SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
Amendment Number 1
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
For the fiscal year ended March 31, 2004
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
PLEASE NOTE THAT ALL VALUES ARE EXPRESSED IN CANADIAN DOLLARS WITH US DOLLARS
SHOWN IN THE BRACKETS FOR ITEM 3D.
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".
Year Seven Months Year Year Year Year
Ended Ended Ended Ended Ended Ended
August 31/99 March 31/00 March 31/01 March 31/02 March 31/03 March 31/04
Web Dream Consolidated Consolidated Consolidated Consolidated Consolidated
Operations Audited Audited Audited Audited Audited Audited
Sales 1,821,413 1,409,764 2,508,122 1,227,878 1,479,254 465,812
Cost of Sales 765,944 578,265 737,562 348,525 529,820 122,055
Gross Profit 1,055,469 831,499 1,770,560 879,353 949,434 343,757
Expenses 1,191,187 1,265,191 2,659,616 1,914,661 1,744,495 1,561,632
Net Income -135,718 -433,692 -889,056 -1,035,308 -720,061 -983,035
Income per
Share -0.67 -0.83 -1.44 -1.52 -0.20 -0.13
Weighted
Average 203,594 522,889 619,179 681,247 2,540,846 7,359,209
1
BALANCE SHEET
INFORMATION
Current Assets 69,244 239,781 145,506 139,267 86,520 43,314
Capital Assets 108,253 125,297 184,876 135,304 101,913 73,543
Goodwill 326,978 258,739 190,501
Due from Jazz Monkey 255,207
Total Assets 77,477 917,263 589,121 465,072 188,433 116,857
Accounts Payable and
Accrued Liabilities 95,992 171,913 471,251 607,996 786,939 905,241
Income Tax Payable 2,415 2,415 2,415 2,415 2,415
Deferred Revenue 46,675 15,961 170,967 3,346 874
Loans Payable 17,404 76,561 76,900 30,779
Due to Shareholders 45,571 36,300 109,725 250,736 9,086
Note Payable 90,000 90,000 90,000 15,000
Convertible Note 125,144 117,544 100,908
Minority Interest 559,144
Total Liabilities 157,222 356,574 692,488 1,183,147 1,206,213 1,577,668
Capital 151,000 1,125,126 1,350,126 1,770,726 2,191,082 2,731,086
Retained Earnings -130,745 -564,437 -1,453,493 -2,488,801 -3,208,862 -4,191,897
Equity 20,255 560,689 -103,367 -718,075 -1,017,780 -901,667
Liabilities and
Shareholders Equity 177,477 917,263 589,121 465,072 188,433 116,857
Item 3D
Risk Factors
We have recorded losses in our fiscal years 1999, 2000, 2001, 2002, 2003 and
2004. Web Dream began operations as a company in February 1998 and recorded
losses of $135,718 ($94,907) for the period ended August 31, 1999, $433,692
($298,295) in the year ended March 31, 2000, $889,056 ($563,514)in the year
ended March 31, 2001, $1,035,308 ($659,642) in the year ended March 31, 2002,
720,061 ($490,070)in the year ended March 31, 2003 and 983,035 ($750,122)in the
year ended March 31, 2004. 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 2004. There can be no assurance that we will
not continue to incur losses after November 2004,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, 2004, our continuance as a going concern is dependent upon our ability to
obtain adequate financing or to reach profitable levels of operation. It is not
possible to predict whether financing efforts will be successful or if we will
attain profitable levels of operations.
Our common shares are considered to be penny stock, which may adversely affect
the liquidity of our common shares. The Securities and Exchange Commission has
2
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 ($381,534) to $1,000,000($763,068) between November 2004 and March
2005. We anticipate raising these funds through private placements of our
securities with sophisticated investors. We have avoided obtaining debt
financing but may have to pursue this option if we are unable to obtain equity
financing on acceptable terms. If we are unable to obtain financing and cannot
pay our debts as they come due, we may be forced to solicit a buyer for the
company or be forced into bankruptcy by our creditors.
We are dependent on a small number of key personnel. We are dependent upon one
key person: John A. van Arem. Mr. van Arem is knowledgeable about all
aspects of our business and has developed relationships in the adult
entertainment industry that facilitate our business and maintains on a
day-to-day basis business relationships with service providers, customers,
investors, and media. The loss of these individual could have a material
adverse effect on our business. We have no key-man life insurance policies on
this individual.
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
3
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.
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
4
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.
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.
5
Item 4A.4
Information on the Company
In management's view there are three key components to success: exposure,
conversion and retention. DigitalRooster has experienced the difficulties in
competing in the online entertainment industry. Worldwide issues with
charge-backs on credit cards have made doing business online more difficult,
especially as it relates to any industry credit card companies refer to as
high-risk, such as on line sales of pharmaceuticals, online gaming and adult
entertainment online. By levying heavy fines on merchants that exceed the 2.5%
chargeback (a charge back is where a customer disputes the charge on their
credit card statement and requests a refund from the bank which passes this on
to the merchant) threshold, companies in the online adult entertainment industry
have been forced to intensify the scrubbing of customer credit cards. Scrubbing
is the any form of verification or elimination of groups of credit card users to
reduce the overall charge back percentage. As such a large number of good
customers are turned away to reduce chargeback by a fraction of one percent. For
instance if the charge-backs from one country are percentage wise much higher
than the average, i.e if the average is 2% but one country has an average of
4.5%, the credit card processing company will simply disallow anyone from that
country to use a credit card. This means that to get rid of this 4.5% of bad
customers from that country 95.5% of good customers are also turned away.
This trend of intensified scrubbing has meant that the overall conversions
meaning the percentage of people that buy your services versus the number that
visit your site has dropped significantly and in many cases more than 50%. The
cost of marketing and the cost of traffic has not really come down so the cost
to acquire new customers virtually doubled in many cases.
Additionally with the proliferation of the webcam content providers have
sprouted up all over the world. Many of them are underselling larger and
established content providers, driving the price of content down. The price for
memberships or one-on-one conferencing is still the same in many cases or has
even gone up. The main issue is the cost of marketing as an ever-increasing
number of companies competing for the same eyeballs.
