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 ENDED AUGUST 31, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER No. 0-30006
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SUNGOLD ENTERTAINMENT CORP.
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(Exact name of Registrant as specified in its charter)
Inapplicable
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(Translation of Registrant's name into English)
British Columbia, Canada
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(Jurisdiction of incorporation or organization)
500 Park Place, 666 Burrard Street
Vancouver, British Columbia, Canada, V6C 3P6
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(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
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
Not Applicable
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(Title of Class)
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: 50,121,209
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.
Yes X No
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Indicate by check mark which financial statement item the Registrant has elected
to follow.
Item 17 X Item 18 _____
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NOTE REGARDING FORWARD LOOKING STATEMENTS
Except for statements of historical fact, certain information contained herein
constitutes "forward-looking statements," including without limitation
statements containing the words "believes," "anticipates," "intends," "expects"
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 or achievements of the
Registrant to be materially different from any future results or achievements of
the Registrant expressed or implied by such forward-looking statements. Such
factors include, among others, the following: the Registrant's history of
operating losses and uncertainty of future profitability; uncertainty of access
to additional capital; management's lack of experience in gaming operations;
competition; risks associated with development, construction and managing gaming
operations; certain restrictions and regulatory requirements regarding gaming
establishment ownership and operation; certain social, regulatory and political
uncertainties regarding the gaming industry; dependence on joint venture
partners for project financing; obtaining gaming licenses and managing gaming
operations; and changes in economic conditions, industry competition and gaming
products. See "Description of Business - Risk Factors."
CURRENCY
Unless otherwise indicated, in this annual report on Form 20-F (the "Annual
Report") all references herein are to Canadian dollars.
TABLE OF CONTENTS
Part I Page No
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Item 1. Identity of Directors, Senior Management and Advisers 1
Item 2. Offer Statistics and Expected Timetable 1
Item 3. Key Information 1
Item 4. Information on the Registrant 9
Item 5. Operating and Financial Review and Prospects 18
Item 6. Directors, Senior Management and Employees 23
Item 7. Major Shareholders and Related Party Transactions 31
Item 8. Financial Information 34
Item 9. The Offer and Listing 35
Item 10. Additional Information 37
Item 11. Quantitative and Qualitative Disclosure About Market Risk 59
Item 12. Description of Securities Other Than Equity Securities 59
Part II
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Item 13. Defaults, Dividends Arrearages and Delinquencies 59
Item 14. Material Modifications to the Rights of Security
Holders and Use of Proceeds 59
Item 15. Controls and Procedures 59
Item 16. [Reserved] 60
Part III
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Item 17. Financial Statements 60
Item 18. Financial Statements 60
Item 19. Exhibits 60
(a) Index to Financial Statements
(b) Exhibits
-i-
PART I
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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
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The following table presents selected consolidated financial data of the
Registrant for the fiscal years 1998, 1999, 2000, 2001 and 2002. This
information should be read in conjunction with the Financial Statements included
elsewhere in this Annual Report. The Financial Statements have been audited by
Loewen, Stronach & Co., Chartered Accountants, the Registrant's independent
accountants. The Financial Statements have been prepared in accordance with
Canadian Generally Accepted Accounting Principles ("Canadian GAAP"). Note 12 to
the 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 Registrant, and a reconciliation to US GAAP
of the Registrant'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 12 to the Financial Statements.
2002 2001 2000 1999 1998
Cdn$ Cdn$ Cdn$ Cdn$ Cdn$
OPERATING DATA:
Revenue $14,931 $24,528 $18,444 ($18,162) $13,492
General And
Administrative
Expenses 2,458,754 1,748,034 1,332,567 641,181 362,321
Net (Loss) from
Continuing
Operations
- Canadian GAAP (2,602,640) (2,184,080) (1,314,123) (659,343) (880,054)
- US GAAP (2,472,205) (2,051,962) (1,956,433) (2,587,016) (3,376,665)
Net (Loss) Per Share
- Canadian GAAP (0.06) (0.08) (0.07) (0.04) (0.06)
- US GAAP (0.06) (0.07) (0.10) (0.15) (0.22)
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2002 2001 2000 1999 1998
Cdn$ Cdn$ Cdn$ Cdn$ Cdn$
BALANCE SHEET DATA;
Working Capital
(Deficiency) $64,291 $18,214 $(39,093) $74,099 $354,960
Total Assets
- Canadian GAAP 3,708,525 3,739,902 3,500,905 2,573,825 2,192,951
- US GAAP 940,209 845,677 462,464 159,256 493,315
Total Liabilities 351,687 168,434 136,688 77,836 81,977
Shareholders Equity
- Canadian GAAP 3,356,838 3,571,468 3,364,217 2,495,989 2,110,974
- US GAAP 588,522 677,243 325,776 81,420 356,338
Long-Term
Obligations 17,253 36,687 - - -
CURRENCY AND EXCHANGE RATES
The following table sets out the exchange rates for one United States dollar
("US$") expressed in terms of one Canadian dollar ("Cdn$") in effect at the end
of the following periods, (based on the average of the exchange rates on the
last day of each month in such periods).
2002 2001 2000 1999 1998
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End of period 1.5737 1.5298 1.4694 1.5055 1.4490
The following table sets out the high and low exchange rates for each month
during the previous six months for one United States dollar ("US$") expressed in
terms of one Canadian dollar ("Cdn$").
High Low
---- ---
January 2003 1.5750 1.5220
December 2002 1.5800 1.5478
November 2002 1.5903 1.5528
October 2002 1.5943 1.5607
September 2002 1.5863 1.5545
August 2002 1.5963 1.5523
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Exchange rates are based upon the noon buying rate in New York City for Cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York.
Unless otherwise indicated, in this Annual Report all references herein are to
Canadian Dollars.
The noon rate of exchange on February 13, 2003 as reported by the United States
Federal Reserve Bank of New York for the conversion of Canadian dollars into
United States dollars was US $0.6579 (US$1.00 = Cdn$1.5199).
B. CAPITALIZATION AND INDEBTEDNESS
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Not Applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
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Not Applicable.
D. RISK FACTORS
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The securities of the Registrant are highly speculative. In evaluating the
Registrant, it is important to consider that the Registrant is in the
preliminary stage of its operations as a developer of emerging gaming
entertainment facilities. A prospective investor or other person reviewing the
Registrant 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 and related party advances. Certain risks are associated
with the Registrant's business including the following:
Limited History of Operations
The Registrant has a limited history of operations. The Registrant currently
has only begun generating revenues from online operations. Most of the
Registrant's initial revenues will come from its www.horsepowerworldpool.com
internet web site. Each of the Registrant's proposed racetracks is in the
start-up phase. The Registrant does not expect to receive any revenues from
land based operations until the required approvals are received and the projects
begin operations in a commercially profitable manner. There can be no assurance
that any approvals will be obtained for the proposed racetracks, that the
Registrant will obtain the required financing or that the Registrant or its
strategic partners will be able to manage the proposed racetracks in a
profitable manner.
Investors should be aware of the delays, expenses and difficulties encountered
in an enterprise in this critical stage, many of which may be beyond the
Registrant's or its affiliates' control, including, but not limited to, the
regulatory environment in which the Registrant expects to operate, problems
related to regulatory compliance costs and delay, marketing difficulties and
costs that may exceed current estimates. There can be no assurance that the
Registrant or its affiliates will be able to implement their business
strategies, successfully develop any of the planned development projects or
complete their projects according to specifications in a timely manner or on a
profitable basis.
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Investors cannot expect to receive a dividend on their investment in the
foreseeable future, if at all. The Registrant will require additional financing
to carry out its business plan and, if financing is unavailable for any reason,
the Registrant may be unable to carry out its business plan.
Material Litigation Related to the Gun Lake Project
The Registrant has filed a complaint against the Gun Lake Band and certain other
parties seeking, among other things, to enforce its agreement related to the Gun
Lake Project. The trial court dismissed the lawsuit on the basis of the
defendants' sovereign immunity. The Registrant applied for permission for a
review of these issues with the Michigan Supreme Court and is considering a
Supreme Court appeal. See Item 8, "Financial Information - Litigation". There
can be no assurance that the Registrant will participate in the Gun Lake Project
or that the Registrant will be able to enforce its agreement with the Gun Lake
Band. Litigation is time consuming, complex, costly and uncertain.
Governmental Regulations; Uncertainty of Obtaining Gaming Licenses
Gaming establishment operations are subject to extensive federal, provincial and
local regulations. Federal, provincial and the applicable local authorities
will require various licenses, permits and approvals to be held by the
Registrant and its management company. The gaming commissions may, among other
things, revoke a gaming license, or the license of any individual or registered
entity. The Registrant has not obtained any government licenses, permits and
approvals necessary for the operation of the proposed gaming activities. Gaming
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 Registrant's Horsepower(R) World Pool racing system operations
for Vancouver Thoroughbred Park will require various approvals from the gaming
authorities, provincial and city government, and this approval process can be
time consuming and costly with no assurance of success. Moreover, all of the
Registrant's projects are subject to risks from political and economic
uncertainty, which are beyond the control of the Registrant. The application
processes for securing gaming licenses are extremely complex and time consuming.
Each project has specific requirements.
The laws, rules and regulations governing the Registrant's proposed gaming
projects are subject to change and variation prior to the Registrant and its
joint venture partners obtaining the required gaming licenses. To a certain
extent, the gaming licensing process is a political process and the Registrant
and its joint venture partners may face delays in obtaining gaming licenses due
to political changes or competing political interests.
Need for Additional Financing to Fund Current Commitments
The Registrant anticipates it will need to raise approximately US $1,500,000 to
meet its operating budget for the fiscal year ending August 31, 2003. The
Registrant has not completed the financing to meet its operating budget through
August 31, 2003. The Registrant requires further financings to continue its
operations. If additional financing is not available at all or on acceptable
terms, the Registrant may have to substantially reduce or cease its operations.
The development of the Registrant's business will depend upon increased cash
flow from operations and the Registrant's ability to obtain financing through
private placement financing, public financing or other
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means. The Registrant currently has no significant revenues from operations and
is experiencing negative cash flow, accordingly, the only other sources of funds
presently available to the Registrant is through the sale of equity and debt
capital. While the Registrant 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
Registrant 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
Registrant's future results and which could result in a material adverse effect
on an investment in the Registrant's securities.
Need for Additional Financing to Fund Major Potential Projects
The Registrant has not completed the financing to complete some of the projects
outlined in its business plan or to fund its operating budget through August 31,
2003.
Other than TAC's commitment related to the Richmond Equine Training Centre and
the Vancouver Thoroughbred Park to purchase 6 million common shares for US $24
million, the development of each project will depend solely upon the
Registrant's ability to obtain financing through the joint venturing of
projects, private placement financing, public financing or other means.
If the Registrant cannot obtain sufficient capital to fund its projects, some or
all of its planned projects may be significantly delayed or abandoned. Any such
delay or abandonment could result in cost increases and adversely affect the
Registrant's future results of operations.
Dependence on Key Personnel
The Registrant currently has 12 persons working full time who function primarily
in management, supervisory and administrative capacities. The Registrant's
success is highly dependent upon the performance of its key personnel.
Particularly, Kim Hart, a director and the Chief Executive Officer of the
Registrant, who has relationships in the gaming and horseracing industries. The
Registrant currently has consulting contracts with its key personnel, and
effective May 22, 1998, the Registrant has $1,000,000 of directors, officers and
Registrant reimbursement liability insurance. The Registrant does not maintain
key-man life insurance. The loss of the services of senior management and/or
key personnel could have a material and adverse effect on the Registrant, its
business and results of operations.
Reliance on Strategic Partners and Joint Ventures
The Registrant's success depends to a significant extent on the performance and
continued service of certain independent contractors. The Registrant has hired
and contracted the services of professional providers for government consulting,
environmental, construction, real estate, engineering, architectural and
planning services.
Gaming Industry Risks
The Registrant's gaming projects are speculative by their nature and involve a
high degree of risk. The gaming business is subject to a number of factors
beyond the Registrant's control including changes in economic conditions,
industry competition, management risks, changes in gaming products, variability
in operating costs, changes in government and changes in regulatory authorities'
rules and regulations.
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Risk of Change in Sovereign Status of Kahnawake First Nations Territory
The Registrant currently operates its Horsepower(R) World Pool system on the
Kahnawake First Nations Territory in Quebec, Canada. While the Registrant
believes that the sovereign status of the Territory is recognized or not
challenged by the Canadian federal or provincial governments, there is no
assurance that the situation will not change forcing the Registrant to seek to
relocate in another jurisdiction with suitable gaming and tax laws and status
which may result in increased costs to the Registrant or disruption to the
Registrant's business.
Real Property Ownership Risks
The Registrant is negotiating an option to acquire 100 acres in Richmond,
British Columbia, Canada. All real property investments are subject to an
element of risk. Such investments are affected by general economic conditions,
local real estate markets, demand for leased premises, competition from other
available premises and various other factors. If real property is acquired,
certain significant expenditures, including property taxes, maintenance costs,
mortgage payments, insurance costs and related charges, must be made throughout
the period of ownership of real property regardless of whether the property is
producing any income. If the Registrant or its affiliates are unable to meet
mortgage payments on any property, loss could be sustained as a result of the
mortgagee's exercise of its rights of foreclosure or sale.
Real property investments are relatively illiquid. Such illiquidity will tend
to limit the Registrant's ability to vary its portfolio promptly in response to
changing economic or investment conditions.
Construction Risk
Historically, most sectors of the construction industry have been cyclical and
have been significantly affected by changes in general and local economic
conditions, levels of consumer confidence, employment and income, housing
demand, interest rates and the availability of financing. The Registrant's
participation in its planned projects will be subject to construction risks such
as availability and cost of financing, materials and labour; environmental
risks; changes in government regulation and increases in government fees. In
addition, the availability of land for development and permitted uses may be
constrained by government regulation. Development activities are also subject
to the risks of inability to obtain, or delays in obtaining, all necessary
zoning, land-use, building and other required government permits and
authorizations.
Further risks associated with the gaming development industry include the risk
that construction costs of a project may exceed original estimates, possibly
making the project uneconomical; and the risk that construction may not be
completed on schedule, resulting in increased debt service expense and
construction costs. Delays in construction schedules may be caused by factors
not within a developer's control, such as adverse weather conditions, labour
disputes, material shortages and regulatory delays. In addition, developers are
subject to the risk of natural disasters such as fire, floods and earthquakes,
which can cause substantial delays and costs.
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Delays in Completion of Construction Projects
The Registrant anticipates that it will derive significant growth in revenues
from its Horsepower(R) World Pool Internet web site. The Registrant is subject
to a number of risks relating to delays in obtaining a long term lease for the
racetrack and grandstands at Hastings Park in Vancouver, British Columbia, and
delays to its plans to renovate the Hastings Park facility in conjunction with
the construction of a one mile thoroughbred training centre in Richmond and
completing construction facilities housing such projects. Such risks include
the unavailability of materials and labour, the abilities of the sub-contractors
to complete work competently and on schedule, the surface and subsurface
conditions of the land underlying the project, weather, economic and other
ordinary risks of construction or other occurrences that may hinder or delay the
successful completion of a particular project and the revenues from operating
the Vancouver racetrack. Many of these factors are beyond the control of the
Registrant.
In addition, where the Registrant undertakes the obligation to construct a
facility to house a gaming project, the Registrant must contract with
professionals, subcontractors and suppliers of materials based on a schedule and
critical path analysis plan. If construction of a project does not proceed in
accordance with the anticipated schedule, the Registrant will, in most
instances, experience increased administrative, financing and other costs
associated with the project. The failure to complete a particular project on
schedule or at the anticipated price may reduce or eliminate profits, or result
in a loss.
Government Construction Regulations and Environmental Matters
The Registrant's participation in its planned projects will be subject to a
variety of statutes and rules regulating certain environmental and developmental
matters, as well as building design and site design. In particular, the
Registrant will be required to obtain the approval of numerous governmental
authorities regulating such matters as permitted land uses, levels of density
and the installation of utility services such as electricity, water and waste
disposal. In addition, development fees, some of which may be substantial, are
typically imposed by municipal authorities to defray the cost of providing
certain governmental services and public improvements. The amount of such
charges cannot always reliably be predicted and may arise after lands are
acquired. The Registrant will also be required to obtain numerous government
approvals and permits before it can commence construction of projects and
obtaining such approvals and permits can require substantial expense, time and
risk. The Registrant's participation in its planned projects may be subject to
additional costs or delays or may be precluded entirely from building its
projects because of "no growth" or "slow growth" initiatives, building permit
allocation ordinances, building moratoriums or similar government regulations
that could be imposed in the future due to unforeseen health, safety, welfare or
environmental concerns. Environmental regulations can also have an adverse
impact on the availability and price of certain raw materials such as lumber.
Low-Priced Stocks are Subject to Greater Disclosure Requirements
The Securities and Exchange Commission adopted rules ("Penny Stock Rules") that
regulate broker-dealer practices in connection with transactions in penny
stocks. The Common Shares of the Registrant fall within the Commission's
definition of a penny stock. The closing price of the Registrant's shares on
January 15, 2003 was UD $0.11. Penny stocks generally are equity securities
with a price of less than $5.00 (other than securities registered on certain
national securities exchanges or quoted on the NASDAQ system, provided that
current prices and volume
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information with respect to transactions in such securities is provided by the
exchange or system). The Penny Stock Rules require a broker-dealer, prior to
effecting a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document prepared by the Securities and
Exchange Commission that provides information about penny stocks and the nature
and level or risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction,
and monthly account statements showing the market value of each penny stock held
in the customer's account. The bid and offer quotations, and the broker-dealer
and salesperson compensation information must be given to the customer orally or
in writing prior to effecting the transaction and must be given to the customer
in writing before or with the customer's confirmation. In addition, the Penny
Stock Rules require that prior to a transaction in a penny stock not otherwise
exempt from such rules, the broker-dealer must receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for a stock
that is subject to the Penny Stock Rules, shareholders may find it more
difficult to sell their shares.
There Is A Limited Market For the Registrant's Common Stock. If A Market For
The Registrant's Common Stock Is Developed, Then The Stock Price May Be Volatile
The Registrant's common stock is traded on the NASD OTC Bulletin Board.
However, there is a limited market for the Registrant's common stock and there
is no assurance that investors will be able to sell their shares in the public
market. The Registrant anticipates that the market price of its common stock
will be subject to wide fluctuations in response to several factors, such as:
1. actual or anticipated variations in our results of operations;
2. the Registrant's ability or inability to generate new revenues;
3. increased competition; and
4. conditions and trends in the gaming industry.
Further, companies traded on the OTC Bulletin Board have traditionally
experienced extreme price and volume fluctuations. Accordingly, the
Registrant'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 Registrant's common stock.
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The Registrant's Audited Financial Statements Contain a Note about the
Registrant's Ability to Continue as a Going Concern
The Registrant's financial statements have been prepared on the basis of
accounting principles applicable to a going concern. As of August 31, 2002 the
Registrant had an accumulated deficit of Cdn $12,799,808, which if prepared
under U.S. GAAP would have been an accumulated deficit of US $20,302,771 The
Registrant continues to incur operating losses, including losses of Cdn
$2,602,640 during fiscal 2002 (Cdn $2,184,080 in 2001, Cdn $1,314,123 in 2000).
Our 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
Registrant to operate the Horsepower World Pool profitably in the future. The
Registrant 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. 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 Registrant's financial statements were
prepared. 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 1 to the
financial statements.
Foreign Incorporation
The Registrant is incorporated under the laws of the Province of British
Columbia, Canada and a majority of the Registrant's directors and 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
Registrant or upon those directors or officers who are not residents of the
United States, or to realize in the United States upon judgements of United
States courts predicated upon civil liabilities under the United States
Securities Exchange Act of 1934, as amended. A judgement 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 judgement 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 Registrant predicated solely upon such
civil liabilities.
ITEM 4 INFORMATION ON THE REGISTRANT
A. HISTORY AND DEVELOPMENT OF THE REGISTRANT
Sungold Entertainment Corp. (the "Registrant"), a British Columbia corporation,
and its wholly-owned subsidiaries, Sungold Entertainment USA, Inc., an Arizona
corporation, and Horsepower Broadcasting Network Inc., a British Columbia
corporation, and Horsepower Broadcasting (HBN) International Limited, a Canadian
Federal corporation, are in the business of developing and operating
entertainment facilities and online virtual horse racing and online prepaid
payment systems.
The Registrant was incorporated on April 7, 1986 pursuant to the British
Columbia Company Act, as a British Columbia corporation under the name 307198
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B.C. Ltd. and commenced trading on the Vancouver Stock Exchange (now the TSX
Venture Exchange) (the "Exchange") on May 3, 1988. The
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Registrant's shares were voluntarily de-listed from the Exchange effective at
the close of trading December 11, 1997.
