UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file # 0-19949
Scarab Systems, Inc.
(Exact Name of Registrant as Specified in its Charter)
Colorado 84-1153522
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
528-666 Burrard Street, Vancouver, British Columbia V6C 2X8
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (604) 639-3178
Securities registered under Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $0.001 par value
Check whether the Issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the Issuer was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [ x ] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of Issuer's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
The Issuer had no revenue for the fiscal year ended March 31, 2004.
As of April 26, 2004, the aggregate market value of the Common Stock
of the Issuer, based upon the average bid and asked prices of such
Common Stock, held by non-affiliates of the Issuer was approximately
$6,307,459.
As of April 26, 2004, 12,173,319 shares of Common Stock of the Issuer
were outstanding. EXCEPT WHERE AND AS OTHERWISE STATED TO THE
CONTRARY IN THIS ANNUAL REPORT, ALL SHARE, PRICES PER SHARE AND
EXERCISE PRICES HAVE BEEN ADJUSTED TO GIVE RETROACTIVE EFFECT TO THE
CHANGE IN THE PRICE PER SHARE OF THE COMMON STOCK RESULTING FROM THE
ONE-FOR-TEN SHARE CONSOLIDATION OF THE COMMON STOCK THAT TOOK EFFECT
ON JANUARY 20, 2004.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No
[X]
FORWARD LOOKING STATEMENTS
Certain statements made in this Annual Report are "forward-looking
statements" (within the meaning of the Private Securities Litigation
Reform Act of 1995) regarding the plans and objectives of management
for future operations. Such statements involve known and unknown
risks, uncertainties and other factors that may cause actual results,
performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or
implied by such forward-looking statements. The forward-looking
statements made in this Report are based on current expectations that
involve numerous risks and uncertainties. The Company's plans and
objectives are based, in part, on assumptions involving the growth
and expansion of business. Assumptions relating to the foregoing
involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company.
Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that
the forward-looking statements made in this Report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements made in this Report, the inclusion of such
information should not be regarded as a representation by the Company
or any other person that the objectives and plans of the Company will
be achieved.
As used in this annual report, the terms "we", "us", "our", "Company"
and "Scarab" means Scarab Systems Inc., unless otherwise indicated.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General Overview
We are a development stage company and are not presently engaged in
any business. Since our formation, we have explored and entered into
various businesses but have since ceased any business operations. We
continue to seek projects of merit and if we require additional
capital in connection with any potential acquisition, we plan to
raise such additional funds through equity or debt of the Company.
Corporate History
Scarab Systems, Inc. (the "Company" or "Scarab") is a development
stage company that was formed by the merger of Scarab Systems, Inc.,
a Nevada corporation into iRV, Inc., a Colorado corporation.
Scarab Systems, Inc. (Nevada) was a privately owned Nevada
corporation that was incorporated on October 8, 2001. It was
initially formed in order to provide services to the e-commerce
industry, and in particular to provide marketing services, e-commerce
development services and the sale and distribution of transaction
processing and payment services, including rechargeable stored value
payment and money transfer systems that could be used for both
electronic commerce and point of sale purchases.
The effective date of the merger transaction between Scarab Systems,
Inc. (Nevada) and iRV, Inc. was July 17, 2002. On that date the
shareholders of Scarab Systems, Inc. (Nevada) received ten shares of
the common stock of iRV, Inc. for each share of Scarab Systems, Inc.
(Nevada) common stock owned. The number of outstanding shares of iRV,
Inc. increased from 1,446,299 to 9,706,290. The 8,260,000 shares of
iRV, Inc.'s stock issued to the former shareholders of Scarab
Systems, Inc. (Nevada) represented, immediately after their issuance,
86% of the total issued and outstanding shares of iRV, Inc.'s common
stock following the merger. This reorganization was accounted for as
though it were a re-capitalization of Scarab Systems, Inc. (Nevada)
and a sale of shares by Scarab Systems, Inc. (Nevada) in exchange for
the net assets of iRV, Inc. Subsequent to completion of the
reorganization, Scarab Systems, Inc. (Nevada) transferred all its
assets and liabilities to iRV, Inc. and ceased operations. The
directors and executive officers of iRV, Inc. were subsequently
reconstituted. iRV, Inc. changed its name to Scarab Systems, Inc. on
March 24, 2003. The corporate charter of Scarab Systems Inc. (Nevada)
was revoked in 2002.
On January 30, 2002, we were given two options in fiscal year 2002 to
acquire all the issued and outstanding shares of 485017 B.C. Ltd., a
British Columbia company doing business as MarketEdge Direct ("MED"),
as security against a subscription receivable of $337,500 for 675,000
shares from the shareholders of MED. MED was in the business of
providing a wide range of marketing products and services. Effective
August 7, 2002, we exercised both of the options and acquired all the
issued and outstanding shares of MED. Due to disappointing financial
results of MED, on March 28, 2003, we entered into an agreement with
the former shareholders of MED to sell MED back to them. As a
result, all the issued and outstanding shares of MED we acquired were
sold back to the former MED shareholders for the return to treasury
of 540,000 of our common shares.
On March 28, 2003, we acquired all the issued and outstanding shares
of Catalyst Technologies, Inc., a British Columbia corporation
("Catalyst"). Catalyst is a Vancouver based, web design and Internet
application developer. Catalyst specializes in the development of web-
sites and Internet software design, primarily for the Health and
Nutraceutical industry. Our acquisition of Catalyst was treated as a
non-material business combination in the fiscal year 2003.
Due to a lack of working capital and disappointing financial results
of Catalyst during the current period, our board of directors decided
on March 15, 2004, that it would abandon Catalyst, the Company's only
subsidiary. The Company's operations related to Catalyst did not
generate material traffic or revenues in the current period.
On January 20, 2004, as approved by the requisite number of shares at
the Special Meeting of Shareholders of the Company on September 24,
2002, a one-for-ten share consolidation of the Company's stock took
effect for shareholders of record. All per share information for all
prior periods have been adjusted accordingly.
Our Current Business
We are a development stage company and are not presently engaged in
any business. Accordingly, the auditor's report on our financial
statements notes that we will need additional financing or future
profitability to continue as a going concern. Since our formation, we
have explored and entered into various businesses but have since
ceased any business operations. We continue to seek projects of
merit and if we require additional capital in connection with any
potential acquisition, we plan to raise such additional funds through
equity or debt of the Company.
We were previously engaged in providing e-commerce services. These
services have been comprised of marketing, e-commerce development,
web design, internet application development and the sale and
distribution of transaction processing and payment services,
including rechargeable stored value payment and money transfer
systems that can be used for both electronic commerce and point of
sale purchases. In fiscal year 2003 we substantially ceased all
operations with respect to our e-commerce services due to nominal
revenue.
We currently have no facilities and no employees. Our administrative
affairs are conducted by our officers as independent contractors. Our
address is 528-666 Burrard Street, Vancouver, British Columbia V6C
2X8. Our telephone number is (604) 639-3178.
Plan of Operations
We actively seek acquisition candidates. We believe the Company can
offer owners of potential merger or acquisition candidates the
opportunity to access public markets. The target company will,
however, incur significant post-merger or acquisition registration
costs in the event target company shareholders wish to offer a
portion of their shares for subsequent sale. Further, while target
company shareholders will receive "restricted securities" in any
merger or acquisition transaction, those restricted securities will
represent, if a trading market develops for our common stock,
ownership in a "publicly-traded" as opposed to a "privately-held"
company. We also believe target company shareholders may benefit in
obtaining a greater ownership percentage in the Company remaining
after a merger or acquisition than may be the case in the event a
target company offered its shares directly for sale to the public.
Nevertheless, our officers and directors have not conducted market
research and are not aware of statistical data which would support
the perceived benefits of a merger or acquisition transaction for
target company shareholders.
We expect to concentrate primarily on the identification and
evaluation of prospective merger or acquisition "target" entities
including private companies, partnerships or sole proprietorships. We
do not intend to act as a general or limited partner in connection
with partnerships we may merge with or acquire. We have not
identified any particular area of interest within which we will
concentrate our efforts.
It should be noted, however, that our independent accountants audit
report for the fiscal year ended March 31, 2004 contains a
qualification and explanatory language that due to our recurring
losses from operations and working capital deficiency, substantial
doubts exist about our ability to continue as a going concern.
Plan of Acquisition
We plan to follow a systematic approach to identify our most suitable
acquisition candidates. In the past, our officers and directors have
not used consultants in an effort to identify potential target
companies, although it is possible that such consultants may be used
in the future.
We intend to concentrate on identifying any number of preliminary
prospects which may be brought to the attention of management through
present associations and personal contacts of our affiliates. As is
customary in the industry, we may pay a fee to a non-affiliate for
locating a merger or acquisition candidate. If any such fee is paid,
it will be approved by our Board of Directors and will be in
accordance with industry standards. After preliminary candidates are
identified, we will then apply certain of our broad criteria to the
prospects. Essentially, this will entail a determination by us as to
whether or not the prospects are in an industry which appears
promising and whether or not the prospects themselves have potential
within their own industries. During this initial screening process,
we will ask and receive answers to questions framed to provide
appropriate threshold information, depending upon the nature of the
prospects' businesses. Such evaluation is not expected to be an in-
depth analysis of the target company's operations although it will
encompass a look at most, if not all, of the same areas to be
examined once one or more target companies are selected for an in-
depth review. For example, at this stage, we may look at a prospect's
unaudited balance sheet. Once a prospect is selected for an in-depth
review, we will review the prospect's audited financial statements.
Nevertheless, this evaluation is anticipated to provide a broad
overview of the business of the target company and should allow a
large percentage of preliminary prospects to be eliminated from
further consideration.
