SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F/A
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended March 31, 2003
Commission file number 00032559
DIGITAL ROOSTER.COM LTD.
AN ONTARIO, CANADA CORPORATION
366 BAY STREET, 12TH FLOOR, TORONTO, ONTARIO M5H 4B2
(416) 815-1771; FAX (416) 815-1259
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 F2 Of this registration and Item 5 "Operating and Financial Review and
Prospects".
ALL VALUES ARE EXPRESSED IN CANADIAN DOLLARS.
Seven Months Year Seven Months Year Year Year
Ended Ended Ended Ended Ended Ended
August 31/98 August 31/99 March 31/00 March 31/01 March 31/02 March 31/03
Web Dream Web Dream Consolidated Consolidated Consolidated Consolidated
Operations Audited Audited Audited Audited Audited Audited
Sales 226,263 1,821,413 1,409,764 2,508,122 1,227,878 1,479,254
Cost of Sales 40,846 765,944 578,265 737,562 348,525 529,820
Gross Profit 185,417 1,055,469 831,499 1,770,560 879,353 949,434
Expenses 180,444 1,191,187 1,265,191 2,659,616 1,914,661 1,669,495
Net Income/Loss 4,973 (135,718) (433,692) (889,056) (1,035,308) (720,061)
Income per
Share 0.02 (0.67) (0.83) (1.44) (1.52) (0.50)
Weighted
Average 200,000 203,594 522,889 619,179 681,247 1,451,912
Page 1
BALANCE SHEET
INFORMATION
Current Assets 17,315 69,244 239,781 145,506 139,267 86,520
Capital Assets 43,976 108,253 125,297 184,876 135,304 101,913
Goodwill 326,978 258,739 190,501
Due from Jazz Monkey 255,207
Total Assets 61,291 177,477 917,263 589,121 465,072 188,433
Accounts Payable and
Accrued Liabilities 38,818 95,992 171,913 471,251 607,996 786,393
Income Taxes Payable 2,415 2,415 2,415 2,415
Deferred Revenue 46,675 15,961 170,967 3,346
Loans Payable 16,500 17,404 76,561 76,900 30,779
Due to Shareholders 38,638 45,571 36,300 109,725 250,736
Due to Jazz Monkey 5,188
Note Payable 90,000 90,000 90,000 15,000
Convertible Notes Payable 125,144 17,544
Total Liabilities 55,318 157,222 356,574 692,488 1,183,147 1,206,213
Capital 1,000 151,000 1,125,126 1,350,126 1,770,726 2,191,082
Retained Earnings 4,973 (130,745) (564,437) (1,453,493) (2,488,801) (3,208,862)
Total Shareholders
Equity 5,973 20,255 560,689 (103,367) (718,075) (1,017,780)
Liabilities and
Shareholders Equity 61,291 177,477 917,263 589,121 465,072 188,433
During the year, the Company consolidated its commonly shares on 50:1 basis. The
issued common shares disclosed above are presented on a consolidated basis
retroactively.
Item 3D
Risk Factors
We have a limited history of operations and recorded losses in our fiscal years
1999,2000, 2001, 2002 and 2003. Web Dream began operations as a company in
February1998 and recorded losses of $135,718 (US$94,907) for the period ended
August 31, 1999, $433,692 (US$298,295) in the year ended March 31, 2000,
$889,056 (US$563,514) in the year ended March 31, 2001, $1,035,308 (US$659,642)
in the year ended March 31, 2002 and $720,061 (US$490,070)in the year ended
March 31, 2003. 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 November 2003. There can be no assurance that we will not
continue to incur losses after November 2003,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.
Because of our operating losses of the past four years and our working capital
deficiency as at March 31, 2003, 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.
Page 2
Our common shares are considered to be penny stock, which may adversely affect
the liquidity of our common shares. The Securities and Exchange Commission has
adopted regulations that define a penny stock to be any equity security that has
a market price, as defined in those regulations, of less than U.S. $5.00 per
share, subject to certain exceptions. Generally, for any transaction involving
a penny stock, a broker-dealer is required to deliver, prior to the transaction,
a disclosure schedule relating to the penny stock market as well as disclosure
concerning, among other things, the commissions payable, current quotations for
the securities and information on the limited market in penny stocks.
The administration requirements imposed by these rules may affect the liquidity
of our common shares.
It may be difficult for our Shareholders to enforce civil liabilities under the
U.S. Federal Securities Laws because we are a Canadian Corporation, incorporated
under Canadian law. 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, directors and their affiliates, in the 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 rise additional financing to sustain growth. Based on
current projections, we will require additional financing in the amount of
500,000 ($340,298) to $1,000,000($680,596) between November 2003 and March
2004. 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 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
theseindividuals could have a material adverse effect on our business. We have
no key-man life insurance policies on these individuals.
Page 3
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 intense. The
lack of availability of unique quality content could adversely affect our
business.
The adult entertainment industry is sensitive to economic conditions. When
economic conditions are prosperous, entertainment industry revenues increase;
conversely, when economic conditions are unfavorable, 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.
Page 4
Our intellectual property may not be adequately protected. Our domain names,
trade secrets and, to a lesser extent our trademarks 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 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.
Page 5
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 4A.4
Information on the Company
In management's view there are three key components to success: exposure,
conversion and retention. The key is traffic, because by virtue of
controlling traffic a company is not dependent on third party promotions.
This is why the company has focused on ways to create this traffic. The
targeted ad server software, the infomercials and especially the deal with
the hotels to provide turnkey internet access. Management believes it has
some of the strongest services and marketing methods, but the inability to
raise the funds needed to roll out the marketing tools effectively has made
the company fall well short of its projections for the fiscal year ending
March 31, 2003.
The spin-off of Avrada Inc. will provide a non-adult public entity. Management
anticipates that funding can be more easily secure for Avrada than it can
for Digital Rooster.com.
Much focus will be given on the spin-off of Avrada because success for
Avrada should mean success for Digital Rooster.com. The companies are closely
related and Digital Rooster.com provides much of the backend services as well as
some of the services Avrada markets.
At the date of record of the spin-off, April 8, 2003 Digital Rooster retained a
75% interest in Avrada Inc. This will be diluted by any funding Avrada will
secure.
The traffic program was working ahead of schedule generating in excess of
$20,000 USD in one week and was still growing, when the largest partnership
program that much of the traffic was send to, suspended our account accusing
us of spamming. It took ten weeks to make them understand how our traffic is
being generated before they reactivated the account. This put the traffic
program well behind schedule. A portion of the funds from the first round of
financing for Avrada will be used to get the traffic program back on
schedule.
The Media contract signed on July 22, 2002 did not materialize due to the
fact the deal was tied into the share price to some extent and the price
continued to go down making the deal not feasible for Digital Rooster.com.
