony Korculanic for the last fiscal year. With the
exception of the exercise price for the stock options, the numbers provided are
in United States dollars based on the yearly average exchange rates for the
fiscal period, which was 1.5483.
Name Year Salary Other Long-Term Compensation
Annual Stock Option Grants
Compen No. of Exercise Vesting Expiry Date
sation Common Price period
Shares (CDN$)
for which
option
granted
- ----------- ---- ---------- ------- ---------- --------- --------- -----------
John A. 2000 $32,002(1) $1,860 240,000 $0.25 Two Feb. 18/03
van Arem (2) years,
50%
per year
Anthony 2000 $30,413(3) $1,548 200,000 $0.25 Two Feb. 18/03
Korculanic (4) years,
(3) 50%
per year
(1) Based on an annual salary of $52,500.
(2) Represents a monthly car allowance of $465, which was paid for the
period December 1, 1999 to March 31, 2000.
(3) Based on an annual salary of $52,500.
(4) Represents a monthly car allowance of $387, which was paid for the
period December 1, 1999 to March 31, 2000.
We have a three-year employment agreement with our President John van Arem
that extends through March 31, 2003. The agreement provides for an annual base
salary of CDN$110,000, plus a CDN$900 per month car allowance. Any performance
bonus and stock option grants are at the discretion of the board of directors.
Mr. van Arem also participates in all benefit plans maintained by us for
salaried employees. Mr. van Arem's agreement contains confidentiality and
non-compete provisions.
23
We have a three-year employment agreement with Anthony Korculanic that
extends through March 31, 2003. The agreement provides for an annual base
salary of CDN$93,600 annually, plus a CDN$600 per month car allowance. Any
performance bonus and stock option grants are at the discretion of the board of
directors. Mr. Korculanic also participates in all benefit plans maintained by
us for salaried employees. Mr. Korculanic 's agreement contains confidentiality
and non-compete provisions.
6E. SHARE OWNERSHIP OF DIRECTORS AND SENIOR MANAGEMENT
The following table shows the share ownership of Directors and Senior Management
as of March 31, 2001.
NAME NUMBER OF SHARES PERCENTAGE OF
OWNED OUTSTANDING SHARES
John A. van Arem 9,720,000 (1)(2) 29%
Anthony Korculanic 8,100,000 (1)(3) 25%
Sean Husvar 50,000(4) .001%
Hubert Mockler 209,217(5) .006%
Brian Usher-Jones 190,000(6) .006%
(1)These shares do not carry any voting or other rights that are different
from the rights attaching to the Corporation's common shares, which are
summarized in Item 9 "The Offer and Listing".
(2)The number of shares owned includes 120,000 options to purchase common
shares that are immediately exercisable at the price of CDN$0.25. An additional
120,000 options vest and are exercisable after February 18, 2002 at the price of
CDN$0.25. These 240,000 options were granted on February 18, 2000 and expire on
February 18, 2003.
(3)The number of shares owned includes 100,000 options to purchase common
shares that are immediately exercisable at the price of CDN$0.25. An additional
100,000 options vest and are exercisable after February 18, 2002 at the price of
CDN$0.25. These 200,000 options were granted on February 18, 2000 and expire on
February 18, 2003
(4)The number of shares owned includes 50,000 options to purchase common
shares that are immediately exercisable at the price of CDN$0.25. An additional
50,000 options to purchase common shares at the price of CDN$0.25 vest and are
exercisable after February 18, 2002. These 100,000 options were granted on
February 18, 2000 and expire on February 18, 2003
(5)The number of shares owned includes 50,000 options to purchase common
shares at the price of CDN$0.25 that are immediately exercisable. An additional
50,000 options to purchase common shares at the price of CDN$0.25 vest and are
exercisable after February 18, 2002. These 100,000 options were granted on
February 18, 2000 and expire on February 18, 2003
(6)The number of shares owned includes 50,000 options to purchase common
shares that are immediately exercisable at the exercise price of CDN$0.25. An
additional 50,000 options to purchase common shares at the price of CDN$0.25
vest and are exercisable after February 18, 2002. These 100,000 options were
granted on February 18, 2000 and expire on February 18, 2003
24
6D. EMPLOYEES
As of March 31, 2000, we had 16 full-time employees, including senior
management. All of our full-time employees are located in Toronto and occupy
management or administrative positions. The current number of employees is
approximately one-third of the number of employees that we had in fiscal 1999.
This reduction is attributable to management's decision to reduce overhead by
contracting out the production of original content. None of our employees are
covered by a collective bargaining agreement, and we believe that our
relationship with our employees is good. Our future success, however, will
depend upon our ability to attract and retain qualified personnel. Competition
for technical personnel required in our business in particular is often intense,
and there can be no assurance that we will be able to attract and retain
adequate numbers of qualified personnel in the future.
Our share option plan (the "Plan") was established in 1997 for the purpose
of attracting and retaining highly qualified personnel by providing incentives
in the form of stock options. Under the Plan incentive share options for up to a
specified limit of 3,000,000 common shares may be granted from time to time by
the board of directors to our directors, officers, employees and consultants,
and to the directors, officers, employees and consultants of our subsidiaries.
Options granted under the Plan will have an exercise price equal to the market
price of the common shares on the day preceding the day of the grant as
determined by our board of directors, where the market price is the closing
price (or the closing bid and asked prices, as applicable) on the exchange or
market where the shares are listed or quoted as selected by the board of
directors, and will be exercisable over the period determined by the board of
directors. Unvested options granted under the Plan will immediately become fully
vested and exercisable upon the occurrence of any one of the following four
events:
- the acquisition of more than 50% of the beneficial ownership of our
outstanding voting securities;
- a consolidation or merger with another company where our shareholders
do not have the same proportionate ownership in the surviving entity
that they had prior to the merger, and we are either (i) not the
continuing or surviving corporation, or (ii) our shares are converted
into cash, securities or other property;
- the sale, lease, exchange or other transfer of all or substantially
all of our assets; and
- our shareholders approve a plan of liquidation or dissolution.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
We are a publicly owned Canadian corporation. We are not controlled
directly or indirectly by another corporation, or any government.
7A. MAJOR SHAREHOLDERS
The following table shows the ownership of our common shares as of March
31, 2001 of each person known to us to be the beneficial owner of more than 5%
of our outstanding common shares.
25
NAME NUMBER OF SHARES PERCENTAGE OF
OWNED OUTSTANDING
SHARES
John A. van Arem 9,720,000(1)(2) 29%
Anthony Korculanic 8,100,000(1)(3) 25%
(1)These shares do not carry any voting or other rights that are different
from the rights attaching to our common shares, which are summarized in Item 9
"The Listing".
(2)The number of shares owned includes 120,000 options to purchase common
shares that are immediately exercisable at the price of CDN$0.25. An additional
120,000 options vest and are exercisable after February 18, 2002 at the price of
CDN$0.25. These 240,000 options were granted on February 18, 2000 and expire on
February 18, 2003.
(3)The number of shares owned includes 100,000 options to purchase common
shares that are immediately exercisable at the price of CDN$0.25. An additional
100,000 options vest and are exercisable after February 18, 2002 at the price of
CDN$0.25. These 200,000 options were granted on February 18, 2000 and expire on
February 18, 2003.
7B. RELATED PARTY TRANSACTIONS
In connection with the reverse takeover described in Item 4 "Information
About Corporation History", John van Arem exchanged his shares of Web Dream for
9,600,000 shares of Digital Rooster. In addition, Anthony Korculanic exchanged
his shares of Web Dream for 8,000,000 shares of Digital Rooster. Brian
Usher-Jones exchanged his shares of Web Dream for 140,000 shares of Digital
Rooster. Hubert Mockler was originally a shareholder in Storimin Resources
Limited and retained his shares.
In the years 1998 and 1999, before the reverse takeover, Web Dream entered
into routine business transactions with Jazz Monkey Media Inc. a company
controlled by John van Arem and Anthony Korculanic. These transactions were in
the normal course of business and at market prices. At the present time, Jazz
Monkey Media Inc. provides us with bandwidth it has obtained from a third party.
Jazz Monkey Media Inc. invoices us for their net cost of these services.
Jazz Monkey Media, Inc. owed us $154,897 as of March 31, 2000. This amount
was advanced for the development of services to be provided to Web Dream. This
amount has now been paid in full.
Web Dream owes Digital Rooster $127,451, which we loaned to Web Dream to
facilitate the reverse takeover in early 2000. This amount is unsecured, bears
no interest and has no fixed term of repayment.
We owed Mr. van Arem and Mr. Korculanic an aggregate of $31,344 at March
31, 2000. This amount has increased to $50,847 as of March 30, 2001 and
represents funds expended in corporate operations. This amount is unsecured,
bears no interest and has no fixed term of repayment.
26
Management of the Corporation is not aware of any material interest, direct
or indirect, of any director, officer or any associate or affiliate of any of
the foregoing persons, in any matter to be acted upon. There may develop
potential conflicts of interest to which the proposed directors and officers of
the Corporation may be subject in connection with the operations of the
Corporation. Conflicts, if any will be subject to the procedures and remedies
under the Business Corporations Act (Ontario). See "Item 10B Memorandum and
Articles of Association - Bylaws; Director's Conflicts."
ITEM 8. FINANCIAL INFORMATION
8A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
The financial statements required herein are set forth beginning on page
F-1 of this registration statement.
DIVIDEND POLICY
We did not pay any cash or other dividends on our common shares in the last
fiscal period and the Board of Directors does not contemplate doing so in the
foreseeable future. We believe that it is in the best interests of the
Corporation and its shareholders to retain all earnings to fund operations and
growth.
LEGAL PROCEEDINGS
There are currently two material claims pending against us. If we lose
either of these suits or enter into settlements requiring us to pay cash, our
liquidity and financial position could be adversely affected over the short
term.
On June 12, 2000, Business Communications, Inc. ("BCI") filed a lawsuit in
the General Court of Justice Superior Court Division of Forsyth County North
Carolina (Case No. 00CVS5719) against Web Dream. The lawsuit alleged breach of
contract and sought damages of $49,313,04 plus reasonable attorney fees and
interest against us. BCI obtained a Default Judgment for the full amount
claimed in the North Carolina on October 26, 2000 and filed in the Ontario
Superior Court of Justice (Court file No. 4922100) in November an action to
enforce judgment, seeking approximately $57,000 plus costs. We filed a
Statement of Defence contesting the jurisdiction of the North Carolina court in
awarding the judgment and the jurisdiction of the Ontario court to enforce it.
We also counterclaimed for $55,000 in damages. On March 9, 2001, the Ontario
Superior Court of Justice awarded summary judgment to BCI. We intend to pay the
damages and costs awarded to BCI, which are approximately $63,000.
In October 1997, the Company's wholly-owned subsidiary, Pizay Investments
Inc. ("Pizay") entered into an agreement with ProAm Explorations Corporation
("ProAm") under which ProAm granted to Pizay an exclusive option to acquire an
undivided 10% interest in certain property. The consideration to earn this 10%
interest included a non-interest bearing demand note payable in the amount of
CDN$90,000. This agreement was terminated in 1999. We have been named as a
defendant in a lawsuit by ProAm Explorations Corporation in the Supreme Court of
British Columbia, Court File No. C992400, Vancouver Registry. This lawsuit
claims damages in the amount of CDN$90,000 plus interest and costs for
non-payment of the outstanding demand note. ProAm bases the claim against us on
an alleged verbal guarantee of the note payable by ProAm. We have filed a
statement of defense denying the allegations in the claim. The outcome cannot be
determined at this time but management believes that the results will not have a
material adverse effect on our business.