Assuming we are able to complete the preliminary evaluation process
and select a limited number of companies for further study, of which
there can be no assurance, we may enter into preliminary negotiations
with target company management in order to obtain detailed financial
and operational information. Following our receipt of such
information, we expect conduct an in-depth analysis of five major
areas of concern with respect to the target company as follows:
1. Managerial and Financial Stability. We expect to review audited
financial statements of the target company, to the extent available,
and will also research the background of each director and member of
management of the target company in order to discern whether the
stability of the company is such that further negotiations are
warranted.
2. Industry Status. We expect to research the potential of the
target company's industry, in order to determine whether the industry
is in the growth, stagnant or declining stage. The concern here is
whether the industry is in a growth, stagnant or declining stage.
3. Production of Product. If the target company is a manufacturer,
we intend to review whether it has the necessary resources or access
to the necessary resources and supplies to produce a quality product
in a timely manner.
4. Acceptance and Potential of Product. We expect to review the
acceptance of the target company's product in the market place and
assess the competition. We intend to also review whether or not the
product is realistic (ie. whether there is potential for the product
to be workable and to fulfill our intended purpose).
5. Development of Target Company. We expect to review the target
company's stage of development (e.g. start-up stage, established
company, etc.).
The foregoing is an outline of the areas of concern which most often
arise and merit careful scrutiny by management. Because of the
possible varieties of target companies which may come to our
attention, additional factors will most likely be considered in any
given analysis. Also, the procedures used in such a review are
expected to vary depending upon the target company being analyzed. We
may select a target company for further negotiations even though the
target may not receive a favorable evaluation as to some of the five
areas of concern.
We expect to enter into further negotiations with target company
management following successful conclusion of financial and
evaluation studies. Negotiations with target company management will
be expected to focus on the percentage of the company that Target
company shareholders would acquire in exchange for their shares in
the target company. Depending upon, among other things, the target
company's assets and liabilities, our shareholders will in all
likelihood hold a lesser percentage ownership interest in the Company
following any merger or acquisition. Assets of a merger or
acquisition candidate would be valued at historical cost for
transactional purposes. The percentage ownership may be subject to
significant reduction in the event we acquire a target company with
substantial assets. Any merger or acquisition we effect can be
expected to have a significant dilutive effect on the percentage of
shares held by our then shareholders.
The final stage of any merger or acquisition to be effected by us
will require us to retain the services of legal counsel and a
qualified accounting firm in order to properly effect the merger or
acquisition. We may be expected to incur significant legal fees and
accounting costs during the final stages of a merger or acquisition.
Also, if the merger or acquisition is successfully completed, we
anticipate that certain costs will be incurred for public relations,
such as the dissemination of information to the public, to the
shareholders and to the financial community. If we are unable to
complete the merger or acquisition for any reason, our capital may be
substantially depleted if legal fees and accounting costs have been
incurred. We intend to retain legal and accounting services only on
an as-needed basis in the latter stages of a proposed merger or
acquisition.
We anticipate that it may be necessary to raise additional funds
within the next 12 months to meet expenditures required for
operations. There are no current plans or commitments in this regard,
and there can be no assurance that we will be able to raise the funds
necessary to continue our limited operations.
It is possible that acquisition targets are seeking a business
combination with us as part of their efforts to raise additional
capital. We may raise capital, either through the public or private
sale of equity or debt securities to enable us to provide bridge
capital to any potential acquisition candidate. In addition, we may
borrow funds or use proceeds of any equity or debt offering to make
payments to our management, promoters, or their respective affiliates
or associates.
Role of Management in Acquisition Process
The consummation of any acquisition may result in a change in control
of the Company, pursuant to which the officers, directors and
principal shareholders of the acquired company will be issued
sufficient numbers of shares of our common stock to exercise voting
control immediately following the acquisition. In addition, the
transaction may involve the sale by our current principal
shareholders of all or a portion of their beneficial ownership of our
common stock to the control persons of the acquired company. Such
sale would be upon terms privately negotiated between the principals
of the acquired company and our principal shareholders. Our
shareholders will, in all likelihood, not be provided with
information, including financial statements, of a business to be
acquired nor be afforded an opportunity to approve or consent to any
stock buy-out transaction involving our principal shareholders.
Moreover, our other shareholders in all likelihood will not be
offered an opportunity to sell their shares of our common stock on
the same or similar terms and conditions. We have not adopted and do
not plan to adopt in the future any policy that would restrict, limit
or prohibit management or our principal shareholders from negotiating
a buy-out of their stock in connection with an acquisition
transaction.
Competition
We will remain an insignificant participant among the firms which
engage in mergers with and acquisitions of privately financed
entities. There are many established venture capital and financial
concerns that have significantly greater financial and personnel
resources and technical expertise than we do. In view of our combined
limited financial resources and limited management availability, we
will continue to be at a significant competitive disadvantage
compared to our competitors. Also, we will be competing with numerous
other small, blank check public companies.
Regulation and Taxation
We could be subject to regulation under the Investment Company Act of
1940 in the event we obtain and continue to hold a minority interest
in a number of entities. Our plan of operation is based upon us
obtaining a controlling interest in any merger or acquisition target
company and, accordingly, we may be required to discontinue any
prospective merger or acquisition of any company in which a
controlling interest will not be obtained.
We could also be required to register under the Investment Company
Act of 1940 in the event it comes within the definition of an
Investment Company contained in that Act due to our assets consisting
principally of shares held in a number of other companies. We intend
to seek at most one or two mergers or acquisitions, which
transactions we believe will not result in the Company being deemed
an "investment company" since our interests will be in majority or
wholly owned subsidiaries which themselves will not be investment
companies.
Any securities that we acquire in exchange for our common stock will
be "restricted securities" within the meaning of the Securities Act
of 1933 (the "1933 Act"). If we elected to resell such securities,
such sale could not proceed unless a registration statement had been
declared effective by the Securities and Exchange Commission or an
exemption from registration was available. Section 4(1) of the 1933
Act, which exempts sales of securities not involving a distribution,
would in all likelihood be available to permit a private sale if
various restrictions pertaining to such a sale are complied with.
Although our plan of operation does not contemplate resale of
securities acquired, in the event such a sale were necessary, we
would be required to comply with the provisions of the 1933 Act.
As a condition to any merger or acquisition, it is possible that the
target company management may request registration of our common
stock to be received by target company shareholders. In such event,
we could incur registration costs, and we intend to require the
target company to bear most, if not all, of the cost of any such
registration. If we do contribute toward the cost of such
registration, our maximum contribution will be limited to the extent
that we have assets available for such contribution. Alternatively,
we may issue "restricted securities" to any prospective target
company, which securities may be subsequently registered for sale or
sold in accordance with Rule 144 of the Securities Act of 1933.
We intend to structure a merger or acquisition in such a manner as to
minimize federal and state tax consequences to the Company and any
target company.
Employees and Consultants
The Company's President, Chief Executive Officer, Chief Financial
Officer and Secretary is Thomas E. Mills. The Company's Chief
Operations Officer is Lou Hilford.
The Company has no employees. Management services are provided to the
Company by Thomas E. Mills and Lou Hilford, without compensation.
There is no employment or consulting agreements between the Company
and Mr. Mills or Mr. Hilford.
ITEM 2. DESCRIPTION OF PROPERTY
The Company does not own any real property either for its own use or
for investment purposes. Office space for our corporate offices is
currently provided at no charge by our President, Thomas E. Mills.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of our securities holders
during the fourth quarter ended March 31, 2004.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
SMALL BUSINESS ISSUERS PURCHASES OF EQUITY SECURITIES
The outstanding shares of the Company's common stock are traded over-
the-counter on an electronic bulletin board under the symbol "SBSY".
The Company's transfer agent is Computershare Investor Services,
located at 350 Indiana Street, Suite 800, Golden, Colorado, 80401.
The following table summarizes the reported high and low bid and ask
prices for the Company's Common Stock for the last two fiscal years
based on OTCBB quotations. Since the quotations do not include
commissions or the amounts that a dealer may mark-up or markdown the
stock in a particular transaction, quotations may not accurately
reflect the actual transactions that were completed during the fiscal
period. All prices per share before January 20, 2004, take into
account the one-for-ten share consolidation which has the effect of
multiplying the pre-consolidated price per share by a factor of ten.
2003 Fiscal Year High Low
---------------- ----- -----
First Quarter $1.70 $0.60
Second Quarter $0.90 $0.10
Third Quarter $0.40 $0.20
Fourth Quarter $0.30 $0.10
2004 Fiscal Year High Low
---------------- ----- -----
First Quarter $0.20 $0.10
Second Quarter $0.20 $0.10
Third Quarter $0.20 $0.10
Fourth Quarter $0.51 $0.05
As of March 31, 2004, there were 188 owners of record of the
Company's common stock. Approximately 1,490,857 were held in the name
of Cede & Co., an institution that holds stock for a large number of
beneficial owners.
Recent Sales of Unregistered Securities
In February, 2004, we issued 510,000 shares of common stock upon the
conversion of debt in the amount of $51,000 to our President, Thomas
E. Mills. Mr. Mills is a non-U.S. person and the shares were issued
in reliance on Regulation S under the Securities Act of 1933.
In February, 2004, we issued 1,200,000 shares of common stock
pursuant to a private placement in exchange for aggregate cash
payments of $120,000. We issued 750,000 of the common shares to two
non-U.S. persons for aggregate payments of $75,000 and in reliance on
Regulation S under the Securities Act of 1933. We also issued 450,000
of the common shares to two U.S. persons for aggregate cash payments
of $45,000 and in reliance on Section 4(2) under the Securities Act
of 1933.