Effective May 14, 1999, the common shares of the Registrant were approved for
quotation by the National Association of Securities Dealers on the OTC Bulletin
Board. Effective September 7, 2001, the common shares of the Registrant were
listed and posted for trading on the Frankfurt Stock Exchange.
The Registrant's head office is located at 500 Park Place, 666 Burrard Street,
Vancouver, BC, V6C 3P6 (Tel: 604-669-9580). The Registrant's registered office
is located at Suite 1880, Royal Centre, 1055 West Georgia Street, Box 11122,
Vancouver, British Columbia, Canada V6E 3P3 (Tel: 604-687-5792). The
Registrant's agent in the United States is located at 2300 West Sahara Avenue,
Suite 500, Box 18, Las Vegas, Nevada, USA, 89102 (Tel: 702-312-6255).
The Registrant changed its name from 307198 B.C. Ltd. to Fircrest Resources Ltd.
effective July 9, 1986 by filing special resolutions with the office of the
British Columbia Registrar of Companies (the "Registrar"). By special
resolutions filed with the Registrar effective October 30, 1991, the Registrant
consolidated its authorized capital on a five-for-one basis such that the
authorized capital of the Registrant was decreased from 100,000,000 common
shares without par value to 20,000,000 common shares without par value and the
name of the Registrant was changed from Fircrest Resources Ltd. to NTC Capital
Corporation. From 1988 to 1993, the Registrant was engaged in the mineral
exploration business. In 1993, the Registrant decided to refocus its principal
business and concentrate its resources on developing property for gaming and
entertainment. By special resolutions filed with the Registrar effective March
1, 1994, the Registrant changed its name from NTC Capital Corporation to Sungold
Gaming Inc. Effective May 26, 1997, the Registrant altered its authorized
capital by subdivision of each one common share without par value into three
common shares without par value, so that the Registrant's authorized capital was
increased from 20,000,000 to 60,000,000 common shares without par value by the
filing of special resolutions with the Registrar. At the same time, the
Registrant changed its name from Sungold Gaming Inc. to Sungold Gaming
International Ltd. by the filing of special resolutions with the Registrar
effective May 26, 1997. Subsequently, the authorized share capital was
decreased to 58,875,000 due to cancellation of escrow shares in accordance with
Section 232 of the Company Act (British Columbia). At the Registrant's Annual
General Meeting held February 25, 2000, the Registrant's shareholders approved a
special resolution providing for a change of name from Sungold Gaming
International Ltd. to Sungold Entertainment Corp. The name change was effective
March 20, 2000. Management of the Registrant believes that the new name more
accurately reflects the future direction and business of the Registrant. At the
Registrant's Annual General Meeting held on February 22, 2002, the shareholders
approved an increase in the Registrant'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 with a par value of Cdn $10.00 each and the creation of
100,000,000 Class "B" Preference Shares with a par value of Cdn $50.00 each to
permit future preferred share financings. The increases to the Registrant's
authorized capital were effective June 13, 2002.
The Registrant is a development stage company which means that all of its
business opportunities are in the development stage and currently produces no
significant revenues from operations. During the three year period ended August
31, 2002, the Registrant has financed its operations by selling $6,961,692 in
equity securities. In the same three year period, the Registrant has spent
$828,764 in acquisition of capital assets, $973,138 in direct costs and
$5,226,562 in indirect overhead and administrative costs (for
- 10 -
a total of $7,028,464) on development expenditures related to its entertainment
projects, including approximately $828,016 in capital assets, $973,138 in direct
costs (for a total of approximately $1,801,154) on its current projects to
August 31, 2002. See "Horsepower Broadcasting Network Inc.", "Horsepower
Broadcasting Network (HBN) International Limited", "Vancouver Thoroughbred Park
"VTP" and Richmond Equine Training Centre "RETC"" and "(R) Project" below.
The Registrant's principal capital expenditures and divestitures currently in
progress consist of:
(1) The Horsepower(R) World Pool Internet based, random, virtual, racing
system, source codes, patent, trademarks and worldwide license;
(2) The rights, title and all intellectual property rights to the
SafeSpending(R) anonymous internet payment system;
(3) Certain computer hardware and software for scaleable operation of
multi-user wagering systems; and
(4) Investment in research and development related to entertainment
systems and online payment processing systems.
The Registrant will continue to finance its operations through the issuance of
equity and debt financing and through revenues from Horsepower(R) World Pool.
Since the commencement of the Registrant's last completed fiscal year, the
Registrant has not received any public takeover offers for its shares from third
parties, nor has it made any such offers.
B. BUSINESS OVERVIEW
The Registrant is currently pursuing four opportunities to develop
entertainment, racing and gaming operations (the "Sungold(R) Projects"):
1. HORSEPOWER BROADCASTING NETWORK (HBN) INTERNATIONAL LIMITED
-----------------------------------------------------------
The Registrant controls the international rights, title and interest in the
Horsepower(R) World Pool Wagering System ("Horsepower(R)"), a random, virtual
horseracing pari-mutuel wagering system. Horsepower(R) operates on the Internet
and through racetrack operators by Horsepower Broadcasting Network (HBN)
International Limited, a wholly-owned subsidiary of the Registrant.
2. VANCOUVER THOROUGHBRED PARK "VTP"
---------------------------------
In fiscal 2001 the Registrant presented a proposal to renovate the Hastings Park
horse track facility in conjunction with the construction of a one mile
thoroughbred training centre in
- 11 -
Richmond, British Columbia, Canada. The Registrant has a team with development,
financing and operations expertise as well as architects that will work to
revive the racecourse.
RICHMOND EQUINE TRAINING CENTRE "RETC"
- --------------------------------------
The Registrant is in the process of negotiating a new option to acquire property
to develop a horse training/auction complex in Richmond, British Columbia (the
"Richmond Equine Training Centre").
3. SAFESPENDING(R) PROJECT
-----------------------
In May 2001, the Registrant acquired the entire world wide right, title and
interest to the internet payment system technology of Safespending Services Inc.
("SafeSpending(R)"). The Safespending(R) 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 with SafeSpending(R) includes all copyrights,
trademarks, source codes and SafeSpending's(R) intellectual property. The
former CEO of Safespending(R) has been retained to work under contract to the
Registrant during the transition phase. Under the terms of the agreement the
Registrant has agreed to pay a 7.5 percent royalty of net revenue relating to
the technology upon the Registrant or its subsidiary Horsepower Broadcasting
Network Inc. receiving $1,000,000 in net revenue from operation, sales or
license of the technology. The Registrant has been negotiating for a joint
venture partner to distribute SafeSpending(R) through retailers (land based) on
a worldwide basis. A patent is pending for the anonymous cash payment system in
105 countries.
The Registrant is in the preliminary stages of obtaining the regulatory and
other approvals required to develop each of the Sungold(R) Projects. Some of
the Registrant's projects are in the development stage and currently produce no
revenues. The Registrant's projects are in the gaming/entertainment industry
and are subject to significant regulatory requirements.
There can be no assurance that the Registrant 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 Registrant anticipates it will need to raise approximately US $1,500,000
during the fiscal year ending August 31, 2003 to meet its minimum projected
expenditures for such period. See "Description of Business - Plan of
Operation." There can be no assurance that the Registrant will successfully
obtain such financing on acceptable terms.
HORSEPOWER BROADCASTING NETWORK INC. AND HORSEPOWER BROADCASTING NETWORK (HBN)
INTERNATIONAL LIMITED
The Registrant controls the international rights, title and interest in the
Horsepower(R) World Pool, random, virtual, horserace pari-mutuel wagering
system. The Horsepower(R) World Pool
- 12 -
Wagering System ("Horsepower(R)") operates on the internet and through licensed,
racetrack operators by Horsepower Broadcasting International (HBN) Limited
("HBN"), a subsidiary company 100% owned and controlled by the Registrant.
Horsepower(R) is an animated horseracing jackpot system, which is viewed in real
time worldwide. Players can win small prizes or multimillion-dollar jackpots
from a $2 wager.
The current revenue for online wagering both in North America and in legal
Internet jurisdictions is estimated by Bear Stearns Internet Gaming Report to be
US$3.0 billion annually. More important to the Registrant however, is the
US$300.0 billion worldwide lottery market and hundreds of racetrack facilities
worldwide that can offer Horsepower(R) as a pari-mutuel wager. The Registrant
has the exclusive perpetual right and license to market; its Horsepower (R)
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(R) is now positioned to become a globally branded world
pool.
During this fiscal year, the Registrant assisted its wholly owned subsidiary HBN
to develop the new Horsepower(R) Internet site for worldwide racetrack
introduction.
A system upgrade is currently underway to add a traditional Chinese wagering
format for both the Internet and racetrack applications. HBN is assisting by
providing technical support in software development, graphics creation,
translation services, security back up, licenses, computer hardware, wagering
systems and establishing 24x7 hosting operations.
All order processing is being outsourced to licensed international payment
processing providers. Horsepower(R) Systems Management and Horsepower(R)
Security are internally managed by HBN.
An advertising/affiliate marketing network has been established to develop
Horsepower(R) and create awareness of the Registrant as a public corporation.
Horsepower(R) operates for US dollar wagering purposes on the Internet for
persons verifying to be of age 21 or over.
Horsepower World Pool Racetrack Program was introduced at the 2002 Breeders Cup
at Arlington Park, Illinois, October 26, 2002.
Legal protection is an ongoing priority for the Registrant. All developments in
Horsepower(R) are protected by an aggressive patent, trademark and copyright
program. Registered trademarks are in place for Sungold(R), Horsepower(R),
Quick 6(R) and Safespending(R).
- 13 -
Licensing
HBN received a permanent (client provider authorization) license from the
Kahnawakee Gaming Commission in December 2001.
Industry Recognition
In November 2001, the Registrant and HBN were awarded the International Internet
Gaming Innovator Award at the Fifth Annual Symposium on Internet Gaming held in
Dublin, Ireland. Horsepower(R) was also featured on the front page of
Thoroughbred Times Magazine (America's premier weekly Thoroughbred magazine) on
September 23, 2001. Recently, Horsepower(R) was referred to as "the wave of the
future" by The Blood-Horse Magazine (December 7, 2002).
New China / Taiwan Campaign
On January 1, 2003 HBN launched a new online marketing campaign aimed at the
China/Taiwan market in conjunction with Lycos Asia. This campaign will be
expanded to include both Chinese languages on the new
www.horsepower(R)worldpool.com website.
----
VANCOUVER THOROUGHBRED PARK
In 2001, the Registrant presented a proposal to renovate the Hastings Park horse
track facility in conjunction with the construction of a one mile thoroughbred
training centre in Richmond, British Columbia, Canada. The Registrant has a
team with extensive development, financing and operations expertise as well as
architects that will work to revive the racecourse. This proposal will be open
to a possible joint venture with a new emphasis on the core live racing product.
This proposal will not involve slot machines but it is anticipated that
government approvals will be necessary for the new Horsepower(R) World Pool
Racetrack program to be included at the Hastings Park Thoroughbred racecourse.
The Registrant has entered into a Letter of Intent with TAC International
Investments LLC. ("TAC") which may provide the Registrant with US$24,000,000 in
financing for racecourse development in British Columbia. The Letter of Intent
between the Registrant and TAC grants TAC an option to purchase 6 million shares
of the Registrant's common stock for $4 US per share until October 1, 2003.
Vancouver Thoroughbred Park Racing Days, Licenses and Long Term Lease
The approval to operate VTP and policies related to gaming activities are
regulated by the Province of British Columbia. The Registrant must submit an
application for business licenses required to operate Vancouver Thoroughbred
Park. The Registrant must also submit an application to the B.C. Government for
authorization to conduct horse racing and to receive race dates for the racing
seasons and apply to the B.C. Gaming Commission for approval to operate
Horsepower(R) electronic horseracing at Vancouver
- 14 -
Thoroughbred Park. The operator of Vancouver Thoroughbred Park must receive the
approval of the Solicitor General before the required permits, licenses and race
days will be issued for VTP.
The Registrant anticipates that TAC, pursuant to the TAC Letter of Intent, will
subscribe to the purchase of 6 million shares of the Registrant's common stock.
See "Richmond Equine Training Centre." The proceeds are expected to be used for
the racetrack development.
TAC's agreement to purchase the 6 million common shares of the Registrant
expires on October 1, 2003, unless extended by the parties. There can be no
assurance that the City of Vancouver or the Province of British Columbia will
provide the approval needed to operate the Vancouver Thoroughbred Park before
October 1, 2003, if at all, or that TAC will purchase the Registrant's treasury
shares in the private placement as agreed. If such private placement is
completed, there can be no assurance that the funds will be sufficient to
complete Vancouver Thoroughbred Park. If the Registrant is unable to obtain the
required approval or financing required to complete the project, the Registrant
may abandon its plans to operate Vancouver Thoroughbred Park.
Summary of Governmental Regulation of the Vancouver Thoroughbred Park
Gaming is a highly regulated industry. The process for obtaining regulatory
approval for the Vancouver Thoroughbred Park is complex and time consuming. In
the future, the federal and provincial legislature may pass legislation that may
place additional regulatory requirements on the Registrant's plans to develop or
operate the Vancouver Thoroughbred Park.
RICHMOND EQUINE TRAINING CENTRE, RICHMOND, BRITISH COLUMBIA
The Registrant is negotiating an option to acquire 100 acres of land (the
"Gilmore Land") from A.C. Gilmore & Sons in Richmond, British Columbia. The
Registrant proposes to develop this land into an international-class
thoroughbred training/auction facility (the "Richmond Equine Training Centre").
The proposed facility is anticipated to include state of the art backstretch
facilities, a 30,000 square foot Equine Therapy Centre, riding trails and an
equine sales pavilion.
The proposal is subject to a number of conditions including, among others, the
financing, appropriate authorization, approval and permits from the City of
Richmond and the Province of British Columbia to develop the project. The
Registrant has received an expression of interest from a leading industry
operator.
Richmond Equine Training Centre Development and Construction Requirements
The Registrant must produce architectural drawings including the proposed
facilities, construction schedule, landscaping schedule and site plan; and
engineering reports must be submitted in a "special use" application to the
Agricultural Land Reserve Commission. Under the Agricultural Land Reserve Act,
the Registrant must complete an agricultural assessment of the Richmond Property
to assess the impact of Richmond Equine Training local and regional agriculture.
- 15 -
Status of Richmond Equine Training Centre
The Registrant has undertaken extensive activities related to the development
and obtaining regulatory approval for Richmond Equine Training Centre. Below is
an outline of the activities undertaken by the Registrant and the status of
Richmond Equine Training Centre as of the date of this annual report.
- The Registrant engaged Hunter Interests of Maryland and Racing
Resource Group of Colorado to prepare a study of the British Columbia
thoroughbred industry and the economic feasibility for Richmond Equine
Training Centre.
- The Registrant engaged Lea and Associates to produce a traffic study
for Richmond Equine Training Centre. Lea and Associates subsequently
met with the Ministry of Transportation and Highways and confirmed
that the Richmond Equine Training Centre traffic plan to access
Highway 91 directly by Nelson Road is consistent with the strategic
plans of B.C. Transportation and Highway.
- The Registrant engaged Ewing, Cole, Cherry and Brott as the master
planner and executive architect/consulting architect for the Richmond
Equine Training Centre. Ewing, Cole, Cherry and Brott has provided the
Registrant consulting services related to site selection and market
analysis, prepared preliminary designs for the Richmond Equine
Training Centre complex and entered into initial discussions with
officials at Richmond Planning and Urban Development.
- B.C. Soil Scientists Eveco Consultants prepared an agricultural
assessment and application strategy for the Gilmore Property for the
Registrant. The agricultural assessment indicates that the intended
use of the Richmond Property is consistent with the agricultural
capability of the surrounding areas and is projected to realize
benefits for both local and regional agricultural development.
- The Registrant engaged Marktrend Research to conduct a survey of
Richmond residents and a second survey of Greater Vancouver residents
to assess public opinion of the Richmond Equine Training Centre
proposed project. The Marktrend results indicate that 70% of those in
Richmond with an opinion supported the proposal and planned site of
Richmond Equine Training Centre.
- The Registrant has engaged P.C.L. Constructors to act as the general
contractor for Richmond Equine Training Centre. P.C.L. is Canada's
leading building contractor and has successfully constructed major
arenas, equine centres and racetracks.
- The Registrant has retained Eikos Planning Inc. to provide consulting
services with the City of Vancouver and all provincial agencies
affected by the Richmond Equine Training Centre development proposal.
The Registrant's principal markets include North America, Asia and Europe for
the Horsepower(R) World Pool Internet site and North America for the
installation of Horsepower(R) at racetracks.
- 16 -
The Registrant's business is not seasonal nor does the Registrant require raw
materials to conduct its business.
The Registrant's marketing channels are primarily world racetracks as well as
the Internet and traditional multimedia.
The regulatory approval process is complex, time consuming and expensive. There
can be no assurance that the Registrant will obtain the required financing,
appropriate authorization, approval and permits to develop Richmond Equine
Training Centre in a timely manner or that the Registrant will successfully
develop and construct Richmond Equine Training Centre. TAC's agreement to
purchase the 6 million common shares of the Registrant to partially fund
Richmond Equine Training Centre expires on October 1, 2003, unless extended by
the parties. There can be no assurance that the Province of British Columbia
will provide the approval needed to complete development of Richmond Equine
Training Centre before October 1, 2003, if at all, or that TAC will purchase the
Registrant's treasury shares in the private placement as agreed. If such
private placement is completed, there can be no assurance that the Registrant
will secure additional funds required to complete Richmond Equine Training
Centre. Except for the TAC Letter of Intent, the Registrant has no other
agreements related to the financing for the Richmond Equine Training Centre. If
the Registrant is unable to obtain the required approval or financing required
to complete the project, the Registrant may abandon its plans to complete
Richmond Equine Park.
As at August 31, 2002, the Registrant expended Cdn $19,821 in direct costs on
the Richmond Equine Training Centre project. The Registrant wrote off a Cdn
$158,817 option fee as the Registrant abandoned an option to purchase a 227 acre
property for the purpose of developing a horse training complex.
C. ORGANIZATIONAL STRUCTURE
The Registrant has three 100% owned Subsidiaries, Sungold Entertainment USA,
Inc., an Arizona United States of America corporation; Horsepower Broadcasting
Network Inc., a British Columbia, Canada corporation and Horsepower Broadcasting
Network (HBN) International Ltd., a Canadian Federal corporation. The
Registrant is in the process of incorporating a fourth subsidiary, Safespending
Limited, in the jurisdiction of the Channel Islands.
D. PROPERTY PLANTS AND EQUIPMENT
The Registrant's corporate headquarters are located in Vancouver, British
Columbia. The Registrant leases corporate office space at an annual rent of
approximately Cdn $75,000, which includes rent, secretarial services, four
offices and the shared use of two boardrooms. The lease term has approximately
22 months remaining on its lease. Management believes these offices are
adequate for its needs and that the rates are comparable with market rates.
- 17 -
ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
During the last three years ending August 31, 2002, the Registrant has funded
its business operations, working capital and the development of its gaming
interests by the issuance of share capital under private placements and by the
exercise of accompanying warrants and stock options in the aggregate amount of
Cdn $6,961,692.
As of August 31, 2002, the Registrant had Cdn $23,772 cash on hand, Cdn $374,953
in prepaid expenses and Cdn $32,824 in accounts payable. As of August 31, 2001,
the Registrant had Cdn$ 104,194 cash on hand. See "Liquidity and Capital
Resources."
The Registrant's net losses for the fiscal years ended 2002, 2001 and 2000 were
Cdn $2,617,571, Cdn $2,184,080 and Cdn $1,314,123, respectively.
A. OPERATING RESULTS
Year Ended August 31, 2002 Compared to August 31, 2001
The Registrant had Cdn $19,446 revenue from operation during fiscal 2002
compared to Cdn $12,428 from 2001 and Cdn $(4,526) in foreign exchange loss for
fiscal year 2002 compared to Cdn $12,098 gain for 2001. The Registrant had a
net loss of Cdn $2,602,640 for fiscal 2002 compared to net loss of Cdn
$2,184,080 for fiscal 2001.
