UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDEDAUGUST 31, 2005
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
OR
¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Event requiring this shell company report …………
COMMISSION FILE NUMBER000-30006
SUNGOLD INTERNATIONAL HOLDINGS CORP.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant's name into English)
Canada
(Jurisdiction of incorporation or organization)
300-940 The East Mall
Toronto, Ontario, Canada M9B 6J7
(Address of principal executive offices)
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each Class | Name of each exchange on which registered |
None | N/A |
Securities registered or to be registered pursuant to Section 12(g) of the Act:Common Shares
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:Not Applicable
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the
period covered by the Annual Report.COMMON SHARES: 119,607,800
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YesxNo ¨
Indicate by check mark which financial statement item the Registrant has elected to follow.
Item 17xItem 18 ¨
GENERAL
In this Annual Report on Form 20-F, all references to the “Corporation” or “Sungold” refer to Sungold International Holdings Corp. and its subsidiaries.
The Corporation uses the Canadian dollar as its reporting currency. All references in this document to “dollars” or “$” are expressed in Canadian dollars, unless otherwise indicated.
NOTE REGARDING FORWARD LOOKING STATEMENTS
This document contains statements that constitute “forward-looking statements”. Forward looking statements include the words “believes”, “anticipates”, “intends”, “expects”, “estimates”, “projects” and words of similar import, as well as all projections of future results. Such forward-looking statements involved known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Corporation to be materially different from any future results, performance or achievements of the Corporation expressed or implied by such forward-looking statements. Such risks are discussed in Item 3D “Risk Factors.” The statements contained in Item 4B “Business Overview” and Item 5 “Operating and Financial Review and Prospects” are inherently subject to a variety of risks and uncertainties that could cause actual results, performance or achievements to differ significantly. You should carefully review the cautionary statements and risk factors contained herein and in other documents that the Corporation files from time to time with the United States Securities and Exchange Commission.
TABLE OF CONTENTS
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data of the Corporation for the fiscal years 2001, 2002, 2003, 2004 and 2005. You should read this information in conjunction with the financial statements included elsewhere in this Annual Report. The Corporation’s financial statements have been audited by Loewen, Stronach & Co., Chartered Accountants, the Corporation’s independent accountants. The financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles (“Canadian GAAP”). Note 13 to the Corporation’s financial statements provides a description of the principal differences between Canadian GAAP and United States Generally Accepted Accounting Principles (“US GAAP”), as they relate to the Corporation, and a reconciliation to US GAAP of the Corporation’s net income and stockholders’ equity.
All information provided in the Summary of Financial Information below is in Canadian dollars and has been compiled according to Canadian GAAP and reconciled with U.S. GAAP at Note 10 to the Financial Statements.
2005 | 2004 | 2003 | 2002 | 2001 | |
(Cdn$) | (Cdn$) | (Cdn$) | (Cdn$) | (Cdn$) | |
OPERATING DATA: | |||||
Revenue(1) | - | - | - | - | - |
General And | |||||
Administrative Expenses(1) | 1,988,897 | 1,211,718 | 2,600,538 | 2,443,823 | 1,723,506 |
Net (Loss) from Operations | |||||
- Canadian GAAP | (1,988,897) | (1,211,718) | (4,617,958) | (2,602,640) | (2,184,080) |
- US GAAP | (1,389,886) | (1,274,878) | (2,601,415) | (2,472,205) | (2,051,962) |
Net (Loss) Per Share(2) | |||||
- Canadian GAAP | (0.02) | (0.01) | (0.07) | (0.06) | (0.07) |
- US GAAP | (0.01) | (0.01) | (0.04) | (0.05) | (0.06) |
2005 | 2004 | 2003 | 2002 | 2001 | |
(Cdn$) | (Cdn$) | (Cdn$) | (Cdn$) | (Cdn$) | |
Working Capital (Deficiency) | (187,667) | 34,395 | (157,799) | 64,291 | 18,214 |
Total Assets | |||||
- Canadian GAAP | 928,938 | 1,592,034 | 1,418,406 | 3,708,525 | 3,739,902 |
- US GAAP | 704,040 | 766,880 | 656,364 | 940,209 | 845,677 |
Total Liabilities | 278,214 | 210,030 | 209,881 | 351,687 | 168,434 |
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2005 | 2004 | 2003 | 2002 | 2001 | |
(Cdn$) | (Cdn$) | (Cdn$) | (Cdn$) | (Cdn$) | |
Shareholders Equity | |||||
- Canadian GAAP | 650,724 | 1,382,004 | 1,208,525 | 3,356,838 | 3,571,468 |
- US GAAP | 425,826 | 556,850 | 446,483 | 588,522 | 677,243 |
Long-Term Obligations | 14,519 | - | 17,253 | 36,676 | 52,724 |
Capital Stock | 119,607,800 | 103,364,740 | 79,871,209 | 50,121,209 | 34,454,543 |
Dividends Declared Per Share | - | - | - | - | - |
(1) | Immaterial revenue received in prior years from the Horsepower® game (2003 - $1,317; 2002 - $19,457; 2001 - $12,430) has been reclassified to show net of prizes expense. Foreign exchange gains (losses) have been reclassified to form part of the general and administrative expenses from revenue. |
CURRENCY AND EXCHANGE RATES
The Corporation prepares its financial statements in Canadian dollars. In this Annual Report, unless otherwise specified, all dollar amounts are expressed in Canadian dollars. The following tables set forth, for the periods and dates indicated, information concerning the exchange rates between U.S. dollars and Canadian dollars based on the noon rates of exchange as reported by the Bank of Canada, expressed in U.S. dollars per Canadian dollar. No representation is made that the Canadian dollar amounts, on the one hand, or the U.S. dollar amounts, on the other hand, referred to in this Annual Report could be or could have been converted in U.S. dollars or Canadian dollars, as the case may be, at any particular rate or at all.
Year Ended | Average(1) | High | Low | Period End |
(US$) | (US$) | (US$) | (US$) | |
August 31, 2001 | 0.6539 | 0.6787 | 0.6334 | 0.6461 |
August 31, 2002 | 0.6358 | 0.6618 | 0.6199 | 0.6415 |
August 31, 2003 | 0.6790 | 0.7495 | 0.6273 | 0.7220 |
August 31, 2004 | 0.7522 | 0.7879 | 0.7159 | 0.7595 |
August 31, 2005 | 0.8163 | 0.8411 | 0.7912 | 0.8411 |
Month | Average(2) | High | Low | Period End |
(US$) | (US$) | (US$) | (US$) | |
August 2005 | 0.8308 | 0.8411 | 0.8205 | 0.8411 |
September 2005 | 0.8519 | 0.8613 | 0.8425 | 0.8613 |
October 2005 | 0.8495 | 0.8577 | 0.8413 | 0.8566 |
November 2005 | 0.8470 | 0.8579 | 0.8361 | 0.8566 |
December 2005 | 0.8606 | 0.8690 | 0.8522 | 0.8577 |
January 2006 | 0.8635 | 0.8742 | 0.8528 | 0.8742 |
(1) | The average of the noon buying rates on the last business day of each month during the period. | |
(2) | The average of the lowest and the highest noon buying rates during the month. |
The noon rate of exchange on February 20, 2006 as reported by the United States Federal Reserve Bank of New York for the conversion of Canadian dollars into United States dollars was $1.148 ($1.00 = US$0.8711) .
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B. CAPITALIZATION AND INDEBTEDNESS
Not Applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not Applicable.
D. RISK FACTORS
The securities of the Corporation are highly speculative. In evaluating the Corporation, it is important to consider that the Corporation is in the development stage of its operations as a software supplier of a virtual pari-mutuel wagering entertainment system, and an Internet anonymous payment system. A prospective investor or other person reviewing the Corporation should not consider an investment unless the investor is capable of sustaining an economic loss of the entire investment. All costs have been funded through equity. Certain risks are associated with the Corporation’s business including the following:
Limited History of Operations
The Corporation has a limited history of operations. Investors should be aware of the delays, expenses and difficulties encountered in an enterprise in this stage, many of which may be beyond the Corporation’s or its affiliates’ control, including, but not limited to, the regulatory environment in which the Corporation expects to operate, problems related to regulatory compliance costs and delay, marketing difficulties and costs that may exceed current estimates. The Corporation is dependent on receiving jurisdictional approvals to have its Horsepower® pari-mutuel wagering based virtual horse racing game legalized as an alternative form of pari-mutuel wagering. The Corporation does not expect to receive any revenues from operations until the required approvals are received and the projects begin operations in a commercially profitable manner. There can be no assurance that any jurisdictional approvals will be obtained for the proposed pari-mutuel licensed facilities at Authorized Racing Affiliates that the Corporation has entered into five year exclusive license agreements with. There can be no assurance that the Corporation or its affiliates will be able to implement their business strategies and successfully develop any of the planned development projects or complete their projects according to specifications in a timely manner or on a profitable basis. The Corporation will require additional financing to carry out its business plan and, if financing is unavailable for any reason, the Corporation may be unable to carry out its business plan.
Governmental Regulations; Uncertainty of Obtaining Licenses
Racetrack establishment operations are subject to federal, provincial and local regulations. Federal, state, provincial and the applicable local authorities will require various licenses, permits and approvals. The local and federal authorities may, among other things, revoke a business license, or the license of any individual or registered entity. No racetrack has yet obtained the government licenses, permits and approvals necessary for the operation of the proposed pari-mutuel wagering activities. Business licenses and related approvals are generally deemed to be privileges under the law and no assurances can be given that any licenses, permits or approvals that may be required will be given or that existing ones will not be revoked. In particular, the Corporation’s Horsepower® World Pool racing system and operations will require various approvals from the applicable authorities, and this approval process can be time consuming and costly with no assurance of success. Moreover, all of the Corporation’s projects are subject to risks from political and economic uncertainty, which are beyond the control of the Corporation. The application processes for securing business licenses are complex and time consuming. Each project has specific requirements.
The laws, rules and regulations governing the Corporation’s proposed projects are subject to change and variation prior to the Corporation obtaining the required licenses. To a certain extent, the licensing process is a political process and the Corporation may face delays in obtaining licenses due to political changes or competing political interests.
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Need for Additional Financing to Fund Current Commitments
The Corporation requires further financing to continue its daily operations and to fund ongoing project development. The Corporation anticipates it will need to raise approximately US$1,450,000 to meet its current operating budget for the fiscal year ending August 31, 2006. If additional financing is not available at all or on acceptable terms, the Corporation may have to substantially reduce or cease its operations.
The development of the Corporation’s business will depend upon cash flow from operations and the Corporation’s ability to obtain financing through private placement financing, or other means. The Corporation currently has no significant revenues from operations and is experiencing negative cash flow, accordingly, the only other sources of funds presently available to the Corporation is through the sale of equity and debt capital. While the Corporation has successfully raised such capital in the past there can be no assurance that it will be able to do so in the future. If the Corporation cannot obtain sufficient capital to fund its planned expenditures, its planned operations may be significantly delayed or abandoned. Any such delay or abandonment could result in cost increases and adversely affect the Corporation’s future results which could result in a material adverse effect on an investment in the Corporation’s securities.
Future Revenues Depend On the Corporation’s Ability To Get Patent Protection For its Technology.
Protection of trade secrets and proprietary know how is critical to the Corporation’s success. If the Corporation’s competitors independently develop similar or superior technologies or gain access to the Corportion’s trade secrets, its business will be materially and adversely affected. Accordingly, the Corporation depends on patent protection for these products. If the Corporation is unable to obtain patent protection for its technology, they may not be able to gain a competitive advantage or protect the technology and the Coporation’s business may be adversely affected.
The Corporation may incur substantial costs seeking to enforce its patent rights against infringement or the unauthorized use of the Corporation’s proprietary technology by others or in defending the Corporation against similar claims of others. The Corporation’s trade secrets and proprietary know how are critical for it to achieve and maintain a competitive position. The Corporation cannot assure you that others may not independently develop similar or superior technologies or gain access to the Corporation’s trade secrets or know how.
The racing industry is subject to a number of factors beyond the Corporation’s control including changes in economic conditions, industry competition, management risks
The Corporation’s projects are speculative by their nature and involve a high degree of risk. The racing industry is subject to a number of factors beyond the Corporation’s control including changes in economic conditions, industry competition and management risks, changes in racing products, variability in operating costs, changes in government and changes in regulatory authorities’ rules and regulations. Any such changes in economic conditions and industry competition could result in cost increases and adversely affect the Corporation’s future results which could result in a material adverse effect on an investment in the Corporation’s securities.
The Corporation’s Common Stock is Traded on the OTC Bulletin Board and as a Result May Experience Price and Volume Fluctuations.
The market price of the Corporation’s common stock is subject to fluctuations in response to several factors, such as:
1. | actual or anticipated variations in the Corporation’s results of operations; |
2. | the Corporation’s ability or inability to generate new revenues; |
3. | competition; and |
4. | conditions and trends in the horse racing industry. |
Accordingly, the Corporation’s stock price may be adversely impacted by factors that are unrelated or disproportionate to its operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of the Corporation’s common stock.
The Corporation’s Audited Financial Statements Contain a Note about the Corporation’s Ability to Continue as a Going Concern
The Corporation’s financial statements have been prepared on the basis of accounting principles applicable to a going concern. As of August 31, 2005, the Corporation had an accumulated deficit of $20,618,381which increased to $20,891,342 as at November 30, 2005, which, if prepared under US GAAP, would have an accumulated deficit of $25,568,050 as at August 31, 2005 and $25,842,484 as at November 30, 2005. The Corporation’s ability to continue as a going concern and the recoverability of the amounts shown for predevelopment costs is primarily dependant on the ability of the Corporation to operate the Horsepower® World Pool, and or the SafeSpending™ system profitably in the future. The Corporation plans to meet anticipated financing needs through private placements, debt offerings, public offerings or joint venture participation by others. Failure to continue as a going concern would require a restatement of assets and liabilities on a liquidation basis, which would differ materially from the going concern basis on which the Corporation’s financial statements were prepared.
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Under U.S. GAAP, the auditor’s report on the consolidated financial statements contains an explanatory paragraph when the financial statements are affected by conditions and events that cast substantial doubt on a company’s ability to continue as a going concern such as those described in Note 2 to the Corporation’s audited financial statements.
It may be difficult for United States investors to effect service of process within the United States upon the Corporation or upon those directors or officers who are not residents of the United States
The Corporation is incorporated under the laws of Canada and a majority of the Corporation’s officers are residents of Canada. Consequently, it may be difficult for United States investors to effect service of process within the United States upon the Corporation or upon those directors or officers who are not residents of the United States, or to realize in the United States upon judgments of United States courts predicated upon civil liabilities under the United States Securities Exchange Act of 1934, as amended. A judgment of a U.S. court predicated solely upon such civil liabilities may not be enforceable in Canada by a Canadian court if the U.S. court in which the judgment was obtained had jurisdiction, as determined by the Canadian court, in the matter. There is substantial doubt whether an original action could be brought successfully in Canada against any of such persons or the Corporation predicated solely upon such civil liabilities.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Name and Incorporation History
The Corporation was incorporated on April 7, 1986 pursuant to theCompany Act (British Columbia) under the name “307198 B.C. Ltd.” and commenced trading on the Vancouver Stock Exchange (now the TSX Venture Exchange) (the “Exchange”) on May 3, 1988. The Corporation’s shares were voluntarily de-listed from the Exchange effective at the close of trading December 11, 1997.
On May 14, 1999, the common shares of the Corporation were approved for quotation by the National Association of Securities Dealers on the OTC Bulletin Board.
The Corporation changed its name from “307198 B.C. Ltd.” to “Fircrest Resources Ltd.” on July 9, 1986. On October 30, 1991, the Corporation consolidated its authorized capital from 100,000,000 common shares without par value to 20,000,000 common shares without par value and the name of the Corporation was changed from “Fircrest Resources Ltd.” to “NTC Capital Corporation”.
On March 1, 1994, the Corporation changed its name from “NTC Capital Corporation” to “Sungold Gaming Inc.”, to reflect the nature of its business.
On May 26, 1997, the Corporation increased its authorized capital from 20,000,000 to 60,000,000 common shares, and changed its name from “Sungold Gaming Inc.” to “Sungold Gaming International Ltd.”, to reflect the nature and location of its business. Subsequently, the authorized share capital was decreased to 58,875,000 due to cancellation of escrow shares in accordance with Section 232 of theCompany Act (British Columbia). On March 20, 2000, the Corporation changed its name from “Sungold Gaming International Ltd.” to “Sungold Entertainment Corp.”. Management of the Corporation believed that the name more accurately reflected the future direction and business of the Corporation.
At the Corporation’s Annual General Meeting held on February 22, 2002, the shareholders approved an increase in the Corporation’s authorized capital to 100,000,000 common shares to ensure that there are sufficient shares reserved for future issuance. The shareholders also approved the creation of 100,000,000 Class “A” Preference Shares, and the creation of 100,000,000 Class “B” Preference Shares, to permit future preferred share financings.
On December 12, 2003, the Corporation changed its name to “Sungold International Holdings Corp.” and was continued under theCanada Business Corporations Act, thereby changing from a provincial to a Canadian federally incorporated company, at which time the authorized capital was changed to an unlimited number of common shares.
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Offices
The Corporation’s head office and registered office, since February 10, 2006, is located at 300-940 The East Mall, Toronto Ontario Canada, M9B 6J7 (Tel: 416-621-4519).
History and Development of the Corporation
The Corporation is a development stage company focused on the development of a pari-mutuel, virtual, horseracing entertainment software, advertising sales designed to operate in conjunction with this software, and an internet payment system. From 1988 to 1993, the Corporation was engaged in the mineral exploration business. Beginning in 1993, the Corporation decided to refocus its principal business and concentrate its resources on developing the above projects and two others which have since been abandoned.
The first such abandoned project was an agreement in 1994 with the Gun Lake Indian Band in the State of Michigan, to develop and manage a full service casino and gaming operation (the “Gun Lake Agreement”). In 1999, the Gun Lake Band breached the agreement with the Corporation. As a result, the Corporation filed a lawsuit in the Michigan courts against the Gun Lake Band claiming damages for breach of contract. In 2002, the Michigan Court of Appeals court dismissed the appeal on the basis of the Gun Lake Band’s claim of sovereign immunity. In 2003, the Michigan Supreme Court denied the Corporation an application to appeal the Michigan Court of Appeals court decision and in 2003 the Corporation decided not to appeal the decision to the United States Supreme Court. This project was written off in fiscal 2003.
The other abandoned project was a letter of intent dated December 8, 1997, which was subsequently amended and extended, with TAC International Investments LLC (“TAC”), a private investment company, regarding Richmond Thoroughbred Training Centre. Pursuant to the TAC letter of intent, if the Corporation had received authorization to develop the complex from the City of Richmond and the Province of British Columbia prior to October 1, 2005, TAC had agreed to purchase six million common treasury shares of the Corporation at US $4.00 per share by way of private placement. In July 2004, this project was amended when the Corporation obtained an option to purchase 126 acres of land southwest of No. 8 Road and Westminster Highway in Richmond, BC, Canada for the purpose of developing a horse training complex, subject to approval of all zoning and regulatory authorities. The agreement gave the Corporation the option to purchase the Westminster Property for $10,500,000 until January 2, 2005, and in July 2004, the Corporation renegotiated to extend the agreement with TAC International Investments LLC (“TAC”) which was interested in both the Vancouver one-mile racecourse and the Corporation’s Richmond Equine Training Center project. The agreement set out the intention of both parties that upon the Corporation receiving the appropriate permission from the Cities of Vancouver and Richmond, British Columbia and from the Province of British Columbia to develop the project, the interested party would purchase 6 million common treasury shares of Sungold at a price of US$4.00 per share. The agreement was extended to October 1, 2005. Zoning approvals were not achieved, the option to purchase the land was allowed to expire on January 2, 2005, and the Corporation expensed the pre-development costs for the project in 2005 in the amount of $628,246.
In September, 1999, the Corporation, through its wholly owned subsidiary, Horsepower Broadcasting Network Inc., the Corporation acquired computer hardware for developing software and leased a hosting facility that enabled Horsepower to operate the $US based world wagering pool at licensed racetracks and licensed teletheatres worldwide. The Corporation engaged another of its wholly owned subsidiaries Horsepower Broadcasting Network (HBN) International Ltd. (“HBN”) to test run their US$ wagering program through the internet.
In May, 2001, the Corporation acquired the right, title and interest to the internet payment system technology of SafeSpending™ from SafeSpending Services Inc. The SafeSpending™ internet payment system is intended to become a prepaid spending system that uses a unique and personalized PIN number which can be used to make anonymous purchases online from merchants and individuals. The acquisition agreement includes all copyrights, trademarks, source codes and SafeSpending’s intellectual property. Under the terms of agreement the Corporation agreed to pay a 7.5% royalty upon the Corporation or its licensed subsidiary receiving $1,000,000 in net revenue from operation, sale or license of the technology.
In March 2003, the Corporation made a strategic decision to offer the Horsepower® pari-mutuel wagering system and the Horsepower® World Pool, exclusively through licensed, land based racetracks and licensed off track betting centres and to grant long term licenses to operate the Horsepower® pari-mutuel wagering system exclusively to authorized racetrack affiliates (“A.R.A.'S”) worldwide.
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In fiscal 2004, the Corporation’s wholly owned subsidiary Horsepower Broadcasting Network (HBN) International Ltd. (“HBN”) entered into five year non-exclusive and non-transferable license agreements for the use of HBN’s Horsepower® pari-mutuel wagering based virtual horse racing game and certain maintenance and support services in relation to the operation and installation of the Horsepower® system, with the following licensees the (“Licensees”):
(a) | Pompano Park Racing, the license agreement was entered into in March, 2004. | |
(b) | Manitoba Jockey Club Inc, the license agreement was entered into in April, 2004. | |
(c) | Truro Raceway, the license agreement was entered into in May, 2004. | |
(d) | Inverness Raceway, the license agreement was entered into in August, 2004. |
In consideration of the grant of license each Licensee agreed to pay 85% of the net revenue received by the Licensee from customers playing the Horsepower® game. Each of the license agreements is subject to termination in the event that: (i) the Licensee fails to make any required payments under the agreement, (ii) the Licensee breaches any of its covenants or commits a breach of its obligations under the agreement that are not cured within 20 days written notice to the Licensee.