Dividend Policy
Our Board of Directors may declare and pay dividends on outstanding
shares of common stock out of funds legally available therefor in our
sole discretion; however, to date no dividends have been paid on
common stock and we do not anticipate the payment of dividends in the
foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
Certain statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not
historical facts are forward-looking statements such as statements
relating to future operating results, existing and expected
competition, financing and refinancing sources and availability and
plans for future development or expansion activities and capital
expenditures. Such forward-looking statements involve a number of
risks and uncertainties that may significantly affect the Company's
liquidity and results in the future and, accordingly, actual results
may differ materially from those expressed in any forward-looking
statements. The following discussion and analysis should be read in
conjunction with the financial statements and notes thereto appearing
elsewhere in this report.
Overview
Our business was to provide services to the e-commerce industry.
Historically, these services have been comprised of marketing, e-
commerce development and the sale and distribution of transaction
processing and payment services, including rechargeable stored value
payment and money transfer systems that can be used for both
electronic commerce and point of sale purchases. We ceased to offer
these services and we are seeking new opportunities.
The Company has been in the development stage since its inception. It
has earned no significant operating revenue to date, has accumulated
losses of $883,317 and will require additional working capital to
sustain its minimal operations. These circumstances raise substantial
doubt as to its ability to continue as a going concern.
We intend to continue to identify and review opportunities in the
technology and resources sectors. We are currently reviewing various
financing alternatives, including the possibility of an additional
private equity offering. There can be no assurance, however, that
such opportunities or financings will be available to us, or if it
is, that it will be available on terms acceptable to us. If we are
unable to obtain the financing necessary to support our operations,
we may be unable to continue as a going concern.
We currently have no facilities and no employees.
Results of Operations
For the Year Ended March 31, 2004 Compared to the Year Ended March
31, 2003
Operating Expenses from Continued Operations. Operating expenses
consisted of consulting fees, management fees, professional fees,
stock based compensation and other general corporate expenses.
Operating expenses were $411,651 for the year ended March 31, 2004,
compared with $347,045 for the year ended March 31, 2003. The
increase was a result of the Company recording $195,740 in stock
based compensation for stock options granted to consultants during
the year ended March 31, 2004, compared with no such expense for the
year ended March 31, 2003. Excluding the stock based compensation
charge of $195,740, the operating costs decreased by $131,134, or
38%, due to the curtailing of substantially all of the Company's
operating activities during the current year. Consulting fees were
$169,059 for the year ended March 31, 2004, compared with $170,469
for the year ended March 31, 2003. During the current period, the
Company recorded $100,000 in consulting services for restructuring
efforts and the balance of $69,059 was related to consulting services
for managing our operations and reporting requirements. During the
comparative period in 2003, consultants were engaged to manage the
operations of the Company. Professional fees were $65,780 for the
year ended March 31, 2003, compared with no such fees for the year
ended March 31, 2004. Professional fees incurred in fiscal year 2003
consisted of financial consulting fees for the negotiation of debt
financing for our operations. Audit and legal fees were $14,924 for
the year ended March 31, 2004 compared to $20,181 for the year ended
March 31, 2003. Legal and accounting fees related to the costs
associated with the Company's audited statements and periodic
reporting obligations. General office expenses were $21,501 for the
year ended March 31, 2004, compared with $30,756 for the year ended
March 31, 2003 when the Company was operating. Interest costs were
$8,948 for the year ended March 31, 2004 compared with $7,621 for the
year ended March 31, 2003.
Gain on Settlement of Debt. We recorded a gain on the settlement of
debt of $37,045 for the year ended March 31, 2004 compared to no such
gain during the year ended March 31, 2003. The gains were from
negotiated settlements with creditors to the benefit of the Company.
We also recorded gains on the settlement of related party debt in the
amount of $110,527 for the year ended March 31, 2004. However, debt
settlements with related parties are treated as contributed surpluses
in the statement of stockholders' deficit instead of the statement of
operations.
Net Income from Discontinued Operations. We ceased substantially all
of our operating businesses during the fiscal year ended March 31,
2003 and, as a result, combined all operating revenues and expenses
related to the previous business under discontinued operations. The
Company recorded no net income from discontinued operations for the
year ended March 31, 2004, compared with a net income of $21,082 for
the year ended March 31, 2003.
Net Loss for the Period. We recorded a net loss of $374,606 for the
year ended March 31, 2004, compared with a net loss of $396,277 for
the year ended March 31, 2003.
Liquidity and Capital Resources
Our cash on hand was $12,621 as at March 31, 2004 compared to no cash
at March 31, 2003. Our working capital deficit was $15,261 as at
March 31, 2004, including $27,882 in accounts payable that existed at
the end of the previous fiscal year. This compares to a working
capital deficit of $210,227 as at March 31, 2003.
Our improved cash position and working capital deficit was achieved
though receipt of gross proceeds of $216,000 from the issuance of
common stock, from $37,045 in debt forgiveness by creditors and from
$110,527 in debt forgiveness by related party creditors during the
year ended March 31, 2004. This compares with $40,000 in gross
proceeds from the issuance of common stock and no debt forgiveness
for the year ended March 31, 2003.
During the year ended March 31, 2004, we received $7,500 from the
issuance of a promissory note and by the end of the year had repaid
all of the existing promissory notes totaling $59,109 and converted a
$40,000 promissory note, along with $11,000 in accrued interest, to
common shares. During the comparative period in 2003, we received
gross proceeds of $90,921 from the issuance of promissory notes.
Other than the foregoing, we know of no trends, demands or
uncertainties that are reasonably likely to have an impact on the
Company's liquidity or capital resources.
We will require additional financing in order to complete our stated
plan of operations for the next twelve months. We believe that we
will require an additional $60,000 to sustain minimum operations
during the next twelve months.
New Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. This Statement
amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives)
and for hedging activities under SFAS No. 133. This Statement is
effective for contracts entered into or modified after June 30, 2003.
The adoption of SFAS No. 149 does not have an impact on the Company's
financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity. This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). This Statement is
effective for financial instruments entered into or modified after
May 30, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The adoption of
SFAS No. 150 does not have an impact on the Company's financial
statements.
In December 2003, the FASB Issued SFAS No. 132(R), a revision to SFAS
No. 132, Employer's Disclosure about Pensions and Other
Postretirement Benefits. SFAS No. 132(R) requires additional
disclosure about assets, obligations, cash flows and net periodic
benefit cost of defined benefit pension plans and other defined
benefit postretirement plans, SFAS No. 132(R) is effective for the
financials statements with fiscal years ending after December 15,
2003, with the exception of disclosure requirements related to
foreign plans and estimated future benefit payments which are
effective for the fiscal years ending after June 15, 2004. The
adoption of SFAS No. 132(R) does not have an impact on the Company's
financial position or results of operations.
In December, 2003 the American Institute of certified Public Accounts
and the Securities and Exchange Commission ("SEC") expressed the
opinion that rate-lock commitments represent written put options, and
therefore be valued as a liability. The SEC expressed that they
expect registrants to disclose the effect on the financial statement
of recognizing the rate-lock commitments as written put options, for
quarters commencing after march 15, 2004, Additionally, the SEC
recently issued Staff Accounting Bulletin (SAB) No. 105. SAB No. 105
clarifies the SEC's position that the inclusion of cash flows from
servicing or ancillary income in the determination of the fair value
of interest rate lock commitments is not appropriate. The Company has
not yet determined the impact on the financial statements of SAB No.
105, which must be implemented for loan commitments entered into on
or after April 1, 2004. The Company is currently analyzing the impact
of the SEC's position and will, if required, account for its loan
origination commitments as prescribed.
In January 2003, the FASB released FASB Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities." FIN 46 requires
that all primary beneficiaries of variable interest entities
consolidate that entity. FIN 46 is effective immediately for variable
interest entities created after January 31, 2003 and to variable
interest entities in which an enterprise obtains an interest after
that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003 to variable interest entities in which
an enterprise holds a variable interest it acquired before February
1, 2003. In December 2003, the FASB published a revision to FIN 46
("FIN 46R") to clarify some of the provisions of the interpretation
and to defer the effective date of implementation for certain
entities. Under the guidance of FIN 46R, entities that do not have
interests in structures that are commonly referred to as special
purpose entities are required to apply the provisions of the
interpretation in financial statements for periods ending after March
14, 2004. The Company did not create a variable interest entity after
January 31, 2003 and does not have a variable interest entity as of
December 31, 2003. The Company expects that the full adoption of FIN
46R in 2004 will not have a material impact on the Company's
financial position or results of operations
Application of Significant Accounting Policies
Cash and Cash Equivalents
Cash equivalents comprise certain highly liquid instruments with a
maturity of three months or less when purchased. As at March 31,
2004 and 2003, cash and cash equivalents consist of cash only.
Accounting Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates and
assumptions.
Furniture
Furniture is recorded at cost. Depreciation is based on the estimated
useful lives of the assets and is computed using the declining
balance method as follows:
Furniture and fixtures 30%
Concentration of Credit Risk
The Company places its cash and cash equivalents with high credit
quality financial institutions. As of March 31, 2004 the Company had
no balance in a bank beyond insured limits.
Foreign Currency Transactions
The Company maintains its accounting records in U.S. Dollars, as
follows:
At the transaction date, each asset, liability, revenue and expense
is translated into U.S. dollars by the use of the exchange rate in
effect at that date. At the period end, monetary assets and
liabilities are remeasured by using the exchange rate in effect at
that date. The resulting foreign exchange gains and losses are
included in operations.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash
equivalents, accounts payable and accrued liabilities and promissory
notes. The carrying amount of accounts payable and accrued
liabilities approximates fair value due to the short-term nature of
these items. The promissory notes also approximate fair value based
on evaluations of market interest rates and short-term nature of the
payable.
Income Taxes
The Company has adopted Statement of Financial Accounting Standards
(SFAS") No. 109, "Accounting for Income Taxes", which requires the
Company to recognize deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized
in the Company's financial statements or tax returns using the
liability method. Under this method, deferred tax liabilities and
assets are determined based on the temporary differences between the
financial statements and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are
expected to reverse.
Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income",
which requires inclusion of foreign currency translation adjustments,
reported separately in its Statement of Stockholders' Equity, in
other comprehensive income. The Company had no other comprehensive
income for the year ended March 31, 2004.
Advertising Expenses
The Company expenses advertising costs as incurred. There were no
advertising expenses incurred by the Company for the years ended
March 31, 2004 and 2003.
Loss Per Share
Loss per share is computed using the weighted average number of
shares outstanding during the year. The Company has adopted SFAS No.
128, "Earnings Per Share". Diluted loss per share is equivalent to
basic loss per share as the stock options to acquire common shares
as disclosed in the notes are anti-dilutive.
Stock-based Compensation
The Company has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-based Compensation", as amended by SFAS
No. 148 "Accounting for Stock-based Compensation - Transition and
Disclosure - An amendment of SFAS No. 123". SFAS No. 123 encourages,
but does not require, companies to adopt a fair value based method
for determining expense related to stock-based compensation. The
Company accounts for stock-based compensation issued to employees and
directors using the intrinsic value method as prescribed under
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. The Company
initiated a 2004 Non-Qualified Stock Option Plan. During the year
ended March 31, 2004, the Company granted 1,060,000 stock options to
non-employees.
Goodwill and Intangible Assets
Goodwill represents the excess of cost over fair value of assets of
business acquired. Goodwill and intangible assets acquired in a
business combination and determined to have an indefinite useful life
are not amortized, but instead are tested for impairment at lest
annually in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142. SFAS No. 142 also requires
that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets.
Accounting for Derivative Instruments and Hedging Activities
The Company has adopted Statement of Financial Accounting Standards
No. 133 (SFAS 133) Accounting for Derivative and Hedging Activities,
which requires companies to recognize all derivative contracts as
either assets or liabilities in the balance sheet and to measure them
at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge, the objective of which is to
match the timing of gain and loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value
of the hedged asset or liability that are attributable to the hedged
risk or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging instrument,
the gain or loss is recognized in income in the period of change. The
Company has not entered into derivative contracts either to hedge
existing risks or for speculative purposes.
Long-Lived Assets Impairment
Long-term assets of the Company are reviewed when changes in
circumstances require as to whether their carrying value has become
impaired, pursuant to guidance established in Statement of Financial
Accounting Standards No. 144 (SFAS 144), Accounting for the
Impairment or Disposal of Long-Lived Assets. Management considers
assets to be impaired if the carrying value exceeds the future
projected cash flows from the related operations (undiscounted and
without interest charges). If impairment is deemed to exist, the
assets will be written down to fair value.
ITEM 7. FINANCIAL STATEMENTS
SCARAB SYSTEMS, INC.
(A development stage enterprise)
Financial Statements
(Expressed in U.S. Dollars)
March 31, 2004 and 2003
Index
Report of Independent Auditors
Balance Sheets
Statements of Stockholders' Deficiency
Statements of Operations
Statements of Cash Flows
Notes to Financial Statements
MOORE STEPHENS ELLIS FOSTER LTD.
CHARTERED ACCOUNTANTS
1650 West 1st Avenue
Vancouver, BC Canada V6J 1G1
Telephone: (604) 734-1112 Facsimile: (604) 714-5916
Website: www.ellisfoster.com
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
SCARAB SYSTEMS, INC.
(A development stage enterprise)
We have audited the balance sheets of Scarab Systems, Inc. (the
"Company") (a development stage enterprise) as at March 31, 2004 and
2003, the related statements of stockholders' deficit from October 8,
2001 (inception) to March 31, 2004 and the statements of operations
and cash flows for the years ended March 31, 2004, 2003 and from
October 8, 2001 (inception) to March 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all
material respects, the financial position of the Company as at March
31, 2004 and 2003 and the results of its operations and cash flows
for the years ended March 31, 2004, 2003 and from October 8, 2001
(inception) to March 31, 2004 in conformity with generally accepted
accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company has not generated any
revenue from operations that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
Vancouver, Canada "MOORE STEPHENS ELLIS FOSTER LTD."
April 7, 2004 Chartered Accountants
SCARAB SYSTEMS, INC.
(A development stage enterprise)
Balance Sheets
(Expressed in U.S. Dollars)
================================================================================
March 31 March 31
2004 2003
--------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 12,621 $ -
--------------------------------------------------------------------------------
Total current assets - -
Furniture, net of accumulated depreciation - 1,305
--------------------------------------------------------------------------------
Total assets $ 12,621 $ 1,305
================================================================================
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 27,882 $ 124,306
Promissory notes - 85,921
--------------------------------------------------------------------------------
Total current liabilities 27,882 210,227
Promissory notes - non current - 5,000
--------------------------------------------------------------------------------
Total liabilities 27,882 215,227
--------------------------------------------------------------------------------
STOCKHOLDERS' DEFICIT
Share capital
Authorized: 100,000,000 common shares with a par value of $0.001 per share
Issued and outstanding: 12,173,319 Common shares
(March 31, 2003 - 9,166,299) $ 12,173 $ 9,166
Additional paid in capital 855,883 245,123
Share subscriptions received - 40,500
Deficit accumulated during
the development stage (883,317) (508,711)
--------------------------------------------------------------------------------
Total stockholders' deficit (15,261) (213,922)
--------------------------------------------------------------------------------
Total liabilities and
stockholders' (deficit) $ 12,621 $ 1,305
================================================================================
The accompanying notes are an integral part of these financial statements.
SCARAB SYSTEMS, INC.
(A development stage enterprise)
Statements of Stockholders' Deficit
For the period from October 8, 2001 (inception) to March 31, 2004
(Expressed in US Dollars)
==================================================================================================================================
Deficit
Share accumulated
Common stock Additional subscription during Total
--------- --------- Paid-in received/ development shareholders'
Shares Amount capital (receivable) stage deficit
----------------------------------------------------------------------------------------------------------------------------------
Stock issued for cash at $0.001 per share
in October, 2001 5,425,000 $ 5,425 $ - $ - $ - $ 5,425
Stock issued for intangible asset acquisition
at $0.001 per share in October,2001 200,000 200 - - - 200
Issued 1,440,000 common stock at
$0.001 per share in October, 2001 1,440,000 1,440 - (1,440) - -
Stock issued at $0.50 per share
in November, 2001 675,000 675 336,825 (337,500) - -
Stock issued for cash at $0.50 per share
in January, 2002 390,000 390 194,610 - - 195,000
Net (loss) for the period - - - - (112,434) (112,434)
----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2002 8,130,000 $ 8,130 $ 531,435 $(338,940) $ (112,434) $ 88,191
Stock issued for cash at $0.25 $0.50 per share
in April 2003 130,000 130 39,870 - - 40,000
Recapitalization to effect the acquisition
of iRV, Inc. 1,446,299 1,446 (1,446) - - -
Acquisition of MarketEdgeDirect - - - 337,500 - 337,500
Proceeds of share subscriptions 1,440 1,440
Return of stocks in connection of
disposal of MarketEdgeDirect (540,000) (540) (358,042) - - (358,582)
Proceeds of 96,000 share subscriptions
at $0.40 to $0.50 per share 40,500 40,500
241,020 Shares allotted for services
rendered at $0.10 to $0.40 per share 33,306 - 33,306
Net (loss) for the period - - - - (396,277) (396,277)
----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2003 9,166,299 $ 9,166 $ 245,123 $ 40,500 $ (508,711) $ (213,922)
==================================================================================================================================
The accompanying notes are an integral part of these financial statements.
SCARAB SYSTEMS, INC.
(A development stage enterprise)
Statements of Stockholders' Deficit
For the period from October 8, 2001 (inception) to March 31, 2004
(Expressed in US Dollars)
==================================================================================================================================
Deficit
Share accumulated
Common stock Additional subscription during Total
--------- --------- Paid-in received/ development shareholders'
Shares Amount capital (receivable) stage deficit
----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2003 9,166,299 $ 9,166 $ 245,123 $ 40,500 $ (508,711) $ (213,922)
Stocks issued for services rendered and
recorded in fiscal year 2003 241,020 241 (241) - - -
Stocks issued at $0.40 to $0.50 per share
in fiscal year 2003 96,000 96 40,404 (40,500) - -
Stocks issued for conversion of debt
at $0.10 per share in February 2004 510,000 510 50,490 - - 51,000
Stocks issued for cash at $0.10 per share
in February and March 2004 1,200,000 1,200 118,800 - 120,000
Stocks issued for exercise of stock options
at $0.10 per share in February and March 2004 960,000 960 95,040 - - 96,000
Issuance of stock options as compensation - - 195,740 - - 195,740
Forgiveness of debt - related party - - 110,527 - - 110,527
Net (loss) for the period - - - - (374,606) (374,606)
----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2004 12,173,319 $ 12,173 $ 855,883 $ - $ (883,317) $ (15,261)
==================================================================================================================================
The accompanying notes are an integral part of these financial statements.
SCARAB SYSTEMS, INC.
(A development stage enterprise)
Statements of Operations
(Expressed in U.S. Dollars)
==========================================================================================
Cumulative Year Year
October 8, 2001 Ended Ended
(inception) to March 31, March 31,
March 31, 2004 2004 2003
General and administrative expenses
Consulting $ 400,620 $ 169,059 $ 170,469
Interest expense on long term debt 16,569 8,948 7,621
Legal and accounting 55,478 14,924 20,181
Office and Miscellaneous 60,513 21,501 30,756
Professional fees 65,780 - 65,780
Rent 43,383 - 29,485
Stock based compensation 195,740 195,740 -
Telephone 16,594 232 15,252
Travel 16,453 1,247 7,501
------------------------------------------------------------------------------------------
Operating (loss) (871,130) (411,651) (347,045)
Other income (expense)
Gain on settlement of debt 37,045 37,045 -
Write-off of goodwill (70,114) - (70,114)
Write-off of Smart-e-Card
Distribution Rights (200) - (200)
------------------------------------------------------------------------------------------
Loss from continued operations (904,399) (374,606) (417,359)
Net income from discontinued operations 21,082 - 21,082
------------------------------------------------------------------------------------------
Net loss for the period $ (883,317) $ (374,606) $ (396,277)
==========================================================================================
Basic and diluted earning (loss) per share,
Loss from continued operations $ (0.04) $ (0.05)
Net income from discontinued operations 0.00 0.00
------------------------------------------------------------------------------------------
Net (loss) for the year $ (0.04) $ (0.05)
==========================================================================================
Weighted average number of
common shares outstanding 9,481,502 8,802,948
==========================================================================================
The accompanying notes are an integral part of these financial statements.
