10KSB 1 d_k108.txt ANNUAL REPORT, 8-31-2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [xx] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended August 31, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [not applicable] Commission File Number: 0-28259 Destiny Media Technologies Inc. -------------------------------- (Exact name of Small Business Issuer as specified in its charter) Colorado 84-1516745 -------- ---------- (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 555 West Hastings Street, Suite 950, Vancouver, British Columbia Canada V6B 4N4 ------------------------------------------------------------------------------- (Address of Principal Executive Offices) Registrant's telephone number, including area code: (604) 609-7736 Securities to be registered pursuant to Section 12(b) of the Act: ----------------------------------------------------------------- None Securities to be registered pursuant to Section 12(g) of the Act: ----------------------------------------------------------------- Common Stock $0.001 par value. ------------------------------ (Title of Class) Page 1 of 64 Index to Exhibits on Page 33 Destiny Media Technologies Inc. Form 10-KSB TABLE OF CONTENTS PART I Page Item 1. Description of Business............................. 3 Item 2. Management's Discussion and Analysis or Plan of Operation........................................... 16 Item 3. Description of Property............................. 20 Item 4. Security Ownership of Certain Beneficial Owners And Management.................................... . 20 Item 5. Directors, Executive Officers, Promoters And Control Persons................................. 22 Item 6. Executive Compensation.............................. 26 Item 7. Certain Relationships and Related Transactions...... 28 Item 8. Description of Securities........................... 28 PART II Item 1. Market Price Of/And Dividends on the Registrant's Common Equity and Related Stockholder Matters....... 30 Item 2. Legal Proceedings................................... 30 Item 3. Changes in and Disagreements with Accountants...... 31 Item 4. Recent Sales of Unregistered Securities........... . 31 Item 5. Indemnification of Directors and Officers......... . 31 PART F/S Item 1. Consolidated Financial Statements................... 31 PART III Item 1. Index to Exhibits 33 Item 2. Description of Exhibits 2 PART I ITEM 1. DESCRIPTION OF BUSINESS -------------------------------- Introduction ------------ Destiny Media Technologies Inc. (hereinafter is also referred to as the "Company" and/or the "Registrant") is a software developer and a sales and marketing company. The Company was incorporated in August 1998 in the state of Colorado under the name Euro Industries Ltd. The Company was originally involved in the acquisition and exploration of mining properties; however in July of 1999 with the start of the process involving the Company's acquisition of Destiny Software Productions Inc. and the introduction of a new management team, the Company became active in the software industry and ceased all of its work in the mining industry. On October 20, 1999 the Company completed the process of acquiring Destiny Software Productions Inc.("Destiny Software"). Destiny Software is a Western Canadian based software development company specializing in streaming media and media distribution products. Destiny Software has created its own proprietary compression format and technologies. Destiny's suite of streaming and downloadable products includes: MPE(TM) (http://www.destinympe.com), a complete, secure media distribution system that provides e-commerce and digital rights management directly from within an MP3-compatible multimedia file; Clipstream(TM) (http://www.clipstream.com), a java-based tool which enables web pages, e-mail and banners to stream audio without the use of a player; Video Clipstream(TM) (http://www.videoclipstream.com), a technology for embedding streaming video into a web page or e-mail; and the RadioDestiny Broadcaster(TM) (http://www.radiodestiny.com), which allows a user to webcast live or scripted internet radio from a computer to anyone on the Internet. All four products are currently being sold in the market place. Destiny has entered into a provisional agreement to sell the Clipstream(TM)business and assets to a private company, Clipstream Technologies, Inc. ("CTI). The Clipstream business and assets are being transferred from Destiny to CTI pursuant to an agreement (the "Technology Transfer Agreement" or "TTA") made as of September 13, 2001. CTI has agreed to acquire all of the Clipstream assets from Destiny for C$5,700,000, payable by issuance of 22,800,000 CTI Shares to Destiny at the deemed price of CDN$0.25 each. Destiny's 3 obligation to complete the sale of the Clipstream assets is subject to CTI obtaining financing of at least C$750,000 to fund the expanded marketing program referred to above. CTI intends to complete a business combination with a Capital Pool Corporation ("CPC") listed in the Canadian Venture Exchange ("CDNX") The financing condition is expected to be fulfilled by a C$750,000 - C$1,500,000 financing intended to be carried out by the CPC, described below, since the proceeds from that financing will be available to CTI upon completion of the transaction. The owners of CTI at the time of closing will be Destiny Software Productions Inc. a wholly owned subsidiary of Destiny and Alfred Sanderson, both of Vancouver, British Columbia. All Clipstream assets and operations are located in Vancouver. Under the TTA, Destiny will transfer the Clipstream technology to CTI and assign its rights to all contracts respecting the Clipstream technology, to CTI upon completion of the minimum financing referred to above. As a result, CTI will be entitled to receive all future license fees and other payments under those contracts, as well as all payments under any new contracts. CTI will also have non-exclusive marketing rights for new and existing products of Destiny and will be actively seeking other technology products to market through its sales channels. Under an Office Services Agreement with Destiny, CTI will for one year after closing receive the use of Destiny office space, facilities and equipment for a flat fee of C$4,500 per month, including taxes and utilities, and will receive marketing and sales services for the Clipstream product line, as well as office services, including administrative, secretarial, bookkeeping, billing, collection and systems administration and management services, for an additional C$45,000 per month. Under a Product Development Agreement with Destiny, CTI will for one year after closing receive product maintenance and development services, including ongoing development of the Clipstream technology to add new functions and features, and website maintenance and technical support, for an additional C$62,500 per month. These costs are expected by CTI to be easily covered by revenues from Clipstream licensing arrangements, and the revenues being generated at this time would cover such costs. It is expected that upon completion of the transaction, the Company will be listed as a Tier 2 Technology Issuer on CDNX. Destiny is developing enhancements to the MPE media distribution technology to support digital file formats other than music. The company believes there is significant opportunity in distributing video and software content. 4 The latest version of the RadioDestiny (TM) network supports playerless access to the live radio streams. This product is currently in Beta release. The Company's principal office is located at 555 West Hastings Street, Vancouver, British Columbia V6B 4N4. The contact person is Mr. Steve Vestergaard, President and Director. The telephone number is (604) 609-7736; the facsimile number is (604) 609-0611. The Company currently maintains four websites, which are radiodestiny.com; dsny.com; destinympe.com; and, clipstream.com. The Company's authorized capital includes 100,000,000 shares of common stock with $0.001 par value. On December 30, 1999 the Registrant announced that the Board of Directors had approved a three for one stock split. The split was affected in the form of a 200% stock dividend to the shareholders of record on December 30, 1999. The additional shares were to be distributed by Computershare Investor Services (formerly American Securities Transfer and Trust Inc.), the Registrant's transfer agent. Shareholders were required to exchange their existing shares as instructed by Computershare. The impact of the split was to increase the outstanding shares of the Registrant from 7,167,000 as of December 30, 1999 to 21,501,000. All reference to share data in this document refers to post split data. As of the close of the Company's latest fiscal year, August 31, 2001, there were 27,177,358 shares of common stock outstanding. The Company's common stock trades on the OTC Bulletin board under the symbol "DSNY". The information in this Registration Statement is current as of November 23, 2001 unless otherwise indicated. Historical Corporate Development -------------------------------- The Company was incorporated in the state of Colorado on August 24, 1998 under the name Euro Industries Ltd. On October 12, 1999 the name of the Company was changed to Destiny Media Technologies Inc. By March 1999, the Company sold 5,950,000 pre-split (17,850,000 post-split) common shares for an aggregate purchase price of $59,500. Each share was issued at $0.01 per share. The shares were purchased by thirty-one individuals all of who were unrelated parties. The shares of common stock in the foregoing offering, were offered pursuant to an exemption to registration provided under Section 3(b), Regulation D, Rule 504 of the Securities Act of 5 1933, as amended and under the exemption to registration under Section 11-51-308(1)(p) of the Colorado Securities Act. The shares of the Company began trading on the National Quotation Bureau's "Pink Sheets" on June 17, 1999. On June 16, 1999, the Company entered into an agreement to purchase control of Destiny Software Productions Ltd., a company 100% owned by Steve Vestergaard who subsequently became the president of the Registrant. At the time of this transaction, Mr. Vestergaard owned 3.6 million shares of the Registrant. The 3.6 million shares represented 20% of the Registrant's outstanding shares. Mr. Vestergaard acquired all of these shares from unrelated parties for cash consideration of $1,200. The detail of these purchases is as follows: Certificate # Name Number of Shares 131 Lorraine Zaiser 900,000 shares (post split) 102 Elefterras Aligizakis 1,050,000 shares (post split) 129 Hilary Wipf 750,000 shares (post split) 117 Patricia Parente 600,000 shares (post split) 113 George Paikos 300,000 shares (post split) Since that time the business of the Company has centered on Destiny Software. The purchase price of Destiny Software was 600,000 pre-split (1,800,000 post-split) common shares of the Company. (These shares were restricted and each certificate includes the following legend: "The shares represented by this Certificate have not been registered under the Securities Act of 1933 ("the Act") and are "restricted securities" as that term is defined in Rule 144 under the Act. The shares may not be offered for sale, sold or otherwise transferred except pursuant to the effective registration statement under the Act, or pursuant to an exemption from registration under the Act, the availability of which is to be established to the satisfaction of the Company.") This transaction was finalized on October 20, 1999 when the shares were physically issued to the owners of Destiny Software. The contract of sale required that the Company had to raise Cdn$1.1 million of which Cdn$1 million would be used for development of the Destiny Software products. The contract of sale further stipulated that a minimum amount of Cdn. $250,000 had to be raised by September 16, 1999 and this was accomplished by a loan from Jade & Co., a shareholder of the Company. On June 16, 1999 the Company entered into a private placement whereby it sold 1,851,000 shares of its common stock at prices between $0.40 and $0.48 per common share (post split). The net proceeds of this private placement were as follows: 6 I. 1,490,724 common shares issued on retirement of debt of $594,236 II. 112,791 common shares issued for services rendered valued at $54,690 III. 247,485 common shares issued for net cash proceeds of $79,999 This offering officially closed on November 9, 1999. In early 1999, Mr. Vestergaard and Mr. Kolic, an unrelated party and the owner of a company called Wonderfall Productions Inc.("Wonderfall"), were introduced to each other at an industry/investor forum. This meeting subsequently led to the acquisition by Destiny Software of Wonderfall in June 1999. Total compensation for this acquisition was $20,000, which was paid by a promissory note. Mr. Ed Kolic was subsequently appointed as the Secretary and Chief Operating Officer of the Registrant. Wonderfall had a history in computer games production and marketing. Wonderfall had two games, at the time of the sale, that had not been commercially released and the rationale for the acquisition by Destiny Software of Wonderfall was so that it could exploit the potential of these games and gain access to Mr. Kolic's marketing skills. The Company completed a private placement on April 25, 2000 whereby it sold 1,000,000 units. Each unit consisted of one common share and one warrant exercisable for a period of six months from the closing of the private placement. Each unit sold for $1.00 and the warrants gave the holder the right to purchase one additional share of common stock for $3.00. This offering was made under Regulation S to offshore investors. The stock is restricted for a period of one year and is then subject to Rule 144. The Company completed a private placement on November 14, 2000 whereby it sold 2,150,000 common shares for $0.10 per common share. This offering was made under Regulation S to offshore investors. The stock is restricted for a period of one year and is then subject to Rule 144. The Company's strategy this year has been to build reseller sales channels. Destiny announced an agreement for a Japanese agent on January 4, 2001 and exclusive distribution in the UK on January 9, 2001. The Japanese agent, Mr. Kumagai, was added as a 7 director on July 16th, 2001. Mr. Kumagai, previously CEO at Vivitar Corporation has successfully established resellers in Sendai and Tokyo Japan. On January 11th, 2001 Destiny announced the addition of David Lawrence as CEO. Mr. Lawrence's previous experience was as co-founder of Reading's Fun, Ltd., which he built into a $200 million in annual revenues company. On May 22nd, 2001, the Company announced the opening of an office in Silicon Valley. As part of the move to become a sales and marketing company, Destiny has sold licenses to a number of key accounts, including the Weather Channel, Mt. Sinai School of Education and Lions Gate Films. 