Recent Corporate Developments
Since the completion of our fiscal year ended August 31, 2004, the Corporation has experienced the following significant corporate developments:
1. | On November 22, 2005, Horsepower Broadcasting Network (HBN) International Ltd., the Corporation’s subsidiary, signed a Letter of Intent with Clinton Phipps Racetrack to be an Authorized Racetrack Affiliate for a five year exclusive license agreement for the pari-mutuel product Horsepower® World Pool at the U.S. Virgin Island facilities on St. Thomas. The definitive five year licensing agreement will be subject to all mandatory legal approvals. There can be no assurance that the definitive agreement will be completed. |
2. | In November 2005 the Corporation announced the appointment of Patrick Kearns as Vice President International Operations to coordinate international efforts and develop opportunities in the emerging markets of Europe. The Corporation entered into a management services agreement with Patrick Kearns dated effective November 14, 2005 pursuant to which Mr. Kearns agreed to act as VP of International Operations of Sungold in consideration of which the Corporation agreed to: (i) pay a monthly fee of £$3,000, (ii) issue an option to purchase 250,000 shares of the Corporation’s common stock at a price of $0.15 per share expiring May 31, 2007, and (iii) issue 100,000 shares of the Corporation’s common stock upon execution of the agreement and a further 250,000 upon achievement of certain milestones. The agreement is for a six month term and may be terminated at any time by Sungold on two months notice. |
3. | For fiscal 2005, the Corporation has focused on five strategic objectives: strengthening management, finishing the software development of the Horsepower® World Pool software system, marketing the product to licensed pari- mutuel wagering establishments, obtaining requisite legal approvals in the appropriate jurisdictions, and starting the software development of the SafeSpending™ Internet Payment system. |
4. | As part of the Corporation’s restructuring of management since the completion of the Corporation’s prior fiscal year, the Corporation appointed a new Chief Financial Officer, President, Vice-President Corporate Development, and Vice-President Administration. The Corporation appointed Keith Blackwell as Chief Executive Officer and Chief Financial Officer, Paul Coulter as Vice-President Administration of Sungold, Patrick Kearns as Vice-President International Operations of Sungold, Troy Griffin as Vice-President Corporate Development of Sungold and President and CEO of Safespending Inc., Tony Currie as President of Sungold, Larry Simpson as President and CEO of HBN, Nicholas DeSante as Vice-President of Operations of HBN and J. Scott Rowe as Director of the Corporation and as Vice-President Corporate Development for Horsepower Broadcasting Network (HBN) International Ltd. In addition, the Corporation announced the appointment of Richard Henley as General Manager, Commercial Advertising for Racing Unified Network (R.U.N.) Inc. |
5. | In June 2005, Sungold entered into an agreement with the estate of Kim N. Hart, the former President and CEO of HBN for the purpose of cancelling warrants to purchase 55,150,000 shares of Sungold previously granted to Mr. Hart. Pursuant to the terms of the cancellation agreement Sungold agreed to pay the estate $25,000 and assume the |
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obligations under certain office leases. The Corporation also reached an agreement with two other warrant holders to cancel an additional 550,000 warrants. | ||
6. | In July 2004, the Corporation obtained an option to purchase 126 acres of land southwest of No. 8 Road and Westminster Highway in Richmond, BC, Canada for the purpose of developing a horse training complex, subject to approval of all zoning and regulatory authorities. The agreement gave the Corporation the option to purchase the Westminster Property for $10,500,000 until January 2, 2005. The option expired on January 2, 2005. The Corporation was unable to arrange for necessary zoning changes before the option on the land expired and therefore was unable to proceed with the project. Also fiscal 2005, the Corporation abandoned the Vancouver Race Course project and wrote down $628,246 in pre-development costs related to both projects. During fiscal 2005, management decided not to pursue the land purchase option on Richmond Equine Training Centre and cancelled the letter of intent to issue six million common shares related to the project at $4.00 per share and expensed the deferred pre- development costs of the project. The Corporation had entered into a letter of intent with TAC for US$24,000,000 in financing for racecourse development in British Columbia. There were no impairment write downs in 2004. | |
7. | In July 2005, the Corporation’s subsidiary, Safe Spending Inc. arranged contracts with Jereome Nootebos and Mark Evans to assist in completing the development of the SafeSpending® Anonymous Internet Payment. | |
8. | In July 2005, the Corporation entered into a six month agreement with Cynthia DeMonte Associates Ltd. Pursuant to which the Corporation agreed to pay a monthly fee of $4,000 and issue 100,000 shares of the Corporation’s common stock to Ms. DeMonte in consideration of which Ms. DeMonte agreed to provide investor relations and marketing communication services to Sungold. | |
9. | The Corporation’s marketing efforts are a continuous process in North America and abroad, in July 2005 the Corporation entered into a one year agreement with an industry consulting agency in Ireland, the Web Gaming Consultants, to represent it in Ireland, the U.K., France, South Africa and Israel. With the appointment of Richard Henley, the marketing effort is expected to include the aspect of selling the video advertising time between the virtual horse races on the Horsepower® World Pool display. | |
10. | During the year ended August 31, 2005, the Corporation signed letters of intent with 5 race track locations and 2 of their off-track affiliates to become licensed affiliates for a total of 7, bringing the total track and off-track affiliates to approximately 40 under license agreements and letters of intend to become licensed affiliates. | |
11. | During fiscal 2005, the Corporation’s wholly owned subsidiary Horsepower Broadcasting Network (HBN) International Ltd. (“HBN”) entered into five year non-exclusive and non-transferable license agreements for the use of HBN’s Horsepower® pari-mutuel wagering based virtual horse racing game and certain maintenance and support services in relation to the operation and installation of the Horsepower® system, with the following licensees the (“Licensees”): | |
a. | Fredericton Exhibition Limited, the license agreement was entered into in September, 2004. | |
b. | Buffalo Trotting Association, the license agreement was entered into in November, 2004. | |
c. | Flagler Greyhound Track, the license agreement was entered into in November, 2004. | |
In consideration of the grant of license each Licensee agreed to pay 85% of the net revenue received by the Licensee from customers playing the Horsepower® game. Each of the license agreements is subject to termination in the event that: (i) the Licensee fails to make any required payments under the agreement, (ii) the Licensee breaches any of its covenants or commits a breach of its obligations under the agreement that are not cured within 20 days written notice to the Licensee. The Corporation has not yet received revenues pursuant to the license agreements and is awaiting regulatory approvals and final development of the Horsepower® game. | ||
12. | As part of the Corporation’s decision to streamline and restructure its operations the Corporation dissolved its wholly owned inactive subsidiary Horsepower Broadcasting Network Inc., in January, 2005. |
The Corporation’s principal capital expenditures currently in progress consist of:
- The Horsepower® based racing system, source codes, patent, trademarks and worldwide license;
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The rights, title and all intellectual property rights to the SafeSpending™ anonymous internet payment system;
Certain computer hardware and software for scaleable operation of multi-user wagering systems; and
Investment in research and development related to pari-mutuel wagering systems and online payment processing systems.
The Corporation intends to continue to finance its operations through the issuance of equity and debt financing and through revenues from Horsepower® World Pool system.
During the three year period ended August 31, 2005, the Corporation financed its operations by selling 65,493,060 in equity securities either for cash or in settlement of debt. In the same three year period, the Corporation spent $497,215 in acquisition of capital assets, and $80,254 in pre-development costs for a total of $577,469 spent on development expenditures related to its entertainment projects. See “Business Overview” below.
B. BUSINESS OVERVIEW
The Corporation and its wholly owned subsidiaries, Horsepower Broadcasting Network (HBN) International Ltd., a company incorporated under the laws of Canada, Racing Unified Network (R.U.N.) Inc. a company incorporated under the laws of Canada, and SafeSpending Inc., a company incorporated under the laws of Arizona, are in the business of developing and operating the virtual horse racing software system, developing advertising revenues associated with the virtual horse racing system, and designing the online internet prepayment system.
1. HORSEPOWER BROADCASTING NETWORK (HBN) INTERNATIONAL LTD.
Horsepower Broadcasting Network (HBN) International Ltd (“HBN”) controls the international rights, title and interest in the Horsepower® World Pool Sytem, random, virtual horserace and pari-mutuel based wagering system. Horsepower® is a computer generated horse racing jackpot system, which is viewed in real time worldwide. The Horsepower® World Pool Wagering System (“Horsepower®”) is designed to operate through licensed, pari-mutuel racetrack locations. Players can win small prizes or multimillion-dollar payoffs from a $1 base wager.
The Corporation believes that the many racetrack facilities worldwide are all opportunities for the Corporation to offer Horsepower® as a pari-mutuel wager worldwide. The Corporation owns the exclusive perpetual right and license to market its Horsepower® proprietary system, commercial sponsorships, advertising and other promotional materials in connection with the use of the technology. This includes the rights to all intellectual property including copyrights, patents and trademarks.
Horsepower® Systems Management and Horsepower® Security are internally managed by Horsepower Broadcasting Network (HBN) International Ltd.
Consulting Agreement with T-Swat Consulting
The Corporation entered into a consulting agreement dated June 29, 2004 with T-Swat Consulting, a private company controlled by Jeff Grant the Chief Technical Officer of HBN, for the purpose of developing the hardware appliance, and web/database infrastructure necessary for the Horsepower® World Pool Wagering System to operate in licensed facilities. Pursuant to the terms of the agreement, the Corporation agreed to pay a fixed cost engagement price of $275,825 excluding hardware, software, network upgrade, travel and 3rd party technical consulting costs for completion of the product. As of August 31, 2004, the Corporation had paid $69,580 as progress payments. During the year ended August 31, 2005, the Corporation paid an additional $180,301, and owed $22,232 at August 31, 2005. The Horsepower® World Pool Wagering System was substantially completed in 2005. The Corporation is presently in the final phase of development of the system. Once the Corporation completes the last phase it intends to commence installing the product at licensed facilities.
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Agency Agreement with The Web Gaming Consultants
On July 15, 2005 Sungold entered into an Agency Agreement with the Web Gaming Consultants (“WGC”) pursuant to which WGC agreed to act as Sungold’s agent in obtaining licensing approvals for the Horsepower World Pool system in Ireland, the United Kingdom, Israel, France and South Africa. Pursuant to the terms of the agreement as consideration for the agency services provided by WGC, the Corporation agreed to pay WGC a fee of $2,500 per month commencing August 1, 2005, issue 15,000 shares of Sungold and pay bonuses of $1,500 and $6,000 upon reaching certain milestones. The agreement is for a term of one year.
2. RACING UNIFIED NETWORK (R.U.N.) INC.
Racing Unified Network (R.U.N.) Inc. (“RUN”) was incorporated to sell and arrange the advertising opportunities associated with the Horsepower® game. The advertising consists of video commercials which are to be broadcast between the Horsepower® races, and background billboard space in the race graphics. Subsequent to the year end, RUN has hired Richard Henley for the position of General Manager Commercial Advertising to head up this function.
3. SAFESPENDING INC.
In May 2001, Sungold® acquired the entire world wide right, title and interest to the internet payment system technology of SafeSpending Services Inc. (“SafeSpending”). The SafeSpending™ internet payment system is a prepaid anonymous cash spending system that uses a unique and personalized PIN number which can be used to make purchases online from merchants and individuals.
The acquisition agreement includes all copyrights, trademarks, source codes and intellectual property. Under the terms of the agreement the Corporation has agreed to pay a royalty of 7.5% of net revenue relating to the technology upon the Corporation or its subsidiary Horsepower Broadcasting Network Inc. receiving $1,000,000 in net revenue from operation, sales or license of the technology. The Corporation intends to negotiate for a joint venture partner to distribute SafeSpending™ through retailers (land based) on a worldwide basis. A patent is pending for the anonymous cash payment system in 105 countries. In July, 2005 Safe Spending Inc. arranged contracts with the inventors of the SafeSpending® Anonymous Internet Payment system to assist in completing the development of the system.
The Corporation is in the preliminary stages of seeking regulatory and other approvals required to develop each of the Sungold® Projects. All of the Corporation’s projects are in the development stage and currently produce no revenues. The Corporation’s Horsepower® project is in the pari-mutuel wagering/entertainment industry and is subject to significant regulatory requirements.
There can be no assurance that the Corporation will successfully develop all of the Projects currently under development or that such projects, if developed, will generate any revenues or profits from operations.
The Corporation anticipates it will need to raise approximately US$1,450,000 during the fiscal year ending August 31, 2006 to meet its minimum projected expenditures for such period. See “Description of Business - Plan of Operation.” There can be no assurance that the Corporation will successfully obtain such financing on acceptable terms.
Principal Markets
The Corporation’s principal markets include North, Central and South America, Asia and Europe for the installation of the Horsepower® racing system at licensed pari-mutuel facilities.
Seasonality of the Corporation’s Business
The Corporation’s business is not seasonal nor does the Corporation require raw materials to conduct its business.
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Marketing Channels
The Corporation’s marketing channels are primarily licensed world pari-mutuel facilities as well as the Internet and traditional multimedia.
PLAN OF OPERATION
Below is a summary of the Corporation’s Plan of Operation and operating budget for each of the Corporation’s projects and for administration and marketing for the fiscal year ending August 31, 2006.
Horsepower® Project
During the fiscal year ending August 31, 2006, the Corporation anticipates that its plan of operation related to the Horsepower® pari-mutuel wagering system will consist of, among other things, (i) preparing the Horsepower® system for introduction and then installation at selected international racetracks; and (ii) development of an advertising network integrated with the Horsepower® system and create more awareness of the Corporation.
SafeSpending™ Project
During the fiscal year ending August 31, 2006, the Corporation intends to begin software development of the internet prepayment system. Set forth below is the Corporation’s anticipated operating budget for the Horsepower® pari-mutuel wagering system and the SafeSpending™ system for the fiscal year ending August 31, 2006.
Horsepower® System
Operating Expenses | US$ | ||
Legal | 25,000 | ||
Software Development | 150,000 | ||
Hardware Systems | 50,000 | ||
System Management | 100,000 | ||
Total Horsepower® System: | $ | 325,000 |
SafeSpending™ System
US$ | |||
Software Development | $ | 200,000 |
Set forth below are the Corporation’s estimated operating budgets for administrative and marketing expenses for the fiscal year ending August 31, 2006:
Administration Expenses | US$ | ||
Office/Telephone/Supplies | 25,000 | ||
Office Rent/Services | 125,000 | ||
Legal/Audit/Transfer Agent | 50,000 |
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Management/Consulting Fees | 250,000 | ||
Investor Relations | 100,000 | ||
Travel/Entertainment | 75,000 | ||
Contingency | 100,000 | ||
Total Administration Expenses | $ | 725,000 | |
Marketing Expenses | $ | 200,000 | |
TOTAL OPERATING BUDGET: | $ | 1,450,000 |
The Corporation’s total operating budget for the fiscal year ending August 31, 2006 is estimated to be approximately $1,450,000. There can be no assurance that the Corporation’s actual expenditures for the fiscal year ending August 31, 2006 will not exceed the Corporation’s estimated operating budgets. Actual expenditures will depend on a number of factors, some of which are beyond the control of the Corporation, including, among other things, timing of regulatory approval of its projects, the availability of financing on acceptable terms, reliability of the assumptions of management in estimating cost and timing, certain economic and political factors, the time expended by consultants and professionals and fees associated with applications related to the Corporation’s projects. If the actual expenditures for such costs exceed the estimated costs or if events occur that require additional expenditures, the Corporation will be required to raise additional financing or to defer certain expenditures to meet other obligations. The failure to meet certain expenditures may cause the Corporation to default on material obligations and such default may have a material adverse effect on the Corporation’s business and results of operations.
C. ORGANIZATIONAL STRUCTURE
The Corporation has three wholly owned subsidiaries: (i) Horsepower Broadcasting Network (HBN) International Ltd., a company incorporated under the laws of Canada; (ii) Racing Unified Network (R.U.N.) Inc., a company incorporated under the laws of Canada; and (iii) SafeSpending Inc. (formerly Sungold Entertainment USA Inc.), a company incorporated under the laws of Arizona. The Corporation wound up its wholly owned subsidiary Horsepower Broadcasting Network Inc. in January, 2005.
D. PROPERTY, PLANTS AND EQUIPMENT
The Corporation’s corporate headquarters are located in Toronto, Ontario, Canada. The Corporation is renting office space in Toronto on a month to month basis from a related party at the rate of $1,570 per month. The Corporation maintains a corporate identity and use of board rooms in Vancouver at a rate of approximately $100 per month. Management believes these rates are favourable compared with market rates, but the Corporation expects to add more office space in the near future.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following should be read in conjunction with the Corporation’s financial statements, forming a part of this document, including note 13 to the annual financial statements which provides a reconciliation between US GAAP and Canadian GAAP.
Critical Accounting Policies
The Corporation’s financial statements are prepared in conformity with Canadian generally accepted accounting principles, which require management to make estimates and assumptions which can affect the reported balances. In determining estimates of net recoverable amounts and net realizable values, or whether there has been a permanent impairment in value, for pre-development costs and equipment, the Corporation relies on assumptions regarding
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applicable industry performance and prospects, as well as general business and economic conditions that prevail and are expected to prevail. Assumptions underlying asset valuations are limited by the availability of reliable comparable data and the uncertainty of predictions concerning future events.
By nature, asset valuations are subjective and do not necessarily result in precise determinations. Should the underlying assumptions change, the estimated net recoverable amounts and net realizable values may change by a material amount. The Corporation’s significant accounting policies are set forth in Note 2 to its consolidated financial statements, which should be read in conjunction with management’s discussion of the Corporation’s critical accounting policies and estimates set forth below.
Commitments and Contingencies
The Corporation’s activities are subject to various governmental laws and regulations relating to, virtual horse racing, copyrights, trademarks and patents. These regulations are continually changing. The Corporation believes its activities comply in all material respects with all applicable laws and regulations.
Translation of Foreign Currencies
Accounts recorded in foreign currency have been converted to Canadian dollars as follows:
Current assets and current liabilities at exchange rates at the end of the year;
Other assets at historical rates; and
Revenues and expenses at the average rate of exchange for the month incurred.
Gains and losses resulting from the fluctuation of foreign exchange rates are included in the determination of income.
Pre-development costs
The Corporation is in the development stage and capitalizes all costs related to its pre-development projects in accordance with Accounting Guideline No. 11, “Enterprises in the Development Stage”, issued by the Canadian Institute of Chartered Accountants. These costs will be amortized on the basis of revenue generated in relation to the project following commencement of operations. When management decides a project is to be abandoned, costs of the abandoned project are written off to operations. As the date of this Annual Report, there were no projects which commenced operations.
The costs deferred at any time do not necessarily reflect present or future values. The ultimate recovery of such amounts depends on the Corporation successfully developing and commencing the project.
Overview
To date, the Corporation has not earned significant revenues and is considered to be in a development stage. The recoverability of pre-development costs is primarily dependent on the ability of the Corporation to put its pre-development projects into economically viable products in the future.
The Corporation has funded its business operations, working capital and business development by the issuance of share capital under private placements and by the exercise of accompanying warrants and stock options in the aggregate amount of $15,973,140 for cash and $2,575,737 for debt settlement since inception.
As of August 31, 2005, the Corporation had $10,876 cash and $43,065 Canadian goods and services tax credits, $22,087 in prepaid expenses and $244,075 in accounts payable. As at August 31, 2004, the Corporation had $93,411 cash on hand, $92,246 Canadian goods and services tax credits, $58,768 in prepaid expenses and $200,334 in accounts payable.
The Corporation's net losses for the fiscal years ended 2005 and 2004 were $1,988,897 (including a write down of pre-development costs of $628,246) and $1,211,718 respectively.
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A. OPERATING RESULTS
The following is a summary of selected financial data for the Corporation for its last three completed financial years.
Year Ended | |||
August 31, 2005 | August 31, 2004 | August 31, 2003 | |
Revenue(1) | $Nil | $Nil | $Nil |
Net Income (Loss) | ($1,988,897) | ($1,211,718) | ($4,617,958) |
Earnings (Loss) Per Share | ($0.0178) | ($0.0131) | ($0.0680) |
Net Income (Loss) US GAAP | ($1,389,886) | ($1,274,878) | ($2,601,415) |
EPS (Loss) US GAAP | ($0.0125) | ($0.0138) | ($0.0383) |
Dividends Per Share | $Nil | $Nil | $Nil |
Dividends Per Share (US GAAP) | $Nil | $Nil | $Nil |
Weighted Average Number of Shares | 111,579,338 | 92,239,057 | 67,894,398 |
Working Capital (Deficiency) | ($187,667) | $34,395 | ($157,799) |
Pre-development costs | $224,898 | $825,154 | $762,042 |
Long Term Debt | $14,519 | $Nil | $17,253 |
Long Term Debt (US GAAP) | $14,519 | $Nil | $17,253 |
Shareholder’s Equity | $650,724 | $1,382,004 | $1,208,525 |
Total Assets | $928,938 | $1,592,034 | $1,418,406 |
Total Assets (US GAAP) | $704,040 | $766,880 | $656,364 |
Notes
(1) | Foreign exchange gains (losses) have been reclassified to form part of the general and administrative expenses from revenue. |
YEAR ENDED AUGUST 31, 2005 COMPARED TO AUGUST 31, 2004
Revenues. The Corporation had no revenue from operations during fiscal 2005 or 2004.
Operating Expenses.Operating expenses for fiscal 2005 increased to $1,988,897 compared to $1,211,718 for fiscal 2004, primarily due to the Corporation writing off $628,246 of pre-development expenses related to the Vancouver Racecourse / Richmond Equine Training Centre projects. Otherwise, the results would have been quite similar.
Financing Expenditures.During the year ended August 31, 2005, the Corporation issued 16,243,060 private placement units to settle debts, pay for services, and provide working capital in total of $1,119,082 Proceeds from the exercise of share purchase warrants and incentive share purchase options were NIL in fiscal 2005 the same as in fiscal 2004.
Pre-development Expenditures. The pre-development expenditures capitalized under Canadian GAAP for the year ended August 31, 2005 were $27,990, being $24,155 related to the SafeSpending™ project and $3,835 related to the Horsepower® project minus a write off of $628,246 closing out the Vancouver Racecourse/Richmond Equine Centre project which was abandoned for a net write off of $600,256 compared to an increase of $63,112 in 2004.
Professional and consulting expenditures for fiscal 2005 were $566,803 compared to expenses of $488,500 in fiscal 2004. Investor relations fees increased to $133,306 in fiscal 2005 over $35,192 in fiscal 2004. Office expenses decreased slightly to $43,756 in fiscal 2005 from $59,673 in fiscal 2004.
Net Loss.The Corporation had a net loss of $1,988,897 for fiscal 2005, which included a pre-development write down of $628,246, compared to a net loss of $1,211,718 for fiscal 2004, so other than the write down the losses were fairly consistent. The $0.0178 loss per share for fiscal 2005 compares to $0.0131 loss per share for fiscal 2004 and reflects the Corporation's net loss in the 2005 and 2004 fiscal years under Canadian GAAP.
As the Corporation is in the development stage, there is no income from operations at this point. However, the Corporation anticipates that revenue will develop before the end of the current fiscal year as the Horsepower® World Pool Racetrack System becomes operational.
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YEAR ENDED AUGUST 31, 2004 COMPARED TO AUGUST 31, 2003
Revenues. The Corporation had no revenue from operations during fiscal 2004 and in fiscal 2003.
Operating Expenses.Operating expenses for fiscal 2004 decreased to $1,211,718 compared to $4,617,958, which included a pre-development cost write down of $2,017,420, for fiscal 2003, primarily due the Corporation being in a period of retrenchment and restructuring administration and management which resulted in reduced management and consulting fees.
Financing Expenditures.During the year ended August 31, 2004, the Corporation issued 19,500,000 private placement units to settle $1,385,197 of debts. Proceeds from the exercise of share purchase warrants, incentive share purchase options and private placements totaled $Nil in fiscal 2004 compared to $1,835,162 in fiscal 2003.
Pre-development Expenditures. Overall the pre-development expenditures and investments capitalized under Canadian GAAP for the year ended August 31, 2004 were increased by $63,112, as compared to a decrease of $2,006,274 in 2003, which includes the impairment write-off of $2,017,420 in 2003. The Vancouver Thoroughbred Park/Richmond Equine Training Centre project pre-development expenditures for fiscal 2004 were $12,919 and the SafeSpending™ project pre-development expenditures for fiscal year 2004 were $30,073. The Horsepower® software development project pre-development expenses for fiscal 2004 were $20,120.
Professional and consulting expenditures for fiscal 2004 were $488,500 compared to expenses of $547,829 in fiscal 2003. Investor relations fees decreased to $35,192 in fiscal 2004 from $214,843 in fiscal 2003. Office expenses decreased to $59,673 in fiscal 2004 from $164,044 in fiscal 2003.
Management Fees.In fiscal years 2004 and 2003, the Corporation had agreements with two consultants providing full time administration and management services and agreements with ten other consultants providing services such as internet consulting, marketing and corporate development. Management fees for the two agreements respecting management services during the year ended August 31, 2004 were $58,353 compared to $286,603 in 2003. Fees for internet services in fiscal 2004 were $23,831 compared to $184,249 in 2003.
Net Loss.The Corporation had a net loss of $1,211,718 for fiscal 2004 which was largely due to the Corporation being in a period of retrenchment and restructuring administration and management, compared to net loss of $4,617,958 for fiscal 2003 which was primarily due to a one time impairment write down of $2,017,420 primarily related to the Gun Lake project. The $0.01 loss per share for fiscal 2004 compares to $0.07 loss per share for fiscal 2003 and reflects the Corporation's net loss in the 2003 and 2004 fiscal years under Canadian GAAP.
As the Corporation's revenue-producing technology, Horsepower® pari-mutuel wagering system is still in the development stage, there is no income from operations.
In 2004 the Corporation’s “The Horsepower® World Pool Program” attracted new Authorized Racetrack Affiliates (A.R.A.’s) under five year exclusive agreements with the following Racetracks; Pompano Park in Florida, Assiniboia Downs in Manitoba, Fredericton Raceway in New Brunswick, Buffalo Raceway in New York, Flagler Greyhound Track in Miami, Florida, and both Truro Raceway and Inverness in Nova Scotia. In 2004, interest has developed in the Horsepower® A.R.A. opportunity in dozens of jurisdictions within North America and the Caribbean.
B. LIQUIDITY AND CAPITAL RESOURCES
As at August 31, 2005, the Corporation had the following cash:
CDN Account | $ | 10,425 | |
USD Account (expressed in CDN$) | 451 | ||
TOTAL: | $ | 10,876 |
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The Corporation has an estimated operating budget of US$1,450,000 for the fiscal year ended August 31, 2006. The Corporation currently does not have sufficient funds to fund its operations through the fiscal year ended August 31, 2006, and will be required to raise additional funds from, operations or through equity or debt financing. The Corporation anticipates it will raise funds to meet its planned operating budget through private placements of equity and debt financing.
There can be no assurance that the Corporation's actual expenditures for the fiscal year ending August 31, 2006 will not exceed the Corporation's estimated operating budget. If the actual expenditures for such costs exceed the estimated costs or if events occur that require additional expenditures, the Corporation will be required to raise additional financing or defer expenditures to meet other obligations. The failure to meet certain expenditures may cause the Corporation to default on material obligations and such default may have a material adverse effect on the Corporation's business and results of operations. If the Corporation is unable to obtain additional financing on acceptable terms, the Corporation will be unable to meet its obligations and the Corporation may be forced to abandon its interest in some of its projects and write off its investment.