Overall the pre-development expenditures and investments for fiscal 2002 were
Cdn $(125,909), which represents the addition of Cdn $32,908 less Richmond
project option fees of Cdn $158,817 write-off during the year, as compared to
Cdn $(144,216) for fiscal 2001. The addition of Cdn $32,908 was due primarily
to the expenditures on consulting and legal fees, option fees and other direct
costs. Specifically the Vancouver Thoroughbred Park/Richmond Equine Training
Centre project pre-development expenditures for fiscal 2002 were Cdn $19,821
compared to Cdn $83,794 in 2001. The Safespending(R) project pre-development
expenditures for fiscal year 2002 were Cdn $13,087 compared to Cdn $65,162 in
2001. The Horsepower(R) software development project pre-development expenses
for fiscal 2002 were nil compared to Cdn $41,884 in fiscal 2001. The Toledo
Beach pre-development expenses for fiscal 2002 were nil compared to Cdn $93,971
for fiscal 2001. The Registrant abandoned the Toledo Beach Project and had
written off all related pre-development costs of Cdn $460,574 in 2001.
Litigation expenditures for fiscal 2002 were nil compared to litigation
expenditures of Cdn $31,546 in fiscal 2001 related to the Gun Lake project in
Michigan.
Proceeds from the exercise of share purchase warrants, incentive share purchase
options and private placements totaled Cdn $2,388,010 in fiscal 2002 compared to
Cdn $2,391,331 in fiscal 2001.
In fiscal years 2002 and 2001, the Registrant 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 in fiscal 2002 were Cdn $246,000
compared to Cdn
- 18 -
$246,000 in fiscal 2001. Consulting fees for internet services in fiscal 2002
were Cdn $410,144 compared to Cdn $151,791 in fiscal 2001 which included the
payment to a related party, T-SWAT Consulting Ltd., a Company with a common
director, totaling Cdn $78,581 for fiscal 2002 compared to Cdn $56, 252 in
fiscal 2001. Professional and consulting fees increased to Cdn $242,565 in
fiscal 2002 from Cdn $118,716 in fiscal 2001. Investor relations fees increased
to Cdn $169,935 in fiscal 2002 from Cdn $93,972 in fiscal 2001. Office expenses
reduced to Cdn $60,936 in fiscal 2002 from Cdn $70, 096 in fiscal 2001.
The Cdn $0.06 loss per share for fiscal 2002 compares to Cdn $0.08 loss per
share for fiscal 2001 and reflects the Registrant's net loss in the 2002 fiscal
year.
Year Ended August 31, 2001 Compared to August 31, 2000
The Registrant had Cdn $24,528 in net revenues for fiscal 2001 compared to net
revenues of Cdn $18,444 for fiscal 2000 due primarily to foreign exchange gain
(loss). The Registrant had Cdn $12,428 from operation during fiscal 2001. The
Registrant had a net loss of Cdn $2,184,080 for fiscal 2001 compared to net loss
of Cdn $1,314,123 for fiscal 2000.
Overall the pre-development expenditures and investments for fiscal 2001 were
Cdn $(144,216) which represents the addition of Cdn $316,358 less Toledo Beach
Project of Cdn $460,574 write-off during the year which compared to Cdn $623,872
for fiscal 2000. This was due primarily to the expenditures on developing,
licensing and start-up costs of the Horsepower2 System and the Toledo Beach
Project in Michigan, USA. Specifically, the Horsepower2 System pre-development
expenses for fiscal 2001 were Cdn $41,884 compared to Cdn $17,115 in fiscal
2000; the Toledo Beach pre-development expenses for fiscal 2001 were Cdn $93,971
compared to Cdn $270,569 for fiscal 2000. The Registrant decided to abandon the
Toledo Beach Project and has written off all related pre-development costs of
Cdn $460,574. Litigation expenditures for fiscal 2001 were Cdn $31,546 compared
to litigation expenditures of Cdn $54,615 in fiscal 2000 related to the Gun Lake
project in Michigan; the racetrack pre-development expenditures for fiscal 2001
were Cdn $83,794 compared to Cdn $281,573 in 2000 and the Safespending(R)
project for fiscal year 2001 were Cdn $65,162 compared to nil in 2000.
Proceeds from the exercise of share purchase warrants, incentive share purchase
options and private placement totaled Cdn $2,391,331 in fiscal 2001 compared to
Cdn $2,123,061 in fiscal 2000.
Management fees in fiscal 2001 were Cdn $246,000 compared to Cdn $186,500 in
fiscal 2000. Consulting fees for internet services in fiscal 2001 were Cdn
$151,791 compared to NIL in fiscal 2000, which include the payment to Jeff
Grant. Jeff Grant, who became a director of the Registrant subsequent to the
year ended August 31, 2001, was paid a consulting fee during the year ended
August 31, 2001 totaling Cdn $56,252. In fiscal 2001, the Registrant had two
full-time personnel involved in administration and management. In 2000, the
Registrant also had two full-time personnel involved in administration and
management. Professional and consulting fees increased to Cdn $118,716 in
fiscal 2001 from Cdn $98,061 in fiscal 2000. Investor relations increased to
Cdn $93,972 in fiscal 2001 from Cdn $18,405 in fiscal 2000. Office expenses
increased to Cdn $70,096 in fiscal 2001 from Cdn $45,753 in fiscal 2000.
The Cdn $0.08 loss per share for fiscal 2001 compares to Cdn $0.07 loss per
share for fiscal 2000 and reflects the Registrant's net loss in the 2001 fiscal
year.
- 19 -
Year Ended August 31, 2000 Compared to August 31, 1999
The Registrant had Cdn $18,444 in net revenues for fiscal 2000 compared to net
revenues of Cdn ($18,162) for fiscal 1999 due primarily to foreign exchange gain
(loss). The Registrant had no revenues from operation during the periods. The
Registrant had a net loss of Cdn $1,314,123 for fiscal 2000 compared to net loss
of Cdn $659,343 for fiscal 1999.
Overall the pre-development expenditures and investments for fiscal 2000 were
Cdn $623,872 compared to Cdn $659,933 for fiscal 1999. This was due primarily
to the expenditures on the Richmond Equine Training Centre in British Columbia,
Canada and the Toledo Beach Project in Michigan, USA. Specifically, the
Richmond Equine Training Center pre-development expenditures for fiscal 2000
were Cdn $281,573 compared to Cdn $349,668 in fiscal 1999; the Toledo Beach
pre-development expenditures for fiscal 2000 were Cdn $270,569 compared to Cdn
$96,034 for fiscal 1999. Litigation expenditures for fiscal 2000 were Cdn
$54,615 compared to litigation expenditures of Cdn $214,231 in fiscal 1999
related to the Gun Lake project in Michigan; the Horsepower2.com Network project
pre-development expenditures for fiscal 2000 were Cdn $17,115 compared to nil in
1999.
Proceeds from the exercise of share purchase warrants, incentive share purchase
options and private placement totaled Cdn $2,123,061 in fiscal 2000 compared to
Cdn $1,044,358 in fiscal 1999.
Management fees in fiscal 2000 were Cdn $186,500 compared to Cdn $151,000 in
fiscal 1999. In fiscal 2000, the Registrant had two full-time personnel
involved in administration and management. In 1999, the Registrant also had two
full-time personnel involved in administration and management. Professional and
consulting fees decreased to Cdn $98,061 in fiscal 2000 from Cdn $171,857 in
fiscal 1999. Investor relations increased to Cdn $18,405 in fiscal 2000 from
Cdn $11,724 in fiscal 1999. Office expenses increased to Cdn $45,753 in fiscal
2000 from Cdn $32,150 in fiscal 1999.
The Cdn $0.07 loss per share for fiscal 2000 compares to Cdn $0.04 loss per
share for fiscal 1999 and reflects the Registrant's net loss in the 2000 fiscal
year.
As the Registrant's only revenue-producing technology (the
www.horsepowerworldpool.com website) is in the early startup stage, income from
operation is not material at this point. However, the Registrant anticipates
that the system will continue to develop more revenues as the player base
develops.
The gaming industry has been traditionally relatively unaffected by inflation,
as gaming is not a product-to- inventory but rather an entertainment service
oriented business. It is not clear how the online gaming industry will be
affected other than it will probably be similar to other established gaming
business models.
The Registrant is deriving its revenues in US$ and paying the bulk of its
expenses in Canadian funds so at present the Registrant enjoys a healthy spread
between the currencies. There can be no guarantee that this will continue to be
the case although the Registrant will maintain its current policy until there is
reason to follow another policy.
- 20 -
As the online gaming industry is an international enterprise the international
political situation will have some affect on business operations but at present
there is no particular country that would have a profound effect on the
Registrant's early stage operation.
B. LIQUIDITY AND CAPITAL RESOURCES
As at January 31, 2003, the Registrant had approximately US $9,092(Cdn $13,833)
cash on hand.
The Registrant has a planned operating budget of US $1,500,000 (Cdn $2,282,250)
for the fiscal year ended August 31, 2003. The Registrant currently does not
have sufficient funds to fund its operations through the fiscal year ended
August 31, 2003, and will be required to raise additional funds from, operations
or through equity or debt financing. The Registrant 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 Registrant will have sufficient financing to
meet its actual expenditure requirements or that additional financing will be
available on terms acceptable to the Registrant. There can be no assurance that
the Registrant's actual expenditures for the fiscal year ending August 31, 2003
will not exceed the Registrant's estimated operating budget. If the actual
expenditures for such cost exceed the estimated costs or if events occur that
require additional expenditures, the Registrant will be required to raise
additional financing or to defer expenditures to meet other obligations. The
failure to meet certain expenditures may cause the Registrant to default on
material obligations and such default may have a material adverse effect on the
Registrant's business and results of operations. If the Registrant is unable to
obtain additional financing on acceptable terms, the Registrant will be unable
to meet its obligations and the Registrant may be forced to abandon its interest
in its gaming projects and write off its investment.
The following is a summary of the Registrant's financing activities during the
fiscal years ending August 31, 2000, 2001 and 2002:
1. During the year ended August 31, 2000, the Registrant issued 4,514,511
common shares pursuant to private placements, the exercise of
incentive share purchase options and the exercise of share purchase
warrants for Cdn $2,123,061.
2. During the year ended August 31, 2001, the Registrant issued
12,278,800 common shares pursuant to private placements, the exercise
of incentive share purchase options, the exercise of share purchase
warrants and debt settlement for Cdn $2,450,621
3. During the year ended August 31, 2002, the Registrant issued
15,666,666 common shares pursuant to private placements, the exercise
of incentive share purchase options and the exercise of share purchase
warrants and for Cdn $2,388,010.
Since August 31, 2002, the Registrant issued 11,500,000 private placement shares
for approximately Cdn $885,000 (US $ 581,000) and granted the share purchasers
an aggregate of 11,500,000 share purchase warrants.
- 21 -
While the Registrant 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 Registrant may be forced to curtail some of its gaming
development efforts to a level for which funding can be secured through new
investment or joint venturing. If the Registrant cannot raise or arrange to
obtain the cash requirements necessary to meet its minimum obligations for the
Richmond Equine Training Centre, the Vancouver Thoroughbred Park and the
SafeSpending(R) Project, some of its gaming projects may be forfeited. The
Registrant believes its minimum financial obligations during the fiscal year
ending August 31, 2003 will be approximately US $1,500,000. The Registrant
anticipates it will finance the Richmond Equine Training Centre by issuing six
million common shares to TAC International Investments LLC for US $4.00 per
share pursuant to a Letter of Intent. The Registrant has TAC's commitment to
purchase six million shares of the Registrant under the TAC Letter of Intent
for US $24 million; the Registrant has not obtained any firm commitment to
finance the Richmond Equine Training Centre. There can be no assurance that
such financing will be obtained on acceptable terms. In 2002, the Registrant
has financed the Horsepower(R) World Pool system with equity financing. The
Registrant anticipates it will finance the Horsepower(R) World Pool system and
the SafeSpending(R) Project primarily through revenues from the Horsepower(R)
World Pool system.
Although the Registrant does not currently have adequate funds available to
finance its operations through August 31, 2003, the Registrant believes it will
obtain such funds.
The Registrant's liquidity depends largely on the established financing
capabilities of its principals and on its ability to access the capital markets
or to enter into joint venture agreements. Although the Registrant has no plans
to acquire additional projects or to explore new opportunities in fiscal 2003,
the Registrant may enter into arrangements to do so if management determines
that such projects are economically viable and in the best interest of the
Registrant's shareholders. Such acquisition may affect the Registrant's ability
to access the capital markets or to enlist new joint venture partners. The
Registrant 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 Registrant's liquidity either materially increasing or decreasing at present
or in the foreseeable future.
The Registrant relies on private placements, investment by related parties and
revenues from the www.horsepowerworldpool.com wagering site for the working
capital necessary for its operations. It is anticipated that financings will
continue to be achieved through these means as well as through potential joint
ventures. The Registrant 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 Registrant's projects.
As at August 31, 2002, the Registrant's only obligation under capital leases are
three computer hardware leases expiring November 2003 through June 2004. The
balance on the leases as at August 31, 2002 was Cdn $52,724 (Cdn $16,037 of
which was a current obligation and Cdn $36,687 of which was a non-current
obligation). Otherwise the Registrant has maintained a policy of operating in a
debt free state. The Registrant expects to continue to operate from equity
investment and cash flow from the www.horsepowerworldpool.com site. The
Registrant does not have any material commitments for capital expenditures.
- 22 -
C. RESEARCH AND DEVELOPMENT
The Registrant has not expended any funds over the last three years on "Research
and Development" as that term is defined in the CICA Handbook. The Registrant
has, however, expended the following amounts directly in connection with
software development of the Horsepower(R)World Pool system through its wholly
owned subsidiary, Horsepower Broadcasting Network Inc. over the past three
years:
Pre-development costs Computer Computer
Year - Consulting and legal Hardware Software Total
2000 17,115 183,976 225,960 427,051
2001 41,884 7,009 349,481 398,374
2002 - 3,112 4,579 7,691
58,999 194,097 580,020 833,116
The Registrant has been entirely in the development business until late in the
last fiscal year when the www.horsepower2 site began operating as a 24 hour
wagering site. Consequently a significant amount of the Registrant's
expenditures have been related to software research and development. The
Registrant's plans for its software research and development expenditures for
fiscal 2003 and beyond will represent an ever decreasing percentage of the
Registrant's budget as advertising and marketing the online products take a
larger and larger role.
D. TREND INFORMATION
The Registrant does not have sufficient history of operations, because it has
been in the development stage until late in the last fiscal year, to be able to
ascertain any trends in production, sales or costs. The Registrant 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 Registrant plans to exploit the
trend towards online delivery of wagering systems and focus primarily on the
trend towards racetrack friendly alternative wagering which the Registrant
believes is in the initial stages of a major international expansion.
ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
All of the directors of the Registrant 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 Registrant's Articles. The
Registrant's last annual regular general meeting was held on February 22, 2002.
The next annual regular general meeting is scheduled for February 21, 2003. The
Registrant's executive officers are appointed by and serve at the pleasure of
the Board of Directors.
- 23 -
As at January 15, 2003, the following persons were directors and/or executive
officers of the Registrant:
- --------------------------------------------------------------------------------
NUMBER OF PERCENTAGE
POSITION WITH COMMON SHARES OF ISSUED
NAME THE REGISTRANT OWNED(1) COMMON SHARES
- --------------------------------------------------------------------------------
Kim N. Hart (2) Director, President 42,450,988 47.06%
And Chief Executive
Officer
- --------------------------------------------------------------------------------
Donald R. Harris (2) Director and 6,585,600 10.85%
Chairman of the Board
- --------------------------------------------------------------------------------
Anne Kennedy Director and Secretary 1,586,800 2.65%
- --------------------------------------------------------------------------------
Walter Wolff (2) Director 309,000 .521%
- --------------------------------------------------------------------------------
Louis Hop Lee Director 100,000 .169%
- --------------------------------------------------------------------------------
Michael Daniel Director 236,000 .398%
Bennett (3)
- --------------------------------------------------------------------------------
Jeff Grant Director 386,000 .651%
- --------------------------------------------------------------------------------
Larry Simpson Director 500,000 .843%
- --------------------------------------------------------------------------------
Art Cowie Director 300,000 .507%
- --------------------------------------------------------------------------------
Melvin Reeves Director 0(4)
- --------------------------------------------------------------------------------
(1) Includes any options and warrants exercisable within 60 days.
(2) Audit Committee Member
(3) Did not stand for re-election at the Annual General Meeting held February
21, 2003.
(4) Mr. Reeves was appointed on January 24, 2003. He acquired 2,000,000 common
shares (3.38%) of the Registrant on January 24, 2003.
Management changes which were made from December, 2001 through January, 2003
took place in order to enhance the Registrant's management expertise in the
Registrant's principal business undertaking of developing the Horsepower(R)
World Pool random, virtual, horserace pari-mutuel wagering system at racetracks,
online payment processing, and broadcasting the Horsepower(R) World Pool system
on the internet twenty-four hours a day.
No director or executive officer of the Registrant has any family relationship
with any other officer or director of the Registrant.
None of the Registrant's directors or executive officers is party to any
arrangement or understanding with any other person pursuant to which such
individual was elected as a director or officer or member of senior management
of the Registrant.
The following is a brief biographical information on each of the officers and
directors listed above:
KIM N. HART, age 46, has served as President and Chief Executive Officer since
May 1, 1998 and as a director since May 1, 1998. Mr. Hart has 27 years
experience in management, marketing, developing pari-mutual wagering,
horseracing, horse breeding and in financing public and private companies. Mr.
Hart is a past director and Vice-President of the Horsemen's Benevolent and
Protective Association of British Columbia, active in the Richmond Asian Pacific
Business Association, Canadian Chamber of Commerce and the American Chamber of
Commerce
- 24 -
DONALD R. HARRIS, age 68, has served as a director since January 13, 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.
ANNE KENNEDY has served as Corporate Secretary since December 1, 1999 and as a
director since June 1, 1998. Ms. Kennedy has over 20 years experience as a
Realtor, co-owner of a private insurance firm and as a budget analyst for a
major oil company. Ms. Kennedy provides regulatory reporting, shareholder
communications, office administration and management services for the
Registrant.
WALTER WOLFF, age 58, was appointed director on February 16, 2001. Mr. Wolff
has owned and operated restaurants, bakeries and food processing facilities for
32 years. European trained Mr. Wolff has been the Chef for some of the world's
most renowned establishments such as the De Bergues in Geneva, the Queen
Elizabeth in Montreal and as the Head Chef for Expo '67 in Montreal, Canada.
Walter has served as a director on a number of Canadian public and private
companies.
JEFF GRANT, age 34, was appointed director on December 20, 2001. Mr. Grant is a
systems architecture and database design consultant specializing in knowledge of
Oracle database also systems security and performance training consultant for
large corporate networks including Bank of Montreal, Human Resource Development
of Canada, Oracle, SNV International, Gencor Corp., Amazon.com, Home Hardware,
EMI Music Canada, BMG, Nettwerk Records, Bryan Adams, Sarah McLachlan.
LOUIS HOP LEE, age 54, was appointed director on June 25, 2002. Mr. Lee is a
graduate of the University of California at Berkeley in Social Sciences (B.A.)
and Hastings School of Law, University of California (J.D.); Mr. Lee practiced
law in San Francisco. He also served as a Commissioner and President of the
Civil Service Commission of San Francisco from 1979 to 1989. Recently Mr. Lee
served in corporate communications for Chinadotcom Corporation, a leading
Internet company in Asia.
LARRY SIMPSON, age 46, was appointed director on October 11, 2002. Mr. Simpson
has 24 years of sales, marketing and public relations experience in the fields
of horseracing, gaming, sports and leisure. He has been involved in both
thoroughbred and standardbred horse ownership and syndication. Mr. Smpson has
published, managed and written for many leading thoroughbred and standardbred
publications over the past 15 years. Mr. Simpson has also been involved in
charity work for equine research, lecturing on handicapping, arranging new owner
seminars and freelance writing for racing and gaming publications.
ART COWIE, B.A., M.Sc., age 68, was appointed director on January 15, 2003.
Mr. Cowie has been a Community Planner, landscape architect and government
affairs consultant. He has an extensive public service record including Member
of the Legislature of British Columbia, Chairman of Vancouver Board of Parks and
Recreation and Director of the Pacific National Exhibition. Mr. Cowie is also a
member of the British Columbia and Canadian Institutes of Planning, past
President of the British Columbia Society of Landscape Architects and a Fellow
of
- 25 -
the British Columbia Society of Landscape Architects. Mr. Cowie is the designer
for the Registrant's proposed Hastings Park one-mile racecourse retrofit.
MELVIN R. REEVES, B.Comm., M.Sc., LLb., age 50, was appointed director on
January 24, 2003. Mr. Reeves has been a member of the Law Society of British
Columbia and the Canadian Bar Association for over 22 years. Combined with his
Bachelor of Commerce degree in finance and his Masters degree in International
Business, he brings over 30 years business experience to the Registrant. Mr.
Reeves is a past member of the Canadian Governor General's Canadian Study
conference on the Impact of Changing Technology on Canadians. Mr. Reeves has
been a principal and operator in three RE/MAX franchises in North America
representing the interests of franchisors and realtors for over 12 years. Mr.