SCARAB SYSTEMS, INC.
(A development stage enterprise)
Statements of Cash Flows
(Expressed in U.S. Dollars)
==========================================================================================
Cumulative Year Year
October 8, 2001 Ended Ended
(inception) to March 31, March 31,
March 31, 2004 2004 2003
Cash flows from (used in) operating activities
Net (loss) for the period $ (883,317) $ (374,606) $ (396,277)
Adjustment to reconcile net loss to
net cash used in operating activities:
- amortization 2,194 1,305 559
- stock based compensation 195,740 195,740 -
- foreign exchange (5,989) 2,688 -
- write-off of goodwill 70,114 - 70,114
- debt forgiven 103,140 103,140 -
- write-off of Smart-e-Card
Distribution Rights 200 - 200
- net income from the discontinued
operations (21,082) - (21,082)
- shares allotted for service rendered 33,306 - 33,306
Changes in non-cash working capital items:
- prepaid expenses and deposits - - 8,515
- accounts payable and accrued liabilities 35,269 (80,037) 116,877
------------------------------------------------------------------------------------------
Net cash used in operating activities (470,425) (151,770) (187,788)
------------------------------------------------------------------------------------------
Cash flows used in investing activities
Loan to Healthnet (Note 4) (62,684) - -
Acquisition of fixed assets (2,195) - -
------------------------------------------------------------------------------------------
Net cash used in investing activities (64,879) - -
------------------------------------------------------------------------------------------
Cash flows provided by financing activities
Proceeds from issuance of common stock 547,925 216,000 40,000
Proceeds from promissory notes - 7,500 90,921
Repayment of promissory notes - (59,109) -
Proceeds from share subscriptions - - 41,940
------------------------------------------------------------------------------------------
Net cash provided by financing activities 547,925 164,391 172,861
------------------------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents 12,621 12,621 (14,927)
------------------------------------------------------------------------------------------
Cash and cash equivalents,
beginning of period - - 14,927
------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 12,621 $ 12,621 $ -
==========================================================================================
Interest expenses paid $ 5,513 $ 3,801 $ 1,712
==========================================================================================
The accompanying notes are an integral part of these financial statements.
SCARAB SYSTEMS INC.
(A development stage enterprise)
Notes to Consolidated Financial Statements
March 31, 2004 and 2003
(Expressed in U.S. Dollars)
1. Incorporation and Continuance of Operations
Scarab Systems, Inc. (formerly called iRV, Inc.) was incorporated in
Colorado on August 1, 1999.
The financial statements presented are those of Scarab Nevada (see below).
The original Scarab Systems, Inc. ("Scarab Nevada") was incorporated on
October 8, 2001 under the laws of the State of Nevada. Scarab Nevada was a
development stage enterprise and was seeking business opportunities.
On March 25, 2002, iRV, Inc. ("iRV") entered into an Agreement and Plan of
Reorganization with Scarab Nevada, whereby iRV issued 8,260,000 share of
its common stock in exchange for all of the outstanding common stock of
Scarab Nevada. As part of the definitive agreement and plan of
reorganization, iRV transferred all its assets and liabilities to its
subsidiaries and then spun off the subsidiaries and iRV became a non-
operating shell company without any assets or liabilities. Immediately
prior to the Agreement and Plan of Reorganization, iRV had 1,446,299 shares
of common stock issued and outstanding. The acquisition was accounted for
as a recapitalization of Scarab Nevada because the shareholders of Scarab
Nevada controlled iRV after the acquisition. Scarab Nevada was treated as
the acquiring entity for accounting purposes and iRV was the surviving
entity for legal purposes. The issued and outstanding common stock of
Scarab Nevada prior to the completion of acquisition was restated to
reflect the 8,260,000 common stock issued by iRV.
Subsequent to the completion of the reorganization, Scarab Nevada
transferred all its assets and liabilities to iRV and Scarab Nevada ceased
to exist, and iRV changed its name to Scarab Systems, Inc. Accordingly, the
financial statements are the continuation of Scarab Nevada. The effective
date of the Agreement and Plan of Reorganization was July 17, 2002.
These financial statements have been prepared in accordance with generally
accepted accounting principles applicable to a going concern, which
contemplates the realization of assets and the satisfaction of liabilities
and commitments in the normal course of business. The Company has not
generated any revenue and requires additional funds to maintain its
operations. Management's plans in this regard are to raise equity financing
as required.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. These financial statements do not include any
adjustments that might result from this uncertainty.
The Company has not generated any material operating revenues to date.
On March 15, 2004, the Company abandoned its only subsidiary, Catalyst
Technologies, Inc.
In fiscal year 2004, the Company consolidated its common stock by issuing
one new share for ten old shares. The financial statements have been
restated to reflect the stock consolidation.
2. Significant Accounting Policies
a) Cash and Cash Equivalents
Cash equivalents comprise certain highly liquid instruments with a
maturity of three months or less when purchased. As at March 31, 2004
and 2003, cash and cash equivalents consist of cash only.
b) Accounting Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and assumptions.
SCARAB SYSTEMS INC.
(A development stage enterprise)
Notes to Consolidated Financial Statements
March 31, 2004 and 2003
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
c) Furniture
Furniture is recorded at cost. Depreciation is based on the estimated
useful lives of the assets and is computed using the declining balance
method as follows:
Furniture and fixtures 30%
d) Concentration of Credit Risk
The Company places its cash and cash equivalents with high credit
quality financial institutions. As of March 31, 2004 the Company had
no balance in a bank beyond insured limits.
e) Foreign Currency Transactions
The Company maintains its accounting records in U.S. Dollars, as
follows:
At the transaction date, each asset, liability, revenue and expense is
translated into U.S. dollars by the use of the exchange rate in effect
at that date. At the period end, monetary assets and liabilities are
remeasured by using the exchange rate in effect at that date. The
resulting foreign exchange gains and losses are included in
operations.
f) Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash
equivalents, accounts payable and accrued liabilities and promissory
notes. The carrying amount of accounts payable and accrued liabilities
approximates fair value due to the short-term nature of these items.
The promissory notes also approximate fair value based on evaluations
of market interest rates and short-term nature of the payable.
g) Income Taxes
The Company has adopted Statement of Financial Accounting Standards
(SFAS") No. 109, "Accounting for Income Taxes", which requires the
Company to recognize deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized
in the Company's financial statements or tax returns using the
liability method. Under this method, deferred tax liabilities and
assets are determined based on the temporary differences between the
financial statements and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are
expected to reverse.
h) Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income",
which requires inclusion of foreign currency translation adjustments,
reported separately in its Statement of Stockholders' Equity, in other
comprehensive income. The Company had no other comprehensive income
for the year ended March 31, 2004.
i) Advertising Expenses
The Company expenses advertising costs as incurred. There were no
advertising expenses incurred by the Company for the years ended March
31, 2004 and 2003.
SCARAB SYSTEMS INC.
(A development stage enterprise)
Notes to Consolidated Financial Statements
March 31, 2004 and 2003
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
j) Loss Per Share
Loss per share is computed using the weighted average number of shares
outstanding during the year. The Company has adopted SFAS No. 128,
"Earnings Per Share". Diluted loss per share is equivalent to basic
loss per share as the stock options to acquire common shares as
disclosed in the notes are anti-dilutive.
k) Stock-based Compensation
The Company has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-based Compensation", as amended by SFAS No.
148 "Accounting for Stock-based Compensation - Transition and
Disclosure - An amendment of SFAS No. 123". SFAS No. 123 encourages,
but does not require, companies to adopt a fair value based method for
determining expense related to stock-based compensation. The Company
accounts for stock-based compensation issued to employees and
directors using the intrinsic value method as prescribed under
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations.
The Company initiated a 2004 Non-Qualified Stock Option Plan. During
the year ended March 31, 2004, the Company granted 1,060,000 stock
options to non-employees.
l) Goodwill and Intangible Assets
Goodwill represents the excess of cost over fair value of assets of
business acquired. Goodwill and intangible assets acquired in a
business combination and determined to have an indefinite useful life
are not amortized, but instead are tested for impairment at lest
annually in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142. SFAS No. 142 also requires
that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets.
m) Accounting for Derivative Instruments and Hedging Activities
The Company has adopted Statement of Financial Accounting Standards
No. 133 (SFAS 133) Accounting for Derivative and Hedging Activities,
which requires companies to recognize all derivative contracts as
either assets or liabilities in the balance sheet and to measure them
at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge, the objective of which is to match
the timing of gain and loss recognition on the hedging derivative with
the recognition of (i) the changes in the fair value of the hedged
asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change.
The Company has not entered into derivative contracts either to hedge
existing risks or for speculative purposes.
SCARAB SYSTEMS INC.