The following is a summary of the Corporation’s financing activities during the fiscal years ending August 31, 2005, 2004 and 2003:
1. | During the year ended August 31, 2005, the Corporation issued 16,243,060 common shares pursuant to private placements to settle $607,979 of debts owed by the Corporation, pay for services of $255,771, and provide working capital of $255,332. The exercise of share purchase warrants, and the exercise of incentive share purchase options for cash was $Nil. |
2. | During the year ended August 31, 2004, the Corporation issued 19,500,000 common shares pursuant to private placements to settle $1,385,197 of debts owed by the Corporation. The exercise of share purchase warrants, and the exercise of incentive share purchase options for cash was $Nil. |
3. | During the year ended August 31, 2003, the Corporation issued 29,750,000 common shares pursuant to private placements, the exercise of share purchase warrants, and the exercise of incentive share purchase options for proceeds of $1,835,162 cash and to settle $582,561 of debts owed by the Corporation. |
While the Corporation has been successful in raising the necessary funds in the past, there can be no assurance it can continue to do so. If such funds cannot be secured, the Corporation may be forced to curtail some of its development efforts to a level for which funding can be secured through new investment or joint venturing. If the Corporation cannot raise or arrange to obtain the cash requirements necessary to meet its minimum obligations for the Horsepower® Worldpool Project and the SafeSpending™ Project, some aspects of these projects may be delayed or forfeited. The Corporation believes its minimum financial obligations during the fiscal year ending August 31, 2006, will be approximately US$1,450,000. There can be no assurance that such financing will be obtained on acceptable terms. In 2005, the Corporation financed the Horsepower® World Pool system with equity financing. The Corporation anticipates it will finance the Horsepower® World Pool system and the SafeSpending™ Project primarily through additional equity financing and, eventually, revenues from the Horsepower® World Pool system.
The Corporation does not currently have adequate funds available to finance its operations through August 31, 2006. The Corporation intends to finance its operations through additional equity financings of its shares.
The Corporation's liquidity depends largely on its ability to access the capital markets or to enter into joint venture agreements. Although the Corporation has no plans to acquire additional projects or to explore new opportunities in fiscal 2006, the Corporation may enter into arrangements to do so if management determines that such projects are economically viable and in the best interest of the Corporation's shareholders. Such acquisition may affect the Corporation's ability to access the capital markets or to enlist new joint venture partners. The Corporation does not know of any other trends, demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, the Corporation's liquidity either materially increasing or decreasing at present or in the foreseeable future.
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The Corporation relies on private placements for the working capital necessary for its operations. It is anticipated that financings will continue to be achieved through these means. The Corporation has received expressions of interest from both private and public investors. There can be no guarantee that the expressions of interest will be sufficient to fund the Corporation's projects.
As at August 31, 2005, the Corporation has obligations under two capital leases for computer hardware.
August 31, 2005 | August 31, 2004 | |||||||||||
Current | Long Term | |||||||||||
Lessor | Portion | Portion | Total | Total | ||||||||
$ | $ | $ | $ | |||||||||
National Leasing, having an original | ||||||||||||
principal of $20,975, repayable in | ||||||||||||
monthly payments of $640 | 5,246 | 12,647 | 17,893 | - | ||||||||
Bodkin Capital, having an original | ||||||||||||
principal of $5,986, repayable in monthly | ||||||||||||
payments of $203 | 1,874 | 1,872 | 3,746 | - | ||||||||
7,120 | 14,519 | 21,639 | - |
C. RESEARCH AND DEVELOPMENT
The Corporation has not expended any funds over the last three years on "Research and Development" as that term is defined in the CICA Handbook. The Corporation has, however, expended the following amounts directly in connection with software development of the Horsepower® World Pool system over the past three years:
Pre-development costs | Computer | Computer | |
Year | - Consulting and legal | Hardware | Software |
2003 | - | - | $181,084 |
2004 | $20,120 | - | $69,580 |
2005 | $3,835 | $38,178 | $207,233 |
TOTAL | $23,955 | $38,178 | $457,897 |
The Corporation continues to be in the development stage of its operations. Consequently a significant amount of the Corporation's expenditures have been related to software development. The Corporation's plans for its software research and development expenditures for fiscal 2006 will represent a decreasing percentage of the Corporation's budget as installing the Horsepower® system and commercial advertising sales are expected to begin generating revenues for the Corporation.
D. TREND INFORMATION
The Corporation does not have sufficient history of operations, because it has been in the development stage until the last fiscal year, to be able to ascertain any trends in production, sales or costs. The Corporation is unaware of any trends, uncertainties, demands, commitments or events that are likely to have a material effect on its net sales or revenues, income from operations, profitability, liquidity or capital resources or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition except that the Corporation plans to exploit the trend towards online delivery of wagering systems and focus primarily on the trend towards racetrack friendly alternative wagering which the Corporation believes is in the initial stages of a major international expansion.
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E. OFF-BALANCE SHEET ARRANGEMENTS
As at the date of this Annual Report the Corporation does not have any off-balance sheet arrangements.
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
As of the date of the balance sheet for the Corporation’s last fiscal year end contained in this Form 20-F, the Corporation’s known contractual obligations identified in the following table are:
Payments Due by Period | |||||
Contractual Obligations | Total | Less than 1 year | 1- 3 years | 3 -5 years | More than 5 years |
Capital (Finance) Lease Obligations(1) | 21,639 | 7,120 | 14,529 | - | - |
Office Lease Obligations(2) | 51,000 | 40,900 | 10,200 | - | - |
Total | 72,639 | 48,020 | 24,729 | - | - |
(1) | During the year ended August 31, 2005, the Corporation acquired computer hardware which it financed with two capital leases. |
(2) | Subsequent to the year end, the Corporation has sublet its offices in Vancouver and is off covenant, and in Toronto, it is currently paying $1,570 per month on a month to month basis for offices with no lease commitment. |
G. SAFE HARBOR
The safe harbor provided in Section 27A of theSecurities Act and Section 21E of theExchange Act applies to forward-looking information provided pursuant to Item 5.E and F above.
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
All of the directors of the Corporation are elected annually by the shareholders and hold office until the next annual general meeting of shareholders or until their successors are duly elected and qualified, unless they sooner resign or cease to be directors in accordance with the Corporation’s bylaws. The Corporation’s last annual general meeting was held on March 4, 2005. The Corporation’s executive officers are appointed by and serve at the pleasure of the Board of Directors.
As of February 20, 2006, the following persons are directors of the Corporation:
Name | Position with the Corporation | Number of Common Shares Owned |
Art Cowie(1)(2) | Director and Vice Chairman | 1,446,500(3) |
Donald R. Harris(1)(2) | Director and Chairman | 6,888,250 |
Dennis Hedtke | Director | 2,443,860 |
J. Scott Rowe | Director | 200,000 |
(1) | Member of the Corporation’s Audit Committee. |
(2) | Member of the Corporation’s Executive Committee. |
(3) | Includes 230,000 shares held in the name of Mr. Cowie’s spouse and 50,000 shares held by Eikos Planning Inc., a company controlled by Mr. Cowie. |
Members of the Corporation’s board of directors are elected by the holders of the Corporation’s shares to represent the interests of all shareholders. The board of directors meets periodically to review significant developments affecting the Corporation and to act on matters requiring board approval. Although the board of directors delegates many matters to others, it reserves certain powers and functions to itself. The only standing committees of the Board of Directors of the Corporation are an audit committee and an executive committee. See “Board Practices” below.
None of the Corporation’s directors or executive officers is party to any arrangement or understanding with any other person pursuant to which said individual was elected as a director or officer or member of senior management of the Corporation.
No director or executive officer of the Corporation has any family relationship with any other officer or director of the Corporation.
The following is a brief summary of biographical information on each of the officers and directors listed above:
ART COWIE has served as President and director of the Corporation since January, 2003. Mr. Cowie has been a career community planner as well as a distinguished landscape architect, government affairs consultant and has an extensive public service record including member of the BC Legislature, Alderman for the City of Vancouver, Director of the Pacific National Exhibition, Chairman of Vancouver Board of Parks and Recreation, member of B.C. and Canadian Institutes of Planning, past President of the BC Society of Landscape Architects and a Fellow of the Canadian Society of Landscape Architects.
DONALD R. HARRIS has served as a director of the Corporation since January, 1998 and Chairman of the Board since December, 1999. Mr. Harris is the President and CEO of TAC International Investment LLC, a private investment company, and the Chairman of the Board and CEO of Town’s Edge Properties, Inc., a developer of multiple residential and commercial properties, for over 31 years. Town’s Edge is the managing entity for 12 real estate investment general and limited partnerships worth in excess of US $65 million.
DENNIS HEDTKE is presently the Corporate Secretary of the Corporation and has been a director of the Corporation since May, 2003. Mr. Hedtke is President and owner of Hedtke, Inc. a Manufacturer’s Representative firm offering engineered products to the mobile off-highway original equipment manufacturing market in 10 states. Mr. Hedtke is also founder and CEO of Specialty Fittings, Inc. a manufacturer of non-standard hydraulic fittings and Partner/Owner and
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CEO of Filtration Products Corporation, a manufacturing company with worldwide sales and distribution of hydraulic filters and accessories.
J. SCOTT ROWE was named a Director of Sungold International Holdings Corp. and Vice-President Corporate Development for Horsepower Broadcasting Network (HBN) International Ltd in January 2006. Mr. Rowe has over 35 years of involvement in all aspects of harness racing including a 27-year driving career and serving as Chairman of the Board of Barrie Raceway and then later Georgian Downs Limited. Most recently Mr. Rowe has been working as a consultant on several new racetrack projects and redesigns around North America and the Caribbean
No director and/or executive officer of the Corporation has been the subject of any order, judgment, or decree of any governmental agency or administrator or of any court of competent jurisdiction, revoking or suspending for cause any license, permit or other authority of such person or of any corporation of which he or she is a director and/or executive officer, to engage in the securities business or in the sale of a particular security or temporarily or permanently restraining or enjoining any such person or any corporation of which he or she is an officer or director from engaging in or continuing any conduct, practice, or employment in connection with the purchase or sale of securities, or convicting such person of any felony or misdemeanor involving a security or any aspect of the securities business or of theft or of any felony.
B. COMPENSATION
The Corporation does not compensate its directors for their services 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 makes separate remuneration to any director undertaking services on behalf of the Corporation other than services ordinarily required of a director. Other than indicated below, no director received any compensation for his or her services as a director, including any committee participation or special assignments.
The Corporation grants stock options to directors, executive officers and employees. See “Options to Purchase Securities from the Corporation or Subsidiary”.
The following table sets forth details of the compensation paid during the Corporation’s fiscal year ended August 31, 2005 to directors and executive officers:
Directors and Officers | Salary/Bonus | Other Compensation |
Art Cowie | Nil | $19,883(1) |
Donald Harris | Nil | $6,977 |
Dennis Hedtke | Nil | $3,883 |
T. Keith Blackwell | Nil | $96,074(2) |
Tony Currie | Nil | $47,000 |
Larry R. Simpson | $16,007 | $39,304(2) |
Troy Griffin | $8,250 | $57,093 |
Jeff Grant | Nil | $202,533(2) |
Kim N. Hart | Nil | $130,622(3) |
(1) | Paid while holding the position of President as consulting fees to Eikos Planning Inc., a company controlled by Mr. Cowie. |
(2) | Paid in consideration of consulting services provided to the Corporation. See “Item 6.C. Board Practices”. |
(3) | Mr. Hart (deceased) was President, Chief Executive Officer and director of the Corporation’s subsidiary – Horsepower Broadcasting Network (HBN) International Ltd until February 10, 2005. |
The aggregate amount of compensation paid by the Corporation during the fiscal year ended August 31, 2005 to all officers and directors as a group was $627,625.
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No amounts have been set aside or accrued by the Corporation during the year ended August 31, 2005 to provide pension retirements or similar benefits for directors or executive officers of the Corporation pursuant to any plan provided for or contributed to by the Corporation.
OPTIONS TO PURCHASE SECURITIES FROM THE CORPORATION OR SUBSIDIARY
Stock Options to purchase shares from the Corporation are granted to directors and employees of the Corporation on the terms and conditions acceptable to the applicable securities regulatory authorities. The Corporation has no formal written stock option plan. No stock option granted under the stock option program is transferable by the optionee other than by will or the laws of descent and distribution, and each stock option is exercisable during the lifetime of the optionee only by such optionee. The exercise price of all stock options granted under the stock option program is based on the market price of the Corporation’s securities at the time of the grant of the incentive stock option and the maximum term of each stock option may not exceed five years.
The names and titles of the directors, executive officers and consultants, past and present, of the Corporation to whom outstanding stock options have been granted and the number of shares subject to such stock options are set forth below as at August 31, 2005. The exercise price of the stock options is stated in U.S. dollars.
Name of Optionees | Options | Exercise Price (US) | Expiration Date | Total Outstanding Options at August 31, 2005 |
Officers and Directors: | ||||
Kim N. Hart | 1,050,000 | $0.06 | February 10, 2006 | |
79,900 | $0.085 | February 10, 2006 | ||
550,764 | $0.08 | February 10, 2006 | ||
400,000 | $0.0725 | February 10, 2006 | 2,080,664 | |
Donald R. Harris | 300,000 | $0.08 | August 10, 2006 | |
108,000 | $0.08 | January 04, 2007 | 408,000 | |
Walter Wolff | 100,000 | $0.15 | February 16, 2006 | |
36,000 | $0.08 | January 04, 2007 | 136,000 | |
Art Cowie | 136,000 | $0.11 | January 15, 2008 | |
64,000 | $0.05 | May 27, 2008 | 200,000 | |
Larry R. Simpson | 200,000 | $0.15 | October 11, 2007 | |
500,000 | $0.12 | March 31, 2007 | 700,000 | |
Dennis Hedtke | 150,000 | $0.05 | May 28, 2008 | 150,000 |
T. Keith Blackwell | 1,000,000 | $0.12 | March 31, 2007 | 1,000,000 |
Tony Currie | 750,000 | $0.12 | March 31, 2007 | 750,000 |
Troy Griffin | 500,000 | $0.12 | March 31, 2007 | 500,000 |
Nicholas DeSante | 500,000 | $0.12 | March 31, 2007 | 500,000 |
Paul T. Coulter | 500,000 | $0.12 | March 31, 2007 | 500,000 |
| ||||
Jeff Grant | 100,000 | $0.09 | December 20, 2006 | |
36,000 | $0.08 | January 04, 2007 | ||
500,000 | $0.12 | March 31, 2007 | 636,000 | |
Robert Zeilke | 300,000 | $0.15 | October 16, 2007 | 300,000 |
Total | 7,860,664 |
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C. BOARD PRACTICES
Directors, Officers and Term of Office
Directors may be appointed at any time in accordance with the Articles and Bylaws of the Corporation and then re-elected annually by the shareholders of the Corporation. Directors may resign at any time and their term of office expires annually at each Annual General Meeting of the shareholders of the Corporation.
Executive officers are appointed from time to time by the Board of Directors. The Board, in its discretion, may remove any officer of the Corporation, otherwise each officer shall hold office until his successor is appointed or until his earlier resignation.
Agreements with Senior Management
Pursuant to a management services agreement dated as of April 14, 2005, between Mr. T. Keith Blackwell, of Toronto Ontario, and the Corporation, Mr. Blackwell agreed to act as: the Chief Financial Officer and Treasurer of the Corporation, the Treasurer and Secretary of Horsepower Broadcasting Network International Ltd. and to serve on a management committee of the Corporation, in consideration of which the Corporation agreed to the following: (i) to pay a monthly fee to Mr. Blackwell at a rate of $3,500 plus $250 per hour for extra time worked over 14 hours a month (not to exceed 25 hours per month), (ii) to issue to Mr. Blackwell 200,000 Common shares on execution of the agreement (which shares have been issued), and (iii) issue to Mr. Blackwell an option to purchase 1,000,000 Common shares of the Corporation at a price of $0.12 per share expiring on March 31, 2007. The agreement is for a term of two years and may only be terminated by a majority vote of the Corporation’s management committee and upon payment of three months notice in which case the options granted under the agreement will continue until their expiration date. In the event of a resignation by Mr. Blackwell, his options granted under the agreement shall terminate within two months of the resignation notice. This agreement was amended on February 7, 2006, to add the title of Chief Executive Officer of the Corporation and replace the consulting fee with a salary of $10,000 per month. Mr. Blackwell is presently the Chief Executive Officer, Chief Financial Officer, and Treasurer of the Corporation, and the Secretary/Treasurer of HBN, a wholly owned subsidiary of the Corporation.
Pursuant to an employment agreement dated effective June 1, 2005, between the Corporation’s wholly owned subsidiary, HBN and Larry R. Simpson, Mr. Simpson is the President and Chief Executive Officer of HBN, at an annual salary of $90,000 and bonuses of (i) 35,000 Common shares for each installation that becomes operational, to a maximum of 525,000, (ii) 5% of HBN pre-tax income to a maximum of $200,000 and (iii) an option to purchase 500,000 Common shares at US$0.12, expiring on March 31, 2007. During the Corporation’s last completed financial year a total of $55,311 has been paid to Mr. Simpson. The agreement is for a term of two years and may only be terminated by a majority vote of the Corporation’s management committee and upon payment of three months notice in which case the options granted under the agreement will continue until their expiration date. In the event of a resignation by Mr. Simpson, his options granted under the agreement shall terminate within two months of the resignation notice. Mr. Simpson was named President and CEO in March, 2005 after serving as Vice President of Corporate Development since October, 2002. Mr. Simpson has over 25 years of administrative, marketing, public relations and sales experience in horseracing, sports and leisure. Mr. Simpson has been a successful publisher, manager and writer for many Thoroughbred and Standardbred publications.
The Corporation entered into a management services agreement with J. Scott Rowe dated effective January 16, 2006 pursuant to which Mr. Rowe agreed to act as VP Corporate Development of HBN and as a director of Sungold in consideration of which the Corporation agreed to: (i) pay a monthly fee of CDN$1,200 plus CDN$200 per hour for extra time over 8 hours per month not to exceed 22 extra hours per month, (ii) issue an option to purchase 300,000 shares of the Corporation’s common stock at a price of $0.65 per share expiring March 31, 2007, and (iii) issue 200,000 shares of the Corporation’s common stock upon achievement of certain milestones. The agreement is for a one year term and may be terminated at any time by Sungold on three months notice.
Pursuant to an employment agreement dated effective July 1, 2005, between the Corporation and Troy Griffin, Mr. Griffin was appointed the President and Chief Executive Officer of SafeSpending Inc. and the Vice-President Corporate Development of Sungold International Holdings Corp., at an annual salary of $60,000 and (i) an allocation of 750,000 Common shares, (ii) a bonus of 250,000 Common shares when the first track is fully operational and (iii) an option to purchase 500,000 Common shares at US$0.12, expiring on March 31, 2007. During the Corporation’s last completed
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financial year a total of $65,343 has been paid by the Corporation to Mr. Griffin. The agreement is for a term of one year and may only be terminated by a majority vote of the Corporation’s management committee and upon payment of three months notice in which case the options granted under the agreement will continue until their expiration date. In the event of a resignation by Mr. Griffin, his options granted under the agreement shall terminate within two months of the resignation notice.
During 2004, the Corporation signed a $275,825 software development agreement with T-Swat Consulting for the development Horsepower® Worldpool system. As of August 31, 2004, the Corporation had paid $69,580 as progress payments. During the year ended August 31, 2005, the Corporation paid an additional $180,301, and owed $22,232 at the year end. The owner of T-Swat Consulting is Jeff Grant, the Chief Technical Officer of HBN. Mr. Grant also has a consulting agreement with Sungold dated as of June 6, 2005 pursuant to which Mr. Grant provides software consulting services at a rate of $125 per hour to HBN to complete the installation of the Horsepower World Pool system and act as HBN’s Chief Technical Officer. Pursuant to the term of the consulting agreement the Corporation also granted Mr. Grant an option to purchase 500,000 shares of the Corporation’s common stock at a price of $0.12 and 200,000 restricted shares of the Corporation’s common stock upon achievement of certain milestones. Jeff Grant has been authorizing and developing the Horsepower World Pool® System from inception to date. Mr. Grant also consults on software development with a variety of other companies and has been for a number of years.
The Corporation entered into a management services agreement with Tony Currie dated effective May 27, 2005 pursuant to which Mr. Currie agreed to act as President of Sungold and sit on the management committee of Sungold in consideration of which the Corporation agreed to: (i) pay a monthly fee of CDN$1,000 plus CDN$150 per hour for extra time over 8 hours per month not to exceed 22 extra hours per month, (ii) issue an option to purchase 500,000 shares of the Corporation’s common stock at a price of $0.12 per share expiring March 31, 2007, and (iii) issue 200,000 shares of the Corporation’s common stock upon achievement of certain milestones. The agreement is for a one year term and may be terminated at any time by Sungold on three months notice.
The Corporation entered into a management services agreement with Paul T. Coulter dated effective June 1, 2005 pursuant to which Mr. Coulter agreed to act as VP of Administration of Sungold in consideration of which the Corporation agreed to: (i) pay a monthly fee of CDN$1,000 plus CDN$150 per hour for extra time over 8 hours per month not to exceed 22 extra hours per month, (ii) issue an option to purchase 500,000 shares of the Corporation’s common stock at a price of $0.12 per share expiring March 31, 2007, and (iii) issue 200,000 shares of the Corporation’s common stock upon achievement of certain milestones. The agreement is for a one year term and may be terminated at any time by Sungold on three months notice.
Audit Committee
The members of the Corporation’s audit committee are Donald Harris, Art Cowie, and T. Keith Blackwell. They may be appointed any time by the Corporation’s board of directors. The board, in its discretion may change the membership and fill vacancies in the audit committee, otherwise, audit committee members shall serve until his or her successor is appointed or until his or her earlier resignation.
The Corporation’s audit committee has the following primary duties, responsibilities and powers:
(a) | to serve as an independent and objective party to monitor the Corporation’s financial reporting process and internal control systems; |
(b) | to review and appraise the audit activities of the Corporation’s independent auditors; |
(c) | to provide open lines of communication among the independent auditors, financial and senior management, and the board of directors for financial reporting and control matters; |
(d) | making recommendations to the Corporation’s board of directors regarding the selection, independence, evaluation, fees and, if necessary, the replacement of the independent auditors; |
(e) | meeting with the Corporation’s auditors and senior management to review the scope of the proposed audit for the current year, and the audit procedures to be used; |
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(f) | reviewing the Corporation’s financial statements with the Corporation’s senior management and its independent auditors to ensure that: | |
a. | senior management has reviewed the audited financial statements with the Audit Committee, including significant judgments affecting the financial statements; | |
b. | the audit committee has received the assurance of both financial management and the Corporation’s independent auditors that its financial statements are fairly presented in conformity with generally accepted accounting principles (GAAP) in all material respects; | |
c. | the Corporation’s senior management review the adequacy and effectiveness of the Corporation’s financial and accounting controls; | |
d. | Making inquiries of the Corporation’s senior management and the Corporation’s independent auditors to identify significant business, political, financial and control risks and exposures and assess the steps management has taken to minimize such risk to the Corporation; | |
(g) | Ensuring that the disclosure of the process followed by the Corporation’s board of directors and its committees, in the oversight of the Corporation’s management of principal business risks, is complete and fairly presented; and | |
(h) | Review and confirmation of compliance with the Corporation’s policies on internal controls, conflicts of interests and other key compliance issues. |
Executive Committee
The executive committee of the Corporation’s board of directors currently consists of Art Cowie and Donald Harris. This committee is directed to have and exercise, during the intervals between the meetings of the Corporation’s board of directors, all the powers vested in the Board except the power to fill vacancies, the power to change the membership of, or fill vacancies in, the executive committee or any other committee of the Board. The Corporation also has a management committee comprised of T.K. Blackwell, Tony Currie, Larry Simpson and Troy Griffin.
D. EMPLOYEES
As of February 20, 2006, the Corporation had five employees. The Corporation also relies on part-time staff, flex-time and consultants to minimize expenses.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The Corporation is currently a publicly-held corporation, with its shares held by residents of Canada, the United States and other countries. To the best of its knowledge, the Corporation is not controlled, directly or indirectly, by another corporation or any government or by any natural or legal persons and, as at February 20, 2006, no person or corporation or other entity owns, directly or indirectly, or controls more than 5% of the shares of the Corporation, the only class of securities with voting rights, except for the persons or groups listed below:
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Identity of Persons or Group | Number of Shares Owned(1) | Percentage of Class |
CDS & Co.(2) | 64,056,469 | 51.32% |
Cede & Co.(2) | 9,248,623 | 7.41% |
Donald Harris(4) | 6,888,250 | 5.51% |
Estate of Kim N. Hart (deceased)(3)(4) | 6,576,859 | 5.27% |
Total | 86,770,201 | 69.5% |
(1) | Based on 124,803,771 shares outstanding at February 20, 2006. |
(2) | CDS & Co. and Cede & Co. are depository enterprises. It is the Corporation’s understanding that CDS & Co, and Cede & Co. hold the specified shares as shareholder of record in a nominal, fiduciary, trustee or similar capacity. Accordingly, the names of the beneficial owners are not available to the Corporation unless the shareholders voluntarily elect to contact the Corporation or request disclosure of his, her or its identity. The Corporation is unaware of the identities of the beneficial owners of these shares. |
(3) | Mr. Hart was the President and Chief Executive Officer of HBN until February, 2005. |
(4) | Mr. Harris and the Estate of Kim N. Hart are the only persons, corporations or other entities known by the Corporation to own directly or indirectly or control more than 5% of the shares of the Corporation. |
There are no arrangements, known to the Corporation which may at a subsequent date result in a change in control of the Corporation.
