SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
AMENDMENT # 5 TO FORM 20F
/X/ REGISTRATION STATEMENT
PURSUANT TO SECTION 12 (b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
_____________________________________
Commission File No._00032559
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
February 7, 2002 was 36,448,366 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 1
1C. AUDITORS 1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 1
ITEM 3. KEY INFORMATION ABOUT THE COMPANY'S
FINANCIAL CONDITION, CAPITALIZATION
AND RISK FACTORS
3A. SELECTED FINANCIAL DATA 2
3B. CAPITALIZATION AND INDEBTEDNESS 2
3C. REASONS FOR THE OFFER AND USE OF PROCEEDS 4
3D. RISK FACTORS 4
ITEM 4. INFORMATION ABOUT THE CORPORATION
OVERVIEW 7
HISTORY 7
THE WEB-BASED ADULT ENTERTAINMENT INDUSTRY 8
OUR BUSINESS STRATEGY 8
COMPETITION 10
PLAN OF OPERATION 11
PROPERTY AND ASSETS 12
INFORMATION TECHNOLOGY AND ONLINE SYSTEMS OPERATIONS 12
REGULATORY MATTERS 12
INTELLECTUAL PROPERTY 13
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
5A. OPERATING RESULTS 13
5B. LIQUIDITY AND CAPITAL RESOURCES 15
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6A AND 6C. DIRECTORS AND SENIOR MANAGEMENT AND BOARD PRACTICES 16
6B. COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT 17
6E. SHARE OWNERSHIP OF DIRECTORS AND SENIOR MANAGEMENT 18
6D. EMPLOYEES 18
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7A. MAJOR SHAREHOLDERS 19
7B. RELATED PARTY TRANSACTIONS 19
ITEM 8. FINANCIAL INFORMATION
8A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION 20
8B. SIGNIFICANT CHANGES 21
ITEM 9. THE LISTING
COMMON SHARES 21
TRANSFER AGENT 21
TRADING MARKET 21
ITEM 10. ADDITIONAL INFORMATION
10A. SHARE CAPITAL 22
10B. MEMORANDUM AND ARTICLES OF ASSOCIATION 23
10C. MATERIAL CONTRACTS 25
10D. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS 25
10E. TAXATION 26
10H. INSPECTION OF DOCUMENTS 29
ITEM 11: QUANTITATIVE AND QUALITATIVE ASSESSMENT OF MARKET RISK 29
PART III
ITEM 17. FINANCIAL STATEMENTS 29
ITEM 18. FINANCIAL STATEMENTS 29
ITEM 19. EXHIBITS 29
SIGNATURE PAGE 30
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 CANADIAN DOLLARS, CANDIAN AMOUNTS CONVERTED
TO U.S. DOLLARS ARE PROVIDED IN BRACKETS.
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.
Hubert Mockler(1) Director of the Corporation(2) Member of the Corporate
216 Degrassi Street, Governance Committee (1)
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 (1)
Amherst, New York 14226,
United States
Anthony Korculanic Operations Manager Public and investor relations, office
82 Sarah Ashbridge Ave. management and human resources
Toronto, Ontario
Canada M4L 3Y9
Wayne Doss (3) Director of the Corporation (3)
1021 Creekford Drive
Weston, Florida
33326
(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.
(3) Wayne Doss was elected as a director at our Annual and Special Meeting
of Shareholders on November 23, 2001.
(4) Brian Usher-Jones resigned as a director for personal reasons on August
30, 2001. Brian Usher-Jones was a director from December 1999 to August 30,
2001.
1B. ADVISERS
Our United States legal counsel is Axelrod, Smith & Kirshbaum, 5300
Memorial Drive, Suite 700, Houston, Texas, 77007-8217.
1C. AUDITORS
Our auditors 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 Exhibits 1.2 and 23.1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
1
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 mineral exploration activities 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
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 the last four years is provided since Web
Dream, the relevant continuing operating company, was incorporated in February
1998.
2
SELECTED FINANCIAL DATA
ALL VALUES ARE EXPRESSED IN CANADIAN DOLLARS.
(Seven Months Year Ended (Seven Months Year ended
Ended) Aug 31/99 Ended) Mar 31/01
Aug 31/98 Mar 31/00
Web Dream Web Dream Consolidated Consolidated
OPERATIONS AUDITED AUDITED AUDITED AUDITED
DATA
Sales 226,263 1,821,413 1,409,764 2,508,122
Cost of Sales 40,846 765,944 578,265 737,562
Gross Profit 185,417 1,055,469 831,499 1,770,560
Expenses 180,444 1,191,187 1,265,191 2,659,616
Net Income 4,973 -135,718 -433,692 -889,056
Income per Share 0.0002 -0.009 -0.01 -0.03
Weighted Average 10,000,000 10,076,712 26,144,464 30,958,948
BALANCE SHEET INFORMATION
Current Assets 17,315 69,224 239,781 145,506
Capital Assets 43,976 108,253 125,297 184,876
Goodwill 326,978 258,739
Due from Jazz Monkey 225,207
Total Assets 61,291 177,477 917,263 589,121
Account Payable and 38,818 95,992 171,913 471,251
Accrued Liabilities
Income tax Payable 2,415 2,415
Deferred Revenue 46,675 15,961
Loans Payable 16,500 17,404 76,561
Due to Shareholder 38,638 45,571 36,300
Due to Jazz Monkey 5,188
Note Payable 90,000 90,000
Total Liabilities 55,318 157,222 356,574 692,488
Capital 1,000 151,000 1,125,126 1,350,126
Retained Earnings 4,973 -130,745 -564,437 -1,453,493
Total Shareholders 5,973 20,255 560,689 -103,367
Equity
Liabilities and Share 61,291 177,477 917,263 589,121
holders Equity
3
3B. CAPITALIZATION AND INDEBTEDNESS
The following table shows our capitalization as of September 30, 2001.
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. All values are expressed in Canadian Dollars.
AS OF SEPTEMBER 30, 2001
Unsecured debt $ 950,955
-------------
TOTAL DEBT $ 950,955
-------------
Shareholders' equity
Common Stock: no par value; unlimited shares authorized;
35,330,866 shares issued and outstanding (1) $ 1,550,126
-------------
Accumulated deficit $ (2,091,799)
-------------
TOTAL SHAREHOLDERS' EQUITY
$ (541,673)
-------------
TOTAL CAPITALIZATION $ 409,282
-------------
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY COMMON SHARES
SHARES AMOUNT
Balance as of June 30, 2000 30,580,866 $1,125,126
Issuance of Common Shares 750,000 $ 75,000
1,500,000 $ 150,000
1,500,000 -
1,000,000 $ 200,000
1,117,500 $ 223,500
Balance as of February 7 2002 36,448,366 $1,773,626
3C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
3D. RISK FACTORS
WE HAVE A LIMITED HISTORY OF OPERATIONS AND RECORDED LOSSES IN OUR FISCAL
YEARS 1999,2000 AND 2001. Web Dream began operations as a company in February
1998 and recorded losses of $135,718 ($94,907) for the period ended August 31,
1999, $433,692 ($298,295) in the year ended March 31, 2000 and $889,056
($563,514) in the year ended March 31, 2001. Our prospects must be considered
in light of the risks, expenses, and difficulties frequently encountered by
companies in their early stages of development. We expect to continue to incur
losses on a monthly basis until approximately March 2002. There can be no
assurance that we will continue to incur losses after March 2002,or that any of
our business strategies will be successful.
OUR INDEPENDENT ACCOUNTANTS HAVE EXPRESSED A GOING CONCERN qualification in
footnote # 1 to our audited financial statements. We recorded losses of $135,718
($94,907) for the period ended August 31, 1999, $433,692 ($298,295) in the year
ended March 31, 2000 and $889,056 ($563,514) in the year ended March 31, 2001.
At March 31, 2001 we had a working capital deficit of $1,453,493 ($921,682).
Because of our operating losses of the past two years and our working capital
deficiency as at March 31, 2001, our continuance as a going concern is dependent
upon our ability to obtain adequate financing or to reach profitable levels of
operation. It is not possible to predict whether financing efforts will be
successful or if we will attain profitable levels of operations.
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
4
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.
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 52% 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. Based
on current projections, we will require additional financing in the amount of $
450,000 ($285,352)to $1,000,000($634,115) between November 2001 and March 2002.
We anticipate raising these funds through private placements of our securities
with sophisticated investors. We have avoided obtaining debt financing but may
have to pursue this option if we are unable to obtain equity financing on
acceptable terms. If we are unable to obtain financing and cannot pay our debts
as they come due, we may be forced to solicit a buyer for the company or be
forced into bankruptcy by our creditors.
WE ARE DEPENDENT ON A SMALL NUMBER OF KEY PERSONNEL. We are dependent upon
two key people: John A. van Arem and Anthony Korculanic. Mr. van Arem is
knowledgeable about all aspects of our business and has developed relationships
in the adult entertainment industry that facilitate our business. Mr.
Korculanic maintains on a day-to-day basis business relationships with service
providers, customers, investors, and media. The loss of either of these
individuals could have a material adverse effect on our business. We have no
key-man life insurance policies on these individuals.
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. Moreover, our success depends on maintaining a high
quality of content. Competition for quality content in the adult industry is
5
intense. The lack of availability of unique quality content could adversely
affect our business.
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. 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. 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. 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
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
6
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.
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"). Approximately
one third of our live video content is produced exclusively for us under
contract, although we have no written agreements and either party can terminate
at any time. 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 traded on the Canadian Unlisted Board, and
real-time quotes are not available to the public 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 exchanged for every one common share in
Web Dream Inc., for a total of 27,512,872 common shares for a consideration of
$621,033. 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. Storimin Resources
Limited carried on mineral exploration activities prior to the acquisition of
Web Dream. At the time of the acquisition, all exploration activities were
abandoned.
7
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 mineral exploration activities. 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.
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. Pizay investments
Inc. was a private Ontario corporation that carried on mineral exploration
activities. We acquired Pizay in November 1997. 1032142 Ontario Inc. was a
private Ontario corporation that carried on mining and mineral exploration
activities. We acquired 1032142 Ontario Inc. in November 1995.
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
We believe that business in the adult entertainment industry are applying
a more corporate approach to management and operations than was historically the
practice. Since entering the adult entertainment industry four years ago, our
President has noted that a number of smaller, less professional, operations have
gone out of business and larger corporations have begun to dominate the adult
industry. These larger companies are employing sophisticated computer
technologies and management information and tracking systems, and operate in a
manner similar to corporations in other industries. Maintaining a competitive
position requires a disciplined approach to monitoring technological advances
and upgrading hardware, demanding the adoption of a corporate infrastructure
largely new to the adult entertainment industry.