8 BUSINESS -------- Media Internet Applications Company Background including Destiny Software --------------------------------------------- Steve Vestergaard who was subsequently appointed as the president of the Registrant formed Destiny Software as a private partnership in January 1991. The private company was sold to Destiny Software Productions, Inc. in 1992. From 1992 until 1995, Destiny Software was involved solely in the development and sale of computer games. In 1992, Destiny Software developed a game called "Creepers" which was published by a subsidiary of Sony Corporation called Psygnosis. Also, in 1992 Destiny Software developed a game called "Solitaire's Journey" which was published by Quantum Quality Productions. In 1993, Destiny Software developed two games, called "Lucky's Casino Adventure" and "Origamo" which were also published by Quantum Quality Productions. Two other games developed in 1993 were "Time Out Sports Baseball" and "Time Out Sports Basketball" which were published by Microleague. In 1994, a game called "Blood Bowl" was developed by Destiny Software and published by Microleague. Three games were developed in 1995. "Dark Seed II" for Windows and "Dark Seed II" for Macintosh were both published by Cyberdreams, "MGM" and "Jam" was a Windows shareware product. In December of 1995, Destiny's first Internet radio prototype was started and this product was then released in April of 1996. The Company owns a proprietary media compression format known as ".dny" ("dny" is an intellectual property which was developed in-house with no third party involvement). The property is in the form of a trade secret, and can be patented and trademarked. At the present time there have been no patents or trademarks taken out for the "dny" intellectual property. This format is used to deliver real time streaming media, such as Internet radio, on an on-demand basis. The ".dny" technology was developed by the Company because Internet radio requires massive compression levels and data packets are not reliably transmitted across the Internet. The Company's media compression technology recursively compresses an audio stream to any target compression ratio and, at the same time, interleaves and buffers data packets and estimates missing audio information. All three Destiny Products (MPE (TM), RadioDestiny (TM) and Clipstream (TM)) are commercially available. In addition, Destiny released Clipstream (TM) Audiomail, which enables users to create playerless 9 streaming emails from a telephone. The company has also developed a prototype playerless live video streaming product. Product Descriptions -------------------- Products, which are complete, are available for download from the Destiny websites at www.dsny.com. Clipstream(TM) The Clipstream (TM) product family consists of Audio Clipstream (TM), Video Clipstream (TM) and Clipstream Audiomail (TM). These Java based technologies allow access to streaming audio and streaming video without requiring the user to download a player. Whereas player based solutions have a market penetration of less than 40%, Clipstream can reach over 94% of browsers. Because it caches, Clipstream offers a 90% cost savings over player based streaming solutions. It is standards based, so it passes through firewalls. Because there is no player, the cost of ownership is much lower for corporations. Unlike player- based solutions, Clipstream (TM) can be embedded in an email. This creates great opportunities for rich media marketing and movie previews. Destiny Media Player(TM) The Destiny Media Player(TM) is a combination MP3/Music player and radio receiver. The Destiny Media Player(TM) will receive two separate formats: live or automated broadcasts from the Destiny Station broadcaster and Audio-on-Demand which will stream from a standard HTTP server. In Radio mode a user can listen to radio broadcasts from any of stations on the RadioDestiny Broadcast Network(TM). Incorporated into the player are features such as a live directory of stations with direct email and weblink to these broadcasters. In Mp3 mode a user can play MP3 files directly from the player's instant library. The player automatically scans the users hard drive for existing music files and creates an Mp3 library. Another feature is the list of MP3 websites allowing a user to easily click a link to access MP3 sources. The Player also supports playback of streaming Mp3's, .wav and midi files, as well as music CD's. The Destiny Media Player(TM) is a small, yet powerful, application and 10 can be downloaded and installed within two minutes. It will be distributed free from the Destiny web site, partner sites and via OEM agreements with computer and sound card manufacturers. RadioDestiny Broadcaster(TM) In live mode, the user simply puts their audio signal into the input of their sound card, configures the options and clicks 'start broadcast'. Their station is automatically added to the directory of stations at the Destiny portal. It is extremely easy to use. In script mode, the user prerecords a set of audio files, and then specifies a schedule for play back. A broadcaster could spend a couple of hours setting up the schedule for the week, then the automated DJ could play back the content 24 hours per day, 7 days per week. The DestinyBroadcaster will also allow the input of metadata, which are digital files such as album cover graphics, lyrics and other artist information that is of interest to music fans. This metadata then streams out simultaneously with music files to the Destiny Media Player allowing the listener to view this information as they are listening to the songs. This technology is unique to Destiny with no current competition. MPE (TM) MPE (TM) is a digital rights management system. It allows viral super distribution of digital files via peer-to-peer systems such as Napster while ensuring that the originating artist gets paid. Currently, MPE will self-extract music files. Destiny is modifying this core technology so that it can be used to distribute playing cards, software, videos and research reports. Competition The market for software and services for the Internet and intranets is relatively new, constantly changing and intensely competitive. As streaming media evolves into a central and necessary component of the Internet experience, more companies are entering the market for, and expending ever-greater resources 11 to develop, streaming media software and services, and competition is thus intensifying. Many of the Company's current and potential competitors have longer operating histories, greater name recognition, larger overall installed bases, more employees and significantly greater financial, technical, marketing, public relations and distribution resources than the Company. The Company's two principal competitors in the development and distribution of streaming media technology are RealNetworks and Microsoft Corporation. Both Microsoft's and RealNetworks' commitment to and presence in the streaming media industry has significantly increased and will continue to increase competitive pressure in the overall market for streaming media software. This could lead to increase pricing pressure, which may result in price reductions in the Company's products. In addition to Microsoft and RealNetworks the Company faces increased competition from other companies that are developing and marketing streaming media product offerings. As more companies enter the market with products and services that compete with the Company's players and tools, the competitive landscape could change significantly to the detriment of the Company. The Company competes for user traffic and Internet advertising revenues with a wide variety of Web sites, ISP's and especially audio, video and other media aggregators, such as Broadcast.com and Microsoft's Web Events. While Internet advertising revenues across the industry continue to grow, the number of Web sites competing for such revenue is also growing rapidly. The Company's advertising sales force and infrastructure are still in early stages of development relative to its competitors. There can be no assurance that advertisers will place advertising with the Company or that revenues derived from such advertising will be material. In addition, if the Company fails to attract new customers or is forced to reduce proposed advertising rates the Company's business, financial condition and results of operations may be materially adversely affected. Competitive factors in the streaming media market include the quality and reliability of software; features for creating, editing and adapting content; ease of use and interactive user features; scalability and cost per user; pricing and licensing terms; the emergence of new and better formats; and, compatibility with the user's existing network components and software systems. To expand its user base and further enhance the user experience, the Company must continue to innovate and improve the performance of its products. The Company anticipates that consolidation will continue in the streaming media industry 12 and related industries such as computer software, media and communications. Consequently, competitors may be acquired by, receive investments from or enter into other commercial relationships with, larger, well-established and well-financed companies. There can be no assurance that the Company can establish or sustain a leadership position in this market segment. The Company is committed to working toward market penetration of its brand, products and services, which, as a strategic response to changes in the competitive environment, may require pricing, licensing, service or marketing changes intended to extend its current brand and technology franchise. Price concessions or the emergence of other pricing or distribution strategies by competitors may have a material adverse effect on the Company's business, financial condition and results of operations. Government Regulation and Legal Uncertainties The Company is not currently subject to direct regulation by any governmental agency other than laws and regulations generally applicable to businesses. It is possible that a number of laws and regulations may be adopted in both the United States and Canada with particular applicability to the Internet. Governments have and may continue to enact legislation applicable to the Company in areas such as content distribution, performance and copying, other copyright issues, network security, encryption, the use of key escrow data, privacy protection, caching of content by server products, electronic authentication or "digital" signatures, illegal or obscene content, access charges and retransmission activities. The applicability to the Internet of existing laws governing issues such as property ownership, content, taxation, defamation and personal privacy is also uncertain. Export or import restrictions, new legislation or regulation or governmental enforcement of existing regulations may limit the growth of the Internet, increase the Company's cost of doing business or increase its legal exposure. Risk Factors Dependence On Key Personnel: The Company's success is dependent, to a large degree, upon the efforts of its current executive officers. The loss or unavailability of any such person could have an adverse effect on the Company. At the present time the Company does not maintain key man life insurance policies for any of these individuals. Also, the continued success and viability of the Company is dependent upon its ability to attract and retain qualified personnel in all areas of its business, especially management positions. In the event the Company is unable to attract and 13 retain qualified personnel, its business may be adversely affected. There are currently only employment agreements in place. Management is, however, currently negotiating agreements with the remaining executive officers of the Company. Limited Operating History: The Company has a limited operating history upon which to base an evaluation of its business and prospects. Operating results for future periods are subject to numerous uncertainties, and there can be no assurance that the Company will achieve or sustain profitability on an annual or quarterly basis. The Company's prospects must be considered in light of the risks encountered by companies in the early stage of development, particularly companies in new and rapidly evolving markets. Future operating results will depend upon many factors, including the demand for the Company's software products, the level of product and price competition, the Company's success in attracting and retaining motivated and qualified personnel, and in particular, the growth of activity on the Internet World Wide Web as it relates to the internet broadcast industry. History of Net Losses: The Company has had net losses since its inception on August 24, 1998. In the Period August 24, 1998 (date of inception) to August 31, 2001 the Company had a net loss of $3,197,098. There can be no assurance that this trend will not continue. The Auditors Report on the consolidated financial statements for the year ended August 31, 2001 includes an additional explanatory paragraph which states that as the Company has incurred recurring losses from operations and has a working capital deficiency that raises substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Possible Dilution to Present and Prospective Shareholders: The Company's plan of operation, in part, contemplates the accomplishment of business negotiations by the issuance of cash, securities of the Company, or a combination of the two, and possibly, incurring debt. Any transaction involving the issuance of previously authorized but unissued shares of common stock, or securities convertible into common stock, would result in dilution, possibly substantial, to present and prospective holders of common stock. 