(A development stage enterprise)
Notes to Consolidated Financial Statements
March 31, 2004 and 2003
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
n) Long-Lived Assets Impairment
Long-term assets of the Company are reviewed when changes in
circumstances require as to whether their carrying value has become
impaired, pursuant to guidance established in Statement of Financial
Accounting Standards No. 144 (SFAS 144), Accounting for the Impairment
or Disposal of Long-Lived Assets. Management considers assets to be
impaired if the carrying value exceeds the future projected cash flows
from the related operations (undiscounted and without interest
charges). If impairment is deemed to exist, the assets will be written
down to fair value.
o) New Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for
hedging activities under SFAS No. 133. This Statement is effective for
contracts entered into or modified after June 30, 2003. The adoption
of SFAS No. 149 does not have an impact on the Company's financial
statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity. This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). This Statement is
effective for financial instruments entered into or modified after May
30, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of SFAS No.
150 does not have an impact on the Company's financial statements.
In December 2003, the FASB Issued SFAS No. 132(R), a revision to SFAS
No. 132, Employer's Disclosure about Pensions and Other Postretirement
Benefits. SFAS No. 132(R) requires additional disclosure about assets,
obligations, cash flows and net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans,
SFAS No. 132(R) is effective for the financials statements with fiscal
years ending after December 15, 2003, with the exception of disclosure
requirements related to foreign plans and estimated future benefit
payments which are effective for the fiscal years ending after June
15, 2004. The adoption of SFAS No. 132(R) does not have an impact on
the Company's financial position or results of operations.
In December, 2003 the American Institute of certified Public Accounts
and the Securities and Exchange Commission ("SEC") expressed the
opinion that rate-lock commitments represent written put options, and
therefore be valued as a liability. The SEC expressed that they expect
registrants to disclose the effect on the financial statement of
recognizing the rate-lock commitments as written put options, for
quarters commencing after march 15, 2004, Additionally, the SEC
recently issued Staff Accounting Bulletin (SAB) No. 105. SAB No. 105
clarifies the SEC's position that the inclusion of cash flows from
servicing or ancillary income in the determination of the fair value
of interest rate lock commitments is not appropriate. The Company has
not yet determined the impact on the financial statements of SAB No.
105, which must be implemented for loan commitments entered into on or
after April 1, 2004. The Company is currently analyzing the impact of
the SEC's position and will, if required, account for its loan
origination commitments as prescribed.
SCARAB SYSTEMS INC.
(A development stage enterprise)
Notes to Consolidated Financial Statements
March 31, 2004 and 2003
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
o) New Accounting Pronouncements (continued)
In January 2003, the FASB released FASB Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities." FIN 46 requires
that all primary beneficiaries of variable interest entities
consolidate that entity. FIN 46 is effective immediately for variable
interest entities created after January 31, 2003 and to variable
interest entities in which an enterprise obtains an interest after
that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003 to variable interest entities in which
an enterprise holds a variable interest it acquired before February 1,
2003. In December 2003, the FASB published a revision to FIN 46 ("FIN
46R") to clarify some of the provisions of the interpretation and to
defer the effective date of implementation for certain entities. Under
the guidance of FIN 46R, entities that do not have interests in
structures that are commonly referred to as special purpose entities
are required to apply the provisions of the interpretation in
financial statements for periods ending after March 14, 2004. The
Company did not create a variable interest entity after January 31,
2003 and does not have a variable interest entity as of December 31,
2003. The Company expects that the full adoption of FIN 46R in 2004
will not have a material impact on the Company's financial position or
results of operations
3. Smart-e-Card Distribution Rights
In October, 2001, the Company entered into an agreement with BentleyTel USA
Inc. ("Bentley"), pursuant to which the Company was granted a perpetual
worldwide exclusive agency to Bentley's Smart-e-Cards. The Company issued
200,000 shares of its common stock at $0.001 each for the distribution
rights. In fiscal year 2003, the Company abandoned Smart-e-Card sales and
distribution operations and charged the cost to operations.
4. Business Acquisition
In fiscal year 2002, the Company loaned the sum of $62,684 to Healthnet
International, Inc. ("Healthnet"). The loan bore interest at 15% per annum
and was convertible into stocks in Healthnet at $0.50 per share (125,000
shares).
On March 28, 2003, Healthnet sold Catalyst Technologies, Inc. ("Catalyst")
to the Company in satisfaction of the related debt owing. Catalyst was
incorporated under the law of the Province of British Columbia, Canada, and
is in the business of providing e-commerce services to bricks and mortar
retailers. The acquisition was accounted for using the purchase method of
accounting and accordingly, the purchase price was allocated to the
tangible and intangible net assets acquired on the basis of their
respective fair values on the acquisition date.
The allocation of the purchase price was as follows:
----------------------------------------------------
Net liabilities acquired $ (7,430)
Consideration 62,684
----------------------------------------------------
Goodwill 70,114
Impairment of Goodwill (70,114)
----------------------------------------------------
Balance $ -
====================================================
In accordance with SFAS No. 142 and 144, the Company has written down the
goodwill arising from the acquisition of Catalyst to nil, being the
estimated fair value of the goodwill at year-end.
On March 15, 2004, the Company abandoned Catalyst. There was no effect on
the financials statements because the subsidiary had a nil carrying value.
SCARAB SYSTEMS INC.
(A development stage enterprise)
Notes to Consolidated Financial Statements
March 31, 2004 and 2003
(Expressed in U.S. Dollars)
5. Discontinued Operations
Effective August 7, 2002, in connection with the 675,000 shares
subscription receivable, the Company exercised its option to acquire all of
the outstanding shares of 485017 B.C. Ltd., a Canadian company involved in
marketing and advertising services. On March 28, 2003, the Company entered
into an agreement with the former shareholders of 485017 B.C. Ltd. to sell
485017 B.C. Ltd. to the former shareholder for the return of 540,000 shares
of the Company which were valued at the $358,582 (the original investment
of $337,500 plus net income of 485017 B.C. Ltd. totalling $21,082 from the
period of August 7, 2002 to March 28, 2003).
6. Promissory Notes
--------------------------------------------------------------------
2004 2003
--------------------------------------------------------------------
Promissory notes - related party $ - $ 41,361
Promissory notes - convertible
at $0.05 to $0.075 per share - 16,531
Promissory notes - unrelated party - 33,029
--------------------------------------------------------------------
Total - 90,921
Less: Long-term portion - (5,000)
--------------------------------------------------------------------
$ - $ 85,921
====================================================================
Promissory notes are unsecured and bearing interest at 0% to 20% per annum
and repayable on maturity.
7. Share Issuances
In fiscal year 2004, the Company received $120,000 for the issuance of
1,200,000 shares at $0.10 per share.
8. Stock Options
a) On February 10, 2004, the Company's Board of Directors adopted the
2004 Non-Qualified Stock Option Plan (the "Plan"). The aggregate
number of shares of common stock that may be granted by the Company
under the Plan will not exceed a maximum of 1,800,000 shares during
the period of the Plan. The Plan shall terminate upon the earlier of
February 10, 2014 or the issuance of all shares granted under the
Plan. The option prices per share are determined by the Board of
Directors when the stock option is granted.
b) During the year, the Company granted 1,060,000 stock options to
consultants. These options have vesting periods ranging from
immediately to over seven months, expiring two (2) years from date of
grant. The Company charged $195,740 stock-based compensation expense
to operations for the options granted to the consultants using the
Black-Scholes option pricing model with the following weighted average
assumptions:
* Dividend yield of 0%, volatibility of 159%, risk-free interest rate
of 2.75% and expended life of two (2) years. The weighted average
fair value of the stock option granted in 2004 fiscal year was
estimated at $0.19.
SCARAB SYSTEMS INC.
(A development stage enterprise)
Notes to Consolidated Financial Statements
March 31, 2004 and 2003
(Expressed in U.S. Dollars)
8. Stock Options (continued)
As at March 31, 2004, the Company had 100,000 stock options
outstanding under the Plan with a weighted average exercise price of
$0.10. The weighted average remaining contractual life of the options
outstanding is 1.89 years.
----------------------------------------------------------------------
Weighted
Weighted Average
Average Remaining
Stock Exercise Life
Options Price (yrs.)
Outstanding at April 1, 2003 and 2002 - $ - -
Granted 1,060,000 $ 0.10
Exercised (960,000) $ 0.10
----------------------------------------------------------------------
Outstanding at March 31, 2004 100,000 $ 0.10 1.89
Exercisable at March 31, 2004 25,000 $ 0.10 1.89
======================================================================
As required by SFAS 123, the Company will disclose pro-forma
information regarding its net income as if it has accounted for its
employee stock options granted under the fair value method. However,
the Company did not grant any stock options to officers, directors or
employees during the fiscal year 2004 and 2003 and as such, no pro
forma information has been provided.
9. Income Taxes
As at March 31, 2004, the Company has estimated tax losses carryforward for
tax purposes of $543,500. This amount may be applied against future federal
taxable income. The Company evaluates its valuation allowance requirements
on an annual basis based on projected future operations. When circumstances
change and this causes a change in management's judgement about the
realizability of deferred tax assets, the impact of the change on the
valuation allowance is generally reflected in current income.
The tax effects of temporary differences that give rise to the Company's
deferred tax asset (liability) are as follows:
------------------------------------------------
2004 2003
------------------------------------------------
Loss carry forwards $ 190,000 $ 182,000
Valuation allowance (190,000) (182,000)
------------------------------------------------
$ - $ -
================================================
SCARAB SYSTEMS INC.
(A development stage enterprise)
Notes to Consolidated Financial Statements
March 31, 2004 and 2003
(Expressed in U.S. Dollars)
10. Related Party Transactions
a) In fiscal year 2004, the Company accrued consulting fees of $59,413
(2003 - $84,516) to the directors and officers of the Company. In
fiscal year 2004, the related parties released the Company of $110,527
of accrued consulting fees and expenses and this was recorded as an
additional paid-in capital on the statement of stockholders'
deficiency.
b) Included in the accounts payable and promissory notes are $nil (2003 -
$50,600) and $nil (2003 - $41,361), respectively, payable to the
directors and officers of the Company.
c) On February 2, 2004, a $40,000 unsecured promissory note with an
officer of the Company, along with $11,000 in accrued interest, was
converted into 510,000 common shares of the Company at a price per
share of $0.10.