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. We generate revenue through
membership fees to our websites, the sale of traffic to our websites, and the
sale of content to wholesale customers. Our focus in fiscal year 2001 will be on
improving our websites and generating sales and traffic through on line and off
8
line marketing. 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.
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 , generating a recurring revenue stream. We currently own and operate
seven web sites: digitalrooster.com; sinvision.com, freesexlounge.com,
sinpass.com; sinusa.com; sinteens.com; and adulttheatre.com. Revenue from the
sale of memberships to our websites represented 30% of our gross revenues for
the year ended March 31, 2001. Our customers pay a monthly membership fee per
web site, ranging from $9.95 to $34.95 depending on the web site subscribed to,
which allows them to access a particular web site. We no longer offer a single
membership allowing access to all of our websites. Products offered include
pictures, streamed videos, live interactive shows, voyeur shows, stories,
e-zines, games and personal ads. We are in the process of implementing a
comprehensive tracking system for memberships, but at this time, we are unable
to provide complete membership statistics.
We believe that 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 website to others who might promote our product on their web sites. 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
monitor trends by reviewing media reports and other publicly available
information on the industry and customer tastes. We also conduct on-line surveys
and monitor customer feedback and preferences. Based on customer feedback, we
have upgraded our hardware and implemented new formats to increase the speed of
video streaming. We have also made changes to our content.
(TM) We generate traffic through our innovative DreamBucks(TM) partnership
program developed in 1998. Through this program, other web site operators
(referred to as webmasters) are permitted to promote our websites on their
websites. We provide some promotional materials for their use. Webmasters who
refer a customer to one of our websites are paid a commission equal to 65% of
revenues generated by their referrals (less bank fees) plus 5% of revenue
generated by referred webmasters. Through a visually rich and efficient website,
www.dreambucks.com, we believe this program offers a much more
- ------------------
lucrative pay out plan than previously available in the adult entertainment
industry. We also believe based on discussions with others in the industry,
feed back from webmasters, and our own experience in promoting other companies'
web sites, that DreamBucks (TM) has one of the highest conversion ratios in the
industry. A conversion ratio is the number of signups relative to the number of
9
unique visitors directed to a website and 2 sign up for a membership, the
conversion ratio is 1:2500. Since we implemented the DreamBucks (TM) program in
1998, it has generated $1,223,134 ($775,609) in gross revenues. We also
generate traffic by purchasing it from third parties and the purchase of "key
word" searches from Internet search engines.
We have recently launched a new distribution program, Sinpass (TM), involving
the sale of prepaid access cards for our Sinpass (TM) web site. The Sinpass (TM)
cards entitle the holder to a basic membership to the Sinpass (TM) web site for
the number of days specified on the card. These cards will be distributed for
resale 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. As of June 30, 2001, we recorded deferred
revenues of $86,127 ($54,614) from the sale of these cards. These amounts will
become revenue when the services have been fully performed. We are currently
printing cards for 2-day memberships, which will sell at a suggested retail
price of $5, and 30-day memberships, which will sell at a suggested retail price
of $20. Our business plan envisions the sale of these prepaid cards to resellers
at a negotiated rate depending on volume, in the range of 30-60% off face value.
Cards may also be placed with a reseller on a consignment basis. Resellers are
free to resell the card for any price, although they may not resell at a price
higher than the face value of the card.
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.
Business-to-business
- --------------------
Content sales represent 30% of our gross revenues in our year ended March
31,2001. We license content to over one thousand top name webmasters, creating
substantial traffic in the millions per month through our server network. Our
systems show that we receive on average over 100,000 unique visitors per day. A
"unique vistor" is defined as a person who has visited the site in a 24-hour
period. 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.
Revenues generated in this manner represented 40% of our gross revenues in our
fiscal year ended March 31, 2001. We have changed the focus of our marketing
practices, concentrating on our membership sites and Sinpass(TM) and do not
anticipate that revenue from the sale of traffic will represent such a
significant portion of our revenues in our fiscal year ended March 31, 2002.
Security
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.
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 four 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. We believe that this
slowdown is partly due to over-saturation of the market, the emergence of
10
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 expect to increase gross revenue in the next twelve months by implementing
new projects designed to attract additional customers to our websites, through
the sale of new products, including Sinpass (TM), a new concept web-site, and
controlling expenses.
Generating additional sales will require 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 and the implementation of new products. We will
also continue our practice of developing innovative products and marketing
strategies to foster growth. We will continually 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 results 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.
In an effort to improve our cash flow position, we have reduced administrative
staff by four people since March 31, 2000 and are auditing our business
operations to identify other cost saving initiatives. As a result of increased
costs imposed by major credit card companies on consumer chargebacks, our third
party billing service provider adopted a more stringent credit review process
and declined a significantly larger number of membership applications than
previously accepted. These improved screening techniques include monitoring new
applicants to determine if they have a chargeback history and denying such
applications. Accordingly, our cost per member increased significantly which had
a substantial effect on our financial performance in the latter part of 1999.
Our cost per member remains at this higher level as a result of continued
stringent screening. As a result, we are implementing alternative online billing
solutions to increase the rate of acceptance of new members. The costs of
developing these systems have already been incurred. We are completing final
testing and anticipate that these systems will be fully implemented by the end
of November. We anticipate revenue growth beginning in December 2001 due to
higher membership acceptance and collection rates.
However, there can be no assurance that we will generate sufficient working
capital or raise financing to support this increased activity. If we cannot
implement these new projects, we may not be able to maintain our relative
competitive position, or remain in business at all.
We expect to continue to incur losses on a monthly basis until March 2002.
Based on current projections, we will require additional financing in the amount
of $450,000 ($285,352) to $1,000,000 ($634,115) between November 2001 and
March
2002.
We are involved in discussions with a market maker with respect to the filing of
a listing application for quotion on the NASD over - the - counter bulletin
board once this registration statement, filed with the Securities and Exchange
Commission under Section 12 of the Securities and Exchange Act in April 2001,
becomes effective and the Commission will have no further comments. Our
objective is to develop a market in our securities and ultimately, if necessary,
raise funds through a private placement or a public offering. We cannot say with
certainty whether and when this registration statement will become effective and
the Commission has no further comments under the Securities Act. Further, there
can be no assurance that we will be quoted on NASD OTCBB or that if required,
additional financing will be available.
11
If we are unable to obtain equity financing on acceptable terms, we will have to
explore debt financing or the sale of our business as possible options. If we
cannot pay our debts as they become due, our creditors may force us into
bankruptcy.
PROPERTY AND ASSETS
We lease office space in Toronto, Ontario. Our lease expires on June 30,
2003. Management believes that this lease will be renewed at the current rates.
Our annual gross rental payments are approximately $150,000, payable in
Monthly installments of approximately $12,500.
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
retention could also be affected if we experience a greater than anticipated
volume of queries through our online customer support with the result that
response times slow down considerably or we experience temporary system
failures.
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.
12
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.
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 webdream.com,
digitalrooster.com, sinvision.com, freesexlounge.com, sinpass.com, sinusa.com,
and 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
Our financial statements have been prepared in accordance with Canadian
Generally Accepted Accounting Principles and reconciled to United States
Generally Accepted Accounting Principles in note 20 to our financial statements
beginning at page F-1 of this registration statement. We are a Canadian company
and accordingly our statements have been prepared in Canadian dollars. For the
reader's convenience, we have concluded the equivalent Unites States dollar
amounts in brackets. 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.
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 four
fiscal years 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.
5A. OPERATING RESULTS
Six Months Ended September 30, 2001 Compared to Six Months Ended September 30,
2000.
For the six months ended revenues have declined slightly from September 30,
2000, we had a total revenue of $1,403,459 (888,828 )compared to $ 1,603,380
(1,063,955) for the period ending September 30, 2000. Cost of Sales were $
640,865 (405,867) for the six months ended September 30, 2001 representing 46%
of revenues for that period, compared to $ 405,090 (268,806) for the six months
ended September 30, 2000 representing 25% of revenues for that period. The main
reason for the increase in cost of sales is due to the increased price of better
quality content that we are supplying to our members. Administrative expenses
were $747,850 (473,623) for the six months ended September 30, 2001 representing
53% of total revenues in that period, compared to $ 584,855 (388,092) for the
six months ended September 30, 2000 representing 36% of revenues for that
period. The increase is due to more professional staff. Selling expenses were
$172,616 (109,320)in the six months ended September 30, 2001 representing 12% of
total revenues in that period, compared to $485,967 (322,473) representing 30%
of revenues for that period. The decrease in selling expense is due to the drop
in advertising as the Company's focus to find more effective ways of doing
business. Computer expenses were $179,764 (113,847)in the six months ended
September 30, 2001 representing 13% of revenues in that period, compared to $
187,918 (124,697) for the six months ended September 30, 2000 representing 12%
of total revenues for that period. Computer expenses have remained relatively
stable with this period. Goodwill has been amortized on a straight line basis
beginning in the fiscal year March 2000 over an estimated useful life of five
year.
Twelve Month Fiscal Year Ended March 31, 2001 Compared to Seven Month Fiscal
Year Ended March 31, 2000.
13
For the twelve month year ended March 31, 2001, we had total revenue of
$2,508,122 ($1,590,439), which amounts to an average of $209,011 ($132,537) per
month. For the seven month year ended March 31, 2000 we earned revenues of
$1,409,764 ($969,643), which amounts to an average of $201,394 ($138,520) per
month. The increase is attributable to an increase in content sales in revenues
in fiscal 2001 compared to fiscal 2000. Cost of sales were $737,562 ($467,699)
for the twelve months ended March 31, 2001 representing 29% of revenues for that
period, compared to $578,265 ($397,734) for the seven months ended in 2000,
representing 41% of revenues for that period. The main reason for the decline in
cost of sales is attributable due to bandwidth cost and administrative overhead.
Administrative expenses were $1,318,371 ($836,000) in fiscal 2001, representing
52% of total revenues in that period, compared to $740,017 ($508,988) in fiscal
2000 representing 23% of total revenues in that period. The increase in
administrative expenses of $578,355 ($327,012) in the twelve month fiscal period
ended March 31, 2001 from the seven month fiscal period ended March 31, 2000 is
attributable to an increase in payroll for professional staff. Selling expenses
were $770,512 ($488,594) in the twelve month fiscal period ended March 31, 2001,
representing 31% of total revenues in that period, compared to $245,432
($168,809) in the seven month fiscal period ended March 31, 2000 representing
17% of total revenues in that period. The increase in selling expenses of
$525,080 ($319,785) in the twelve month fiscal period ended March 31, 2001 from
the seven month fiscal period ended March 31, 2000 is attributable to increased
expenditures for advertising and promotion. Computer expenses were $439,071
($278,422) in the twelve month fiscal period ended March 31, 2001, representing
17% of total revenues in that period, compared to $221,056 ($152,043) in the
seven month fiscal period ended March 31, 2000. The increase of $218,015
($126,379) attributable to additional bandwidth and system development.