Digital Rooster sought to get away from competing with everyone for the same
eyeballs. Rather than engaging competitors using methods readily available to
all, the company decided to create an audience as opposed to competing for the
same one. Over one year ago the company started to explore the possibility of
providing in room computers to hotels and with that turn-key internet access. In
return the Company would keep all adult traffic and outsource mainstream
content. The solution was rather costly.
At the same time, formerly wholly owned subsidiary Avrada Inc (Avrada) that
spun-off to form a standalone company, obtained the exclusive rights to provide
all adult content on the Telecentre device in the hotel rooms. The completed
software, the InterACT software platform bundled together with unique patented
hardware and proprietary software that form the Telecenter Solution courtesy of
Avrada's business partner iCit America Inc ("iCit)", provides hotel owners with
a means of improving revenue, occupancy and guest satisfaction by first offering
High Speed Internet Access in every hotel room, and then capitalizing on the
unique captive audience that is created.
The device will be deployed in North America. Additionally Avrada acquired the
exclusive distribution rights for the device in Europe, where Digital Rooster
will also be contracted to provide the same services as in North America. The
device
6
contains a magnetic card reader, which will match use of a credit card to the
name of the guest in a room, nearly eliminating charge-backs.
Digital Rooster will not only benefit from all the content it can provide
through the devices but will additionally benefit from Avrada's growth as
Digital Rooster remains a large shareholder in Avrada with over 4,000,000 shares
currently giving it about a 40% stake in its formerly wholly owned subsidiary.
Item 5A.1
Operating Results
Twelve Months Ended March 31, 2004 Compared to the Twelve Months Ended March 31,
2003
For the twelve months ended March 31, 2004 revenue was $ 465,812 (355,446)
compared to $1,479,254 (1,006,775) for the period ending March 31, 2003.
Cost of sales was $ 122,055 (93,136) for the twelve months ended March 31, 2004
representing 26% of revenue for that period, compared to $ 529,820 (360,593)
representing 36% of revenue for the twelve months ended March 31, 2003. Cost of
Sales is directly influenced by the Company's sales mix among content sales,
traffic and membership sales. The main reason for the decrease in cost of sales
is attributable to the decrease in traffic sales. Cost of sales differs for each
of these categories, being lower in content sales and membership and higher in
traffic. The Company does not include the cost of its own employees in cost of
services. As the Company intends to increase traffic sales, the Company's
overall cost of sales is expected to increase.
The Administrative expenses were $894,115 (682,270) for the twelve months ended
March 31, 2004 representing 192% of revenue, compared to $ 996,172 (677,991) for
the twelve months ended March 31, 2003 representing 67% of revenue. The main
reason for the decrease in an administrative expense is attributable to the
decrease in revenue.
Selling expenses were $46,938 (35,816) for the period ended March 31, 2004
representing 10% of total revenue compared to $103,398 (70,372) for the period
ended March 31, 2003 representing 7% of total revenue. The decrease in selling
expenses is attributable to the decrease in advertising. Computer expenses were
$110,290 (84,159) in the twelve months ended March 31, 2004, representing 24% of
revenue in that period, compared to $316,010 (215,075) in the twelve months
ended March 31, 2003, representing 21% of revenue. Computer expenses have
decreased due to the decrease in bandwidth rates.
Impairment of Goodwill in 2004 fiscal year represents the following. The gain on
dilution of Company's interest in Avrada of $234,840 was recognized in the
financial statements of the Company. An equal amount was allocated to goodwill
and was written off as at March 31, 2004
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
7
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 53% 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; as there has been increased competition for
bandwidth there our price has dropped. 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.
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; as there has been increased competition for
bandwidth there our price has dropped. Goodwill has been amortized on a
straight-line basis beginning in the fiscal year March 2000 over an estimated
useful life of five years
8
Twelve Months 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 23% of total revenues in that period. The increase in
administrative expenses of $578,355 ($327,012) in the twelve month fiscal period
ended March 31, 2001 from the seven month fiscal period ended March 31, 2000 is
attributable to an increase in payroll for professional staff. Selling expenses
were $770,512 ($488,594) in the twelve-month fiscal period ended March 31, 2001,
representing 31% of total revenues in that period, compared to $245,432
($168,809) in the seven month fiscal period ended March 31, 2000 representing
17% of total revenues in that period. The increase in selling expenses of
$525,080 ($319,785) in the twelve-month fiscal period ended March 31, 2001 from
the seven-month fiscal period ended March 31, 2000 is attributable to increased
expenditures for advertising and promotion. Computer expenses were $439,071
($278,422) in the twelve-month fiscal period ended March 31, 2001, representing
17% of total revenues in that period, compared to $221,056 ($152,043) in the
seven-month fiscal period ended March 31, 2000. The increase of $218,015
($126,379) 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
9
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.
Item 5B
Liquidity and capital resources
Twelve Months ended March 31, 2004
Cash used in operating activities was $425,312 (324,542) for the twelve months
ended March 31, 2004, primarily attributable to a net loss of $983,035
(750,122).
Cash provided by financing activities in the twelve months ended March 31, 2004
was $425,734 (324,864) consisting of $241,650 (184,935) decrease in advances
from shareholders, decrease in convertible notes payable of $16,635 (12,694),
decrease in loans payable of $30,780 (123,487), decrease in note payable of
$15,000 (11,446) offset by increase in capital stock of $ 170,654 (130,220) and
share issuance by subsidiary of $559,144 (426,665).
Cash used in investing activities for the twelve months ended March 31, 2004 was
$648 (494).
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 $64,153 (40,184) increase in advances from
shareholders, increase in convertible note of $125,144 (79,735)and an increase
in capital stock of $ 195,600 (122,518), offset by decrease in loans payable of
$76,522 (47,931).
Cash used in investing activities for the twelve months ended March 31, 2002 was
$9,527 (5,967).