The Corporation’s major shareholders do not have different voting rights from other shareholders of the Corporation. Based on the records of Computershare Trust Company., the Corporation’s registrar and transfer agent, as at February 20, 2006, there were 395 holders of record of the Corporation’s shares with United States addresses who collectively held 44,537,676 shares or approximately 35.7% of the 124,803,771 issued and outstanding shares, and 102 holders of record of the Corporation’s shares with Canadian addresses who collectively held 78,013,092 shares or approximately 62.5% of the 124,803,771 issued and outstanding shares.
B. RELATED PARTY TRANSACTIONS
Except for the ownership of the Corporation’s securities and the compensation described herein, advances to and by certain officers to or from the Corporation to cover expenses (all of which were reimbursed or repaid without interest), below are all of the material transactions between the Corporation and its directors, executive officers, holders of ten percent or more of the Corporation’s outstanding shares, or any associate or affiliate of such person since the commencement of the last fiscal year, or in any proposed transaction which may materially affect the Corporation.
The Corporation has entered into consulting agreements with certain directors. See “Item 6. Directors, Senior Management and Employees.”
The Corporation does not provide benefits to any personnel or its consultants. None of the officers or directors of the Corporation are indebted to the Corporation or were indebted to the Corporation during the fiscal years ended August 31, 2005, 2004 and 2003. See “Indebtedness of Directors and Officers” below.
During the prior year the Corporation signed a $275,825 software development agreement with a consulting company for its Horsepower® program. As of August 31, 2004, the Corporation had paid $69,580 as progress payments. The owner of the consulting company is also the Chief Technical Officer of a subsidiary - Horsepower Broadcasting Network (HBN) International Ltd. See Note 7 of the audited consolidated financial statements of Sungold for the year ended August 31, 2005 attached to this report.
INDEBTEDNESS OF DIRECTORS AND OFFICERS
None of the directors, executive officers or senior officers of the Corporation or persons who were directors, executive officers or senior officers of the Corporation at any time during the Corporation’s last completed financial year, and non of the associates of such persons are or have been indebted to the Corporation or its subsidiaries at any time since the beginning of the Corporation’s last completed financial year. Furthermore, no such person was indebted to a third party during such period where their indebtedness was the subject of a guarantee, support agreement, letter of credit or other similar arrangement or understanding provided by the Corporation or its subsidiaries.
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ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
The financial statements required as part of this Annual Report are filed under Item 17 of this Annual Report.
LITIGATION
To the best of its knowledge, the Corporation is not subject to any active or pending legal proceedings or claims against it or any of its properties that will have a material effect on the Corporation’s business or results of operations.
DIVIDEND POLICY
Other than as described below, the Corporation has not and does not currently intend to pay any dividends on any of its shares. The Corporation intends to follow a policy of retaining earnings to finance the growth of the business. Any future determination to pay dividends will be at the discretion of the Corporation’s board of directors on the basis of earnings, financial requirements and other relevant factors.
SIGNIFICANT CHANGES
The Corporation does not have any significant changes to report since the date of the financial statements included with this Annual Report on Form 20-F.
ITEM 9. THE OFFER AND LISTING
On March 29, 1999, the Corporation became a Reporting Issuer under the Securities Exchange Act of 1934 and on May 14, 1999, the Corporation began trading on the OTC Bulletin Board under the symbol “SGGNF.” Effective September 7, 2001, the Corporation’s shares were also listed and posted for trading on the Frankfurt and Berlin Stock Exchanges. On December 15, 2003, the Corporation changed its trading symbol on the OTC Bulletin Board to “SGIHF” in connection with the Corporation’s name change to “Sungold International Holdings Corp.”.
The following is a summary of trading of Sungold on the OTC Bulletin Board during the first, second, third and fourth quarters of fiscal 2001, 2002, 2003, 2004 and 2005:
OTC Bulletin Board | 2001 | High (US$) | Low (US$) | Volume |
1st Quarter | 0.25 | 0.047 | 12,114,300 | |
2ndQuarter | 0.25 | 0.10 | 13,945,400 | |
3rd Quarter | 0.18 | 0.08 | 6,721,600 | |
4th Quarter | 0.17 | 0.08 | 8,380,100 | |
2002 | High (US$) | Low (US$) | Volume | |
1st Quarter | 0.18 | 0.07 | 17,189,600 |
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2ndQuarter | 0.23 | 0.06 | 11,947,300 | |
3rd Quarter | 0.59 | 0.14 | 29,207,400 | |
4th Quarter | 0.37 | 0.10 | 29,207,400 | |
2003 | High (US$) | Low (US$) | Volume | |
1st Quarter | 0.20 | 0.07 | 15,671,400 | |
2ndQuarter | 0.13 | 0.06 | 16,929,100 | |
3rd Quarter | 0.13 | 0.03 | 27,202,400 | |
4th Quarter | 0.13 | 0.03 | 33,562,100 | |
2004 | High (US$) | Low (US$) | Volume | |
1st Quarter | 0.12 | 0.06 | 21,369,400 | |
2ndQuarter | 0.11 | 0.05 | 23,462,400 | |
3rd Quarter | 0.13 | 0.07 | 18,689,600 | |
4th Quarter | 0.11 | 0.07 | 13,427,018 | |
2005 | High (US$) | Low (US$) | Volume | |
1st Quarter | 0.10 | 0.05 | 15,470,619 | |
2nd Quarter | 0.11 | 0.08 | 14,451,875 | |
3rd Quarter | 0.10 | 0.07 | 6,340,071 | |
4th Quarter | 0.10 | 0.07 | 7,174,801 |
The following is a summary of trading, on a monthly basis, in the shares on the OTC Bulletin Board in the United States during the past six months:
Month & Year | High (US$) | Low (US$) | Volume |
January 2006 | 0.40 | 0.20 | 5,733,967 |
December 2005 | 0.42 | 0.10 | 10,426,369 |
November 2005 | 0.10 | 0.06 | 2,554,124 |
October 2005 | 0.09 | 0.06 | 2,638,499 |
September 2005 | 0.08 | 0.06 | 1,340,940 |
August 2005 | 0.09 | 0.06 | 1,582,048 |
The Corporation’s shares were approved for quotation by the National Association of Securities Dealers on the OTC Bulletin Board in the United States on May 14, 1999. The Corporation’s shares were listed and posted for trading on the Frankfurt and Berlin Stock Exchanges on September 7, 2001. Other than described above, the Corporation’s shares are not and have not been listed or quoted on any other exchange or quotation system.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
The authorized capital of the Corporation consists of: (i) an unlimited number of common shares without nominal or par value; (ii) 100,000,000 Class A Preference Shares, without nominal or par value; and (iii) 100,000,000 Class B Preference Shares, without nominal or par value.
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At February 20, 2006, there were 124,803,771 common shares and no preferred shares issued and outstanding and an additional 3,861,493 shares have been allotted and reserved for issuance pursuant to outstanding private placement warrants to purchase shares and 5,680,000 incentive stock options.
There are no shares of the Corporation held by or on behalf of the Corporation itself or by subsidiaries of the Corporation.
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SUMMARY OF SECURITIES TRANSACTIONS
Set forth below are the closed and pending transactions pursuant to which securities of the Corporation have been issued or sold over the Corporation’s last three fiscal years.
SHARE, OPTION AND WARRANT TRANSACTIONS
Shares Issued During Fiscal Year Ended August 31, 2003 | |||||||||
Price per | Total Gross | ||||||||
Number of | Security | Consideration | |||||||
Transaction | Securities Issued | (US$) | (Cdn$) | Date Closed | |||||
Private Placement | 1,500,000 | 0.08 | 185,388 | September 2002 | |||||
Private Placement | 1,500,000 | 0.08 | 188,316 | October 2002 | |||||
Private Placement | 1,500,000 | 0.08 | 185,532 | October 2002 | |||||
Private Placement | 1,000,000 | 0.07 | 115,672 | November 2002 | |||||
Private Placement | 1,000,000 | 0.08 | 123,800 | November 2002 | |||||
Private Placement | 700,000 | 0.06 | 64,995 | November 2002 | |||||
Private Placement | 300,000 | 0.06 | 27,855 | November 2002 | |||||
Private Placement | 1,000,000 | 0.06 | 92,265 | January 2003 | |||||
Private Placement | 500,000 | 0.05 | 38,720 | January 2003 | |||||
Private Placement | 2,000,000 | 0.10 | 308,200 | January 2003 | |||||
Private Placement | 500,000 | 0.05 | 37,810 | February 2003 | |||||
Warrants Exercised | 500,000 | 0.06 | 44,070 | February 2003 | |||||
Warrants Exercised | 1,000,000 | 0.05 | 73,450 | February 2003 | |||||
Warrants Exercised | 500,000 | 0.06 | 43,704 | March 2003 | |||||
Private Placement | 1,200,000 | 0.05 | 88,554 | March 2003 | |||||
Private Placement | 800,000 | 0.05 | 59,036 | March 2003 | |||||
Private Placement | 1,000,000 | 0.05 | 71,725 | April 2003 | |||||
Private Placement | 1,500,000 | 0.04 | 86,070 | April 2003 | |||||
Private Placement | 2,250,000 | 0.04 | 124,605 | May 2003 | |||||
Private Placement | 3,000,000 | 0.03 | 121,707 | June 2003 | |||||
Private Placement | 700,000 | 0.03 | 28,398 | June 2003 | |||||
Private Placement | 2,300,000 | 0.03 | 95,324 | July 2003 | |||||
Private Placement | 721,000 | 0.03 | 30,878 | July 2003 | |||||
Private Placement | 1,779,000 | 0.03 | 76,971 | August 2003 | |||||
Private Placement | 1,000,000 | 0.07 | 104,678 | August 2003 | |||||
Total (Since Inception) | 79,871,209 | $18,574,369 |
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Shares Issued During Fiscal Year Ended August 31, 2004 | |||||||||
Total Gross | |||||||||
Number of | Price per Security | Consideration | |||||||
Transaction | Securities Issued | (Cdn$)/(US$) | (Cdn$) | Date Closed | |||||
21 for 20 stock split | 3,993,531 | - | - | ||||||
Private Placement | 1,000,000 | $0.08/US$0.060 | 81,792 | September 2003 | |||||
Private Placement | 1,000,000 | $0.08/US$0.060 | 79,308 | September 2003 | |||||
Private Placement | 1,000,000 | $0.08/US$0.060 | 79,308 | October 2003 | |||||
Private Placement | 1,000,000 | $0.08/US$0.060 | 78,756 | October 2003 | |||||
Private Placement | 4,000,000 | $0.05/US$0.040 | 212,920 | February 2004 | |||||
Private Placement | 2,500,000 | $0.06/US$0.045 | 151,306 | February 2004 | |||||
Private Placement | 1,500,000 | $0.07/US$0.0525 | 103,235 | March 2004 | |||||
Private Placement | 3,000,000 | $0.08/US$0.060 | 244,386 | June 2004 | |||||
Private Placement | 4,500,000 | $0.08/US$0.060 | 354,186 | August 2004 | |||||
Total (Since Inception) | 103,364,740 | $19,959,566 |
Shares Issued During Fiscal Year Ended August 31, 2005 | |||||||||
Number of | Price per Security | Total Gross | |||||||
Securities | (Cdn$)/(US$) | Consideration | |||||||
Transaction | Issued | (Cdn$) | Date Closed | ||||||
Private Placement | 2,500,000 | $0.076/US$0.06 | 189,750 | October 2004 | |||||
Private Placement | 4,000,000 | $0.060/US$0.05 | 240,720 | December 2004 | |||||
Private Placement | 3,200,000 | $0.056/US$0.05 | 177,509 | January 2005 | |||||
Private Placement | 500,000 | $0.077/US$0.06 | 38,750 | May 3, 2005 | |||||
Private Placement | 535,000 | $0.087/US$0.07 | 46,622 | May 5, 2005 | |||||
Private Placement | 305,000 | $0.082/US$0.065 | 24,949 | May 25, 2005 | |||||
Private Placement | 305,000 | $0.082/US$0.065 | 24,949 | May 26, 2005 | |||||
Private Placement | 500,000 | $0.088/US$0.065 | 44,000 | May 27, 2005 | |||||
Private Placement | 200,000 | $0.086/US$0.065 | 17,200 | May 31, 2005 | |||||
Private Placement | 1,393,260 | $0.063/US$0.05 | 87,148 | May 31, 2005 | |||||
Private Placement | 100,000 | $0.088/US$0.07 | 8,798 | May 31, 2005 | |||||
Private Placement | 100,000 | $0.088/US$0.07 | 8,800 | June 1, 2005 | |||||
Private Placement | 104,500 | $0.0861/US$0.07 | 9,000 | June 17, 2005 | |||||
Private Placement | 295,000 | $0.0862/US$0.07 | 25,435 | June 22, 2005 | |||||
Private Placement | 750,000 | $0.0735/US$0.06 | 55,152 | July 11, 2005 | |||||
Private Placement | 150,000 | $0.0733/US$0.06 | 10,997 | July 20, 2005 | |||||
Private Placement | 150,000 | $0.0733/US$0.06 | 10,997 | July 20, 2005 | |||||
Private Placement | 100,000 | $0.0855/US$0.07 | 8,553 | July 20, 2005 | |||||
Private Placement | 175,000 | $0.0855/US$0.07 | 14,963 | July 20, 2005 | |||||
Private Placement | 101,300 | $0.0987/US$0.08 | 10,000 | July 27, 2005 | |||||
Private Placement | 102,000 | $0.0987/US$0.08 | 10,069 | July 29, 2005 | |||||
Private Placement | 102,000 | $0.0987/US$0.08 | 10,069 | July 29, 2005 | |||||
Private Placement | 575,000 | $0.0778/US$0.065 | 44,652 | August 12, 2005 | |||||
Total (Since Inception) | 119,607,800 | $21,078,648 |
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Options Outstanding as of August 31, 2005 | |||
Description | Number of Shares | Exercise Price (US$) | Expiration Date |
Option | 100,000 | $0.15 | February 16, 2006 |
Option | 1,050,000 | $0.06 | February 10, 2006 |
Option | 79,900 | $0.08 | February 10, 2006 |
Option | 300,000 | $0.12 | August 10, 2006 |
Option | 100,000 | $0.09 | December 20, 2006 |
Option | 550,764 | $0.08 | February 10, 2006 |
Option | 400,000 | $0.07 | February 10, 2006 |
Option | 180,000 | $0.08 | January 4, 2007 |
Option | 4,250,000 | $0.12 | March 31, 2007 |
Option | 200,000 | $0.15 | October 11, 2007 |
Option | 300,000 | $0.15 | October 16, 2007 |
Option | 136,000 | $0.11 | January 15, 2008 |
Option | 64,000 | $0.05 | May 27, 2008 |
Option | 150,000 | $0.05 | May 28, 2008 |
Total: | 7,860,664 |
Shares Purchase Warrants Outstanding as of August 31, 2005(2) | |||||||||
Exercise Price | |||||||||
Description | Date of Grant | Number of Shares | (US$) | Expiry Date | |||||
Warrant(1) | May 2, 2005 | 250,000 | $0.15 | May 31, 2007 | |||||
Warrant(1) | May 31, 2005 | 300,000 | $0.15 | May 31, 2007 | |||||
Warrant(1) | May 31, 2005 | 300,000 | $0.15 | May 31, 2007 | |||||
Warrant(1) | May 31, 2005 | 793,260 | $0.15 | May 31, 2007 | |||||
Warrant(1) | May 31, 2005 | 152,500 | $0.15 | May 31, 2007 | |||||
Warrant(1) | May 31, 2005 | 152,500 | $0.15 | May 31, 2007 | |||||
Warrant(1) | June 17, 2005 | 52,250 | $0.15 | June 30, 2007 | |||||
Warrant(1) | June 22, 2005 | 147,500 | $0.15 | June 30, 2007 | |||||
Warrant(1) | July 20, 2005 | 87,500 | $0.15 | July 31, 2007 | |||||
Warrant(1) | July 27, 2005 | 50,650 | $0.15 | July 31, 2007 | |||||
Warrant(1) | July 30, 2005 | 51,000 | $0.15 | July 31, 2007 | |||||
Warrant(1) | August 5, 2005 | 51,000 | $0.15 | July 31, 2007 | |||||
Total | 2,388,160 |
(1) | Each warrant is exercisable to acquire one common share. |
(2) | On May 11, 2005 the Corporation entered into an agreement with the Estate of Kim N. Hart for the purpose of canceling warrants to purchase 55,150,000 shares of the Corporation’s common stock previously held by Kim N. Hart. |
CURRENCY TRANSLATION
The Corporation’s proposed operations will be carried out in United States and Canadian dollars. As a result, the Corporation will be faced with currency fluctuations. The Corporation does not currently engage in currency hedging, however, the Corporation may do so once operations have commenced.
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B. ARTICLES AND BYLAWS
The Corporation was continued on December 12, 2003 under the provisions of theCanada Business Corporations Act(the "CBCA"). The Articles of Corporation place no restrictions upon the Corporation's objects and purposes.
Articles and Bylaws
Pursuant to the Articles and the By-laws of the Corporation and the requirements of the CBCA, the board of directors must consist of not fewer than five (5) and not more than eleven (11) directors. A majority of the number of directors appointed constitutes a quorum at any meeting of directors, provided, however, that no business may be transacted at a meeting of directors unless at least one-quarter of the directors present are resident Canadians. The duty of the directors is to manage or supervise the management of the business of the Corporation.
There is no provision in the By-laws that imposes a requirement in respect of a director's power to vote on a proposal, arrangement or contract in which the director is materially interested. The CBCA provides that a director must disclose to the Corporation, in writing or by requesting to have it entered in the minutes of meetings of directors or of meetings of committees of directors, the nature and extent of any interest that he or she has in a material contract or material transaction, whether made or proposed, with the Corporation, if the director: (a) is a party to the contract or transaction; (b) is a director, or an individual acting in a similar capacity of a party to the contract or transaction; or (c) has a material interest in a party to the contract or transaction.
The By-laws of the Corporation state that the directors may fix the remuneration of the directors and that the directors shall be paid such remuneration for their services as the board may from time to time determine. The directors are also entitled to be reimbursed for travel and other expenses properly incurred by them in attending meetings of the board or any committee of the board of directors. Nothing in the By-laws precludes any director from serving the Corporation in any other capacity and receiving remuneration for such services.
The Articles and By-laws of the Corporation state that without limiting the borrowing powers of the Corporation as set forth in the CBCA, the board may from time to time on behalf of the Corporation without authorization of the shareholders: (a) borrow money upon the credit of the Corporation; (b) issue, reissue, sell or pledge debt obligations of the Corporation; (c) to the extent permitted by the CBCA, give a guarantee on behalf of the Corporation to secure performance of an obligation of any person; and (d) mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of the Corporation owned or subsequently acquired to secure any obligation of the Corporation.
The directors may, by resolution, make, amend or repeal any By-laws that regulate the business or affairs of the Corporation. Any resolution making, amending or repealing any By-laws of the Corporation must be submitted to the next following shareholders meeting for ratification by the shareholders who may by ordinary resolution confirm, reject or amend the By-law, amendment or repeal.
The powers of the directors set out in the Articles of the Corporation may be amended by special resolution. A special resolution is a resolution passed by a majority of not less than two-thirds (2/3) of the votes cast by shareholders of the Corporation who being entitled to do so, vote in person or by proxy at an annual or special meeting of shareholders of the Corporation. Under the CBCA, an ordinary resolution of shareholders requires approval by a majority of the votes cast at a meeting of shareholders, present in person or represented by proxy.
Election and Qualifications of Directors
The directors of the Corporation stand for election at the annual meeting of shareholders and there are no staggered terms. There is no cumulative voting for directors of the Corporation. There is no provision in the Articles or By-laws that imposes a requirement for retirement or non-retirement of directors.
There is no provision in the Corporation's Articles or By-laws that a director be required to hold a share in the capital of the Corporation as a qualification for his office, but he must be qualified to become or act as a director as required by the CBCA. The CBCA provides that no person is qualified to act as a director if that person is less than 18 years of age; is a person who has been found to be a person of unsound mind by a court in Canada; a person who is not an individual; or is a person who has the status of bankrupt.
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The CBCA provides that a director of a Company may be removed if the shareholders by ordinary resolution at a special meeting vote to remove a director or directors from office.
Meetings
The CBCA provides that the Corporation must hold an annual meeting of its shareholders not later than 15 months after holding the last preceding annual meeting but no later than six months after the end of the Corporation's preceding financial year. The Corporation must give notice of any meeting to its shareholders entitled to receive notice not more than 60 days prior to and not less than 21 days before the date of meeting. The CBCA requires the directors of a company to provide with the notice of a general meeting a form of proxy for use by every member entitled to vote at such meeting as well as an information circular containing prescribed information regarding the matters to be dealt with and the conduct of the meeting.
Under the CBCA, the directors of the Corporation may call a meeting of shareholders and one or more shareholders holding not less than 5% of the issued voting shares of the Corporation may give notice to the directors requiring them to call and hold a meeting.
Limitations on Ownership of Securities
Except as described below under "Exchange Controls," there are no limitations on the right to own securities imposed by foreign law to the Corporation's knowledge or by the Articles of the Corporation.
Change in Control of Corporation
There are no provisions in the Corporation's Articles or By-laws that would have the effect of delaying, deferring, or preventing a change in control of the Corporation and that would operate only with respect to a merger, acquisition or corporate restructuring of the Corporation or its subsidiaries.
Rights to Own Securities
There are no limitations under the applicable laws of Canada, except as provided in theInvestment Canada Act (the “ICA”) as described below, or by the Corporation’s charter or other constituent documents on the rights of non-resident or foreigners to hold or vote common shares or other securities of the Corporation.
The ICA requires a non-Canadian making an investment to acquire control of a Canadian business, the gross assets of which exceed certain defined threshold levels, as set out below, to file an application for review with Investment Canada, an agency of the Canadian government created by the ICA.
The ICA will prohibit implementation, or if necessary, require divestiture of an investment deemed “reviewable” under the ICA by an investor that is not a “Canadian” as defined in the ICA (a “non-Canadian”), unless after review the Minister responsible for the ICA (“the Minister”) is satisfied that the “reviewable” investment is likely to be of net benefit to Canada. An investment in the Corporation’s common shares by a non-Canadian would be reviewable under the ICA if it was an investment to acquire control of the Corporation and the value of the Corporation’s assets was $5 million or more. A non-Canadian would be deemed to acquire control of the Corporation for the purposes of the ICA if the non-Canadian acquired a majority of the Corporation’s outstanding common shares (or less than a majority but controlled the Corporation in fact through the ownership of one-third or more of the Corporation’s outstanding common shares) unless it could be established that, on the acquisition, the Corporation was not controlled in fact by the acquirer through the ownership of such common shares. Certain transactions in relation to the Corporation’s common shares would be exempt from review under the ICA, including, among others, the following:
acquisition of common shares by a person in the ordinary course of that person’s business as a trader or dealer in securities;
acquisition of control of the Corporation in connection with the realization of security granted for a loan or other financial assistance and not for any purpose related to the provisions of the ICA; and
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- acquisition of control of the Corporation by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control of the Corporation, through the ownership of voting interests, remains unchanged.
As a result of the Canada-U.S. Free Trade Agreement, the ICA was amended in January 1989 to provide distinct threshold levels for Americans who acquire control of a Canadian business. The threshold levels for Americans, as described below, gradually rose between 1989 and 1992 to its present level.
The ICA was amended with the World Trade Organization Agreement to provide for special review thresholds for “WTO Investors” of countries belonging to the World Trade Organization, among others, nationals and permanent residents (including “WTO Investor controlled entities” as defined in the ICA). Under the ICA, as amended, an investment in the Corporation’s common shares by WTO Investors would be reviewable only if it was an investment to acquire control of the Corporation and the value of the Corporation’s assets was equal to or greater than a specified amount which is published by the Minister after its determination for any particular year.
A Canadian business is defined in the ICA as a business carried on in Canada that has a place of business in Canada, an individual or individuals in Canada who are employed or self-employed in connection with the business, and assets in Canada used in carrying on the business.
An American, as defined in the ICA, includes: an individual who is an American national or a lawful permanent resident of the U.S.; a government or government agency of the U.S.; an American-controlled entity, corporation or limited partnership; and a corporation, limited partnership or trust of which two-thirds of its board of directors, general partners or trustees, as the case may be, are Canadians or Americans.