27
8B. SIGNIFICANT CHANGES
Since the close of our third quarter ended December 31, 2000, we have raised
$147,503 in capital through financing activities. See Item 10 "Additional
Information, Recent Sales of the Corporation's Securities ".
ITEM 9. THE LISTING
COMMON SHARES
Each of our Common Shares carries one vote at all meetings of shareholders,
is entitled to dividends as and when declared by our Board of Directors and is
entitled upon liquidation, dissolution or winding-up to a pro rata share of the
assets distributable to holders of common shares. Our common shares carry no
conversion or pre-emptive rights. We have no other classes of shares. Pursuant
to section 23 (1) of the Business Corporations Act (R.S.O. 1990, c. B. 16),
which is our governing corporate legislation, our articles allow us to issue an
unlimited number of common shares at such time and to such persons and for such
consideration as the directors may determine. However, in certain circumstances
the Ontario Securities Act and the rules and policies of the Ontario Securities
Commission may require that we obtain shareholder approval to issue shares
At our 2000 Annual General Meeting of Shareholders, the shareholders passed
a resolution authorizing our directors to cause us to issue up to 30,580,866
common shares or 30,580,866 units consisting of one common share and one warrant
through one or more private placement financing transactions. Any such
transactions must be entered into before September 2001 at the market price at
the time of the transaction less any discounts as approved by our directors. We
are only authorized to enter into such a private placement if funds are required
to continue or expand or activities and the subscription price is reasonable in
the circumstances. This resolution was obtained to obviate any need for
shareholder approvals of a private placement that may be required by a
securities regulatory authority and thereby reduce the time required to complete
a financing. Any financing that is not in accordance with the terms of the
shareholder's resolution may require shareholder approval pursuant to the rules
and policies of the Ontario Securities Commission.
TRANSFER AGENT
Our common shares are issued in registered form. Heritage Trust Company
located in Toronto, Ontario, Canada, is the registrar and transfer agent for our
common shares
TRADING MARKET
Our common shares trade "over-the-counter" on the Canadian Unlisted Board
("CUB") with the trading symbol "ROOS" (formerly "SMRL") and CUSIP #253886-10-3.
The CUB system was implemented in November 2000. It is only available to
traders and brokers for reporting trades that they have arranged in unlisted and
unquoted equity securities in Ontario. No real-time quotes or trades are
available to the public.
Prior to November 2000, our common shares traded on the Canadian Dealing
Network (CDN). The following table lists the reported high, low, closing prices
and the aggregate quarterly trading volumes on CDN for our common shares for the
eight fiscal quarters from December 31, 1998 to September 30, 2000.
28
CANADIAN DEALING NETWORK TRADING ACTIVITY
SALES (IN CANADIAN DOLLARS)
Period High Low Trading Volume
January 1 through March 15, 2001 * * *
Quarter ended December 31, 2000 $ 0.35 $ 0.25 11,111
Quarter ended September 30, 2000 $ 1.00 $ 0.40 271,054
Quarter ended June 30, 2000 $ 1.00 $ 0.40 20,698
Quarter ended March 31, 2000 $ 0.75 $ 0.50 22,640
Quarter ended December 31, 1999 $ 0.09 $ 0.01 **
Quarter ended September 30, 1999 $ 0.09 $ 0.01 5,133,722
Quarter ended June 30, 1999 $ 0.07 $ 0.01 1,282,167
Quarter ended March 31, 1999 $0.015 $0.015 287,723
Quarter ended December 31, 1998 $ 0.08 $ 0.01 419,000
*Since the formation of CUB, there is no record of quotations. On several
occasions in March 2001 we were advised by brokers trading in our common shares
that they were being offered at CDN$0.25. We are unable to conclusively
determine whether any trading occurred or the price of any trades.
**There were no trades reported during this period.
There can be no assurance that an active trading market for our common
shares will develop or be sustained.
ITEM 10. ADDITIONAL INFORMATION
10A. SHARE CAPITAL
COMMON SHARES
Each of our Common Shares carries one vote at all meetings of shareholders,
is entitled to dividends as and when declared by our Board of Directors and is
entitled upon liquidation, dissolution or winding-up to a pro rata share of the
assets distributable to holders of common shares. Our common shares carry no
conversion or pre-emptive rights.
On March 31, 2001, the shareholders' list for our common shares showed 196
registered shareholders and 32,830,866 shares outstanding. 13 of these
registered shareholders listed U.S. addresses, showing ownership of an aggregate
of 29,601 shares, representing 0.0009% of our outstanding common shares. All of
our outstanding common shares are fully paid and non-assessable.
29
OPTIONS
Options to acquire our common shares are also discussed in Item 6
"Directors, Senior Management and Employees". On March 31, 2001, there were
1,738,500 options to purchase our common shares outstanding net of forfeitures.
The exercise price for all of these options is CDN$0.25. The expiry dates of
these options range from February 17, 2003 to December 31, 1010.
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
COMMON SHARES
SHARES AMOUNT
Balance as at April 1, 1998 23,815,191 $2,532,277
Issued for Acquisition of 1345969
Ontario Limited 1,000,000 200,000
Consolidation (12 for 1 basis) (22,747,197) (2,569,760)
------------ ----------
2,067,994 162,517
Reverse Takeover - Issuance of Common Shares 20,000,000 694
------------ ----------
Balance as at March 31, 1999 22,067,994 163,211
Issuance of shares for cash 4,000,000 101,190
Issuance of shares for cash 1,132,872 161,960
Issuance of shares for cash 680,000 100,179
Issuance of shares in consideration of
investment banking services 1,600,000 41,028
Issuance of shares for cash 100,000 16,795
Issuance of shares for cash 1,000,000 172,446
------------ ----------
Balance as at March 31, 2000 30,580,866 756,809
Issuance of Common Shares for cash 1,250,000 81,946
1,000,000 65,557
------------ ----------
Balance as at March 31, 2001 32,830,866 904,312
RECENT SALES OF THE CORPORATIONS' SECURITIES
On February 14, 2001 we closed a private placement with two offshore
investors. We issued an aggregate of 2,250,000 common shares at the price of
CDN$0.10 per share, for aggregate consideration of $147,503. We were not
required to register these securities in Ontario.
30
On February 18, 2000 we issued 350,000 options to acquire our common shares
to a consultant in consideration for management consulting services. On February
18, 2000 we issued 150,000 options to acquire our common shares to a consultant
in consideration for investor relations services. These options are exercisable
at the price of CDN $0.25 per share, vest equally over two years and expire on
February 18, 2003. During our fiscal year 2002 we issued an aggregate of 100,000
options to acquire our common shares to a consultant in consideration for legal
and management services. These options are exercisable at the price of CDN $0.25
per share, vest at varying rates over four years and expire on dates varying
from November 2010 to February 2011.
On November 12, 1999, we issued 1,600,000 common shares to a consultant for
investor relations' services.
Pursuant to the reverse takeover of the Corporation, discussed under Item 4
"Information about the Corporation - History" of this registration statement,
the Corporation acquired all of the issued and outstanding common shares of Web
Dream from 74 persons for aggregate consideration of $254,093. Two of our
common shares were issued for every one common share in Web Dream Inc., for a
total of 27,512,872 post-consolidated common shares. The issuance of these
shares was exempted from registration in accordance with 72(1)(j) of the Ontario
Securities Act which applies to exchanges of securities in the course of a
take-over bid.
On March 18, 1999, the Company issued 1,000,000 common shares to the
shareholders of 1345969 Ontario Limited in exchange for all of its issued and
outstanding shares.
10B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Incorporation: Originally a federally incorporated company, we were
--------------
continued as an Ontario corporation under the Business Corporations Act
(Ontario) by Articles of Continuance dated October 30, 1998. We filed Articles
of Amalgamation under the name Storimin Resources Limited on April 1, 1999,
Ontario Corporation number 1348061. By Articles of Amendment filed January 19,
2000, we changed our name from Storimin Resources Limited to Digital Rooster.com
Inc. Our Ontario corporation number is 1348061. The Articles of Amalgamation
provide in section 6 that there are no restrictions on the business that we may
carry on or on the powers that we may exercise. These provisions of our
Articles of Amalgamation have not been amended or revoked.
Bylaws: Our bylaws explain the way our corporate affairs are to be
------
conducted. A copy of our bylaws is attached as Exhibit 2.1 to this registration
statement. As provided for in the legislation that governs us, a bylaw can be
made, amended or repealed at any time by our directors. If the directors make,
amend or repeal a bylaw, the bylaw, amendment or repeal must be submitted to our
shareholders at the next shareholder meeting. Our shareholders may confirm,
reject or amend the bylaw, amendment or repeal. (R.S.O. 1990, c. B.16, s. 116
(2)). A shareholder may propose to make, amend or repeal a bylaw. Such a
proposal must be submitted to our shareholders for adoption at the next
shareholder meeting.
Borrowing powers: Our borrowing powers are authorized by section 2.05 and
-----------------
section 3.01 of our bylaws. The financial institutions with which our banking
business is to be conducted are to be determined by our board of directors or
any committee or person designated by our board of directors to make such
determination (section 2.05). Our board of directors, or any committee or
person designated by our board of directors, is authorized to borrow money,
31
issue, reissue, sell or pledge bonds, debentures, notes or other evidences of
indebtedness on our behalf. Our board of directors, or any committee or person
designated by our board of directors, is also authorized to secure or guarantee
on our behalf the performance of any present or future indebtedness, liability
or obligation of any person. The board of directors is authorized to exercise
the borrowing powers described above without obtaining authorization from our
shareholders.
Director's Appointment and Quorum: A quorum for the transaction of business
---------------------------------
at any meeting of the board of directors is set in section 4.01 of our bylaws to
be at least a majority of the directors. The board of directors can determine
that a quorum shall be more than a majority. Our directors are not required to
hold any of our common shares. Section 404 of our bylaws provides that our
shareholders may by resolution passed at a meeting specially called for such
purpose remove any director from office and fill the vacancy created by such
removal.
Director's Conflicts: Section 4.18 of our bylaws governs conflicts of
----------------------
interest involving our directors. That section provides that a director or
officer who is a party to, or who is a director or 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, shall disclose the nature and extent of
his interest at the time and in the manner provided by the Business Corporations
Act (Ontario). The relevant provisions of that Act as of the date of this
registration statement provide that a director or officer of a corporation who
(a) is a party to a material contract or transaction or proposed material
contract or transaction 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 transaction or proposed material contract or transaction with the
corporation, shall disclose in writing to the corporation or request to have
entered in the minutes of meetings of directors the nature and extent of his or
her interest. (R.S.O. 1990, c. B.16, s. 132 (1).) Any such contract or proposed
contract may be referred to the board or shareholders for approval even if such
contract is one that in the ordinary course of the Corporation's business would
not require approval by the board or shareholders. Such a director shall not
vote on any resolution to approve the same except as provided by the Act.
Section 4.19 of our bylaws provides that subject to any unanimous shareholder
agreement, the directors shall be paid such remuneration for their services and
reimbursed for expenses properly incurred as the board may from time to time
determine. Directors are not precluded from serving us in any other capacity and
receiving remuneration therefor.