10
Twelve months ended March 31, 2001
Cash used in operating activities was $472,170 ($299,277) for the twelve months
ended March 31, 2001, primarily attributable to a net loss of $889,055
($593,815) and an increase in prepaid expenses and sundry receivables $28,357
($25,555), partially offset by a decrease in accounts receivable of $78,665
($57,015) and an increase in accounts payable and accrued liabilities of
$299,339 ($180,587), and a decrease in deferred revenue of $30,714 ($21,763).
Cash used in operating activities for the seven months in 2000 was $355,456
($232,060), primarily attributable to a loss of $433,692 ($296,963) and an
increase in accounts receivable.
Cash provided by financing activities in the twelve months ended March 31, 2001
was $517,497 ($344,855) consisting of $9,271 ($8,325) decrease in advances to
shareholders, increase in loans payable of $76,561($48,549), decrease in
advances from Jazz Monkey Media of $225,207 ($154,897), issue of capital stock
in the amount of $225,000 ($149,734).
Cash used in investing activities for the twelve months ended March 31, 2001 was
$111,245 ($74,306) consisting primarily of computer hardware. Cash used in
investing activities for the seven months ended March 31, 2000 was $67,808
($46,639).
Twelve Months ended March 31, 2004 compared to Twelve Months ended March 31,
2003
Cash used in operating activities was $425,312 (324,542) for the twelve months
ended March 31, 2004, primarily attributable to a net loss of 982,035 (750,122).
For the same period in 2003 cash used in operating activities was $382,014
(259,997), attributable to a net loss of $1,035,308 (659,641).
Cash provided by financing activities in the twelve months ended March 31, 2004
was $425,734 (324,864) consisting of $241,650 (184,935) decrease in advances
from shareholders, decrease in convertible notes payable of $16,635 (12,694),
decrease in loans payable of $30,780 (123,487), decrease in note payable of
$15,000 (11,446) offset by increase in capital stock of $ 170,654 (130,220) and
share issuance by subsidiary of $559,144 (426,665).
For the twelve months ended March 31, 2003 cash provided by financing activities
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).
Cash used in investing activities for the twelve months ended March 31, 2004 was
$648 (494) compared to $5,065 (3,447) for the same period ended March 31, 2003.
We believe that our cash and cash requirements as at March 31, 2004 of
$11,384(8,687) together with funds raised in recent financing activities and
funds expected to be generated from operations and new projects will be
sufficient to meet our cash requirements through March 31, 2005. There can be
no assurance that we will not require additional financing prior to that time.
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).
11
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 $64,153
(40,184) increase advances from shareholders, increase in convertible notes
payable of $125,144 (79,735) and an increase in capital stock of $ 195,600
(122,518), offset by decrease in loans payable of $76,522 (47,931).
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 $64,153 (40,184) increase in advances from
shareholders, increase in convertible note of $125,144 (79,735) and an increase
in capital stock of $ 195,600 (122,518), offset by decrease in loans payable of
$76,522 (47,931).
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 $407,931 (272,481).
Cash used in investing activities for the twelve months ended March 31, 2002 was
$9,527 (5,967), compared to $46,639 (31,153) for the same period ended March 31,
2001.
Seven Months ended March 31, 2000 Compared to the Twelve Months ended August 31,
1999
Cash used in operating activities was $355,456 ($244,484) for the seven months
ended March 31, 2000,primarily attributable to a net loss of $433,692 ($298,296)
and an increase in accounts receivable of $60,415 ($41,554) partially offset by
an increase in accounts payable of $75,921 ($52,219) and an increase in deferred
revenue of $46,674 ($32,103). Cash generated from operating activities for the
same period in 1999 was $105,077 ($73,480) primarily attributable to net loss of
$135,718 ($94,908), partially offset by an increase in accounts receivable of
$53,171 ($37,183) and an increase in accounts payable of $57,174 ($39,325).
Cash provided by financing activities for the seven months ended March 31, 2000
totaled $499,469 ($343,537) consisting of $632,931 ($435,333) in net proceeds
from the issuance of common shares pursuant to a private placement, an advance
of $230,395 ($158,467) to Jazz Monkey Media Inc. at March 31, 2000. It was
repaid in full by December 31, 2000. Cash used in financing activities in the
12
twelve month period ended August 31, 1999 was $193,826 ($135,543) representing
an advance of $38,638 ($27,020) to shareholders and an issuance of capital stock
of $150,000 ($104,895).
Cash used in investing activities for the seven months ended March 31, 2000
was $46,639 ($32,079), attributable to the purchase of capital assets, primarily
computer hardware, in the amount of $125,297 ($86,180). Cash used in investing
activities for the twelve month period ended August 31, 1999 was $90,929
($63,587), attributable to the purchase of capital assets, primarily computer
hardware, in the amount of $108,253 ($75,701).
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).
13
Item 6 A & C. Directors, Senior Management and Employees
Each of the four directors was re-elected at the Corporation's Annual General
Meeting of Shareholders held on December 21, 2003. Shortly after the Annual
Meeting, Anthony Korculanic resigned. Brad Estra, John A. van Arem and Wayne
Doss 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.
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
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.
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.
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.
14
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 fiscal 2004, no stock options were granted
to any of directors, senior managers or employees.
In March 2004, John A. van Arem received 1,200,000 common shares of the Company
and Anthony Korculanic received 500,000 common shares as a compensation for
management fees.
The following table and notes show the compensation paid by us to John Alexander
van Arem and to Anthony Korculanic for 2004 fiscal year.
Name Year Salary Other Number of Value of
Annual Common Shares Common Shares
Compen Issued Issued
sation
- --------------------------------------------------------------------------------
John A. 2004 $ 0(1) $11,856 (2) 1,200,000 $ 141,000(3)
van Arem
Anthony 2004 $ 0(4) $ 4,200(5) 500,000 $ 80,000(6)
Korculanic
(1) In the fiscal year 2004, Mr. van Arem's total salary for twelve months was
$0.
(2) Represents a monthly car allowance of $988.