The following investments by a non-Canadian are subject to review by Investment Canada:
all direct acquisitions of control of Canadian businesses with assets of $5 million or more;
all indirect acquisitions of control of Canadian businesses with assets of $50 million or more if such assets represent less than 50% of the value of the assets of the entities, the control of which is being acquired; and
all indirect acquisitions of control of Canadian businesses with assets of $5 million or more if such assets represent more than 50% of the value of the assets of the entities, the control of which is being acquired.
Review by Investment Canada is required when investments by Americans exceed $150 million for direct acquisitions of control. No review by Investment Canada is required for indirect acquisitions of control.
For purposes of the ICA:
“direct acquisitions of control” means purchase of the voting interests of a corporation, partnership, joint venture or trust carrying on a Canadian business, or any purchase of all or substantially all of the assets used in carrying on a Canadian business; and
“indirect acquisition of control means” a purchase of the voting interest of a corporation, partnership, joint venture or trust, whether a Canadian or foreign entity, which controls a corporation, partnership, joint venture or trust company on a Canadian business in Canada.
The acquisition of certain Canadian businesses is excluded from the higher thresholds set out for Americans. These excluded businesses are oil, gas, uranium, financial services (except insurance), transportation services and cultural services (i.e., the publication, distribution or sale of books, magazines, periodicals (other than printing or typesetting businesses), music in print or machine readable form, radio, television, cable and satellite services; the publication, distribution, sale or exhibition of film or video recordings or audio or video music recordings). Direct or indirect acquisitions of control of these excluded businesses are reviewable at the $5 million and $50 million thresholds.
A non-Canadian shall not implement an investment reviewable under the ICA unless the investment has been reviewed and the Minister responsible for Investment Canada is satisfied or is deemed to be satisfied that the investment is likely to
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be a net benefit to Canada, the non-Canadian shall not implement the investment or, if the investment has been implemented, shall divest himself of control of the business that is the subject of the investment.
A non-Canadian or American making the following investments:
(a) | an investment to establish a new Canadian business; and |
(b) | an investment to acquire control of a Canadian business |
which investment is not subject to review under the ICA, must notify Investment Canada, within prescribed time limits, of such investments.
Ownership Threshold Requiring Public Disclosure
There are no provisions in the Corporation’s Articles or By-Laws or in the CBCA governing the threshold above which shareholder ownership must be disclosed. TheSecurities Act (British Columbia), which is applicable to the Corporation, requires that a shareholder disclose ownership of 10% or more of the shares (and any further increases of 2% or more) of a publicly traded company by issuing a news release and filing a report (both containing prescribed disclosure) with the Securities Commissions in those provinces. They also require that the Corporation disclose, in its proxy circular sent out for an Annual Meeting or Special Meeting, the names of holders known to the Corporation to beneficially own more than 10% of the Corporation’s issued and outstanding shares.
Most state corporation statutes do not contain provisions governing the threshold above which shareholder ownership must be disclosed. United States federal securities laws require a company to disclose, in its Annual Report or Form 20-F, holders who own more than 5% of a corporation’s issued and outstanding shares.
Changes in the Capital of the Corporation
There are no conditions imposed by the Corporation’s Articles or By-Laws which are more stringent than those required by the CBCA.
C. MATERIAL CONTRACTS
Except as otherwise disclosed in this Annual Report and the Corporation’s financial statements and notes included in this Annual Report, the Corporation has no other material contracts.
D. EXCHANGE CONTROLS
There are no governmental laws, decrees or regulations in Canada relating to restrictions on the import of capital affecting the remittance of interest, dividends or other payments to non-resident holders of the Corporation’s shares. Any such remittances to United States residents, however, are subject to a 5% to 15% withholding tax pursuant to Article X of the reciprocal tax treaty between Canada and the United States. See “Taxation”.
Except as provided in the Investment Canada Act (the “Investment Act”), there are no limitations under the laws of Canada, the Province of British Columbia or in the charter or any other constituent documents of the Corporation on the right of foreigners to hold and/or vote the shares of the Corporation.
The Investment Act requires a non-Canadian making an investment to acquire control of a Canadian business, the gross assets of which exceed certain defined threshold levels, as set out below, to file an application for review with Investment Canada, an agency of the Canadian government created by the Investment Act.
As a result of the Canada-U.S. Free Trade Agreement, the Investment Act was amended in January 1989 to provide distinct threshold levels for Americans who acquire control of a Canadian business. The threshold levels for Americans, as described below, gradually rose between 1989 and 1992 to its present level.
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A Canadian business is defined in the Investment Act as a business carried on in Canada that has a place of business in Canada, an individual or individuals in Canada who are employed or self-employed in connection with the business, and assets in Canada used in carrying on the business.
An American, as defined in the Investment Act, includes: an individual who is an American national or a lawful permanent resident of the U.S.; a government or government agency of the U.S.; an American-controlled entity, corporation or limited partnership; and a corporation, limited partnership or trust of which two-thirds of its board of directors, general partners or trustees, as the case may be, are Canadians or Americans.
The following investments by a non-Canadian are subject to review by Investment Canada:
(a) | all direct acquisitions of control of Canadian businesses with assets of $5,000,000 or more; |
(b) | all indirect acquisitions of control of Canadian businesses with assets of $50,000,000 or more if such assets represent less than 50% of the value of the assets of the entities, the control of which is being acquired; and |
(c) | all indirect acquisitions of control of Canadian businesses with assets of $5,000,000 or more if such assets represent more than 50% of the value of the assets of the entities, the control of which is being acquired. |
Review by Investment Canada is required when investments by Americans exceed $150,000,000 for direct acquisitions of control. No review by Investment Canada is required for indirect acquisitions of control.
For purposes of the Investment Act, direct acquisitions of control means:
a purchase of the voting interests of a corporation, partnership, joint venture or trust carrying on a Canadian business, or any purchase of all or substantially all of the assets used in carrying on a Canadian business; and
indirect acquisition of control means:
a purchase of the voting interest of a corporation, partnership, joint venture or trust, whether a Canadian or foreign entity, which controls a corporation, partnership, joint venture or trust company on a Canadian business in Canada.
The acquisition of certain Canadian businesses is excluded from the higher thresholds set out for Americans. These excluded businesses are oil, gas, uranium, financial services (except insurance), transportation services and cultural services (i.e., the publication, distribution or sale of books, magazines, periodicals (other than printing or typesetting businesses), music in print or machine readable form, radio, television, cable and satellite services; the publication, distribution, sale or exhibition of film or video recordings or audio or video music recordings). Direct or indirect acquisitions of control of these excluded businesses are reviewable at the $5,000,000 and $50,000,000 thresholds.
A non-Canadian shall not implement an investment reviewable under the Investment Act unless the investment has been reviewed and the Minister responsible for Investment Canada is satisfied or is deemed to be satisfied that the investment is likely to be a net benefit to Canada, the non-Canadian shall not implement the investment or, if the investment has been implemented, shall divest himself of control of the business that is the subject of the investment.
A non-Canadian or American making the following investments:
(a) | an investment to establish a new Canadian business; and |
(b) | an investment to acquire control of a Canadian business |
which investment is not subject to review under the Investment Act, must notify Investment Canada, within prescribed time limits, of such investments.
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E. TAXATION
Canadian Federal Income Tax Consequences
The following is a general summary of all material Canadian federal income tax considerations generally applicable to a holder of the Corporation’s common shares who is not a resident of Canada for the purposes of theIncome Tax Act(Canada) (the “Act”). The discussion does not address individual consequences to persons subject to special provisions of federal income tax law.
The summary is based on the current provisions of the Act and the regulations thereunder and the Corporation’s understanding of the current administrative practices published by, and press announcements released by Canada Customs and Revenue Agency and the Department of Finance. This summary takes into account proposals to amend the Act announced prior to the date hereof (although no assurances can be given that such changes will be enacted in the form presented or at all), but does not otherwise take into account or anticipate any other changes in law, whether by judicial, governmental or legislative action or decision nor does it take into account any provincial, territorial, local or foreign tax considerations. Accordingly, holders and prospective holders of the Corporation’s shares are urged to consult their own tax advisors about the federal, provincial, territorial, local and foreign tax consequences of purchasing, owning and disposing of such shares.
The Act provides in subsection 212(2) that dividends and other distributions which are deemed to be dividends and which are paid or credited or are deemed to be paid or credited by a Canadian resident Company to a non-resident of Canada shall be subject to non-resident withholding tax equal to 25 percent of the gross amount of the dividend or deemed dividend.
Subsections 2(3) and 115(1) of the Act provide that a non-resident person is subject to tax in Canada at the rates generally applicable to residents of Canada on any “taxable capital gain” arising on the disposition of the shares of a company which are listed on a prescribed stock exchange if such non-resident, together with persons with whom he does not deal at arm’s length, owned 25 percent or more of the issued shares of any class of the capital stock of the Corporation at any time in the five years immediately preceding the date of disposition of the shares. Subsections 2(3) and 115(1) also provide that a non-resident person is subject to tax in Canada on taxable capital gains arising on the disposition of shares that constitute capital property used in carrying on a business in Canada. The taxable portion of a capital gain is equal to one-half of the amount by which the proceeds of disposition of such shares, net of any reasonable costs associated with the disposition, exceeds the adjusted cost base to the holder of the shares.
Provisions in the Act relating to dividend and deemed dividend payments and gains realized by non-residents of Canada who are residents of the United States are subject to the Canada-United States Income Tax Convention (1980), as amended (the “1980 Convention”).
Article X of the 1980 Convention provides that for 1997 and subsequent taxation years pursuant to the Third Protocol to the 1980 Convention the rate of Canadian non-resident withholding tax on dividends paid to a U.S. company that beneficially owns at least 10% of the voting stock of the Corporation shall not exceed 5% of the dividends. Otherwise, and except in the case of dividends received by a resident of the United States who carries on business in Canada through a Canadian permanent establishment and the shares in respect of which the dividends are paid are effectively connected with that permanent establishment, the rate of non-resident withholding shall not exceed 15 percent of the dividend. Where the dividends are received by a United States person carrying on business in Canada through a Canadian permanent establishment and the shares in respect of which the dividends are paid are effectively connected with that permanent establishment the dividends are generally subject to Canadian tax as business profits, generally without limitation under the 1980 Convention.
Article XIII of the 1980 Convention provides that gains realized by a United States resident on the disposition of shares of a Canadian company may not generally be taxed in Canada unless the value of those shares is derived principally from real property situated in Canada or the shares form part of the business property of a permanent establishment which the United States shareholder has or had in Canada within the 12 month period preceding the date of disposition. Canada also retains the right to tax gains on property owned at the time of departure from Canada if it is sold by a person who was resident in Canada for 120 months in any 20 consecutive years preceding the sale and who was a resident in Canada at any time in the 10 years preceding sale.
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United States Federal Income Tax Consequences
The following is a general discussion of all material United States federal income tax consequences, under current law, generally applicable to a U.S. Holder (as hereinafter defined) of common shares of the Corporation. This discussion does not address individual consequences to persons subject to special provisions of federal income tax law, such as those described below as excluded from the definition of a U.S. Holder. In addition, this discussion does not cover any state, local or foreign tax consequences. (See “Canadian Federal Tax Consequences).
The following discussion is based upon the sections of the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations, published Internal Revenue Service (“IRS”) rulings, published administrative positions of the IRS and court decisions that are currently applicable, any or all of which could be materially and adversely changed, possibly on a retroactive basis, at any time. This discussion does not consider the potential effects, both adverse and beneficial, of any recently proposed legislation which, if enacted, could be applied, possibly on a retroactive basis, at any time. This discussion is for general information only and it is not intended to be, nor should it be construed to be, legal or tax advise to any holder or prospective holder of common shares of the Corporation and no opinion or representation with respect to the United States federal income tax consequences to any such holder or prospective holder is made. Accordingly, holders and prospective holders of common shares of the Corporation are urged to consult their own tax advisors about the federal, state, local, and foreign tax consequences of purchasing, owning and disposing of common shares of the Corporation.
U.S. Holders
As used herein, a “U.S. Holder” means a holder of common shares of the Corporation who is a citizen or individual resident of the United States, a corporation or partnership created or organized in or under the laws of the United States or of any political subdivision thereof or a trust whose income is taxable in the United States irrespective of source. This summary does not address the tax consequences to, and U.S. Holder does not include, persons subject to specific provisions of federal income tax law, such as tax-exempt organizations, qualified retirement plans, individual retirement accounts and other tax-deferred accounts, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, non-resident alien individuals, persons or entities that have a “functional currency” other than the U.S. dollar, shareholders who hold common shares as part of a straddle, hedging or a conversion transaction, and shareholders who acquired their common shares through the exercise of employee stock options or otherwise as compensation for services. This summary is limited to U.S. Holders who own common shares as capital assets. This summary does not address the consequences to a person or entity holding an interest in a shareholder or the consequences to a person of the ownership, exercise or disposition of any options, warrants or other rights to acquire common shares.
Distribution on Common Shares of the Corporation
U.S. Holders receiving dividend distributions (including constructive dividends) with respect to common shares of the Corporation are required to include in gross income for United States federal income tax purposes the gross amount of such distributions equal to the U.S. dollar value of such dividends on the date of receipt (based on the exchange rate on such date) to the extent that the Corporation has current or accumulated earnings and profits, without reduction for any Canadian income tax withheld from such distributions. Such Canadian tax withheld may be credited, subject to certain limitations, against the U.S. Holder’s federal income tax liability or, alternatively, may be deducted in computing the U.S. Holder’s federal taxable income by those who itemize deductions. (See more detailed discussion at “Foreign Tax Credit” below). To the extent that distributions exceed current or accumulated earnings and profits of the Corporation, they will be treated first as a return of capital up to the U.S. Holder’s adjusted basis in the common shares and thereafter as gain from the sale or exchange of the common shares. Preferential tax rates for long-term capital gains are applicable to a U.S. Holder which is an individual, estate or trust. There are currently no preferential tax rates for long-term capital gains for a U.S. Holder which is a corporation.
In the case of foreign currency received as a dividend that is not converted by the recipient into U.S. dollars on the date of receipt, a U.S. Holder will have a tax basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Generally any gain or loss recognized upon a subsequent sale or other disposition of the foreign currency, including the exchange for U.S. dollars, will be ordinary income or loss. However, an individual whose realized gain does not exceed $200 will not recognize that gain, to the extent that there are no expenses associated with the transaction that meet the
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requirement for deductibility as a trade or business expense (other than travel expenses in connection with a business trip) or as an expense for the production of income.
Dividends paid on the common shares of the Corporation will not generally be eligible for the dividends received deduction provided to corporations receiving dividends from certain United States corporations. A U.S. Holder which is a corporation may, under certain circumstances, be entitled to a 70% deduction of the United States source portion of dividends received from the Corporation (unless the Corporation qualifies as a “foreign personal holding company” or a “passive foreign investment company,” as defined below) if such U.S. Holder owns shares representing at least 10% of the voting power and value of the Corporation. The availability of this deduction is subject to several complex limitations which are beyond the scope of this discussion.
Under current temporary Treasury Regulations, dividends paid on the Corporation’s common shares, if any, generally will not be subject to information reporting and generally will not be subject to U.S. backup withholding tax. However, dividends paid, and the proceeds of a sale of the Corporation’s common shares, in the U.S. through a U.S. or U.S. related paying agent (including a broker) will be subject to U.S. information reporting requirements and may also be subject to the 31% U.S. backup withholding tax, unless the paying agent is furnished with a duly completed and signed Form W-9. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a refund or a credit against the U.S. Holder’s U.S. federal income tax liability, provided the required information is furnished to the IRS.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distributions) Canadian income tax with respect to the ownership of common shares of the Corporation may be entitled, at the option of the U.S. Holder, to either receive a deduction or a tax credit for such foreign tax paid or withheld. Generally, it will be more advantageous to claim a credit because a credit reduces United States federal income taxes on a dollar-for-dollar basis, while a deduction merely reduces the taxpayer’s income subject to tax. This election is made on a year-by-year basis and applies to all foreign taxes paid by (or withheld from) the U.S. Holder during that year. There are significant and complex limitations which apply to the credit, among which is the general limitation that the credit cannot exceed the proportionate share of the U.S. Holder’s United States income tax liability that the U.S. Holder’s foreign sources income bears to his or its worldwide taxable income. In the determination of the application of this limitation, the various items of income and deduction must be classified into foreign and domestic sources. Complex rules govern this classification process. In addition, this limitation is calculated separately with respect to specific classes of income such as “passive income,” “high withholding tax interest,” “financial services income,” “shipping income,” and certain other classifications of income. Dividends distributed by the Corporation will generally constitute “passive income” or, in the case of certain U.S. Holders, “financial services income” for these purposes. The availability of the foreign tax credit and the application of the limitations on the credit are fact specific, and U.S. Holders of common shares of the Corporation should consult their own tax advisors regarding their individual circumstances.
Disposition of Common Shares of the Corporation
A U.S. Holder will recognize gain or loss upon the sale of common shares of the Corporation equal to the difference, if any, between (i) the amount of cash plus the fair market value of any property received, and (ii) the shareholder’s tax basis in the common shares of the Corporation. Preferential tax rates apply to long-term capital gains of U.S. Holders who are individuals, estates or trusts. This gain or loss will be capital gain or loss if the common shares are a capital asset in the hands of the U.S. Holder, which will be long-term capital gain or loss if the common shares of the Corporation are held for more than one year. Lower long-term capital gain rates will apply if the U.S. Holder is an individual, estate or trust and such U.S. Holder has held the common shares for more than eighteen months. Deductions for net capital loss may be carried over to be used in later tax years until such net capital loss is thereby exhausted. For U.S. Holders that are corporations (other than corporations subject to Subchapter S of the Code), an unused net capital loss may be carried back three years and carried forward five years from the loss year to be offset against capital gains until such net capital loss is thereby exhausted.
Other Considerations
In the following circumstances, the above sections of this discussion may not describe the United States federal income tax consequences resulting from the holding and disposition of common shares:
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Foreign Personal Holding Company
If at any time during a taxable year more than 50% of the total combined voting power or the total value of the Corporation’s outstanding shares is owned, directly or indirectly, by five or fewer individuals who are citizens or residents of the United States and 60% or more of the Corporation’s gross income for such year was derived from certain passive sources (e.g. from dividends received from its subsidiaries), the Corporation may be treated as a “foreign personal holding company.” In that event, U.S. Holders that hold common shares would be required to include in gross income for such year their allocable portions of such passive income to the extent the Corporation does not actually distribute such income.
Foreign Investment Company
If 50% or more of the combined voting power or total value of the Corporation’s outstanding shares are held, directly or indirectly, by citizens or residents of the United States, United States domestic partnerships or corporations, or estates or trusts other than foreign estates or trusts (as defined by the Code Section 7701(a)(31)), and the Corporation is found to be engaged primarily in the business of investing, reinvesting, or trading in securities, commodities, or any interest therein, it is possible that the Corporation may be treated as a “foreign investment company” as defined in Section 1246 of the Code, causing all or part of any gain realized by a U.S. Holder selling or exchanging common shares to be treated as ordinary income rather than capital gain.
Passive Foreign Investment Company
Certain United States income tax legislation contains rules governing “passive foreign investment companies” (“PFIC”) which can have significant tax effects on U.S. Holders of foreign corporations. These rules do not apply to non-U.S. Holders. Section 1296 of the Code defines a PFIC as a corporation that is not formed in the United States and, for any taxable year, either (i) 75% or more of its gross income is “passive income”, which includes interest, dividends and certain rents and royalties or (ii) the average percentage, by fair market value (or, if the Corporation is a controlled foreign corporation or makes an election, adjusted tax basis) of its assets that produce or are held for the production of “passive income” is 50% or more. The Corporation does not believe that it is a PFIC. Each U.S. Holder of the Corporation is urged to consult a tax advisor with respect to how the PFIC rules affect their tax situation.
A U.S. Holder who holds stock in a foreign corporation during any year in which such corporation qualifies as a PFIC is subject to United States federal income taxation under one of two alternative tax regimes at the election of each such U.S. Holder. The following is a discussion of such two alternative tax regimes applied to such U.S. Holders of the Corporation. In addition, special rules apply if a foreign corporation qualifies as both a PFIC and a “controlled foreign corporation” (as defined below) and a U.S. Holder owns, directly or indirectly, ten percent (10%) or more of the total combined voting power of classes of shares of such foreign corporation (See more detailed discussion at “Controlled Foreign Corporation” below).
A U.S. Holder who elects in a timely manner to treat the Corporation as a QEF (an “Electing U.S. Holder”) will be subject, under Section 1293 of the Code, to current federal income tax for any taxable year in which the Corporation qualifies as a PFIC on his pro rata share of the Corporation’s (i) ”net capital gain” (the excess of net long-term capital gain over net short-term capital loss), which will be taxed as long-term capital gain to the Electing U.S. Holder and (ii) ”ordinary earnings” (the excess of earnings and profits over net capital gain), which will be taxed as ordinary income to the Electing U.S. Holder, in each case, for the shareholder’s taxable year in which (or with which) the Corporation’s taxable year ends, regardless of whether such amounts are actually distributed.
The effective QEF election also allows the Electing U.S. Holder to (i) generally treat any gain realized on the disposition of their common shares of the Corporation (or deemed to be realized on the pledge of their shares) as capital gain; (ii) treat his share of the Corporation’s net capital gain, if any, as long-term capital gain instead of ordinary income; and (iii) either avoid interest charges resulting from PFIC status altogether, or make an annual election, subject to certain limitations, to defer payment of current taxes on his share of the Corporation’s annual realized net capital gain and ordinary earnings subject, however, to an interest charge. If the Electing U.S. Holder is not a corporation, such an interest charge would be treated as “personal interest” that is not deductible.
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The procedure a U.S. Holder must comply with in making an effective QEF election will depend on whether the year of the election is the first year in the U.S. Holder’s holding period in which the Corporation is a PFIC. If the U.S. Holder makes a QEF election in such first year, i.e., a timely QEF election, then the U.S. Holder may make the QEF election by simply filing the appropriate documents at the time the U.S. Holder files his tax return for such first year. If, however, the Corporation qualified as a PFIC in a prior year, then in addition to filing documents, the U.S. Holder must elect to recognize (i) under the rules of Section 1291 of the Code (discussed below), any gain that he would otherwise recognize if the U.S. Holder sold his stock on the qualification date or (ii) if the Corporation is a controlled foreign corporation, the U.S. Holder’s pro rata share of the Corporation’s post-1986 earnings and profits as of the qualification date. The qualification date is the first day of the Corporation’s first tax year in which the Corporation qualified as a “qualified electing fund” with respect to such U.S. Holder. The elections to recognize such gain or earnings and profits can only be made if such U.S. Holder’s holding period for the common shares of the Corporation includes the qualification date. By electing to recognize such gain or earnings and profits, the U.S. Holder will be deemed to have made a timely QEF election. A U.S. Holder who made elections to recognize gain or earnings and profits after May 1, 1992 and before January 27, 1997 may, under certain circumstances, elect to change such U.S. Holder’s qualification date to the first day of the first QEF year. U.S. Holders are urged to consult a tax advisor regarding the availability of and procedure for electing to recognize gain or earnings and profits under the foregoing rules. In addition, special rules apply if a foreign corporation qualifies as both a PFIC and a “controlled foreign corporation” (as defined below) and a U.S. Holder owns, directly or indirectly, ten percent (10%) or more of the total combined voting power of classes of shares of such foreign corporation (See more detailed discussion at “Controlled Foreign Corporation” below).
If the Corporation no longer qualifies as a PFIC in a subsequent year, a timely QEF election will remain in effect, although not applicable, during those years that the Corporation is not a PFIC. Therefore, if the Corporation requalifies as a PFIC, the QEF election previously made is still valid, and the U.S. Holder is required to satisfy the requirements of that election. Furthermore, a QEF election remains in effect with respect to a U.S. Holder, although dormant, after a U.S. Holder disposes of its entire interest in the Corporation. Upon the U.S. Holder’s reacquisition of an interest in the Corporation, the QEF election will apply to the newly acquired stock of the Corporation.
Effective for tax years of U.S. Holders beginning after December 31, 1997, U.S. Holders who hold (actually or constructively) marketable stock of a foreign corporation that qualifies as a PFIC, may annually elect to mark such stock to the market (a “mark-to-market election”). If such an election is made, such U.S. Holder will not be subject to the special taxation rules of Section 1291 described below for the taxable year for which the mark-to-market election is made. A U.S. Holder who makes such an election will include in income for the taxable year for which the election was made in an amount equal to the excess, if any, of the fair market value of the common shares of the Corporation as of the close of such tax year over such U.S. Holder’s adjusted basis in such common shares. In addition, the U.S. Holder is allowed a deduction for the lesser of (i) the excess, if any, of such U.S. Holder’s adjusted tax basis in the common shares over the fair market value of such shares as of the close of the tax year, or (ii) the excess, if any, of (A) the mark-to-market gains for the common shares in the Corporation included by such U.S. Holder for prior tax years, including any amount which would have been included for any prior tax year but for Section 1291 interest on tax deferral rules discussed below with respect to Non-Electing U.S. Holders, over (B) the mark-to-market losses for shares that were allowed as deductions for prior tax years. U.S. Holder’s adjusted tax basis in the common shares of the Corporation will be increased to reflect the amount included or deducted as a result of a mark-to-market election. A mark-to-market election only applies to the taxable year in which the election was made. A separate election must be made by a U.S. Holder for each subsequent taxable year. Because the Internal Revenue Service has not established procedures for making a mark-to-market election, U.S. Holders should consult their tax advisor regarding the manner of making such an election.