14 Risks of Product Defects and Product Liability: As a result of their complexity, software products may contain undetected errors or failures when first introduced or as new versions are released. There can be no assurance that, despite testing by the Company and testing and use by current and potential customers, errors will not be found in new products after commencement of commercial shipments. The occurrence of such errors could result in loss of or delay in market acceptance of the Company's products, which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's product also may be vulnerable to break-ins and similar disruptive problems caused by Internet or other users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through the computer systems of the Company's customers, which may result in significant liability to the Company and deter potential customers. The sale and support of the Company's products may entail the risk of liability claims. A product liability claim brought against the Company could have a material adverse effect on the Company's business, financial condition and results of operations. The Ability to Manage Growth: Should the Company be successful in the sales and marketing efforts of its software products it will experience significant growth in operations. If this occurs, management anticipates that additional expansion will be required in order to continue its product development. Any expansion of the Company's business would place further demands on its management, operational capacity and financial resources. The Company anticipates that it will need to recruit qualified personnel in all areas of its operations, including management, sales, marketing, delivery, and software development. There can be no assurance that the Company will be effective in attracting and retaining additional qualified personnel, expanding its operational capacity or otherwise managing growth. In addition, there can be no assurance that the Company's current systems, procedures or controls will be adequate to support any expansion of it's operations. The failure to manage growth effectively could have a material adverse effect on the Company's business, financial condition and results of operations. Risk of System Failure and/or Security Risks: Despite the implementation of security measures, the core of the Company's network infrastructure could be vulnerable to unforeseen computer problems. Although the Company believes it 15 has taken steps to mitigate much of the risk, it may in the future experience interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees or others. Unknown security risks may result in liability to the Company and also may deter new customers from purchasing its software and services, and individuals from utilizing it. Although the Company intends to continue to implement and establish security measures, there can be no assurance that measures implemented by it will not be circumvented in the future, which could have a material adverse effect on the Company's business, financial condition or results of operations. Lack of Established Market for Products and Services; Dependence on Internet and Intranets as Mediums of Commerce and Communications: The market for the Company's streaming media products and services is new and evolving rapidly. It depends on increased use of the Internet and intranets. If the Internet and intranets are not adopted as methods for commerce and communications, or if the adoption rate slows, the market for the Company's products and services may not grow, or may develop more slowly than expected. The Company believes that increased Internet use may depend on the availability of greater bandwidth or data transmission speeds or on other technological improvements, and the Company is largely dependent on third party companies to provide or facilitate these improvements. Changes in content delivery methods and emergence of new Internet access devices such as TV set-tops boxes could dramatically change the market for streaming media products and services if new delivery methods or devices do not use streaming media or if they provide a more efficient method for transferring data than streaming media. The electronic commerce market is relatively new and evolving. Sales of the Company's products depend in large part on the development of the Internet as a viable commercial marketplace. There are now substantially more users and much more "traffic" over the Internet than ever before, use of the Internet is growing faster than anticipated, and the technological infrastructure of the Internet may be unable to support the demands placed on it by continued growth. Delays in development or adoption of new technological standards and protocols, or increased government regulation, could also affect Internet use. In addition, issues related to use of the Internet and intranets, such as security, reliability, cost, ease of use and quality of service, remain unresolved and may affect the amount of business that is conducted over the Internet and intranets. 16 Product Delays and Errors: The Company has experienced development delays and cost overruns associated with its product development. It may encounter such problems in the future. Delays and cost overruns could affect the Company's ability to respond to technological changes, evolving industry standards, competitive developments or customer requirements. The Company's products also may contain undetected errors that could cause adverse publicity, reduced market acceptance of the products, or lawsuits by customers. Online Commerce Security Risks: Online commerce and communications depend on the ability to transmit confidential information securely over public networks. Any compromise of the Company's ability to transmit confidential information securely, and costs associated with the prevention or elimination of such problems, could have a material adverse effect on the Company's business. International Operations: The Company markets and sells its products in the United States, Canada, Europe and Asia. As such, it is subject to the normal risks of doing business abroad. Risks include unexpected changes in regulatory requirements, export and import restrictions, tariffs and trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, potential adverse tax consequences, exchange rate fluctuations, increased risks of piracy, limits on the Company's ability to enforce its intellectual property rights, discontinuity of the Company's infrastructures, limitations on fund transfers and other legal and political risks. Such limitations and interruptions could have a material adverse effect on the Company's business. The Company does not currently hedge its foreign currency exposures. Dividend Policy: The Company does not presently intend to pay cash dividends in the foreseeable future, as any earnings, are expected to be retained for use in developing and expanding its business. However, the actual amount of dividends received from the Company will remain subject to the discretion of the Company's Board of Directors and will depend on results of operations, cash requirements and future prospects of the Company and other factors. The Lack of Assurance That the Company Will Be Able to Meet Its Future Capital Requirements: 17 The Company currently has no source of operating cash flow to fund future projects or corporate overhead. The Company has limited financial resources, and there is no assurance that additional funding will be available. The Company's ability to continue to operate will be dependent upon its ability to raise significant additional funds in the future. Risks Associated with Penny Stock Classification: The Company's stock is subject to "penny stock" rules as defined in 1934 Securities and Exchange Act rule 3151-1. The Commission has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. The Company's common shares are subject to these penny stock rules. Transaction costs associated with purchases and sales of penny stocks are likely to be higher than those for other securities. Penny stocks generally are equity securities with a price of less than U.S. $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from such rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the common shares in the United States and shareholders may find it more difficult to sell their shares. Significant Customers and/or Suppliers -------------------------------------- 18 The Company has moved into the selling and marketing of its products and has a broad scope of customers and suppliers, it continues to develop and expand its product base. Employees --------- At 11/01/01, the Company operated with the services of its Directors, Executive Officers, and 9 additional employees. There is no collective bargaining agreement in place. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS --------------------------------------------- OR PLAN OF OPERATION -------------------- SELECTED FINANCIAL DATA ----------------------- The selected financial data in Table No. 1 for the period from incorporation on "August 24, 1998 to August 31, 2001 was derived from the consolidated financial statements of the Company. The selected financial data was extracted from the more detailed consolidated financial statements and related notes included therein and should be read in conjunction with such consolidated financial statements and with the information appearing under the heading, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Table No. 1 (Destiny Media Technologies Inc.) Selected Financial Data (USD 000's) --------------------------------- ------------------- ------------ ------------ The Period 8/24/98 Fiscal Year Fiscal Year 8/24/98 (date Ended Ended of incorporation) 8/31/2001 8/31/2000 to 8/31/01 --------------------------------- ------------------- ------------ ------------ --------------------------------- ------------------- ------------ ------------ Revenue $431 $346 $85 --------------------------------- ------------------- ------------ ------------ Net Income (Loss) ($3,197) (1,557) ($1,581) --------------------------------- ------------------- ------------ ------------ Earnings (Loss) per Share ($0.17) ($0.06) ($0.07) --------------------------------- ------------------- ------------ ------------ Dividends per Share 0 0 0 --------------------------------- ------------------- ------------ ------------ Weighted Average Number of Shares Outstanding 19,314,335 25,068,025 21,512,150 --------------------------------- ------------------- ------------ ------------ --------------------------------- ------------------- ------------ ------------ Working Capital N/A ($697) ($51) --------------------------------- ------------------- ------------ ------------ Long Term Debt N/A $22 195 --------------------------------- ------------------- ------------ ------------ Shareholders' Equity (Deficiency) N/A ($527) $273 --------------------------------- ------------------- ------------ ------------ Total Assets N/A $391 $731 --------------------------------- ------------------- ------------ ------------ 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATION -------------------- The following discussion of financial condition of the Company and its subsidiaries and the results of operations should be read together with the consolidated financial statements and related notes that are included later in this registration statement. This discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" or in other parts of this registration statement. Cash Balances ------------- The Company maintains its major cash balances at two financial institutions. One is located in Vancouver, British Columbia, Canada. The balances in that institution are insured up to $40,200 (Cdn$60,000) per account by the Canada Deposit Insurance Corporation. The second is located in Bolder, Colorado. Commitments and Contingencies ----------------------------- The Company leases its office facility in Vancouver, British Columbia, Canada. The Company entered into a one-year lease in June 2001. The total minimum lease payments to May 31,2002 under the operating leases are US $51,416. Liquidity and Capital Resources ------------------------------- Cash used during the fiscal year ended August 31, 2001 for operating activities totaled $419,897 (2000-$1,227,225). Common stock was issued for debt and services rendered of $45,300 (2000-$54,690) stock-based compensation in the form of stock options totaled $108,961 (2000-$21,346); shares issuable for services rendered totaled $44,372 (2000-nil) and interest accrued on note receivable totaled $11,187 (2000-nil). Cash flows from investing activities related to the purchases of other assets of $34,498 (2000-$79,468. The net cash outflow by investing activities totaled $33,494 (2000-inflow of $162,789). Cash flows from financing activities totaled $394,250 (2000-$1,181,384). This was made up of $384,250 (2000-$1,079,999) in net proceeds from the issuance of common stock and subscriptions and $10,000 in common stock issuable. 20 The Company had a negative working capital position at August 31,2001 of $696,917 as compared to a negative working capital balance of $51,258 at the fiscal year ended August 31,2000. Results of Operations --------------------- The Company has moved into the selling and marketing of its products and has a broad scope of customers and suppliers, it continues to develop and expand its product base. For the year ended August 31, 2001, 85% of the sales were derived from customers located in the United States and the balance from international locations. Sales for the period were $345,653 (2000-$85,544). Operating expenses totaled $1,888,943 (2000-$1,681,127). Major expenses incurred during the period-included $692,349 (2000-$494,857) in wages and benefits. This increase is due to the hiring of 4 additional sales staff and the payment of sales commissions of $79,425 (2000-nil), the increase is also due to the inclusion of stock based compensation expense of $108,961 (2000-21,346). This stock compensation expense relates to the costs associated with granting stock options to employees and directors at a price below the current market price at the date of grant. This expense relates to the fair market value of the options. This form of non-cash compensation is important to the company as it allows the company to retain employees at lower wages, which helps reduce operating cash outflow. Consulting expenses also increased by $279,063 due to the hiring of the CEO and CFO and two other outside consultants for two separate contracts of business development in Eastern Canada and fundraising. Bad debt increased by $33,583. A large part of this change is due to the write-off of a particular receivable in the amount of $13,564. The Company is currently pursuing the customer for default of contract (refer to item 2- Legal Proceedings). The increase in bad debt is also due to the Company forgiving a $12,144 portion of note receivable with one of its officers. The balance of bad debt relates to various unrelated transactions. Business development expenses for the year were $29,300 compared to nil in the prior year. This expense relates to compensation paid under a business development contract and relates specifically to two business promotion initiatives undertaken by the company during the year. This business development relationship with the McKenna Group brought strategic deals with Solutions America, an ecommerce service provider and Lions Gate Films. 21 Professional fees increased by $31,835 due to the additional costs incurred in legal fees relating to patent and trademarks and to various sales and reseller agreements. Rent also increased in fiscal 2001 by $24,468. This relates to the Company operating out of 2 offices for additional rental costs of CDN$18,488. The Company merged the 2 offices and moved into the larger and hence more expensive suite at CDN$9,452 per month (2000-CDN6,300). The Company incurred moving expenses of CDN$1,650 and additional insurance costs of CDN1,867. Telephone and communications increase of $29,429 resulted from increased usage in bandwidth, Internet connections, 4 additional phone/fax/modem lines, and cellular phones. During fiscal 2001, the Company concentrated on sales and cost control. Savings of $114,718 were realized in the advertising and promotion categories. The Company had incurred a one time advertising deal with MP3.com of $50,000 in fiscal 2000, which did not repeat in fiscal 2001. The Company also was able to cut CDN$74,287 in costs relating to website design, promotional brochure design and printing. Savings of $173,330 in marketing expense are due to the cutting of costs of relating to establishment of the Company's image, branding and cutting all trade show expenses and travel which were incurred in fiscal 2000. The Company was also able to save $78,068 in shareholder and transfer agent cost due to the expiration of an agreement between the company and investor relations firm. The Company had also incurred a one-time shareholder expense in fiscal 2000. For the Period August 24, 1998 (Date of Incorporation) to August 31, 2001 the Company reported a net loss of $3,197,098 (2000-$1,580,729). 22 During the Fiscal year ending 8/31/02, management plans on concentrating its efforts in the following three areas in order to become profitable: 1. Marketing the "Clipstream" java based audio streaming solution. Development has been completed and the Company is now embarking on a marketing and sales program to fully exploit and maximize revenue from this product. Secure online sales are now available online at www.clipstream.com. A sales group will be assembled for direct sales efforts. This will include both inside and outside sales. License agreements and partnership opportunities will be sought with larger content providers, aggregators and resellers. Additional product development will take place to extend the product to a rich media ad banner product targeted to the advertising community and interactive ad agencies. 