Director's Indemnity: Section 7 of our bylaws set forth certain protections
--------------------
for our directors and officers. Section 7.01 provides that no director or
officer shall be held liable for any losses or liabilities provided that in
exercising his powers and discharging his duties he acts honestly and in good
faith with a view to our best interests and exercises the care, diligence and
skill that a reasonably prudent person would exercise in comparable
circumstances. These provisions of our bylaws do not relieve any director or
officer from the duty to act in accordance with the Act and the regulations
thereunder or from liability for breach of such laws.
Shareholder's Meetings: Our board of directors, our chairman of the board,
-----------------------
or our president are responsible for setting the date and place for the annual
general meeting of shareholders, which by law must be held no later than fifteen
months after the last annual meeting. The purpose of the annual meeting is to
consider our financial statements and reports, elect directors, appoint an
auditor and transact any other business (section 8.01). Section 8.02 of our
bylaws provides that our board, our chairman of the board, or our president has
the power to call a special meeting of shareholders at any time.
32
Section 8.04 of our bylaws specifies the requirements for calling a
shareholder meeting. That section requires that notice of the time and place of
each meeting of shareholders shall be given not less than 21 nor more than 50
days before the date of the meeting to each director, to our auditor and to each
shareholder who at the close of business on the record date for notice is
entered in the securities register as the holder of one or more shares carrying
the right to vote at the meeting. Notice of a meeting of shareholders called for
any purpose other than consideration of the financial statements and auditor's
report, election of directors, and reappointment of the incumbent auditor must
state the nature of such business in sufficient detail to permit the shareholder
to form a reasoned judgment thereon and shall state the text of any special
resolution to be submitted to the meeting.
We are required by section 8.05 of our bylaws to prepare a list of
shareholders entitled to receive notice of a meeting, arranged in alphabetical
order and showing the number of shares held by each shareholder entitled to vote
at the meeting. If a record date for the meeting is fixed, the shareholders
listed are those registered at the close of business on the record date. If no
record date is fixed, the shareholders listed are those registered at the close
of business on the day immediately preceding the day on which notice of the
meeting is given or, where no such notice is given, on the day on which the
meeting is held. The list is to be made available for examination by any
shareholder during usual business hours at our registered office or at the place
where our central securities register is maintained and at the meeting. Where a
separate list of shareholders has not been prepared, the names of persons
appearing in the securities register at the requisite time as the holder of one
or more shares carrying the right to vote at such meeting will be deemed to be a
list of shareholders.
Section 8.06 of our bylaws sets out the requirements for setting a record
date. Our directors are not required to set a record date, but if they do, the
record date must not precede the date of the shareholder's meeting by more than
50 days or by less than 21 days. If our board does not fix a record date, the
record date for the determination of the shareholders entitled to receive notice
of a meeting shall be at the close of business on the day immediately preceding
the day on which the notice is given, or if no notice is given, the day of which
the meeting is held.
A shareholder meeting may be held without notice if the requirements set
out in section 8.07 of our bylaws are met. These are requirements that must be
met are: (a) all the shareholders entitled to vote at the meeting are present
in person or represented, or if those not present or represented waive notice of
or otherwise consent to the meeting, and (b) our auditors are present or waive
notice of or otherwise consent to the meeting. The meeting can only proceed
without notice having been given if the shareholders, auditors or directors
present are not attending for the express purpose of objecting to the
transaction of any business on the grounds that the meeting is not lawfully
called.
Section 8.10 of our bylaws states that the quorum required in order to
conduct business at a shareholder's meeting two individuals present in person,
each of whom is a shareholder or proxyholder entitled to vote at the meeting.
Section 8.11 of our bylaws provides that every person named in the shareholder
list is entitled to vote the number of shares shown on the list opposite their
name. Every question to be decided at a shareholders meeting shall, unless
otherwise required by law, be determined by a majority of the votes cast on the
question (section 8.15). Section 8.12 of our bylaws governs the rights of a
shareholder to appoint a proxy holder or representative to attend a shareholder
meeting and vote at that meeting on the shareholder's behalf. A proxy must be
33
in writing and signed by the shareholder or his or her attorney. Where a
shareholder is a corporation or association, it may authorize an individual to
represent it at a shareholder meeting. The authority of such an individual must
be given by a resolution of the corporation or shareholder and deposited with
us.
Section 8.18 of our bylaws allows the chairman at a shareholders meeting to
adjourn the meeting provided that the shareholders consent to the adjournment.
If a shareholder meeting is adjourned for less than 30 days, notice of the
adjourned meeting does not have to be given. If a shareholder meeting is
adjourned by one or more adjournments for a total of 30 days or more, then
notice of the adjourned meeting must be given as required for an original
meeting.
10C. MATERIAL CONTRACTS
None.
10D. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
The federal Investment Canada Act (the "ICA"), which became effective on
June 30, 1985, regulates the acquisition by non-Canadians of control of a
Canadian Business (as defined in the ICA). Such an acquisition is either
notifiable or reviewable depending on its structure and the value of the assets
of the Canadian business being acquired. In effect, the ICA requires review by
Investment Canada, the agency which administers the ICA, and approval by the
Canadian government in the case of an acquisition of control of a Canadian
business by a non-Canadian that is a WTO Investor (as defined in the ICA) where:
(i) in the case of a direct acquisition of control of a Canadian entity (i.e.,
through a share purchase), the assets of the entity carrying on the Canadian
Business and of all other entities in Canada, the control of which is acquired
exceeds CDN $209 million (this threshold is adjusted annually for inflation and
growth in Canada's domestic product); or (ii) in the case of a direct
acquisition of assets of a Canadian Business (i.e., through an asset
acquisition) the value of the assets used in carrying on the Canadian business
exceeds CDN $209 million. Where an investor is not a WTO Investor, review is
required where: (i) in the case of a direct acquisition of control of a
Canadian Business, the value of the assets of the business and all other
entities being acquired is CDN $5 million or more; or (ii) in the case of an
indirect acquisition of control of a Canadian Business, where the Canadian
Business has assets of CDN $50 million or more in value; or (iii) in the case of
an acquisition of assets of a Canadian Business, the assets represents more than
50% of the assets of the original group and the value of the acquired assets
exceeds CDN $5 million.
In the context of the Corporation three methods of acquiring control of a
Canadian business are regulated by the ICA: (i) the acquisition of all or
substantially all of the assets used in carrying on the Canadian business; (ii)
the acquisition, directly or indirectly, of voting shares of a Canadian
corporation carrying on the Canadian business; (iii) the acquisition of voting
shares of an entity which controls, directly or indirectly, another entity
carrying on a Canadian business. An acquisition of a majority of the voting
interests of an entity, including a corporation, is deemed to be an acquisition
of control under the ICA. An acquisition of less than one-third of the voting
shares of a corporation is deemed not to be an acquisition of control. An
acquisition of less than a majority, but one-third or more, of the voting shares
of a corporation is presumed to be an acquisition of control unless it can be
established that on the acquisition the corporation is not, in fact, controlled
by the acquirer through the ownership of voting shares. For partnerships,
trusts joint ventures or other unincorporated entities; an acquisition of less
than a majority of the voting interests is deemed not to be an acquisition of
control.
34
10E. TAXATION
CERTAIN CANADIAN FEDERAL INCOME TAX CONSEQUENCES
The following summary of the material Canadian federal income tax
considerations generally applicable in respect of the holding and disposition of
common shares reflects the Corporation's opinion. The tax consequences to any
particular holder of common shares will vary according to the status of that
holder as an individual, trust, corporation or member of a partnership, the
jurisdiction in which that holder is subject to taxation, the place where that
holder is resident and, generally, according to that holder's particular
circumstances.
This summary is applicable only to holders who are resident solely in the
United States, have never been resident in Canada, deal at arm's length with the
Corporation, hold their common shares as capital property and who will not use
or hold the common shares in carrying on business in Canada.
This summary is based upon the provisions of the Income Tax Act of Canada
and the regulations thereunder (collectively, the "Tax Act" or "ITA") and the
Canada-United States Tax Convention (the "Tax Convention") as at the date hereof
and the current administrative practices of Revenue Canada, Taxation. This
summary does not take into account provincial income tax consequences.
This summary is not exhaustive of all possible income tax consequences. It
is not intended as legal or tax advice to any particular holder of common shares
and should not be so construed. Each holder should consult his own tax advisor
with respect to the income tax consequences applicable to him in his own
particular circumstances.
Dividends
In the case of any dividends paid to non-residents, we withhold the
Canadian tax and pay only the net amount to the shareholder. The rate of
withholding tax is generally 25% but by virtue of Article X of the Tax
Convention, the rate of tax on dividends paid to persons who are residents only
of the United States for purposes of the Tax Convention is generally limited to
15% of the gross dividend (or 5% in the case of certain corporate shareholders
owning at least 10% of our voting shares).
Dispositions
A non-resident of Canada is not subject to tax under the ITA in respect of
a capital gain realized upon the disposition of a common share unless the share
is "taxable Canadian property" to the holder thereof and the non-resident is not
otherwise entitled to relief under a tax treaty. In the case of a non-resident
holder to whom our shares represent taxable Canadian property and who is
resident only in the United States for purposes of the Tax Convention, no tax
under the ITA will be payable on a capital gain realized on such shares by
reason of the Tax Convention unless the value of such shares is derived
principally from real property situated in Canada. We believe that the value of
our common shares is not derived from real property situated in Canada.
35
A common share of the Corporation will be taxable Canadian property to a
non-resident holder if, at any time during the period of five years immediately
preceding the disposition, the non-resident holder, persons with whom the
non-resident holder did not deal at arm's length, or the non-resident holder
together with persons with whom the holder did not deal at arm's length owned
25% or more of the issued shares of any class or series of the Corporation. In
addition, a common share will be taxable Canadian property if the shares are not
listed on a prescribed stock exchange. For this purpose, it is unclear whether
the Nasdaq Small Cap Market constitutes a prescribed stock exchange although the
better view is that it should. Holders who cannot avail themselves of the
protection of the Tax Convention should consult their own tax advisors in
advance of any disposition of common shares.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion that encompasses all of the material United
States Federal income tax consequences, under the law, generally applicable to a
U.S. Holder (as defined below) of our common shares. This discussion does not
address all potentially relevant Federal income tax matters and it does not
address consequences peculiar to persons subject to special provisions of
Federal income tax law, such as, for example, tax-exempt organizations,
qualified retirement plans, persons subject to alternative minimum tax,
financial institutions, insurance companies, real estate investment trusts,
regulated investment companies, broker-dealers, non-resident alien individuals
or foreign corporations whose ownership of common shares of the Corporation is
not effectively connected with the conduct of a trade or business in the United
States and shareholders who acquired their shares through the exercise of
employee share options or otherwise as compensation. In addition, this
discussion only applies to common shares held by U.S. Holders as capital assets
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code"), and does not cover any state, local or foreign tax
consequences.
The following discussion is based upon the sections of the Code, Treasury
Regulations, published Internal Revenue Service ("IRS") rulings, published
administrative positions of the IRS and court decisions that are currently
applicable, any or all of which could be materially and adversely changed,
possibly on a retroactive basis, at any time. The following discussion is for
general information only and is not intended to be, nor should it be construed
to be, legal or tax advice to any holder or prospective holder of common shares
of the Corporation and no opinion or representation with respect to the United
States Federal income tax consequences to any such holder or prospective holder
is made. Accordingly, holders and prospective holders of common shares of the
Corporation should consult their own tax advisors about the federal, state,
local, and foreign tax consequences of purchasing, owning and disposing of our
common shares.