(3) In March 2004, John A. van Arem received 1,200,000 common shares of the
Company for the total value of $141,000 as a compensation for management
fees.
(4) In the fiscal year 2004, Mr. Korculanic's total salary for twelve months
was $0.
(5) Represents a monthly car allowance of $600 for first seven months of fiscal
2004.
(6) In March 2004, Anthony Korculanic received 500,000 common shares as a
compensation for management fees for the total value of $80,000.
6E. SHARE OWNERSHIP OF DIRECTORS AND SENIOR MANAGEMENT
The following table shows the share ownership of Directors and Senior Management
as of March 31, 2004.
NAME NUMBER OF SHARES PERCENTAGE OF
OWNED OUTSTANDING SHARES
John A. van Arem 1,754,940 (1)(2) 22%
Wayne Doss 70,000 (3) 1%
Brad Estra 50,000 (3) 1%
(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".
15
(2) The number of shares owned includes 124,000 options to purchase common
shares that are immediately exercisable at the price of CDN$0.25. These 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.
6D. EMPLOYEES
As of March 31, 2004, we had 4 full-time employees, compared to 8 at March 31,
2003. This reduction is attributable to management's decision to reduce
overhead. All of our full-time employees are located in Toronto and occupy
technical, accounting 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
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.
16
7A. MAJOR SHAREHOLDERS
The following table shows the ownership of our common shares as of March
31, 2004 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 1,754,940 (1)(2) 22%
Anthony Korculanic 934,606 (1)(3) 12%
(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 124,000 options to purchase common
shares that are immediately exercisable at the price of CDN$0.25. These options
were granted on March 26, 2003 and expire on March 26, 2013.
(3) The number of shares owned includes 110,000 options to purchase common
shares that are immediately exercisable at the price of CDN$0.25. These options
were granted on March 26, 2003 and expire on March 26, 2013.
7B. RELATED PARTY TRANSACTIONS
During the year, the Company's wholly owned subsidiary, Avrada Inc.
("Avrada"), issued from treasury 4,187,000 common shares, the majority of which
were issued to the shareholders of the Company, for proceeds of $559,144. Each
share of Avrada was issued with one common share purchase warrant attached,
given the holder the option to purchase one additional common share of the
subsidiary at the cost of US$0.20, for the period of one year from the date of
agreement. In addition, the Company issued by way of dividend 1,335,869 common
shares of Avrada to its shareholders. Subsequent to this dividend, the Company
held 4,007,607 common shares of Avrada or 42.1 per cent of the issued and
outstanding shares. This distribution was based on one common share of Avrada
for every two common shares. The gain on dilution of Company's interest in
Avrada of $234,840 was recognized in the financial statements of the Company.
This corresponding entry to the dilution gain was recorded as goodwill and was
subsequently written down as impairment (Note 10 to the Consolidated Financial
Statements). The 4,187,000 shares of Avrada were issued subsequent to the
year-end, on May 17, 2004.
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 invoiced us for the net cost of these services.
We owed Mr. van Arem and Mr. Korculanic an aggregate of $9,086 at March 31,
2004. This amount has decreased from $ 250,736 as of March 31, 2003 and is
unsecured, bears no interest and has no fixed term of repayment. (See note 9 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
17
in connection with the operations of the Corporation. Conflicts, if any will be
subject to the procedures and remedies under the Business Corporations Act
(Ontario). See "Item 10B Memorandum and Articles of Association - Bylaws;
Director's Conflicts."
ITEM 8. FINANCIAL INFORMATION
8A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
The financial statements required herein are set forth beginning on page
F-1 of this registration statement.
DIVIDEND POLICY
On February 27, 2004, the Company issued by way of dividend 1,335,869
common shares of Avrada, formerly wholly owned subsidiary of the Company, to the
Company's shareholders. This distribution was based on one common share of
Avrada for every two common shares held.
On March 17, 2004, the Company issued 75 per cent stock dividend for its
shareholders of record on April 7, 2004 issued on April 26, 2004. The shares
were issued on April 26, 2004.
We did not pay any cash dividends in the last fiscal period and the Board of
Directors does not contemplate doing so in the foreseeable future. We believe
that it is in the best interests of the Corporation and its shareholders to
retain all earnings to fund operations and growth.
LEGAL PROCEEDINGS
There are currently two material claims pending against us. If we lose
either of these suits or enter into settlements requiring us to pay cash, our
liquidity and financial position could be adversely affected over the short
term.
In 2001, a claim was filed against the Company seeking return of the sum of
$82,115 plus interest plaintiff claimed to have advanced by way of loan to the
Company, whereas the monies clearly appear to have advanced to Jazz Monkey Media
Inc so that Digital Rooster.com Ltd should have no liability. There was little
activity in the claim and the outcome of the case is uncertain
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.
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
18
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.
CANADIAN DEALING NETWORK TRADING ACTIVITY
SALES (IN CANADIAN DOLLARS)
Period High Low Trading Volume
January 1 through March 15, 2001 * * *
Quarter ended December 31, 2000 $ 0.35 $ 0.25 11,111
Quarter ended September 30, 2000 $ 1.00 $ 0.40 271,054
Quarter ended June 30, 2000 $ 1.00 $ 0.40 20,698
Quarter ended March 31, 2000 $ 0.75 $ 0.50 22,640
Quarter ended December 31, 1999 $ 0.09 $ 0.01 **
Quarter ended September 30, 1999 $ 0.09 $ 0.01 5,133,722
Quarter ended June 30, 1999 $ 0.07 $ 0.01 1,282,167
Quarter ended March 31, 1999 $0.015 $0.015 287,723
Quarter ended December 31, 1998 $ 0.08 $ 0.01 419,000
*Since the formation of CUB, there is no record of quotations. On several
occasions in March 2001 we were advised by brokers trading in our common shares
that they were being offered at CDN$0.25. We are unable to conclusively
determine whether any trading occurred or the price of any trades.
**There were no trades reported during this period.
There can be no assurance that an active trading market for our common
shares will develop or be sustained.