The contract signed with Groove entertainment networks for $500,000 USD of
media exposure for infomercials promoting Digital Rooster.com services is
currently in the development stage of the actual infomercial. The
infomercial will start airing in a few major North American markets as soon
as it is ready. This deal is a strict revenue share deal and is not
dependent upon the price of the shares.
The deals with the Hotels are still awaiting funding. The reception has been
very good from the hotels. The hardware required does bring an upfront cost
with it per room that Digital Rooster.com is currently trying to cover
through a partnership with an Internet provider, which will get a share of
the ongoing revenue in return.
Page 6
The content for wireless in North America is being developed. Due to the
size of the partner and the tight regulations it is a slow process. The
company anticipates to start offering this wireless content the first
calendar quarter of 2004.
DigitalDate's (the dating service site) growth is also slowed by the
decrease in traffic. All three marketing methods are geared to generate
exposure for DigitalDate. The company's focus is first and foremost on
trying to get the targeted ad server software back to previous levels.
The US dollar has also dropped significantly towards the Canadian dollar.
All revenues are in US dollars but most expenses are in Canadian dollars. In
2002 the US dollar was at one point worth more than $1.60 CAD. Now it is
below $1.35. That means for every $100,000 USD that the company converts it
gets $25,000 less than it would at $1.60. This strength of the Canadian
dollar towards the US dollar means that with the same revenue in US dollars
the company actually has less funds to cover expenses.
Item 5A.1
Operating Results
ALL AMOUNTS IN CANADIAN DOLLARS WITH US DOLLARS IN BRACKETS.
Twelve Months Ended March 31, 2003 Compared to the Twelve Months Ended March 31,
2002
For the twelve months ended March 31, 2003 revenue was $ 1,479,254 (1,006,775)
compared to $ 1,227,878 (782,337)for the period ending March 31, 2002. Cost of
sales were $ 529,820 (360,593) for the twelve months ended March 31, 2003
representing 36% of revenue for that period, compared to $ 348,525 (218,306)
representing 28% of revenue for the twelve months ended March 31, 2002. The main
reason for the increase in cost of sales is attributable to the increase in
revenue, the company's main focus for the twelve months ended March 31, 2003 was
to concentrate on the development and launching of new products to increase
their market share in buying and selling of traffic. The Administrative expenses
were $ 996,172 (677,991) for the twelve months ended March 31, 2003 representing
67% of revenue, compared to $1,369,681 (857,927) for the twelve months ended
March 31, 2002 representing 111% of revenue. The main reason for the increase in
an administrative expense is attributable to the increase in revenue.
Selling expenses were $103,398 (70,372) for the period ended March 31,
2003 representing 7% of total revenue compared to $61,059 (38,246) representing
5% for the twelve months ended March 31, 2002. The Selling expenses remained
relatively stable for both periods.
Computer expenses were $ 316,010 (215,075) in the twelve months ended March 31,
2003, representing 21% of revenue in that period, compared to $300,205 (188,039)
for the twelve months ended March 31, 2002 representing 25% of total revenue for
that period. Computer expenses have decreased due to a decrease in price for
bandwidth
The company has determined that goodwill representing the value of the company's
listing on a Canadian Stock Exchange is permanently impaired, as the main market
for the company shares has been moved to the over the-counter bulletin board
market ("OTC BB") in the United States. Accordingly, an appropriate amount has
been recorded as an impairment charge in the statement of operations.
Page 7
Twelve Months Ended March 31, 2002 Compared to the Twelve Months Ended March 31,
2001
For the twelve months ended March 31, 2002 revenue was $ 1,227,878 (782,337)
compared to $2,508,122 (1,590,439) for the period ending March 31, 2001. Cost of
sales were $ 348,525 (218,306) for the twelve months ended March 31, 2002
representing 28% of revenue for that period, compared to $737,562 (467,699)
representing 29% of revenue for the twelve months ended March 31, 2001. The main
reason for the decrease in cost of sales is attributable to the decrease in
revenue, the company's main focus for the twelve months ended March 31, 2002 was
to concentrate on the development and launching of new products to increase
their market share in the adult entertainment sector. The buying and selling of
traffic was very limited in the twelve months ended March 31, 2002. The
Administrative expenses were $ 1,369,681 (857,927) for the twelve months ended
March 31, 2002 to $ 1,318,372 (836,000) for the twelve months ended March 31,
2001 representing 53% of revenue. The administrative expenses remained
relatively stable for both periods in light of the significant decrease in
revenue. Selling expenses were $61,059 (38,246) for the period ended March 31,
2002 representing 5% of total revenue compared to $ 770,512 (488,594)
representing 31% for the twelve months ended March 31, 2002. The decrease in
selling expenses is attributable to the decrease in traffic sales. Computer
expenses were $300,205 (188,039) in the twelve months ended March 31, 2002,
representing 25% of revenue in that period, compared to $ 439,071 (278,422) for
the twelve months ended March 31, 2001 representing 18% of total revenue for
that period.
Computer expenses have decreased due to a decrease in price for bandwidth
Goodwill has been amortized on a straight-line basis beginning in the fiscal
year March 2000 over an estimated useful life of five years.
Twelve Month Fiscal Year Ended March 31, 2001 Compared to Seven Month Fiscal
Year Ended March 31, 2000.
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 was $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 52% 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,
Page 8
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) was 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
Page 9
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.
Item 5B
Liquidity and capital resources
Twelve Months ended March 31, 2003
Cash used in operating activities was $382,014 (259,997) for the twelve months
ended March 31, 2003, primarily attributable to a net loss of $ 720,061
(490,070). Cash provided by financing activities in the twelve months ended
March 31, 2003 was $389,896 (265,362) consisting of $141,012 (95,972) increase
in advances from shareholders, decrease in convertible note of $7,600 (5,173)
and an increase in capital stock of $ 302,605 (205,952), offset by decrease in
loans payable of $46,121 (31,390).
Cash used in investing activities for the twelve months ended March 31, 2003 was
$5,065 (3,447).
Twelve Months ended March 31, 2002
Cash used in operating activities was $633,978 (403,936) for the twelve months
ended March 31, 2002, primarily attributable to a net loss of $1,035,308
(659,641). Cash provided by financing activities in the twelve months ended
March 31, 2002 was $619,507 (388,041) consisting of $73,424 (46,782) increase in
advances from shareholders, increase in convertible notes payable of $125,144
(79,735) and an increase in capital stock of $ 420,600 (267,983) and increase in
loans payable of $339 (216).
Cash used in investing activities for the twelve months ended March 31, 2002 was
$9,527 (5,967).
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
$299,337 ($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 $354,810 ($242,953) 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 to Jazz Monkey Media of $225,207 ($154,897), issue of capital stock
in the amount of $225,000 ($149,734).
Page 10
Cash used in investing activities for the twelve months ended March 31, 2001 was
$111,245 ($70,879) consisting primarily of computer hardware. Cash used in
investing activities for the seven months ended March 31, 2000 was $387,834
(265,566).