Amortization of goodwill was $68,239 ($43,271) for the twelve months ended March
31, 2001, compared to $14,217 ($9,780) for the seven months ended March 31,
2000. Goodwill has been amortized on a straight line basis beginning in the
fiscal year March 2000 over an estimated useful life of five years.
Seven Months Fiscal Year Ended March 31, 2000 Compared to Twelve month Fiscal
Year Ended August 31, 1999
For the seven month year ended March 31, 2000, we had total revenue of
$1,409,764 ($969,643), which amounts to an average of $201,394 ($138,520) per
month. For the twelve month year ended August 31, 1999 we earned revenues of
$1,821,413 ($1,273,715), which amounts to an average of $151,784 ($106,143) per
month. The increase in revenue in our fiscal year ended March 31, 2000 is
primarily attributable to increase in sales of traffic to our websites. Cost of
sales were $578,265 ($397,734) for the seven months ended March 31, 2000
representing 41% of revenues for that period, compared to $765,944 ($535,625)
for the twelve months ended in 1999, representing 42% of revenues for that
period. Administrative expenses were $740,017 ($508,988) in fiscal 2000,
representing 57% of total revenues in that period, compared to $781,134
($546,248) in fiscal 1999. The increase in administrative expenses of $41,117
($37,260) in the seven month fiscal period ended March 31, 2000 from the twelve
month fiscal period ended August 31, 1999 is attributable to an increase in
payroll for designers and programmers. Selling expenses were $245,432
($168,809) in the seven month fiscal period ended March 31, 2000, representing
17% of total revenues in that period, compared to $213,734 ($149,464) in the
twelve month fiscal period ended August 31, 1999. The increase in selling
expenses of $31,698 ($19,345) in the seven month fiscal period ended March 31,
2000 from the twelve month fiscal period ended August 31, 1999 is attributable
to increased expenditures for advertising and promotion. Computer expenses were
$221,056 ($152,043) in the seven month fiscal period ended March 31, 2000,
representing 16% of total revenues in that period, compared to $196,319
($137,286) in the seven month fiscal period ended August 31, 1999. The increase
in computer expenses of $24,737 ($14,757) is attributable to additional
bandwidth. Amortization of goodwill was $14,217 ($9,778) for the twelve months
ended August 31, 1999. There was no goodwill amortization in the twelve month
fiscal period ended August 31, 1998.
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.
14
5B LIQUIDITY AND CAPITAL RESOURCES
Six Months ended September 30, 2001
Cash used in operating activities was $314,724 ($201,218) for the six months
ended September 30, 2001, attributable to a net loss of $378,068 ($239,435), an
overall increase in prepaid expense and sundry receivables of $ 181,404
($114,885), increase in accounts payable and accrued liabilities of $ 231,264
($146,462), increase in deferred revenue of $64,527 ($40,866). Cash used in
operating activities for the six months ended September 30, 2001 was $615,552
($389,837).
Cash provided by financing activities in the six months ended September 30, 2001
was $598,971 ($379,336) consisting of $77,256 ($48,927) increase in advances
from shareholders, increase in loans payable of $111,608 ($70,683) and an
increase in issuance of capital stock of $401,000 ($253,958), decrease in
advances from Jazz Monkey Media of $73,597($46,610).
Cash used in financing activities for the six months ended September 30, 2001
was $7,039 ($4,458) a decrease of $63,317 (40,099).
Twelve months ended March 31, 2001
Cash used in operating activities was $472,170 ($299,277) for the twelve months
ended March 31, 2001, primarily attributable to a net loss of $889,055
($593,815) and an increase in prepaid expenses and sundry receivables $28,357
($25,555), partially offset by a decrease in accounts receivable of $78,665
($57,015) and an increase in accounts payable and accrued liabilities of
$299,339 ($180,587), and a decrease in deferred revenue of $30,714 ($21,763).
Cash used in operating activities for the seven months in 2000 was $355,456
($232,060), primarily attributable to a loss of $433,692 ($296,963) and an
increase in accounts receivable.
Cash provided by financing activities in the twelve months ended March 31, 2001
was $517,497 ($344,855) consisting of $9,271 ($8,325) decrease in advances to
shareholders, increase in loans payable of $76,561($48,549), decrease in
advances from Jazz Monkey Media of $225,207 ($154,897), issue of capital stock
in the amount of $225,000 ($149,734)
Cash used in investing activities for the twelve months ended March 31, 2001 was
$111,245 ($74,306) consisting primarily of computer hardware. Cash used in
investing activities for the seven months ended March 31, 2000 was $67,808
($46,639).
We believe that our cash and cash requirements as at March 31, 2001 of $32,794
($20,616) together with funds raised in recent financing activities and funds
excepted to be generated from operations and new projects, will be sufficient to
meet our cash requirements through March 31, 2002. There can be no assurance
that we will not require additional financing prior to that time.
Seven Months ended March 31, 2000 Compared to the Twelve Months ended
August 31, 1999
Cash used in operating activities was $355,456 ($244,484) for the seven
months ended March 31, 2000,primarily attributable to a net loss of $433,692
($298,296) and an increase in accounts receivable of $60,415 ($41,554) partially
offset by an increase in accounts payable of $75,921 ($52,219)and an increase in
deferred revenue of $46,674 ($32,103). Cash generated from operating activities
for the same period in 1999 was $105,077 ($73,480) primarily attributable to net
loss of $135,718 ($94,908), partially offset by an increase in accounts
receivable of $53,171 ($37,183) and an increase in accounts payable of $57,174
($39,325). Cash provided by financing activities for the seven months ended
March 31, 2000 totaled $499,469 ($343,537) consisting of $632,931 ($435,333) in
net proceeds from the issuance of common shares pursuant to a private placement,
an advance of $230,395 ($158,467) to Jazz Monkey Media Inc. at March 31, 2000.
It was repaid in full by December 31, 2000. Cash used in financing activities in
the twelve month period ended August 31, 1999 was $193,826 ($135,543)
representing an advance of $38,638 ($27,020) to shareholders and an issuance of
capital stock of $150,000 ($104,895).
Cash used in investing activities for the seven months ended March 31, 2000
was $46,639 ($32,079), attributable to the purchase of capital assets, primarily
computer hardware, in the amount of $125,297 ($86,180). Cash used in investing
activities for the twelve month period ended August 31, 1999 was $90,929
($63,587), attributable to the purchase of capital assets, primarily computer
hardware, in the amount of $108,253 ($75,701).
Year ended August 31, 1999 Compared to Year ended August 31, 1998
Cash used in operating activities was $105,077 ($73,480) in the year ended
August 31, 1999, attributable primarily to a net loss of $135,718 ($94,908) and
an increase in accounts receivable of $53,171 ($37,537), partially offset by an
increase in accounts payable of $57,174 ($39,325). Cash from operating
activities in the year ended August 31, 1998 was $53,939($23,944) attributable
primarily to net income of $4,973 ($3,754) and an increase in accounts payable
of $35,571 ($24,828), partially offset by an increase in prepaid expenses of
$3,574 ($2,495) and an increase in accounts receivable of $9,070 ($6,331).
We have capital equipment commitment for new computers in the aggregate amount
of $48,543, pursuant to a 36-month lease that began in May 26, 2001. The lease
has a payout of $ 3,843.60. Payments under this lease will be funded from
working capital.
We continually monitor developments in the adult entertainment market and
redevelop our strategic plan and products, and upgrade technology. However, we
do not have formal research and development policies or a research and
development budget and have not to date tracked funds spent on research and
development. There can be no assurance that we will have sufficient resources
to implement new products and technology could have a material adverse effect on
our competitive position and our continued viability.
15
Cash provided by financing activities in the twelve months ended March 31, 2001
was $344,855 ($517,497) consisting of $8,325 ($9,271) decrease in advances to
shareholders, increase in loans payable of $ 48,549 (76,561), decrease in
advances from Jazz Monkey Media of $154,897 ($225,207), issue of capital stock
in the amount of $225,000 ($149,734)
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6A AND 6C. DIRECTORS AND SENIOR MANAGEMENT AND BOARD PRACTICES
Each of our three directors was re-elected at the Corporation's Annual
Special Meeting of Shareholders held on November 23, 2001. In addition Wayne
Doss was also elected as a director at that meeting. Each director will hold
office until the next Annual General Meeting or until their successors are
elected or appointed. 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 senior officers and key persons.
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.
HusVar is currently the CEO of TagFX a digital printing and marketing solutions
company. Mr. HusVar is a co-founder of Chek, Inc. now CKMP, Inc., a provider of
business and consumer e-mail outsourcing solutions. From 1998 to the end of 2000
he was the Chairman of the Board and President of Chek, Inc. 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.
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. On July 9, 1999 Mr. Korculanic pleaded
guilty under a plea agreement dated January 7, 1999 to one count of
16
carrying lottery materials in inter state or foreign commerce contrary to 18
U.S.C. Sec.Sec.1301 and 2. The offense was committed by affiliation as Sales
Manager at Intertel Marketing on March 9, 1995. The court ordered three years
probation and imposed a fine in the amount of U.S. $30,000. No jail or prison
sentence was imposed.
Wayne Doss, 48, is an independent management consultant, formerly President &
Chief Executive Officer of Keller Ladders, Inc. and Biltbest of California, Inc.
(formerly Keller Industries, Inc.) from 1993 to December 31, 1999.
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.
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$0.25. 50% of these options vest and
are exercisable after February 18, 2001 and the remaining 50% vest and are
exercisable after February 18, 2002. The options expire on February 18, 2003.
The following table and notes show the compensation paid by us to John
Alexander van Arem and to Anthony Korculanic for the last fiscal year.