U.S. Holders
As used herein, a ("U.S. Holder") includes a holder of our common shares
who is a citizen or resident of the United States, a partnership or corporation
organized under the laws of the United States, an estate, the income of which is
subject to United States federal income tax without regard to its source and a
trust if a United States court is able to exercise primary supervision over
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust or if the trust was in
existence on August 20, 1996 and has elected to continue to be treated as a
United States person, and any other person or entity whose ownership of our
common shares is effectively connected with the conduct of a trade or business
in the United States.
36
Distributions on our Common Shares
U.S. Holders receiving dividend distributions (including constructive
dividends) with respect to our common shares are required to include in gross
income for United States Federal income tax purposes the gross amount of such
distributions to the extent that we have current or accumulated earnings and
profits, without reduction for any Canadian income tax withheld from such
distributions. Such Canadian tax withheld may be credited, subject to certain
limitations, against the U.S. Holder's United States Federal Income tax
liability or, alternatively, may be deducted in computing the U.S. Holder's
United States Federal taxable income by those who itemize deductions. (See more
detailed discussion at "Foreign Tax Credit" below). To the extent that
distributions exceed our current or accumulated earnings and profits, they will
be treated first as a return of capital up to the U.S. Holder's adjusted basis
in the common shares and thereafter as gain from the sale or exchange of the
common shares. Preferential tax rates for long-term capital gains are applicable
to an U.S. Holder, which is an individual, estate or trust. There are currently
no preferential tax rates for long-term capital gains for an U.S. Holder, which
is a corporation. Dividends paid in Canadian dollars will be included in income
in an U.S. dollar amount based on the exchange rate at the time of their
receipt. U.S. Holders should consult their own tax advisors regarding the
treatment of any foreign currency gain or loss on any Canadian dollars received
as a dividend, which are converted into U.S. dollars on a date subsequent to
receipt.
Dividends paid on our common shares will not generally be eligible for the
dividends received deduction provided to corporations receiving dividends from
certain United States corporations. A U.S. Holder which is a corporation may,
under certain circumstances, be entitled to a 70% deduction of the United States
source portion of dividends received from the Corporation (unless we qualify as
a "foreign personal holding Corporation" or a "passive foreign investment
Corporation", as defined below) if such U.S. Holder owns shares representing at
least 10% of the voting power and value of the Corporation. The availability of
this deduction is subject to several complex limitations, which are beyond the
scope of this discussion.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distributions) Canadian income
tax with respect to the ownership of our common shares may be entitled, at the
option of the U.S. Holder, to either a deduction or a tax credit for such
foreign tax paid or withheld. Generally, it will be more advantageous to claim a
credit because a credit reduces United States Federal income taxes on a
dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income
subject to tax. This election is made on an annual basis and applies to all
foreign income taxes (or taxes in lieu of income tax) paid by (or withheld from)
the U.S. Holder during the year. There are significant and complex limitations
which apply to the credit, among which is the general limitation that the credit
cannot exceed the proportionate share of the U.S. Holders United States income
tax liability that the U.S. Holder's foreign source income bears to his/her or
its worldwide taxable income.
37
In the determination of the application of this limitation, the various
items of income and deduction must be classified into foreign and domestic
sources. Complex rules govern this classification process. There are further
limitations on the foreign tax credit for certain types of income such as
"passive income", "high withholding tax interest", "financial services income",
"shipping income", and certain other classifications of income. In certain
circumstances, recently enacted legislation and other guidance issued by the
United States Treasury may deny a United States holder foreign tax credits (and
instead may allow deductions) for foreign taxes imposed on a dividend if the
United States holder (i) has not held the common shares for at least 16 days in
the 30-day period beginning 15 days before the ex-dividend date, during which it
is not protected from risk of loss; (ii) is obligated to make payments related
to the dividends; or (iii) holds the common shares in arrangements in which the
United States holder's expected economic profit, after non-US taxes, is
insubstantial.
The availability of the foreign tax credit and the application of the
limitations on the credit are fact specific and holders and prospective holders
of common shares of the Corporation should consult their own tax advisors
regarding their individual circumstances.
Disposition of our Common Shares of the Corporation
A U.S. Holder will recognize gain or loss upon the sale of our common
shares equal to the difference, if any, between (i) the amount of cash plus the
fair market value of any property received, and (ii) the shareholder's tax basis
in our common shares. Any gain recognized on the sale or other disposition of
common shares will generally be U.S. source income. Any loss recognized on the
sale or other disposition of common shares will generally be U.S. source.
However, such loss will be foreign source to the extent certain dividends were
received by the U.S. Holder within the 24-month period preceding the date on
which the loss was recognized. This gain or loss will be capital gain or loss if
the common shares are capital asset in the hands of the U.S. Holder, which will
be a short-term or long-term capital gain or loss depending upon the holding
period of the U.S. Holder. Gains and losses are netted and combined according to
special rules in arriving at the overall capital gain or loss for a particular
tax year. Deductions for net capital losses are subject to significant
limitations. For U.S. Holders who are individuals, a capital loss is deductible
only to the extent of capital gains, plus ordinary income of up to U.S. $3,000;
any unused portion of such net capital loss may be carried over to be used in
later tax years until such net capital loss is thereby exhausted. For U.S.
Holders that are corporations (other than corporations subject to Subchapter S
of the Code), any unused net capital loss may be carried back three years from
the loss year and carried forward five years from the loss year to be offset
against capital gains until such net capital loss is thereby exhausted. If the
amount realized on a sale or exchange is not denominated in U.S. dollars, the
amount realized will be equal to the U.S. dollar value thereof, determined at
the spot rate on the date of the sale or exchange.
Other Considerations
In the following two circumstances, the above sections of the discussion
may not describe the United States Federal income tax consequences resulting
from the holding and disposition of our common shares. Based on (a) the number
of shareholders of our common shares and (b) the majority ownership of our
shares by Canadian residents,we do not believe that it is either a "Foreign
Personal Holding Corporation" or a "Controlled Foreign Corporation."
38
10H. INSPECTION OF DOCUMENTS
Documents referred to in this registration statement may be inspected at
our executive offices at 366 Bay Street, 12th floor, Toronto, Ontario, M5H 4B2,
during normal business hours.
ITEM 11: QUANTITATIVE AND QUALITATIVE ASSESSMENT OF MARKET RISK
EXCHANGE RATE SENSITIVITY
Substantially large amounts of our revenues are earned in United States
dollars, and expenses are incurred in Canadian dollars. Increases in the value
of the Canadian dollar relative to the United States dollar could adversely
affect our results of operations. We do not engage in any foreign currency
hedging policies. To the extent that we are not able to or do not raise our
prices to reflect an adverse change in exchange rates, our profitability would
be adversely affected. The impact of future exchange rates fluctuations on our
results of operations and financial condition cannot be accurately predicted.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18. The
financial statements required are set forth beginning on page F-1.
39
INDEX TO FINANCIAL STATEMENTS
ENTITY
PAGE
I. AUDITED FINANCIAL STATEMENTS
WEB DREAM INC.-
March 31, 2000, August 31, 1999 and 1998,
Auditors' Report F1
Financial Statements and Notes F2 to F15
II. PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
DIGITAL ROOSTER.COM INC. -
March 31, 2000 and 1999
Compilation Report F16
Pro-Forma Consolidated Financial Statements and Notes F17 to F33
AUDITORS' REPORT
To The Directors of
Web Dream Inc.
We have audited the balance sheets of Web Dream Inc. as at March 31, 2000,
August 31, 1999, and 1998 and the statements of operations, (deficit) retained
earnings and cash flows for the periods 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 Canadian and United States generally
accepted auditing standards. Those standards require that we plan and perform
an audit to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at March 31, 2000, August 31,
1999, and 1998 and the results of its operations and its cash flows for the
periods then ended in accordance with Canadian generally accepted accounting
principles.
Toronto, Ontario. /S/ "MINTZ & PARTNERS LLP"
March 7, 2001 CHARTERED ACCOUNTANTS
F1.
WEB DREAM INC.
BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
MARCH 31, MARCH 31, AUGUST 31, AUGUST 31,
AS AT 2000 1999 1999 1998
(UNAUDITED)
(Refer Note 17)
====================================================================================================
A S S E T S
-----------
CURRENT
Cash $ 17,718 $ 13,497 $ 895 $ 2,248
Accounts receivable 91,382 10,229 42,269 6,331
Prepaids and sundry receivables 4,701 2,584 3,230 2,495
----------- ----------- ------------ ------------
113,801 26,310 46,394 11,074
DUE FROM SHAREHOLDERS - 31,225 - 3,776
CAPITAL ASSETS (Note 3) 86,179 57,172 72,551 28,140
DUE FROM JAZZ MONKEY MEDIA INC.
(NOTE 4) 154,897 - - -
----------- ----------- ------------ ------------
$ 354,877 $ 114,707 $ 118,945 $ 42,990
=========== =========== ============ ============
L I A B I L I T I E S
---------------------
CURRENT
Accounts payable and accrued liabilities $ 97,604 $ 17,335 $ 64,334 $ 24,828
Deferred Revenue 31,884 - - -
----------- ----------- ------------ ------------
129,488 17,335 64,334 24,828
LOANS PAYABLE - 11,523 11,664 11,131
DUE TO SHAREHOLDERS (Note 5) 31,344 - 25,895 3,198
DUE TO JAZZ MONKEY MEDIA INC. (Note 4) - - 3,477 -
DUE TO DIGITAL ROOSTER.COM INC. (Note 6) 127,451 - - -
----------- ----------- ------------ ------------
288,283 28,858 105,370 39,157
----------- ----------- ------------ ------------
S H A R E H O L D E R S' E Q U I T Y
------------------------------------
CAPITAL STOCK (Note 7) 421,846 694 101,884 694
TRANSLATION ADJUSTMENT 581 338 (1,759) (615)
(DEFICIT) RETAINED EARNINGS (355,833) 84,817 (86,550) 3,754
----------- ----------- ------------ ------------
66,594 85,849 13,575 3,833
----------- ----------- ------------ ------------
$ 354,877 $ 114,707 $ 118,945 $ 42,990
=========== =========== ============ ============
APPROVED BY THE BOARD:
/s Brian Usher Jones
- ---------------------------
Director
/s/ Hubert Mockler
- ---------------------------
Director
================================================================================
See Accompanying Notes F2.
WEB DREAM INC.
STATEMENT OF (DEFICIT) RETAINED EARNINGS
(EXPRESSED IN U.S. DOLLARS)
MARCH 31, MARCH 31, AUGUST 31, AUGUST 31,
FOR THE PERIODS ENDED 2000 1999 1999 1998
(7 MONTHS) (7 MONTHS) (12 MONTHS) (7 MONTHS)
(UNAUDITED)
(Refer
Note 17)
=============================================================================
BALANCE - Beginning of period $ (86,550) $ 3,754 $ 3,754 $ -
Net (loss) income (269,283) 81,063 (90,304) 3,754
---------- ---------- ---------- ----------
BALANCE - End of period $(355,833) $ 84,817 $ (86,550) $ 3,754
========== ========== ========== ==========
================================================================================
See Accompanying Notes F3.
WEB DREAM INC.