Twelve Months ended March 31, 2003 Compared to Twelve Months ended March 31,
2002
Cash used in operating activities was $382,014 (259,997) for the twelve months
ended March 31, 2003, primarily attributable to a net loss of $ 720,061
(490,070). For the same period in 2002 cash used in operating activities was
$633,978 (403,936), attributable to a net loss of $ 1,035,308 (659,641). Cash
provided by financing activities in the twelve months ended March 31, 2003 was
$389,896 (265,362) consisting of $141,012 (95,972) increase in advances from
shareholders, decrease in convertible notes payable of $7,600 (5,173) and an
increase in capital stock of $ 302,605 (205,952), offset by decrease in loans
payable of $46,121 (31,390). For the twelve months ended March 31, 2002 cash
provided by financing activities were $619,507 (388,041) consisting of $73,424
(46,782) increase advances from shareholders, increase in convertible notes
payable of $125,144 (79,735), an increase in capital stock of $ 420,600
(122,518)and an increase in loans payable of $339 (216).
Cash used in investing activities for the twelve months ended March 31, 2003 was
$5,065 (3,447), compared to $9,527 (5,967) for the same period ended March 31,
2002.
We believe that our cash and cash requirements as at March 31, 2003 of $11,610
(7,902) 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, 2004. There can be no assurance
that we will not require additional financing prior to that time.
Twelve Months ended March 31, 2002 Compared to Twelve Months ended March 31,
2001
Cash used in operating activities was $633,978 (403,936) for the twelve months
ended March 31, 2002, primarily attributable to a net loss of $ 1,035,308
(659,641). For the same period in 2001 cash used in operating activities was $
472,170 (315,390), attributable to a net loss of $ 889,056 (593,852). Cash
provided by financing activities in the twelve months ended March 31, 2002 was
$619,507 (388,041) consisting of $73,424 (46,782) increase advances from
shareholders, increase in convertible notes payable of $125,144 (79,735), an
increase in capital stock of $ 420,600(122,518)and an increase in loans payable
of $339 (216).
For the twelve months ended March 31, 2001 cash provided by financing activities
were $517,497 (345,666) consisting of $ 76,561 (51,140)increase in loans
payable, offset by a decrease in capital stock of $225,000 (149,734).
Cash used in investing activities for the twelve months ended March 31, 2002 was
$9,527 (5,967), compared to $111,245 (70,879) for the same period ended March
31, 2001.
Seven Months ended March 31, 2000 Compared to the Twelve Months ended
August 31, 1999
Page 11
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 $387,834 ($265,566), 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.
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).
Page 12
Item 6 A & C. Directors, Senior Management and Employees
Each of the three directors was re-elected at the Corporation' s Annual a
General Meeting of Shareholders held on November 23, 2001. They will hold
office until the next Annual General Meeting or until there successors are
elected. We do not maintain insurance for the benefit of our directors and
officers against liabilities incurred by them in their capacity as directors or
officers. We do not maintain key man life insurance. There is no family
relationship between or among any of our directors and executive officers. None
of our directors has a contract with us providing for benefits upon termination
of his position as a director.
The following discusses the business experience, history and functions of our
directors and senior officers.
Wayne Doss, 49, 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.
John A. van Arem, 45, 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.
Anthony Korculanic, 36, 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 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.
Brad Estra, Director. Mr. Estra's background is comprised of a solid mix of
professional and entrepreneurial experiences rooted in financial analysis,
strategic management, and accounting. A Presidential scholar who received his
bachelor's degree in finance and accounting with honors from Babson College, Mr.
Estra has a wide range of exposure to both public and private corporations in a
variety of industries. With a primary background in financial analysis and
strategic management, Mr. Estra spent two years with Swiss Bank Corp, and then
UBS, AG working on the trading floor of one of the world's largest investment
banks. Responsible for positioning the US Dollar book, Mr. Estra managed the
trade and purchase of over $10 billion a day. After leaving the
investment-banking world Mr. Estra purchased All Nursing Services, a South
Florida based home health agency. Estra's management, and client marketing
strategies played a key role in the financial turn-around of a company suffering
from slumping revenue and the uncertainty of regulatory change. After
Page 13
successfully managing ANS back to profitability with consistent growth in sales
and income, Mr. Estra has proven his ability to navigate in the profitable, yet
difficult market of South Florida health care.
Our Corporate Governance Committee performs an independent supervisory rollover
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 March 2003, Brad Estra and Wayne Doss
were granted an option to purchase 40,000 each of our common shares at the
exercise price of $0.25. 100% of these options vest and were exercisable
after March 26, 2003. The options expire on March 26, 2013.
Page 14
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 Management Other Long-Term Compensation
Service Annual Stock Option Grants
Provided Compen No. of Exercise Vesting period Expiry Date
sation Common Price
Shares
for which
option
granted
- ------------------------------------------------------------------------------------------------
John A .$35,837 (1) 10,800 (2) 80,000 $ 0.25 25% Mar. 26/04 Mar. 26/13
van Arem 25% Mar. 26/05
25% Mar. 26/06
25% Mar. 26/07
44,000 $ 0.25 100% Mar. 26/03 Mar, 26/13
Anthony $ 30,606 (3) $ 7,200(4) 70,000 $ 0.25 25% Mar. 26/04 Mar. 26/13
Korculanic 25% Mar. 26/05
25% Mar. 26/06
25% Mar. 26/07
40,000 $ 0.25 100% Mar. 26/03 Mar, 26/13
(1) Mr. van Arem received in fiscal year 2003 a payment of $35,837
relating to management service provided. In the fiscal year 2003, Mr. van Arem's
total salary for twelve months was $0.
(2) Represents a monthly car allowance of $900.
(3) Mr. Korculanic received in fiscal year 2003 a payment of $30,606
relating to management service provided. In the fiscal year 2003, Mr.
Korculanic's total salary for twelve months was $0.
(4) Represents a monthly car allowance of $600.
Page 15
6E. SHARE OWNERSHIP OF DIRECTORS AND SENIOR MANAGEMENT
The following table shows the share ownership of Directors and Senior Management
as of March 31, 2003.
NAME NUMBER OF SHARES PERCENTAGE OF
OWNED OUTSTANDING SHARES
John A. van Arem 380,940 (1)(2) 16%
Anthony Korculanic 324,606 (1)(3) 13%
Wayne Doss 70,000 (4) 3%
Brad Estra 50,000 (4) 2%
<FN>
(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 44,000 options to purchase common
shares that are immediately exercisable at the price of CDN$0.25. An additional
80,000 options vest and were exercisable after March 26, 2004 at the price
of CDN$0.25. These 124,000 options were granted on March 26, 2003 and expire
on March 26, 2013.
(3) The number of shares owned includes 40,000 options to purchase common
shares that are immediately exercisable at the price of CDN$0.25. An additional
70,000 options vest and were exercisable after March 26, 2004 at the price
of CDN$0.25. These 110,000 options were granted on March 26, 2003 and expire
on March 26, 2013.