Name Year Salary Other Long-Term Compensation
Annual Stock Option Grants
Compen No. of Exercise Vesting period Expiry Date
sation Common Price
Shares (CDN$)
for which
option
granted
- ----------- ---- ---------- ------- ---------- --------- --------------- -----------
John A. 2001 $110,000(1) $10,800(2)240,000 $0.25 50% Feb. 18/01 Feb. 18/03
van Arem 50% Feb. 18/02
Anthony 2001 $93,600(3) $7,200(4) 200,000 $0.25 50% Feb. 18/01; Feb. 18/03
Korculanic 50% Feb. 18/02
<FN>
(1) Mr. van Arem also received in fiscal year 2001 a payment of $20,500
relating to compensation deferred in our fiscal year ended March 31,
2000. In our fiscal year 2000, Mr. van Arem's total salary for seven
months was $52,500, of which $32,000 was paid to him. Payment of the
remaining amount of $20,500 was deferred due to a management decision
to forgo compensation for the benefit of the Corporation. This
deferred amount was included as a shareholder loan on our balance
sheet for the year ended March 31, 2000. This loan was repaid without
interest in May 2000. See note 8 to our financial statements beginning
at page F-1 of this registration statement.
(2) Represents a monthly car allowance of $900.
(3) Mr. Korculanic also received in fiscal year 2001 a payment of $22,087
relating to compensation deferred in our fiscal year ended March 31,
2000. In our fiscal year 2000, Mr. Korculanic's total salary for seven
months was $52,500, of which $30,412 was paid to him. Payment of the
remaining amount of $22,087 was deferred due to a management decision
to forgo compensation for the benefit of the Corporation. This
deferred amount was included as a shareholder loan on our balance
17
sheet for the year ended March 31, 2000. This loan was repaid without
interest in May 2000. See note 8 to our financial statements beginning
at page F-1 of this registration statement.
(4) Represents a monthly car allowance of $600.
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 $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.
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 August 15, 2001.
NAME NUMBER OF SHARES PERCENTAGE OF
OWNED OUTSTANDING SHARES
John A. van Arem 9,720,000 (1)(2) 28%
Anthony Korculanic 8,100,000 (1)(3) 23%
Sean Husvar 50,000(4) .001%
Hubert Mockler 209,217(5) .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
6D. EMPLOYEES
As of December 14, 2001, we had 12 full-time employees, including senior
management, compared to 16 at March 31, 2000. This reduction is attributable to
management's decision to reduce overhead. All of our full-time employees are
located in Toronto and occupy management or administrative positions. None
18
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
August 13, 2001 of each person known to us to be the beneficial owner of more
than 5% of our outstanding common shares.
NAME NUMBER OF SHARES PERCENTAGE OF
OWNED OUTSTANDING
SHARES
John A. van Arem 9,720,000(1)(2) 28%
Anthony Korculanic 8,100,000(1)(3) 23%
(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
19
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.
(See note 17 to our financial statements beginning at page F-1 of this
registration statement.)
Jazz Monkey Media, Inc. owed us $225,207 ($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.
We owed Mr. van Arem and Mr. Korculanic an aggregate of $31,344 at March
31, 2000. This amount has increased to $36,300 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. (See note 17 to our
financial statements beginning at page F-1 of this registration statement.)
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.
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.
20
A former employee filed a lawsuit against us on November 23, 2000 in the Ontario
Superior Court of Justice, court file No. 00-CV-201313 alleging wrongful
dismissal. This lawsuit claims damages in the amount of CDN$50,000 plus interest
and costs and a declaratory order confirming our former employee's ownership of
25,000 options to acquire our common shares. We have filed a statement of
defense denying the allegations in the claim. The outcome cannot be determined
at this time. Given our current financial position, if we are ordered to pay the
amount of damages claimed this would have a material affect on our business.
In April 2001 we reached an agreement with Business Communications, Inc.
("BCI") to pay an outstanding judgment, including interest and attorney fees, of
$96,658.68 US ($62,626.99) over four months commencing in April 2001. This
judgment arose from a lawsuit filed by BCI on June 12, 2000 in the General Court
of Justice Superior Court Division of Forsyth County North Carolina (Case No.
00CVS5719) against Web Dream alleging breach of contract. We have paid this
amount in full.
8B. SIGNIFICANT CHANGES
Since the close of our year ended March 31, 2001, we have raised $423,500 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 2001 Annual Special Meeting of Shareholders, the shareholders passed
a resolution authorizing our directors to cause us to issue up to 30,000,000
common shares or 30,000,000 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 2002 at the market price at
the time of the transaction less any discounts as approved by our directors. Any
other financing activities that are proposed and require shareholder approval
will be put forth to the shareholders in accordance with applicate legislative
or regulatory requirements. 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 #25388G-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.
21
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 November 23, 2001, the shareholders' list for our common shares showed
220 registered shareholders and 35,330,866 shares outstanding. 17 of these
registered shareholders listed U.S. addresses, showing ownership of an aggregate
of 2,379,038 shares, representing 0.07% of our outstanding common shares. All of
our outstanding common shares are fully paid and non-assessable.
OPTIONS
Options to acquire our common shares are also discussed in Item 6
"Directors, Senior Management and Employees". On September 30, 2001, there were
1,646,000 options to purchase our common shares outstanding net of forfeitures.
On September 30, 2001 there were 1,646,000 options to purchase our common shares
outstanding net of forfeitures. The exercise price for all of these options is
CDN$0.25. The expiry dates of these options range from February 17, 2003 to
December 31, 1010.
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
Balance at August 31, 1998 1,000 -
----------- -----------
Balance at August 31, 1999 20,000,000 1,000
Issued for cash 6,912,872 810,033
Issuance of shares in consideration of investment
Banking services 1,600,000 60,000
Issuance of shares on reverse take over 2,067,994 254,093
----------- -----------
Balance as at March 31, 2000 30,580,866 1,125,126
Issuance for cash 2,250,000 225,000
----------- -----------
Balance as at March 31, 2001 32,830,866 1,350,126
22
Issuance of shares for consulting services 1,500,000 -
Issued for cash 1,000,000 200,000
Issued for cash 1,005,000 201,000
Issued for cash 112,500 22,500
----------- -----------
Balance as at February 7, 2002 36,448,366 1,773,626
RECENT SALES OF THE CORPORATIONS' SECURITIES
On January 17, 2002 we closed a private placement with a Corporation
domiciled in the Bahamas. We issued 112,500 shares at a price of CDN$ 0.20 per
share, for aggregate consideration of $22,500. We were not required to register
these securities in Ontario.
On September 30, 2001 we closed a private placement with a corporation
domiciled in the Bahamas. We issued 1,005,000 shaers at a price of CDN$ 0.20 per
share, for aggregate consideration of $201,000. We were not required to register
these securities in Ontario.
In August, 2001 we closed a private placement with a Canadian Corporation.
We issued 1,000,000 shares at a price of CDN$ 0.20 per share, for aggregate
consideration of $200,000. These securities were acquired in reliance on
exemption 72.1d of The Securities Act (Ontario).
On February 14, 2001 we closed a private placement with two corporations
domiciled in Bahamas and Turks & Caicos Islands, B.W.I., respectively . 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.
On February 18, 2000 we issued (i) 350,000 options to acquire our common shares
to a consultant in consideration for management consulting services and (ii)
150,000 options to acquire our common shares to a consultant in consideration
for investor relations services. All of the options issued on February 18,2000
are exercisable at the price of CDN $0.25 per share, vest equally over two years
and expire ob February 18,2003. During our fiscal year 2002 we issued an
aggregate of 100,000 options to acquire our common share 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.
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.
In November, 1999 the company issued 1,600,000 common shares to an
unrelated party for certain investment banking services, related to the reverse
takeover transaction described in item 4 " Information about Corporation
History". The value of these services was recorded at $ 60,000 based on the
agreed value of the services provided at that time.
From September 1, 1999 to March 31, 2000 the company issued 6,912,872
shares for cash in the aggregate amount of $ 810,033.
In August, 1999 Web Dream Inc. issued a 2 for 1 stock split making the
balance as at August 31, 1999 20,000,000
On June 18, 1999 Web Dream Inc. issued a stock split of 10,000 to 1.
Web Dream Inc. (see Note 4 Information about the Corporation) opened on
February 18, 1998 with a balance of 1000 founder 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,
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
23
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.
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.
24
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
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:
25
(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.
10E. TAXATION
MATERIAL 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).
26
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.
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.
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.
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
27
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.
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
28
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."
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.
DIGITAL ROOSTER.COM INC.
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000 AUGUST 31, 1999 AND 1998
(EXPRESSED IN CANADIAN DOLLARS)
CONTENTS
PAGE
Auditors' Report 1
Consolidated Financial Statements:
Consolidated Balance Sheets 2
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
AUDITORS' REPORT
To the Directors of
DIGITAL ROOSTER.COM INC.
We have audited the consolidated balance sheet of DIGITAL ROOSTER.COM INC. as at
March 31, 2000 August 31, 1999 and August 31, 1998 and the consolidated
statements of operations, deficit 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 United States and Canadian 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 consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at March 31, 2000
August 31, 1999 and August 31, 1998 and the results of its operations and its
cash flows for the periods then ended in accordance with generally accepted
accounting principles.
The consolidated balance sheet as at March 31, 2000 and the consolidated
statement of operations, deficit and cash flows for the seven months then ended
are presented to give effect to the change in accounting policy for revenue
recognition and a correction of an error subsequently discovered that existed at
the date of the previously issued auditors' report. We have audited the
adjustments to the March 31, 2000 consolidated financial statements and in our
opinion, such adjustments, in all material respects, are appropriate and have
been properly applied.
Canada -U.S. Reporting Differences
i) U.S. GAAP Reconciliation
In the United States, to comply with certain requirements of the Securities and
Exchange Commission, a specific reference to the restatement of a previously
filed U.S. GAAP reconciliation to correct errors, as described in Note 20 to the
financial statements, is required in the auditors' report.
ii) Comments by Auditor
Our report to the Directors dated June 1, 2000 is expressed in accordance with
Canadian reporting standards which do not permit a reference to such events and
conditions in the auditor's report when these are adequately disclosed in the
financial statements.
"Silver Gold Glatt & Grosman, llp"
Toronto, Ontario
June 1, 2000 except to Note 2 Chartered Accountants
which is as of December 14, 2001
AUDITORS' REPORT
To the Directors of
Digital Rooster.com Inc.
We have audited the consolidated balance sheet of Digital Rooster.com Inc. as at
March 31, 2001 and the consolidated statement of operations, deficit and cash
flows for the year then ended. These financial statements are the responsibility
of the corporation's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit 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 consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
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 corporation as at March 31, 2001 and the
results of operations and its cash flows for the year then ended in accordance
with Canadian generally accepted accounting principles.