STATEMENT OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
MARCH 31, MARCH 31, AUGUST 31, AUGUST 31,
FOR THE PERIODS ENDED 2000 1999 1999 1998
(7 MONTHS) (7 MONTHS) (12 MONTHS) (7 MONTHS)
(UNAUDITED)
(Refer Note 17)
===========================================================================================
REVENUES $ 963,009 $ 696,312 $ 1,209,783 $ 155,103
COST OF SALES 395,012 268,687 508,740 28,000
------------ ----------- ------------ -----------
GROSS PROFIT 567,997 427,625 701,043 127,103
------------ ----------- ------------ -----------
EXPENSES
Administrative 488,123 204,913 490,000 62,967
Selling 167,655 100,480 141,962 19,580
Computer 151,003 29,195 130,396 34,596
Interest 10,144 1,784 11,127 1,403
Amortization 20,355 10,190 17,862 4,803
------------ ----------- ------------ -----------
837,280 346,562 791,347 123,349
------------ ----------- ------------ -----------
NET (LOSS) INCOME $ (269,283) $ 81,063 $ (90,304) $ 3,754
============ =========== ============ ===========
(LOSS) INCOME PER SHARE (Note 11)
Basic (0.012) 0.047 (0.009) 0.0002
Fully diluted (0.012) 0.047 (0.009) 0.0002
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING DURING THE PERIOD 12,761,523 10,000,000 10,076,712 10,000,000
================================================================================
See Accompanying Notes F4.
WEB DREAM INC.
STATEMENT OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
MARCH 31, MARCH 31, AUGUST 31, AUGUST 31,
FOR THE PERIODS ENDED 2000 1999 1999 1998
(7 MONTHS) (7 MONTHS) (12 MONTHS) (7 MONTHS)
(UNAUDITED)
(Refer Note 17)
=======================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(269,283) $ 81,063 $(90,304) $ 3,754
Adjustment for non-cash items:
Amortization 20,355 10,190 17,862 4,803
Non-cash expenses (Note 13 (ii)) 41,028 - - -
Translation adjustment 2,340 953 (1,144) (615)
---------- --------- --------- ---------
(205,560) 90,206 (73,586) 7,942
Changes in non-cash operating items
(Note 13 (i)) 14,570 (11,480) 2,883 16,002
---------- --------- --------- ---------
CASH FLOWS (USED IN) PROVIDED BY
OPERATING ACTIVITIES (190,990) 80,726 (70,703) 23,944
---------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from (to) shareholders 5,449 (30,647) 26,473 (578)
Increase (decrease) in loans payable (11,664) 392 533 11,131
Due from (to) Jazz Monkey Media Inc. (158,374) - 3,477 -
Due from Digital Rooster.com Inc. 127,451 - - -
Issuance of capital stock (Note 7) 278,934 - 101,190 694
---------- --------- --------- ---------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES 241,796 (30,255) 131,673 11,247
---------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (33,983) (39,222) (62,323) (32,943)
---------- --------- --------- ---------
CASH FLOWS USED IN INVESTING
ACTIVITIES (33,983) (39,222) (62,323) (32,943)
---------- --------- --------- ---------
INCREASE (DECREASE) IN CASH 16,823 11,249 (1,353) 2,248
CASH - Beginning of period 895 2,248 2,248 -
---------- --------- --------- ---------
CASH - End of period $ 17,718 $ 13,497 $ 895 $ 2,248
========== ========= ========= =========
================================================================================
See Accompanying Notes F5.
WEB DREAM INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND MARCH 31, 1999 (UNAUDITED) AND AUGUST 31, 1999, AND 1998
(EXPRESSED IN U.S. DOLLARS)
================================================================================
1. NATURE OF COMPANY'S OPERATIONS
Web Dream Inc. (the "Company") derives its revenues from the license of
video content, subscriptions to website content and advertisements
displayed on its website.
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
a) Basis of presentation
These financial statements have been prepared in accordance with
Canadian Generally Accepted Accounting Principles. Significant
differences between Canadian Generally Accepted Accounting Principles
and United States Generally Accepted Accounting Principles as they
relate to these financial statements, are explained in Note 16.
b) Use of estimates
The preparation of these financial statements in conformity with
Canadian Generally Accepted Accounting Principles has required
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
liabilities as at March 31, 2000, August 31, 1999 and 1998 and the
revenue and expenses reported for the periods then ended. Actual
results may differ from those estimates.
c) Revenue recognition
Revenues from monthly subscriptions to the website are deferred on
receipt and are recognized as the services are provided. Revenues from
internet advertising are recognized over the period the services are
provided.
d) Capital assets
Capital assets are recorded at cost, less accumulated amortization.
Amortization is provided over the estimated useful lives of the assets
as follows:
Furniture and fixtures - 20% declining balance
Leasehold improvements - 20% straight line
Computer hardware - 30% declining balance
Computer software - 100% declining balance
Capital assets purchased during the year are amortized at one-half of
the above stated rates.
================================================================================
/Continued . . . F6.
WEB DREAM INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND MARCH 31, 1999 (UNAUDITED) AND AUGUST 31, 1999, AND 1998
(EXPRESSED IN U.S. DOLLARS)
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENATION - Continued
e) Income taxes
The Company follows the asset and liability approach to accounting and
reporting for income taxes.
The income tax provision differs from that calculated by applying the
statutory rates to the changes in current or future income tax assets
or liabilities during the year.
The Company provides a valuation allowance to reduce future income tax
assets when it appears likely that the asset will not be realized.
f) Foreign currency translation
The reporting currency in these financial statements is the U.S.
dollar. Accordingly, assets and liabilities denominated in Canadian
dollars have been translated into U.S. dollars at the exchange rate
prevailing at the balance sheet date other than common stock which has
been translated at historical rates. Results of operations have been
translated at the average exchange rate for the year. Cumulative net
translation adjustments are included as a separate component of
shareholders' equity.
The functional currency in these financial statements is the Canadian
dollar. Accordingly, transactions have been translated at the average
exchange rate for the year. Exchange gains and losses resulting from
translation of these amounts are reflected in the statement of
operations in the period in which they occurred.
g) Costs of raising capital
Incremental costs incurred in respect of raising capital are charged
against equity proceeds raised.
3. CAPITAL ASSETS
As At March 31, 2000
--------------------
Accumulated Net Carrrying
Cost Amortization Amount
---- ------------ ------
Furniture and equipment $ 10,693 $ 1,982 $ 8,711
Leasehold improvements 4,752 1,409 3,343
Computer hardware 110,228 37,970 72,258
Computer software 4,315 2,448 1,867
--------- -------- ---------
$ 129,988 $ 43,809 $ 86,179
========= ======== =========
================================================================================
/Continued . . . F7.
WEB DREAM INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND MARCH 31, 1999 (UNAUDITED) AND AUGUST 31, 1999, AND 1998
(EXPRESSED IN U.S. DOLLARS)
================================================================================
3. CAPITAL ASSETS - Continued
As At March 31, 1999 (Unaudited)
--------------------------------
Accumulated Net Carrrying
Cost Amortization Amount
------------ ---------------------- --------------
Furniture and equipment $ 2,533 $ 340 $ 2,193
Leasehold improvements 3,649 618 3,031
Computer hardware 64,932 13,844 51,088
Computer software 1,324 464 860
------------ ---------------------- --------------
$ 72,438 $ 15,266 $ 57,172
============ ====================== ==============
As At August 31, 1999
----------------------
Accumulated Net Carrrying
Cost Amortization Amount
------------ ---------------------- --------------
Furniture and equipment $ 7,067 $ 911 $ 6,156
Leasehold improvements 3,694 887 2,807
Computer hardware 83,179 20,322 62,857
Computer software 1,464 733 731
------------ ---------------------- --------------
$ 95,404 $ 22,853 $ 72,551
============ ====================== ==============
As At August 31, 1998
----------------------
Accumulated Net Carrrying
Cost Amortization Amount
------------ ---------------------- --------------
Furniture and equipment $ 1,142 $ 149 $ 993
Leasehold improvements 2,438 250 2,188
Computer hardware 29,363 4,404 24,959
------------ ---------------------- --------------
$ 32,943 $ 4,803 $ 28,140
============ ====================== ==============
================================================================================
/Continued . . . F8.
WEB DREAM INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND MARCH 31, 1999 (UNAUDITED) AND AUGUST 31, 1999, AND 1998
(EXPRESSED IN U.S. DOLLARS)
================================================================================
4. DUE FROM (TO) JAZZ MONKEY MEDIA INC.
The amount due from (to) the company related by virtue of common
shareholders, is unsecured, bears no interest and has no fixed terms of
repayment.
5. DUE TO SHAREHOLDERS
Shareholders' advances are unsecured, bear no interest and have no fixed
terms of repayment.
6. DUE TO DIGITAL ROOSTER.COM INC.
The amount, which is due to the company's parent, is unsecured, bears no
interest and has no fixed terms of repayment. This was loaned to facilitate
the "reverse takeover" on January 19, 2000 as discussed in Note 8.
================================================================================
/Continued . . . F9.
WEB DREAM INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND MARCH 31, 1999 (UNAUDITED) AND AUGUST 31, 1999, AND 1998
(EXPRESSED IN U.S. DOLLARS)
================================================================================
7. CAPITAL STOCK
Authorized
Unlimited number of Common shares
Unlimited number of Class A voting preference shares, having a
non-cumulative dividend as determined by the Board of Directors and are
redeemable and retractable.
Unlimited number of Class B voting preference shares, having a
non-cumulative dividend as determined by the Board of Directors and are
redeemable and retractable.
Unlimited number of non-voting special shares.
Issued - Common shares NUMBER AMOUNT
Issuance of shares on February 17, 1998 1,000 $ 694
---------- --------
Balance as at August 31, 1998 and
March 31, 1999 1,000 694
Stock split on August 18, 1999 on the
basis of 10,000 shares for each share issued 9,999,000 -
Issuance of shares on August 18, 1999 for cash 2,000,000 101,190
---------- --------
Balance as at August 31, 1999 12,000,000 101,884
Issuance of shares on September 22, 1999
for cash 566,436 161,960
Issuance of shares on November 3, 1999
for cash 340,000 100,179
Issuance of shares on November 12, 1999 in
consideration of investment banking
services (i) 800,000 41,028
Issuance of shares on December 15, 1999
for cash 50,000 16,795
---------- --------
Balance, as at March 31, 2000 13,756,436 $421,846
========== ========
(i) As no cash consideration was received, the net cash received, during the
period of seven months from September 1, 1999 to March 31, 2000, from
issuance of share capital was $278,934.
================================================================================
/Continued . . . F10.
WEB DREAM INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND MARCH 31, 1999 (UNAUDITED) AND AUGUST 31, 1999, AND 1998
(EXPRESSED IN U.S. DOLLARS)
================================================================================
8. REVERSE TAKEOVER
On January 19, 2000, the shareholders of Web Dream Inc. sold and
transferred all of their shares to Storimin Resources Limited ("Storimin")
in consideration of 28,000,000 shares of Storimin. Web Dream Inc.
shareholders received as consideration, 2 post-consolidation common shares
of Storimin for each common share of Web Dream Inc. sold. Subsequent to the
share exchange, the former shareholders of Web Dream Inc. own a majority of
all the issued and outstanding common shares of Storimin. The transaction
is accounted for as a "reverse takeover" by Storimin using the purchase
method of accounting with Web Dream Inc. being the acquiring company.
On January 19, 2000, subsequent to the reverse takeover, Storimin Resources
Limited, the legal parent, changed its name to Digital Rooster.com Inc. to
better reflect the corporation's activities.
9. CONTINGENT LIABILITY
In 1998, a claim was filed against the Company seeking damages of
$1,600,000 resulting from a breach of a contract. The Company has defended
the claim on the basis that the contract was properly terminated.