2. Product development is planned to complete the Listen Look and Buy" streaming metadata component of the RadioDestiny Broadcast solution. Once complete, this product will then be launched and marketed in the second quarter. 3. Continued marketing of the Destiny Media Player to build the registered users base is also planned. This will include various online promotions and marketing initiative, trade show participation and partnership opportunities. As stated above, the Registrant will have to raise additional funds to complete the aforementioned business plan. As yet, no investment banking agreements have been reached. There is no guarantee that the Registrant will be able to raise the capital necessary to complete the business plan for the period ending 8/31/02. Known Trends ------------ Management has determined that because of the deficiency in working capital, significant operating losses and lack of liquidity, there is doubt about the ability of the Company to continue as a going concern unless additional working capital is obtained. Consequently such trends or conditions could have a material adverse effect on the Company's financial position, future results of operations, or liquidity. The Company currently has plans to raise sufficient working capital through equity financing or reorganization of the Company. Income Taxes ------------ 23 All tax returns due for the Company have been filed. Inflation --------- The Company's results of operations have not been affected by inflation and management does not expect inflation to have a material impact on its operations in the future. ITEM 3. DESCRIPTION OF PROPERTY ------------------------------- The Company leases approximately 3,525 square feet of space at 950 - 555 West Hastings Street, Vancouver, British Columbia, Canada V6B 4N4 for administrative and sales efforts. The Company pays approximately Cdn$8,860 per month going forward, with a lease term of one year, for this facility. The Company considers the facility adequate for current purposes. ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND ------------------------------------------------------------ MANAGEMENT ---------- The Registrant is a publicly owned corporation, the shares of which are owned by United States and Canadian residents. Another corporation or any foreign government does not control the Registrant directly or indirectly. Table No. 2 lists as of October 31, 2001persons/companies the Registrant is aware of as being the beneficial owner of more than five percent (5%) of the common stock of the Registrant. 24 Table No. 2 Title Amount and Nature Percent of of Beneficial of Class Name of Beneficial Owner Ownership Class # ------ ------------------------- ----------------- ------- Common Steve Vestergaard (1) 5,645,430 19.80% Common David Lawrence (2) 1,575,000 5.52% Common Jade Capital 1,551,000 5.44% TOTAL 8,771,430 30.76% # Based on 28,515,903 shares outstanding as of October 31, 2001 and options to purchase shares of common stock. (1) Does not include a vested option to purchase 255,416 shares of common stock. (2)Does not include a vested option to purchase 38,125 shares of common stock. Table No. 3 lists as of August 31, 2001 all Directors and Executive Officers who beneficially own the Registrant's voting securities and the amount of the Registrant's voting securities owned by the Directors and Executive Officers as a group. Table No. 3 Shareholdings of Directors and Executive Officers Title Amount and Nature Percent of of Beneficial of Class Name of Beneficial Owner Ownership Class # ------ ------------------------- ----------------- ------- Common Steve Vestergaard, Pres. & Director (1)5,645,430 19.79% Common Ed Kolic, Chief Operating Officer & Secretary (2) 471,010 1.65% Common Greg Foisy, Director (3) 25,000 0.09% Common Larry Langs, Director (4) 0 0.0% Common Yoshitaro Kumagai, Director (5) 0 0.0% Total 6,141,440 21.53% # Based on 28,515,903 shares outstanding as of October 31, 2001. (1) Does not include vested options to purchase 280,834 shares of common stock. (2) Does not include vested options to purchase 280,834 shares of common stock. (3) Does not include vested options to purchase 144,563shares of common stock. 25 (4) Does not include vested options to purchase 83,032 shares of common stock. (5) Does not include vested options to purchase 37,364 shares of common stock. ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND ----------------------------------------------------- CONTROL PERSONS --------------- Table No. 4 lists as of August 31, 2001 the names of the Directors of the Company. The Directors have served in their respective capacities since their election and/or appointment and will serve until the next Annual Shareholders' Meeting or until a successor is duly elected, unless the office is vacated in accordance with the Articles/By-Laws of the Company. Three of the 5 Directors are residents of and citizens of Canada and the other 2 are residents and citizens of the United States of America. 26 Table No. 4 Directors Date First Elected Name Age or Appointed --------------------- ------------------- ------------------- Steve Vestergaard (1) 35 July 1999 Greg Foisy (1) 39 Oct. 1999 Ed Kolic 40 July 1999 Lawrence J. Langs 40 Aug 2000 Yoshitaro Kumagai 55 July 2001 (1) Members of Audit Committee. Table No. 5 lists, as of August 31, 2001, the names of the Executive Officers of the Company. The Executive Officers serve at the pleasure of the Board of Directors. Three of the four Executive Officers are residents/citizens of Canada. One Officer is resident and citizen of the USA. Table No. 5 Executive Officers Name Position Date of Board Approval ----------------- ------------------------------------- ---------------------- Steve Vestergaard President Oct. 1999 Ed Kolic Chief Operating Officer and Secretary Oct. 1999 David Lawrence Chief executive Officer Jan. 2001 Alf Sanderson Chief Financial Officer Mar. 2001 -------------------------------------------------------------------------------- Business Experience Steve Vestergaard. Mr. Vestergaard is President and a Director of the Company. The Company has employed him since June 1999 when the Company began negotiations to purchase Destiny Software Productions Inc. His responsibilities include coordinating strategy, planning, and product development. Mr. Vestergaard devotes 100% of his time to the affairs of the Company. He has been involved in the software development industry since 1982 at which time he founded a private company called Tronic Software. Tronic Software was a developer of computer games, which were sold by mail order. In 1990 he became employed by Distinctive Software Inc., a company that later changed its name to Electronic Arts Canada. At Electronic Arts Canada he was involved in developing game products. In 1991 he became the Chief Executive Officer of Destiny Software Productions, Inc. At Destiny Software Productions Inc. his responsibilities included not only general managerial functions, but also supervision of the development of computer games. Mr. Vestergaard holds an International Baccalaureate Degree and a Bachelor of Science 27 Degree in Computer Science from the University of British Columbia. Ed Kolic. Mr. Kolic is the Chief Operating Officer and Secretary. His responsibilities include overseeing the marketing efforts of the Company. He devotes 100% of his time to the affairs of the Company. From 1988 until 1995, he was employed as the President of Target Canada Production Ltd. His experience includes the production of documentary television, educational and information programming for the Canadian Educational Television Networks, large screen interactive presentation media for international conferences and a range of communication programs for corporate, government and institutional clients. From 1993 until 1997, he was a partner in a private company called Jacqueline Conoir Designs Ltd., which is a fashion design house. At Conoir Designs Ltd. he developed all of the marketing, communications and image strategies for the company. From 1997 until June of 1999, he was the president of WonderFall Productions Inc., a computer game development company, which he sold to the Company in June of 1999. David Lawrence Mr. Lawrence was responsible for building the sales organization, bottom line revenue generation, strategic deployment of resources and recruiting and product development of Reading's Fun Ltd. Launched in November of 1990; the company's revenues grew at the rate of 225% annually for five years. In 1999, with annual sales well above $200 million, the company was renamed "Books are Fun" and sold to Reader's Digest for $380 million US Alf Sanderson Alf Sanderson has served in executive roles with Go Vacations America Inc, Carriage Lane Furniture and for the past eight years has operated as a private consultant to firms operating in the public market. He has a background in company valuations and preparation of business plans. His credentials include a Partners and Directors certification from the Canadian Securities Institute. He has studied business administration at the University of Calgary and is a Member and registered student in the Canadian Institute of Chartered Business Valuators. Greg Foisy. Mr. Foisy is a member of the Company's Board of Directors. From 1986 until 1991 Mr. Foisy worked in sales with Apollo Computer, which subsequently became the workstation 28 division of Hewlett-Packard. In 1991 a company called Interactive Development Environments, a software company specializing in development tools, employed him. He opened up the first offices in Canada for Interactive Development Environments and was successful in making the Canadian organization one of the top producing regions within that company. He left Interactive Development Environments in 1995 and founded a private company called Red Brick Systems. Red Brick Systems is a provider of database technology for the Data Warehousing and Decision Support market space and was involved in providing loyalty management and click-stream analysis for companies involved in e-commerce or Internet access. In 1998, a company called Informix purchased Red Brick Systems. Mr. Foisy is now employed as the Director of Sales for Data Warehousing for Informix. As a member of the Board of Directors, Mr. Foisy devotes 5% of his time to the affairs of the Company. Lawrence J. Langs Mr. Langs most recently worked as Vice President of Business Development at MP3.com (Nasdaq: MPPP). Prior to MP3.com, Larry had a variety of experience as a technology and entertainment lawyer, a senior management consultant as well as a technology advocate. Mr. Langs worked with his associates at Interactive Media Consulting as legal and business counsel exclusively to clients in the interactive media industry since 1991. From 1995-96 Mr. Langs was acting Business Development Manager for the New Media Division of Sybase, where he was involved with strategic interactive television initiatives. And with developing and executing strategic relationships with Internet companies. Prior experience also includes several years as an Investment Banker for Chemical Bank in New York, and Senior Strategic Consultant for Arthur D. Little in Boston. Mr. Langs holds a Juris Doctorate from Boston University School of Law, and a Master's Degree in Finance and Management of Technology from the Sloan School of Management at M.I.T. He is a member of the New York Bar. There have been no events during the last five years that are material to an evaluation of the ability or integrity of any director, person nominated to become a director, executive officer, promoter or control person including: a) 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; 29 b) Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); c) Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently enjoining, barring, suspending or otherwise limiting his/her involvement in any type of business, securities or banking activities; d) Being 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. Family Relationships -------------------- There are no family relationships between any of the officers and/or directors. Other Relationships/Arrangements -------------------------------- There are no arrangements or understandings between any two or more Directors or Executive Officers, pursuant to which he/she was selected as a Director or Executive Officer. There are no material arrangements or understandings between any two or more Directors or Executive Officers. ITEM 6. EXECUTIVE COMPENSATION ------------------------------- The Company has no formal plan for compensating its Directors for their service in their capacity as Directors. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of the Board of Directors. The Board of Directors may award special remuneration to any Director undertaking any special services on behalf of the Company other than services ordinarily required of a Director. During Fiscal 2001, no Director received and/or accrued any compensation for his services as a Director, including committee participation and/or special assignments. The Company has no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to the Company's Directors or Executive Officers. The Company has no formal stock option plan, which has been approved by regulatory authorities or other long-term compensation program. 30 The President's and COO's compensation are outlined in the following table which also includes the material terms of the two employment agreements:

--------------------- ----------------------------------- ----------------------------------- Steve Vestergaard President Ed Kolic (COO) --------------------- ----------------------------------- ----------------------------------- Responsibilities Responsible for software Responsible for All operations of development activities of the the business including financial, Company, new product development administration, operational and and public company issues. sales and marketing --------------------- ----------------------------------- ----------------------------------- Reports to Board of Directors Board of Directors --------------------- ----------------------------------- ----------------------------------- Commencement date Aug 01,1999 March 1, 2001 --------------------- ----------------------------------- ----------------------------------- Term N/a 12 months --------------------- ----------------------------------- ----------------------------------- --------------------- ----------------------------------- ----------------------------------- Severance- On 1 years salary + 2 1 years salary + 2 change of Control years performance years performance bonus + waiver of bonus + waiver of vesting on stock vesting on stock options options --------------------- ----------------------------------- ----------------------------------- Salary $86,000 CDN $86,000 CDN --------------------- ----------------------------------- -----------------------------------