Reeves was the Chairman and Chief Executive Officer of Impark Services Ltd.,
Canada's largest parking services group.
None of the directors or executive officers of the Registrant have 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 Registrant 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 Registrant 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 Registrant grants stock options to directors, executive officers and
employees. See "Options to Purchase Securities from the Registrant or
Subsidiary".
The following table sets forth details of the compensation paid during the
Registrant's fiscal year ended August 31, 2002, to directors and executive
officers:
Director and Executive Officers Salary/Bonus Other Compensation(1)
- ------------------------------- ------------ ---------------------
Kim N. Hart nil Cdn $168,000(1)
Anne Kennedy nil Cdn $78,000(1)
- 26 -
Jeff Grant nil Cdn $78,581(2)
Alan Weinrib nil Cdn $36,000(3)(5)
Michael Bennett nil Cdn $36,000(4)(5)
The aggregate amount of compensation paid by the Registrant during the fiscal
year ended August 31, 2002 to all officers and directors as a group was
$396,581. (1) (2) (3) (4)
(1) Compensation paid pursuant to management agreements.
(2) Compensation paid pursuant to internet services consulting agreement.
Mr. Grant also indirectly received Cdn $7,130 during fiscal 2002, in
payments to software consulting services companies of which he is a
director.
(3) Compensation paid pursuant to marketing services agreement.
(4) Compensation paid pursuant to corporate development agreement.
(5) Directors during the fiscal year ended August 31, 2002, however no
longer directors as at the date of this Annual Report
No amounts have been set aside or accrued by the Registrant during fiscal 2002
to provide pension retirements or similar benefits for directors or executive
officers of the Registrant pursuant to any plan provided for or contributed to
by the Registrant.
The following table sets forth details of the compensation paid during the
Registrant's fiscal year ended August 31, 2001, to directors and executive
officers:
Director and
Executive Officers Salary/Bonus Other Compensation(1)
- ------------------ ------------ ---------------------
Kim N. Hart nil Cdn $168,000(1)
Anne Kennedy nil Cdn $78,000(1)
Steven S. Marette nil Cdn $25,753(2)
Peter E. Morgana nil Cdn $25,753(2)
Jeff Grant(2) nil Cdn $56,262(3)
The aggregate amount of compensation paid by the Registrant during the fiscal
year ended August 31, 2001 to all officers and directors as a group was
$297,506. (1) (2)
(1)Compensation paid pursuant to management agreements.
(2)Compensation paid pursuant to internet services consulting agreements.
(3)Mr. Grant did not become a director of the Registrant until after the fiscal
year ended August 31, 2001; however, he was paid a consulting fee during
the fiscal year ended August 31, 2001.
No amounts have been set aside or accrued by the Registrant during fiscal 2001
to provide pension retirements or similar benefits for directors or executive
officers of the Registrant pursuant to any plan provided for or contributed to
by the Registrant.
The following table sets forth details of the compensation paid during the
Registrant's fiscal year ended August 31, 2000, to directors and executive
officers:
- 27 -
Director and Executive Officers Salary/Bonus Other Compensation
- ------------------------------- ------------ ------------------
Kim N. Hart nil Cdn $147,000
Anne Kennedy nil Cdn $73,500
The aggregate amount of compensation paid by the Registrant during the fiscal
year ended August 31, 2001 to all officers and directors as a group was
$186,500.
No amounts have been set aside or accrued by the Registrant during fiscal 2000
to provide pension retirements or similar benefits for directors or executive
officers of the Registrant pursuant to any plan provided for or contributed to
by the Registrant.
OPTIONS TO PURCHASE SECURITIES FROM THE REGISTRANT OR SUBSIDIARY
Stock Options to purchase common shares from the Registrant are granted to
directors and employees of the Registrant on the terms and conditions acceptable
to the applicable securities regulatory authorities. The Registrant 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 Registrant'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 of the
Registrant to whom outstanding stock options have been granted and the number of
common shares subject to such stock options are set forth below as at August 31,
2002. The exercise price of the stock options is stated in U.S. dollars.
- --------------------------------------------------------------------------------
Total
Outstanding
Options at
Exercise January
Name of Optionees Options Price (US) Expiration Date 15, 2003
- --------------------------------------------------------------------------------
Officers and
Directors:
- --------------------------------------------------------------------------------
Kim N. Hart 1,050,000 $ 0.06 February 28, 2006
79,900 $ 0.085 March 05, 2006
550,764 $ 0.08 January 04, 2007
400,000 $0.0725 January 24, 2007 2,080,664
- --------------------------------------------------------------------------------
Donald R. Harris 300,000 $ 0.12 August 10, 2006
108,000 $ 0.08 January 04, 2007 408,000
- --------------------------------------------------------------------------------
Anne Kennedy 272,000 $ 0.20 May 17, 2007 272,000
- --------------------------------------------------------------------------------
Walter Wolff 100,000 $ 0.15 February 16, 2006
36,000 $ 0.08 January 04, 2007 136,000
- --------------------------------------------------------------------------------
Michael Bennett 100,000 $ 0.10 October 22, 2006
36,000 $ 0.08 January 04, 2007 136,000
- --------------------------------------------------------------------------------
Alan Weinrib 100,000 $ 0.12 October 23, 2006
36,000 $ 0.08 January 04, 2007 136,000
- --------------------------------------------------------------------------------
- 28 -
- --------------------------------------------------------------------------------
Jeff Grant 100,000 $ 0.09 December 20, 2006
36,000 $ 0.08 January 04, 2007 136,000
- --------------------------------------------------------------------------------
Walter Davidson 136,000 $ 0.23 March 26,2007 136,000
- --------------------------------------------------------------------------------
Total 3,440,664
- --------------------------------------------------------------------------------
The names and titles of the directors, executive officers and consultants of the
Registrant to whom outstanding stock options have been granted and the number of
common shares subject to such stock options are set forth below subsequent to
August 31, 2002. The exercise price of the stock options is stated in U.S.
dollars.
- --------------------------------------------------------------------------------
Total
Outstanding
Options at
Exercise January
Name of Optionees Options Price (US) Expiration Date 15, 2003
- --------------------------------------------------------------------------------
Officers and
Directors:
- --------------------------------------------------------------------------------
Larry R. Simpson 200,000 $0.15 October 11, 2007 200,000
- --------------------------------------------------------------------------------
Robert Zielke 300,000 $0.15 October 16, 2007 300,000
- --------------------------------------------------------------------------------
Art Cowie 136,000 $0.11 January 15, 2007 136,000
- --------------------------------------------------------------------------------
Total 636,000
- --------------------------------------------------------------------------------
The Registrant has entered into the TAC Letter of Intent dated December 8, 1997,
as extended, with TAC International Investments LLC, a company controlled by
Donald Harris, a director of the Registrant. Pursuant to the TAC Letter of
Intent, TAC has an option to purchase 6 million common treasury shares of the
Registrant at US $4.00 per share, by way of private placement.
C. BOARD PRACTICES
1. Directors may be appointed at any time in accordance with the Articles of
the Registrant and then re-elected annually by the shareholders of the
Registrant. Directors may resign at any time and their term of office expires
annually at each Annual General Meeting of the shareholders of the Registrant.
Executive officers are appointed from time to time by the Board of Directors.
The Board, in its discretion, may remove any officer of the Registrant,
otherwise each officer shall hold office until his or her successor is appointed
or until his or her earlier resignation.
2. Effective May 1, 1998 as amended January 2, 2003, the Registrant entered
into a consulting agreement with Mr. Kim Hart ("Hart"). The consulting
agreement provides for the payment of consulting fee in the amount of US $8,000
per month. Pursuant to the terms of the consulting agreement, Hart is
responsible for the supervision, direction, control, promotion and operation of
the Registrant. Hart has the obligation and duty to perform all those duties
which are generally performed by a Chief Executive Officer and President in
corporations of similar size to the Registrant, and all acts which are
reasonably necessary for the efficient and proper operation and development of
the Registrant including all matters related to the general administration of
the Registrant. Hart is also required to provide management services to the
Registrant, including negotiations with other persons, firms, corporations or
financial institutions in connection with
- 29 -
the arranging and securing of financing for the Registrant, including arranging
financings through underwritings, best efforts offerings or such other offerings
as may be allowed through the facilities of the NASD and financings through
limited partnership offerings or by conventional bank financing methods, the
terms of such financing to be subject to the approval of the Board of Directors.
Hart may be paid consulting bonuses from time to time, as are determined by the
Board of Directors. The consulting agreement may be terminated by the Registrant
at any time with cause and at any time on payment of twelve month's compensation
without cause. Hart may terminate the consulting agreement on 90 day's notice to
the Registrant. Pursuant to an agreement dated May 01, 2001, Hart also agreed to
provide management services to the Registrant's wholly owned subsidiary,
Horsepower Broadcasting Network Inc. for a management fee of Cdn $7,000 per
month. Hart is the President, CEO and director of the Registrant. His is also
the President Chief Executive Officer and a director of Horsepower Broadcasting
Network Inc.
Effective July 1, 1998, the Registrant entered into a consulting agreement, as
amended effective January 2, 2003 with Anne Kennedy ("Kennedy") pursuant to
which Kennedy provides shareholder communications, office administration and
clerical services to the Registrant. The consulting agreement provides for the
payment of US$5,000 per month to Kennedy by the Registrant. The consulting
agreement may be terminated by the Registrant at any time for cause, and at any
time without cause by giving 90 days written notice to Kennedy and Kennedy may
terminate the consulting agreement at any time by giving the Registrant 90 days'
written notice. Kennedy is the Secretary and a director of the Registrant.
Effective January 14, 2002, Horsepower Broadcasting Network (HBN) International
Limited also has an agreement with Alan Weinrib ("Weinrib") of One, Old Rectory
Park, Taney Road Dundrum, Dublin 14, Ireland, pursuant to which Weinrib agreed
to provide marketing and management services to Horsepower Broadcasting Network
(HBN) International Limited for a consulting fee of Cdn $4,000 per month
Effective January 14, 2002, Horsepower Broadcasting Network (HBN) International
Limited also has an agreement with Jeff Grant dba T-SWAT Consulting Ltd.
("Grant") of 717-1045 Haro Street, Vancouver, British Columbia, pursuant to
which Grant agreed to provide internet development services to the Registrant at
a consulting fee of Cdn $4,000 per month. Grant is a director of the
Registrant.
Effective October 11, 2002, the Registrant's wholly owned subsidiary, Horsepower
Broadcasting Network (HBN) International Ltd. ("HBN") has entered into an
agreement with Larry Simpson ("Simpson") of Georgetown, Ontario, pursuant to
which Simpson provides marketing services to HBN at a consulting fee of Cdn
$2,500 per month. Simpson is a director of the Registrant.
3. The members of the Registrant's Audit Committee are Kim Hart, Donald
Harris and Walter Wolff. This committee is directed to review the scope, cost
and results of the independent audit of the Registrant's books and records, the
results of the annual audit with management and the adequacy of the Registrant's
accounting, financial and operating controls; to recommend annually to the Board
of Directors the selection of the independent auditors; to consider
- 30 -
proposals made by the Registrant's independent auditors for consulting work; and
to report to the Board of Directors, when so requested, on any accounting or
financial matters. They may be appointed any time by the 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 members of the Registrant's Executive Committee are Kim Hart, Anne Kennedy
and Walter Wolff. This committee is directed to have and exercise, during the
intervals between the meetings of the 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.
D. EMPLOYEES
As of January 31, 2003, the Registrant had 12 persons working full time, in
sales, administration and operations. The Registrant plans to add one or two
new persons to its staff. The Registrant also intends to rely primarily on
part-time staff, flex-time and consultants to minimize expenses.
As of January 31, 2002, the Registrant had eight persons working full time, in
administration and management.
As of January 31, 2001, the Registrant had two persons working full time, in
administration and management.
The average number of part time employees for the last fiscal year has been 3.
The employees of the Registrant are not members of a trade union.
E. SHARE OWNERSHIP
Shares owned by the directors of the Registrant are disclosed at Item 6
"Directors, Senior Management and Employees" under the heading "A. Directors
and Senior Management".
ITEM 7 MAJOR SHAREHOLDER AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The Registrant 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 Registrant is not controlled, directly or indirectly, by another
corporation or any government or by any natural or legal persons and, as at
January 15, 2003, no person or corporation or other entity owns, directly or
indirectly, or controls more than 5% of the shares of the Registrant, the only
class of securities with voting rights, except for the persons or groups listed
below:
- 31 -
- -----------------------------------------------------------
Identity of Number of
Persons or Group Shares Owned Percentage of Class
- -----------------------------------------------------------
CDS & Co. (b) 25,558,081 43.28% (a)
Cede & Co. (c) 5,446,643 9.21% (a)
Kim N. Hart 42,450,988(g) 47.06% (g)
Donald Harris 6,585,600(g) 10.85% (g)
Officers and
Directors, as a
group (8 persons) 52,454,388(d) 56.47% (d)(e)(f)(g)
(e)(f)(g)
- -----------------------------------------------------------
(a) Based on 59,121,209 shares outstanding at January 15, 2003.
(b) CDS & Co. is a depository enterprise. It is the Registrant's
understanding that CDS & Co. holds 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 Registrant unless the shareholders voluntarily elect to contact
the Registrant or request disclosure of his, her or its identity. The
Registrant is unaware of the identities of the beneficial owners of
these shares.
(c) Cede & Co. is a depository enterprise. It is the Registrant's
understanding that 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 Registrant unless the shareholders voluntarily elect to contact
the Registrant or request disclosure of his, her or its identity. The
Registrant is unaware of the identities of the beneficial owners of
these shares.
(d) Includes 11,367,000 shares, 2,080,664 options and 29,003,344 warrants
(47.06%) held directly by Kim N. Hart, the President and a director of
the Registrant.
(e) Includes 5,036,600 shares, 408,000 options and 1,141,000 warrants
(10.85%) held directly by Donald Harris, a director of the Registrant.
(f) Messrs. Hart and Harris are the only persons, corporations or other
entities known by the Registrant to own directly or indirectly or
control more than 5% of the shares of the Registrant.
(g) Includes any options and warrants exercisable by directors within 60
days.
There are no arrangements, known to the Registrant which may at a subsequent
date result in a change in control of the Registrant.
The Registrant's major shareholders do not have different voting rights from
other shareholders of the Registrant.
Based on the records of Computershare Investor Services Inc., the Registrant's
registrar and transfer agent, at January 15, 2003, there were 261 holders of
record of the Registrant's shares with United States addresses who collectively
held 20,652,144 shares or approximately 34.9% of the 59,121,209 issued and
outstanding shares. The Registrant's records indicate that, as at January 15,
2003, there was one holder of record of stock options or warrants with a United
States address. As noted above, the Registrant is not in a position to confirm
ownership by these parties.
- 32 -
The Registrant is not aware of any significant changes in the ownership of its
shares during the past three years.
B. RELATED PARTY TRANSACTIONS
Except for the ownership of the Registrant's securities and the compensation
described herein, advances to and by certain officers to or from the Registrant
to cover expenses (all of which were reimbursed or repaid without interest),
below are all of the material transactions between the Registrant and its
directors, executive officers, holders of ten percent or more of the
Registrant's outstanding shares, or any associate or affiliate of such person
since the commencement of the last fiscal year on September 1, 2001, or in any
proposed transaction which may materially affect the Registrant.
The Registrant has entered into consulting agreements with certain directors.
See "Directors, Senior Management and Employees-Compensation."
The Registrant does not provide benefits to any personnel or its consultants.
None of the officers or directors of the Registrant are indebted to the
Registrant or were indebted to the Registrant during the fiscal years ended
August 31, 2002, 2001 and 2000. See "Indebtedness of Directors and Officers"
below.
The Registrant has entered into the TAC Letter of Intent dated December 8, 1997,
as extended, with TAC International Investments LLC, a company controlled by
Donald Harris, a director of the Registrant. Pursuant to the TAC Letter of
Intent, TAC has an option to purchase 6 million common treasury shares of the
Registrant at US $4.00 per share, by way of private placement.
The Registrant has retained Eikos Planning Inc. to provide consulting services
with the City of Vancouver and all provincial agencies affected by the Richmond
Equine Training Centre. Art Cowie, a director of the Registrant is also a
principal of Eikos Planning Inc.
INDEBTEDNESS OF DIRECTORS AND OFFICERS
None of the directors, executive officers or senior officers of the Registrant
or persons who were directors, executive officers or senior officers of the
Registrant at any time during the Registrant's last completed financial year,
and none of the associates of such persons are or have been indebted to the
Registrant or its subsidiaries at any time since the beginning of the
Registrant's last completed financial year. Furthermore, none of 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 Registrant or its subsidiaries.
C. INTERESTS OF EXPERTS AND COUNSEL
Not Applicable.
- 33 -
ITEM 8 FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
See attached financial statements which are incorporated herein by reference.
LITIGATION
Gun Lake
- --------
On February 19, 1999, the Registrant filed the Gun Lake Complaint in the
Michigan Circuit Court for the County of Eaton. The Registrant named the Gun
Lake Band, the United Nation of Chippewa, Ottawa and Pottawatomi Indians of
Michigan, Inc., the Gun Lake Band of Indians Acknowledgement Project, David K.
Sprague, William Church, the members of the elder/tribal council of the Gun Lake
Band as defendants (collectively, the "Defendants"). The Gun Lake Complaint
alleges, among other things, that (i) the Gun Lake Band breached the Gun Lake
Agreement; (ii) Mr. Church breached his agreements with the Registrant; (iii)
the Defendants, collectively, fraudulently induced the Registrant to make
certain payments to the Gun Lake Band and Mr. Church and to provide certain
services to the Gun Lake Band for the purposes of obtaining federal recognition
and planning a Class III gaming operation; (iv) fraud and innocent
misrepresentation in entering agreements with the Defendants; and (v) defamation
related to certain false statements made by the Defendants to third parties
related to the Registrant and its business. The Registrant is seeking damages
and specific performance under the Gun Lake Agreement. On June 7, 1999, an
Order was issued whereby the Honorable Robert Holmes Bell, United States
District Court for the Western District of Michigan, granted the Registrant's
Motion to Remand to State Court the Registrant's suit against the Defendants.
The Defendants had removed the Registrant's suit to federal court claiming
complete federal preemption. The federal court ruled that it did not have
subject matter jurisdiction over the lawsuit and the law suit was remanded to
the State Court in Michigan for all further proceedings, including trial. Judge
Calvin Osterhaven, however, held a hearing December 10, 1999 to determine the
status of the Complaint. The trial court dismissed the lawsuit on the basis of
the Defendants claim of sovereign immunity. The Registrant applied for
permission for a review of these issues with the Michigan Supreme court and is
considering a Supreme Court appeal.
To the best of its knowledge, the Registrant is not subject to any other active
or pending legal proceedings or claims against it or any of its properties that
will have a material effect on the Registrant's business or results of
operations. However, from time to time, the Registrant may become subject to
claims and litigation generally associated with any business venture.
DIVIDEND POLICY
The Registrant has not and does not currently intend to pay any dividends on any
of its shares. The Registrant intends to follow a policy of retained earnings
to finance the growth of the business. Any future determination to pay
dividends will be at the discretion of the Board of Directors on the basis of
earnings, financial requirements and other relevant factors.
- 34 -
SIGNIFICANT CHANGES
The Registrant does not have any significant changes to report since August 31,
2002 except that the Registrant abandoned its original option to purchase 227
acres to develop a horse training facility in Richmond, British Columbia and is
now in the process of negotiating a new option to acquire 100 acres to develop
a horse training and auction complex in Richmond British, Columbia.
ITEM 9 THE OFFER AND LISTING
The Registrant's shares traded on the VSE in Canada from May 3, 1988 until
February 26, 1997 and they were voluntarily de-listed from trading on the VSE on
December 11, 1997. In the United States, the Registrant's shares were quoted on
the Pink Sheets published by the National Quotation Bureau, Inc. (the "Pink
Sheets"); under the trading symbol "SGGNF" effective December 29, 1997. On
March 29, 1999, the Registrant became a Reporting Issuer under the Securities
Exchange Act of 1934 and on May 14, 1999, the Registrant began trading on the
OTC Bulletin Board as "SGGNF." Effective September 7, 2001, the Registrant's
shares were also listed and posted for trading on the Frankfurt Stock Exchange
under the trading symbol "SGS".