(4) The number of shares owned includes 40,000 options to purchase common
shares that are immediately exercisable at the price of CDN$0.25.
During the year, the Company consolidated its commonly shares on 50:1 basis.
6D. EMPLOYEES
As of March 31, 2003, we had 8 full-time employees, compared to 10 at March 31,
2002.
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 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
Page 16
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. Another corporation, or any
government does not control us directly or indirectly.
7A. MAJOR SHAREHOLDERS
The following table shows the ownership of our common shares as of
March 31, 2003 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 380,940 (1)(2) 16%
Anthony Korculanic 324,606 (1)(3) 13%
<FN>
(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 44,000 options to purchase common
shares that are immediately exercisable at the price of CDN$0.25. An additional
80,000 options vest and were exercisable after March 26, 2004 at the price
of CDN$0.25. These 124,000 options were granted on March 26, 2003 and expire
on March 26, 2013.
(3) The number of shares owned includes 40,000 options to purchase common
shares that are immediately exercisable at the price of CDN$0.25. An additional
70,000 options vest and were exercisable after March 26, 2004 at the price
of CDN$0.25. These 110,000 options were granted on March 26, 2003 and expire
on March 26, 2013.
(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 were 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.
Page 17
(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 were 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 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.
We owed Mr. van Arem and Mr. Korculanic an aggregate of $250,736 at March
31, 2003. This amount has increased by $ 141,012 from March 31, 2002 and
is unsecured, bears no interest and has no fixed term of repayment.
(See note 8 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 annual report.
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 is 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.
Page 18
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. ProAm Explorations
Corporation in the Supreme Court of British Columbia, Court File No, has named
us as a defendant in a lawsuit, C992400, Vancouver Registry. This lawsuit
was settled for $15,000 cash in July 2003.
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. There has been no activity on this claim in the
last 12 months.
In 2002, a claim for constructive dismissal was filed against the Company and
its subsidiary seeking damages. Management believes that adequate provisions
have been recorded in the accounts with respect to this claim. Any differences
from amounts recorded will be recorded in the year when determined.
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
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 on over-the-counter bulletin board market ("OTC
BB") in the United States with the trading symbol "DGRLF. In Canada 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.
Page 19
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
<FN>
*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.
On April 5, 2002 the Corporation was cleared for trading on the NASD OTC BB
under the symbol DGROF. We were cleared to submit a quote for $0.10 Bid to $
0.30.
Item 10B
MEMORANDUM AND ARTICLES OF ASSOCIATION
Incorporation: Originally a federally incorporated company, we were
continued 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,
Page 20
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
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
other 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 therefore.
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
Page 21
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
there under 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
50days before the date of the meeting to each director, to our auditor and to
each shareholder who at the close of business on the record date for notice is
entered in the securities register as the holder of one or more shares carrying
the right to vote at the meeting. Notice of a meeting of shareholders called for
any purpose other than consideration of the financial statements and auditor's
report, election of directors, and reappointment of the incumbent auditor must
state the nature of such business in sufficient detail to permit the shareholder
to form a reasoned judgment thereon and shall state the text of any special
resolution to be submitted to the meeting.
We are required by section 8.05 of our bylaws to prepare a list of shareholders
entitled to receive notice of a meeting, arranged in alphabetical order and
showing the number of shares held by each shareholder entitled to vote at the
meeting. If a record date for the meeting is fixed, the shareholders listed are
those registered at the close of business on the record date. If no record date
is fixed, the shareholders listed are those registered at the close of business
on the day immediately preceding the day on which notice of the meeting is given
or, where no such notice is given, on the day on which the meeting is held. The
list is to be made available for examination by any shareholder during usual
business hours at our registered office or at the place where our central
securities register is maintained and at the meeting. Where a separate list of
shareholders has not been prepared, the names of persons appearing in the
securities register at the requisite time as the holder of one or more shares
carrying the right to vote at such meeting will be deemed to be a list of
shareholders.
Section 8.06 of our bylaws sets out the requirements for setting a record
date. Our directors are not required to set a record date, but if they do, the
record date must not precede the date of the shareholder's meeting by more than
50daysory 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
setouts 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
presenting person or represented, or if those not present or represented waive
notice have Or otherwise consent to the meeting, and (b) our auditors are
present or waive Notice have 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.
Page 22
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 proxy holder 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.
Item 10D
EXCHANGE CONTROLS
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
modifiable or review able depending on its structure and the value of the assets
of the Canadian business being acquired. In effect, the ICA requires review by
Investment Canada, the agency which administers the ICA, and approval by the
Canadian government in the case of an acquisition of control of a Canadian
business by a non-Canadian that is a WTO Investor (as defined in the ICA) where:
(i) In the case of a direct acquisition of control of a Canadian entity (i.e.,
through a share purchase), the assets of the entity carrying on the
Canadian Business and of all other entities in Canada, the control of which
is acquired exceeds CDN $209 million (this threshold is adjusted annually
for inflation and growth in Canada's domestic product); or (ii) in the case
of a direct acquisition of assets of a Canadian Business (i.e., through an
asset acquisition) the value of the assets used in carrying on the Canadian
business exceeds CDN $209 million. Where an investor is not a WTO Investor,
review is required where: (i) in the case of a direct acquisition of
control of a Canadian Business, the value of the assets of the business and
all other entities being acquired is CDN $5 million or more; or (ii) in the
case of an indirect acquisition of control of a Canadian Business, where
the Canadian Business has assets of CDN $50 million or more in value; or
(iii) in the case of an acquisition of assets of a Canadian Business, the
assets represents more than50% 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
Page 23
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's 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
to15% of the gross dividend (or 5% in the case of certain corporate shareholders
owning at least 10% of our voting shares).
Dispositions
A non-resident of Canada is not subject to tax under the ITA in respect of
a capital gain realized upon the disposition of a common share unless the share
is "taxable Canadian property" to the holder thereof and the non-resident is not
otherwise entitled to relief under a tax treaty. In the case of a non-resident
Page 24
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
anon-resident holder if, at any time during the period of five years immediately
preceding the disposition, the non-resident holder, persons with whom then
on-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.
Page 25
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
inexistence 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
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)
Page 26
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
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
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
Page 27
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.
Page 28
Part III
Item 17. FINANCIAL STATEMENTS
Audited Financial Statements
Page
Digital Rooster.com Inc.
For the year ended March 31, 2003 and 2002
Auditors' Report F1
Financial Statements and Notes F2 - F15
Page 29
AUDITORS' REPORT
To the Shareholders of
Digital Rooster.com Ltd.
We have audited the consolidated balance sheets of Digital Rooster.com Ltd. as
at March 31, 2003 and 2002 and the consolidated statements of operations,
deficit and cash flows for the years 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, 2003 and
2002 and the results of operations and its cash flows for the years then ended
in accordance with Canadian generally accepted accounting principles.