During Fiscal 2001, no funds were set aside or accrued by the Company to provide pension, retirement or similar benefits for Directors or Executive Officers. Except as indicated above, the Company has no plans or arrangements in respect of remuneration received or that may be received by Executive Officers of the Company in Fiscal 2001 to compensate such officers in the event of termination of employment (as a result of resignation, retirement, change of control) or a change of responsibilities following a change of control, where the value of such compensation exceeds $60,000 per Executive Officer. The Company has two written employment agreements. Other than that disclosed above, no compensation was paid during Fiscal 2001 to any of the officers or directors of the Company to the extent that they were compensated in excess of $60,000. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ------------------------------------------------------- 31 On October 20, 1999 the Company completed the purchase of Destiny Software, a private corporation wholly owned by Steve Vestergaard, the current president of the Company. The purchase price was 1,800,000 shares of restricted common stock. In June 1999 Destiny Software purchased Wonderfall from Mr. Ed Kolic, the Secretary and Chief Operating Officer of the Registrant. In September of 1999, Jade Co., a private company owned by a shareholder of the Registrant, loaned the Registrant $250,000 to assist in covering operating expenses, this amount has since been repaid through the issuance of shares referred to in "Historical Corporate Developments" above. Other than described above, there have been no transactions since August 24, 1998 (Date of Inception), or proposed transactions, which have materially affected or will materially affect the Company in which any Director, Executive Officer, or beneficial holder of more that 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. ITEM 8. DESCRIPTION OF SECURITIES ---------------------------------- The authorized capital of the Registrant is 100,000,000 shares of common stock with a par value of $0.001 per share. 27,177,358 shares of common stock were issued and outstanding at August 31, 2001, the end of the most recent fiscal year. All common shares are equal to each other, and when issued, are fully paid and non-assessable, and the private property of shareholders who are not liable for corporate debts. Each holder of a common share of record has one vote for each share of stock outstanding in his name on the books of the Corporation and shall be entitled to vote said stock. The common stock of the Company shall be issued for such consideration as shall be fixed from time to time by the Board of Directors. In the absence of fraud, the judgment of the directors as to the value of any property or services received in full or partial payment for shares shall be conclusive. When shares are issued upon payment of the consideration fixed by the Board of Directors, such shares shall be taken to be fully paid stock and shall be non-assessable. Except as may otherwise be provided by the Board of Directors, holders of shares of stock of the Corporation shall have no 32 preemptive right to purchase, subscribe for or otherwise acquire shares of stock of the Company, rights, warrants or options to purchase stocks or securities of any kind convertible into stock of the Company. Dividends in cash, property or shares of the Company may be paid, as and when declared by the Board of Directors, out of funds of the Company to the extent and in the manner permitted by law. Upon any liquidation, dissolution or winding up of the Company, and after paying or adequately providing for the payment of all its obligations, the remainder of the assets of the Company shall be distributed, either in cash or in kind, pro-rata to the holders of the common stock, subject to preferences, if any, granted to holders of the preferred shares. The Board of Directors may, from time to time, distribute to the shareholders in partial liquidation from stated capital of the Company, in cash or property, without the vote of the shareholders, in the manner permitted and upon compliance with limitations imposed by law. Each outstanding share of common stock is entitled to one vote and each fractional share of common stock is entitled to a corresponding fractional vote on each matter submitted to a vote of shareholders. Cumulative voting shall not be allowed in the election of Directors of the company and every shareholder entitled to vote at such election shall have the right to vote the number of shares owned by him for as many persons as there are Directors to be elected, and for whose election he has a right to vote. When, with respect to any action to be taken by the Shareholders of the Company, the Colorado Corporation Code requires the vote or concurrence of the holders of two-thirds of the outstanding shares entitled to vote thereon, or of any class or series, any and every such action shall be taken, notwithstanding such requirements of the Colorado Corporation Code, by the vote or concurrence of the holders of a majority of the outstanding shares entitled to vote thereon, or of any class or series. Debt Securities to be Registered. Not applicable. -------------------------------- American Depository Receipts. Not applicable. ---------------------------- Other Securities to be Registered. Not applicable. --------------------------------- PART II Item 1. Market Price Of And Dividends on the Registrant's ---------------------------------------------------------- Common Equity and Other Shareholder Matters ------------------------------------------- 33 The Company's common stock trades in the OTC Bulletin Board in the United States, having the trading symbol "DSNY" and CUSIP# 25063G204. Trading volume and high/low/closing prices, on a monthly basis, for the period September 30, 1999 to August 31, 2001 is given in the following table. Table No. 7 DSNY Stock Trading Activity ---------------------------- ------------ -------------- ------------------ Month High Low Close Volume --------------- ------------ ------------ -------------- ------------------ September,1999 $1.03 $0.83 $1.02 457,200 --------------- ------------ ------------ -------------- ------------------ October $1.04 $0.68 $0.99 880,500 --------------- ------------ ------------ -------------- ------------------ November $1.02 $$0.58 $0.95 591,600 --------------- ------------ ------------ -------------- ------------------ December $0.92 $0.67 $0.88 1,254,900 --------------- ------------ ------------ -------------- ------------------ January,2000 $2.70 $0.55 $1.40 1,998,000 --------------- ------------ ------------ -------------- ------------------ February $4.00 $1.41 $3.40 2,078,000 --------------- ------------ ------------ -------------- ------------------ March $3.95 $2.00 $2.60 2,271,600 --------------- ------------ ------------ -------------- ------------------ April $2.60 $1.20 $1.65 797,700 --------------- ------------ ------------ -------------- ------------------ May $2.90 $1.40 $1.70 745,300 --------------- ------------ ------------ -------------- ------------------ June $1.15 $1.05 $1.13 714,100 --------------- ------------ ------------ -------------- ------------------ July $1.07 $0.75 $0.81 1,167,400 --------------- ------------ ------------ -------------- ------------------ August $1.09 $0.69 $1.10 1,313,000 --------------- ------------ ------------ -------------- ------------------ September,2000 $1.18 $0.625 $0.625 763,000 --------------- ------------ ------------ -------------- ------------------ October $0.52 $0.17 $0.219 1,316,800 --------------- ------------ ------------ -------------- ------------------ November $0.29 $0.20 $0.24 1,060,400 --------------- ------------ ------------ -------------- ------------------ December $0.24 $0.15 $0.19 1,159,300 --------------- ------------ ------------ -------------- ------------------ January,2001 $0.57 $0.21 $0.438 3,192,200 --------------- ------------ ------------ -------------- ------------------ February $0.50 $0.26 $0.26 1,344,500 --------------- ------------ ------------ -------------- ------------------ March $0.33 $0.145 $0.20 1,500,300 --------------- ------------ ------------ -------------- ------------------ April $0.23 $0.14 $0.14 1,418,200 --------------- ------------ ------------ -------------- ------------------ May $0.27 $0.105 $0.27 1,445,900 --------------- ------------ ------------ -------------- ------------------ June $0.27 $0.11 $0.145 3,012,400 --------------- ------------ ------------ -------------- ------------------ July $0.16 $0.12 $0.123 1,831,200 --------------- ------------ ------------ -------------- ------------------ August $0.13 $0.08 $0.115 1,298,600 --------------- ------------ ------------ -------------- ------------------ The Company's common stock is issued in registered form. Computershare Investor Services (located in Denver, Colorado) is the registrar and transfer agent for the common stock. On September 30, 2001 the shareholders' list for the Company's common shares showed one hundred and twelve registered shareholders and 28,165,903 of common stock outstanding. The Company has not declared any dividends since incorporation and does not anticipate that it will do so in the foreseeable future. The present policy of the Company is to retain future earnings for use in its operations and expansion of its business. 34 ITEM 2. LEGAL PROCEEDINGS -------------------------- Destiny Software Productions Inc, a wholly owned subsidiary of Destiny Media Technologies, Inc. has commenced legal proceedings against Impatica.com Inc. in the Supreme Court of British Columbia, Canada for payment of approximately US$512,500 in unpaid technology licensing fees. During November 2000, Destiny agreed to license its Clipstream(TM) and Videoclipstream(TM) technology to Impatica in return for a US$675,000 license fee. The agreement called for payment of that fee in three installments against delivery of the technology in three phases. The technology was delivered and Destiny received the first two payments totalling US$162,500, but Impatica has defaulted in paying the last US$62,500 in cash and delivering the 200,000 Impatica shares which were to make up the balance of the purchase price. It is Destiny's position that Impatica has repudiated the licensing agreement and that the unpaid license fees totalling US$512,500 are a debt owing by Impatica to Destiny. The outstanding balance has not been booked as revenue. The Writ of Summons was filed in the BC Supreme Court on June 6, 2001. The S.C.B.C. Registry No. is S013166. ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ------------------------------------------------------ Not Applicable ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES ------------------------------------------------ On September 12, 2001, the Company issued 250,000 common shares to an officer of the company for services rendered in lieu of cash at a price of $0.10 per share for total proceeds of $26,250. On September 12, 2001, the Company issued 113,605 common shares to an officer of the company for services rendered in lieu of cash at a price of $0.11 per share for total proceeds of $11,361. On September 21, 2001, the Company issued 353,930 common shares to an officer of the company for debt settlement in lieu of cash at a price of $0.10 per share for total proceeds of $35,393. On September 21, 2001, the Company issued 271,010 common shares to an officer of the company for debt settlement in lieu of cash at a price of $0.10 per share for total proceeds of $27,101. 35 On October 5, 2001, the Company issued 250,000 common shares to an unrelated party for services rendered in lieu of cash at a price of $0.10 per share for total proceeds of $25,000. On October 11, 2001, the Company issued 100,000 common shares to an unrelated party for cash proceeds of $10,000 at a price of $0.10 per share. ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS -------------------------------------------------- The Company's By-Laws address indemnification under Article Seven (b). The corporation shall indemnify, to the maximum extent permitted by Colorado law, any person who is or was a director, officer, agent, fiduciary or employee of the corporation against any claim, liability or expense arising against or incurred by such person made party to a proceeding because he is or was a director, officer, agent, fiduciary or employee of the corporation or because he is or was serving another entity or employee benefit plan as a director, officer, partner, trustee, employee, fiduciary or agent at the corporation's request. The corporation shall further have the authority to the maximum extent permitted by Colorado law to purchase and maintain insurance providing such indemnification. PART F/S ITEM 1. FINANCIAL STATEMENTS ----------------------------- The financial statements and notes thereto as required under ITEM #13 are attached hereto and found immediately following the text of this Registration Statement. The audit report of KPMG LLP, independent Chartered Accountants, on the audited financial statements is included herein immediately preceding the audited financial statements. (A-1) Audited Financial Statements: Fiscal 2001 Auditors' Report, dated September 28, 2001 Consolidated Balance Sheets at August 31, 2001 and 2000 36 Consolidated Statements of Operations for the years ended August 31, 2001 and 2000; and, for the period from August 24, 1998 (inception) to August 31, 2001. Consolidated Statements of Stockholders' Equity (Deficiency) and Comprehensive Loss for the period from inception to August 31, 2001. Consolidated Statements of Cash Flows for the years ended August 31, 2001 and 2000; and, for the period from August 24, 1998 (inception) to August 31, 2001. Notes to Consolidated Financial Statements 37 PART III Item 1. INDEX TO EXHIBITS: None 38 Consolidated Financial Statements (Expressed in United States dollars) DESTINY MEDIA TECHNOLOGIES INC. (A Development Stage Company) Years ended August 31, 2001 and 2000 Period from August 24, 1998 (inception) to August 31, 2001 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Destiny Media Technologies Inc. We have audited the consolidated balance sheets of Destiny Media Technologies Inc. and subsidiaries (A Development Stage Company) as of August 31, 2001 and 2000 and the consolidated statements of operations, stockholders' equity (deficiency) and comprehensive loss, and cash flows for the years then ended and for the period from August 24, 1998 (inception) to August 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 the audit to obtain reasonable assurance about 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Destiny Media Technologies Inc. and subsidiaries as of August 31, 2001 and 2000 and the results of their operations and their cash flows for the years then ended and for the period from August 24, 1998 (inception) to August 31, 2001 in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 2 to the financial statements, the Company has incurred recurring losses from operations and has a working capital deficiency 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 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. "KPMG LLP" KPMG LLP Chartered Accountants Vancouver, Canada September 28, 2001