If a U.S. Holder does not make a timely QEF election during a year in which it holds (or is deemed to have held) the shares in question and the Corporation is a PFIC (a “Non-electing U.S. Holder”), then special taxation rules under Section 1291 of the Code will apply to (i) gains realized on the disposition (or deemed to be realized by reasons of a pledge) of his common shares of the Corporation and (ii) certain “excess distributions”, as specifically defined, by the Corporation.
A Non-electing U.S. Holder generally would be required to pro rate all gains realized on the disposition of his common shares of the Corporation and all excess distribution of his common shares and all excess distributions over the entire holding period for the Corporation. All gains or excess distributions allocated to prior years of the U.S. Holder (other than years prior to the first taxable year of the Corporation during such U.S. Holder’s holding period and beginning after January 1, 1987 for which it was a PFIC) would be taxed at the highest tax rate for each such prior year applicable to ordinary income. The Non-electing U.S. Holder also would be liable for interest on the foregoing tax liability for each such prior year calculated as if such liability had been due with respect to each such prior year. A Non-electing U.S.
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Holder that is not a corporation must treat this interest charge as “personal interest” which, as discussed above, is wholly non-deductible. The balance of the gain of the excess distribution will be treated as ordinary income in the year of the disposition or distribution, and no interest charge will be incurred with respect to such balance.
If the Corporation is a PFIC for any taxable year during which a Non-electing U.S. Holder holds common shares of the Corporation, then the Corporation will continue to be treated as a PFIC with respect to such common shares, even if it is no longer definitionally a PFIC. A Non-electing U.S. Holder may terminate this deemed PFIC status by electing to recognize a gain (which will be taxed under the rules discussed above for Non-electing U.S. Holders) as if such common shares had been sold on the last day of the last taxable year for which it was a PFIC.
Under Section 1291(f) of the Code, the IRS has issued proposed regulations that, subject to certain exceptions, would treat as taxable certain transfers of PFIC stock by Non-Electing U.S. Holders that are generally not otherwise taxed, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death. Generally, in such cases the basis of the Corporation common shares in the hands of the transferee and the basis of any property received in the exchange for those common shares would be increased by the amount of gain recognized. An Electing U.S. Holder would not be taxed on certain transfers of PFIC stock, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death. The transferee’s basis in this case will depend on the manner of the transfer. In a transfer at death, for example, the transferee’s basis is equal to (i) the fair market value of the Electing U.S. Holder’s common shares, less (ii) the excess of the fair market value of the Electing U.S. Holder’s common shares reduced by the U.S. Holder’s adjusted basis in these common shares at death. The specific tax effect to the U.S. Holder and the transferee may vary based on the manner in which the common shares are transferred. Each U.S. Holder of the Corporation is urged to consult a tax advisor with respect to how the PFIC rules affect their tax situation.
Certain special, generally adverse, rules will apply with respect to common shares of the Corporation while the Corporation is a PFIC whether or not it is treated as a QEF. For example under Section 1297(b)(6) of the Code, a U.S. Holder who uses PFIC stock as security for a loan (including a margin loan) will, except as may be provided in regulations, be treated as having made a taxable disposition of such shares.
Controlled Foreign Corporation
If more than 50% of the voting power of all classes of shares or the total value of the shares of the Corporation is owned, directly or indirectly, by citizens or residents of the United States, United States domestic partnerships and corporations or estates or trusts other than foreign estates or trusts, each of whom own 10% or more of the total combined voting power of all classes of shares of the Corporation (“United States shareholder”), the Corporation could be treated as a “controlled foreign corporation” under Subpart F of the Code. This classification would effect many complex results one of which is the inclusion of certain income of a CFC which is subject to current U.S. tax. The United States generally taxes a United States shareholder of a CFC currently on their pro rata shares of the Subpart F income of the CFC. Such U.S. shareholders are generally treated as having received a current distribution out of the CFC’s Subpart F income and are also subject to current U.S. tax on their pro rata shares of the CFC’s earnings invested in U.S. property. The foreign tax credit described above may reduce the U.S. tax on these amounts. In addition, under Section 1248 of the Code, gain from the sale or exchange of shares by a U.S. Holder of common shares of the Corporation who is or was a United States shareholder at any time during the five-year period ending with the sale or exchange is treated as ordinary income to the extent of earnings and profits of the Corporation attributable to the shares sold or exchanged. If a foreign corporation is both a PFIC and a CFC, the foreign corporation generally will not be treated as a PFIC with respect to United States shareholders of the CFC. This rule generally will be effective for taxable years of United States shareholders beginning after 1997 and for taxable years of foreign corporations ending with or within such taxable years of United States shareholders. Special rules apply to United States shareholders who are subject to the special taxation rules under Section 1291 discussed above with respect to a PFIC. Because of the complexity of Subpart F, and because it is not clear that Subpart F would apply to U.S. Holders of common shares of the Corporation, a more detailed review of these rules is outside of the scope of this discussion.
F. DIVIDENDS AND PAYING AGENTS
Not Applicable.
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G. STATEMENTS BY EXPERTS
Not Applicable.
H. DOCUMENTS ON DISPLAY
The documents concerning the Corporation may be viewed at Suite 300, 940 The East Mall, Toronto, Ontario, Canada M9B 6J7, during normal business hours.
I. SUBSIDIARY INFORMATION
Not Applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
PART III
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUINCIES
Not Applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not Applicable.
ITEM 15. CONTROLS AND PROCEDURES
Evaluation Of Disclosure Controls And Procedures
As of the end of the period covered by this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. The Corporation’s disclosure controls and procedures are designed to provide a reasonable level of assurance of achieving the Corporation’s disclosure control objectives. The Corporation’s Principal Executive Officer and Principal Accounting Officer have concluded that its disclosure controls and procedures are, in fact, effective at this reasonable assurance level as of the period covered.
Changes In Internal Controls Over Financial Reporting
In connection with the evaluation of the Corporation’s internal controls during its last fiscal year, the Corporation’s Principal Executive Officer and Principal Financial Officer have determined that there are no changes to the
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Corporation’s internal controls over financial reporting that has materially affected, or is reasonably likely to materially effect, the Corporation’s internal controls over financial reporting.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The Corporation has no independent financial expert on the audit committee. T. Keith Blackwell, a Chartered Accountant and the CEO and CFO of the Corporation, serves on the Corporation’s audit committee. Mr. Blackwell is the Corporation’s audit committee financial expert as that term is defined in paragraph (a) of Item 16A of Form 20-F.
ITEM 16B. CODE OF ETHICS
The Corporation has adopted a Code of Ethics applicable to its officers and directors which is a "code of ethics" as defined by applicable rules of the SEC. Sungold’s Code of Ethics is attached as an exhibit to this Annual Report. If the Corporation makes any amendments to its Code of Ethics other than technical, administrative, or other non-substantive amendments, or grant any waivers, including implicit waivers, from a provision of the Corporation’s Code of Ethics to its Chief Executive Officer, Chief Financial Officer, or certain other finance executives, the Corporation will disclose the nature of the amendment or waiver, its effective date and to whom it applies in a report on Form 6-K filed with the SEC.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed for the two most recently completed fiscal years ended August 31, 2005 for professional services rendered by the principal accountant for the audit of the Corporation’s annual financial statements and review of the financial statements included in the Corporation’s Annual Report on Form 20-F and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:
Year Ended August 31, 2005 | Year Ended August 31, 2004 | |
Audit Fees | $20,250 | $30,815 |
Audit Related Fees | $6,150 | $7,900 |
Tax Fees | $2,500 | $2,800 |
Other Fees | $7,220 | $10,690 |
Total | $36,120 | $52,205 |
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not Applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
None.
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PART IV
ITEM 17. FINANCIAL STATEMENTS
The Report and Consolidated Financial Statements for the years ended August 31, 2005, 2004, and 2003 reported on by Loewen, Stronach & Co., Chartered Accountants. The Financial Statements were prepared in accordance with Canadian GAAP and are presented in Canadian dollars. There are differences between United States and Canadian GAAP which are set forth in Note 13 of the Report and Consolidated Financial Statements for the years ended August 31, 2005, 2004, and 2003.
ITEM 18. FINANCIAL STATEMENTS
Not applicable.
ITEM 19. EXHIBITS
The following financial statements and related schedules are included in this Item:
(a) | Financial Statements | |
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SUNGOLD INTERNATIONAL HOLDINGS CORP.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
LOEWEN, STRONACH & CO.
Chartered Accountants
AUDITOR’S REPORT
To The Shareholders of Sungold International Holdings Corp.:
We have audited the consolidated balance sheet of Sungold International Holdings Corp. (a development stage company) as at August 31, 2005 and 2004 and the consolidated statements of loss and deficit and cash flows for the years ended August 31, 2005, 2004 and 2003 and for the cumulative period from April 7, 1986 (inception) to August 31, 2005. 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 Canadian generally accepted auditing standards and with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at August 31, 2005 and 2004 and the results of its operations and cash flows for the years ended August 31, 2005, 2004 and 2003 and for the cumulative period from April 7, 1986 (inception) to August 31, 2005 in accordance with Canadian generally accepted accounting principles which differ in certain respects from United States generally accepted accounting principles (refer to Note 13).
“Loewen, Stronach & Co.”
Chartered Accountants
Vancouver, BC
December 28, 2005
Comments by Auditors for U.S. Readers on Canada-U.S. Reporting Conflict
In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Company’s ability to continue as a going concern, such as described in Note 2 (a) to the financial statements. Our report to the shareholders dated December 28, 2005, is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditors’ report when these are adequately disclosed in the financial statements.
“Loewen, Stronach & Co.”
Chartered Accountants
Vancouver, BC
December 28, 2005
SUNGOLD INTERNATIONAL HOLDINGS CORP.
CONSOLIDATED BALANCE SHEET
AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
2005 | 2004 | |||||
$ | $ | |||||
ASSETS | ||||||
CURRENT ASSETS | ||||||
Cash | 10,876 | 93,411 | ||||
Canadian goods and services input tax credit | 43,065 | 92,246 | ||||
Prepaid expenses and deposits | 22,087 | 58,768 | ||||
76,028 | 244,425 | |||||
PRE-DEVELOPMENT COSTS (Note 3) | 224,898 | 825,154 | ||||
EQUIPMENT (Note 4) | 628,012 | 522,455 | ||||
928,938 | 1,592,034 | |||||
LIABILITIES | ||||||
CURRENT LIABILITIES | ||||||
Accounts payable and accrued liabilities | 244,075 | 200,334 | ||||
Loans payable (Note 7c) | 12,500 | 9,696 | ||||
Current obligation under capital leases (Note 6) | 7,120 | - | ||||
263,695 | 210,030 | |||||
OBLIGATION UNDER CAPITAL LEASES (Note 6) | 14,519 | - | ||||
278,214 | 210,030 | |||||
SHAREHOLDERS’ EQUITY | ||||||
SHARE CAPITAL (Note 5) | 21,078,648 | 19,959,566 | ||||
CONTRIBUTED SURPLUS (Note 5d) | 190,457 | 51,922 | ||||
DEFICIT | (20,618,381 | ) | (18,629,484 | ) | ||
650,724 | 1,382,004 | |||||
928,938 | 1,592,034 | |||||
Going concern – Note 2 | ||||||
Operating lease commitment - Note 8 | ||||||
Subsequent events – Note 12 |
APPROVED BY THE DIRECTORS:
“Art Cowie” | Director |
“Donald R. Harris” | Director |
(See accompanying notes to consolidated financial statements)
SUNGOLD INTERNATIONAL HOLDINGS CORP.
CONSOLIDATED STATEMENT OF LOSS AND DEFICIT
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
April 7, 1986 | ||||||||||||
(inception) to | ||||||||||||
August 31, 2005 | 2005 | 2004 | 2003 | |||||||||
$ | $ | $ | $ | |||||||||
REVENUE | ||||||||||||
Gain on disposition of marketable securities | 838,947 | - | - | - | ||||||||
EXPENSES | ||||||||||||
Impairment write-down of pre-development costs | 6,460,304 | 628,246 | - | 2,017,420 | ||||||||
Advertising and promotion | 3,317,206 | 55,443 | 122,508 | 594,941 | ||||||||
Professional and consulting fees | 3,022,136 | 566,803 | 488,500 | 547,829 | ||||||||
Management fees and salaries | 1,934,294 | 46,688 | 58,353 | 286,603 | ||||||||
Investor relations | 1,169,813 | 133,306 | 35,192 | 214,843 | ||||||||
Travel and conferences | 1,109,935 | 75,970 | 168,116 | 201,229 | ||||||||
Office and miscellaneous | 837,399 | 43,756 | 59,673 | 164,044 | ||||||||
Internet services | 799,574 | 29,559 | 23,831 | 184,249 | ||||||||
Amortization | 794,558 | 140,449 | 126,899 | 144,616 | ||||||||
Office rent and services | 580,815 | 60,896 | 63,452 | 80,595 | ||||||||
Transfer agent and filing fees | 373,265 | 30,658 | 50,287 | 33,078 | ||||||||
Insurance | 263,786 | 833 | 563 | 61,470 | ||||||||
Financing fees | 218,000 | - | - | - | ||||||||
Stock based compensation | 190,457 | 138,535 | - | 51,922 | ||||||||
Finder fees | 154,031 | - | - | - | ||||||||
Interest and bank charges | 113,668 | 5,222 | 12,561 | 8,302 | ||||||||
Settlement agreements | 71,178 | 31,178 | - | - | ||||||||
Interest on capital leases | 29,228 | 2,600 | 1,005 | 11,962 | ||||||||
Fees and commissions | 29,741 | - | - | - | ||||||||
Prizes | 1,547 | - | - | 4,336 | ||||||||
Loss on disposition of equipment | 826 | - | 826 | - | ||||||||
Quebec capital tax | 500 | - | - | 250 | ||||||||
Foreign exchange loss (gain) | (14,933 | ) | (1,245 | ) | (48 | ) | 10,269 | |||||
21,457,328 | 1,988,897 | 1,211,718 | 4,617,958 | |||||||||
LOSS | 20,618,381 | 1,988,897 | 1,211,718 | 4,617,958 | ||||||||
DEFICIT– BEGINNING | - | 18,629,484 | 17,417,766 | 12,799,808 | ||||||||
DEFICIT – ENDING | 20,618,381 | 20,618,381 | 18,629,484 | 17,417,766 | ||||||||
Weighted average number of shares | 111,579,338 | 92,239,057 | 63,900,867 | |||||||||
Adjusted for Sept 8, 2003, 21 for 20 stock split | - | - | 3,993,531 | |||||||||
111,579,338 | 92,239,057 | 67,894,398 | ||||||||||
Loss per share | 0.0178 | 0.0131 | 0.0680 |
(See accompanying notes to consolidated financial statements)
SUNGOLD INTERNATIONAL HOLDINGS CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
April 7, 1986 | ||||||||||||
(inception) to | ||||||||||||
August 31, 2005 | 2005 | 2004 | 2003 | |||||||||
$ | $ | $ | $ | |||||||||
OPERATING ACTIVITIES | ||||||||||||
Loss | (20,618,381 | ) | (1,988,897 | ) | (1,211,718 | ) | (4,617,958 | ) | ||||
Items not involving cash: | ||||||||||||
Write-down of pre-development costs | 6,460,303 | 628,246 | - | 2,017,420 | ||||||||
Amortization | 794,558 | 140,449 | 126,899 | 144,616 | ||||||||
Stock-based compensation | 190,457 | 138,535 | - | 51,922 | ||||||||
Issuance of private placement units or common shares for | ||||||||||||
services | 233,777 | 233,777 | - | - | ||||||||
Gain on disposition of marketable securities | (838,947 | ) | - | - | - | |||||||
Loss on disposition of equipment | 14,858 | - | 826 | - | ||||||||
(13,763,375 | ) | (847,890 | ) | (1,083,993 | ) | (2,404,000 | ) | |||||
Cash provided (used) by changes in non-cash working capital | ||||||||||||
items: | ||||||||||||
Canadian goods and services tax input tax credit | (43,065 | ) | 49,181 | (48,197 | ) | (25,981 | ) | |||||
Prepaid expenses | (22,087 | ) | 36,681 | (54,614 | ) | 370,799 | ||||||
Accounts payable and accrued liabilities | 244,073 | 43,739 | 25,096 | 142,414 | ||||||||
(13,584,454 | ) | (718,289 | ) | (1,161,708 | ) | (1,916,768 | ) | |||||
INVESTING ACTIVITIES | ||||||||||||
Pre-development costs (See Note 3 below) | (5,275,823 | ) | (5,996 | ) | (63,112 | ) | (11,146 | ) | ||||
Proceeds of disposition of equipment | 38,028 | - | 23,682 | - | ||||||||
Acquisition of equipment (see Note 4 below) | (1,392,826 | ) | (220,221 | ) | (69,580 | ) | (207,414 | ) | ||||
(6,630,621 | ) | (226,217 | ) | (109,010 | ) | (218,560 | ) | |||||
FINANCING ACTIVITIES | ||||||||||||
Loans payable (See Note 5 below) | 2,588,228 | 610,774 | 1,377,503 | 317,764 | ||||||||
Repayment of obligation under capital leases (see Note 4 | (61,164 | ) | (4,135 | ) | (17,253 | ) | (19,423 | ) | ||||
below) | ||||||||||||
Issuance of shares | 15,973,140 | 255,332 | - | 1,835,162 | ||||||||
Proceeds of disposition of marketable securities | 1,725,747 | - | - | - | ||||||||
20,225,951 | 861,971 | 1,360,250 | 2,133,503 | |||||||||
INCREASE (DECREASE) IN CASH | 10,876 | (82,535 | ) | 89,532 | (1,825 | ) | ||||||
CASH – beginning | - | 93,411 | 3,879 | 5,704 | ||||||||
CASH – ending | 10,876 | 10,876 | 93,411 | 3,879 |
Notes to statement of cash flows:
1) | Cash consists of balances with banks | ||||||||||||
2) | Interest and income taxes paid: | ||||||||||||
Interest paid | 191,163 | 7,822 | 13,566 | 20,276 | |||||||||
Income taxes paid | - | - | - | - |
3) | During the year, the Company issued 300,000 common shares in lieu payment of $21,994 consultant fees for its SafeSpending™ Project in addition to cash payments |
4) | During the year, the Company acquired at an aggregate cost $26,961 of computer hardware under capital leases, including a $1,177 deposit in addition to cash payments. |
5) | During in the year the Company issued 9,700,000 private placement units to settle $607,979 of debts. Since April 7, 1986 (inception) to August 31, 2005, the Company issued 40,950,000 private placement units to settle $2,575,737 of debts |
(See accompanying notes to consolidated financial statements)
SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
Note 1 | NATURE OF OPERATIONS |
Sungold International Holdings Corp. (the “Company” or “Sungold”) is continued under the Canada Business Corporations Act and is a publicly traded company on the OTC bulletin board under the symbol SGIHF. The principal activity is developing and promoting a proprietary pari-mutuel wagering virtual horseracing project, commercial advertising time on the product, and an internet payment system. To date, the Company has not earned significant revenues and is considered to be in a development stage. | |
Note 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
a) | Going concern | |
These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include the accounts of the Company and its wholly owned legal subsidiaries: SafeSpending Inc., Horsepower Broadcasting Network Inc., Racing Unified Network (R.U.N.) Inc., and Horsepower Broadcasting Network (HBN) International Ltd. | ||
These consolidated financial statements have been prepared on a going concern basis in accordance with Canadian generally accepted accounting principles. The going concern basis of presentation assumes that the Company will continue in operation for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business. | ||
The recoverability of the amounts shown for pre-development costs is primarily dependant on the ability of the Company to put its pre-development projects into economically viable products in the future. The Company plans to meet anticipated financing needs in connection with its obligations by the exercise of stock options, share purchase warrants, and through private placements, public offerings or joint-venture participation by others. | ||
There is significant doubt about the appropriateness of the use of the going concern assumption because the Company experienced significant recurring losses from operations and has experienced significant negative cash flow from operations over a number of years. | ||
The ability of the Company to continue as a going concern and to realize the carrying value of its assets and discharge its liabilities when due is dependent on the successful completion of the actions taken or planned, which management believes will mitigate the adverse conditions and events which raise doubt about the validity of the "going concern" assumption used in preparing these financial statements. There is no assurance that the Company will be successful in its efforts. | ||
The financial statements do not reflect adjustments that would be necessary if the "going concern" assumption is not appropriate. If the "going concern" basis is not appropriate for these financial statements, then adjustments would be necessary in the carrying value of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. | ||
b) | Commitments and Contingencies | |
The Company’s activities are subject to various governmental laws and regulations relating to pari- mutuel wagering virtual horseracing product, internet payment system, copyrights, trademarks and patents. These regulations are continually changing. The Company will require approval under all applicable laws and regulations. |
SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 2 -
Note 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
c) | Use of estimates | ||
The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities at the date of financial statements and revenue and expenses for the year reported. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future years could be significant. There are significant estimates on the deferred pre-development costs and equipment amortization policy. Actual results could from those estimates. | |||
d) | Basis of Consolidation | ||
These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Horsepower Broadcasting Network (HBN) International Ltd., SafeSpending Inc., and Racing Unified Network (R.U.N.) Inc. All inter-company transactions and balances have been eliminated. In January 2005, the Company wound up a wholly owned subsidiary, Horsepower Broadcasting Network Inc. | |||
e) | Translation of Foreign Currencies: | ||
Accounts recorded in foreign currency have been converted to Canadian dollars as follows: | |||
Current assets and current liabilities at exchange rates at the end of the year; | |||
Other assets at historical rates; | |||
Revenues and expenses at the average rate of exchange for the month incurred. | |||
Gains and losses resulting from the fluctuation of foreign exchange rates are included in the determination of income. | |||