Toronto, Ontario. /S/ MINTZ & PARTNERS LLP
June 22, 2001 CHARTERED ACCOUNTANTS
CANADA - U.S. REPORTING DIFFERENCES
(a) Going Concern Basis of Presentation
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph when the financial statements are affected by
conditions and events that cast substantial doubt on the company's ability
to continue as a going concern, such as those described in Note 1 to the
financial statements.
(a) Restatement of a previously filed U.S. GAAP reconciliation.
In the United States, to comply with certain requirements of the Securities
& Exchange Commission, a specific reference to the restatement of a
previously filed U.S. GAAP reconciliation to correct errors, as described
in Note 20 to the financial statements, is required in the auditors'
report.
(b) Comments by Auditor
Our report to the directors dated June 22, 2001 is expressed in accordance
with Canadian reporting standards which do not permit a reference to such
events and conditions in the auditor's report when these are adequately
disclosed in the financial statements.
Toronto, Ontario. /S/ MINTZ & PARTNERS LLP
December 14, 2001 CHARTERED ACCOUNTANTS
1.
DIGITAL ROOSTER.COM INC.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN CANADIAN DOLLARS)
AS AT MARCH 31, MARCH 31, AUGUST 31, AUGUST 31
2001 2000 1999 1998
A S S E T S
-----------
CURRENT
Cash $ 32,791 $ 98,709 $ 1,335 $ 3,515
Accounts receivable 54,198 123,484 63,069 9,898
Prepaids and sundry receivables $ 58,517 17,588 4,820 3,901
------------ ----------- ------------ ------------
145,506 239,781 69,224 17,314
CAPITAL ASSETS (Note 5) 184,876 125,297 108,253 43,977
GOODWILL (Note 6) 258,739 326,978 -
DUE FROM JAZZ MONKEY MEDIA INC. (Note 17) - $ 225,207 -
------------ ------------
$ 589,121 $ 917,263 177.477 $ 61,291
============ =========== ============ ============
L I A B I L I T I E S
CURRENT
Accounts payable and accrued liabilities $ 471,251 $ 171,913 95,992 $ 38,818
Income taxes payable 2,415 2,415 -
Deferred Revenue 15,961 46,675 -
Loans payable (Note 7) 76,561 - 17,404 16,500
Note payable (Note 8) 90,000 90,000 -
Due to Jazz Monkey Media Inc. (Note 17) - - 5,188
$ 656,188 $ 311,003 $ 118,584 $ 55,318
DUE TO SHAREHOLDERS (Note 9) 36,300 45,571 38,638
------------ ----------- ------------
692,488 356,574 157,222 $ 55,318
------------ ----------- ------------ ------------
S H A R E H O L D E R S' E Q U I T Y
CAPITAL STOCK (Note 10) 1,350,126 1,125,126 151,000 1.000
DEFICIT ( Profit) (1,453,493) (564,437) (130,745) 4,973
------------ ----------- ------------
(103,367) 560,689 20,255 5,973
------------ ----------- ------------ ------------
$ 589,121 $ 917,263 $ 177,477 $ 61,291
============ =========== ============ ============
See Accompanying Notes
2.
DIGITAL ROOSTER.COM INC.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN CANADIAN DOLLARS)
AS AT MARCH 31, MARCH 31, AUGUST 31, AUGUST 31
2001 2000 1999 1998
DEFICIT (Profit) - Beginning of period $ (564,437) $ (130,745) $ 4,973 $ -
Net loss (889,056) (433,692) (135,718) 4,973
------------ ----------- ------------
DEFICIT (Profit) - End of period $(1,453,493) $ (564,437) $ (130,745) $ 4,973
============ =========== ============ -----------
See Accompanying Notes
3.
DIGITAL ROOSTER.COM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN CANADIAN DOLLARS)
FOR THE PERIODS ENDED MARCH 31, MARCH 31, AUGUST 31, AUGUST 31,
2001 2000 1999 1998
12 MONTHS 7 MONTHS 12 MONTHS 7 MONTHS
REVENUES $ 2,508,122 $ 1,409,764 1,821,413 $ 226,263
COST OF SALES 737,562 578,265 765,944 40,846
------------ ------------ ------------ ------------
GROSS PROFIT 1,770,560 831,499 1,055,469 185,417
EXPENSES
Administrative 1,318,372 740,017 737,730 101,412
Selling 770,512 245,432 213,734 28,565
Computer 439,071 221,056 196,319 50,467
Interest 11,755 14,874 16,752
Amortization of capital assets 51,667 29,595 26,652
Amortization of goodwill 68,239 14,217 -
------------ ------------ ------------
2,659,616 1,265,191 1,191,187 180,444
------------ ------------ ------------ ------------
NET LOSS $ (889,056) $ (433,692) (135,718) 4,973
============ ============ ============
LOSS PER SHARE (Note 14)
Basic (0.03) $ (0.01) $ (0.009) $ 0.0002
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING DURING THE PERIOD 30,958,948 26,144,464 10,076,712 10,000,000
4.
DIGITAL ROOSTER.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN CANADIAN DOLLARS)
FOR THE PERIODS ENDED MARCH 31, MARCH 31, AUGUST 31, AUGUST 31,
2001 2000 1999 1998
12 MONTHS 7 MONTHS 12 MONTHS 7 MONTHS
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss ( income)
Adjustment for non-cash items: $(889,056) $(433,692) (135,718) $ 4,973
Amortization of capital assets 51,667 29,595 26,652 7,447
Amortization of goodwill 68,239 14,217 -
---------- ---------- ----------
(769,150) (389,880) (109,066) 12,420
Changes in non-cash balances
related to operations
(Note 15) 296,980 34,424 3,085 41,519
---------- ---------- ---------- ----------
CASH FLOWS USED IN OPERATING
ACTIVITIES (472,170) (355,456) (105,077) 53,939
---------- ---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of capital assets (111,245) (46,639 (90,029) (51,424)
---------- ---------- ----------
CASH FLOWS USED IN INVESTING
ACTIVITIES (111,245) (46,639) (90,029) (51,424)
---------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Advances (to) from shareholders (9,271) 6,933 38,638
Increase in loans payable 76,561 - 904
Increase in note payable - 90,000 -
Advances from (to) Jazz Monkey 225,207 (230,395) 5,188
Media Inc. 225,000 632,931 150,000
---------- ---------- ----------
Issuance of Capital Stock 1,000
CASH FLOWS PROVIDED BY 517,497 499,469 193,826 1,000
FINANCING ACTIVITIES ---------- ---------- ---------- ----------
(DECREASE) INCREASE IN CASH (65,918) 97,374 (2,180) 3,515
CASH - Beginning of period 98,709 1,335 3,515 -
---------- ---------- ---------- ----------
CASH - End of period $ 32,791 $ 98,709 1,335 3,515
========== ========== ========== ==========
5.
All Amounts in Canadian dollars
DIGITAL ROOSTER.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AUGUST 31, 1999 AND 1998
(EXPRESSED IN CANADIAN DOLLARS)
1. NATURE OF COMPANY'S OPERATIONS AND BASIS OF PRESENTATION
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.
GOING CONCERN BASIS OF PRESENTATION
These financial statements have been prepared in accordance with generally
accepted accounting principles applicable to a going concern that
contemplates the realization of assets and the payment of liabilities in
the ordinary course of business. Accordingly, they do not give effect to
adjustments that would be necessary should the company be unable to
continue as a going concern. In other than the normal course of business,
the Company may be required to realize its assets and liquidate its
liabilities and commitments at amounts different from those in the
accompanying financial statements.
The Company has suffered recurring losses from operations and has a net
capital deficiency as at March 31, 2001, that could raise substantial doubt
about its ability to continue as a going concern. The Company's continuance
as a going concern is dependent upon its ability to obtain adequate
financing or to reach profitable levels of operation. It is not possible to
predict whether financing efforts will be successful or if the company will
attain profitable levels of operations.
2. RESTATEMENT OF PRIOR YEAR
(a) Change in accounting policy
During 2001, the company changed its revenue recognition policy used
in preparation of its consolidated financial statements, and the
change has been applied retroactively.
The company has adopted a revenue recognition policy, which is in
accordance with American Institute of Certified Public Accountant's
Statement of Position 97 - 2 (SOP 97 - 2) and as commented in Staff
Accounting Bulletin 101 issued by the United States Securities and
Exchange Commission (SAB 101). Accordingly, monthly subscription fees
to the company's website is recognized as the services are provided
and revenue from wholesale customers is recognized as the services are
provided under the terms of the contract.
(b) Correction of an error
During the year, an error was discovered whereby accounts payable of
$32,207 has been excluded from the previously issued and audited prior
year financial statements. To correct the error, computer expenses
have been increased by $32,207 and accounts payable have been
increased by $32,207 for the year ended March 31, 2000.
/Continued
6.
DIGITAL ROOSTER.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AUGUST 31, 1999 AND 1998
(EXPRESSED IN CANADIAN DOLLARS)
2. RESTATEMENT OF PRIOR YEAR - Continued
The balance sheet as at March 31, 2000 and the consolidated statements of
operations, deficit and cash flow for the seven months then ended are
restated to give effect to these changes subsequently discovered that
existed at the date of the previously issued financial statements.
The effect of these changes, applied retroactively, are as follows:
Financial statement component Increase (decrease)
- -------------------------------------------------------------------------------
Deficit, April 1, 1999 $ -
Deficit, increased as at March 31, 2000 78,882
Revenues, (decreased) for the period ended March 31, 2000 (46,675)
Expenses increased for the period ended March 31, 2000 32,207
Net loss, increased for the period ended March 31, 2000 78,882
Liabilities - increased, as at March 31, 2000 78,882
- -------------------------------------------------------------------------------
The effect of these changes in 2001 are as follows:
Financial statement component Increase (decrease)
- -------------------------------------------------------------------------------
Deficit, increased as at March 31, 2001 $ 15,961
Revenues, increased for the year ended March 31, 2001 30,714
Net loss, (decreased) for the year ended March 31, 2001 (30,714)
Liabilities - increased, as at March 31, 2001 15,961
- -------------------------------------------------------------------------------
3. 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"). As a result, the Company's year end was changed from
August 31 to March 31 in 2000. Accordingly, the comparative figures
have been presented for seven months. See Note 4 for a detailed
description of the reverse takeover ("RTO") transaction. Web was
incorporated in Ontario on February 17, 1998.
(b) Basis of presentation
These 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 consolidated financial statements, are
explained in Note 20.
/Continued
7.