Destiny Media Technologies Inc. (A Development Stage Company) Consolidated Balance Sheets (Expressed in United States dollars) August 31, 2001 and 2000 -------------------------------------------------------------------------------- ------------- -------------- 2001 2000 -------------------------------------------------------------------------------- ------------- -------------- Assets Current assets: Cash and cash equivalents $ 30,443 $ 97,928 Short-term investments 7,022 7,070 Accounts receivable, net of allowance for doubtful accounts of $683 62,981 83,495 (2000 - $719) Prepaid expenses 11,946 24,071 -------------------------------------------------------------------------- ------------- ------------ Total current assets 112,392 212,564 Other assets, net of accumulated amortization of $ 5,959 (2000 - $680) 29,862 1,392 Notes receivable (note 5) 99,946 111,133 Equipment: Furniture and fixtures 53,256 66,120 Computer hardware 102,397 101,425 Computer software 12,696 10,646 Leasehold improvements 5,771 6,002 ------------------------------------------------------------------------- ------------- ------------ 174,120 184,193 Accumulated depreciation and amortization (79,626) (47,960) ------------------------------------------------------------------------- ------------- ------------ Net property and equipment 94,494 136,233 Intellectual property, net of accumulated amortization of $137,293 (2000 - 19,599 98,057 $58,835) Goodwill, net of accumulated amortization of $240,850 (2000 - $103,222) 34,408 172,036 -------------------------------------------------------------------------------- ------------- ------------ Total assets $ 390,701 $ 731,415 -------------------------------------------------------------------------------- --- --------- --- -------- Liabilities and Stockholders' Equity (Deficiency) Current liabilities: Accounts payable and accrued liabilities $ 388,277 $ 162,400 Related party payable (note 6) 1,352 101,422 Demand loan (note 6) 100,000 - Deferred revenue 156,657 - Current portion of long-term debt (note 7) 163,023 - -------------------------------------------------------------------------- ------------- ------------ Total current liabilities 809,309 263,822 Long-term debt (note 7) 22,320 194,590 Deferred revenue 85,589 - Shareholders' equity (deficiency): Common stock, par value $0.001 Authorized: 100,000,000 shares Issued and outstanding: 27,177,358 shares (2000 - 22,501,000) 26,928 22,501 Common stock issuable 54,372 - Additional paid-in capital 2,648,018 1,986,553 Deferred stock compensation (44,931) (87,550) Deficit accumulated during the development stage (3,197,098) (1,640,229) Accumulated other comprehensive loss (13,806) (8,272) --------------------------------------------------------------------------- ------------- ------------ Total stockholders' equity (deficiency) (526,517) 273,003 -------------------------------------------------------------------------------- ------------- ------------ Total liabilities and stockholders' equity (deficiency) $ 390,701 $ 731,415 -------------------------------------------------------------------------------- --- --------- --- --------

Commitments and contingencies (notes 2 and 11) Subsequent events (note 15) See accompanying notes to consolidated financial statements. 1 Destiny Media Technologies Inc. (A Development Stage Company) Consolidated Statements of Operations (Expressed in United States dollars) ------------------------------------------------------ ------------------ ------------------ ----------------- Period from August 24, Year ended Year ended 1998 (inception) August 31, August 31, to August 31, 2001 2000 2001 ------------------------------------------------------ ------------------ ------------------ ----------------- Sales $ 345,653 $ 85,544 $ 431,197 Operating expenses: Advertising and promotion 40,792 155,510 196,302 Bad debt expense 34,297 714 35,011 Bank charges and interest 3,033 4,811 7,844 Business Development 29,300 - 29,300 Consulting 330,085 51,022 381,107 Depreciation and amortization 256,573 197,368 453,941 Filings and listings 10,134 20,541 31,125 Financing 6,585 3,597 10,182 Foreign exchange (5,395) - (5,395) In-process research and development - 33,846 33,846 Management fees - 6,071 6,071 Marketing 10,419 183,749 194,168 Meals and entertainment 7,865 6,130 13,995 Office and miscellaneous 11,988 25,640 47,002 Professional fees 156,484 124,649 283,101 Shareholder relations and transfer agent 45,737 123,805 170,292 Rent 85,607 61,139 154,746 Research and development - 8,995 8,995 Repairs and maintenance 3,688 3,529 7,217 Subcontracts 38,334 70,326 108,660 Trademark 113 5,751 5,864 Telephone and telecommunications 74,166 44,737 118,903 Travel 56,789 54,340 111,129 Wages and benefits 692,349 494,857 1,226,164 ---------------------------------------------- ------------------ ------------------ ----------------- 1,888,943 1,681,127 3,629,570 ------------------------------------------------------ ------------------ ------------------ ----------------- Loss from operations (1,543,290) (1,595,583) (3,198,373) Interest income and other income 15,170 14,854 30,024 ------------------------------------------------------ ------------------ ------------------ ----------------- Loss for the period, before extraordinary item (1,528,120) (1,580,729) (3,168,349) Loss on debt settlement (note 9(c)) (28,749) - (28,749) ------------------------------------------------------ ------------------ ------------------ ----------------- Loss for the period $ (1,556,869) $ (1,580,729) $ (3,197,098) ------------------------------------------------------ ------------------ ------------------ ----------------- Loss per common share, basic and diluted before extraordinary item (0.06) (0.07) (0.16) ------------------------------------------------------ ------------------ ------------------ ----------------- Loss per common share, basic and diluted $ (0.06) $ (0.07) $ (0.17) ------------------------------------------------------ ------------------ ------------------ ----------------- Weighed average common shares outstanding, basic and diluted 25,068,025 21,512,150 19,314,335 ------------------------------------------------------ ------------------ ------------------ ----------------- See accompanying notes to consolidated financial statements. 2

Destiny Media Technologies Inc. (A Development Stage Company) Consolidated Statements of Stockholders' Equity (Deficiency) and Comprehensive Loss (Expressed in United States dollars) ----------------------------------------------------------------------------------------------------------------------------------- Deficit accumulated Total Common stock Additional Deferred during Cumulative stockholders' ------------------ paid-in Shares stock velopment translation equity Shares Amount capital issuable compensation stage adjustment (deficiency) ------------------------------------ ---------- ------- --------- -------- ------------- ------------ ------------ --------------- Balance, August 24, 1998 - $ - $ - $ - $ - $ - $ - $ - Loss for the period - - - - - (59,500) - (59,500) ------------- Comprehensive loss - (59,500) Common stock issued for cash 17,850,000 17,850 41,650 - - - - 59,500 ------------------------------------ ---------- ------- --------- -------- ------------- ------------ ------------ --------------- Balance, August 31, 1999 17,850,000 17,850 41,650 - - (59,500) - - Loss for the period - - - - - (1,580,729) - (1,580,729) Cumulative translation adjustment - - - - - - (8,272) (8,272) ------------- Comprehensive loss (1,589,001) Common stock issued for cash on private placement 1,000,000 1,000 999,000 - - - - 1,000,000 Common stock issued for cash 247,485 247 79,752 - - - - 79,999 Common stock issued on acquisition 1,800,000 1,800 (1,200) - - - - 600 Common stock issued for retirement of debt 1,490,724 1,491 592,745 - - - - 594,236 Common stock issued for services rendered 112,791 113 54,577 - - - - 54,690 Deferred stock compensation - - 108,896 - (108,896) - - - Amortization of deferred stock - - - - 21,346 - - 21,346 compensation Return of profit from shareholder from short-swing profit - - 111,133 - - - - 111,133 ------------------------------------ ---------- ------- --------- -------- ------------- ------------ ------------ --------------- Balance, August 31, 2000 22,501,000 22,501 1,986,553 - (87,550) (1,640,229) (8,272) 273,003 Loss for the period - - - - - (1,556,869) - (1,556,869) Cumulative translation adjustment - (5,534) (5,534) ------------- Comprehensive loss - (1,289,400) Common stock issued for cash on private placements (note 8) 3,571,200 3,571 370,679 10,000 - - - 384,250 Common stock issued for services rendered 180,158 181 45,119 - - - - 45,300 Common stock issued for debt settlement (note 9(c)) 675,000 675 179,325 - - - - 180,000 Common stock issued for services to be rendered 250,000 - - - - - - - Common stock issuable - - - 44,372 - - - 44,372 Deferred stock compensation - - 29,631 - (29,631) - - - Amortization of deferred stock - - - - 72,250 - - 72,250 compensation Options issued to non-employees for - - 36,711 - - - - 36,711 services ------------------------------------ ---------- ------- --------- -------- ------------- ------------ ------------ --------------- Balance, August 31, 2001 77,358 $26,928 $2,648,018 $54,372 $ (44,931) $ (3,197,098) $ (13,806) $ (526,517) ------------------------------------ ---------- ------- --------- -------- ------------- ------------ ------------ ---------------

See accompanying notes to consolidated financial statements. 3

Destiny Media Technologies Inc. (A Development Stage Company) Consolidated Statements of Cash Flows (Expressed in United States dollars) -------------------------------------------------- --------------- -------------- ------------------- Period from August 24, 1998 Year ended Year ended (inception) to August 31, August 31, August 31, 2001 2000 2001 -------------------------------------------------- --------------- -------------- -------------- Cash flows from operating activities: Loss for the period $ (1,556,869) $ (1,580,729) $ (3,197,098) Items not involving cash: Depreciation and amortization 256,573 197,368 453,941 Write-off of in-process research and development - 33,846 33,846 Shares issuable for services 44,372 44,372 Shares issued for services rendered 45,300 54,690 99,990 Shares issued for debt settlement 180,000 - 180,000 Stock-based compensation - employees 72,250 11,248 83,498 Stock-based compensation - non-employees 36,711 10,098 46,809 Interest accrued on term deposit (304) - (304) Interest accrued on note receivable 11,187 - 11,187 Changes in non-cash working capital: Accounts receivable 16,541 (82,937) (66,396) Prepaid expenses 11,034 (15,872) (4,838) Accounts payable and accrued liabilities 221,061 145,063 366,124 Deferred revenue 242,247 - 242,247 --------------------------------------------- --------------- -------------- -------------- Net cash used in operating activities (419,897) (1,227,225) (1,706,622) Cash flows from investing activities: Cash acquired on acquisition - 250,719 250,719 Purchase of equipment (10,276) (79,468) (89,744) Refund on return of equipment 11,280 - 11,280 Purchase of other assets (34,498) (1,392) (53,390) Investment in short-term investments - (7,070) (29,770) Proceeds on disposal of mineral properties and marketable securities to related party - - 40,200 Long-term loan receivable from related party - - (594,236) --------------------------------------------- --------------- -------------- -------------- Net cash provided (used in) by investments (33,494) 162,789 (464,941) Cash flows from financing activities: Net proceeds from issuance of debt - 101,385 695,621 Common stock issuable 10,000 - 10,000 Net proceeds from issuances of common stock and subscriptions 384,250 1,079,999 1,523,749 --------------------------------------------- --------------- -------------- -------------- Net cash provided by financing activities 394,250 1,181,384 2,229,370 ---- --------------------------------------------- --------------- -------------- -------------- Net increase (decrease) in cash and cash equivalents during the period (59,141) 116,948 57,807 Effect of foreign exchange rate changes on cash (8,344) (19,020) (27,364) Cash and cash equivalents at beginning of period 97,928 - - -------------------------------------------------- --------------- -------------- -------------- Cash and cash equivalents at end of period $ 30,443 $ 97,928 $ 30,443 -------------------------------------------------- --------------- -------------- -------------- Supplementary disclosure: Cash paid for: Interest $ - $ - $ - Income tax - - - Non-cash transactions: Stock issued to acquire Destiny Software Productions Inc., net of cash acquired - (250,119) (250,119) Stock issued for settlement of debt 180,000 594,236 774,236 Stock issued for services rendered 45,300 54,690 99,990 Stock issuable for services rendered 44,372 - 44,372 Deferred stock-based compensation 66,342 108,896 175,238 Note receivable for return of profit from shareholder from short-swing profit - 111,133 99,946 Advertising obtained through barter 36,000 - 36,000 transaction -------------------------------------------------- --------------- -------------- --------------

See accompanying notes to consolidated financial statements. 4 Destiny Media Technologies Inc. (A Development Stage Company) Notes to Consolidated Financial Statements (Expressed in United States dollars) Years ended August 31, 2001 and 2000 Period from August 24, 1998 (inception) to August 31, 2001 -------------------------------------------------------------------------------- 1. Organization: Destiny Media Technologies Inc. (the "Company") was incorporated on August 24, 1998 as Euro Industries Ltd. under the laws of the State of Colorado. On October 12, 1999, the Company's name was changed to Destiny Media Technologies Inc. The Company develops enabling technologies that allow for the distribution over the Internet of digital media files in either a streaming or digital download format. The technologies are proprietary. 2. Continuing operations: From inception of the business, the Company has incurred cumulative losses of $3,197,098 and at August 31, 2001 had a working capital deficiency of $696,917. As a result, substantial doubt exists about its ability to continue as a going concern. These financial statements have been prepared on the going concern basis under which an entity is considered to be able to realize its assets and satisfy its liabilities and commitments in the ordinary course of business. Operations to date have been primarily financed by long-term debt and equity transactions. As a result, the Company's future operations are dependent upon the identification and successful completion of additional long-term or permanent equity financing, the continued support of creditors and shareholders, and, ultimately, the achievement of profitable operations. Subsequent to year end, the Company has entered into an agreement to sell the Clipstream Technology in order to generate additional cash for future operations (see note 15). There can be no assurances that the Company will be successful in generating additional cash for operations. If it is not, the Company will be required to reduce operations or liquidate assets. The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. 3. Significant accounting policies: These consolidated financial statements have been prepared using generally accepted accounting principles in the United States. (a) Principles of consolidation: The financial statements include the accounts of the Company and its wholly owned subsidiaries, Destiny Software Productions Inc. ("Destiny Software") and Wonderfall Productions Inc. ("Wonderfall"). All intercompany balances and transactions have been eliminated on consolidation. For United States accounting and reporting purposes, the Company is considered to be in the development stage as it has not generated significant revenue from its operating model and is devoting substantially all of its efforts to developing its business operations and these consolidated financial statements are those of a development stage enterprise. 