11. Non-cash Activities
a) In fiscal year 2004, the Company issued 510,000 common shares in
connection with the conversion of a $40,000 unsecured promissory note,
along with $11,000 of accrued interest, to a related party.
b) Pursuant to the grant of 1,060,000 stock options to consultants during
the fiscal year 2004, the Company recorded stock based compensation
charges of $195,740.
c) In fiscal year 2004, the amount totalling $110,527 owing to the
directors and officers of the Company was released.
12. Comparative Figure
Certain of the comparative figures have been reclassified to conform to the
current year's presentation.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We adopt by reference the disclosure made in item 4 and exhibit 16 of Form 8-K/A
filed by us with the Securities and Exchange Commission on August 9, 2002.
Except as already disclosed in this item, there were neither changes in
accountants nor disagreements of the type required to be reported under this
item between us and our independent accountants during the fiscal years ended
March 31, 2004 or 2003.
ITEM 8a. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Exchange Act, we have carried out an
evaluation of the effectiveness of the design and operation of our company's
disclosure controls and procedures as of the end of the period covered by this
annual report, being March 31, 2004. This evaluation was carried out under the
supervision and with the participation of our company's management, including
our company's president and chief executive officer. Based upon that evaluation,
our company's president and chief executive officer concluded that our company's
disclosure controls and procedures are effective. There have been no significant
changes in our company's internal controls or in other factors, which could
significantly affect internal controls subsequent to the date we carried out our
evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our company's
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our company's reports filed under the
Exchange Act is accumulated and communicated to management, including our
company's president and chief executive officer as appropriate, to allow timely
decisions regarding required disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The name, position with the Company, age of each Director and executive officer
of the Company is as follows:
Name Age Position Director/Officer Since
--------------- --- -------------------- ----------------------
Thomas E. Mills 36 Chief Executive 2002
Officer, President
Chief Financial
Officer, Secretary &
Director
Lou Hilford 59 Chief Operations 2002
Officer & Director
On March 2, 2004, John Allen resigned as Chief Financial Officer and Secretary.
Thomas E. Mills was appointed the Chief Financial Officer and Secretary.
Thomas E. Mills has served as our President, Chief Executive Officer and a
Director since 2002, Chief Financial Officer and Secretary since March 2004.
He was President of Scarab Systems, Inc. (Nevada), until it ceased to exist in
2002. From 2000 to 2001, Mr. Mills was in-house counsel for Healthnet
International, Inc. of Colorado. During Mr. Mills' tenure at Healthnet,
the company's common stock was quoted on the NASD over-the-counter bulletin
board under the trading symbol "HLNT". Previously, Mr. Mills was an associate
with McRae, Holmes & King, a firm of Barristers and Solicitors in Vancouver,
British Columbia. Mr. Mills received a Bachelor of Arts degree from the
University of Waterloo in 1992, and a Bachelor of Laws degree from the
University of British Columbia in 1996.
Lou Hilford has served as our Chief Operations Officer and a Director since
2002. For the five years previous, Mr. Hilford has been the President of Loudon
Consultants Incorporated, a privately held consulting firm, specializing in
casino, bingo and card room design and marketing, government lobbies, community
studies, horse racing, charity and First Nations gaming.
All directors serve for terms of one year each, and are subject to re-election
at our regular Annual Meeting of Shareholders, unless they earlier resign.
There are no material proceedings to which any of our directors, officers or
affiliates, any owner of record or beneficially of more than five percent of any
class of our voting securities, or any associate of any such director, officer,
affiliate, or security holder is a party adverse to us or any of our
subsidiaries or has a material interest adverse to us or any of our
subsidiaries.
We have attempted and will continue to continue to attempt to insure that any
transactions between us and our officers, directors, principal shareholders, or
other affiliates have been and will be on terms no less favorable to us than
could be obtained from unaffiliated third parties on an arm's-length basis.
Audit Committee
During the fiscal years ending March 31 2004 and 2003, we had an Audit Committee
comprised of the Board of Directors. The members of the Audit Committee for the
fiscal year ending in 2004 and 2003 were Thomas E. Mills and Lou Hilford. No
member of the Audit Committee receives any compensation for his service as a
member of that Committee. During the fiscal years ending in 2004 and 2003, the
Audit Committee held no formal meetings.
The Audit Committee is responsible for providing assurance that financial
disclosures made by us reasonably portray our financial condition, results of
operations, plan and long-term commitments. To accomplish this, the Audit
Committee oversees the external audit coverage, including the annual nomination
of the independent public accountants, reviews accounting policies and policy
decisions, reviews the financial statements, including interim financial
statements and annual financial statements, together with auditor's opinions,
inquires about the existence and substance of any significant accounting
accruals, reserves or estimates made by us, reviews with us the Management's
Discussion and Analysis section of the Annual Report, and reviews the letter of
Management Representations given to the independent public accountants.
Our Board of Directors has determined that it does not have a member of our
audit committee that qualifies as an "audit committee financial expert" as
defined in Item 401(e) of Regulation S-B, and is "independent" as the term is
used in Tem 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of
1934, as amended. We believe that retaining an independent director who would
qualify as an "audit committee financial expert" would be overly costly and
burdensome and is not warranted in our circumstances given the early stages of
our development and the fact that we have not generated revenues to date.
Compensation Committee
During the fiscal year ending in 2004 and 2003 the Compensation Committee
consisted of Thomas E. Mills and Lou Hilford. No member of the Compensation
Committee receives any additional compensation for his service as a member of
that Committee. During the fiscal years ending in 2004 and 2003, the
Compensation Committee held no meetings. The Compensation Committee is
responsible for reviewing pertinent data and making recommendations with respect
to compensation standards for the executive officers, including the President
and Chief Executive Officer, establishing guidelines and making recommendations
for the implementation of management incentive compensation plans, and reviewing
the performance of the President and Chief Executive Officer.
Involvement in Certain Legal Proceedings
Except as noted herein or below, during the last five-(5) years none of our
directors or officers have:
(1) had any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time;
(2) been convicted in a criminal proceeding or subject to a pending criminal
proceeding;
(3) been subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; or
(4) been found by a court of competent jurisdiction in a civil action, the
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment has not been
reversed, suspended, or vacated.
Indemnification and Limitation on Liability of Directors
The Company's Articles of Incorporation provide that the Company shall
indemnify, to the fullest extent permitted by Colorado law, any director,
officer, employee or agent of the corporation made or threatened to be made a
party to a proceeding, by reason of the former or present official of the
person, against judgments, penalties, fines, settlements and reasonable expenses
incurred by the person in connection with the proceeding if certain standards
are met. At present, there is no pending litigation or proceeding involving any
of our directors, officers, employees or agents where indemnification will be
required or permitted. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
Our Articles of Incorporation limit the liability of our directors to the
fullest extent permitted by the Colorado Corporation Code. Specifically, our
directors will not be personally liable for monetary damages for breach of
fiduciary duty as directors, except for (i) any breach of the duty of loyalty to
the Company or our stockholders, (ii) acts or omissions not in good faith or
that involved intentional misconduct or a knowing violation of law, (iii)
dividends or other distributions of corporate assets that are in contravention
of certain statutory or contractual restrictions, (iv) violations of certain
laws, or (v) any transaction from which the director derives an improper
personal benefit. Liability under federal securities law is not limited by the
Articles. Our executive officers will dedicate sufficient time to fulfill their
fiduciary obligations to our affairs. We have no retirement, pension or profit
sharing plans for our officers and directors.
Compliance with Section 16(a) of the Exchange Act
Under the Securities Laws of the United States, the Company's Directors, our
Executive (and certain other) Officers, and any persons holding more than ten
percent of the Company's common stock are required to report their ownership of
the Company's common stock and any changes in that ownership to the Securities
and Exchange Commission. Specific due dates for these reports have been
established and the Company is required to report in this report any failure to
file by these dates.
All of these filing requirements were satisfied by the Company's Officers,
Directors, and ten-percent holders.
In making these statements, we have relied on the written representation of our
Directors and Officers or copies of the reports that they have filed with the
Commission.
Code of Ethics
The Company has adopted a Code of Ethics for Senior Financial Officers that is
applicable to our principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions. A copy of our Code of Ethics for Senior Financial Officers is filed
as an exhibit to this annual report on Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
The following tables and discussion set forth information with respect to all
plan and non-plan compensation awarded to, earned by or paid to our Chief
Executive Officer ("CEO") for all services rendered in all capacities to us and
our subsidiaries for each of our last three completed fiscal years.
TABLE 1
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
(1) Other All
Name and Annual Restricted Other
Principal Compen- Stock Options LTIP Compen-
Position Year Salary Bonus sation(2) Awards /SARs Payouts sation
------------- ----- ------ ------ --------- ---------- -------- ------- -------
Thomas E. 2004 nil nil $19,804 nil nil nil nil
Mills, (3) 2003 nil nil $22,930 nil nil nil nil
President 2002 nil nil $25,830 nil nil nil nil
(1) No executive officer received greater than $100,000 in
salary during the fiscal years ended March 31, 2004 or
2003. Furthermore, no executive officer received
perquisites and other personal benefits, which, in the
aggregate, exceeded the lesser of either $50,000 or 10%
of the total of annual salary and bonus paid during the
respective fiscal years.
(2) The other annual compensation represents consulting
fees.
(3) In February 2004, Mr. Mills released the Company of all
debt resulting from the accrued consulting fees during
fiscal 2003 and 2004.
Employment Matters
In July 2002, we appointed Thomas E. Mills and Lou Hilford to the Board of
Directors. The members of our Directors do not receive any compensation for
their services as directors.