DIGITAL ROOSTER.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AUGUST 31, 1999 AND 1998
(EXPRESSED IN CANADIAN DOLLARS)
3. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION - Continued
(c) Use of estimates
The preparation of these 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, 2001, March 31, 2000 and the
revenue and expenses reported for the periods then ended. Actual
results may differ from those estimates.
(d) Revenue recognition
Revenue from monthly subscriptions to the website is deferred on
receipt and is recognized as the services are provided.
Revenue from the license of video contents and access to the Company's
website to wholesale customers is recognized as the services are
provided under the terms of the contract.
Revenue from advertisements on the website of the Company is
recognized when all the significant obligations have been completed,
the fees are fixed and determinable and collectability of such fees is
reasonably assured. Revenue from an advertising barter transaction is
recorded only if the fair value of the advertising surrendered in the
transaction is determinable based on the entity's own historical
practice of receiving cash for the similar barter transactions. If the
fair value of the advertising surrendered in the barter transaction is
not determinable, the advertising income from the barter transaction
is recorded based on the carrying amount of the advertising
surrendered which is generally nil.
(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.
/Continued
8.
DIGITAL ROOSTER.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AUGUST 31, 1999 AND 1998
(EXPRESSED IN CANADIAN DOLLARS)
3. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION - Continued
(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 is more likely than not that the asset will not be
realized.
(h) Foreign currency translation
The reporting currency in these consolidated financial statements is
the Canadian dollar. Accordingly, assets and liabilities denominated
in U.S. dollars have been translated into Canadian 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.
(i) Costs of raising capital
Incremental costs incurred in respect of raising capital are charged
against equity proceeds raised.
4. REVERSE TAKEOVER
These consolidated financial statements are prepared to give effect to a
reverse takeover transaction using purchase method of accounting. In
accordance with Canadian generally accepted accounting principles, these
consolidated financial statements represent a continuation of the financial
statements of the legal subsidiary, Web Dreams Inc.
On January 19, 2000, the company issued 2,067,994 common shares for all of
the issued and outstanding common shares of Web Dreams Inc. Subsequently,
the company filed articles of amendment changing its name from Storimin
Resources Inc. to Digital Rooster.com Inc.
/Continued
9.
DIGITAL ROOSTER.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AUGUST 31, 1999 AND 1998
(EXPRESSED IN CANADIAN DOLLARS)
a. REVERSE TAKEOVER - CONTINUED
Assets acquired, liabilities assumed and purchase considerations are:
Cash and short-term deposits $ 13,519
Liabilities (100,621)
-------------
Net liabilities assumed (87,102)
Goodwill on acquisition 341,195
-------------
Less: Non-cash consideration $ 254,093
=============
Net liabilities assumed $ 87,102
Purchase consideration (1,016,369 common
shares valued at $0.25 per share) 254,093
-------------
Goodwill $ 341,195
=============
5. CAPITAL ASSETS
As At March
31, 2001
------------ Net
Accumulated Carrying
Cost Amortization Amount
------------ ------------ --------
Furniture and equipment $ 54,303 $ 8,300 $ 46,003
Leasehold improvements 8,141 3,522 4,619
Computer hardware 219,052 93,130 125,922
Computer software 18,741 10,409 8,332
------------ ------------ --------
$ 300,237 $ 115,361 $184,876
============ ============ ========
As At March
31, 2000
------------ Net
Accumulated Carrying
Cost Amortization Amount
------------ ------------ --------
Furniture and equipment $ 15,547 $ 2,882 $ 12,665
Leasehold improvements 6,909 2,048 4,861
Computer hardware 160,262 55,205 105,057
Computer software 6,273 3,559 2,714
------------ ------------ --------
$ 188,991 $ 63,694 $125,297
============ ============ ========
/Continued
10.
DIGITAL ROOSTER.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AUGUST 31, 1999 AND 1998
(EXPRESSED IN CANADIAN DOLLARS)
5. CAPITAL ASSETS - Continued
As At August
31, 1999
------------ Net
Accumulated Carrying
Cost Amortization Amount
------------ ------------ --------
Furniture and equipment $ 10,545 $ 1,360 $ 9,185
Leasehold improvements 5,512 1,323 4,189
Computer hardware 124,110 30,323 93,787
Computer software 2,185 1,093 1,092
------------- ------------ --------
$ 142,352 $ 34,099 $108,253
============= ============ ========
As At August
31, 1998
Accumulated Net Carrying
Cost Amortization Amount
---------------------------------------
Furniture and Fixtures $ 1,704 $ 170 $ 1,534
Leasehold Improvements 3,812 391 3,421
Computer hardware 45,908 6,886 39,022
$ 51,424 $ 7,447 $ 43,977
6. GOODWILL
As At March
31, 2001
------------ Net
Accumulated Carrying
Cost Amortization Amount
------------ ------------ --------
Goodwil $ 341,195 $ 82,456 $258,739
============ ============ ========
As At March
31, 2001
------------ Net
Accumulated Carrying
Cost Amortization Amount
------------ ------------ --------
Goodwil $ 341,195 $ 14,217 $326,978
============ ============ ========
7. LOANS PAYABLE
The loans payable are unsecured, bear no interest and have no fixed terms
of repayment. The loans payable consists of:
2001 2000 1999 1998
------- ----- ------- -------
Wade Pratt $40,600 $ - $ -
Thistle Development Corp. 25,000 - -
On line Theatre - - 17,404 16,500
Pepe Appugliese 10,961 - -
------- ----- -------
$76,561 $ - $17,404 $16,500
======= ===== ======= =======
/Continued
11.
DIGITAL ROOSTER.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AUGUST 31, 1999 AND 1998
(EXPRESSED IN CANADIAN DOLLARS)
8. NOTE PAYABLE
The company's wholly-owned subsidiary, Pizay Investments Inc. ("Pizay"),
entered into an agreement with ProAm Exploration Corporation with an
exclusive option to acquire an undivided 10% interest in the property. As a
part of the agreement, a non-interest bearing demand note payable of
$90,000 was issued. The agreement was terminated in 1999. The company and
Pizay are disputing a legal action initiated by ProAm Exploration
Corporation.
9. DUE TO SHAREHOLDERS
Shareholders' advances are unsecured, bear no interest and while there are
no fixed terms of repayment, the lenders have agreed not to demand payment
before July 1, 2002.
10. CAPITAL STOCK
i) Authorized
Unlimited number of Common shares
Issued - Common shares Number Amount
Balance as at August 31, 1998 1,000 -
---------- ----------
Balance as at August 31, 1999 20,000,000 $ 1,000
Issued for cash 6,912,872 810,033
Issuance of shares in consideration of investment
banking services (b) 1,600,000 60,000
Issuance of shares on reverse takeover 2,067,994 254,093
---------- ----------
Balance as at March 31, 2000 30,580,866 1,125,126
Issued for cash 2,250,000 225,000
---------- ----------
Balance as at March 31, 2001 32,830,866 $1,350,126
========== ==========
(a) The issued and outstanding common shares reflect the stock split that
occurred in Web Dream Inc. on August 18, 1999 (10,000:1). The stock
split has been recorded in these consolidated financial statements as
if it had occurred from the Company's inception.
(b) The company issued 1,600,000 common shares to an unrelated party for
certain investment banking services, including corporate development,
design, structure, and financing, related to the reverse takeover
transaction described on Note 4. The value of these services was
recorded at $60,000 based on the agreed upon value of the services
provided.
/Continued
12.
DIGITAL ROOSTER.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AUGUST 31, 1999 AND 1998
(EXPRESSED IN CANADIAN DOLLARS)
10. 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 options 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, April 1, 1999 2,560,000 $ 0.25 2,560,000 $ 0.25
Granted 1,591,000 0.25 1,591,000 0.25
Cancelled (2,560,000) 0.25 (2,560,000) 0.25
----------- --------- ------------ ---------
Balance, March 31, 2000 1,591,000 $ 0.25 1,591,000 $ 0.25
--------- ---------
Cancelled (77,500) - (77,500) 0.25
Granted 232,500 - 232,500 0.25
Exercised - - - -
----------- --------- ------------ ---------
Balance, March 31, 2001 1,746,000 $ 0.25 1,746,000 $ 0.25
=========== --------- ============ ---------
Options outstanding and exercisable at March 31, 2001 are as follows:
Outstanding Exercisable
----------- -----------
Wt. Avg.
Expiry Remaining Wt. Avg. Exercise
Price Number Date Life Exercise Price Number Price
----- ----------- --------------- --------- --------------- ----------- --------
0.25 1,518,500 February, 2002 1 $ 0.25 1,518,500 $ 0.25
0.25 30,000 September, 2003 2 0.25 30,000 0.25
0.25 167,500 December, 2004 3 0.25 167,500 0.25
0.25 30,000 February, 2004 3 0.25 30,000 0.25
11. CONTINGENT LIABILITY
In 1998, a claim was filed against the Company and its subsidiary seeking
damages of $2,000,000 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.
/Continued
13.
DIGITAL ROOSTER.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AUGUST 31, 1999 AND 1998
(EXPRESSED IN CANADIAN DOLLARS)
12. LEASE COMMITMENTS
The subsidiary of the Company is obligated under operating leases for its
premises, vehicles and equipment. The lease of premises expires on June 30,
2003.
Future minimum payments for its premises as at March 31, 2001 are as
follows:
2002 $150,688
2003 145,865
2004 41,407
2005 2,967
13. INCOME TAXES
The Company has available losses, the benefits of which have not been
recorded, of approximately $1,598,000 to be applied against future taxable
income. The losses expire as follows:
2005 $ 80,000
2006 133,000
2007 614,000
2008 771,000
--------
1,598,000
==========
The nature and effects of the temporary differences that give rise to
significant portions of the future income tax assets are as follows:
March 31, March 31, August 31,
2001 2000 1999
----------- ----------- ------------
Future income tax assets - Losses carried forward $ 703,000 $ 367,000 54,000
Valuation allowance (703,000) (367,000) (54,000)
----------- ----------- ------------
Net future income tax asset $ - $ - $ -
=========== =========== ============
No future income tax asset has been recorded in respect of the above
because the company cannot determine whether it is more likely than not
that it will be able to realize the future income tax assets during the
carry forward period.
14. LOSS PER SHARE
Loss per share is calculated on the basis of the weighted average number of
common shares outstanding for the period. Loss per share has not been
presented on a fully diluted basis as the effect would be antidilutive.
/Continued
14.