Management believes this action will not have a material adverse effect on
the financial position of the Company and no provision has been accrued in
these financial statements.
10. LEASE COMMITMENTS
The Company is obligated under an operating lease for its premises. The
lease expires on June 30, 2001.
Future minimum payments for its premises as at March 31, 2000 are as
follows:
2001 $ 38,214
2002 9,554
================================================================================
/Continued . . . F11.
WEB DREAM INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND MARCH 31, 1999 (UNAUDITED) AND AUGUST 31, 1999, AND 1998
(EXPRESSED IN U.S. DOLLARS)
================================================================================
11. INCOME TAXES
The Company has non-capital losses of approximately $262,000 as at March
31, 2000, which are available to offset future years' taxable income. The
potential tax benefit of these losses has not been recorded in the
financial statements. The losses expire as follows:
2005 $ 55,000
2006 91,000
2007 116,000
----------
$ 262,000
==========
12. (LOSS) INCOME PER SHARE
The loss (income) per share, which has been computed proportionately for
the periods presented, is based on the weighted average numbers of shares
outstanding during each period, including the effect of the split of shares
on August 18, 1999 described in note 7.
13. CHANGES IN NON-CASH OPERAING ITEMS AND SUPPLEMENTAL CASH FLOW DISCLOSURE
i) Changes in non-cash operating items:
MARCH 31, MARCH 31, AUGUST 31, AUGUST 31,
2000 1999 1999 1998
(7 MONTHS) (7 MONTHS) (12 MONTHS) (7 MONTHS)
(UNAUDITED)
Increase in accounts receivable $ (49,113) $ (3,898) $ (35,938) $ (6,331)
Increase in prepaid and sundry
receivables (1,471) (89) (735) (2,495)
Increase in deferred revenue 31,884 - - -
Increase (decrease) in accounts
payable and accrued liabilities 33,270 (7,493) 39,506 24,828
----------- ------------ ------------ ------------
$ 14,570 $ (11,480) $ 2,833 $ 16,002
=========== ============ ============ ============
Interest paid $ 10,144 $ 1,784 $ 11,127 $ 1,403
=========== ============ ============ ============
Income taxes paid $ - $ - $ - $ -
=========== ============ ============ ============
ii) Supplemental disclosure of
non-cash activities:
Non-cash investment banking
expenses (see Note 7) $ 41,028 $ - $ - $ -
=========== ============ ============ ============
================================================================================
/Continued . . . F12.
WEB DREAM INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND MARCH 31, 1999 (UNAUDITED) AND AUGUST 31, 1999, AND 1998
(EXPRESSED IN U.S. DOLLARS)
================================================================================
14. FAIR VALUE OF FINANCIAL STATEMENTS
The present carrying amount of the Company's financial assets and
liabilities approximates fair value.
15. BUSINESS SEGMENTS AND GEOGRAPHICAL INFORMATION
The Company has been operating in one business segment only, being monthly
subscriptions to, and license of, website and video contents.
Geographical information
Information as to sales and accounts receivable by reportable geographic
segments is:
Sales March, 2000 March, 1999 August, 1999 August, 1998
----- ----------- ----------- ------------ ------------
(7 months) (7 months) (12 months) (7 months)
(Unaudited)
Canada 5% 9% 12% 12%
United States 95% 91% 88% 88%
Accounts receivable
-------------------
Canada - - - -
United States 100% 100% 100% 100%
16. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES
Significant differences between Canadian Generally Accepted Accounting
Principles ("Canadian GAAP") and U.S. Generally Accepted Accounting
Principles ("U.S. GAAP") are summarized as follows:
BALANCE SHEET
ACCOUNTS RECEIVABLE
U.S. GAAP requires disclosure of the allowance for doubtful accounts on the
face of the financial statements.
The Company has not recorded any such allowance for the periods presented
in these financial statements.
================================================================================
/Continued . . . F13.
WEB DREAM INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND MARCH 31, 1999 (UNAUDITED) AND AUGUST 31, 1999, AND 1998
(EXPRESSED IN U.S. DOLLARS)
================================================================================
16. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - Continued
DEFERRED TAX ASSETS
Deferred tax assets (in Canada future income tax assets) are comprised of
benefits arising from losses carried forward. No deferred tax assets have
been recorded in accordance with Canadian GAAP because the Company cannot
determine whether it is more likely than not that it will be able to
realize the benefit of these losses carried forward during the carry
forward period. U.S. GAAP requires, in such circumstances, that disclosure
be made of the value of the asset and any valuation allowance applied to
it. Therefore, in accordance with U.S. GAAP the following would be included
in disclosures related to deferred tax assets in notes to the financial
statements:
MARCH 31, 2000 MARCH 31, 1999 AUGUST 31, 1999 AUGUST 31, 1998
---------------- ---------------- ----------------- -----------------
(UNAUDITED)
Deferred tax assets $ 115,300 $ 47,500 $ 64,200 $ 24,200
Less: Valuation allowance (115,300) (47,500) (64,200) (24,200)
---------------- ---------------- ----------------- -----------------
Net deferred tax assets $ - $ - $ - $ -
---------------- ---------------- ----------------- -----------------
STATEMENTS OF OPERATIONS AND CASH FLOWS
There are no material differences between the Canadian GAAP used in
preparing the statements of operations and cash flow and those that would
apply had the statements been prepared in accordance with U.S. GAAP.
================================================================================
/Continued . . . F14.
WEB DREAM INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND MARCH 31, 1999 (UNAUDITED) AND AUGUST 31, 1999, AND 1998
(EXPRESSED IN U.S. DOLLARS)
================================================================================
16. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - Continued
ADDITIONAL DISCLOSURES
i) Information as to products, geographic markets, significant estimates
and concentrations
United States GAAP requires information as to products, geographic
markets, significant estimates and concentrations, to be disclosed in
the notes to financial statements. This information is usually
disclosed with the summary of significant accounting policies. Such
information is provided in Notes 2 and 15.
ii) Recent accounting pronouncement
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101, as amended, summarizes
certain of the SEC's views in applying Generally Accepted Accounting
Principles to revenue recognition in financial statements. At this
time, management does not expect the adoption of SAB 101 to have a
material effect on the Company's operations or financial position. As
the SEC has delayed application of SAB 101, the Company will be
required to adopt SAB 101 in the first quarter of fiscal 2002.
iii) Differences in various accounting terms used in U.S. GAAP and Canadian
GAAP
In U.S. GAAP some of the accounting terms used differ from Canadian
GAAP. The following is a summary:
U.S. GAAP Canadian GAAP
----------- --------------
Deferred income taxes Future income taxes
Depreciation of tangible Amortization
capital assets
Reverse Acquisition Reverse takeover
Property and equipment Capital assets
iv) Comprehensive income
U.S. GAAP (SFAS 130) requires information regarding comprehensive
income and its components. The only substantial component of
comprehensive income, as defined in SFAS 130, relates to foreign
currency translation.
Accordingly, the foreign currency translation adjustment arising as a
result of translating the financial statements into U.S. dollars has
been disclosed as a separate item on the balance sheet.
17. COMPARATIVE FIGURES
Comparative figures for balance sheet as at March 31, 1999 and the
statement of operations, retained earnings and cash flows for the period
then ended are unaudited and have been provided for comparative purposes
only.
================================================================================
/Continued . . . F15.
COMPILATION REPORT
To the Directors of Digital Rooster.com Inc.
We have reviewed, as to compilation only, the accompanying pro-forma financial
statements of Digital Rooster.com Inc. as at March 31, 2000 and March 31, 1999
and for the seven months then ended which have been prepared for inclusion in
the registration statement on Form 20 - F to provide additional information as
to proforma changes in operating results from those separately reported in this
Form 20-F. In our opinion, the pro-forma financial statements have been properly
compiled to give effect, on a pro-forma basis, to the transaction and the
assumptions described in note 3 thereto.
Toronto, Ontario. /S/ "MINTZ & PARTNERS LLP"
March 23, 2001 CHARTERED ACCOUNTANTS
F16.
DIGITAL ROOSTER.COM INC.
PROFORMA CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
MARCH 31, MARCH 31,
AS AT 2000 1999
(UNAUDITED) (UNAUDITED)
=============================================================================
A S S E T S
-----------
CURRENT
Cash and short-term investment $ 67,892 $ 94,896
Accounts receivable 91,383 10,229
Prepaids and sundry receivables 5,646 2,584
---------- --------
164,921 107,709
DUE FROM SHAREHOLDERS - 31,225
CAPITAL ASSETS (Note 4) 86,179 57,172
GOODWILL (Note 5) 60,311 77,963
DUE FROM JAZZ MONKEY MEDIA INC.
(NOTE 6) 154,897 -
---------- --------
$ 466,308 $274,069
========== ========
L I A B I L I T I E S
---------------------
CURRENT
Accounts payable and accrued liabilities $ 118,241 $ 31,854
Income tax payable 1,661 -
Deferred Revenue 31,884 -
---------- --------
151,786 31,584
LOANS PAYABLE - 11,523
DUE TO SHAREHOLDERS (Note 7) 31,344 -
NOTE PAYABLE. (Note 8) 61,902 59,589
---------- --------
245,032 102,966
---------- --------
S H A R E H O L D E R S' E Q U I T Y
------------------------------------
CAPITAL STOCK (Note 9) 756,809 163,211
TRANSLATION ADJUSTMENT 4,446 2,739
(DEFICIT) RETAINED EARNINGS (539,979) 5,153
---------- --------
221,276 171,103
---------- --------
$ 466,308 $274,069
========== ========
================================================================================
See Accompanying Notes F17.
DIGITAL ROOSTER.COM INC.
PROFORMA CONSOLIDATED STATEMENT OF (DEFICIT) RETAINED EARNINGS
(EXPRESSED IN U.S. DOLLARS)
MARCH 31, MARCH 31
FOR THE PERIODS ENDED 2000 1999
(7 MONTHS) (7 MONTHS)
(UNAUDITED) UNAUDITED)
================================================================================
BALANCE - Beginning of period $(205,489) $ 3,260
Net (loss) income (334,490) 1,893
---------- ----------
BALANCE - End of period $(539,979) $ 5,153
========== ==========
================================================================================
See Accompanying Notes F18.
DIGITAL ROOSTER.COM INC.
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
MARCH 31, MARCH 31
FOR THE PERIODS ENDED 2000 1999
(7 MONTHS) (7 MONTHS)
(UNAUDITED) UNAUDITED)
================================================================================
REVENUES $ 963,009 $ 696,312
COST OF SALES 395,012 268,687
------------ ------------
GROSS PROFIT 567,997 427,625
------------ ------------
EXPENSES
Administrative 543,033 273,786
Selling 167,655 100,480
Computer 151,003 29,195
Interest 10,144 1,784
Amortization of capital assets 20,355 10,190
Amortization of goodwill 10,297 10,297
------------ ------------
902,487 425,732
------------ ------------
NET (LOSS) INCOME $ (334,490) $ 1,893
============ ============
(LOSS) INCOME PER SHARE (Note 13)
Basic (0.007) 0.00005
Fully diluted (0.007) 0.00005
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING DURING THE PERIOD 26,144,464 22,067,994
================================================================================
See Accompanying Notes F19.
DIGITAL ROOSTER.COM INC.