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.
19
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,
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
20
(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
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
21
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.
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
22
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
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 there under (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.
23
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
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.
24
The following discussion is based upon the sections of the Code, Treasury
Regulations, published Internal Revenue Service ("IRS") rulings, published
administrative positions of the IRS and court decisions that are currently
applicable, any or all of which could be materially and adversely changed,
possibly on a retroactive basis, at any time. The following discussion is for
general information only and is not intended to be, nor should it be construed
to be, legal or tax advice to any holder or prospective holder of common shares
of the Corporation and no opinion or representation with respect to the United
States Federal income tax consequences to any such holder or prospective holder
is made. Accordingly, holders and prospective holders of common shares of the
Corporation should consult their own tax advisors about the federal, state;
local and foreign tax consequences of purchasing, owning and disposing of our
common shares.
U.S. Holders
As used herein, a ("U.S. Holder") includes a holder of our common shares
who is a citizen or resident of the United States, a partnership or corporation
organized under the laws of the United States, an estate, the income of which is
subject to United States federal income tax without regard to its source and a
trust if a United States court is able to exercise primary supervision over
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust or if the trust was
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
25
least 10% of the voting power and value of the Corporation. The availability of
this deduction is subject to several complex limitations, which are beyond the
scope of this discussion.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distributions) Canadian income
tax with respect to the ownership of our common shares may be entitled, at the
option of the U.S. Holder, to either a deduction or a tax credit for such
foreign tax paid or withheld. Generally, it will be more advantageous to claim a
credit because a credit reduces United States Federal income taxes on a
dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income
subject to tax. This election is made on an annual basis and applies to all
foreign income taxes (or taxes in lieu of income tax) paid by (or withheld from)
the U.S. Holder during the year. There are significant and complex limitations
which apply to the credit, among which is the general limitation that the credit
cannot exceed the proportionate share of the U.S. Holders United States income
tax liability that the U.S. Holder's foreign source income bears to his/her or
its worldwide taxable income.
In the determination of the application of this limitation, the various
items of income and deduction must be classified into foreign and domestic
sources. Complex rules govern this classification process. There are further
limitations on the foreign tax credit for certain types of income such as
passive income", "high withholding tax interest", "financial services income","
shipping income", and certain other classifications of income. In certain
circumstances, recently enacted legislation and other guidance issued by the
United States Treasury may deny a United States holder foreign tax credits (and
instead may allow deductions) for foreign taxes imposed on a dividend if the
United States holder (i) has not held the common shares for at least 16 days in
the 30-day period beginning 15 days before the ex-dividend date, during which it
is not protected from risk of loss; (ii) is obligated to make payments related
to the dividends; or (iii) holds the common shares in arrangements in which the
United States holder's expected economic profit, after non-US taxes, is
insubstantial.
The availability of the foreign tax credit and the application of the
limitations on the credit are fact specific and holders and prospective holders
of common shares of the Corporation should consult their own tax advisors
regarding their individual circumstances.
Disposition of our Common Shares of the Corporation
A U.S. Holder will recognize gain or loss upon the sale of our common
shares equal to the difference, if any, between (i) the amount of cash plus the
fair market value of any property received and (ii) the shareholder's tax basis
in our common shares. Any gain recognized on the sale or other disposition of
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
26
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
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.
27
Part III
Item 17. FINANCIAL STATEMENTS
Audited Financial Statements
Page
Digital Rooster.com Inc.
For the year ended March 31, 2004 and 2003
Auditors' Report F1
Financial Statements and Notes F2 - F15
28
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, 2004 and 2003 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, 2004 and
2003 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
August 5, 2004
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 August 5 , 2004 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.
August 5, 2004
/S/ MINTZ & PARTNERS LLP
CHARTERED ACCOUNTANTS
DIGITAL ROOSTER.COM LTD.
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED MARCH 31, 2004 2003
=======================================================================
A S S E T S
-----------
CURRENT
Cash $ 11,384 $ 11,610
Accounts receivable 18,396 56,180
Prepaids and sundry receivables 13,534 18,730
------------ ------------
43,314 86,520
PROPERTY AND EQUIPMENT (Note 3) 73,543 101,913
------------ ------------
$ 116,857 $ 188,433
============ ============
L I A B I L I T I E S
---------------------
CURRENT
Accounts payable and accrued liabilities $ 905,241 $ 786,393
Income taxes payable 2,415 2,415
Deferred Revenue 874 3,346
Convertible Notes payable (Note 5) 100,908 117,544
Loans payable (Note 6) - 30,779
------------ ------------
1,009,438 940,477
NOTE PAYABLE (Note 7) - 15,000
DUE TO SHAREHOLDERS (Note 8) 9,086 250,736
MINORITY INTEREST (Note 10) 559,144 -
------------ ------------
1,577,668 1,206,213
------------ ------------
S H A R E H O L D E R S' DEFICIENCY
-----------------------------------
CAPITAL STOCK (Note 9) 2,731,086 2,191,082
DEFICIT (4,191,897) (3,208,862)
------------ ------------
(901,667) (1,017,780)
------------ ------------
$ 116,857 $ 188,433
============ ============
APPROVED ON BEHALF OF THE BOARD
_________________________________________
================================================================================
2.
See Accompanying Notes
DIGITAL ROOSTER.COM LTD.
CONSOLIDATED STATEMENTS OF DEFICIT
FOR THE YEARS ENDED MARCH 31, 2004 2003
=========================================================
DEFICIT - beginning of year $(3,208,862) $(2,488,801)
Net loss (983,035) (720,061)
------------ ------------
DEFICIT - End of year $(4,191,897) $(3,208,862)
============ ============
================================================================================
3.