Toronto, Ontario /s/ MINTZ & PARTNERS LLP
September 26, 2003 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 financials statements are effected 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.
(b) Comments by Auditor
Our report to the directors dated September 26, 2003 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.
September 26, 2003
/S/ MINTZ & PARTNERS LLP
CHARTERED ACCOUNTANTS
Page 30
DIGITAL ROOSTER.COM LTD.
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31, 2003 2002
=======================================================================
A S S E T S
-----------
CURRENT
Cash $ 11,610 $ 8,793
Accounts receivable 56,180 113,570
Prepaids and sundry receivables 18,730 16,904
------------ ------------
86,520 139,267
CAPITAL ASSETS (Note 3) 101,913 135,304
GOODWILL (Note 4) - 190,501
------------ ------------
$ 188,433 $ 465,072
============ ============
L I A B I L I T I E S
---------------------
CURRENT
Accounts payable and accrued liabilities $ 786,393 $ 607,996
Income taxes payable 2,415 2,415
Deferred Revenue 3,346 170,967
Convertible Notes payable (Note 5) 117,544 125,144
Loans payable (Note 6) 30,779 76,900
------------ ------------
940,477 983,422
NOTE PAYABLE (Note 7) 15,000 90,000
DUE TO SHAREHOLDERS (Note 8) 250,736 109,725
------------ ------------
1,206,213 1,183,147
------------ ------------
S H A R E H O L D E R S' DEFICIENCY
-----------------------------------
CAPITAL STOCK (Note 9) 2,191,082 1,770,726
DEFICIT (3,208,862) (2,488,801)
------------ ------------
(1,017,780) (718,075)
------------ ------------
$ 188,433 $ 465,072
============ ============
APPROVED ON BEHALF OF THE BOARD
- ---------------------------------------------
================================================================================
See Accompanying Notes 31.
DIGITAL ROOSTER.COM LTD.
CONSOLIDATED STATEMENTS OF DEFICIT
FOR THE YEARS ENDED MARCH 31, 2003 2002
=========================================================
DEFICIT - beginning of year $(2,488,801) $(1,453,493)
Net loss (720,061) (1,035,308)
------------ ------------
DEFICIT - End of year $(3,208,862) $(2,488,801)
============ ============
================================================================================
See Accompanying Notes 32.
DIGITAL ROOSTER.COM LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2003 2002
====================================================================
REVENUES (Note 10) $1,479,254 $ 1,227,878
COST OF SALES 529,820 348,525
----------- ------------
GROSS PROFIT 949,434 879,353
----------- ------------
EXPENSES
Administrative 996,172 1,369,681
Computer 316,010 300,205
Selling 103,398 61,059
Interest 41,208 56,378
Amortization of Capital Assets 38,456 59,099
Amortization of Goodwill - 68,239
Impairment of Goodwill (Note 4) 190,501 -
Impairment of Intangibles (Note 11) 58,750 -
----------- ------------
1,744,495 1,914,661
----------- ------------
NET LOSS - before under noted item (795,061) (1,035,308)
Settlement of Debt (Note 7) (75,000) -
----------- ------------
NET LOSS $ (720,061) $(1,035,308)
=========== ============
LOSS PER SHARE (Note 12) $ (0.50) $ (1.52)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 1,451,912 681,247
================================================================================
See Accompanying Notes 33.
DIGITAL ROOSTER.COM LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
MARCH 31, 2003 AND 2002
========================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(720,061) $(1,035,308)
Adjustment for non-cash items:
Amortization of Capital Assets 38,456 59,099
Amortization of Goodwill - 68,239
Impairment of Goodwill 190,501 -
Settlement of Debt (75,000) -
Consulting services paid by issuance of shares 45,000 -
Impairment of Intangibles 58,750 -
Expenses paid by issuance of stock options 14,000 -
---------- ------------
(448,354) (907,970)
Changes in non-cash balances related to operations (Note 13) 66,340 273,992
---------- ------------
CASH FLOWS USED IN OPERATING ACTIVITIES (382,014) (633,978)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to capital assets (5,065) (9,527)
---------- ------------
CASH FLOWS USED IN INVESTING ACTIVITIES (5,065) (9,527)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from shareholders 141,012 73,424
Convertible notes payable (7,600) 125,144
(Decrease) increase in loans payable (46,121) 339
Issuance of capital stock 302,605 420,600
---------- ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 389,896 619,507
---------- ------------
NET CHANGE IN CASH 2,817 (23,998)
CASH - Beginning of year 8,793 32,791
---------- ------------
CASH - End of year $ 11,610 $ 8,793
========== ============
Non-cash transactions:
During 2003, the Company entered into the following non-cash transactions:
- The Company acquired certain assets of Real 1-on-1 Inc., a Toronto
based online adult entertainment company by issuing 235,000 restricted
common shares for a consideration of $58,750 (Note 11).
- The Company granted 467,000 stock options at an exercise price of
$0.25 per share with an intrinsic value of $14,000.
- The Company issued 9,000,000 common shares on pre-consolidation basis
(180,000 common shares on post-consolidation basis) for consulting
services of $45,000.
No non-cash transactions were entered in 2002.
================================================================================
See Accompanying Notes 34.
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
================================================================================
1. NATURE OF COMPANY'S OPERATIONS AND BASIS OF PRESENTATION
Nature of Company's operations
Digital Rooster.com Ltd and its wholly owned subsidiaries Web Dream Inc.,
Avrada Inc., Bill Media Inc. and Pizay Investment Inc. ("the Group") derive
their revenues from the generation and sale of Internet traffic, the
license of video content, monthly subscriptions to the website content,
advertisements displayed on its website and development and distribution of
interactive one-on-one entertainment.
During the year, the Company changed its name from Digital Rooster.com Inc.
to Digital Rooster.com Ltd.
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. Because of the operating losses of the
past four years and the working capital deficiency as at March 31, 2003,
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 in the future.
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
a) 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.
b) 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, 2003 and March 31, 2002 and the
revenue and expenses reported for the years then ended. Actual results
may differ from those estimates.
================================================================================
/Continued 35.
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION - CONTINUED
c) Revenue recognition
Revenue from monthly subscriptions to the website is deferred upon
receipt of payment and is recognized as revenue 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 within
the preceding six month period.
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.
Revenue from web traffic is recognised when all significant
obligations are completed, the fees are fixed and determinable and
collectability of the fees is reasonable assured.
d) Capital assets
Capital assets are recorded at cost, less accumulated amortization.
Amortization is provided over the estimated useful lives of the assets
as follows:
Furniture and fixtures - 20% declining balance
Leasehold improvements - 20% straight line
Computer hardware - 30% declining balance
Computer software - 100% declining balance
Capital assets purchased during the period are amortized at one-half
of the above stated rates.
e) Goodwill
Goodwill represented the value of the company's listing on a Canadian
Stock Exchange. The company assess the carrying value of goodwill on a
periodic basis to determine if a write down is required for
impairment. Such review lead to the determination that impairment had
occurred as described in Note 4.
f) 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.