PROFORMA CONSOLIDATED STATEMENT OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
MARCH 31, MARCH 31
FOR THE PERIODS ENDED 2000 1999
(7 MONTHS) (7 MONTHS)
(UNAUDITED) UNAUDITED)
================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(334,490) $ 1,893
Adjustment for non-cash items:
Amortization of capital assets 20,355 10,190
Amortization of goodwill 10,297 10,297
Non-cash expenses (Note 14 (ii)) 41,028 -
Translation adjustment 3,194 3,422
---------- ----------
(259,616) 25,802
Changes in non-cash operating items
(Note 14 (i)) 20,451 (4,752)
---------- ----------
CASH FLOWS (USED IN) PROVIDED BY
OPERATING ACTIVITIES (239,165) 21,050
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from (to) shareholders 5,449 (30,647)
(Decrease) increase in loans payable (11,664) 392
Advances from (to) Jazz Monkey Media Inc. (158,374) -
Issuance of capital stock (Note 9(i)) 451,380 -
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES 286,791 (30,255)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (33,983) (39,222)
---------- ----------
CASH FLOWS USED IN INVESTING
ACTIVITIES (33,983) (39,222)
---------- ----------
INCREASE (DECREASE) IN CASH FROM
BUSINESS ACTIVITIES 13,643 (48,427)
CASH AND SHORT - TERM INVESTMENT -
Acquired in reverse takeover (Note 3) - 141,075
CASH - Beginning of period 54,249 2,248
---------- ----------
CASH AND SHORT -
TERM INVETMENT - End of period $ 67,892 $ 94,896
========== ==========
================================================================================
See Accompanying Notes F20.
DIGITAL ROOSTER.COM INC.
PROFORMA CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000, MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
================================================================================
1. NATURE OF COMPANY'S OPERATIONS
Digital Rooster.com Inc and its wholly owned subsidiary Web Dream Inc.,
("the Group") derive their revenues from the license of video content,
monthly subscriptions to the website content and advertisements displayed
on its website.
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
a) Organization
Digital Rooster.com Inc. ("the Company"), formerly Storimin Resources
Inc. ("Storimin") was incorporated pursuant to the provisions of the
Canada Business Corporations Act on January 16, 1984. Pursuant to an
agreement dated November 12, 1999 Storimin acquired all of the issued
and outstanding shares of Web Dream Inc. ("Web") from its shareholders
and subsequently changed its name to Digital Rooster.com Inc.
("Digital"). See Note 3 for a detailed description of the reverse
takeover ("RTO") transaction. However these proforma consolidated
financial statements have been prepared assuming a reverse takeover
had occurred on August 31, 1998. Web was incorporated in Ontario on
February 17, 1998.
b) Basis of presentation
These proforma consolidated financial statements have been prepared in
accordance with Canadian Generally Accepted Accounting Principles.
Significant differences between Canadian Generally Accepted Accounting
Principles and United States Generally Accepted Accounting Principles,
as they relate to these proforma consolidated financial statements,
are explained in Note 17.
c) Use of estimates
The preparation of these proforma consolidated financial statements in
conformity with Canadian Generally Accepted Accounting Principles has
required management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent liabilities as at March 31, 2000, March 31, 1999 and the
revenue and expenses reported for the periods then ended. Actual
results may differ from those estimates.
d) Revenue recognition
Revenues from monthly subscriptions to the website are deferred on
receipt and are recognized as the services are provided. Revenues from
internet advertising are recognized over the period the services are
provided.
================================================================================
/Continued . . . F21.
DIGITAL ROOSTER.COM INC.
PROFORMA CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000, MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENATION
e) Capital assets
Capital assets are recorded at cost, less accumulated
amortization. Amortization is provided over the estimated useful
lives of the assets as follows:
Furniture and fixtures - 20% declining balance
Leasehold improvements - 20% straight line
Computer hardware - 30% declining balance
Computer software - 100% declining balance
Capital assets purchased during the period are amortized at
one-half of the above stated rates.
f) Goodwill
Goodwill is amortized on a straight line basis over its estimated
useful life of 5 years.
g) Income taxes
The Company follows the asset and liability approach to
accounting and reporting for income taxes.
The income tax provision differs from that calculated by applying
the statutory rates to the changes in current or future income
tax assets or liabilities during the period.
The Company provides a valuation allowance to reduce future
income tax assets when it appears likely that the asset will not
be realized.
h) Foreign currency translation
The reporting currency in these proforma consolidated financial
statements is the U.S. dollar. Accordingly, assets and
liabilities denominated in Canadian dollars have been translated
into U.S. dollars at the exchange rate prevailing at the balance
sheet date other than common stock which has been translated at
historical rates. Results of operations have been translated at
the average exchange rate for the period. Cumulative net
translation adjustments are included as a separate component of
shareholders' equity.
The functional currency in these proforma consolidated financial
statements is the Canadian dollar. Accordingly, transactions have
been translated at the average exchange rate for the period.
Exchange gains and losses resulting from translation of these
amounts are reflected in the statement of operations in the
period in which they occurred.
================================================================================
/Continued . . . F22.
DIGITAL ROOSTER.COM INC.
PROFORMA CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000, MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENATION - Continued
i) Costs of raising capital
Incremental costs incurred in respect of raising capital are
charged against equity proceeds raised.
3. REVERSE TAKEOVER
These proforma consolidated financial statements are prepared to
give effect to a reverse takeover transaction using the purchase
method of accounting. In accordance with Canadian generally
accepted accounting principles, these proforma consolidated
financial statements represent a continuation of the financial
statements of the legal subsidiary, Web Dream Inc.
These proforma consolidated financial statements are prepared to
give effect to the reverse takeover transaction as if the
transaction occurred on August 31, 1998. Accordingly, on August
31, 1998, the Company issued 20,000,000 common shares for all of
the issued and outstanding common shares of Web Dream Inc. The
following is a summary of the transaction:
Amount
------
Net assets acquired $ 74,257
Goodwill 88,260
-----------
Purchase consideration $ 162,517
-----------
Assets acquired, liabilities assumed and purchase considerations
are:
Amount
------
Cash and short-term deposits $ 141,075
Liabilities (66,818)
-----------
Net assets acquired 74,257
Goodwill on acquisition 88,260
-----------
Purchase value 162,517
Less: non-cash consideration 162,517
-----------
$ -
===========
Cash and short - term deposits acquired $ 141,075
===========
================================================================================
/Continued . . . F23.
DIGITAL ROOSTER.COM INC.
PROFORMA CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000, MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
================================================================================
4. CAPITAL ASSETS
As At March 31, 2000
--------------------
Accumulated Net Carrying
Cost Amortization Amount
--------------- --------------------- -------------
Furniture and equipment $ 10,693 $ 1,982 $ 8,711
Leasehold improvements 4,752 1,409 3,343
Computer hardware 110,228 37,970 72,258
Computer software 4,315 2,448 1,867
--------------- --------------------- -------------
$ 129,988 $ 43,809 $ 86,179
=============== ===================== =============
As At March 31, 1999
--------------------
Accumulated Net Carrying
Cost Amortization Amount
--------------- --------------------- -------------
Furniture and equipment $ 2,533 $ 340 $ 2,193
Leasehold improvements 3,649 618 3,031
Computer hardware 64,932 13,844 51,088
Computer software 1,324 464 860
--------------- --------------------- -------------
$ 72,438 $ 15,266 $ 57,172
=============== ===================== =============
5. GOODWILL
As At March 31, 2000
--------------------
Accumulated Net Carrying
Cost Amortization Amount
--------------- --------------------- -------------
Goodwill $ 88,260 $ 27,949 $ 60,311
As At March 31, 1999
--------------------
Accumulated Net Carrying
Cost Amortization Amount
--------------- --------------------- -------------
Goodwill $ 88,260 $ 10,297 $ 77,963
================================================================================
/Continued . . . F24.
DIGITAL ROOSTER.COM INC.
PROFORMA CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000, MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
================================================================================
6. DUE FROM (TO) JAZZ MONKEY MEDIA INC.
The amount due from (to) the Company related by virtue of common
shareholders, is unsecured, bears no interest and has no fixed terms of
repayment.
7. DUE TO SHAREHOLDERS
Shareholders' advances are unsecured, bear no interest and have no fixed
terms of repayment.
8. NOTE PAYABLE
In October 1997, the Company's wholly-owned subsidiary, Pizay Investments
Inc. ("Pizay"), entered into an agreement with ProAm Explorations
Corporation whereby the latter granted Pizay an exclusive option to acquire
an undivided 10% interest in the property. The consideration to earn this
10% interest was $68,780 cash, 500,000 shares of Pizay valued at $68,780
and a commitment to incur $412,680 in exploration expenditures over a two
year period, subsequent to which a joint venture will be formed. Flow
through financing for $144,438 was obtained in 1997 and the balance of the
$206,340 first year's commitment was secured by a non-interest bearing
demand note payable of $61,902. This agreement was terminated in 1999. All
expenditures have been charged to loss on abandonment of mining properties
in the 1999 fiscal year.
The Company and Pizay are disputing a legal action initiated by ProAm
Explorations Corporation with respect to Pizay's demand note payable, and
related interest and costs.
================================================================================
/Continued . . . F25.
DIGITAL ROOSTER.COM INC.
PROFORMA CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000, MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
================================================================================
9. CAPITAL STOCK
i) Authorized
Unlimited number of Common shares
Issued - Common shares Number Amount
Balance as at August 31, 1998 20,000,000 $ 694
Issued upon reverse takeover
on August 31, 1998 2,067,994 162,517
---------- --------
Balance as at March 31, 1999 22,067,994 163,211
Issuance of shares on August 18, 1999 for cash 4,000,000 101,190
Issuance of shares on September 22, 1999 for cash 1,132,872 161,960
Issuance of shares on November 3, 1999 for cash 680,000 100,179
Issuance of shares on November 12, 1999 in
consideration of investment banking services (b) 1,600,000 41,028
Issuance of shares on December 15, 1999 for cash 100,000 16,795
Issuance of shares on March 8, 2000 for cash 1,000,000 172,446
---------- --------
Balance as at March 31, 2000 30,580,866 $756,809
---------- --------
a) The issued and outstanding common shares reflect the stock split that
occurred in Web on August 18, 1999 (10,000:1). The stock split has
been recorded in these proforma consolidated financial statements as
if it had occurred from the Company's inception.
b) As no cash consideration was received, the net cash received, during
the period of seven months from September 1, 1999 to March 31, 2000,
from issuance of share capital was $451,380.
================================================================================
/Continued . . . F26.
DIGITAL ROOSTER.COM INC.
PROFORMA CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000, MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
================================================================================
9. CAPITAL STOCK - Continued
ii) Stock Options
The Company currently issues stock options at the direction of the Board of
Directors. These options have been granted to employees, directors, and
consultants under the Company's stock option plan and any other terms and
conditions determined by the Board of Directors at the time the options are
issued. These are granted with an exercise price equal to the market price
of the Company's stock on the date of the grant. Presented below is a
summary of stock option plan activity:
Wt. Avg. Wt. Avg.
Exercise Options Exercise
Number Price Exercisable Price
---------- --------- ------------ ---------
Balance, September 1, 1998 2,500,000 $ 0.14 2,500,000 $ 0.14
Cancelled (535,000) 0.14 (535,000) 0.14
Granted 60,000 0.04 60,000 0.04
---------- --------- ------------ ---------
Balance, April 1, 1999 2,025,000 0.14 2,025,000 0.14
Granted 1,591,000 0.17 1,591,000 0.17
---------- --------- ------------ ---------
Balance, March 31, 2000 3,616,000 $ 0.15 3,616,000 $ 0.15
---------- --------- ------------ ---------
Options outstanding and exercisable at March 31, 2000 are as follows:
Outstanding Exercisable
----------- -----------
Wt. Avg. Wt. Avg.