See Accompanying Notes
DIGITAL ROOSTER.COM LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2004 2003
====================================================================
REVENUES (Note 11) $ 465,812 $1,479,254
COST OF SALES 122,055 529,820
------------ -----------
GROSS PROFIT 343,757 949,434
------------ -----------
EXPENSES
Administrative 894,115 918,413
Computer 110,290 316,010
Selling 46,938 103,398
Interest 25,431 41,208
Amortization of Capital Assets 29,018 38,456
Management Fees 221,000 77,759
Impairment of Goodwill (Note 4) 234,840 190,501
Impairment of Intangibles (Note 12) - 58,750
------------ -----------
1,561,632 1,744,495
------------ -----------
NET LOSS - before under noted items (1,217,875) (795,061)
Gain on dilution (Note 10) 234,840 -
Settlement of Debt (Note 7) - (75,000)
------------ -----------
NET LOSS $ (983,035) $ (720,061)
============ ===========
LOSS PER SHARE (Note 13) $ (0.13) $ (0.20)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 7,359,209 2,540,846
================================================================================
4.
See Accompanying Notes
DIGITAL ROOSTER.COM LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
MARCH 31, 2004 AND 2003
FOR THE YEARS ENDED MARCH 31, 2004 2003
======================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(983,035) $(720,061)
Adjustment for non-cash items:
Amortization of Capital Assets 29,018 38,456
Dilution Gain (Note 10) (234,840) -
Management fees paid by issuance of shares 221,000 -
Consulting services paid by issuance of shares 102,350 45,000
Loan repaid by issuance of shares 45,000 -
Note payable repaid by issuance of shares 1,000 -
Amortization of Goodwill - -
Impairment of Goodwill 234,840 190,501
Settlement of Debt - (75,000)
Impairment of Intangibles - 58,750
Expenses paid by issuance of stock options - 14,000
---------- ----------
(584,667) (448,354)
Changes in non-cash balances related to operations (Note 14) 159,355 66,340
---------- ----------
CASH FLOWS (USED) PROVIDED IN OPERATING ACTIVITIES (425,312) (382,014)
---------- ----------
CASH FLOWS USED INVESTING ACTIVITIES
Additions to capital assets (648) (5,065)
---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES (648) (5,065)
---------- ----------
CASH FLOWS PROVIDED (USED) IN FINANCING ACTIVITIES
Advances from shareholders (241,650) 141,012
Convertible notes payable (16,635) (7,600)
(Decrease) increase in loans payable (30,780) (46,121)
Note Payable (15,000) -
Issuance of capital stock 170,654 302,605
Share issuance by Subsidiary 559,144 -
---------- ----------
CASH FLOWS PROVIDED (USED) IN FINANCING ACTIVITIES 425,734 389,896
---------- ----------
NET CHANGE IN CASH (226) 2,817
CASH - Beginning of year 11,610 8,793
---------- ----------
CASH - End of year $ 11,384 $ 11,610
========== ==========
================================================================================
5.
See Accompanying Notes
DIGITAL ROOSTER.COM LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
MARCH 31, 2004 AND 2003
================================================================================
Non-cash transactions:
During 2004, the Company entered into the following non-cash transactions:
- The Company issued 1,700,000 common shares on post-consolidation basis
for management services of $221,000.
- The Company issued 1,041,000 common shares on post-consolidation basis
for consulting services of $102,350.
- The Company issued 450,000 common shares on post-consolidation basis
as a loan repayment of $45,000.
- The Company issued 10,000 common shares on post-consolidation basis as
repayment of $1,000 on a note payable.
- On March 17, 2004 the Company declared 75 per cent stock dividend to
its shareholders. Shareholders of record April 7, 2004 receive 3
additional shares for every four shares held. The stock dividend
effected as a stock split and the shareholders have received no
monetary value.
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 12).
- 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.
================================================================================
6.
/Continued...
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
===============================================================================
1. NATURE OF COMPANY'S OPERATIONS AND BASIS OF PRESENTATION
Digital Rooster.com Ltd and its wholly owned subsidiaries Web Dream Inc.,
Avrada Inc. and Pizay Investments 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.
As at November 1, 2002 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 three years and the working capital deficiency as at March 31, 2004,
the Company's continuance as a going concern is dependent upon its ability
to obtain adequate financing or to reach profitable levels of operation. It
is not possible to predict whether financing efforts will be successful or
if the company will attain profitable levels of operations.
2. 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 21.
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, 2004 and March 31, 2003 and the
revenue and expenses reported for the periods then ended. Actual
results may differ from those estimates.
================================================================================
7.
/Continued...
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
================================================================================
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
collect ability of the fees is reasonable assured.
d) Property and equipment
Property and equipment 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
Property and equipment purchased during the period are amortized at
one-half of the above stated rates.
e) Goodwill
Effective January 1, 2002, goodwill is no longer amortized and is
subject to an annual test. Goodwill impairment is evaluated between
annual tests upon the occurrence of certain events or circumstances.
Goodwill impairment is assessed based on a comparison of the fair
value of a reporting unit to the underlying carrying value the
reporting unit's assets, including goodwill. When the carrying amount
of the reporting unit exceeds its fair value, the fair value of the
reporting unit's goodwill is compared with its carrying amount to
measure the amount of impairment loss, if any. The fair value of
goodwill is determined using the estimated discontinued future flows
of the reporting unit. Prior to January 1, 2002, goodwill was
generally amortized over 20 years in all cases amortization did not
exceed 40 years. Prior to 2003 Goodwill represented the value of the
company's listing on a Canadian Stock Exchange. In 2004, Goodwill
reflected the results of the investment in a formerly wholly owned
subsidiary as described in Note 10.
================================================================================
8.
/Continued...
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION - CONTINUED
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.
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.
================================================================================
9.
/Continued...
DIGITAL ROOSTER.COM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION - CONTINUED
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 to
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 but to present pro forma expense for the same. 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
================================================================================
10.
/Continued...
DIGITAL ROOSTER.COM LTD.
================================================================================
3. PROPERTY AND EQUIPMENT
As At March 31, 2004
--------------------
Accumulated Net Carrying
Cost Amortization Amount
-------- ------------- -------------
Furniture and equipment $ 45,978 $ 24,803 $ 21,175
Leasehold improvements 8,141 8,141 -
Computer hardware 236,404 184,036 52,368
Computer software 20,958 20,958 -
-------- ------------- -------------
$311,481 $ 237,938 $ 73,543
======== ============= =============
As At March 31, 2004
--------------------
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
======== ============= =============
================================================================================
11.