================================================================================
/Continued 36.
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION - CONTINUED
g) 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.
h) Costs of raising capital
Incremental costs incurred in respect of raising capital are charged
against equity proceeds raised.
i) Intangible assets
Intangible assets consist of in process research and development and
business concept for the interactive one-on-one adult video
entertainment industry. The Company regularly reviews the carrying
values of its intangible assets for any impairment. The Company
supports the carrying value of these assets based on the undiscounted
value of expected future cash flows. If the Company determines
impairment in value of the intangible assets, an appropriate amount
will be charged to the consolidated statements of operations.
j) Non-monetary transactions
Transactions in which shares or other non-cash consideration are
exchanged for assets or services are valued at the fair value of the
assets or services involved in accordance with Section 3830
("Non-monetary transactions") of the CICA Handbook.
k) Stock-based compensation
Effective June 1, 2002 the company adopted Section 3870 ("Stock-based
Compensation and Other Stock-based payments") of the CICA Handbook. As
permitted by Section 3870, the company has applied this change
prospectively for new awards granted on or after June 1, 2002. The
company has chosen to recognize no compensation when stock options are
granted to employees and directors under stock option plans with no
cash settlement features. However, direct awards of stock to employees
and stock and stock option awards granted to non-employees will be
accounted for in accordance with the fair value method of accounting
for stock-based compensation. The fair value of direct awards of stock
will be determined by the quoted market price of the company's stock.
l) Loss per share
The Company has adopted the treasury stock method of calculating
diluted earnings/loss per share. Under this method, the exercise of
options is assumed to have occurred at the beginning of the period and
the related common shares are assumed to have been issued at that
time. The proceeds from the exercise are assumed to have purchased
common shares of the Company for cancellation at the average market
price during the period. The incremental shares (the difference
between the number of shares assumed issued and the number of shares
assumed purchased) are included in the denominator of the diluted
earnings/loss per share calculation. Fully diluted loss per share will
not be calculated, as the effect on the loss per share would be
anti-dilutive.
================================================================================
/Continued 37.
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
================================================================================
3. CAPITAL ASSETS
As At March 31, 2003
---------------------
Accumulated Net Carrying
Cost Amortization Amount
-------- --------------------- -------------
Furniture and equipment $ 45,330 $ 19,590 $ 25,740
Leasehold improvements 8,141 6,779 1,362
Computer hardware 236,404 161,593 74,811
Computer software 20,958 20,958 -
-------- --------------------- -------------
$310,833 $ 208,920 $ 101,913
======== ===================== =============
As At March 31, 2003
--------------------
Accumulated Net Carrying
Cost Amortization Amount
-------- --------------------- -------------
Furniture and equipment $ 55,183 $ 17,589 $ 37,594
Leasehold improvements 8,141 5,150 2,991
Computer hardware 225,482 131,871 93,611
Computer software 20,958 19,850 1,108
-------- --------------------- -------------
$309,764 $ 174,460 $ 135,304
======== ===================== =============
================================================================================
/Continued 38.
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
================================================================================
4. GOODWILL
2003 2002
---------- ----------
Cost as at March 31 $ 341,195 $ 341,195
Less: Accumulated amortization (150,694) (150,694)
---------- ----------
190,501 190,501
Less: Impairment of goodwill (190,501) -
---------- ----------
Net Book Value as at March 31 $ - $ 190,501
========== ==========
During the year, the Company reviewed the carrying value of Goodwill for
impairment. The company has determined that goodwill representing the value
of the company's listing on a Canadian Stock Exchange is permanently
impaired, as the main market for the company shares has been moved to the
over the-counter bulletin board market ("OTC BB") in the United States.
Accordingly, an appropriate amount has been recorded as an impairment
charge in the statement of operations.
5. CONVERTIBLE NOTES PAYABLE
The convertible notes payable are non-interest bearing, unsecured and
payable within one year from the date of the issuance of the notes. The
notes are convertible, at the option of the lenders, at a conversion rate
of US $12.50 per common share for a total of approximately 6,400 common
shares.
6. LOANS PAYABLE
The loans payable are unsecured, bear no interest and have no fixed terms
of repayment.
7. 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 non-interest
bearing note arising from a dispute in 1999 was settled for $15,000 in cash
in July, 2003. Accordingly, a gain on settlement of this debt of $75,000
has been recorded.
8. 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, 2004.
================================================================================
/Continued 39.
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
================================================================================
9. CAPITAL STOCK
i) Authorized
Unlimited number of Common shares
Issued - Common shares Number Amount
Balance as at April 1, 2001 32,830,866 1,350,126
Issued for cash 3,505,000 420,600
------------ ----------
Balance as at March 31, 2002 36,335,866 1,770,726
Issued for cash 34,877,357 224116
Issued for consulting services 9,000,000 45,000
Effect of consolidation of shares on 50:1 basis (78,608,959) -
------------ ----------
1,604,264 2,039,842
Issued for cash 526,400 59,240
Issued for cash on exercise of options 77,000 19,250
Issued on acquisition of "Real 1-on-1 Inc." 235,000 58,750
Stock options granted - 14,000
------------ ----------
Balance as at March 31, 2003 2,442,664 $2,191,082
============ ==========
During the year, the Company consolidated its commonly shares on 50:1 basis. The
issued common shares disclosed above are presented on a consolidated basis
retroactively.
================================================================================
/Continued 40.
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
================================================================================
9. CAPITAL STOCK - CONTINUED
i) 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, 2001 34,920 $ 12.50 34,920 $12.50
Cancelled (8,580) 12.50 (8,580) 12.50
Granted 12,470 12.50 12,470 12.50
--------- --------- ------------ ------
Balance, March 31, 2002 38,810 $ 12.50 38,810 $12.50
Cancelled (34,940) 12.50 (34,940) 12.50
Granted 467,000 0.25 467,000 0.25
Exercised (77,000) 0.25 (77,000) 0.25
--------- --------- ------------ ------
Balance, March 31, 2003 393,870 $ 0.25 393,870 $ 0.25
========= ========= ============ ======
Options outstanding and exercisable at March 31, 2003 are as follows:
Outstanding Exercisable
----------- -----------
Wt. Avg.
Expiry Remaining Wt. Avg. Exercise
Price Number Date Life Exercise Price Number Price
- ----- ------- -------------- ---- --------------- ------- ------
12.50 850 December, 2010 7 $ 12.50 850 $12.50
12.50 3,020 December, 2011 8 12.50 3,020 12.50
0.25 390,000 March, 2013 10 0.25 390,000 0.25
------- -------
393,870 393,870
======= =======
================================================================================
/Continued 41.