5 Destiny Media Technologies Inc. (A Development Stage Company) Notes to Consolidated Financial Statements (Expressed in United States dollars) Years ended August 31, 2001 and 2000 Period from August 24, 1998 (inception) to August 31, 2001 -------------------------------------------------------------------------------- 3. Significant accounting policies (continued): (b) Basis of presentation: Certain comparative figures have been reclassified to conform to the presentation adopted in the current year. 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Significant areas requiring the use of estimates include estimating the recoverability of accounts receivable and notes receivable and the valuation of property and equipment, intellectual property, goodwill and other assets. Actual results could differ from those estimates. (c) Cash and cash equivalents: For the purposes of the statements of cash flows, the Company considers all highly liquid marketable securities with original terms to maturity of three months or less when acquired to be cash equivalents. (d) Short-term investments: Short-term investments are carried at market value, which does not materially differ from cost. (e) Research and development costs: Research and, except as indicated below, development costs are expensed as incurred. Software and related development costs, after the establishment of technological feasibility and commercial viability, are capitalized as software development costs until the product is ready for general release to customers. Amortization is provided on a product by product basis over the estimated economic life of the product, not to exceed three years. Amortization commences when the product is available for general release to customers. (f) Revenue recognition: The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred, the fee is fixed or determinable, collectibility is reasonably assured, and there are no substantive performance obligations remaining. The Company's revenue recognition policies are in conformity with the AICPA's Statement of Position No. 97-2, "Software Revenue Recognition", as amended ("SOP 97-2"). 6 Destiny Media Technologies Inc. (A Development Stage Company) Notes to Consolidated Financial Statements (Expressed in United States dollars) Years ended August 31, 2001 and 2000 Period from August 24, 1998 (inception) to August 31, 2001 -------------------------------------------------------------------------------- 3. Significant accounting policies (continued): (f) Revenue recognition (continued): SOP 97-2 generally requires revenue from software arrangements involving multiple elements to be allocated to each element of the arrangement based on the relative fair values of the elements, such as software products, post-contract customer support, installation, or training and recognized as the element is delivered and the Company has no significant remaining performance obligations. The determination of fair value is based on objective evidence that is specific to the vendor. If evidence of fair value for each element of the arrangement does not exist, and the only outstanding deliverable is post-customer support, all revenue from the arrangement is recognized ratably over the term of the arrangements. License revenue is recognized when there is persuasive evidence of an arrangement and delivery to the customer has occurred, provided the arrangement does not require significant customization of the software, the fee is fixed and determinable, and collectibility is considered probable. Service revenue from maintenance contracts is recognized ratably over the term of the maintenance contract, on a straight-line basis. Other service revenue is recognized at the time the service is performed. The Company generally recognizes product revenue upon transfer of title, which generally occurs on shipment of product, as all other revenue recognition criteria are satisfied. When significant post-delivery obligations exist, revenue is deferred until such obligations are fulfilled. Cash received in advance of meeting the revenue recognition criteria is recorded as deferred revenue. Royalty revenue from third party sales is recognized when there is persuasive evidence that the arrangement is complete, and only when all deliverables have been performed. Revenues generated in exchange for advertising services are valued at the fair value of the services exchanged, based on the Company's own historical practice of receiving cash, or other consideration that is readily convertible to known amounts of cash for similar advertising from buyers unrelated in the barter transaction. During the year ended August 31, 2001, the Company recognized $36,000 (2000 - nil) of revenue from barter transactions. 7 Destiny Media Technologies Inc. (A Development Stage Company) Notes to Consolidated Financial Statements (Expressed in United States dollars) Years ended August 31, 2001 and 2000 Period from August 24, 1998 (inception) to August 31, 2001 -------------------------------------------------------------------------------- 3. Significant accounting policies (continued): (g) Equipment: Equipment is stated at cost. Depreciation is calculated using the declining balance method at the following annual rates, commencing upon utilization of the assets: ----------------------------------------- Asset Rate ----------------------------------------- Furniture and fixtures 20% Computer hardware 30% Computer software 50% ------------------------------------------ Leasehold improvements are amortized on a straight-line basis over the term of the lease. (h) Intellectual property: Intellectual property represents the technologies, which were acquired on the acquisition of Destiny Software (note 4) and are carried at cost less accumulated amortization. Amortization is provided on a straight-line basis over the estimated period of benefit being two years. (i) Goodwill: Goodwill represents the excess of the cost of acquisition of Destiny Software over the fair market value of the net identifiable assets acquired (note 4). These amounts are amortized on a straight-line basis over the estimated period of benefit being two years. (j) Other assets: Other assets consist of domain names, trademarks and patents and are being amortized straight-line over three years. (k) Impairment of long-lived assets: The Company assesses the recoverability of its long-lived assets by determining whether the carrying value of the long-lived assets can be recovered over their remaining life through undiscounted future operating cash flows. The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability will be impacted if estimated future operating cash flows are not achieved. Through August 31, 2001, no impairment charges have been recognized. 8 (A Development Stage Company) Notes to Consolidated Financial Statements (Expressed in United States dollars) Years ended August 31, 2001 and 2000 Period from August 24, 1998 (inception) to August 31, 2001 -------------------------------------------------------------------------------- 3. Significant accounting policies (continued): (l) Translation of foreign currencies: The Company's functional currency is the U.S. dollar. Financial statements of foreign operations for which the functional currency is the local currency are translated into U.S. dollars with assets and liabilities translated into U.S. dollars at the rate of exchange in effect at the balance sheet date and revenue and expense items are translated at the average rates for the period. Unrealized gains and losses resulting from the translation of the financial statements are deferred and accumulated in a separate component of stockholders' equity as a cumulative translation adjustment in accumulated other comprehensive loss. (m) Advertising: Advertising costs are expensed as incurred. Advertising costs are separately disclosed on the consolidated statements of operations. (n) Income taxes: Income taxes are accounted for under the asset and liability method in accordance with Statement of Financial Accounting Standard No. 109 "Accounting for Income Taxes" ("FAS 109"). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance to the extent that the recoverability of the asset is not considered to be more likely than not. (o) Stock option and share purchase plans: The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for awards to employees and directors under its stock option and share purchase plans. As such, compensation is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above for employee grants, and has adopted the disclosure requirements of SFAS No. 123. Grants to non-employees are recognized based on the fair value of the equity instrument at the date services are performed. 9 Destiny Media Technologies Inc. (A Development Stage Company) Notes to Consolidated Financial Statements (Expressed in United States dollars) Years ended August 31, 2001 and 2000 Period from August 24, 1998 (inception) to August 31, 2001 -------------------------------------------------------------------------------- 3. Significant accounting policies (continued): (o) Stock option and share purchase plans (continued): Deferred compensation expense arises when the employee compensation expense relates to future services. Deferred compensation expense is amortized to income over the service period which generally reflects the vesting period. 4. Acquisition: On October 20, 1999, the Company issued 1,800,000 common shares for the purchase of 100% of Destiny Software Production Inc. Destiny Software is a high-tech development company that develops video and audio compression software and to a lesser extent design and development of computer games. The transaction has been recorded under the purchase method of accounting with effect from the date of acquisition. The market value of the consideration paid for the acquisition was based on the trading price of the Company's shares at the time the terms of the transaction were agreed to between the parties and announced. At that time, there had been only one significant block of shares traded. The per share value of this trade was considered representative of market value. The Company's interest in the net assets acquired, at assigned values are as follows: ------------------------------------------------------------ Cash $ 250,719 Other current assets 8,722 Property and equipment 91,977 Intellectual property 156,892 Goodwill 275,258 Acquired in-process research and development 33,846 Current liabilities (22,289) Long-term liabilities (794,525) ------------------------------------------------------------ $ 600 ------------------------------------------------------------ Consideration: 1,800,000 common shares $ 600 ------------------------------------------------------------ Acquired in process research and development was valued based on accumulated expenditures incurred by Destiny Software to the acquisition date on specifically identified products that are in the early stages of development and on which the core technology stage had not been reached. Goodwill has been valued as equal to the excess of the fair value of the consideration given over the fair value of the net identifiable assets and liabilities acquired. A 20% shareholder of the Company owned 100% of the outstanding shares of Destiny Software at the time of the acquisition. 10 Destiny Media Technologies Inc. (A Development Stage Company) Notes to Consolidated Financial Statements (Expressed in United States dollars) Years ended August 31, 2001 and 2000 Period from August 24, 1998 (inception) to August 31, 2001 -------------------------------------------------------------------------------- 5. Related party transactions: During the year ended August 31, 2000, certain officers were required to remit proceeds from short-swing profits of $111,133 to the Company. During fiscal 2001, the Company entered into notes receivable for the settlement of the proceeds. These notes bear interest at a rate of prime plus 1% and are repayable on September 8, 2001. On February 12, 2001, the Company entered into an agreement with one of the officers to forgive his portion of the receivable, totaling $12,144, which includes principal and interest. The amount forgiven has been included in bad debt expense in the consolidated statements of operations. The remaining balance of the note receivable is $99,946 at August 31, 2001. This amount was not repaid on September 8, 2001. The Company has commenced proceedings regarding the collection of the note receivable. However, as the timing of resolution is not certain, the note receivable has been classified as a non-current asset in the consolidated balance sheet. 6. Related party loans payable:

---------------------------------------------------------------- ---------- ---------- 2001 2000 ---------------------------------------------------------------- ---------- ---------- Loan payable, due to a shareholder, unsecured, non-interest bearing, due on demand $ 1,352 $ 1,422 Loan payable, due to an individual related to a shareholder, unsecured, non-interest bearing, due on demand - 100,000 ---------------------------------------------------------------- ---------- ---------- $ 1,352 $ 101,422 ---------------------------------------------------------------- ---------- ----------

The loan payable due to an individual for $100,000 was reclassified to a demand loan during the year as the individual is no longer a related party. 11 Destiny Media Technologies Inc. (A Development Stage Company) Notes to Consolidated Financial Statements (Expressed in United States dollars) Years ended August 31, 2001 and 2000 Period from August 24, 1998 (inception) to August 31, 2001 -------------------------------------------------------------------------------- 7. Long-term debt:

---------------------------------------------------------------- ------------- ------------ 2001 2000 ---------------------------------------------------------------- ------------- ------------ Amount is non-interest bearing and repayable in twelve monthly instalments commencing on September 30, 2001 $ 81,450 $ 85,317 Full amount is repayable at the earlier of: (a) the first day of production work of a final version of Mission to Mars ("Production One") and (b) the sale, transfer, assignment, reassignment or other disposition of Production One. Interest is payable on any balance outstanding from the date that the amount becomes repayable at prime plus 2%. 45,228 47,570 Full amount is repayable at the earlier of: (a) the first day of production work of a final version of Penitentiary ("Production Two") and (b) the sale, transfer, assignment, reassignment or other disposition of Production Two. Interest is payable on any balance outstanding from the date that the amount becomes repayable at prime plus 2%. 36,345 38,227 Other 22,320 23,476 ---------------------------------------------------------------- ------------- ------------ 185,343 194,590 Current portion (163,023) - ---------------------------------------------------------------- ------------- ------------ $ 22,320 $ 194,590 ---------------------------------------------------------------- ------------- ------------