/Continued...
DIGITAL ROOSTER.COM LTD.
================================================================================
4. GOODWILL
2004 2003
---------- ----------
Cost as at March 31 $ - $ 341,195
Less: Accumulated amortization - (150,694)
---------- ----------
- 190,501
Amount allocated from dilution gain (Note 10) 234,840 -
Less: Impairment of goodwill (234,840) (190,501)
---------- ----------
Net Book Value as at March 31 $ - $ -
========== ==========
During 2003, the Company reviewed the carrying value of Goodwill for
impairment. The company 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.
In addition, during 2004, the Company determined that the Goodwill arising
form the transaction described in Note 10 was impaired
5. CONVERTIBLE NOTES PAYABLE
The convertible notes payable are non-interest bearing, unsecured and
payable within one year from the date of the note payable. The notes are
convertible, at the option of the lenders, at a conversion rate of US $7.14
per common share for a total of approximately 11,200 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.
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, 2005.
Accordingly the amount due was classified as long term.
================================================================================
12.
/Continued...
DIGITAL ROOSTER.COM LTD.
================================================================================
9. CAPITAL STOCK
i) Authorized
Unlimited number of Common shares
Issued - Common shares Number Amount
Balance as at April 1, 2002 36,335,866 $1,770,726
Issued for cash 34,877,357 224,116
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
Issued for cash 2,450,975 170,654
Issued for consulting services 1,041,000 102,350
Issued for management services 1,700,000 221,000
Issued as loan repayment 460,000 46,000
------------ ----------
Balance as at March 31, 2004 8,094,639 $2,731,086
============ ==========
During the 2003 Fiscal Year, the Company consolidated its common shares on 50:1
basis.
On March 17, 2004, the Company declared a 75 per cent split of the Company's
Common Shares effected by means of a dividend. Every four outstanding whole
common shares became entitled to three additional common shares. Share
certificates representing the stock dividend were mailed on or after April 26,
2004 to shareholders of record as of the close of business on April 7, 2004. The
effect of increasing by 75 per cent the number of Company's outstanding common
shares is reflected in weighted average number of shares outstanding and
earnings per share.
================================================================================
13.
/Continued...
DIGITAL ROOSTER.COM LTD.
================================================================================
9. CAPITAL STOCK - CONTINUED
ii) Stock Options
The Company currently issues stock options at the direction of the Board of
Directors. These options have been granted to employees, directors, and
consultants under the Company's stock option plan and any other terms and
conditions determined by the Board of Directors at the time the options are
issued. These 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 adjusted for the stock
dividend declared on March 17, 2004:
Wt. Avg. Wt. Avg.
Exercise Options Exercise
Number Price Exercisable Price
--------- -------- ------------ ---------
Balance, March 31, 2002 38,810 $ 12.50 34,920 $ 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 $ 0.21 393,870 $ 0.21
Cancelled (146,870) 0.25 (146,870) 0.25
Granted - - - -
Exercised - - - -
--------- -------- ------------ ---------
Balance, March 31, 2004 247,000 $ 0.44 247,000 $ 0.44
========= ======== ============ =========
Options outstanding and exercisable at March 31, 2004 are as follows:
Outstanding Exercisable
----------- -----------
Wt. Avg.
Expiry Remaining Wt. Avg. Exercise
Price Number Date Life Exercise Price Number Price
------- ------- ----------- --------- -------------- ------- --------
0.44 247,000 March, 2013 9 0.44 247,000 0.44
247,000 247,000
======= =======
================================================================================
14.
/Continued...
DIGITAL ROOSTER.COM LTD.
================================================================================
9. CAPITAL STOCK - CONTINUED
iii) 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 $0.21 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.
No stock options were granted during the year ended March 31, 2004.
10. GAIN ON DILUTION OF INVESTMENT IN SUBSIDIARY
During the year, the Company's wholly owned subsidiary, Avarda Inc.
("Avrada"), issued from treasury 4,187,000 common shares for proceeds of
$559,144. Each share of Avrada was issued with one common share purchase
warrant attached, given the holder the option to purchase one additional
common share of the subsidiary at the cost of US$0.20, for the period of
one year from the date of agreement.
In addition, the Company issued by way of dividend 1,335,869 common shares
of Avrada to its shareholders. Subsequent to this dividend, the Company
held 4,007,607 common shares of Avrada or 42.1 per cent of the issued and
outstanding shares. This distribution was based on one common share of
Avrada for every two common shares.
The gain on dilution of Company's interest in Avrada of $234,840 was
recognized in the financial statements of the Company. An equal amount was
allocated to goodwill (Note 4).
The 4,187,000 shares of Avrada were issued subsequent to the year-end, on
May 17, 2004.
11. REVENUE - BARTER TRANSACTION
There were no barter transactions in fiscal years 2004 and 2003.
12. ACQUISITION OF REAL 1-ON-1 INC AND IMPAIRMENT OF INTANGIBLES
During 2003, 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. 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 2003 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.
There were no such assets acquired in the year ended March 31, 2004.
================================================================================
15.
/Continued...
DIGITAL ROOSTER.COM LTD.
================================================================================
13. 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.
14. CHANGES IN NON-CASH OPERATING ITEMS AND SUPPLEMENTAL CASH FLOW DISCLOSURE
i) Changes in non-cash operating items:
March 31, March 31,
2004 2003
----------- -----------
Decrease in accounts receivable $ 37,784 $ 57,390
Decrease (increase) in prepaid and sundry receivables 5,196 (1,826)
Decrease in deferred revenue (2,473) (167,621)
Increase in accounts payable and accrued liabilities 118,848 178,397
----------- -----------
$ 159,355 $ 66,340
=========== ===========
Interest paid $ 25,431 $ 41,208
=========== ===========
15. 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. The claim was settled in
December 2003. The difference of previously accrued amount was
recorded in the year ended March 31, 2004.
c) In 2001, a claim was filed against the Company seeking return of the
sum of $82,115 plus interest plaintiff claimed to have advanced by way
of loan to the Company, whereas the monies clearly appear to have
advanced to Jazz Monkey Media Inc so that Digital Rooster.com Ltd
should have no liability. There was little activity in the claim and
the outcome of the case is uncertain
================================================================================
16.