DIGITAL ROOSTER.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AUGUST 31, 1999 AND 1998
(EXPRESSED IN CANADIAN DOLLARS)
15. CHANGES IN NON-CASH OPERATING ITEMS AND SUPPLEMENTAL CASH FLOW DISCLOSURE
i) Changes in non-cash operating items:
March 31, August 31, August 31,
2001 March 31, 2000 1999 1998
(12 months) (7 months) (12 months) (7 months)
----------- ---------------- --------- -----------
Decrease (increase) in accounts receivable $ 69,286 $ (60,415) $(53,171) $ 9,898
Increase in tax payable - 2,415 -
Increase in prepaid and sundry receivables (40,929) (12,768) (918) $ 3,901
Increase (decrease) in deferred revenue (30,714) 46,675 -
Increase (decrease) in accounts payable and accrued liabilities 299,337 58,517 57,174 $ 38,818
----------- ---------------- --------- -----------
$ 296,980 $ 34,424 $ 3.085 $ 17,617
=========== ================ ========= ===========
Interest paid $ 11,755 $ 14,874 $ 16,752
=========== ================ =========
Income taxes paid $ - $ - -
=========== ================ =========
(ii) Supplemental disclosure of non-cash activities:
a) Goodwill on reverse takeover $ - $ 341,125 $ - $ -
=========== ================
b) Non-cash investment banking expenses
(See Note 10 (i) (b)) $ - $ 60,000 - -
=========== ================ ========= ===========
16. FAIR VALUE OF FINANCIAL STATEMENTS
The present carrying amount of the Company's financial assets and
liabilities approximates fair value.
/Continued
15.
DIGITAL ROOSTER.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AUGUST 31, 1999 AND 1998
(EXPRESSED IN CANADIAN DOLLARS)
17. RELATED PARTY TRANSACTIONS
(a) Computer expenses include $124,632 (2000 - $NIL) paid to a company
with common ownership in the normal course of operations accounted for
an amount of consideration established and agreed to by the related
parties.
(b) The 2000 amount due from Jazz Monkey Media Inc. $Nil (2000 -
$225,207), related by virtue of common shareholder, was unsecured,
bear no interest and had no fixed terms of repayment.
18. BUSINESS SEGMENTS AND GEOGRAPHICAL INFORMATION
The subsidiary of the Company has been operating in one business segment
only, being monthly subscription to, and license of, website and video
contents.
Geographical information
Information as to sales and accounts receivable by reportable geographic
segments is:
March 31, 2001 March 31, 2000 August 31, 1999 August 31, 1999
(12 months) (7 months) (12 months) (7 months)
--------------- --------------- ---------------- ---------------
Sales
-----
Canada 4% 5% 5% 3%
United States 96% 95% 95% 97%
Accounts receivable
-------------------
United States 100% 100% 100% 100%
19. SUBSEQUENT EVENTS
Filing of Form 20 - F
Subsequent to year-end, the Company filed an initial registration statement
on Form 20 - F with the Securities and Exchange Commission of the United
States. Accordingly, the disclosures in Note 20 have been prepared.
20. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES
The consolidated financial statements of the Company have been prepared in
accordance with Canadian generally accepted accounting principles
("Canadian GAAP"). In certain respects, Canadian GAAP differs from United
States generally accepted accounting principles ("U.S. GAAP").
/Continued...
16.
DIGITAL ROOSTER.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AUGUST 31, 1999 AND 1998
(EXPRESSED IN CANADIAN DOLLARS)
20. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - Continued
The company prepared and filed Canadian and United States generally
accepted accounting principles difference reconciliation with its initial
registration statement. The previously prepared reconciliation of Canadian
and United States generally accepted accounting principles has been
restated to comply with certain requirements of the Securities and Exchange
Commission of the United States. The effects on the Company's financial
statements resulting from these differences are summarized as follows:
BALANCE SHEET
March 31, March 31, August 31, August 31,
2001 2000 1999 1998
----------- ----------- ---------------- -----------
TOTAL ASSETS UNDER CANADIAN GAAP $ 589,122 $ 917,263 $ 177,477 $ 61,291
Adjustments in respect of:
- Goodwill on reverse takeover (Note 20 (a)) (258,740) (326,978) $ -
----------- ----------- ----------------
TOTAL ASSETS UNDER U.S. GAAP 330,382 $ 590,285 $ 177,477 $ 61,291
=========== =========== ================ ===========
March 31, March 31, August 31, August 31,
2001 2000 1999 1998
----------- ----------- ---------------- -----------
SHAREHOLDERS' EQUITY UNDER CANADIAN GAAP (103,367) $ 560,689 $ 20,255 $ 5,973
Adjustments to opening balances to reflect effect of
- Goodwill on reverse takeover (Note 20 (a)) (326,978) - -
----------- ----------- ----------------
Opening balance under U.S. GAAP, as adjusted (380,345) 560,689 20,255 $ 5,973
Adjustments in respect of:
- Goodwill on reverse takeover (Note 20 (a)) - (341,195) -
- Amortization of goodwill on reverse takeover
(Note 20 (a)) 68,239 14,217 -
----------- ----------- ----------------
SHAREHOLDERS' EQUITY UNDER U.S GAAP (312,106) $ 233,711 $ 20,255 $ 5,973
=========== =========== ================ ===========
/Continued
17.
DIGITAL ROOSTER.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AUGUST 31, 1999 AND 1998
(EXPRESSED IN CANADIAN DOLLARS)
20. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - Continued
CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE
INCOME
March 31, March 31, August 31, August 31,
2001 2000, 1999 1998
(12 months) (7 months) (12 months) (7 months)
------------ ------------ ----------------- ------------
NET INCOME (LOSS) UNDER CANADIAN GAAP (889,056) $ (433,692) $ (135,718) $ 4,973
Adjustments in respect of:
- Goodwill on reverse takeover (Note 20 (a)) - (341,195) -
- Amortization of goodwill on reverse takeover
(Note 20 (a)) 68,239 14,217 -
------------ ------------ -----------------
Correction of Expenditure recorded (192,000)
in November, 1999 (Note 20(b)) 60,000
NET INCOME AND COMPREHENSIVE INCOME UNDER U.S. GAAP $ (820,817) $ (892,670) $ (135,718) $ 4,973
============ ============ =================
Loss per common share as per U.S. GAAP
(Note 20 (e))
Basic
- Weighted average common shares outstanding 30,958,948 26,144,464 20,000,000 1,000
- Basic loss per share $ (0.03) $ (0.03) (0.01) .0002
<FN>
Loss per share has not been presented on a fully diluted basis as the
effect would be anti-dilutive.
STATEMENTS OF OPERATIONS AND CASH FLOWS
There are no material differences between the Canadian GAAP used in
preparing the statements of operations and cash flows and those that would
apply had the statements been prepared in accordance with U.S. GAAP.
DIFFERENCE BETWEEN CANADIAN AND U.S. GAAP AND ADDITIONAL DISCLOSURES
(a) Goodwill on reverse takeover
In accordance with Canadian GAAP (EIC 10), the excess of purchase
consideration paid in a reverse takeover transaction over the sum of the
amounts assigned to the assets acquired and liabilities assumed is recorded
as goodwill as described in Note 4.
(b) US GAAP (FAS 123 and SEC) practices require that shares issued for
services near to or anticipate an initial public offering, must be valued
at the offering price and recorded once the transaction had been initiated.
Canadian GAAP practices require that the transaction be at a fair value and
recorded at the time the services are performed.
/Continued
18.
DIGITAL ROOSTER.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AUGUST 31, 1999 AND 1998
(EXPRESSED IN CANADIAN DOLLARS)
20. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - Continued
In accordance with U.S. GAAP, the purchase consideration paid on the
merger of a public shell and a private operating company is accounted
for as a recapitalization of the private operating company and no
goodwill is recorded.
Accordingly, the audited balance sheets for 2001 and 2000 prepared in
accordance with Canadian GAAP would have been restated under U.S. GAAP
to reduce the goodwill and share capital recorded. In addition, the
statements of operations for 2001 and 2000 are also adjusted to
reverse the annual amortization of goodwill.
(b) 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.
(c) 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, March 31, August 31,
2001 2000 1999
----------- ----------- ------------
Deferred tax assets $ 703,300 $ 367,000 54,000
Less: Valuation allowance (703,300) (367,000) (54,000)
----------- ----------- ------------
$ - $ - $ -
=========== =========== ============
/Continued
19.
DIGITAL ROOSTER.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AUGUST 31, 1999 AND 1998
(EXPRESSED IN CANADIAN DOLLARS)
20. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - Continued
(d) 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 3 and 18.
(e) 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:
Expected life of options 1.5 years
Risk free interest rate 5%
Expected volatility 325%
Expected dividend yield 0.0%
/Continued
20.
DIGITAL ROOSTER.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AUGUST 31, 1999 AND 1998
(EXPRESSED IN CANADIAN DOLLARS)
20. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - Continued
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.
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, 2001 and
2000 would have been impacted as indicated in the following table. The
results which reflect only the impact of the options granted are as
follows:
March 31, 2001 March 31,2000 August 31, 1999 August 31, 1998
(12 months) (7 months) (12 months) (7 months)
------------------------ ---------------------- --------------------- ----------------------
Reported Proforma Reported Proforma Reported Proforma Reported Proforma
---------- ------------ ---------- ---------- --------- ---------- ---------- ----------
Net loss $(889,056) $(1,164,850) $(433,692) $(433,692) (135,718) (135,718) 4,973 4,973
Basic loss per $ (0.03) $ (0.04) $ (0.01) $ (0.01) (0.01) (0.01) .0002 .0002
share
(f) 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
21.
DIGITAL ROOSTER.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AUGUST 31, 1999 AND 1998
(EXPRESSED IN CANADIAN DOLLARS)
20. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - Continued
(g) Statement of shareholders' equity
In accordance with U.S. GAAP, statement of shareholders' equity is
presented as under:
Total
Capital Shareholders
Stock Deficit Equity
---------- -------------- ----------
Common stock and other
Balance, August 31, 1999 $ 255,092 (130,745) $ 124,347
Issued during the year
Issuance of shares for cash 810,034 - 810,034
Issuance of shares in consideration
of investment banking services 192,000 - 192,000
Net loss - (565,692) (565,692)
---------- -------------- ----------
Balance, March 31, 2000 1,257,126 (696,437) 560,689
Issued during the year
Issuance of shares for cash 225,000 - 225,000
Net loss - (889,056) (889,056)
---------- -------------- ----------
Balance, March 31, 2001 $1,482,126 $ (1,585,493) $(103,367)
22.
DIGITAL ROOSTER.COM INC.