In July 2002, we appointed Thomas E. Mills as President and Chief Executive
Officer, Lou Hilford as Chief Operations Officer, and John Allen as Chief
Financial Officer. In March 2004, John Allen resigned as Chief Financial
officer and was replaced by Thomas E. Mills. These Officers provide their
services as independent contractors pursuant to consulting agreements entered
into with us. Each such agreement provides that the officer will receive $2,152
(CAD$3,000) per month to provide the services reasonably necessary for the
fulfillment of his position. In an effort to keep the costs of the Company to a
minimum, Mr. Mills, Mr. Hilford and Mr. Allen agreed that their respective
consulting agreements would terminate effective January 1, 2004. Management of
the Company has agreed to provide management services without compensation for
the immediate future.
2004 Non-Qualified Stock Option Plan
In February 2004, the Board of Directors authorized the 2004 Non-Qualified Stock
Option Plan (the "Plan) for our executive, employees and outside consultants and
advisors. Under the Plan, executives, employees and outside consultants and
advisors may receive awards of non-qualified stock options. A maximum of
1,800,000 shares of the Company's common stock are subject to the Plan. As of
the date of this Annual Report, 1,060,000 stock options have been granted to
consultants under the Plan to purchase 1,060,000 shares of the Company's common
stock. The purpose of the Plan is to provide executives, employees and non-
employee consultants and advisors with an increased incentive to make
contributions to the Company. As of March 31, 2004, there were 100,000 options
to purchase shares of our common stock outstanding.
The following table sets forth certain information concerning the granting of
incentive stock options during the last completed fiscal year to each of the
named executive officers and the terms of such options:
TABLE 2
Option/SAR Grants in the Last Fiscal Year
Individual Grants
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base Expiration
Name Granted (#) Fiscal Year Price ($/Share) Date
---------------- ----------- ------------- ---------------- ----------
Thomas E. Mills nil n/a n/a n/a
The following table sets forth certain information concerning the exercise of
incentive stock options during the last completed fiscal year by each of the
named executive officers and the fiscal year-end value of unexercised options on
an aggregated basis:
TABLE 3
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SAR Options/SARs
Shares Value at FY-End(#) at FY-End($)(2)
Acquired Realized(1) Exercisable/ Exercisable/
Name on Exercise(#) ($) Unexercisable Unexercisable
--------------- -------------- ----------- ------------- -----------------
Thomas E. Mills -0- -0- 0/0 0/0
(1) Value Realized is determined by calculating the difference
between the aggregate exercise price of the options and
the aggregate fair market value of the Common Stock on the
date the options are exercised.
(2) The value of unexercised options is determined by
calculating the difference between the fair market value
of the securities underlying the options at fiscal year
end and the exercise price of the options.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS
The following table sets forth, as of April 7, 2004 and as adjusted for the sale
of option and warrant stock, the stock ownership of (i) each person known by us
to be the beneficial owner of five (5%) percent or more of our Common Stock,
(ii) all Directors individually, (iii) all Executive Officers individually, and
(iv) all Directors and Executive Officers as a group. Each person has sole
voting and investment power with respect to the shares shown, except as noted.
Title Name & Address Shares Beneficially Owned (2)
of Class of Beneficial Owner Number Percent(1)
-------- --------------------------------------- ----------- ---------
Common Thomas E. Mills 710,000 5.8%
Stock 2708-939 Homer Street
Vancouver, British Columbia V6B 2W6
Common Lou Hilford 200,000 1.6%
Stock 7866 Vivian Drive
Vancouver, British Columbia V6S 2V9
Common All Executive Officers 910,000 7.4%
Stock and Directors
as a Group (2 Persons)
(1) Shares not outstanding but beneficially owned by virtue of the
individuals' right to acquire them as of the date of this Annual
Report or within sixty days of such date, are treated as
outstanding when determining the percent of the class owned by
such individual.
(2) Beneficial ownership is based on information provided to us, and
the beneficial owner has no obligation to inform us of or
otherwise report any changes in beneficial ownership indicated.
Equity Compensation Plan Information
Number of
securities
Number of Weighted- remaining
securities to average available for
be issued upon exercise price future issuance
Plan category exercise of of outstanding under equity
outstanding options, compensation
options, warrants and plans (excluding
warrants and rights securities
rights reflected in
column (a))
------------------ -------------- ------------- ---------------
(a) (b) (c)
Equity
compensation plans 0 N/A 0
approved by
security holders
Equity
compensation plans 100,000 $0.10 760,000
not approved by ------- ----- -------
security holders
Total 100,000 $0.10 760,000
------- ----- -------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than as disclosed below, there have been no transactions, or proposed
transactions, which have materially affected or will materially affect us in
which any director, executive officer or beneficial holder of more than 10% of
the outstanding common stock, or any of their respective relatives, spouses,
associates or affiliates, has had or will have any direct or material indirect
interest.
On March 15, 2003, the Company issued to our President, Thomas E. Mills, an
unsecured promissory note in the amount of $40,000 bearing interest at the rate
of twenty percent per year, that was due and payable on March 15, 2004. The note
was issued in respect of $40,000 advanced on behalf of the Company by Mr. Mills.
The Board of Directors convened to evaluate the fairness of the promissory note
without the benefit of advice from any third party or reference materials. It
was resolved by the Board of Directors (Mr. Mills abstaining) that the
promissory note was fair and further that the Company should issue the
promissory note to Mr. Mills. On February 2, 2004, the $40,000 unsecured
promissory note, along with $11,000 in accrued interest, was converted into
510,000 common shares of the Company at a price per share of $0.10.
Over the year ended March 31, 2004, our company incurred consulting fees in the
amount of $59,413. The consulting fees were charged by Thomas E. Mills, Lou
Hilford and John Allen, directors and officers of our Company. During February
2004, all of the aforementioned consulting fees were forfeited by the respective
individuals for the purpose of improving the Company's working capital position.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Title
No.
3.1 Restated Articles of Incorporation, Scarab Systems,
Inc., incorporated by reference from the Form 10-
KSB/A filed February 11, 2004.
3.2 Bylaws, Scarab Systems, Inc., incorporated by
reference from the Form 10-KSB/A filed February 11,
2004.
4.1* Form of Stock certificate.
10.1 Scarab Systems, Inc. 2004 Non-Qualified Stock
Option Plan, incorporated by reference from the
Form S-8 filed February 19, 2004.
14* Code of Ethics for Senior Financial Officers.
23.1* Consent of Certifying Accountants.
31.1* Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 17CFR 240.13a-14(a) or
17CFR 240.15d-14(a).
32.1* Certifications pursuant to 18 U.S.C. Section 1350.
* filed herewith
(b) Reports on Form 8-K
On April 8, 2003, we filed a current report on Form 8-K advising of a change of
name of the Registrant, the appointment of a director, a non-material business
combination and the termination of a non-material business combination.
On July 8, 2003, we filed a current report on Form 8-K advising under Item 5
that it was withdrawing a Form 15 filed June 30, 2003.
On July 31, 2003, we filed a current report on Form 8-K advising of the
resignation of a director.
On February 2, 2004, we filed a report on Form 8-K advising of the conversion of
a promissory note to common stock and the undertaking of a $120,000 private
placement.
On March 4, 2004, we filed a report on Form 8-K advising of the completion of a
$120,000 private placement and the resignation on an officer.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
Our board of directors had appointed Moore Stephens Ellis Foster Ltd. as
independent auditors to audit our financial statements for the current fiscal
year. The aggregate fees billed by Moore Stephens Ellis Foster Ltd. for
professional services rendered for the audit of our annual financial statements
included in this Annual Report on Form 10-KSB for the fiscal years ended March
31, 2004 and March 31, 2003 were $12,000 and $6,000, respectively.
Audit Related Fees
For the fiscal years ended March 31, 2004 and March 31, 2003, the aggregate fees
billed for assurance and related services by Moore Stephens Ellis Foster Ltd.
relating to our quarterly financial statements which are not reported under the
caption "Audit Fees" above, were nil, respectively.
Tax Fees
For the fiscal years ended March 31, 2004 and March 31, 2004, the aggregate fees
billed for tax compliance, by Moore Stephens Ellis Foster Ltd. were nil,
respectively.
All Other Fees
For the fiscal years ended March 31, 2004 and March 31, 2003, the aggregate fees
billed by Moore Stephens Ellis Foster Ltd. for other non-audit professional
services, other than those services listed above, totaled nil, respectively.
Effective May 6, 2003, the Securities and Exchange Commission adopted rules that
require that before Moore Stephens Ellis Foster Ltd. is engaged by us or our
subsidiaries to render any auditing or permitted non-audit related service, the
engagement be:
- approved by our audit committee; or
- entered into pursuant to pre-approval policies and procedures established
by the audit committee, provided the policies and procedures are detailed as
to the particular service, the audit committee is informed of each service,
and such policies and procedures do not include delegation of the audit
committee's responsibilities to management.
The audit committee pre-approves all services provided by our independent
auditors. The pre-approval process has just been implemented in response to the
new rules. Therefore, the audit committee does not have records of what
percentage of the above fees were pre-approved. However, all of the above
services and fees were reviewed and approved by the audit committee either
before or after the respective services were rendered.
The audit committee has considered the nature and amount of the fees billed by
Moore Stephens Ellis Foster Ltd., and believes that the provision of the
services for activities unrelated to the audit is compatible with maintaining
Moore Stephens Ellis Foster Ltd. independence.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
duly caused this annual report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SCARAB SYSTEMS, INC.
Date: April 28, 2004 By:/s/ Thomas E. Mills
Thomas E. Mills, Chief Executive, Chief
Financial Officer, President & Secretary
In accordance with the Securities Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
TITLE DATE
SIGNATURE
/s/ Thomas E. Mills Chief Executive, Chief April 28, 2004
Thomas E. Mills Financial Officer,
President, Secretary &
Director
/s/ Lou Hilford Chief Operations Officer & April 28, 2004
Lou Hilford Director