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
================================================================================
9. CAPITAL STOCK - CONTINUED
ii) Fair value
In accordance with Section 3870 of the CICA Handbook, the company discloses
pro forma information regarding net income as if the company had accounted
for its employees and directors stock options granted after June 1, 2002
under the fair value method. The fair value of stock options issued by the
company during the year has been determined using the Black-Scholes option
pricing model with the following assumptions: weighted-average risk-free
interest rate of 4%; dividend yield of 0%; weighted-average volatility
factor of the expected market price of the Company's common shares of 170%;
and a weighted-average expected life of the options of 2 years.
The weighted average fair value of stock options granted during the year
ended March 31, 2003 was $0.27 per share. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting periods. The Company's pro forma net
income under Canadian GAAP, including the proforma effect of awards granted
prior to June 1, 2002, would be reduced by $44,280 for the year ended March
31, 2003. Basic earnings-per-share figures would not have changed.
10. REVENUE - BARTER TRANSACTIONS
During 2002, the Company entered into barter transactions with a notional
value of $923,358. As the fair value of the barter transactions were not
determinable, the barter transactions have not been reflected in these
financial statements. There were no such transactions during 2003.
11. ACQUISITION OF REAL 1-ON-1 INC AND IMPAIRMENT OF INTANGIBLES
During the year, the Company acquired certain assets of Real 1-on-1 Inc., a
Toronto based online adult entertainment company, by issuing 235,000 common
shares for a consideration of $58,750 representing a 50% discount from its
trading value of the common share at the date of the transaction. Such
common shares are not free trading as they are subject to restriction as to
when they may be sold. Accordingly, this discount was applied to reflect
the fair value of the share consideration. All consideration was in respect
of customer contacts, business concepts and related intangible assets. At
the year end, the Company assessed the value of its intangible assets
acquired and determined that the value of these assets were impaired due to
insignificant revenue generated and significant doubts on the Company's
ability to successfully integrate the acquired assets with the existing
business and achieve positive operating and cash flow results within a
predictable time. Accordingly, the assets have been written down to $Nil.
12. LOSS PER SHARE
Basic loss per share is calculated on the basis of the weighted average
number of common shares outstanding for the year. Loss per share has not
been presented on a fully diluted basis, as the effect would be
anti-dilutive.
================================================================================
/Continued 42.
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
================================================================================
13. CHANGES IN NON-CASH OPERATING ITEMS AND SUPPLEMENTAL CASH FLOW DISCLOSURE
i) Changes in non-cash operating items:
March 31, March 31,
2003 2002
----------- -----------
Decrease (increase) in accounts receivable $ 57,390 $ (59,371)
(Decrease) increase in prepaid and sundry receivables (1,826) 41,612
Decrease (increase) in deferred revenue (167,621) 99,794
Increase in accounts payable and accrued liabilities 178,397 191,957
----------- -----------
$ 66,340 $ 273,992
=========== ===========
Interest paid $ 41,208 $ 56,378
=========== ===========
14. CONTINGENT LIABILITIES
a) 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. There has
been no activity on this claim in the last 12 months.
b) In 2002, a claim for constructive dismissal was filed against the
Company and its subsidiary seeking damages. Management believes that
adequate provisions have been recorded in the accounts with respect to
this claim. Any differences from amounts recorded will be recorded in
the year when determined.
15. 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,
2004.
Future minimum payments for its operating leases as at March 31, 2003 are
approximately as follows:
2004 $ 85,000
2005 $ 22,000
2006 $ 3,000
================================================================================
/Continued 43.
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
================================================================================
16. INCOME TAXES
The provision for income taxes differs from the expense that would be
obtained by applying statutory rates as a result of the following:
2003 2002
---------- --------
Amount % Amount %
---------- -------- ---------- --------
Combined statutory basic Canadian federal
and provincial tax rates $(263,500) (36.60) $(399,600) (38.60)
Loses for which no income tax benefits have
been recorded and other permanent
differences 263,500 36.60 (399,600) 38.60
---------- -------- ---------- --------
$ - - $ - -
========== ======== ========== ========
The Company has available non-capital losses, the benefits of which have not
been recorded, of approximately $3,140,000 to be applied against future taxable
incomes. The losses expire as follows:
2004 $ 80,000
2006 133,000
2007 614,000
2008 771,000
2009 1,052,000
2010 490,000
----------
3,140,000
==========
The nature and effects of the temporary differences that give rise to
significant portions of the future income tax asset is as follows:
March 31, March 31,
2003 2002
------------ ------------
Future income tax asset - Losses carried forward $ 1,150,000 $ 1,113,000
Valuation allowance (1,150,000) (1,113,000)
------------ ------------
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.
17. FAIR VALUE OF FINANCIAL STATEMENTS
The Company's financial assets and liabilities are valued at management's best
estimates of fair values as follows:
(i) Accounts receivable
The carrying amount is equal to the fair value due to the liquidity of
the assets.
================================================================================
/Continued 44.
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
================================================================================
17. FAIR VALUE OF FINANCIAL STATEMENTS - continued
(ii) Notes payable, loans payable
Based on maturity and interest at fixed rates, the estimated fair
value is approximately equal to the carrying value.
(iii) Accounts payable
The carrying value is equal to the fair value due to the requirements
to extinguish the liabilities on demand.
18. RELATED PARTY TRANSACTIONS
a) Computer expenses include $123,535 (2002 - $264,736) paid to a company
with common ownership. These charges were incurred in the normal
course of operations and have been accounted for at an amount of
consideration established and agreed to by the related parties.
b) Administrative expenses include rent of approximately $NIL (2002 - $
72,000) paid to a company with common ownership and were incurred in
the normal course of operations. The rent have been accounted for at
an amount of consideration established and agreed to by the related
parties.
19. 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, March 31,
2003 2002
---------- ----------
Sales
-----
Canada 4% 4%
United States 96% 96%
Accounts receivable
-------------------
United States 100% 100%
================================================================================
/Continued 46.
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
================================================================================
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"). The effects
on the Company's financial statements resulting from these differences are
summarized as follows:
BALANCE SHEET
March 31, March 31,
2003 2002
------------ -----------
TOTAL ASSETS UNDER CANADIAN GAAP $ 188,433 $ 465,072
Adjustments in respect of:
- Goodwill on reverse takeover - (190,501)
------------ -----------
TOTAL ASSETS UNDER U.S. GAAP $ 188,433 $ 274,571
============ ===========
March 31, March 31,
2003 2002
------------ -----------
SHAREHOLDERS' EQUITY UNDER CANADIAN GAAP $(1,017,780) $ (718,075)
Adjustments to opening balances to reflect effect of:
Correction of prior period - compensation expenses - (130,680)
- paid in capital - 130,680
Goodwill on reverse takeover (190,500) (258,739)
------------ -----------
Opening balance under U.S. GAAP, as adjusted (1,208,280) (967,814)
Adjustments in respect of:
Compensation expense for stock options - (87,120)
Equity - Paid in capital for compensation expense - 87,120
Impairment of goodwill 190,500 -
Amortization of goodwill on reverse takeover - 68,239
------------ -----------
SHAREHOLDERS' EQUITY UNDER U.S GAAP $(1,017,780) $ (908,575)
============ ===========
================================================================================
/Continued 46.