The following is a summary of trading, on an annual basis, in the shares of the
Registrant on the Pink Sheets in the United States, during 1998, and the first
two quarters of fiscal 1999 and on the OTC Bulletin Board during the third and
fourth quarters of fiscal 1999 and for 2000, 2001 and 2002:
-------------------------------------------
1998 High (US$) Low (US$)
-------------------------------------------
$4.25 $0.37
-------------------------------------------
1999 High (US$) Low (US$)
-------------------------------------------
$2.37 $0.25
-------------------------------------------
2000 High (US$) Low (US$)
-------------------------------------------
$1.06 $0.06
-------------------------------------------
2001 High (US$) Low (US$)
-------------------------------------------
$0.25 $0.05
-------------------------------------------
2002 High (US$) Low (US$)
-------------------------------------------
$0.59 $0.06
-------------------------------------------
- 35 -
The following is a summary of trading on a fiscal quarter basis of the shares of
the Registrant on the OTC Bulletin Board in the United States during the two
most recent full financial years and the first quarter of fiscal 2003:
------------------------------------------------------------
2001 High (US$) Low (US$) Volume
------------------------------------------------------------
1st Quarter 0.37 0.11 5,863,700
------------------------------------------------------------
2nd Quarter 0.20 0.05 5,987,500
------------------------------------------------------------
3rd Quarter 0.25 0.06 20,236,000
------------------------------------------------------------
4th Quarter 0.22 0.09 7,379,700
------------------------------------------------------------
2002 High (US$) Low (US$) Volume
------------------------------------------------------------
1st Quarter 0.18 0.07 7,189,600
------------------------------------------------------------
2nd Quarter 0.23 0.06 11,947,300
------------------------------------------------------------
3rd Quarter 0.59 0.14 29,207,400
------------------------------------------------------------
4th Quarter 0.37 0.10 29,207,400
------------------------------------------------------------
2003 High (US$) Low (US$) Volume
------------------------------------------------------------
1st Quarter 0.22 0.07 16,560,400
------------------------------------------------------------
The following is a summary of trading, on a monthly basis, in the shares on the
OTC Bulletin Board in the United States during the past six months:
------------------------------------------------------------
Month & Year High (US$) Low (US$) Volume
------------------------------------------------------------
January 2003 0.14 0.06 7,774,300
------------------------------------------------------------
December 2002 0.10 0.06 6,454,000
------------------------------------------------------------
November 2002 0.14 0.07 4,456,500
------------------------------------------------------------
October 2002 0.19 0.10 7,817,300
------------------------------------------------------------
September 2002 0.22 0.10 4,286,600
------------------------------------------------------------
August 2002 0.37 0.10 6,884,100
------------------------------------------------------------
The price for the Registrant's shares quoted on the OTC Bulletin Board on
January 31, 2003, was US $0.10 (High) and US $0.09 (Low), and the close price
was US $0.10.
Other than described above, the Registrant's shares are not and have not been
listed or quoted on any other exchange or quotation system.
- 36 -
ITEM 10 ADDITIONAL INFORMATION
A. SHARE CAPITAL
The Registrant's authorized capital consists of 100,000,000 common shares
without par value, 100,000,000 Class A preference shares with a par value of $10
each and 100,000,000 Class B preference shares with a par value of $50 each. At
January 15, 2003, there were 59,121,209 common shares issued and outstanding.
An additional 38,912,334 shares have been allotted and reserved for issuance
pursuant to outstanding private placement warrants to purchase shares and
3,804,664 shares have been allotted and reserved for issuance pursuant to
outstanding incentive stock options. As at August 31, 2002, there were
50,121,209 shares issued and outstanding and an additional 26,138,998 shares had
been allotted and reserved for issuance pursuant to outstanding private
placement warrants to purchase shares and incentive stock options.
All shares of the same class have the same rights, preferences and limitations.
Holders of shares are entitled to receive dividends in cash, property or shares
when and if dividends are declared by the Board of Directors out of funds
legally available therefor. There are no limitations on the payment of
dividends. A quorum for a general meeting of shareholders is one shareholder
entitled to attend and vote at the meeting who may be represented by proxy and
other proper authority, holding at least one-twentieth of the outstanding
shares. Holders of shares are entitled to one vote per share. Upon any
liquidation, dissolution or winding up of the business of the Registrant, The
Registrant's assets, if any, after payment or provision for payment of all
debts, obligations or liabilities of the Registrant shall be distributed to the
holders of shares. There are no pre-emptive rights, subscription rights,
conversion rights and redemption provisions relating to the shares and none of
the shares carry any liability for further calls.
The rights of holders of shares may not be modified other than by vote of 3/4 of
the shares voting on such modification. Because a quorum for a general meeting
of shareholders can exist with one shareholder (proxyholder) personally present,
the rights of holders of shares may be modified by less than a majority of the
issued shares of the Registrant.
Shareholders may apply to the Supreme Court of British Columbia for various
remedies on the ground that the affairs of the Registrant are being conducted in
a manner oppressive to one or more of the shareholders or that some resolution
of shareholders has been passed or is proposed that is unfairly prejudicial to
one or more of the shareholders. That Court may, with a view to bringing it to
an end or to remedying the matters complained of, make an interim or final order
if it considers appropriate, including the following:
(a) direct or prohibit any act or cancel or vary any transaction or
resolution;
(b) regulate the conduct of the Registrant's affairs in the future;
(c) provide for the purchase of the shares of any member of the Registrant
by another member of the Registrant, or by the Registrant;
(d) in the case of a purchase by the Registrant, reduce the Registrant's
capital or otherwise;
(e) appoint a receiver or receiver manager;
(f) order that the Registrant be wound up;
(g) authorize or direct that proceedings be commenced in the name of the
Registrant against any party on the terms the Court directs;
- 37 -
(h) require the Registrant to produce financial statements;
(i) order the Registrant to compensate an aggrieved person; and
(j) direct rectification of any record of the Registrant.
Where a special resolution to modify the rights of the holders of shares has
been passed, the holders of not less than 10% of the shares who are entitled to
vote and did vote against the special resolution (in person or by proxy), may
apply to the Supreme Court of British Columbia to set aside the resolution.
There are no restrictions on the purchase or redemption of shares by the
Registrant while there is any arrearage in the payment of dividends or sinking
fund installments.
There are no shares of the Registrant held by or on behalf of the Registrant
itself or by subsidiaries of the Registrant. The Registrant's Board of
Directors has approved in principal a share buy back program by its subsidiary
HBN whereby HBN may buy back up to 25% of the Registrants shares from HBN
revenues.
- 38 -
SUMMARY OF REGISTRANT SECURITIES TRANSACTIONS
Set forth below are the closed and pending transactions pursuant to which
securities of the Registrant have been issued or sold since incorporation.
SHARE, OPTION AND WARRANT TRANSACTIONS
--------------------------------------
--------------------------------------
Shares Outstanding at August 31, 1999
--------------------------------------
Number of Total Gross
Shares Issued Consideration
------------- -------------
(Cdn)
-----
17,661,231 $9,194,954
- --------------------------------------------------------------------------------
Shares Issued During Fiscal Year Ended August 31, 2000
- --------------------------------------------------------------------------------
Total Gross
Number of Price per Consider-
Securities Security ation
Transaction Issued (Cdn$/US$) (Cdn$) Date Closed
- ----------------- ---------- -------------- ---------- --------------
Warrants Exercised 200,000 $0.365/US$0.25 $ 73,500 September 1999
Private Placement. 440,000 $0.366/US$0.25 $ 161,700 October 1999
Private Placement 136,000 $0.366/US$0.25 $ 49,973 October 1999
Private Placement 150,000 $0.464/US$0.32 $ 69,600 October 1999
Warrants Exercised 24,411 $ 0.36/US$0.25 $ 8,885 December 1999
Warrants Exercised 94,000 $0.366/US$0.25 $ 34,446 December 1999
Warrants Exercised 50,000 $ 0.36/US$0.25 $ 18,000 January 2000
Warrants Exercised 120,000 $0.359/US$0.25 $ 43,083 January 2000
Private Placement 200,000 $ 0.43/US$0.30 $ 85,302 January 2000
Warrants Exercised 80,000 $0.357/US$0.25 $ 28,626 February 2000
Private Placement 300,000 $0.607/US$0.42 $ 181,062 February 2000
Warrants Exercised 170,000 $ 0.36/US$0.25 $ 61,026 March 2000
Warrants Exercised 200,000 $ 0.43/US$0.30 $ 86,154 March 2000
Options Exercised 100,100 $ 0.72/US$0.50 $ 72,232 March 2000
Options Exercised 200,000 $ 0.72/US$0.50 $ 144,320 March 2000
Warrants Exercised 300,000 $ 0.61/US$0.42 $ 182,448 March 2000
Private Placement 400,000 $ 0.48/US$0.33 $ 193,156 April 2000
Private Placement 50,000 $ 0.48/US$0.33 $ 24,144 April 2000
Private Placement 50,000 $ 0.48/US$0.33 $ 24,178 April 2000
Options Exercised 50,000 $ 0.73/US$0.50 $ 36,475 June 2000
Private Placement 400,000 $ 0.36/US$0.25 $ 145,150 June 2000
Private Placement 200,000 $ 0.36/US$0.25 $ 72,800 June 2000
Options Exercised 100,000 $ 0.73/US$0.50 $ 72,800 June 2000
Private Placement 200,000 $ 0.61/US$0.42 $ 122,430 July 2000
Private Placement 200,000 $ 0.44/US$0.30 $ 87,774 July 2000
Private Placement 100,000 $ 0.44/US$0.30 $ 43,797 August 2000
---------- -----------
Total Outstanding 22,175,743 $11,318,015
- 39 -
- --------------------------------------------------------------------------------
Shares Issued During Fiscal Year Ended August 31, 2001
- --------------------------------------------------------------------------------
Total Gross
Number of Price per Consider-
Securities Security ation
Transaction Issued (Cdn$) (Cdn$) Date Closed
- ----------------- ---------- -------------- ---------- --------------
Private Placement 100,000 $0.44/US$0.30 $ 44,007 September 2000
Private Placement 240,000 $0.44/US$0.30 105,105 September 2000
Private Placement 100,000 $0.44/US$0.30 44,169 September 2000
Private Placement 100,000 $0.37/US$0.25 37,000 September 2000
Private Placement 120,000 $0.22/US$0.15 26,658 September 2000
Private Placement 500,000 $0.22/US$0.15 112,035 October 2000
Private Placement 165,000 $0.22/US$0.15 37,076 October 2000
Private Placement 100,000 $0.22/US$0.15 22,476 October 2000
Private Placement 380,000 $0.22/US$0.15 85,408 October 2000
Private Placement 54,000 $0.23/US$0.15 12,303 November 2000
Private Placement 400,000 $0.23/US$0.15 91,620 November 2000
Options Exercised 300,000 $0.12/US$0.08 36,060 December 2000
Options Exercised 1,179,900 $0.12/US$0.08 142,466 December 2000
Options Exercised 50,000 $0.12/US$0.08 6,127 December 2000
Debt settlements 610,000 $0.12/US$0.08 72,883 December 2000
Private Placement 100,000 $0.22/US$0.15 22,223 January 2001
Options Exercised 100,000 $0.12/US$0.08 11,988 January 2001
Options Exercised 300,000 $0.12/US$0.08 35,522 February 2001
Options Exercised 100,000 $0.12/US$0.08 11,968 February 2001
Options Exercised 50,000 $0.12/US$0.08 6,109 February 2001
Options Exercised 300,000 $0.12/US$0.08 36,328 February 2001
Options Exercised 400,000 $0.12/US$0.08 48,382 February 2001
Options Exercised 279,900 $0.12/US$0.08 34,280 March 2001
Options Exercised 46,733 $0.18/US$.012 8,585 March 2001
Options Exercised 53,267 $0.18/US$0.12 9,770 March 2001
Options Exercised 50,000 $0.17/US$.011 8,407 March 2001
Private Placement 100,000 $0.23/US$0.15 23,302 March 2001
Private Placement 100,000 $0.23/US$0.15 23,265 March 2001
Options Exercised 350,000 $0.17/US$0.11 60,014 March 2001
Private Placement 400,000 $0.23/US$0.15 93,528 March 2001
Private Placement 150,000 $0.23/US$0.15 35,072 March 2001
Private Placement 150,000 $0.23/US$0.15 35,138 March 2001
Private Placement 600,000 $0.23/US$0.15 138,928 April 2001
Private Placement 550,000 $0.23/US$0.15 128,106 May 2001
Private Placement 200,000 $0.23/US$0.15 46,584 May 2001
Private Placement 300,000 $0.23/US$0.15 68,558 May 2001
Private Placement 100,000 $0.23/US$0.15 23,008 May 2001
Private Placement 200,000 $0.23/US$0.15 46,050 May 2001
Private Placement 200,000 $0.23/US$0.15 45,864 May 2001
Private Placement 510,000 $0.23/US$0.15 116,096 June 2001
Private Placement 200,000 $0.22/US$0.15 44,975 June 2001
Private Placement 190,000 $0.23/US$0.15 42,981 June 2001
Private Placement 100,000 $0.22/US$0.15 22,433 June 2001
Private Placement 200,000 $0.22/US$0.15 44,865 June 2001
Private Placement 200,000 $0.23/US$0.15 45,399 July 2001
Private Placement 200,000 $0.23/US$0.15 45,420 August 2001
Private Placement 105,000 $0.23/US$0.15 24,014 August 2001
- 40 -
Private Placement 80,000 $0.23/US$0.15 18,276 August 2001
Options Exercised 300,000 $0.12/US$0.08 36,543 August 2001
Private Placement 50,000 $0.23/US$0.15 11,446 August 2001
Options Exercised 150,000 $0.21/US$0.14 32,193 August 2001
Private Placement 165,000 $0.23/US$0.15 37,941 August 2001
Options Exercised 200,000 $0.22/US$0.14 43,184 August 2001
Options Exercised 50,000 $0.17/US$0.11 8,483 August 2001
---------- -----------
Total Outstanding 34,454,543 $13,768,636
- --------------------------------------------------------------------------------
Shares Issued During Fiscal Year Ended August 31, 2002
- --------------------------------------------------------------------------------
Total Gross
Number of Price per Consider-
Securities Security ation
Transaction Issued (Cdn$) (Cdn$) Date Closed
- ----------------- ---------- -------------- ---------- --------------
Private Placement. 150,000 $ 0.23/US$0.15 34,850 September 2001
Private Placement. 230,000 $ 0.23/US$0.15 53,590 September 2001
Private Placement 400,000 $ 0.23/US$0.15 93,714 September 2001
Options Exercised 200,000 $ 0.17/US$0.11 34,621 October 2001
Options Exercised 200,000 $ 0.17/US$0.11 34,621 October 2001
Private Placement 220,000 $ 0.24/US$0.15 51,932 October 2001
Private Placement 420,000 $ 0.24/US$0.15 99,143 October 2001
Options Exercised 200,000 $ 0.16/US$0.10 31,546 November 2001
Options Exercised 100,000 $ 0.19/US$0.12 18,928 November 2001
Options Exercised 100,000 $ 0.19/US$0.12 19,003 November 2001
Private Placement 150,000 $ 0.09/US$0.06 14,189 December 2001
Private Placement 100,000 $ 0.09/US$0.06 9465 December 2001
Private Placement 2,000,000 $ 0.09/US$0.06 189,300 December 2001
Private Placement 133,334 $ 0.09/US$0.06 12,620 December 2001
Private Placement 200,000 $ 0.09/US$0.06 18,930 December 2001
Private Placement 100,000 $ 0.09/US$0.06 9,465 December 2001
Private Placement 150,000 $ 0.10/US$0.06 14,403 January 2002
Private Placement 166,666 $ 0.10/US$0.06 16,003 January 2002
Private Placement 1,700,000 $ 0.10/US$0.06 163,231 January 2002
Options Exercised 400,000 $ 0.16/US$0.10 64,012 January 2002
Private Placement 1,000,000 $ 0.10/US$0.06 95,748 February 2002
Private Placement 300,000 $ 0.17/US$0.11 52,061 March 2002
Options Exercised 136,000 $ 0.13/US$0.08 17,188 March 2002
Private Placement 1,000,000 $ 0.27/US$0.17 268,312 April 2002
Warrants Exercised 1666,666 $ 0.09/US$0.06 15,813 April 2002
Private Placement 1,000,000 $0.26/US$0.165 260,915 April 2002
Options Exercised 36,000 $ 0.13/US$0.08 4,511 April 2002
Options Exercised 100,000 $ 0.23/US$0.15 23,495 April 2002
Options Exercised 36,000 $ 0.12/US$0.08 4,497 April 2002
Options Exercised 100,000 $ 0.23/US$0.15 23,419 April 2002
Warrants Exercised 200,000 $ 0.09/US$0.06 18,557 May 2002
Private Placement 400,000 $ 0.25/US$0.16 98,980 May 2002
Options Exercised 222,000 $ 0.12/US$0.08 27.210 May 2002
- 41 -
Private Placement 600,000 $ 0.23/US$0.15 136,764 May 2002
Warrants Exercised 150,000 $ 0.09/US$0.06 13,793 June 2002
Private placement 2,500,000 $0.12/US$0.075 289,856 July 2002
Private Placement 250,000 $ 0.12/US$0.08 31,026 July 2002
Private Placement 100,000 $ 0.14/US$0.09 13,885 August 2002
Total Outstanding 50,121,209 16,156,646
- ------------------------------------------------------------------------------
Options Outstanding as of January 31, 2003
- ------------------------------------------------------------------------------
Description Number of Shares Exercise Price (US$) Expiration Date
- ----------- ---------------- -------------------- --------------------
Option 1,050,000 $0.06 February 28, 2006
Option 79,900 $0.085 March 05, 2006
Option 550,764 $0.08 January 04, 2007
Option 400,000 $0.0725 January 24, 2007
Option 300,000 $0.12 August 10, 2006
Option 108,000 $0.08 January 4, 2007
Option 272,000 $0.20 May 17, 2007
Option 100,000 $0.15 February 16, 2006
Option 36,000 $0.08 January 04, 2007
Option 100,000 $0.10 October 22, 2006
Option 36,000 $0.08 January 04, 2007
Option 100,000 $0.12 October 23, 2006
Option 36,000 $0.08 January 04, 2007
Option 100,000 $0.09 December 20, 2006
Option 36,000 $0.08 January 04, 2007
Option 200,000 $0.15 October 11, 2007
Option 300,000 $0.15 October 11, 2007
Total: 3,804,664
- -----------------------------------------------------------------------------
Share Purchase Warrants Outstanding as of January 31, 2003
- -----------------------------------------------------------------------------
Exercise
Price
Description Date of Grant Number of Shares (US$) Expiry Date
- ----------- -------------- ---------------- -------- --------------
Warrant(1) Apr. 20, 2000 500,000 0.33 Apr. 20, 2003
Warrant(1) Jun. 16, 2000 400,000 0.25 May 24, 2003
Warrant(1) Jul. 17, 2000 200,000 0.42 Jun. 28, 2003
Warrant(1) Aug. 1, 2000 200,000 0.30 Jul. 31, 2003
Warrant(1) Aug. 17, 2000 100,000 0.30 Jul. 31, 2003
Warrant(1) Aug. 24, 2000 240,000 0.30 Aug. 24, 2003
Warrant(1) Sept. 12, 2000 100,000 0.30 Sept. 6, 2003
Warrant(1) Sept. 6, 2000 100,000 0.30 Jul. 31, 2003
Warrant(7) Sept. 18, 2000 100,000 0.25 Aug. 29, 2003
Warrant(1) Oct. 2, 2000 120,000 0.20 Sept. 21, 2003
Warrant(9) Oct. 6, 2000 200,000 0.20 Oct. 12, 2003
Warrant(1) Oct. 10, 2000 680,000 0.20 Sept. 21, 2003
Warrant(1) Nov. 23, 2000 400,000 0.20 Oct. 12, 2003
- 42 -
Warrant(1) Dec. 22, 2000 100,000 0.20 Dec. 22, 2003
Warrant(1) Mar. 19, 2001 100,000 0.20 Mar. 23, 2004
Warrant(1) Mar. 20, 2001 100,000 0.20 Mar. 23, 2004
Warrant(1) Mar. 27, 2001 400,000 0.20 Mar. 23, 2004
Warrant(1) Mar. 27, 2001 150,000 0.20 Mar. 23, 2004
Warrant(1) Mar. 30, 2001 150,000 0.20 Mar. 23, 2004
Warrant(1) Mar. 19, 2001 600,000 0.20 Mar. 19, 2004
Warrant(1) May 4, 2001 550,000 0.20 Mar. 29, 2004
Warrant(1) May 8, 2001 400,000 0.20 May 8, 2004
Warrant(1) May 9, 2001 300,000 0.20 May 8, 2004
Warrant(1) May 15, 2001 100,000 0.20 May 8, 2004
Warrant(1) May 23, 2001 200,000 0.20 May 8, 2004
Warrant(1) Jun. 1, 2001 510,000 0.20 May 29, 2004
Warrant(1) Jun. 11, 2001 200,000 0.20 May 29, 2004
Warrant(1) Jun. 22, 2001 190,000 0.20 May 29, 2004
Warrant(1) Jun. 27, 2001 100,000 0.20 May 29, 2004
Warrant(1) Jun. 27, 2001 1,000,000 0.20 Jun. 27, 2004
Warrant(1) Oct. 12, 2000 100,000 0.20 Oct. 12, 2003
Warrant(1) Oct. 12, 2000 54,000 0.20 Oct. 12, 2003
Warrant(1) Oct. 12, 2000 165,000 0.20 Oct. 12, 2003
Warrant(1) Sept. 7, 2001 1,000,000 0.20 Sept. 7, 2004
Warrant(1) Dec. 14, 2001 2,333,334 0.06 Dec. 14, 2004
Warrant(1) Jan. 4, 2002 1,700,000 0.06 Jan. 4, 2005
Warrant(1) Jan. 30, 2002 1,000,000 0.06 Jan. 31, 2005
Warrant(1) Oct. 24, 2001 420,000 0.15 Oct. 24, 2004
Warrant(1) Nov. 4, 2001 1,000,000 0.15 Nov. 4, 2004
Warrant(1) Mar. 1, 2002 300,000 0.11 Mar. 1, 2005
Warrant(1) Mar. 26, 2002 1,000,000 0.17 Mar. 26, 2005
Warrant(1) Apr. 4, 2002 1,000,000 0.165 Apr. 4, 2005
Warrant(1) May 7, 2002 400,000 0.16 May 7, 2005
Warrant(1) May 30, 2002 600,000 0.15 May 30, 2005
Warrant(1) Jul. 23, 2002 250,000 0.08 Jul. 23, 2005
Warrant(1) Aug. 9, 2002 100,000 0.09 Aug. 9, 2005
Warrant(1) Jul. 23, 2002 1,500,000 0.08 Jul. 23, 2005
Warrant(1) Jul. 23, 2002 1,500,000 0.08 Jul. 23, 2005
Warrant(1) Sept. 27, 2002 1,500,000 0.08 Sept. 27, 2005
Warrant(1) Sept. 27, 2002 1,500,000 0.08 Sept. 27, 2005
Warrant(1) Nov. 1, 2002 1,000,000 0.075 Nov. 1, 2005
Warrant(1) Nov. 12, 2002 1,000,000 0.08 Nov. 12, 2005
Warrant(1) Nov. 28, 2002 1,000,000 0.06 Nov. 28, 2005
Warrant(1) Dec. 12, 2002 1,000,000 0.06 Dec. 12, 2005
Warrant(1) Dec. 18, 2002 500,000 0.05 Dec. 18, 2005
Warrant(1) Dec. 18, 2002 500,000 0.05 Dec. 18, 2005
Warrant(1) Jan. 24, 2003 2,000,000 0.10 Jan. 24, 2006
- --------------------------------------------------------------------------------
Pending Transactions and Security Grants
- --------------------------------------------------------------------------------
Relevant Number Closing
Description Agreement of Shares Price Date/Expiry
- ----------------- ----------- ---------- -------- -------------
Private Placement TAC Letter 6,000,000 US$4.00 Est. to 10/03(2)
to TAC(2) of Intent
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(1) One warrant is exercisable to acquire one common share.