f) | Pre-development costs | ||
The Company is in the development stage and capitalizes all costs related to its pre-development projects in accordance with Accounting Guideline No. 11, “Enterprises in the Development Stage”, issued by the Canadian Institute of Chartered Accountants. These costs will be amortized on the basis of revenue generated in relation to the project following commencement of operations. When management decides a project is to be abandoned, costs of the abandoned project are written off to operations. | |||
The costs deferred at any time do not necessarily reflect present or future values. The ultimate recovery of such amounts depends on the Company successfully developing the project. |
…/ 3
SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 3 -
Note 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
g) | Equipment and Amortization | |
Equipment is recorded at cost with amortization provided on a declining balance as follows: |
Software – Horsepower® | 20% |
Computer hardware | 30% |
Computer software | 100% |
Computers under capital leases | 30% |
Office equipment | 20% |
The above rates have been utilized to reflect the anticipated life expectancy. In the year acquired and put in use, only one-half the normal rate is applied. | ||
h) | Income Taxes | |
Income taxes are provided for in accordance with the liability method. Under this method of tax allocation, future income tax assets and liabilities are determined based on differences between the financial statements carrying values and their respective income tax bases (temporary differences). Future income tax assets and liabilities are measured using the enacted tax rates expected to be in effect when the temporary differences are likely to reverse. The effect on future income tax assets and liabilities of a change in rates is included in operations in the year in which the change is enacted or substantively enacted. The amount of future income tax assets recognized is limited to the amount that is more likely than not to be realized. | ||
i) | Loss Per Share | |
Loss per share is determined using the treasury stock method on the weighted average number of shares outstanding during the year. All outstanding options, purchase warrants and private placement units are anti-dilutive, and therefore have no effect on the determination of loss per share. | ||
j) | Stock-based Compensation Plans | |
The Company follows the fair value method of accounting for its stock-based compensation plans. The fair value of the stock options awarded is determined at the grant date using the Black-Sholes option pricing model. The Company recognizes compensation expense at the time the options are granted, since the options are immediately vested. | ||
Shares issued for services received in lieu of payment in cash are valued according to the market value of the shares at the time the service is provided. |
…/ 4
SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 4 -
Note 3 | PRE-DEVELOPMENT COSTS |
a) | SafeSpending™ project | |
In May 2001, a subsidiary of the Company, SafeSpending Inc., acquired all the rights to an internet payment system technology which is a spending system that can be used to make anonymous purchases online from merchants and individuals. The agreement provides SafeSpending Inc. with all copyrights, trademarks, source codes and intellectual property and the Company has patents pending in 105 countries for the SafeSpending™ anonymous payment system. During the year, the Company entered into consulting agreements with the two individuals from whom the rights were acquired, to assist in the further development of the project. The contracts are for six months from July 20th, 2005, and the consultants each received total compensation of 150,000 shares, having a total value at the time of $10,997 each. |
August 31 | Impairment | August 31 | |||||||||||
2004 | Additions | Write off | 2005 | ||||||||||
$ | $ | $ | $ | ||||||||||
Acquisition cost | 62,300 | - | - | 62,300 | |||||||||
Legal and consulting fees | 55,489 | 24,155 | - | 79,644 | |||||||||
117,789 | 24,155 | - | 141,944 |
b) | Horsepower® project | |
Horsepower® World Pool Virtual Horse Racing System is a proprietary, pari-mutuel wagering product operated by Horsepower Broadcasting Network (HBN) International Ltd., a subsidiary of the Company. The product is being offered to Licensed facilities and Authorized Racetrack Affiliates. Development of this project is largely complete but there are no operating installations as of the date of this statement. | ||
The hardware and software development costs are capitalized under equipment and amortized annually when put in use, and legal fees for trademark applications for Horsepower® were deferred under its HorsepowerTMproject. |
August 31 | Impairment | August 31 | |||||||||||
2004 | Additions | Write off | 2005 | ||||||||||
$ | $ | $ | $ | ||||||||||
Legal and consulting fees | 79,119 | 3,835 | - | 82,954 |
…/ 5
SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 5 -
Note 3 | PRE-DEVELOPMENT COSTS (continued) |
c) | Vancouver Racecourse / Richmond Equine Training Centre project | |
In July 2004, the Company obtained an option to purchase 126 acres of land southwest of No. 8 Road and Westminster Highway in Richmond, BC, Canada (“Land”) for the purpose of developing a horse training complex, subject to approval of all zoning and regulatory authorities. The agreement gave the Company the option to purchase the Land for $10,500,000 until January 2, 2005. During the year, the management decided not to pursue the project and did not exercise the land purchase option, cancelled the letter of intention to issue six million common treasury shares related to the project at $4.00 per share and expensed the deferred pre-development costs of the project. |
August 31 | Impairment | August 31 | |||||||||||
2004 | Additions | Write off | 2005 | ||||||||||
$ | $ | $ | $ | ||||||||||
Consulting and legal fees | 616,718 | - | 616,718 | - | |||||||||
Options | 10,000 | - | 10,000 | - | |||||||||
Other direct costs | 1,528 | - | 1,528 | - | |||||||||
628,246 | - | 628,246 | - |
Impairment | |||||||||||||
2004 | Additions | Write off | 2005 | ||||||||||
$ | $ | $ | $ | ||||||||||
TOTAL PRE-DEVELOPMENT COSTS | 825,154 | 27,990 | 628,246 | 224,898 |
Note 4 | EQUIPMENT |
2005 | 2004 | ||||||||||||
Cost | Less | Net Book | Net Book | ||||||||||
Accumulated | Value | Value | |||||||||||
Amortization | |||||||||||||
$ | $ | $ | $ | ||||||||||
Software – Horsepower® | 1,033,216 | 493,386 | 539,830 | 446,938 | |||||||||
Computer hardware | 324,598 | 261,926 | 62,672 | 75,517 | |||||||||
Computers under capital leases | 26,961 | 4,044 | 22,917 | - | |||||||||
Computer software | 4,701 | 2,351 | 2,350 | - | |||||||||
Office equipment | 270 | 27 | 243 | - | |||||||||
1,389,746 | 761,734 | 628,012 | 522,455 |
…/ 6
SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 6 -
Note 5 | SHARE CAPITAL |
2005 | 2004 | ||||||
$ | $ | ||||||
Authorized: | |||||||
Unlimited common shares without par value | |||||||
100,000,000 Class “A” preference shares | |||||||
without par value | |||||||
100,000,000 Class “B” preference shares | |||||||
without par value | |||||||
Issued and outstanding: | |||||||
119,607,800 common | |||||||
(August 31, 2004 – 103,364,740 common) | 21,078,648 | 19,959,566 |
a) | Shares issued during the year: | 2005 | 2004 | |||||||||||
# | $ | # | $ | |||||||||||
For cash | 3,383,060 | 255,332 | - | - | ||||||||||
Non-cash transactions: | ||||||||||||||
- for services provided | 3,160,000 | 255,771 | - | - | ||||||||||
- for debt settlement | 9,700,000 | 607,979 | 19,500,000 | 1,385,197 | ||||||||||
12,860,000 | 863,750 | 19,500,000 | 1,385,197 | |||||||||||
- 21 for 20 stock split – Sept 8/03 | - | - | 3,993,531 | - | ||||||||||
16,243,060 | 1,119,082 | 23,493,531 | 1,385,197 |
b) | Stock options and stock based compensation: | |
The Company has a fixed stock option plan on the issuance of options of up to 10% of the Company’s issued share capital. The following are incentive share purchase options outstanding: |
Date of Grant | Price | Balance Aug 31, 2004 | Granted | Exercised / Expired / Cancelled | Balance August 31, 2005 | Expiration date |
Feb 16, 2001 | US$0.1500 | 100,000 | - | - | 100,000 | Feb 16, 2006 |
Feb 28, 2001 | US$0.0600 | 1,050,000 | - | - | 1,050,000 | Feb 28, 2006 |
Mar 5, 2001 | US$0.0850 | 79,900 | - | - | 79,900 | Mar 5, 2006 |
Aug 10, 2001 | US$0.1200 | 300,000 | - | - | 300,000 | Aug 10, 2006 |
Dec 20, 2001 | US$0.0900 | 100,000 | - | - | 100,000 | Dec 20, 2006 |
Jan 4, 2002 | US$0.0800 | 730,764 | - | - | 730,764 | Jan 4, 2007 |
Jan 24, 2002 | US$0.0725 | 400,000 | - | - | 400,000 | Jan 24, 2007 |
Oct 11, 2002 | US$0.1500 | 200,000 | - | - | 200,000 | Oct 11, 2007 |
Oct 16, 2002 | US$0.1500 | 300,000 | - | - | 300,000 | Oct 16, 2007 |
Jan 23, 2003 | US$0.1100 | 136,000 | - | - | 136,000 | Jan 23, 2008 |
May 27, 2003 | US$0.0500 | 64,000 | - | - | 64,000 | May 27, 2008 |
May 28,2003 | US$0.0500 | 150,000 | - | - | 150,000 | May 28,2008 |
Apr 14, 2005 | US$0.1200 | - | 1,000,000 | - | 1,000,000 | Mar 31, 2007 |
May 27, 2005 | US$0.1200 | - | 750,000 | - | 750,000 | Mar 31, 2007 |
Jun 1, 2005 | US$0.1200 | - | 500,000 | - | 500,000 | Mar 31, 2007 |
Jun 1, 2005 | US$0.1200 | - | 500,000 | - | 500,000 | Mar 31, 2007 |
Jun 6, 2005 | US$0.1200 | - | 500,000 | - | 500,000 | Mar 31, 2007 |
Jul 1, 2005 | US$0.1200 | - | 500,000 | - | 500,000 | Mar 31, 2007 |
Jul 20, 2005 | US$0.1200 | - | 500,000 | - | 500,000 | Mar 31, 2007 |
3,610,664 | 4,250,000 | - | 7,860,664 |
…/ 7
SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 7 -
Note 5 | SHARE CAPITAL (continued) |
b) | Stock options and stock based compensation (continued): | |
In 2001, the Canadian Institute of Chartered Accountants issued Section 3870 for Stock-based Compensations, which requires the use of fair value based method for fiscal years beginning on or after January 1, 2002, and applies to awards granted on or after the date of adoption. The Company adopted the recommendations prospectively for the fiscal year starting September 1, 2002. | ||
Under this fair value based method, the value of a stock-based compensation plan is the sum of two component parts: its intrinsic value and its time value. The intrinsic value reflects the extent to which it is “in the money” at any date, and the time value is the value of the potential increases to the plan holder at any given time. The estimated time value is added to the intrinsic value to determine the fair value of the plan at any time. | ||
Since September 1, 2002, the Company granted 5,100,000 share purchase options as follows: |
Date of Grant | Price | Granted # | Exercisable # | Exercised # | Compensation $ | Expiration date |
Option granted in fiscal 2003: | ||||||
Oct 11, 2002 Oct 16, 2002 Jan 23, 2003 May 27, 2003 May 28,2003 | US$0.1500 US$0.1500 US$0.1100 US$0.0500 US$0.0500 | 200,000 300,000 136,000 64,000 150,000 | 200,000 300,000 136,000 64,000 150,000 | - - - - - | 16,600 24,900 8,282 640 1,500 | October 11, 2007 October 6, 2007 January 23, 2008 May 27, 2008 May 27, 2008 |
Total granted | 850,000 | 850,000 | - | 51,922 | ||
Outstanding Aug 31, 2003 | 850,000 | 850,000 | - | |||
Option granted in fiscal 2004: | - | - | - | - | ||
Outstanding Aug 31, 2004 | 850,000 | 850,000 | ||||
Option granted in fiscal 2005: | ||||||
Apr 14, 2005 May 27, 2005 Jun 1, 2005 Jun 1, 2005 Jun 6, 2005 Jul 1, 2005 Jul 20, 2005 | US$0.1200 US$0.1200 US$0.1200 US$0.1200 US$0.1200 US$0.1200 US$0.1200 | 1,000,000 750,000 500,000 500,000 500,000 500,000 500,000 | 1,000,000 750,000 500,000 500,000 500,000 500,000 500,000 | - - - - - - - | 32,597 24,448 16,307 16,307 16,298 16,290 16,288 | Mar 31, 2007 Mar 31, 2007 Mar 31, 2007 Mar 31, 2007 Mar 31, 2007 Mar 31, 2007 Mar 31, 2007 |
Total granted | 4,250,000 | 4,250,000 | - | 138,535 | ||
Outstanding Aug 31, 2005 | 5,100,000 | 5,100,000 |
…/ 8
SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 8 -
Note 5 | SHARE CAPITAL (continued) |
b) | Stock options and stock based compensation (continued): | |
The fair value of each option granted is estimated on the date of the grant using the Black-Sholes option pricing model with the following assumptions: |
Risk-free interest rate | 2.82% to 3.00% |
Dividend yield | 0 |
Estimated hold period prior to exercise (years) | 2 to 3 year |
Volatility in the price of the Company’s common shares | 120% to 150% |
Between January 1, 2002 and August 31, 2002, the Company granted 946,764 share purchase options to directors at US$0.08 per share until Jan 4, 2007, 136,000 share purchase options to a director at US$0.08 per share until Jan 15, 2007, 400,000 share purchase options to a director at US$0.0725 per share until Jan 24, 2007, 136,000 share purchase options to a director at US$0.23 per share until March 26, 2007 and 272,000 share purchase options to a director at US$0.20 per share until May 17, 2007.
Had compensation cost of the stock based employee compensation been recorded, based upon the fair value of share options, additional compensation expense for the year ended August 31, 2002 would have been $111,430. The pro forma loss per share, assuming this additional compensation expense would have been ($0.0584) . The Pro forma results may be materially different than actual results realized.
The Black-Sholes valuation model was developed for use in estimating the fair value of traded options which are fully transferable and highly traded. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its director stock options.
Outstanding share purchase options which were issued prior to January 1, 2002, have neither been charged to income nor included in the calculation of the pro forma loss, in accordance with Section 3870 of the CICA Handbook, which took effect prospectively.
…/9
SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 9 -
Note 5 | SHARE CAPITAL (continued) |
c) | Share purchase warrants (see also Note 7e - Related Party Transactions): |
Date of Grant | Price | Balance August 31, 2004 | Granted | Exercised | Expired / Cancelled | Balance August 31, 2005 | Expiration date |
Sep 7, 2001 | US$0.200 | 1,000,000 | - | - | 1,000,000 | - | Expired |
Oct 24, 2001 | US$0.150 | 420,000 | - | - | 420,000 | - | Expired |
Nov 4, 2001 | US$0.150 | 1,000,000 | - | - | 1,000,000 | - | Expired |
Dec 14, 2001 | US$0.060 | 2,333,334 | - | - | 2,333,334 | - | Expired |
Jan 7, 2002 | US$0.060 | 1,700,000 | - | - | 1,700,000 | - | Expired |
Jan 30, 2002 | US$0.060 | 1,000,000 | - | - | 1,000,000 | - | Expired |
Mar 1, 2002 | US$0.110 | 300,000 | - | - | 300,000 | - | Expired |
Mar 26, 2002 | US$0.170 | 1,000,000 | - | - | 1,000,000 | - | Expired |
Apr 4, 2002 | US$0.165 | 1,000,000 | - | - | 1,000,000 | - | Expired |
May 7, 2002 | US$0.160 | 400,000 | - | - | 400,000 | - | Expired |
May 30, 2002 | US$0.150 | 600,000 | - | - | 600,000 | - | Cancelled |
Jul 10, 2002 | US$0.075 | 2,500,000 | - | - | 2,500,000 | - | Cancelled |
Jul 24, 2002 | US$0.080 | 250,000 | - | - | 250,000 | - | Cancelled |
Jul 23, 2002 | US$0.080 | 1,500,000 | - | - | 1,500,000 | - | Cancelled |
Aug 21, 2002 | US$0.090 | 100,000 | - | - | 100,000 | - | Expired |
Sep 27, 2002 | US$0.080 | 3,000,000 | - | - | 3,000,000 | - | Cancelled |
Nov 1, 2002 | US$0.070 | 3,000,000 | - | - | 3,000,000 | - | Cancelled |
Mar 26, 2003 | US$0.050 | 3,000,000 | - | - | 3,000,000 | - | Cancelled |
Apr 10, 2003 | US$0.040 | 3,750,000 | - | - | 3,750,000 | - | Cancelled |
May 16, 2003 | US$0.030 | 3,000,000 | - | - | 3,000,000 | - | Cancelled |
Jun 11, 2003 | US$0.030 | 3,000,000 | - | - | 3,000,000 | - | Cancelled |
Jul 7, 2003 | US$0.031 | 2,500,000 | - | - | 2,500,000 | - | Cancelled |
Aug 21, 2003 | US$0.075 | 1,000,000 | - | - | 1,000,000 | - | Cancelled |
Sep 5, 2003 | US$0.060 | 2,000,000 | - | - | 2,000,000 | - | Cancelled |
Oct 31, 2003 | US$0.060 | 2,000,000 | - | - | 2,000,000 | - | Cancelled |
Feb 10, 2004 | US$0.040 | 4,000,000 | - | - | 4,000,000 | - | Cancelled |
Feb 18, 2004 | US$0.045 | 2,500,000 | - | - | 2,500,000 | - | Cancelled |
Mar 30, 2004 | US$0.0525 | 1,500,000 | - | - | 1,500,000 | - | Cancelled |
Jun 04, 2004 | US$0.060 | 3,000,000 | - | - | 3,000,000 | - | Cancelled |
Aug 20, 2004 | US$0.060 | 4,500,000 | - | - | 4,500,000 | - | Cancelled |
Oct 1, 2004 | US$0.060 | - | 2,500,000 | - | 2,500,000 | - | Cancelled |
Dec 31, 2004 | US$0.050 | - | 4,000,000 | - | 4,000,000 | - | Cancelled |
Jan 19, 2005 | US$0.045 | - | 3,200,000 | - | 3,200,000 | - | Cancelled |
May 2, 2005 | US$0.150 | - | 250,000 | - | - | 250,000 | May 31, 2007 |
May 31, 2005 | US$0.050 | - | 300,000 | - | - | 300,000 | May 31, 2007 |
May 31, 2005 | US$0.050 | - | 300,000 | - | - | 300,000 | May 31, 2007 |
May 31, 2005 | US$0.050 | - | 793,260 | - | - | 793,260 | May 31, 2007 |
May 31, 2005 | US$0.150 | - | 152,500 | - | - | 152,500 | May 31, 2007 |
May 31, 2005 | US$0.150 | - | 152,500 | - | - | 152,500 | May 31, 2007 |
Jun 17, 2005 | US$0.150 | - | 52,250 | - | - | 52,250 | Jun 30, 2007 |
Jun 22, 2005 | US$0.150 | - | 147,500 | - | - | 147,500 | Jun 30, 2007 |
Jul 20, 2005 | US$0.150 | - | 87,500 | - | - | 87,500 | Jul 31, 2007 |
Jul 27, 2005 | US$0.150 | - | 50,650 | - | - | 50,650 | Jul 31, 2007 |
Jul 30, 2005 | US$0.150 | - | 51,000 | - | - | 51,000 | Jul 31, 2007 |
Aug 5, 2005 | US$0.150 | - | 51,000 | - | - | 51,000 | Jul 31, 2007 |
56,853,334 | 12,088,160 | - | 66,553,334 | 2,388,160 |
…/10
SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 10 -
Note 5 | SHARE CAPITAL (continued) |
d) | Contributed surplus |
2005 | 2004 | ||||||
$ | $ | ||||||
Contributed surplus – beginning | 51,922 | 51,922 | |||||
Addition related to stock options granted under fair values | 138,535 | - | |||||
190,457 | 51,922 | ||||||
Adjustment related to stock options exercised | - | - | |||||
Contributed surplus – ending | 190,457 | 51,922 |
Note 6 | OBLIGATION UNDER CAPITAL LEASES |
The Company has two lease agreements for computers accounted for as capital leases. Current payments are $843 monthly, expiring June 2007 through April 2008. The following is a schedule of future lease payments | |
2005 | 2004 | ||||||
$ | $ | ||||||
Total minimum lease payments | 26,879 | - | |||||
Less amount representing interest | (5,240 | ) | - | ||||
Balance of obligations | 21,639 | - | |||||
Less current portion | (7,120 | ) | - | ||||
Non-current portion | 14,519 | - |
Future annual principal payments required to retire the lease obligations are as follows:
2006 | 7,120 | ||||||
2007 | 8,011 | ||||||
2008 | 6,518 | ||||||
21,639 |
Note 7 | RELATED PARTY TRANSACTIONS |
a) | During the year the Company paid $180,301 and has a payable of $22,232, for a total cost of $202,533 for software development to a consulting company for its Horsepower® program. The owner of the consulting company is also the Chief Technical Officer of a subsidiary - Horsepower Broadcasting Network (HBN) International Ltd. The fees are in the normal course of business, which is the amount of consideration established and agreed to by the related parties. | |
b) | Accounts payable include $51,751 to two directors for consulting service rendered. | |
c) | The loans payable of $12,500 are from two shareholders with no significant shareholdings. The loans were subsequently converted into common shares (See Note 12 - Subsequent events). | |
d) | During the year consulting fees of $460,436 (2004 - $392,386) were paid to directors and officers of the Company and subsidiaries of the Company, of which $282,079 was paid by cash and $178,357 was paid by shares, valued at the closing price before the date of settlement. The fees are in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. |
…/11
SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 11 -
Note 7 | RELATED PARTY TRANSACTIONS (continued) |
e) | During the year the Company made agreements with share purchase warrant holders, the Estate of Kim N. Hart, to cancel all the 56,050,000 unexpired warrants issued prior to May 1, 2005 for a consideration of $31,178 (US$25,000) and Ms. Anne Kennedy 250,000 unexpired warrants for $Nil. | |
The amount is the amount of consideration established and agreed to by the related parties and the Company. The Company recorded the payment as a settlement agreement in the income statement. |
Note 8 | COMMITMENTS |
Future minimum lease payments required on its Vancouver office under operating leases as follows: |
Year | Amount | ||||||
$ | |||||||
2006 | 40,900 | ||||||
2007 | 10,200 | ||||||
51,000 |
In addition, the Company is paying month to month rent for office space in Toronto at the rate of $1,570 per month. There is no lease commitment or long term liability. | |
Note 9 | FINANCIAL INSTRUMENTS |
The Company’s financial instruments consist of cash, Canadian goods and services input tax credit, accounts payable and accrued liabilities, loans payable and leases payable. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial statements. The fair value of these financial instruments approximates their carrying value, unless otherwise noted. | |
Note 10 | INCOME TAXES AND ACCUMULATED LOSSES |
The Company has accumulated non-capital losses for income tax purposes of $10,943,936 which may be carried forward and used to reduce taxable income in future years. Under present tax legislation, these losses will expire as follows: | |
Year | Amount | ||||||
2006 | 653,279 | ||||||
2007 | 1,273,366 | ||||||
2008 | 1,714,246 | ||||||
2009 | 2,427,247 | ||||||
2010 | 2,473,112 | ||||||
2014 | 1,188,956 | ||||||
2015 | 1,213,730 | ||||||
10,943,936 |
The company also has accumulated capital losses from the pre-development projects written-off for income tax purposes of $3,771,802 that may be carried forward indefinitely and used to reduce capital gains in the future.
…/12
SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 12 -
Note 10 | ACCUMULATED LOSSES AND INCOME TAXES (continued) |
The Company follows the asset and liability method of accounting for income taxes. Future income tax assets and liabilities are determined based on temporary differences between the accounting and tax bases of existing assets and liabilities, and are measured using tax rates expected to apply when these differences reverse. A valuation allowance is recorded against any future tax asset if it is more likely than not that the asset will not be realized.
In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion of all of the future tax assets will not be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of future tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The amount of future tax assets considered realizable could change materially in the near term based on future taxable income during the carry forward period.
The Company’s effective income tax rate differs from the combined Canadian federal and provincial income tax rate. The difference results from the following:
2005 | 2004 | ||||||
Combined federal and provincial tax rate | 35.62% | 36.29% | |||||
Provision for income taxes: | |||||||
Income taxes at statutory rate | (708,445 | ) | (439,732 | ) | |||
Adjusted for written-down of pre-development costs | 223,781 | - | |||||
Adjusted for stock based compensation | 49,346 | - | |||||
Other adjustments | 261 | 154 | |||||
Permanent differences for tax and accounting income | 2,726 | 8,106 | |||||
Unrecognized deductible temporary difference | 432,331 | 431,472 | |||||
Income tax expense | - | - |
Future income tax assets and liabilities result from the differences between the carrying amount and the tax basis of the following:
2005 | 2004 | ||||||
Tax losses carried forward | 3,898,230 | 3,702,791 | |||||
Difference in tax and accounting valuations for equipment | 945 | 1,247 | |||||
3,899,175 | 3,704,038 | ||||||
Valuation allowance | (3,899,175 | ) | (3,704,038 | ) | |||
Future tax asset | - | - |
Note 11 | COMPARATIVE FIGURES |
The comparative figures have been reclassified where applicable in order to conform to the presentation used in the current year.