/Continued...
DIGITAL ROOSTER.COM LTD.
================================================================================
16. LEASE COMMITMENTS
The subsidiary of the Company is obligated under operating leases for its
premises, vehicles and equipment. The lease of premises expires on May 31st
2006.
Future minimum payments for its operating leases as at March 31, 2004 are
approximately as follows:
2005 $83,000
2006 $75,000
2007 $12,000
17. 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:
2004 2003
---------- ----------
Amount % Amount %
---------- ------- ---------- -------
Combined statutory basic Canadian federal $(360,000) (36.60) $(263,500) (36.60)
and provincial tax rates
Loses for which no income tax benefits have (360,000) 36.60 (263,500) 36.60
---------- ------- ---------- -------
been recorded and other permanent
differences
$ - - $ - -
========== ======= ========== =======
The Company has available non-capital losses, the benefits of which have
not been recorded, of approximately $3,140,000 to be
2005 $ 80,000
2006 133,000
2007 614,000
2008 771,000
2009 1,052,000
2010 490,000
2011 960,000
----------
$4,100,000
==========
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,
2004 2003
------------ ------------
Future income tax asset - Losses carried forward $ 1,500,000 $ 1,150,000
Valuation allowance (1,500,000) (1,150,000)
------------ ------------
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.
/Continued...
DIGITAL ROOSTER.COM LTD.
================================================================================
18. 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.
(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.
19. RELATED PARTY TRANSACTIONS
a) Computer expenses include $NIL (2003 - $123,535) 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) During the year, the Company's wholly owned subsidiary, Avrada Inc.
("Avrada"), issued from treasury 4,187,000 common shares, the majority
of which were issued to the shareholders of the Company, for proceeds
of $559,144. Each share of Avrada was issued with one common share
purchase warrant attached, given the holder the option to purchase one
additional common share of the subsidiary at the cost of US$0.20, for
the period of one year from the date of agreement.
In addition, the Company issued by way of dividend 1,335,869 common
shares of Avrada to its shareholders. Subsequent to this dividend, the
Company held 4,007,607 common shares of Avrada or 42.1 per cent of the
issued and outstanding shares. This distribution was based on one
common share of Avrada for every two common shares.
The gain on dilution of Company's interest in Avrada of $234,840 was
recognized in the financial statements of the Company. This
corresponding entry to the dilution gain was recorded as goodwill and
was subsequently written down as impairment (Note 10).
The 4,187,000 shares of Avrada were issued subsequent to the year-end,
on May 17, 2004.
================================================================================
18.
/Continued...
DIGITAL ROOSTER.COM LTD.
================================================================================
20. 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,
2004 2003
---------- ----------
Sales
-----
Canada 10% 4%
United States 90% 96%
Accounts receivable
-------------------
United States 93% 100%
Canada 7%
21. 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,
2004 2003
----------- ------------
SHAREHOLDERS' EQUITY UNDER CANADIAN GAAP $ (901,667) $(1,017,780)
Adjustments to opening balances to reflect effect of:
Goodwill on reverse takeover - (190,500)
----------- ------------
Opening balance under U.S. GAAP, as adjusted (901,667) (1,208,280)
Adjustments in respect of:
Compensation expense for stock options - -
Equity - Paid in capital for compensation expense - -
Impairment of goodwill - 190,500
Amortization of goodwill on reverse takeover - -
----------- ------------
SHAREHOLDERS' EQUITY UNDER U.S GAAP $ (901,667) $(1,017,780)
=========== ============
================================================================================
19.
/Continued...
DIGITAL ROOSTER.COM LTD.
================================================================================
21. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - continued
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
March 31, March 31,
2004 2003
----------- -----------
NET LOSS UNDER CANADIAN GAAP $ (983,035) $ (720,061)
Adjustments in respect of:
Impairment of goodwill - 190,500
----------- -----------
Net income (loss) and comprehensive income under U.S. GAAP $ (983,035) $ (529,561)
=========== ===========
Income (loss) per common share as per U.S. GAAP
Basic
- Weighted average common shares outstanding 7,359,209 2,540,846
- Loss per share $ (0.13) $ (0.20)
Loss per share has not been presented on a fully diluted basis, as the
effect would be anti-dilutive.
================================================================================
20.
/Continued...
DIGITAL ROOSTER.COM LTD.
================================================================================
21. 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, 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)
Issued during the year - for cash 170,654 - 170,654
Issued for consulting services 102,350 - 102,350
Issued for management services 221,000 - 221,000
Issued as a loan repayment 46,000 - 46,000
Net Income (Loss) - (983,035) (983,035)
---------- ------------ --------------
Balance, March 31, 2004 $2,731,086 $(4,191,897) $ (1,460,811)
========== ============ ==============
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.
================================================================================
21.
/Continued...
DIGITAL ROOSTER.COM LTD.
================================================================================
21. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - continued
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.
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).
================================================================================
22.
/Continued...
DIGITAL ROOSTER.COM LTD.
================================================================================
21. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - continued
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.
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 pronouncements
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:
================================================================================
23.
/Continued...
DIGITAL ROOSTER.COM LTD.
================================================================================
21. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - continued
(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.
(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.
================================================================================
24.
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
DIGITAL ROOSTER.COM LTD.
================================================================================
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
"John A. van Arem"
Chief Financial Officer of
Digital Rooster.com, Ltd
-------------------------------
Registrant
Date: September 30, 2004
--------------------------------
Print the name and title of the signing officer under this signature
================================================================================
24.
EXHIBIT INDEX
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