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
================================================================================
20. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - continued
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
March 31, March 31,
2003 2002
----------- ------------
NET LOSS UNDER CANADIAN GAAP $ (720,061) $(1,035,308)
Adjustments in respect of:
Impairment of goodwill 190,500 -
Compensation expense for stock options (Note 20(b)) - (87,120)
Amortization of goodwill on reverse takeover - 68,239
----------- ------------
NET LOSS AND COMPREHENSIVE INCOME UNDER U.S. GAAP $ (529,561) $(1,054,189)
=========== ============
Loss per common share as per U.S. GAAP
Basic
- - Weighted average common shares outstanding 1,451,912 681,247
- Loss per share $ (0.36) $ (1.55)
Loss per share has not been presented on a fully diluted basis as the
effect would be anti-dilutive.
================================================================================
/Continued 47.
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
================================================================================
20. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - continued
STATEMENT OF SHAREHOLDERS' EQUITY
In accordance with U.S. GAAP, a statement of shareholders' equity is
presented as follows:
Total
Shareholders
Capital Equity
Stock Deficit (Deficiency)
------------- ------------ -------------
Balance, April 1, 2001 $ 1,350,126 $(1,712,232) $ (362,106)
Issued during the year - for cash 420,600 - 420,600
Stock option compensation 87,120 87,120
Net Loss - (1,054,189) (1,054,189)
------------- ------------ -------------
Balance, March 31, 2002 1,770,726 (2,679,301) (908,575)
Issued during the year - for cash 283,356 - 283,356
Issued for cash on exercise of stock options 19,250 19,250
Issued for consulting services 45,000 - 45,000
Issued on Acquisition of Real 1-on-1 58,750 58,750
Stock options granted 14,000 14,000
Net Loss - (529,561) (529,561)
------------- ------------ -------------
Balance, March 31, 2003 $ 2,191,082 $(3,208,862) $ (1,017,780)
============= ============ =============
STATEMENTS OF CASH FLOWS
There are no material differences between the Canadian GAAP used in
preparing the statements of 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 at the time of the reverse takeover
transaction (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 was recorded as goodwill
as described in Note 4.
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. During 2003, Canadian GAAP was changed to be
substantially similar to US GAAP in this circumstance.
================================================================================
/Continued 48.
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
================================================================================
20. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - continued
Accordingly, the audited balance sheets for 2002 prepared in
accordance with Canadian GAAP would have been restated under U.S. GAAP
to reduce the goodwill and share capital recorded. Balance sheet under
US GAAP for 2003 is not restated as goodwill was considered impaired
and written down to $nil. In addition, the statements of operations
for 2003 and 2002 are also adjusted to reverse the annual amortization
of goodwill.
b) Stock options
Valuation of outstanding stock options
United States GAAP (FAS 123) requires certain disclosures regarding
stock options granted to employees as compensation under stock option
plans. Because the company applies 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 FAS 123, the company would be required, in
any event, to disclose the following:
The company is required to adopt FAS 123, Accounting for Stock-Based
Compensation. In accordance with the provisions of FAS 123, therefore,
the company applied APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its employee
stock option 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 current fair
market value of common shares.
FAS 123 requires entities that account for awards for stock based
compensation to employees in accordance with APB 25 to present
pro-forma disclosure 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 company has followed the disclosures
requirement of Section 3870 of the CICA Handbook, which is
substantially similar to U.S. GAAP (FAS 123). Since the Company has
applied this change prospectively. the difference between Canadian and
U.S. in relation to disclosures for fiscal 2002 under FAS 123 are
disclosed as follows:
March 31,
----------
2002
Reported Proforma
------------ ----------
Net loss $(1,054,189) $(996,989)
Loss per share $ (0.03) $ (0.03)
c) 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.
================================================================================
/Continued 49.
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
================================================================================
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 Note 19.
e) 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 Goodwill
value of net assets acquired
Reverse acquisition Reverse takeover
f) Recent accounting pronouncememts
U.S. GAAP (Securities and Exchange Commission Staff Accounting
Bulletin 74) requires that recently enacted pronouncements that may
have an impact on financial statements be discussed and the impact, if
known, disclosed. Accordingly, under U.S. GAAP, the following
disclosures are required:
(i) In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations ("SFAS No. 143"). SFAS No. 143 requires
the Company to record the fair value of an asset retirement
obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction,
development and/or normal use of the assets. The Company also
records a corresponding asset which is depreciated over the life
of the asset. Subsequent to the initial measurement of the asset
retirement obligation, the obligation will be adjusted at the end
of each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. The
company has adopted SFAS No. 143 on January 1, 2003. The adoption
of SFAS 143 did not have a material impact on our financial
position or results of operations.
================================================================================
/Continued 50.
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
================================================================================
20. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - continued
(ii) On April 30, 2002, the FASB issued Statement of Financial
Accounting Standards No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections ("SFAS 145"). Among other amendments and rescissions,
SFAS No.145 eliminates the requirement that gains and losses from
the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income
tax effect, unless such gains and losses meet the criteria in
paragraph 20 of Accounting Principles Board Opinion No. 30,
Reporting the Results of Operations, Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions. The adoption
of SFAS 145 did not have a material impact on our financial
position or results of operations.
(iii) In July 2002, the Financial Accounting Standards Board issued
SFAS No. 146, Accounting for Exit or Disposal Activities. SFAS
No. 146 addresses the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities,
including costs related to terminating a contract that is not a
capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time
benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred-compensation contract. SFAS No. 146
supersedes Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 will be effective for exit or
disposal activities of the Company that are initiated after
December 31, 2002 and is not expected to have a material impact
on our financial position or results of operations.
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51.
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SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this registration (annual report) on its behalf
"John A. van Arem"
Chief Executive Officer of
Digital Rooster.com, Ltd.
-------------------------------
Registrant
"Anthony Korculanic"
Chief Financial Officer of
Digital Rooster.com, Ltd
--------------------------------
Registrant
Date: September 26, 2003
--------------------------------
Print the name and title of the signing officer under this signature
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52.
DIGITAL ROOSTER.COM LTD.
Attached hereto are the following exhibits:
12.1 Certificate of the Chief Executive Officer pursuant to S302 of the Sarbanes
Oxley Act of 2002
12.2 Certificate of the Chief Financial officer pursuant to S302 of the Sarbanes
Oxley Act of 2002
13.1 Certificate of the Chief Executive Officer pursuant to S906 of the Sarbanes
Oxley Act of 2002
13.2 Certificate of the Chief Financial officer pursuant to S906 of the Sarbanes
Oxley Act of 2002