(2) Pursuant to the TAC Letter of Intent, TAC has agreed to enter into a
private placement subscription agreement to purchase 6,000,000 shares from
the Registrant at US$4.00, subject to receiving all regulatory authority to
operate the Richmond Equine Training Centre and the Vancouver Thoroughbred
Park on or before October 1, 2003. There can be no assurance that the
Registrant will receive such regulatory approval in a timely manner, if at
all.
CURRENCY TRANSLATION
The Registrant's proposed operations will be carried out in United States and
Canadian dollars. As a result, the Registrant will be faced with currency
fluctuations. The Registrant does not currently engage in currency hedging,
however, the Registrant will do so once operations have commenced.
A. MEMORANDUM AND ARTICLES OF ASSOCIATION
Objects and Purposes
The Registrant was incorporated in the province of British Columbia, Canada
under incorporation number 307198. The Memorandum and Articles of the
Registrant do not address the Registrant's objects and purposes. Pursuant to
the Company Act (British Columbia) a company incorporated in British Columbia
has the power and capacity of a natural person of full capacity except that no
company has the capacity to operate a railway as a common carrier, except as
authorized by the Lieutenant Governor in Council or to operate a club unless
authorized in writing by the minister.
Directors
A director who is, in any way, directly or indirectly interested in a proposed
contract or transaction with the Registrant shall disclose the nature and extent
of his interest at a meeting of the directors in accordance with the provisions
of the British Columbia Company Act (the "Company Act"). A director shall not
-----------
vote in respect of any contract or transaction with the Registrant in which he
is interested.
The remuneration of the directors may from time to time be determined by the
directors themselves, or if the directors so decide, by the shareholders. Such
remuneration may be in addition to any salary or other remuneration paid to any
officer or employee of the Registrant as such who is also a director, and
reimbursement for travel and other expenses.
The directors may, at their discretion authorize the Registrant to borrow any
sum of money or incur indebtedness for the purpose of the Registrant and may
raise or secure the repayment of such sum of money in such manner and upon such
terms and conditions as the directors think fit.
There are no provisions with respect to the retirement of a director or the
non-retirement of a director under an age requirement.
A director is not required to hold a share in the capital of the Registrant as
qualification for his office.
With respect to the above noted matters, there are generally no significant
differences between British Columbia and United States law.
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Rights, Preference and Restrictions Attached to Common Shares
All of the authorized common shares of the Registrant, once issued, rank equally
as to dividends, voting powers, and participation in assets. Holders of common
shares are entitled to one vote for each common share held of record on all
matters to be acted upon by the shareholders. Holders of common shares are
entitled to receive such dividends as may be declared from time to time by the
board of directors, in its discretion, out of funds legally available therefore.
The Registrant's Articles do not provide for cumulative voting.
Upon liquidation, dissolution or winding up of the Registrant, holders of common
shares, subject to any special rights or restrictions attached to any issued
Preference Shares, are entitled to receive pro rata the Registrant's assets, if
any, remaining after payments of all debts and liabilities. No common shares
have been issued subject to call or assessment. There are no pre-emptive or
conversion rights and no provisions for redemption or purchase for cancellation,
surrender, or sinking or purchase funds. There are no restrictions on the
repurchase or redemption of common shares by the Registrant while there is any
arrearage in the payment of dividends or sinking fund installments.
With respect to the rights, preferences and restrictions attaching to the
Registrant's common shares, there are generally no significant differences
between British Columbia and United States law as the board of directors, or the
applicable corporate statute, will determine the rights, preferences and
restrictions attaching to each class of the Registrant's shares.
Changes to Common Shares
The Registrant's Articles provide that it may, by ordinary resolution, (i.e.
approved by a simple majority of the votes cast in person or by proxy at a
meeting of the Registrant's shareholders or consented to in writing by not less
than 3/4 of the Registrant's shareholders) increase our authorized capital by:
i) creating shares with or without par value or both;
ii) increasing the number of shares with or without par value or both; or
iii) increasing the par value of a class of shares with par value, if no shares
of that class are issued.
The Registrant's Articles also provide that it may, by a resolution of its
directors, purchase any of its shares at the price and upon the terms specified
in such resolutions.
Provisions as to the modification, amendment or variation of the rights
attaching to the common shares are also contained in the Company Act. The
Company Act requires approval by a special resolution (i.e. approved by at least
of the votes cast at a meeting of the Registrant's shareholders or consented to
in writing by each of the Registrant's shareholders) in order to effect any of
the following changes:
i) creating, defining and attaching special rights or restrictions to any
shares whether issued or unissued;
ii) varying or abrogating any special rights or restrictions attached to any
shares, whether issued or unissued;
iii) subdividing all or any of the Registrant's unissued, or fully paid issued,
shares with par value into shares of smaller par value;
iv) subdividing all or any of the Registrant's unissued, or fully paid issued,
shares without par value so that the number of those shares is increased;
v) consolidating all or any of the Registrant's shares with par value into
shares of larger par value;
vi) consolidating all or any of the Registrant's shares without par value so
that the number of those shares authorized is reduced;
vii) changing all or any of the Registrant's unissued, or fully paid issued,
shares with par value into shares without par value;
viii) changing all or any of the Registrant's unissued shares without par value
into shares with par value;
ix) altering the name or designation of all or any of the Registrant's shares,
whether issued or unissued, or
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x) altering the provisions as to the maximum price or consideration at or for
which shares without par value may be issued.
The Company Act also provides that the Registrant may reduce its capital,
whether issued or unissued, in any way by special resolution confirmed by the
court and may:
a) extinguish or reduce the liability on any of the Registrant's partly paid
shares in respect of capital not paid up,
b) either with or without extinguishing or reducing the liability on any of
the Registrant's partly paid shares, cancel any paid up capital that is
lost or unrepresented by available assets, or
c) either with or without extinguishing or reducing liability on any of its
partly paid shares, pay off any paid up capital that is in excess of the
needs of the Registrant.
The Company Act also provides that the Registrant may, by ordinary resolution:
a) cancel shares that are not allotted or issued,
b) cancel fully paid shares that are surrendered to the Registrant by way of
gift, or
c) cancel shares that have been held in escrow under an escrow agreement
required by the executive director, and that are surrendered for
cancellation under that agreement and diminishing the authorized capital
accordingly.
Generally, there are no significant differences between British Columbian and
United States law with respect to changing the rights of shareholders as most
state corporation statutes require shareholder approval (usually a majority) for
any such changes that affect the rights of shareholders.
Annual General Meetings and Extraordinary General Meetings
Annual General Meetings (an "AGM") must be held once every financial year,
within 13 months of the previous AGM. If the Registrant fails to hold an AGM,
the Supreme Court of British Columbia may, on the application of a shareholder
of the Registrant, call or direct an AGM. Under the Company Act, the
Registrant must give its shareholders written notice of an AGM not less than 21
days before the AGM is to be held.
The Registrant's directors may, whenever they think fit, convene an
Extraordinary General Meeting (an "EGM").
An AGM or EGM may also be requisitioned by one or more shareholders of the
Registrant so long as such shareholders own not less than 5% of the issued and
outstanding shares at the date such shareholders requisition an AGM or EGM.
After receiving such requisition, the Registrant's directors must within 21 days
call the meeting.
All shareholders entitled to attend and vote at an AGM or an EGM will be
admitted to the meeting.
Most state corporation statutes require a public company to hold an annual
meeting for the election of directors and for the consideration of other
appropriate matters. The state statutes also include general provisions
relating to shareholder votings and meetings. Apart from the timing of when an
AGM must be held and the percentage of shareholders required to call an AGM or
EGM, there are generally no material differences between British Columbian and
United States law respecting AGMs and EGMs.
Rights to Own Securities
There are no limitations on the rights of non-resident or foreign shareholders
to hold or exercise voting rights.
Except as provided in the Investment Canada Act, there are no limitations under
the applicable laws of British Columbia or by the Registrant's charter or other
constituent documents of the Registrant on the right of foreigners to hold or
vote common shares or other securities of the Registrant.
- 46 -
The Investment Canada Act will prohibit implementation, or if necessary, require
divestiture of an investment deemed "reviewable" under the Investment Canada Act
by an investor that is not a "Canadian" as defined in the Investment Canada Act
(a "non-Canadian"), unless after review the Minister responsible for the
Investment Canada Act ("the Minister") is satisfied that the "reviewable"
investment is likely to be of net benefit to Canada. An investment in the
Registrant's common shares by a non-Canadian would be reviewable under the
Investment Canada Act if it was an investment to acquire control of the
Registrant and the value of the Registrant's assets was $% million or more. A
non-Canadian would be deemed to acquire control of the Registrant for the
purposes of the Investment Canada Act if the non-Canadian acquired a majority of
the Registrant's outstanding shares (or less than a majority but controlled the
Registrant in fact through the ownership of one-third or more of our outstanding
common shares) unless it could be established that, on the acquisition, the
Registrant was not controlled in fact by the acquirer through the ownership of
such common shares. Certain transactions in relation to the Registrant's common
shares would be exempt from review under the Investment Canada Act, including,
among others, the following:
1. acquisition of common shares by a person in the ordinary course of that
person's business as a trader or dealer in securities;
2. acquisition of control of the Registrant 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 Investment Canada Act; and
3. acquisition of control of the Registrant by reason of an amalgamation,
merger, consolidation or corporate reorganization following which the
ultimate direct or indirect control of the Registrant, through the
ownership of voting interests, remains unchanged.
The Investment Canada Act 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 Investment Canada Act). Under the Investment Canada Act, as amended, an
investment in our common shares by WTO Investors would be reviewable only if it
was an investment to acquire control of the Registrant and the value of the
Registrant's assets was equal to or greater than a specified amount (the "Review
Threshold"), which is published by the Minister after its determination for any
particular year. The Review Threshold for WTO Investors is currently $223
million for the year 2003.
Change in Control
There are no provisions in the Registrant's Articles that would have the effect
of delaying, deferring or preventing a change in control of the Registrant, and
that would operate only with respect to a merger, acquisition or corporate
restructuring involving the Registrant.
The Company Act does not contain any provisions that would have the effect of
delaying, deferring or preventing a change of control of the Registrant.
Generally, there are no significant differences between British Columbia and
United States law in this regard, as many state corporation statutes also do not
contain such provisions and only empower a company's board of directors to adopt
such provisions.
Ownership Threshold
There are no provisions in the Registrant's Articles or Memorandum or in the
Company Act governing the threshold above which shareholder ownership must be
disclosed. The Securities Act (British Columbia) requires that the Registrant
disclose, in its annual general meeting proxy statement, holders who
beneficially own more than 10% of the Registrant's issued and outstanding
shares. Most state corporation statutes do not contain provisions governing
- 47 -
the threshold above which shareholder ownership must be disclosed. United States
federal securities laws require a company to disclose, in its Annual Report of
Form 20-F, holders who own more than 5% of a company's issued and outstanding
shares.
Changes in the Capital of the Registrant
There are no conditions imposed by our Articles which are more stringent than
those required by the Company Act.
C. MATERIAL CONTRACTS
The Registrant has entered into the following material contracts in the past two
years:
1. Letter of Intent-Extension between TAC International Investments LLC
("TAC") and the Registrant dated September 28, 2001 pursuant to which the
Registrant and TAC agreed to extend the deadline from October 1, 2001 to
October 1, 2002 for the Registrant to receive permission from the City of
Richmond and the Province of British Columbia to develop the Richmond
Equine Training Centre. Once such permission is received, TAC has an option
to purchase 6,000,000 common shares of the Registrant at a price of US
$4.00 per share, the proceeds of which will be used to fund the Richmond
Equine Training Centre and the Vancouver Thoroughbred Park Projects.
2. Letter of Intent-Extension between TAC and the Registrant dated September
30, 2002 pursuant to which the Registrant and TAC agreed to extend the
deadline from October 1, 2002 to October 1, 2003 for the Registrant to
receive permission from the City of Richmond and the Province of British
Columbia to develop the Richmond Equine Training Centre. Once such
permission is received, TAC has an option to purchase 6,000,000 common
shares of the Registrant at a price of US $4.00 per share, the proceeds of
which will be used to fund the Richmond Equine Training Centre and the
Vancouver Thoroughbred Park Projects.
- 48 -
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 Registrant'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 Registrant on the right
of foreigners to hold and/or vote the shares of the Registrant.
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.
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.
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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.
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.
E. TAXATION
The following is a summary of the principal Canadian federal income tax
considerations which would generally apply to holders of the Registrant's
shares. This summary is based upon the provisions of the Income Tax Act of
Canada and the regulations thereunder (collectively, the "Tax Act") and the
Canada-United States Tax Convention (the "Tax Convention") as at the date of
this Annual Report and the current administrative practices of Canada Customs
and Revenue Agency. This summary does not take into account provincial income
tax consequences.
- 50 -
Canadian Federal Income Tax Consequences
The following is a general summary of certain Canadian federal income tax
considerations generally applicable to a holder of the Registrant's shares who
is not a resident of Canada for the purposes of the Income Tax Act (Canada) (the
"Act"). The discussion does not address all potentially relevant federal income
tax matters and it does not address consequences peculiar to persons subject to
special provisions of federal income tax law.
The summary is based on the current provisions of the Act and the regulations
thereunder and the Registrant'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
Registrant's shares should 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
Registrant 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 Registrant 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
- 51 -
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.
United States Federal Income Tax Consequences
The following is a general discussion of certain possible 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 Registrant. This
discussion does not address all potentially relevant federal income tax matters
and it does not address consequences peculiar to persons subject to special
provisions of federal income tax law, such as 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 advice to any holder or prospective holder of
common shares of the Registrant 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 Registrant should consult their own tax advisors about the
federal, state, local, and foreign tax consequences of purchasing, owning and
disposing of common shares of the Registrant.
U.S. Holders
As used herein, a "U.S. Holder" means a holder of common shares of the
Registrant 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
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accounts, financial institutions, insurance companies, real estate investment
trusts, regulated investment companies, broker-dealers, nonresident 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 Registrant
U.S. Holders receiving dividend distributions (including constructive dividends)
with respect to common shares of the Registrant 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
Registrant 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 Registrant, 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 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 Registrant 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 Registrant
(unless the Registrant 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
Registrant. 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 Registrant'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 Registrant's common
- 53 -
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 Registrant 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 Registrant 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 Registrant should consult
their own tax advisors regarding their individual circumstances.
Disposition of Common Shares of the Registrant
A U.S. Holder will recognize gain or loss upon the sale of common shares of the
Registrant 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 Registrant. 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 Registrant 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:
- 54 -
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 Registrant'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 Registrant's gross income
for such year was derived from certain passive sources (e.g., from dividends
received from its subsidiaries), the Registrant 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 Registrant does not actually
distribute such income.
Foreign Investment Company
If 50% or more of the combined voting power or total value of the Registrant'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 Registrant 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 Registrant 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 Registrant 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.
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 Registrant. 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 Registrant 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 Registrant
qualifies as a PFIC on his pro rata share of the Registrant'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
- 55 -
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 Registrant'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 his Registrant common shares (or
deemed to be realized on the pledge of his shares) as capital gain; (ii) treat
his share of the Registrant'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
Registrant'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.
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 Registrant 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 Registrant 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 Registrant is a controlled foreign corporation, the U.S. Holder's pro rata
share of the Registrant's post-1986 earnings and profits as of the qualification
date. The qualification date is the first day of the Registrant's first tax
year in which the Registrant 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 Registrant 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 Registrant 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 Registrant is not a PFIC. Therefore, if the Registrant 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 Registrant. Upon the
U.S. Holder's reacquisition of an interest in the Registrant, the QEF election
will apply to the newly acquired stock of the Registrant.
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
- 56 -
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
Registrant 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 Registrant 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 Registrant 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 Registrant 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 Registrant common shares and (ii)
certain "excess distributions", as specifically defined, by the Registrant.
A Non-electing U.S. Holder generally would be required to pro rate all gains
realized on the disposition of his Registrant common shares and all excess
distribution of his Registrant common shares and all excess distributions over
the entire holding period for the Registrant. 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 Registrant 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. Holder that is not a
corporation must treat this interest charge as "personal interest" which, as
discussed above, is wholly nondeductible. 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 Registrant is a PFIC for any taxable year during which a Non-electing
U.S. Holder holds Registrant common shares, then the Registrant will continue to
be treated as a PFIC with respect to such Registrant 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
Registrant 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
- 57 -
transfers at death. Generally, in such cases the basis of the Registrant 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 Registrant 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 Registrant
common shares while the Registrant 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 Registrant 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 Registrant ("United States shareholder"), the Registrant 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 Registrant 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 Registrant 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 Registrant, a more
detailed review of these rules is outside of the scope of this discussion.
F. DIVIDENDS AND PAYING AGENTS
Not Applicable.
- 58 -
G. STATEMENTS BY EXPERTS
Not Applicable.
H. DOCUMENTS ON DISPLAY
The documents concerning the Registrant may be viewed at Suite 1880, 1055 West
Georgia Street, Vancouver, British Columbia, Canada V6E 3P3, during normal
business hours.
I. SUBSIDIARY INFORMATION
Not required.
ITEM 11 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
PART II
-------
ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUINCIES
None.
ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15 CONTROLS AND PROCEDURES
The Registrant has established and maintains disclosure controls and procedures
which are designed to provide reasonable assurance that material information
relating to it and its subsidiaries is made known to the Chief Executive Officer
of each company by others within those entities, particularly during the period
in which the Registrant's Annual Report is being prepared. The Executive
Committee of the Registrant monitors and evaluates these disclosure controls and
procedures. The Executive Committee
- 59 -
has evaluated the effectiveness of the disclosure controls and procedures as of
a date within 90 days prior to the filing date of this Annual Report and based
on this evaluation it was concluded that the disclosure controls and procedures
were effective in providing reasonable assurance during the period covered in
the Annual Report. There were no significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of the Registrant's most recent evaluation.
ITEM 16 [RESERVED]
PART III
ITEM 17 FINANCIAL STATEMENTS
The Report and Consolidated Financial Statements for the years ended August 31,
2002, 2001, and 2000 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 12 of the Report and
Consolidated Financial Statements for the years ended August 31, 2002, 2001, and
2000.
ITEM 18 FINANCIAL STATEMENTS
Not applicable.
ITEM 19 EXHIBITS
The following financial statements and related schedules are included in this
Item:
(a) Financial Statements
Auditors' Report
Consolidated Balance Sheets as at August 31, 2002 and 2001.
Consolidated Statements of Loss and Deficit for the years ended August
31, 2002, 2001, and 2000.
Consolidated Statements of Cash Flows for the years ended August 31,
2002, 2001, and 2000.
Notes to Consolidated Financial Statements.
- 60 -
Consent letter of Auditors dated March 12, 2003.
(b) Exhibits
Exhibit
Number Description
- ------- -----------------------------------------------------------------------
1.1+ Certificate of Incorporation for 307198 B.C. Ltd. dated April 7, 1986.
1.2+ Certificate for 307198 B.C. Ltd. changing name to Fircrest Resources
Ltd. dated July 2, 1986.
1.3+ Certificate for Fircrest Resources Ltd. changing name to NTC Capital
Corporation dated October 30, 1991.
1.4+ Certificate of Change of Name for NTC Capital Corporation changing name
to Sungold Gaming Inc. dated March 1, 1994.
1.5+ Certificate of Change of Name for Sungold Gaming Inc. changing name to
Sungold Gaming International Ltd. dated May 26, 1997.
1.6+ Directors' Resolution, dated March 3, 1998, for Sungold Gaming
International Ltd., amending share capital.
1.7 Altered Memorandum of the Company dated February 22, 2002, effective
June 13, 2002. amending share capital.
4.1+ Option to Purchase Land between A.C. Gilmore and Sons (Farms) Ltd. and
Sungold Gaming International Ltd. dated June 24, 1997.
4.2+ Modification Agreement to Option to Purchase Land between A.C. Gilmore
and Sons (Farms) Ltd. and Sungold Gaming International Ltd. dated July
16, 1998.
4.3+ Priority Agreement between Sungold Gaming International Ltd. and A.C.
Gilmore and Sons (Farms) Ltd. dated July 16, 1998.
4.4+ Letter of Intent between TAC International Investments LLC and Sungold
Gaming International Ltd. dated December 8, 1997.
4.5+ Letter of Intent - Extension between TAC International Investments LLC
and Sungold Gaming International Ltd. dated June 12, 1998.
4.6+ Commitment Letter between Choong-Nam City Gas Co., Ltd. and Sungold
Gaming Inc. dated January 27, 1996.
4.7+ Joint Venture Agreement between Insung Development Co., Ltd. and
Sungold Gaming, Inc. dated December 11, 1996.
4.8+ Letter of Intent between Sungold Gaming, (U.S.A.) Inc. and the Gun Lake
Band of Indians dated September 30, 1994.
4.9+ Letter of Intent between Sungold Gaming, (U.S.A.) Inc. and Gun Lake
Band of Indians dated February 10, 1995.
4.10+ Letter Agreement between Sungold Gaming U.S.A., Inc. and the Gun Lake
Band of Indians dated April 24, 1995.
4.11+ Letter from Hans R. Banziger, Sungold Gaming International Ltd., to
William Loren Church transmitted on July 8, 1997, confirming terms of
Consulting Agreement dated April 15, 1995.
4.12+ Letter from Hans R. Banziger, Sungold Gaming Inc., to William L.
Church dated April 15, 1995.
4.13+ Consulting Agreement between Sungold Gaming U.S.A., Inc. and William
Loren Church dated April 15, 1995.
- 61 -
4.14+ Letter Agreement between Sungold Gaming U.S.A., Inc. and the Gun Lake
Band of Indians dated March 6, 1995.
4.15+ Letter Agreement To Provide Funding between Sungold Gaming U.S.A.,
Inc. and the Gun Lake Band of Indians dated September 30, 1994.
4.16+ Letter from Timothy M. Gladieux, Gladieux Enterprises, Inc., to Kim N.
Hart, Sungold Gaming International Ltd. dated May 31, 1998.
4.17+ Facilitation Fee Agreement between Sungold Gaming Inc. and United Law
Counsellors Ltd. dated October 9, 1995.
4.18+ Preliminary Joint Venture Agreement between Choong-Nam City Gas Co.,
Ltd. and Sungold Gaming Inc. dated November 25, 1996.
4.19+ Royalty Agreement between Sungold Gaming Inc. and United Law
Counsellors Ltd. dated November 29, 1996.
4.20+ Memorandum of Understanding on World Class Destination Resort
Development in South Korea between Sungold Gaming Inc. and Insung
Development Co., Ltd. dated October 3, 1996.
4.21+ Royalty Agreement between Sungold Gaming Inc. and United Law
Counsellors Ltd. dated October 3, 1996.
4.22+ Consulting Agreement between Sungold Gaming International Ltd. and Kim
Noble Hart dated May 1, 1998.
4.23+ Consulting Agreement between Sungold Gaming International Ltd. and
Hans R. Banziger dated January 1, 1994; Amending Agreement between
Sungold Gaming Inc. and Hans R. Banziger dated September 2, 1994;
Letter from Shaun Wylde, Vancouver Stock Exchange, to David R.
Bissett, Scott, Bissett, dated September 2, 1994; Letter from Shaun
Wylde, Vancouver Stock Exchange, to David R. Bissett, Scott, Bissett,
dated April 1995; Letter from Sungold Gaming International Ltd. to
Hans R. Banziger dated July 1, 1998.
4.24+ Consulting Agreement between Sungold Gaming International Ltd. and
Anne Kennedy dated July 1, 1998.
4.25+ Letter of Intent - Extension between TAC International Investments LLC
and Sungold Gaming International Ltd. dated October 14, 1998.
4.26+ Letter from United States Department of Interior to D.K. Sprague dated
August 26, 1998; Memorandum from Bill Church, Gun Lake Project, to Kim
Hart, Sungold Gaming International, Inc. dated August 27, 1998.
4.27+ Gun Lake Band Tribal Resolution No. 98-02 dated July 8, 1998.
4.28+ Participation Agreement between Sungold Gaming International Ltd. And
Toledo Beach Investments, Ltd. Effective December 14, 1998.
4.29+ Letter of Intent - Extension between TAC International Investments LLC
and Sungold Gaming International Ltd. dated October 14, 1998.
4.30+ Letter of Intent - Extension between TAC International Investments LLC
and Sungold Gaming International Ltd. dated February 19, 1999.
4.31+ Letter of Intent - Extension between TAC International Investments LLC
and Sungold Gaming International Ltd. dated September 27, 1999.
4.32+ First Amendment to Participation Agreement between Sungold Gaming
International Ltd. and Toledo Beach Investments, Ltd. effective
February 12, 1999.
4.33+ Second Amendment to Participation Agreement between Sungold Gaming
International Ltd. and Toledo Beach Investments, Ltd. effective
December 3, 1999.
- 62 -
4.34+ License Agreement for Gaming System Technology dated August 20, 1999
among Sungold Gaming International Ltd., New Gaming Generation Pty.
Ltd., an Australian company, and Robert F. Ollington
4.35+ Option Agreement dated September 15, 1999 among Donald Gilmore, Ralph
Gilmore, Ila Gilmore, Ethel Minerva Gilmore, Donald Gilmore and Ethel
Minerva Gilmore as Executors of the Estate of Andrew Carson Gilmore,
deceased, and Sungold Gaming International Ltd.
4.36+ Letter of Intent - Extension between TAC International Investments LLC
and Sungold Entertainment Corp. dated September 29, 2000.
4.37+ Third Amendment to Participation Agreement between Sungold Gaming
International Ltd. and Toledo Beach Investments, Ltd. effective June
29, 2000.
4.38+ Amended Consulting Agreement between Sungold Entertainment Corp. and
Anne Kennedy effective April 1, 2000.
4.39+ Agreement dated March 24, 2000 between the Registrant and Tantalus
Communications Inc.
4.40+ Agreement dated July 11, 2000 between the Registrant and Matrix
Enterprises, L.L.C.
4.41+ Advertising Agreement dated September 25, 2000 between the Registrant
and Diablo Stocks Inc.
4.42+ Agreement dated October 1, 2000 between the Registrant and Computer
Information Network dba Sportsnetwork.com.
4.43+ Lease Agreement dated October 1, 2000 between the Registrant and
Insignia Corporate Establishments (Nine) Inc.
4.44+ Consulting Agreement dated November 24, 2000 between the Registrant
and eWebPlace.com Inc.
4.45+ Consulting and Financial Engagement Agreement dated December 18, 2000
between the Registrant and Robert S. Jones, Sr./Charlie Jarvis.
4.46+ Second Extension Agreement dated February 15, 2001 between the
Registrant and Donna Gilmore, Ralf Gilmore, Ila Gilmour, and Donald
Gilmour and Noel Power as Executors of the Estate of Ethel Minerva
Gilmour and Donald Gilmour as Executor of the Estate of Andrew Carsen
Gilmour (the "Shareholders of A.C. Gilmour & Sons").
4.47+ Consulting Agreement dated February 23, 2001 between the Registrant
and Conscious Committed Corporate Consultants.
4.48+ Advertising Agreement dated March 20, 2001 between the Registrant and
Diablo Stocks Inc.
4.49+ Agreement dated April 3, 2001 between the Registrant and Firecash Ltd.
4.50+ Agreement dated April 4, 2001 between the Registrant and Firecash Ltd.
4.51+ Agreement dated May 1, 2001, as amended May 1, 2001 and June 1, 2001
between the Registrant and Toledo Beach Investments, Ltd.
4.52+ Agreement dated May 2, 2001 between the Registrant and Safespending
Services Inc.
4.53+ Agreement dated May 2, 2001 between the Registrant and Jerome
Nootebos.
4.54+ Advertising Agreement dated May 3, 2001 between the Registrant and
Diablo Stocks Inc.
4.55+ Service Agreement dated May 7, 2001 between the Registrant and NBT
Capital Inc.
4.56+ Company Coverage Agreement dated May 8, 2001 between the Registrant
and Mondial Investors Services, Inc.
4.57+ Consulting Agreement dated May 10, 2001 between the Registrant and
Scotia Wilson International Ltd.
4.58+ Consulting Agreement dated May 14, 2001 between the Registrant and
Jerome Nootebos.
4.59+ Agreement dated July 24, 2001 between the Registrant and Jeff Grant
dba T-Swat Consulting Ltd.
4.60+ Consulting Services Agreement dated July 31, 2001 between the
Registrant and Baltic Investment/World of Investment GmbH.
- 63 -
4.61+ Third Extension Agreement dated August 16, 2001 between the Registrant
and the Shareholders of A.C. Gilmour & Sons.
4.62+ Consulting Services Agreement dated August 21, 2001 between the
Registrant and World of Investment/Baltic Investment GmbH.
4.63+ Consulting Services Agreement dated September 8, 2001 between the
Registrant and Wallstreet Manager Ltd./Baltic Investment Group.
4.64+ Letter of Intent-Extension between TAC International Investments LLC
and the Registrant dated September 28, 2001.
4.65+ Advertising Agreement dated October 26, 2001 between the Registrant
and Diablo Stocks Inc.
4.66+ Promotion Agreement dated December 08, 2001, between the Registrant
and Sina.com.
4.67+ Consulting Agreement dated December 10, 2001, between the Registrant
and Louis Hop Lee.
4.68+ Agreement dated December 11, 2001 between the Registrant and Laykin
Communications Inc.
4.69+ Consulting Agreement dated January 14, 2002, between the Registrant
and Lindsay Malcolm.
4.70+ Consulting Agreement dated January 14, 2002, between the Registrant
and Jeff Grant doing business as T-SWAT Consulting Ltd.
4.71+ Consulting Agreement dated January 14, 2002, between the Registrant
and Alan Weinrib.
4.72 Consulting Agreement dated December 10, 2001, between the Registrant
and Louis Hop Lee.
4.73 Consulting Agreement dated October 16, 2002, between the Registrant and
Robert Zielke.
4.74 Consulting Agreement dated October, 11, 2002, between the Registrant
and Larry Simpson.
4.75 Amendment to Consulting Agreement dated January 2, 2003, between the
Registrant and Kim N. Hart.
4.76 Amendment to Consulting Agreement dated January 2, 2003, between the
Registrant and Anne Kennedy.
4.77 Consulting Agreement dated January 24th, 2003, between the Registrant
and Melvin R. Reeves.
4.78 Consulting Agreement dated January 29, 2003 between the Registrant and
Kenneth Kay.
4.79 Consulting Agreement dated January 31, 2003 between the Registrant and
Brant Little.
8.0 List of Subsidiaries
- ------- -----------------------------------------------------------------------
+ Previously filed.
- 64 -
SUNGOLD ENTERTAINMENT CORP.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
LOEWEN, STRONACH & CO.
Chartered Accountants
LS
LOEWEN, STRONACH & CO.
Chartered Accountants
A partnership of incorporated professionals
7th Floor, 2695 Granville Street, Vancouver, B.C. V6H 3H4
Fax (604) 736-1225 - Telephone (604) 736-1221 - E-mail Isco@telus.net
- --------------------------------------------------------------------------------
AUDITORS' REPORT
To The Shareholders of Sungold Entertainment Corp.:
We have audited the consolidated balance sheet of Sungold Entertainment Corp. as
at August 31, 2002 and August 31, 2001 and the consolidated statements of loss
and deficit and cash flows for the years ended August 31, 2002, 2001 and 2000.
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.
With respect to the financial statements for the year ended August 31, 2002 and
2001, we conducted our audits in accordance with Canadian generally accepted
auditing standards and United States generally accepted auditing standards. With
respect to the financial statements for the year ended August 31, 2000, we
conducted our audits in accordance with Canadian generally accepted auditing
standards. 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, 2002
and 2001 and the results of its operations and cash flows for the years ended
August 31, 2002, 2001 and 2000 in accordance with Canadian generally accepted
accounting principles which differ in certain respects from United States
generally accepted accounting principles (refer to Note 12). As required by the
Company Act of British Columbia, we report that, in our opinion, these
principles have been applied on a consistent basis.
/s/ Loewen Stronach & Co.
Chartered Accountants
Vancouver, BC
December 2, 2002
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
1 to the financial statements. Our report to the shareholders dated December 2,
2002 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.
/s/ Loewen Stronach & Co.
Chartered Accountants
Vancouver, BC, Canada
December 2, 2002
CA Members of
Institute of Chartered Accountants of British Columbia
SUNGOLD ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEET
AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
2002 2001
$ $
--------------------------
ASSETS
CURRENT ASSETS
Cash 23,772 104,194
Prepaid expenses and deposits 374,953 45,767
------------ ------------
398,725 149,961
PRE-DEVELOPMENT COSTS (Note 4) 2,768,316 2,894,225
CAPITAL ASSETS (Note 5) 541,484 695,716
------------ ------------
3,708,525 3,739,902
============ ============
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 32,824 115,710
Loans payable (Note 8 a) 282,187 -
Obligation under capital leases (Note 6) 19,423 16,037
------------ ------------
334,434 131,747
OBLIGATION UNDER CAPITAL LEASES (Note 6) 17,253 36,687
------------ ------------
351,687 168,434
------------ ------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 7) 16,156,646 13,768,636
DEFICIT (12,799,808) (10,197,168)
------------ ------------
3,356,838 3,571,468
------------ ------------
3,708,525 3,739,902
============ ============
APPROVED BY THE DIRECTORS:
/s/ Kim Hart Director
- ---------------------
/s/ Anne Kennedy Director
- ---------------------
(See accompanying notes to financial statements)
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
CONSOLIDATED STATEMENT OF LOSS AND DEFICIT
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
2002 2001 2000
$ $ $
-------------------------------------
REVENUE
Sales 19,446 12,428 -
Foreign exchange gain (loss) (4,526) 12,098 18,438
Interest income 11 2 6
----------- ------------ ----------
14,931 24,528 18,444
----------- ------------ ----------
EXPENSES
Advertising and promotion 808,511 714,709 701,109
Internet services 410,144 151,791 -
Management fees 246,000 246,000 186,500
Professional and consulting fees 242,565 118,716 98,061
Investor relations 169,935 93,927 18,405
Amortization 161,923 142,669 52,388
Travel and conferences 138,468 77,504 114,240
Insurance 71,552 51,449 42,086
Office rent and services 69,017 48,990 49,248
Office and miscellaneous 60,936 70,096 45,753
Transfer agent and filing fees 34,902 24,916 23,789
Prizes 29,085 - -
Interest on capital leases 10,543 3,118 -
Interest and bank charges 4,923 4,149 988
Corporate capital tax 250 - -
----------- ------------ ----------
2,458,754 1,748,034 1,332,567
Write-down of pre-development
costs and investment 158,817 460,574 -
----------- ------------ ----------
2,617,571 2,208,608 1,332,567
----------- ------------ ----------
LOSS 2,602,640 2,184,080 1,314,123
DEFICIT - beginning 10,197,168 8,013,088 6,698,965
----------- ------------ ----------
DEFICIT - ending 12,799,808 10,197,168 8,013,088
=========== ============ ==========
Loss per share 0.0614 0.0780 0.0664
=========== ============ ==========
(See accompanying notes to financial statements)
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
2002 2001 2000
$ $ $
---------------------------------------
OPERATING ACTIVITIES
Loss (2,602,640) (2,184,080) (1,314,123)
Items not involving cash:
Amortization 161,923 142,669 52,388
Write-down of pre-development
costs and investment 158,817 460,574 -
---------------------------------------
(2,281,900) (1,580,837) (1,261,735)
Cash provided by changes in non-
cash working capital items:
Prepaid expenses and deposits (329,186) (4,718) (5,362)
Accounts payable and accrued
liabilities (82,886) (20,977) 58,852
Loans payable 282,187 - -
---------------------------------------
(2,411,785) (1,606,532) (1,208,245)
---------------------------------------
INVESTING ACTIVITIES
Pre-development costs (32,908) (316,358) (623,872)
Acquisition of capital assets (7,690) (416,489) (409,936)
---------------------------------------
(40,598) (732,847) (1,033,808)
---------------------------------------
FINANCING ACTIVITIES
Repayment of capital leases liability (16,049) (4,304) -
Issuance of shares 2,388,010 2,391,331 2,182,351
---------------------------------------
2,371,961 2,387,027 2,182,351
---------------------------------------
INCREASE (DECREASE) IN CASH (80,422) 47,648 (59,702)
CASH - beginning 104,194 56,546 116,248
---------------------------------------
CASH - ending 23,772 104,194 56,546
=======================================
Notes to statement of cash flows:
1) Cash consists of balances with banks
2) Interest and income taxes paid:
Interest paid 15,466 7,267 988
Income taxes paid - - -
(See accompanying notes to financial statements)
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
Note 1 GOING CONCERN AND NATURE OF OPERATIONS
Sungold Entertainment Corp. (the "Company") is incorporated in the Province of
British Columbia under the Company Act (British Columbia), and its principal
activity is developing and promoting horseracing, virtual horseracing and other
internet related products. To date, the Company has not earned significant
revenues and is considered to be in a development stage.
The recoverability of the amounts shown for pre-development costs is primarily
dependent on the ability of the Company to operate the Horsepower World Pool
profitably 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.
These consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses from operations that raise substantial doubt about its ability to
continue as a going concern. These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Currently the Company's shares are trading in the United States on the O.T.C.
bulletin board and on the Frankfurt Stock Exchange, Germany.
Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Commitments and Contingencies
The Company's activities are subject to various governmental laws and
regulations relating to horseracing, virtual horseracing and online jackpot
wagering. These regulations are continually changing. The Company believes its
operations comply in all material respects with all applicable laws and
regulations.
b) Basis of Consolidation
These consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Sungold Entertainment USA, Inc., Horsepower
Broadcasting Network Inc. and Horsepower Broadcasting Network (HBN)
International Ltd. All inter-company transactions and balances have been
eliminated.
c) 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.
/2
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 2 -
Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
d) Pre-development costs
The cost of each pre-development project is capitalized until commercial
production is established. If management determines that a project is not
economically viable, the property and related deferred expenditures are written
off.