8. Private placement equity financing: (a) On November 14, 2000, the Company completed a private placement, which consisted of the issuance of 2,150,000 common shares at a price of $0.10 per share. In connection with this offering, the Company agreed to pay Agent's finders fees of $6,500. These fees are directly related to the private placement and have been offset against paid-in capital at August 31, 2001. (b) On December 15, 2000, the Company issued 18,000 common shares at $0.15 per share on exercise of warrants, which entitled the holder of the warrant to purchase one additional common share at a price of $0.15 per share. (c) On March 6, 2001, the Company completed a private placement, which consisted of the issuance of 218,200 common shares at a price of $0.25 per share. (d) On June 14, 2001, the Company completed a private placement, which consisted of the issuance of 1,185,000 common shares at a price of $0.10 per share. 12 Destiny Media Technologies Inc. (A Development Stage Company) Notes to Consolidated Financial Statements (Expressed in United States dollars) Years ended August 31, 2001 and 2000 Period from August 24, 1998 (inception) to August 31, 2001 -------------------------------------------------------------------------------- 9. Share capital: (a) Stock option plan: Pursuant to a stock option plan dated October 12, 1999, the Company has reserved 3,750,000 common shares for future issuance under its stock option plan. Stock option activity is presented below: --------------------------------- -------------- ---------------- Weighted Number of average Shares exercise price --------------------------------- -------------- ---------------- Outstanding, August 31, 1999 - $ - Granted 2,439,500 0.11 Exercised - - Forfeited - - Expired - - --------------------------------- -------------- ---------------- Outstanding, August 31, 2000 2,439,500 0.11 Granted 1,691,000 0.14 Exercised - - Forfeited (1,317,000) (0.59) Expired (450,000) (0.39) --------------------------------- -------------- ---------------- Outstanding, August 31, 2001 2,363,500 $ 0.40 --------------------------------- -------------- ---------------- 13 Destiny Media Technologies Inc. (A Development Stage Company) Notes to Consolidated Financial Statements (Expressed in United States dollars) Years ended August 31, 2001 and 2000 Period from August 24, 1998 (inception) to August 31, 2001 -------------------------------------------------------------------------------- 9. Share capital (continued): (a) Stock option plan (continued): The following table summarizes information concerning outstanding and exercisable options at August 31, 2001:

----------------------------------------------------------------------------------------------------- Options outstanding Options exercisable Weighted average Weighted Weighted remaining average average Number contractual exercise price Number exercise price Exercise prices outstanding life (in per share exercisable per share years) ------------------ -------------- ---------------- ---------------- ---------------- ---------------- $ 0.25 1,371,000 4.20 0.11 757,164 0.11 0.83 240,000 3.12 0.78 240,000 0.78 1.00 675,000 3.58 0.71 593,540 0.71 1.80 50,000 3.67 1.20 32,400 1.20 2.50 27,500 3.35 2.07 19,530 2.07 ------------------ -------------- ---------------- ---------------- ---------------- ---------------- 2,363,500 1,642,634 ------------------ -------------- ---------------- ---------------- ---------------- ----------------

At August 31, 2001, 2,363,500 (2000 - 2,439,500) options had been granted and were outstanding and an additional 1,386,500 shares were available for grant under the Plan. Of the total options outstanding at year end, 2,048,000 (2000 - 2,309,000) were granted to employees and 315,500 (2000 - 130,500) were granted to non-employees of the Company. The compensation expense, representing the intrinsic value of the options granted to employees was $72,250 (2000 - $11,248), calculated in accordance with APB Opinion No. 25. The compensation expense related to options granted to non-employees was $36,711 (2000 - $10,098), calculated in accordance with SFAS 123. During December 2000, the Company cancelled 825,000 options held by Directors and granted replacement options with a lower exercise price. For accounting purposes, these replacement options are accounted for as variable plan options whereby the date the awards are exercised, forfeited or expired to the extent that the market price at the reporting date exceeds the new exercise price. No incremental compensation has been recognized for variable options in fiscal year 2001. 14 Destiny Media Technologies Inc. (A Development Stage Company) Notes to Consolidated Financial Statements (Expressed in United States dollars) Years ended August 31, 2001 and 2000 Period from August 24, 1998 (inception) to August 31, 2001 -------------------------------------------------------------------------------- 9. Share capital (continued): (a) Stock option plan (continued): The Company applies APB Opinion No. 25 in accounting for its employee stock option plan and, accordingly, employee stock compensation cost has been recognized in the financial statements only to the extent of intrinsic value. Had the Company determined compensation cost based on the fair value on the measurement date for its employee stock option plan using the assumptions for the Black-Scholes valuation model described below, the Company's net loss and loss per share for 2001 and 2000 would have decreased to the pro forma amounts indicated below: ----------------------------------- -------------- ------------- 2001 2000 ----------------------------------- -------------- ------------- Loss for the period: As reported $ (1,556,869) $ (1,580,729) Pro forma (1,640,655) (1,627,815) Loss per share, basic and diluted: As reported (0.06) (0.07) Pro forma (0.07) (0.08) ----------------------------------- -------------- ------------- The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions: ----------------------------------- -------------- ------------- 2001 2000 ----------------------------------- -------------- ------------- Per share weighted - average fair value of stock options granted $ 0.29 $ 0.21 Expected dividend yield - - Risk-free interest rate 5.5% 5.5% Volatility 189% 70.0% Expected lives 2.01 years 2.08 years ----------------------------------- ------------- ------------- 15 Destiny Media Technologies Inc. (A Development Stage Company) Notes to Consolidated Financial Statements (Expressed in United States dollars) Years ended August 31, 2001 and 2000 Period from August 24, 1998 (inception) to August 31, 2001 -------------------------------------------------------------------------------- 9. Share capital (continued): (b) Non-cash consideration: Shares issued for non-cash consideration have been valued at their market value at the date the services are provided. During the year ended August 31, 2001, 250,000 common shares were issued to a consultant for future licensing and financing services. Management has not recorded any compensation under this contract as no services have been performed to August 31, 2001. Management believes that the common shares are forfeitable and has requested that the common shares be returned for non-performance under the contract. The contractor is currently disputing the obligations to return the shares. (c) Shares issued for debt settlement: Throughout the year ended August 31, 2001, the Company issued 675,000 common shares having a market value of $180,000 to various individuals to settle outstanding accounts payable and accrued liabilities. The Company has recorded an extraordinary loss on debt settlement of $28,749, representing the excess of the market value of the common shares at the date of settlement over the carrying value of the debt. 10. Income taxes: --------------------------------------- ------------- -------------- 2001 2000 --------------------------------------- ------------- -------------- Deferred tax assets: Net operating loss carryforwards $ 1,334,482 $ 757,668 Book over tax depreciation 36,510 20,910 ---------------------------------- ------------- -------------- 1,370,992 778,578 Valuation allowance (1,362,051) (724,898) --------------------------------------- ------------- -------------- Net deferred tax assets 8,941 53,680 Deferred tax liabilities: Intangible costs (8,941) (53,680) --------------------------------------- ------------- -------------- $ - $ - --------------------------------------- ------------- -------------- Based on historical operations, management is not able to demonstrate that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets, before the valuation allowance, reflected on the Company's balance sheet. 16 Destiny Media Technologies Inc. (A Development Stage Company) Notes to Consolidated Financial Statements (Expressed in United States dollars) Years ended August 31, 2001 and 2000 Period from August 24, 1998 (inception) to August 31, 2001 -------------------------------------------------------------------------------- 10. Income taxes (continued): The reconciliation of income tax attributable to continuing operations computed at the U.S. federal statutory tax rates to income tax expense is: ----------------------------------------- ------------- ------------- 2001 2000 ----------------------------------------- ------------- ------------- Tax at U.S. statutory rates 34.0% 34.0% Rate difference in other jurisdictions 8.3% 8.3% Change in valuation allowance (42.3%) (41.2%) Other net - (1.1%) ----------------------------------------- ------------- ------------- Tax recovery (expense) - - ----------------------------------------- ------------- ------------- The reconciliation of losses from operations by geographic region is as follows: ----------------------------------------- ------------- ------------- 2001 2000 ----------------------------------------- ------------- ------------- United States $ (649,762) $ (360,443) Canada (907,107) (1,220,286) ----------------------------------------- ------------- ------------- $(1,556,869) $(1,580,729) ----------------------------------------- ------------- ------------- 11. Commitments and contingencies: (a) The Company leases office facilities in British Columbia under an operating lease agreement that expires May 31, 2002. The Company is committed to minimum lease payments to May 31, 2002 under this lease agreement totalling $51,416. (b) Destiny Software Productions Inc., a wholly owned subsidiary of the Company, has commenced legal proceedings against Impatica.com Inc. ("Impatica") for payment of approximately $512,500 in unpaid technology license fees. It is the Company's position that Impatica has repudiated the licensing agreement and that the unpaid license fees totaling $512,500 are a debt owing by Impatica to the Company. The outstanding balance has not been booked as revenue at year end. 17 Destiny Media Technologies Inc. (A Development Stage Company) Notes to Consolidated Financial Statements (Expressed in United States dollars) Years ended August 31, 2001 and 2000 Period from August 24, 1998 (inception) to August 31, 2001 -------------------------------------------------------------------------------- 12. Financial instruments: (a) Fair value disclosures: The carrying value of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities, demand loan and long-term debt approximate their fair values due to the relatively short periods to maturity of the instruments. Due to the related party nature of the notes receivable and amounts owing to a related party, it is not practicable to estimate its fair value. (b) Foreign currency risk: The Company operates internationally, which gives rise to the risk that cash flows may be adversely impacted by exchange rate fluctuations. The Company has not entered into contracts for foreign exchange hedges. 13. Segmented information: In the opinion of management, the Company operates solely in the digital media software segment, and all sales of its products and services are made in this segment. Management of the Company makes decisions about allocating resources based on this one operating segment. Substantially, all assets and operations are in Canada. A summary of sales by region (based on location of customers) is as follows: ------------------------------ ----------------- ----------------- Years ended August 31, 2001 2000 ------------------------------ ----------------- ----------------- United States $ 293,805 $ 72,712 Other 51,848 12,832 ------------------------------ ----------------- ----------------- Total sales $ 345,653 $ 85,544 ------------------------------ ----------------- ----------------- 18 Destiny Media Technologies Inc. (A Development Stage Company) Notes to Consolidated Financial Statements (Expressed in United States dollars) Years ended August 31, 2001 and 2000 Period from August 24, 1998 (inception) to August 31, 2001 -------------------------------------------------------------------------------- 14. Recent accounting pronouncements: In July 2001, the Financial Accounting Standards Board ("FASB") released Statement of Financial Accounting Standards No. 141, "Business Combinations" (collectively, "Business Combinations") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (collectively, "Goodwill"). The Business Combinations standard requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is prohibited. The standards related to Goodwill change, among other things, the accounting for goodwill from an amortization method to an impairment-only approach, and are required to be applied prospectively with effect, for the Company, from September 1, 2002, although adoption in the first quarter of fiscal 2002 is available to the Company. Management has not yet concluded on the timing of adoption of the Goodwill standard. Under the Goodwill standard, the Company is required to perform an initial benchmark test of impairment within six months of adoption, and subsequent annual tests of impairment at the reporting unit level. If the carrying value of goodwill of a reporting unit exceeds the fair value of the reporting unit's goodwill, the carrying value must be written down to fair value. Management has not currently done a comprehensive analysis of the potential impact of this standard. 15. Subsequent events: (a) On September 13, 2001, the Company entered into an agreement with Clipstream Technologies Inc. ("CTI"), a related company, whereby CTI will acquire the Clipstream(TM) technologies, trademarks, patents, permits and licenses from the Company in exchange for 22,800,000 shares of CTI giving the Company majority interest shareholdings of CTI. Under the terms of the agreement, CTI will have the right to pledge as security the Clipstream(TM) technology. This agreement is contingent upon CTI obtaining at least Cdn. $750,000 in financing. Under the terms of the agreement, CTI will have the right to use, sell, license and carry on all business related to Clipstream(TM). The Company has also contracted to supply office support and services and product development support to CTI and royalties will be received from CTI based on specified future revenue targets if the transactions complete. (b) On September 12, 2001, the Company issued 363,665 common shares to officers of the Company for services rendered prior to August 31, 2001. Compensation expense of $44,372 related to these services was fully accrued as at August 31, 2001. On September 21, 2001, the Company issued 624,940 common shares to officers of the Company in settlement of outstanding liabilities of the Company. No material gain or loss on settlement of debt resulted from these transactions. 19