CONSOLIDATED BALANCE SHEET AS AT SEPTEMBER 30, 2001
(un-audited)
2001 2000
----------- -----------
ASSETS
Current
Cash 14,101 $ 17,014
Accounts receivable 354,398 92,324
Prepaid expenses and sundry receivables 24,709 105,379
------------------------------------------ ----------- -----------
Total Current Assets 393,209 214,717
------------------------------------------ ----------- -----------
Capital Assets 162,690 170,692
Goodwill 224,621 292,860
Due from Olaf Cordt 5,070
Due from Jazz Monkey Media Inc. - 151,610
------------------------------------------ ----------- -----------
TOTAL ASSETS 785,590 $ 829,879
========================================== =========== ===========
LIABILITIES
Current
Accounts payable and accrued liabilities 398,251 $ 166,987
Deferred Revenue 64,527
Income Tax Payable 2,415 2,415
Loans Payable 86,700
Due to shareholders 122,664 54,678
Note payable 90,000 90,000
Convertible Note 101,469
------------------------------------------ ----------- -----------
Total Current Liabilities 866,026 314,079
------------------------------------------ ----------- -----------
SHAREHOLDERS' EQUITY
Capital Stock 1,751,127 1,125,127
Deficit (1,831,563) (609,327)
------------------------------------------ ----------- -----------
Total Shareholders' Equity (80,436) 515,800
------------------------------------------ ----------- -----------
------------------------------------------ ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 785,590 $ 829,879
========================================== =========== ===========
All Amounts in Canadian Dollars
23.
DIGITAL ROOSTER.COM INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(un-audited)
THREE MONTHS ENDED SEPTEMBER 30, 2001
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------
SALES (I) 659,662 $ 702,272 1,403,459 $1,650,055
COST OF SALES (II) 248,205 123,655 640,865 405,090
GROSS PROFIT 411,456 578,617 762,594 1,244,965
EXPENSES (III)
Administrative 361,674 315,652 747,850 584,855
Selling 6,320 216,243 172,616 485,967
Bandwidth and Computer Expenses 38,403 123,398 130,548 155,711
Capital Asset Amortization 14,903 12,154 29,225 24,960
Goodwill Amortization 17,060 17,060 34,120 34,120
Interest 22,429 3,145 26,305 4,242
460,788 687,652 1,140,664 1,289,855
- ---------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (49,332) $(109,035) (378,070) $ (44,890)
========================================================== ======== ========== ========== ===========
All Amounts in Canadian Dollars
24.
DIGITAL ROOSTER.COM INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(un-audited)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Loss (49,332) $(109,035) (378,070) $ (44,890)
Adjustment for non-cash item:
Capital Asset Amortization 14,903 12,807 29,225 24,960
Goodwill Amortization 17,060 17,059 34,120 34,120
- ---------------------------------------------------- --------- ---------- --------- ----------
CASH FLOW FROM EARNINGS (17,369) (79,169) (314,725) 14,190
- ---------------------------------------------------- --------- ---------- --------- ----------
Changes in non-cash operating assets and liabilities (414,865) (200,185) (300,828) (29,350)
- ---------------------------------------------------- --------- ---------- --------- ----------
CASH EXPENDED IN OPERATING ACTIVITIES (432,234) (279,353) (615,553) (15,160)
- ---------------------------------------------------- --------- ---------- --------- ----------
INVESTING ACTIVITY
Purchase of capital assets (4,552) (28,812) (7,039) (70,356)
- ---------------------------------------------------- --------- ---------- --------- ----------
CASH EXPENDED IN INVESTING ACTIVITY (4,552) (28,812) (7,039) (70,356)
- ---------------------------------------------------- --------- ---------- --------- ----------
FINANCING ACTIVITIES
Advances from shareholders 24,546 (1,529) 86,364 9,108
Advances from (to) Jazz Monkey Media Inc. (46,328) 175,360 - 73,597
Loans payable 38,100 10,139
-
Convertible Note 101,469 101,469
Issuance of capital stock 333,000 401,000
- ---------------------------------------------------- --------- ---------- --------- ----------
CASH PROVIDED BY FINANCING ACTIVITIES 450,786 173,831 598,971 82,705
- ---------------------------------------------------- --------- ---------- --------- ----------
NET CHANGE IN CASH 14,000 (134,334) (18,690) (81,692)
CASH, BEGINNING OF PERIOD 101 151,348 32,791 98,705
- ---------------------------------------------------- --------- ---------- --------- ----------
CASH, END OF PERIOD 14,101 $ 17,014 14,101 $ 17,014
==================================================== ========= ========== ========= ==========
25.
Digital Rooster.com Inc.
Notes To Consolidated Financial Statements
For Six Months Ended September 30, 2001
(Expressed in Canadian Dollars)
BASIS OF PRESENTATION
These consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("Canadian GAAP"). In certain
respects, Canadian GAAP differs from United States generally accepted accounting
principals ("U.S. GAAP"). The effects on the Company's financial statements
resulting from these differences are summarized as follows:
Balance Sheet
September 30, September 30,
2001 2000
Total assets $ 785,590 $ 829,879
Under Canadian GAAP
Goodwill (224,621) (292,860)
--------------- ---------------
Total assets under U.S. GAAP $ 560,969 $ 537,019
--------------- ---------------
September 30, September 30,
2001 2000
Shareholders' Equity Under
Canadian GAAP $ (80,436) $ 515,800
Adjustments to opening balances (258,739) (326.978)
--------------- ---------------
Opening balance under US GAAP $ (339,175) $ 188,822
Amortization of goodwill 34,120 34,120
--------------- ---------------
Shareholders' Equity under
US GAAP $ (305,055) $ 222,942
--------------- ---------------
Consolidated Statements of Operation and Comprehensive Income
September 30, September 30,
2001 2000
Net Income (loss) under
Canadian GAAP $ (427,284) $ (44,890)
Amortization of goodwill 34,120 34,120
--------------- ---------------
Net income and comprehensive
Income under US GAAP $ (393,164) $ (10,770)
Loss per common share as per US GAAP
Basic
-weighted average common
shares outstanding 33,508,436 30,958,866
- basic loss per share $ (0.01) $ (0.0003)
Loss per share has not been presented on a fully diluted basis as the effect
would be anti-dilutive.
Statement of Operations and Cash Flows
There are no material differences between the Canadian GAAP used in preparing
the statements of operations and cash flows and those that would apply had the
statements been prepared in accordance with U.S. GAAP.
Difference between Canadian and U.S. GAAP
a) Goodwill on reverse takeover
In accordance with Canadian GAAP (EIC 10), the excess of purchase consideration
paid in a reverse takeover transaction over the sum of the amounts assigned to
the assets acquired and liabilities assumed is recorded as goodwill.
In accordance with U.S. GAAP, the purchase consideration paid on the merger of a
public shell and a private operating company is accounted for as a
recapitalization of the private operating company and no goodwill is recorded.
Accordingly, the balance sheets for 2001 and 2000 prepared in accordance with
the Canadian GAAP would have been restated under U.S. GAAP to reduce the
goodwill and share capital recorded. In addition, the statement of operations
for 2001 and 2000 are also adjusted to reverse the annual amortization of
goodwill.
b) Accounts Receivable
U.S. GAAP requires disclosure of allowance for doubtful accounts in the
financial statements. The company has not recorded any such allowance for the
periods presented in these financial statements.
c) 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:
September 30,2001
-----------------
Deferred tax assets $ 876,000
Less: Valuation allowance (876,000)
-----------------
-
d) 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.
Use of estimates
The preparation of these consolidated financial statements in conformity with
Canadian GAAP has required management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclose of contingent
liabilities as at September 30, 2001 and September 30, 2000 and the revenue and
expenses reported for the periods then ended. Actual results may differ from
those estimates.
Business Segment and Geographical Information
Information as to sales and accounts receivable by reportable geographic
segments is:
September 30, September 30,
2001 2000
Sales
- -----
Canada 4% 5%
United States 96% 95%
Accounts Receivable
- -------------------
United States 100% 100%
e) Stock Options
U.S. GAAP (SFAS 123) requires certain disclosures regarding stock options
granted to employees and directors as compensation under stock option plans. The
company applies the principals of APB 25, (Accounting for Stock Issued to
Employees), which are the same as Canadian GAAP, there are no differences noted
in respect of the options granted.
f) Differences in various accounting terms used in U.S. GAAP and 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 value Goodwill
Of net assets acquired
Reverse acquisition Reverse takeover
g) Statement of shareholders' equity
In accordance with U.S. GAAP, statement of shareholders' equity is presented as
under:
Total
Capital Shareholders
Stock Deficit Equity
---------- ------------- -------------
Common stock balance,
March 31, 2000 1,125,125 (696,437) 428,688
Net Loss (44,890) (44,890)
Balance, September 30,
2000 1,125,125 (741,327) 383,798
Issuance of shares for cash 225,000 225,000
Net Loss (889,056) (889,056)
Balance, March 31, 2001 1,350,126 (1,585,493) (235,367)
Issuance of shares for cash 401,000 (378,070) 22,930
Balance, September 30,
2001 1,751,126 (1,963,563) (212,437)
ITEM 19. EXHIBITS
The following documents are filed as part of this Report:
1.1 Consent of Independent Auditors ( Mintz and Partners LLP)
1.2 Consent of Independent Auditors ( Silver Gold Glatt & Grossman LLP)
2.1 Articles of Amendment dated January 19, 2000 (1)
2.2 Articles of Amalgamation dated April 1, 1999 (1)
2.3 Articles of Continuance dated October 30, 1998 (1)
2.4 Certificate of Amendment dated April 1, 1997 (1)
2.5 Certificate and Articles of Arrangement dated September 28, 1995(1)
29
2.6 Certificate of Incorporation dated January 16, 1984. (1)
3.1 By law No. 1 of the Corporation (1)
3.2 Specimen Common Share Certificate (1)
5.1 List of Subsidiaries (1)
6.1 Management Information Circular dated August 20, 2000 (1)
7.1 Storimin Resources Limited Notice of Annual and Special Meeting and
Management Information Circular dated November 12, 1999. (1)
7.2 Securities Exchange Agreement dated November 12, 1999. (1)
8.1 Form of Stock Option Agreement (1)
8.2 Memo to Board of Directors *
8.3 Memo to Consultants *
9.1 Employment Agreement for John A. van Arem (1)
9.2 Employment Agreement for Anthony Korculanic (1)
10.1 Management Information Circular dated October 15, 2001
23.1 Consent of Independent Auditors ( Mintz and Partners LLP)
23.2 Consent of Independent Auditors ( Silver Gold Glatt & Grossman LLP)
(1) Previously Provided
* Filed with this amendment#4.
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: February 11, 2001
30