Expiry Remaining Remaining Exercise
Price Number Date Life Exercise Price Number Price
----- --------- -------------- --------- --------------- --------- --------
0.14 250,000 October, 2001 2 $ 0.14 250,000 0.14
0.14 1,715,000 April, 2002 2 0.14 1,715,000 0.14
0.17 1,591,000 February, 2003 3 0.17 1,591,000 0.17
0.04 60,000 August, 2003 3 0.04 60,000 0.04
10. CONTINGENT LIABILITY
a) In 1998, a claim was filed against the Company and its subsidiary
seeking damages of $1,600,000 resulting from a breach of a contract.
The Company has defended the claim on the basis that the contract was
properly terminated. Management believes this action will not have a
material adverse effect on the financial position of the Company and
no provision has been accrued in these financial statements.
b) The Company is the defendant in two lawsuits involving total claims of
$38,500 plus costs. In the opinion of management, these lawsuits are
without merit and no provision has been made for these claims in the
financial statements. Any settlement will be reflected in the year it
occurs.
================================================================================
/Continued . . . F27.
DIGITAL ROOSTER.COM INC.
PROFORMA CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000, MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
================================================================================
11. LEASE COMMITMENTS
The subsidiary of the Company is obligated under an operating lease for its
premises. The lease expires on June 30, 2001.
Future minimum payments for its premises as at March 31, 2000 are as
follows:
2001 $ 38,214
2002 9,554
12. INCOME TAXES
The Company and its subsidiaries have non-capital losses of approximately
$573,000 as at March 31, 2000, which are available to offset future years'
taxable income. The potential tax benefit of these losses has not been
recorded in the financial statements. The losses expire as follows:
TOTAL
2005 $ 55,000
2006 91,000
2007 427,000
---------
$ 573,000
=========
13. LOSS (INCOME) PER SHARE
The loss (income) per share, which has been computed proportionately for
the periods presented, is based on the weighted average numbers of shares
outstanding during each period.
================================================================================
/Continued . . . F28.
DIGITAL ROOSTER.COM INC.
PROFORMA CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000, MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
================================================================================
14. CHANGES IN NON-CASH OPERAING ITEMS AND SUPPLEMENTAL CASH FLOW DISCLOSURE
i) Changes in non-cash operating items:
MARCH 31, MARCH 31,
000 1999
Increase in accounts receivable $ (48,004) $ (3,675)
Increase in prepaid and sundry
receivables (2,331) -
Increase in deferred revenue 31,884 -
Increase (decrease) in accounts
payable and accrued liabilities 38,902 (1,077)
----------- -----------
$ 20,451 $ (4,752)
=========== ===========
Interest paid $ 10,144 $ 1,784
=========== ===========
Income taxes paid $ - $ -
=========== ===========
ii) Supplemental disclosure of non-cash activities:
Non-cash investment banking
expenses (See Note 9 (i)) $ 41,028 $ -
=========== ===========
15. FAIR VALUE OF FINANCIAL STATEMENTS
The present carrying amount of the Company's financial assets and
liabilities approximates fair value.
16. BUSINESS SEGMENTS AND GEOGRAPHICAL INFORMATION
The subsidiary of the Company has been operating in one business segment
only, being monthly subscription to, and licenses of, website and video
contents.
Geographical information
Information as to sales and accounts receivable by reportable geographic
segments is:
Sales March, 2000 March, 1999
----- ------------ ------------
Canada 5% 9%
United States 95% 91%
Accounts receivable
-------------------
Canada - -
United States 100% 100%
================================================================================
/Continued . . . F29.
DIGITAL ROOSTER.COM INC.
PROFORMA CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000, MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
================================================================================
17. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES
Significant differences between Canadian Generally Accepted Accounting
Principles ("Canadian GAAP") and U.S. Generally Accepted Accounting
Principles ("U.S. GAAP") are summarized as follows:
BALANCE SHEET
ACCOUNTS RECEIVABLE
U.S. GAAP requires disclosure of allowance for doubtful account in the
financial statements.
The Company has not recorded any such allowance for the periods presented
in these financial statements.
DEFERRED TAX ASSETS
Deferred tax assets (in Canada future income tax assets) are comprised of
benefits arising from losses carried forward. No deferred tax assets have
been recorded in accordance with Canadian GAAP because the Company cannot
determine whether it is more likely than not that it will be able to
realize the benefit of these losses carried forward during the carry
forward period. U.S. GAAP requires, in such circumstances, that disclosure
be made of the value of the asset and any valuation allowance applied to
it. Therefore, in accordance with U.S. GAAP the following would be included
in disclosures related to deferred tax assets in notes to the financial
statements:
March 31, 2000 March 31, 1999
-------------- --------------
Deferred tax assets $ 252,100 $ 47,500
Less: Valuation allowance (252,100) (47,500)
----------- ----------
$ - $ -
=========== ==========
STATEMENTS OF OPERATIONS AND CASH FLOWS
There are no material differences between the Canadian GAAP used in
preparing the statements of operations and cash flow and those that would
apply had the statements been prepared in accordance with U.S. GAAP.
================================================================================
/Continued . . . F30.
DIGITAL ROOSTER.COM INC.
PROFORMA CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000, MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
================================================================================
17. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - Continued
ADDITIONAL DISCLOSURES
i) Information as to products, geographic markets, significant estimates
and concentrations
United States GAAP requires information as to products, geographic
markets, significant estimates and concentrations, to be disclosed in
the notes to financial statements. This information is usually
disclosed with the summary of significant accounting policies. Such
information is provided in Notes 2 and 16.
ii) Recent accounting pronouncement
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101, as amended, summarizes
certain of the SEC's views in applying Generally Accepted Accounting
Principles to revenue recognition in financial statements. At this
time, management does not expect the adoption of SAB 101 to have a
material effect on the Group's operations or financial position. As
the SEC has delayed application of SAB 101, the Company will be
required to adopt SAB 101 in the first quarter of fiscal 2002.
iii) Differences in various accounting terms used in U.S. GAAP and Canadian
GAAP
In U.S. GAAP some of the accounting terms used differ from Canadian
GAAP. The following is a summary:
U.S. GAAP Canadian GAAP
--------- -------------
Deferred income taxes Future income taxes
Depreciation of tangible Amortization
capital assets
Excess of cost over fair Goodwill
value of net assets acquired
Reverse Acquisition Reverse takeover
================================================================================
/Continued . . . F31.
DIGITAL ROOSTER.COM INC.
PROFORMA CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000, MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
================================================================================
17. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - Continued
iv) Comprehensive income
U.S. GAAP (SFAS 130) requires information regarding comprehensive
income and its components. The only substantial component of
comprehensive income, as defined in SFAS 130, relates to foreign
currency translation.
Accordingly, the only foreign currency translation adjustment arising
as a result of translating the financial statements into U.S. dollars
has been disclosed as a separate item on the balance sheet.
v) Stock options
U.S. GAAP (SFAS 123) requires certain disclosures regarding stock
options granted to employees and directors as compensation under stock
option plans. Because the Company applies the principles of APB 25,
(Accounting for Stock Issued to Employees), which are the same as
Canadian generally accepted accounting principles, there are no
differences noted in respect of the options granted.
However, in accordance with SFAS 123, the Company would be required, in any
event, to disclose the following:
"The Company is required to adopt SFAS 123, Accounting for Stock-Based
Compensation. In accordance with the provisions of SFAS 123, therefore, the
Company applied APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its plans, the
Company would not recognize compensation expense for its stock-based
compensation plans as the exercise price of options granted under the plan
was not less then the than current fair market value of common shares.
SFAS 123 requires entities that account for awards for stock-based
compensation to employees in accordance with APB 25 to present pro forma
disclosures of net income and earnings per share as if compensation cost
was measured at the date of grant based on fair value of the award. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions:
March 31, 2000 March 31, 1999
-------------- --------------
Expected life of options 1.5 years 2.5 years
Risk free interest rate 5% 5%
Expected volatility 3.31 5.4
Expected dividend yield 0.0% 0.0%
The Black Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
================================================================================
/Continued . . . F32.
DIGITAL ROOSTER.COM INC.
PROFORMA CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000, MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
================================================================================
17. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - Continued
Had the compensation costs for the Company's stock option plan been recognized
based upon the fair value on the grant date under the methodology prescribed by
SFAS 123, the Company's income from continuing operations and earnings per share
for the periods ended March 31, 2000 and 1999 would have been impacted as
indicated in the following table. The proforma results which reflect only the
impact of the options granted are as follows:
March 31, March 31,
---------- ----------
2000 1999
---- ----
Reported Proforma Reported Proforma
---------- ---------- --------- ---------
Net (loss) income $(302,606) $(483,582) $ 1,893 $ 738
Basic EPS $ (0.007) $ (0.011) $ 0.00005 $ 0.00002
Diluted EPS $ (0.007) $ (0.011) $ 0.00005 $ 0.00002
================================================================================
F33.
ITEM 19. EXHIBITS
The following documents are filed as part of this Report:
1.1 Unaudited Financial Statements for the nine months ended December 31,
2000 and December 31, 1999.
1.2 Consent of Independent Auditors
2.1 Articles of Amendment dated January 19, 2000
2.2 Articles of Amalgamation dated April 1, 1999
2.3 Articles of Continuance dated October 30, 1998
2.4 Certificate of Amendment dated April 1, 1997
2.5 Certificate and Articles of Arrangement dated September 28, 1995
2.6 Certificate of Incorporation dated January 16, 1984.
3.1 By law No. 1 of the Corporation
3.2 Specimen Common Share Certificate
5.1 List of Subsidiaries
6.1 Management Information Circular dated August 20, 2000
7.1 Storimin Resources Limited Notice of Annual and Special Meeting and
Management Information Circular dated November 12, 1999.
7.2 Securities Exchange Agreement dated November 12, 1999.
8.1 Form of Stock Option Agreement
9.1 Employment Agreement for John A. van Arem
9.2 Employment Agreement for Anthony Korculanic
39
SIGNATURE PAGE
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, there unto duly authorized.
DIGITAL ROOSTER.COM INC.
/s/ JOHN ALEXANDER VAN AREM
---------------------------------------------
By: John Alexander van Arem
President and Chief Executive Officer
and Chief Accounting Officer
Dated: April 16, 2001
40
EXHIBIT INDEX
The following documents are filed as part of this Report:
1.1 Unaudited Financial Statements for the nine months ended December 31,
2000 and December 31, 1999.
1.2 Consent of Independent Auditors
2.1 Articles of Amendment dated January 19, 2000
2.2 Articles of Amalgamation dated April 1, 1999
2.3 Articles of Continuance dated October 30, 1998
2.4 Certificate of Amendment dated April 1, 1997
2.5 Certificate and Articles of Arrangement dated September 28, 1995
2.6 Certificate of Incorporation dated January 16, 1984.
3.1 By law No. 1 of the Corporation
3.2 Specimen Common Share Certificate
5.1 List of Subsidiaries
6.1 Management Information Circular dated August 20, 2000
7.1 Storimin Resources Limited Notice of Annual and Special Meeting and
Management Information Circular dated November 12, 1999.
7.2 Securities Exchange Agreement dated November 12, 1999.
8.1 Form of Stock Option Agreement
9.1 Employment Agreement for John A. van Arem
9.2 Employment Agreement for Anthony Korculanic