…/13
SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 13 -
Note 12 | SUBSEQUENT EVENTS |
Subsequent to the year-end, the Company received $296,036 from the issuance of 2,771,416 private placement shares, for an average share of $0.11 per share. | |
Subsequent to the year- end, the loans from shareholders of $12,500 were converted to 179,250 shares. | |
Subsequent to the year-end, the Company issued 1,024,800 shares for services in lieu of payments of $85,030. | |
Note 13 | UNITED STATES ACCOUNTING PRINCIPLES |
These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“CDN GAAP”) which differ in certain respects from those principles that the Company would have followed had its consolidated financial statements been prepared in accordance with generally accepted accounting principles in United States (“US GAAP”). The Company is considered to be a pre-operational Company under US GAAP. | |
The significant differences related principally to the following items and the adjustments necessary to restate the loss and shareholders’ equity in accordance with US GAAP are outlined as follows: | |
a) | Pre-Development Costs | |
Under CDN GAAP, pre-development expenditures are capitalized and amortized over the benefit period of the deferred expenditures once operations commence or written off if abandoned or impaired. US GAAP requires that pre-development expenditures be expensed as incurred until it is determined that commercially viable operations exist and the expenses then incurred are recoverable. | ||
b) | Foreign Currency Translation | |
Under US GAAP, all asset and liability accounts are translated at the exchange rates in effect at the balance sheet dates. Income statement amounts are translated at the average rate of exchange for the year. The resulting differences are accumulated in a separate component of shareholders’ equity. | ||
c) | Comprehensive Income | |
Under US GAAP, SFAS No. 130 requires that companies report comprehensive income as a measure of overall performance. Comprehensive income includes all changes in equity during a year except those resulting from investments by owners and distribution to owners. There is no similar concept under Canadian GAAP. The Company has determined that it had no comprehensive income other than the loss in any of the years presented. | ||
d) | The following are balance sheet items under US GAAP that differ from Canadian GAAP: |
2005 | 2004 | 2003 | ||||||||
$ | $ | $ | ||||||||
Pre-development costs | - | - | - | |||||||
Share capital | 25,789,386 | 24,670,304 | 23,285,107 | |||||||
Foreign currency adjustments | 14,933 | 13,688 | 13,640 | |||||||
Accumulated Deficit During Development | (25,568,950 | ) | (24,179,064 | ) | (22,904,186 | ) | ||||
Stage |
…/16
SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 14 -
Note 13 | UNITED STATES ACCOUNTING PRINCIPLES (Continued) |
e) | The following table summarizes the effect on Deficit of differences between CDN GAAP and US GAAP: |
2005 | 2004 | 2003 | ||||||||
$ | $ | $ | ||||||||
Deficit - CDN GAAP | (20,618,381 | ) | (18,629,484 | ) | (17,417,766 | ) | ||||
Cumulative effect of previous | ||||||||||
years’ adjustments | (5,549,580 | ) | (5,486,420 | ) | (7,502,963 | ) | ||||
(26,167,961 | ) | (24,115,904 | ) | (24,920,729 | ) | |||||
US GAAP material adjustments: | ||||||||||
• Effect of the write-off of pre- | ||||||||||
development costs on net loss | 600,256 | (63,112 | ) | 2,006,274 | ||||||
• Foreign currency adjustments | (1,245 | ) | (48 | ) | 10,269 | |||||
599,011 | (63,160 | ) | 2,016,543 | |||||||
Deficit - US GAAP | (25,568,950 | ) | (24,179,064 | ) | (22,904,186 | ) |
f) | The following table summarizes the effect on shareholders’ equity after considering the US GAAP adjustments: |
Deficit | Foreign | ||||||||||||||
Common | Additional | Accumulated | Currency | Total | |||||||||||
Shares | Paid-in | During | Translation | Shareholders’ | |||||||||||
Amount | Capital | Development | Adjustments | Equity | |||||||||||
Stage | |||||||||||||||
$ | $ | $ | $ | $ | |||||||||||
Common Shares issued /net loss: | |||||||||||||||
August 31, 1986 | |||||||||||||||
• Shares for cash | 107,501 | - | - | - | 107,501 | ||||||||||
• Net loss under US GAAP | - | - | - | - | - | ||||||||||
August 31, 1987 | 107,501 | - | - | - | 107,501 | ||||||||||
• Shares for cash | 166,971 | - | - | - | 166,971 | ||||||||||
• Net loss under US GAAP | - | - | - | - | - | ||||||||||
August 31, 1988 | 274,472 | - | - | - | 274,472 | ||||||||||
• Shares for cash | 401,667 | - | - | - | 401,667 | ||||||||||
• Shares for property | 227,000 | - | - | - | 227,000 | ||||||||||
• Net loss under US GAAP | - | - | (753,962 | ) | - | (753,962 | ) | ||||||||
August 31, 1989 | 903,139 | - | (753,962 | ) | - | 149,177 | |||||||||
• Shares for cash | 622,215 | - | - | - | 622,215 | ||||||||||
• Shares for property | 1,897,000 | - | - | - | 1,897,000 | ||||||||||
• Net loss under US GAAP | - | - | (575,612 | ) | - | (575,612 | ) | ||||||||
August 31, 1990 | 3,422,354 | - | (1,329,574 | ) | - | 2,092,780 | |||||||||
• Shares for cash | 100,250 | - | - | - | 100,250 | ||||||||||
• Net loss under US GAAP | - | - | (350,482 | ) | - | (350,482 | ) | ||||||||
August 31, 1991 | 3,522,604 | - | (1,680,056 | ) | - | 1,842,548 | |||||||||
• Shares for cash | 402,900 | - | - | - | 402,900 | ||||||||||
• Net loss under US GAAP | - | - | (1,420,584 | ) | - | (1,420,584 | ) | ||||||||
August 31, 1992 | 3,925,504 | - | (3,100,640 | ) | - | 824,864 |
…/15
SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 15 -
Note 13 | UNITED STATES ACCOUNTING PRINCIPLES (continued) |
Deficit | Foreign | ||||||||||||||
Common | Additional | Accumulated | Currency | Total | |||||||||||
Shares | Paid in | During | Translation | Shareholders’ | |||||||||||
Amount | Capital | Development | Adjustments | Equity | |||||||||||
Stage | |||||||||||||||
$ | $ | $ | $ | $ | |||||||||||
August 31, 1992 – balance forward | 3,925,504 | - | (3,100,640 | ) | - | 824,864 | |||||||||
• Shares for cash | 465,875 | - | - | - | 465,875 | ||||||||||
• Shares for property | 150,000 | - | - | - | 150,000 | ||||||||||
• Net loss under US GAAP | - | - | (289,189 | ) | - | (289,189 | ) | ||||||||
August 31, 1993 | 4,541,379 | - | (3,389,829 | ) | - | 1,151,550 | |||||||||
• Shares for cash | 576,500 | - | - | - | 576,500 | ||||||||||
• Net loss under US GAAP | - | - | (836,050 | ) | - | (836,050 | ) | ||||||||
August 31, 1994 | 5,117,879 | - | (4,225,879 | ) | - | 892,000 | |||||||||
• Shares for cash | 175,000 | - | - | - | 175,000 | ||||||||||
• Foreign currency | - | - | - | 3,448 | 3,448 | ||||||||||
• Net loss under US GAAP | - | - | (738,384 | ) | - | (738,384 | ) | ||||||||
August 31, 1995 | 5,292,879 | - | (4,964,263 | ) | 3,448 | 332,064 | |||||||||
• Shares for cash | 255,750 | - | - | - | 255,750 | ||||||||||
• Foreign currency | - | - | - | 3,329 | 3,329 | ||||||||||
• Net loss under US GAAP | - | - | (501,749 | ) | - | (501,749 | ) | ||||||||
August 31, 1996 | 5,548,629 | - | (5,466,012 | ) | 6,777 | 89,394 | |||||||||
• Shares for cash | 1,250,000 | - | - | - | 1,250,000 | ||||||||||
• Share-based compensation | 1,345,680 | - | (1,345,680 | ) | - | - | |||||||||
• Foreign currency | - | - | - | (1,646 | ) | (1,646 | ) | ||||||||
• Net loss under US GAAP | - | - | (1,046,798 | ) | - | (1,046,798 | ) | ||||||||
August 31, 1997 | 8,144,309 | - | (7,858,490 | ) | 5,131 | 290,950 | |||||||||
• Shares for cash | 1,351,967 | - | - | - | 1,351,967 | ||||||||||
• Share-based compensation | 2,078,946 | - | (2,078,946 | ) | - | - | |||||||||
• Foreign currency | - | - | - | 11,140 | 11,140 | ||||||||||
• Net loss under US GAAP | - | - | (1,297,719 | ) | - | (1,297,719 | ) | ||||||||
August 31, 1998 | 11,575,222 | - | (11,235,155 | ) | 16,271 | 356,338 | |||||||||
• Shares for cash | 1,044,358 | - | - | - | 1,044,358 | ||||||||||
• Share-based compensation | 1,286,112 | - | (1,286,112 | ) | - | - | |||||||||
• Foreign currency | - | - | - | (18,372 | ) | (18,372 | ) | ||||||||
• Net loss under US GAAP | - | - | (1,300,904 | ) | - | (1,300,904 | ) | ||||||||
August 31, 1999 | 13,905,692 | - | (13,822,171 | ) | (2,101 | ) | 81,420 | ||||||||
• Shares for cash | 2,182,351 | - | - | - | 2,182,351 | ||||||||||
• Foreign currency | - | - | - | 18,438 | 18,438 | ||||||||||
• Net loss under US GAAP | - | - | (1,956,433 | ) | - | (1,956,433 | ) | ||||||||
August 31, 2000 | 16,088,043 | - | (15,778,604 | ) | 16,337 | 325,776 | |||||||||
• Shares for cash | 2,391,331 | - | - | - | 2,391,331 | ||||||||||
• Foreign currency | - | - | - | 12,098 | 12,098 | ||||||||||
• Net loss under US GAAP | - | - | (2,051,962 | ) | - | (2,051,962 | ) | ||||||||
August 31, 2001 | 18,479,374 | - | (17,830,566 | ) | 28,435 | 677,243 |
…/16
SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 16 -
Note 13 | UNITED STATES ACCOUNTING PRINCIPLES (continued) |
Deficit | Foreign | ||||||||||||||
Common | Additional | Accumulated | Currency | Total | |||||||||||
Shares | Paid-in | During | Translation | Shareholders’ | |||||||||||
Amount | Capital | Development | Adjustments | Equity | |||||||||||
Stage | |||||||||||||||
$ | $ | $ | $ | $ | |||||||||||
August 31, 2001 – balance forward | 18,479,374 | - | (17,830,566 | ) | 28,435 | 677,243 | |||||||||
• Shares for cash | 2,388,010 | - | - | - | 2,388,010 | ||||||||||
• Foreign currency | - | - | - | (4,526 | ) | (4,526 | ) | ||||||||
• Net loss under US GAAP | - | - | (2,472,205 | ) | - | (2,472,205 | ) | ||||||||
August 31, 2002 | 20,867,384 | - | (20,302,771 | ) | 23,909 | 588,522 | |||||||||
• Shares issuance | 2,417,723 | - | - | - | 2,417,723 | ||||||||||
• Share-based compensation | - | 51,922 | - | - | 51,922 | ||||||||||
• Foreign currency | - | - | - | (10,269 | ) | (10,269 | ) | ||||||||
• Net loss under US GAAP | - | - | (2,601,415 | ) | - | (2,601,415 | ) | ||||||||
August 31, 2003 | 23,285,107 | 51,922 | (22,904,186 | ) | 13,640 | 446,483 | |||||||||
• Shares issuance | 1,385,197 | - | - | - | 1,385,197 | ||||||||||
• Foreign currency | - | - | - | 48 | 48 | ||||||||||
• Net loss under US GAAP | - | - | (1,274,878 | ) | - | (1,274,878 | ) | ||||||||
August 31, 2004 | 24,670,304 | 51,922 | (24,179,064 | ) | 13,688 | 556,850 | |||||||||
• Shares issuance | 1,119,082 | - | - | - | 1,119,082 | ||||||||||
• Share-based compensation | - | 138,535 | - | - | 138,535 | ||||||||||
• Foreign currency | - | - | - | 1,245 | 1,245 | ||||||||||
• Net loss under US GAAP | - | - | (1,389,886 | ) | - | (1,389,886 | ) | ||||||||
August 31, 2005 | 25,789,386 | 190,457 | (25,568,950 | ) | 14,933 | 425,826 |
g) | The following table summarizes the effect on Net Loss of differences between CDN GAAP and US GAAP: |
Cumulative | 2005 | 2004 | 2003 | ||||||||||
Amounts | |||||||||||||
From | |||||||||||||
Apr 7/86 to | |||||||||||||
Aug 31/05 | |||||||||||||
$ | $ | $ | $ | ||||||||||
Net loss under CDN GAAP | (20,618,381 | ) | (1,988,897 | ) | (1,211,718 | ) | (4,617,958 | ) | |||||
US GAAP material adjustments: | |||||||||||||
Effect of the write-off of pre- | - | - | |||||||||||
development costs on net loss | (224,898 | ) | 600,256 | (63,112 | ) | 2,006,274 | |||||||
Share-based compensation | (4,710,738 | ) | - | - | - | ||||||||
Foreign currency adjustments | (14,933 | ) | (1,245 | ) | (48 | ) | 10,269 | ||||||
Net loss under US GAAP | (25,568,950 | ) | (1,389,886 | ) | (1,274,878 | ) | (2,601,415 | ) | |||||
Loss per share under US GAAP | 0.0125 | 0.0138 | 0.0383 | ||||||||||
Weighted average number of shares | 111,579,338 | 92,239,057 | 67,894,398 |
…/17
SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 17 -
Note 13 | UNITED STATES ACCOUNTING PRINCIPLES (continued) |
h) | The following table summarizes the effect on cash flows after considering the US GAAP adjustment: |
Cash flows from operating activities
April 7, 1986 | |||||||||||||
(Inception) to | 2005 | 2004 | 2003 | ||||||||||
August 31,2005 | $ | $ | $ | ||||||||||
Per CDN GAAP | (13,584,454 | ) | (718,289 | ) | (1,161,708 | ) | (1,916,768 | ) | |||||
Pre-developments costs | (5,275,823 | ) | (5,996 | ) | (63,112 | ) | (11,146 | ) | |||||
Per US GAAP | (18,860,277 | ) | (724,285 | ) | (1,224,820 | ) | (1,927,914 | ) |
Cash flows from investing activities
April 7, 1986 | |||||||||||||
(Inception) to | 2005 | 2004 | 2003 | ||||||||||
August 31,2005 | $ | $ | $ | ||||||||||
Per CDN GAAP | (6,630,621 | ) | (226,217 | ) | (109,010 | ) | (218,560 | ) | |||||
Pre-developments costs | 5,275,823 | 5,996 | 63,112 | 11,146 | |||||||||
Per US GAAP | (1,354,798 | ) | (220,221 | ) | (45,898 | ) | (207,414 | ) |
i) New Accounting Standards
Under the Securities and Exchange Commission’s Staff Accounting Bulletin No.74, the Company is required to disclose certain information related to recently issued accounting standards. The recently issued accounting standards are summarized as follows:
U.S. Standards
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs – an amendment of ARB No. 43 Chapter 4” (“SFAS 151”). The Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that, "… under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges..." This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect that adoption of SFAS 151 will have a material impact on its results from operations or financial position.
…/18
SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 18 -
Note 13 | UNITED STATES ACCOUNTING PRINCIPLES (continued) |
h) | New Accounting Standards (continued) | |
In December 2004, the FASB issued FASB Interpretations (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143”. The Interpretation clarifies that the termconditional asset retirement obligationas used in FASB Statement No. 143,Accounting for Asset Retirement Obligations,refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred— generally upon acquisition, construction, or development and (or) through the normal operation of the asset. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Statement 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. This Interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company does not expect that adoption of FIN 47 will have a material impact on its results from operations or financial position. | ||
In December 2004, the FASB issued SFAS 152, “Accounting for Real Estate Time-Sharing Transactions— an amendment of FASB Statements No. 66 and 67”. The Statement amends FASB Statement No. 66, | ||
Accounting for Sales of Real Estate,to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2,Accounting for Real Estate Time-Sharing Transactions.This Statement also amends FASB Statement No. 67,Accounting for Costs and Initial Rental Operations of Real Estate Projects,to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. SFAS 152 is effective for real estate time-sharing transactions occurring in fiscal period beginning after June 15, 2005. The Company does not expect that adoption of SFAS 152 will have a material impact on its results from operations or financial position. | ||
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, “Exchange of Non monetary Assets – an amendment of APB Opinion No. 29” (“SFAS 153”) which amends Accounting Principles Board (“APB”) Opinion No. 29, “Accounting for Non monetary Transactions” to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for non-monetary asset exchanges occurring in fiscal period beginning after June 15, 2005. The Company does not expect that adoption of SFAS 153 will have a material impact on its results from operations or financial position. | ||
In December 2004, FASB issued Statement of Financial Accounting Standards No. 123R, “Share Based Payment” (“SFAS 123R”). SFAS 123R supersedes APB 25 and its related implementation guidance by requiring entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. As the Company is using fair value method to recognize stock-based compensation, the Company does not expect that adoption of SFAS 123R will have a material impact on its results from operations or financial position. |
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SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 19 -
Note 13 | UNITED STATES ACCOUNTING PRINCIPLES (continued) |
h) | New Accounting Standards (continued) | |
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS 154”) which replaces APB Opinion No. 20, “Accounting Changes” and FASB 3 “Reporting Accounting Changes in Interim Financial Statements”,and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transaction provisions, those provisions should be followed. SFAS 154 requires the issuer to report all voluntary changes in accounting principle via retrospective application, unless impracticable, which enhances the consistency of financial information between periods. SFAS 154 shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date of SFAS 154 was issued. | ||
Canadian Standards | ||
In January 2004 and amended in December 2004, the CICA issued Accounting Guideline No. 18 “Investment Companies” (“AcG-18”). AcG-18 requires investment companies to carry investment at fair value when they otherwise would have had to consolidate them or account for them using the equity method (An investment company will, however, consolidate a controlling interest in another investment company The Company does not expect that adoption of AcG-18 will have a material impact on its results from operations or financial position. | ||
In January 2005 and amended in March 2005, the CICA issued EIC-151“Exchangeable Securities Issued by Subsidiaries of Income Trust”,which provides guidance on how should exchangeable securities representing the retained interest in a subsidiary of an income trust be presented on the consolidated balance sheet of the income trust, the exchangeable securities be measured, the accounting treatment for the conversion of exchangeable securities that are not presented as part of unitholders’ equity, and earnings per shares be calculated. EIC –151 should be applied for financial years beginning on or after June 30, 2005, with earlier adoption encouraged. The Company does not expect that adoption of EIC-151 will have a material impact on its results from operations or financial position. | ||
In March 2005, the CICA issued EIC-152“Mining Assets – Impairment and Business Combination”,which provides guidance on an issue when testing mining assets for impairment under CICA 3063. Some mining entities exclude estimated cash flows associated with the economic value of a mining asset beyond that asset’s proven and probable reserves, and those estimated cash flows may also exclude the effects of anticipated fluctuations in the future market price of minerals over the period of cash flows. EIC–152 should be applied for financial years beginning on or after March 16, 2005. As the Company is a pre-operating stage entity and capitalized deferred exploration cost under AcG-11, the Company does not expect that adoption of EIC-152 will have a material impact on its results from operations or financial position. | ||
In April 2005, the CICA issued EIC-154 “Accounting for Pre-Existing Relationships Between the Parties of a Business Combination”.EIC-154 addresses whether a business combination between two parties that have a pre-existing relationship should be evaluated to determine if a settlement of a pre-existing relationship exists, thus requiring the acquirer to account for the settlement separately from the business combination. EIC-154 shall be effective for a component of an enterprise that is either disposed of or classified as held for sale in fiscal years beginning after April 22, 2005. The Company does not expect that adoption of EIC- 154 will have a material impact on its results from operations or financial position. |
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SUNGOLD INTERNATIONAL HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2005
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 20 -
Note 13 | UNITED STATES ACCOUNTING PRINCIPLES (continued) |
h) | New Accounting Standards (continued) | |
In April 2005, the CICA issued new Section 1530 “Comprehensive Income”, the new section establishes standards for reporting and display of comprehensive income. The main feature of Section 1530 is a requirement for an enterprise to present comprehensive income and its components, as well as net income, in its financial statements. Section 1530 should be applied for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2006. | ||
In April 2005, the CICA issued new Section 3251 “Equity”, the new section, which replaces section 3250 “Surplus”, establishes standards for the presentation of equity and changes in equity during the reporting period. The main feature of Section 3250 is a requirement for an enterprise to present separately each of the changes in equity during the period, including comprehensive income, as well as components of equity at the end of the period. Section 3251 should be applied for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2006. | ||
In April 2005, the CICA issued new Section 3855 “Financial instruments – recognition and measurement”, the new section establishes standards for recognizing and measuring financial assets, financial liabilities and non-financial derivatives. The main features of Section 3855 are classified financial assets as held for trading, held to maturity, loans and receivables, or available for sales and their measurement. Section 3855 should be applied for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2006. | ||
In April 2005, the CICA issued new Section 3861 “Financial instruments – disclosure and presentation”, the new section, which replaces section 3860 “Financial instruments – disclosure and presentation”, establishes standards for the presentation of financial instruments and non-financial derivatives, and identifies the information that should be disclosed about them. Section 3861 should be applied for fiscal years beginning on or after November 1, 2004. | ||
In April 2005, the CICA issued new Section 3865 “Hedges”, the new section establishes standards for when and how hedge accounting may be applied. Section 3865 should be applied for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2006. | ||
In May 2005, the CICA issued Accounting Guideline (“AcG”) - 19“Disclosure by entities subject to rate regulation”.The guideline presents the views of the Accounting Standard Board on certain aspects of the disclosure and presentation of information in the financial statements of entities providing services or products for which customer rates are established, or subject to approval,by a regulator or a governing body empowered by status or contract to set rates. The Company does not expect that adoption of AcG-19 will have a material impact on its results from operations or financial position. | ||
In June 2005, the CICA released new Handbook Section 3831, Non-monetary Transactions, effective for fiscal periods beginning on or after January 1, 2006. This standard requires all non-monetary transactions to be measured at fair value unless they meet one of four very specific criteria. Commercial substance replaces the culmination of the earnings process as the test for fair value measurement. A transaction has commercial substance if it causes an identifiable and measurable change in the economic circumstances of the entity. The Company does not expect that adoption of Section 3831 will have a material impact on its results from operations or financial position. |
(b) | Exhibits |
Exhibit Number | Description |
1.1 | Certificate of Incorporation for 307198 B.C. Ltd. dated April 7, 1986.(1) |
1.2 | Certificate for 307198 B.C. Ltd. changing name to Fircrest Resources Ltd. dated July 2, 1986.(1) |
1.3 | Certificate for Fircrest Resources Ltd. changing name to NTC Capital Corporation dated October 30, 1991.(1) |
1.4 | Certificate of Change of Name for NTC Capital Corporation changing name to Sungold Gaming Inc. dated March 1, 1994.(1) |
1.5 | Certificate of Change of Name for Sungold Gaming Inc. changing name to Sungold Gaming International Ltd. dated May 26, 1997.(1) |
1.6 | Altered Memorandum of the Corporation dated February 22, 2002, effective June 13, 2002, amending share capital.(3) |
1.7 | Articles of Continuance.(4) |
1.8 | Bylaw No. 1 of the Corporation.(4) |
4.1 | Consulting Agreement between Sungold Gaming International Ltd. and Kim N. Hart dated May 1, 1998.(1) |
4.2 | Consulting Agreement between Sungold Gaming International Ltd. and Anne Kennedy dated July 1, 1998.(1) |
4.3 | Consulting Agreement between Horsepower Network.com Inc. and Kim N. Hart dated May 1, 2000.(4) |
4.4 | Agreement dated May 2, 2001 between the Corporation and SafeSpending Services Inc.(2) |
4.5 | Agreement dated May 2, 2001 between the Corporation and Jerome Nootebos.(2) |
4.6 | Consulting Agreement between Horsepower Broadcasting Network (HBN) International Ltd. and Larry Simpson dated October 11, 2002.(3) |
4.7 | Amendment to Consulting Agreement dated January 2, 2003, between the Corporation and Kim N. Hart.(3) |
4.8 | Amendment to Consulting Agreement dated January 2, 2003, between the Corporation and Anne Kennedy.(3) |
4.9 | Letter of Intent-Extension between TAC International Investments LLC and the Corporation dated September 30, 2003.(4) |
4.10 | Amendment to Consulting Agreement dated October 1, 2003, between the Corporation and Anne Kennedy.(1) |
4.11 | Amendment to Consulting Agreement dated October 1, 2003, between the Corporation and Kim N. Hart.(1) |
4.12 | Amendment to Consulting Agreement dated January 2, 2004, between the Corporation and Anne Kennedy.(4) |
4.13 | Amendment to Consulting Agreement dated January 2, 2004, between the Corporation and Kim N. Hart.(4) |
4.14 | Amendment to Consulting Agreement dated January 2, 2004, between Horsepower Broadcasting Network (HBN) International Ltd. and Kim N. Hart.(4) |
4.15 | Business Services Agreement dated January 18, 2005, between Sungold International Holdings Corp. and Hart Ventures.(5) |
4.16 | Option Agreement dated March, 2004 between the Corporation and A.C. Gilmore & Sons (Farms) Ltd.(5) |
4.17 | Consulting Agreement dated June 28, 2004 between the Corporation and T-SWAT Consulting Ltd.(5) |
4.18 | License Agreement dated May 12, 2004 between Truro Raceway and Horsepower Broadcasting Network (HBN) International Ltd.(5) |
4.19 | License Agreement dated August 13, 2004 between Inverness Raceway and Horsepower Broadcasting Network (HBN) International Ltd.(5) |
4.20 | License Agreement dated April 2, 2004 between Manitoba Jockey Club dba as Assinboia Downs and Horsepower Broadcasting Network (HBN) International Ltd.(5) |
4.21 | License Agreement dated March 8, 2004 between Pompano Park Racing and Horsepower Broadcasting Network (HBN) International Ltd.(5) |
4.22 | License Agreement dated September 28, 2004 between Fredericton Exhibition Limited and Horsepower Broadcasting Network (HBN) International Ltd.(5) |
4.23 | License Agreement dated November 15, 2004 between Flagler Greyhound Track and Horsepower Broadcasting Network (HBN) International Ltd.(5) |
4.24 | License Agreement dated November 24, 2004 between Buffalo Trotting Association and Horsepower Broadcasting Network (HBN) International Ltd.(5) |
4.25 | Letter of Intent-Extension between TAC International Investments LLC and the Corporation dated July 30, 2004.(5) |
- 46 -
(1) | Previously filed as an exhibit to the Corporation’s Registration Statement on Form 20-F filed on February 20, 2002 |
(2) | Previously filed as an exhibit to the Corporation’s Annual Report on Form 20-F filed on February 28, 2002. |
(3) | Previously filed as an exhibit to the Corporation’s Annual Report on Form 20-F filed on March 17, 2003. |
(4) | Previously filed as an exhibit to the Corporation’s Annual Report on Form 20-F filed March 19, 2004. |
(5) | Previously filed as an exhibit to the Corporation’s Annual Report on Form 20-F filed March 5, 2005. |
- 47 -
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
SUNGOLD INTERNATIONAL HOLDINGS CORP.
Date: March 14, 2006 | By: | /s/ T. Keith Blackwell |
T. KEITH BLACKWELL | ||
Chief Executive Officer and | ||
Chief Financial Officer |