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 and commencing the project.
e) Capital Assets and Amortization
Capital assets are recorded at cost with amortization provided on a declining
balance as follows:
Computer equipment 30%
Computers under capital leases 30%
Internet software 20%
The above rate has been utilized to reflect the anticipated life expectancy. In
the year of acquisition only one-half the normal rate is applied.
f) Income Taxes
The Company has adopted the new recommendations of the Canadian Institute of
Chartered Accountants (the "CICA") regarding accounting for income taxes, which
requires the use of asset and 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 period 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.
g) Stock-based Compensation Plans
The Company has a stock-based compensation plan, which is described in Note 7 b)
i). No compensation expense is recognized for these plans when stock options are
issued to members of the Board of Directors. Any consideration paid by members
of the Board of Directors upon exercise of stock options is recorded as an
increase to share capital.
/3
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 3 -
NOTE 3 PRE-DEVELOPMENT COSTS
a) Gun Lake Indian Band project
In 1994 the Company entered into an agreement with the Gun Lake Indian Band
("Band") in Michigan, USA to develop and manage a full service casino and gaming
operation.
The Company had filed a comprehensive lawsuit in the Michigan courts against the
Band. The litigation arose out of notification that the Band would not honour
its agreement with the Company. The Company sued for specific performance and is
seeking damages. The Michigan Court of Appeals court dismissed the appeal on the
basis of the Defendants' claim of sovereign immunity. The Company applied for
permission for a review of these issues with the Michigan Supreme Court.
Recently, the Michigan Court ruled that the State of Michigan is required to
issue a gaming compact to the Gun Lake Tribe.
During the year, no pre-development costs were capitalized under Gun Lake Indian
Band project; legal fees incurred for the Band appeals were expensed through
income statement.
2001 Additions Write off 2002
$ $ $ $
-----------------------------------------------
Consulting and legal fees 1,036,168 - - 1,036,168
Contractual obligation 520,117 - - 520,117
Travel and lodging 213,432 - - 213,432
-----------------------------------------------
1,769,717 - - 1,769,717
-----------------------------------------------
/4
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 4 -
NOTE 3 PRE-DEVELOPMENT COSTS (continued)
b) Vancouver Racecourse / Richmond Equine Training Centre project
In Vancouver, British Columbia, the Company has presented a proposal to renovate
the Hastings Park horse track facility in conjunction with the construction of a
one-mile thoroughbred training centre in Richmond.
The Company had an option to purchase 227 acres in Richmond, British Columbia,
Canada for the purpose of developing a horse training complex, subject to
approval of all zoning and regulatory authorities. The extension agreement gave
the Company the option to purchase 100% of the shares of A.C. Gilmore & Sons
Ltd., the owner of the property, for CDN $20,992,490 until November 30, 2002
(lapsed). (See Subsequent Events Note 11 a).
In September 2002, the Company renegotiated to extend the agreement with a party
who is interested in both the Vancouver one-mile racecourse and the Richmond
equine training centre project. The agreement set out the intention of both
parties that upon the Company receiving the appropriate permission from the City
of Richmond, BC and from the province of British Columbia to develop the
project, the interested party would purchase 6 million common treasury shares of
Sungold Entertainment Corp. at US$4.00 per share by way of a private placement.
The agreement was extended to October 1, 2003. (See Related Party Transactions
Note 8 a).
2001 Additions Write off 2002
$ $ $ $
---------------------------------------------
Consulting and legal fees 801,214 6,412 - 807,626
Option fee 146,447 12,370 (158,817) -
Architectural fees 32,752 - - 32,752
Other direct costs 19,933 1,039 - 20,972
---------------------------------------------
1,000,346 19,821 (158,817) 861,350
---------------------------------------------
/5
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 5 -
NOTE 3 PRE-DEVELOPMENT COSTS (continued)
c) HorsepowerTM Software Development project
On September 15, 1999, the Company incorporated a wholly owned subsidiary,
Horsepower.com Network Inc. in the Province of British Columbia under the
Company Act (British Columbia), and its principal activity is developing
internet wagering and payment processing software. On March 22, 2000, the
subsidiary name changed to Horsepower Network.com Inc., and on January 25, 2001,
the subsidiary name changed to Horsepower Broadcasting Network Inc. ("HBN").
Since 1999 the Company has developed the HorsepowerTM parimutal, random, world
wagering pool which is based on a virtual Horserace system.
Sungold owns the exclusive proprietary rights to operate the Horsepower World
Pool (HPWP), market the Horsepower system, license the system, sell commercial
sponsorships, sell advertising and any other promotion associated with the
system. Sungold reserves the rights to all intellectual property.
HBN acquired computer hardware, developed software and leased a hosting facility
that enables HorsepowerTM to operate on the world wide web 24 / 7 as a $US based
World wagering pool. HBN has engaged its' sister company Horsepower
Broadcasting Network (HBN) International Ltd. to operate their US $ Internet
wagering site.
A major expansion of the Horsepower World Pool is expected in 2003 with many
racetracks in North America and internationally wagering into the Horsepower
World Pool Pick 1 and Pick 6 parimutal pools.
2001 Additions Write off 2002
$ $ $ $
-----------------------------------------
Legal and consulting fees 58,999 - - 58,999
-----------------------------------------
/6
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 6 -
NOTE 4 PRE-DEVELOPMENT COSTS (continued)
d) HorsepowerTM Operating project
On February 20, 2001, the Company incorporated a wholly owned subsidiary,
Horsepower Broadcasting Network (HBN) International Ltd. ("HBN Int'l"), in the
Province of Quebec under the Canada Business Corporation Act. HBN Int'l licensed
by the Kahnawake Gaming Commission and operates on the Kahnawake Territory in
Quebec. It's main activity is operating the Horsepower World Pool parimutal
wagering system. All players have an equal chance to win, wagering in real time
24 / 7 on common parimutuel pools. HorsepowerTM has been tested to
international lottery standards. During the year no predevelopment costs were
capitalized under Horsepower operating project. The Company operates under the
permanent license of the Kahnawake Gaming Commission in Quebec, Canada and the
Company management believes the Company complies in all material respects with
the governing laws and regulations.
e) SafeSpending project
In May 2001, the Company signed an agreement for the acquisition of 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 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 with SafeSpending includes all copyrights, trademarks,
source codes and SafeSpending's intellectual property. Under the terms of
agreement the Company has agreed to pay a 7.5 percent royalty of net revenue of
the Company upon the Company or it's subsidiary Horsepower Broadcasting Network
Inc. receiving $1,000,000 in net revenue from operation, sale or license of the
technology.
(See Subsequent Events Note 11 b.)
-------------------------------------------
2001 Additions Write off 2002
$ $ $ $
---------------------------------------------
Acquisition cost 62,300 - - 62,300
Legal and consulting fees 2,863 13,087 - 15,950
---------------------------------------------
65,163 13,087 - 78,250
---------------------------------------------
2001 Additions Write off 2002
$ $ $ $
---------------------------------------------
TOTAL PRE-DEVELOPMENT
COSTS 2,894,225 32,908 (158,817) 2,768,316
=============================================
/7
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 7-
Note 5 CAPITAL ASSETS
2002 2001
--------------------------------------------
Cost Less Net Book Net Book
Accumulated Value Value
Amortization
$ $ $ $
--------------------------------------------
Internet software 580,020 194,118 385,902 477,224
Computer equipment 258,223 139,760 118,463 165,465
Computers under capital leases 62,378 25,259 37,119 53,027
--------------------------------------------
900,621 359,137 541,484 695,716
============================================
Note 6 OBLIGATION UNDER CAPITAL LEASES
The Company has three lease agreements for computers accounted for as capital
leases. Current payments are $2,094 monthly including applicable taxes, expiring
November 2003 through June 2004.
The following is a schedule of future lease payments
2002 2001
$ $
--------------------
Total minimum lease payments 41,834 65,429
Less amount representing interest (5,158) (12,705)
--------------------
Balance of obligations 36,676 52,724
Less current portion (19,423) (16,037)
--------------------
Non-current portion 17,253 36,687
====================
For next two years:
- 2002 - 16,037
- 2003 19,423 16,037
- 2004 17,253 20,650
--------------------
36,676 52,724
====================
/8
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 8-
Note 7 SHARE CAPITAL
During the year, the Company received regulatory approval to increase its
authorized share capital as approved in the Annual General Meeting held in
February 2002. The authorized common shares were then increased to 100,000,000
shares from 58,875,000 shares, and two classes of preference shares were created
2002 2001
$ $
-------------------------
Authorized:
100,000,000 common shares
without par value
100,000,000 Class "A" Preference
shares with a par value of $10 each
100,000,000 Class "B" Preference
shares with a par value of $50 each
Issued and outstanding:
50,121,209 shares
(2001 - 34,454,543 shares) 16,156,646 13,768,636
=========================
a) Shares issued during the year:
2002 2001
--------------------------------------------
# $ # $
--------------------------------------------
For cash - exercise of share
purchase warrants 516,666 48,162 - -
For cash - exercise of incentive
share purchase options 1,880,000 311,467 4,259,800 576,410
For cash - private placements 13,270,000 2,028,381 7,409,000 1,801,328
--------------------------------------------
15,666,666 2,388,010 11,668,800 2,377,738
For debt settlements - - 610,000 72,883
--------------------------------------------
15,666,666 2,388,010 12,278,800 2,450,621
============================================
/9
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 9-
Note 7 SHARE CAPITAL (continued)
b) i) The Company has a fixed stock option plan which permits the issurance
of options of up to 10% of the Company's issued share capital. The
following are outstanding incentive share purchase options:
#
-----------
100,000 @ US $0.15 each to February 16, 2006
1,050,000 @ US $0.06 each to February 28, 2006
79,900 @ US $0.085 each to March 5, 2006
300,000 @ US $0.12 each to August 10, 2006
100,000 @ US $0.10 each to October 22, 2006
100,000 @ US $0.12 each to October 23, 2006
100,000 @ US $0.09 each to December 20, 2006
802,764 @ US $0.08 each to January 4, 2007
400,000 @ US $0.0725 each to January 24, 2007
136,000 @ US $0.23 each to March 26, 2007
272,000 @ US $0.20 each to May 17, 2007
-----------
3,440,664
===========
In 2001, the Canadian Institute of Chartered Accountants issued Handbook 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 applied to
awards granted on or after the date of adoption. The Company will adopt the
recommendations for the year ended August 31, 2003.
Under this fair value based method, the value of 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 January 1, 2002, the Company has 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
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions:
risk-free interest rate of 3%, dividend yield of 0%, volatility factor of 150%,
and an expected life of 1 year.
/10
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 10 -
Note 7 SHARE CAPITAL (continued)
b) i) Incentive share purchase options (continued)
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 be as follows:
2002 2001
$ $
------------------
Pro forma loss (0.0026) N/A
------------------
Pro forma results may be materially different than actual results realized.
The Black-Scholes 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 January 1, 2002 have
neither been charged to income nor included in the calculation of pro forma
loss, in accordance with Section 3870 of the CICA Handbook, which is to take
effect prospectively.
/11
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 11 -
Note 7 SHARE CAPITAL (continued)
ii) The following are outstanding share purchase warrants:
#
------------
136,000 @ US $0.25 each to October 12, 2002 (1)
150,000 @ US $0.32 each to October 12, 2002 (1)
500,000 @ US $0.33 each to April 20, 2003
400,000 @ US $0.25 each to May 24, 2003
200,000 @ US $0.42 each to June 28, 2003
400,000 @ US $0.30 each to July 31, 2003
240,000 @ US $0.30 each to August 24, 2003
100,000 @ US $0.25 each to August 29, 2003
100,000 @ US $0.30 each to September 6, 2003
800,000 @ US $0.20 each to September 21, 2003
919,000 @ US $0.20 each to October 12, 2003
100,000 @ US $0.20 each to December 22, 2003
900,000 @ US $0.20 each to March 23, 2004
600,000 @ US $0.20 each to March 19, 2004
550,000 @ US $0.20 each to April 5, 2004
1,000,000 @ US $0.20 each to May 8, 2004
1,000,000 @ US $0.20 each to May 29, 2004
1,000,000 @ US $0.20 each to June 27, 2004
1,000,000 @ US $0.20 each to September 7, 2004
420,000 @ US $0.15 each to October 24, 2004
1,000,000 @ US $0.15 each to November 4, 2004
2,333,334 @ US $0.06 each to December 14, 2004
1,700,000 @ US $0.06 each to January 7, 2005
1,000,000 @ US $0.06 each to January 30, 2005
300,000 @ US $0.11 each to March 1, 2005
1,000,000 @ US $0.17 each to March 26, 2005
1,000,000 @ US $0.165 each to April 4, 2005
400,000 @ US $0.16 each to May 7, 2005
600,000 @ US $0.15 each to May 30, 2005
2,500,000 @ US $0.075 each to July 10, 2005
250,000 @ US $0.08 each to July 24, 2005
100,000 @ US $0.09 each to August 21, 2005
------------
22,698,334
============
(1) See Subsequent Events note 11 (g)
/12
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 12 -
Note 8 RELATED PARTY TRANSACTIONS
a) Loans payable of $282,187 (US$181,028) is from a director and officer of
the Company.
b) The Company entered into an intention agreement, on December 8, 1997, to
an entity with a common director, for its Richmond/Vancouver Horseracing
project. The agreement was re-extended to October 1, 2003. In the agreement, the
interested party would purchase 6 million common treasury shares of Sungold
Entertainment Corp. at US$4 per share by way of a private placement upon the
Company receiving the appropriate permission from the government agencies. (See
Pre-development Costs Note 3 c).
c) During the year management fees of $246,000 were paid to the directors
and officers.
d) During the year consulting fees of $76,102 were paid to the directors or
entity with a common director.
Note 9 FINANCIAL INSTRUMENTS
The carrying value of cash and accounts payable and accrued liabilities
reflected in the balance sheet approximate their respective fair value.
Note 10 ACCUMULATED LOSSES
The company has accumulated non-capital losses for income tax purposes of
$7,715,493 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
$
- --------------------
2003 629,337
2004 543,932
2005 474,086
2006 653,279
2007 1,306,106
2008 1,714,246
2009 2,394,507
----------
7,715,493
==========
The company has accumulated capital losses for income tax purposes of $1,126,136
that may be carried forward indefinitely and used to reduce capital gains in the
future.
/13
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 13 -
Note 11 SUBSEQUENT EVENTS
a) The Company is in a process of renegotiating the extension of the option
to purchase 227 acres in Richmond, British Columbia. (See Pre-development Costs
Note 3 b)
b) The Company is in the process to incorporating a new subsidiary,
SafeSpending Limited, in the Channel Islands for its SafeSpending Project.
c) In September 2002, the Company received $185,388 (US$120,000) from a
subscriber for 1,500,000 July 23, 2002 private placement units at US$0.08 each.
d) On September 27, 2002, the Company announced a private placement of
3,000,000 units at US$0.08 each. The Company received $373,848 (US$240,000) from
a subscriber for 3,000,000 units in October.
e) On October 11, 2002, the Company granted 200,000 stock options to a
director at an exercise price of US$0.15 each.
f) On October 16, 2002, the Company granted 300,000 stock options to a
director at an exercise price of US$0.15 each.
g) 136,000 October 12, 2002 share purchase warrants at US$0.25 each and
150,000 October 12, 2002 share purchase warrants at US$0.32 each expired after
the year-end.
h) On November 1, 2002, the Company announced a private placement of
1,000,000 units at US$0.075 each. The Company received $115,672 (US$75,000) from
a subscriber for 1,000,000 units in November 2002.
i) On November 12, 2002, the Company announced a private placement of
1,000,000 units at US$0.08 each. The Company received $123,800 (US$80,000) from
a subscriber for 1,000,000 units in November 2002.
j) On November 28, 2002, the Company announced a private placement of
1,000,000 units at US$0.06 each. The Company received $92,850 (US$60,000) from
subscribers for 1,000,000 units in November 2002.
/14
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 14 -
Note 12 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. 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) Share Options
Under US GAAP, granting of share options to employees and directors may give
rise to a charge to income for compensation. For the purposes of this
reconciliation from CDN GAAP to US GAAP, the Company has prepared its financial
statements in accordance with Accounting Principles Board (APB) 25 under which
share options are measured by the intrinsic value method whereby employee and
director compensation cost is limited to the excess of the quoted market price
at date of grant over the option exercise price. Since the exercise price
equalled the quoted market price at the dates the share options were granted,
there were no compensation costs to be recognized.
d) Loss per share
For all years indicated, the options and warrants outstanding during the year
are anti-dilutive and therefore fully diluted loss per share has not been
disclosed.
/15
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 15 -
Note 12 UNITED STATES ACCOUNTING PRINCIPLES (continued)
e) 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 period expect 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.
f) The following are balance sheet items under US GAAP:
2002 2001 2000
$ $ $
------------------------------------------
Pre-development costs - - -
Share capital 20,867,384 18,479,374 16,088,043
Foreign currency adjustments 23,909 28,435 16,337
Deficit (20,302,771) (17,830,566) (15,778,604)
g) The following table summarizes the effect on Deficit of differences
between CDN GAAP and US GAAP:
2002 2001 2000
$ $ $
-----------------------------------------
Deficit - CDN GAAP (12,799,808) (10,197,168) (8,013,088)
Cumulative effect of prior
years' adjustments (7,633,398) (7,765,516) (7,123,206)
-----------------------------------------
(20,433,206) (17,962,684) (15,136,294)
-----------------------------------------
US GAAP material adjustments:
- - Effect of the write-off of
pre-development costs on net loss 125,909 144,216 (623,872)
- - Foreign currency adjustments 4,526 (12,098) (18,438)
-----------------------------------------
130,435 132,118 (642,310)
-----------------------------------------
Deficit - US GAAP (20,302,771) (17,830,566) (15,778,604)
=========================================
/16
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 16 -
Note 12 UNITED STATES ACCOUNTING PRINCIPLES (continued)
h) The following table summarizes the effect on shareholders' equity after
considering the US GAAP adjustments:
Foreign Total
Common Accumulated Currency Shareholders'
Shares Deficit Translation Equity
Amount Adjustments
$ $ $ $
-----------------------------------------------------
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
- 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
/17
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 17 -
Note 12 UNITED STATES ACCOUNTING PRINCIPLES (continued)
Foreign Total
Common Accumulated Currency Shareholders'
Shares Deficit Translation Equity
Amount Adjustments
$ $ $ $
-----------------------------------------------------
August 31, 1995
- - balance forward 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
- 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
=====================================================
/18
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 18 -
Note 12 UNITED STATES ACCOUNTING PRINCIPLES (continued)
i) The following table summarizes the effect on Net Loss of differences
between CDN GAAP and US GAAP:
Cumulative 2002 2001 2000
Amounts
From
Apr 7/86 to
Aug 31/02
$ $ $ $
---------------------------------------------------
Net loss under CDN GAAP (12,799,808) (2,602,640) (2,184,080) (1,314,123)
US GAAP material
adjustments:
- - Effect of the write-off
of pre-development
costs on net loss (2,768,316) 125,909 144,216 (623,872)
- - Share-based compensation (4,710,738) - - -
- - Foreign currency
adjustments (23,909) 4,526 (12,098) (18,438)
---------------------------------------------------
Net loss under US GAAP (20,302,771) (2,472,205) (2,051,962) (1,956,433)
===================================================
Loss per share under
US GAAP 0.06 0.07 .10
=====================================
Weighted average number
of shares 42,409,898 27,991,260 19,785,894
=====================================
/19
Loewen, Stronach & Co. Chartered Accountants
SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
(A Development Stage Company)
(Presented in Canadian Dollars)
PAGE - 19 -
Note 12 UNITED STATES ACCOUNTING PRINCIPLES (continued)
j) The following income statement shows cumulative amounts from the
Company's inception after considering the U.S. GAAP adjustments:
Cumulative
Amounts
From
Apr 7/86 to
Aug 31/02
$
-------------
REVENUE
Gain on disposition of marketable securities 838,947
Interest income and miscellaneous 43,324
Foreign exchange gain (loss) 23,909
Sales 31,874
-------------
938,054
-------------
EXPENSES
Advertising and promotion 2,544,314
Management fees 1,542,650
Professional and consulting 1,419,004
Investor relations 786,472
Automotive, travel and conference 664,620
Office and miscellaneous 569,926
Office rent and services 375,872
Transfer agent and filing fees 259,242
Amortization 382,594
Financing fees 218,000
Finders fees 154,031
Internet services 561,935
Insurance 200,920
Interest and bank charges 130,907
Settlement of agreement 40,000
Prizes 29,085
Fees and commissions 29,741
Interest on capital leases 13,661
Quebec capital tax 250
-------------
9,923,224
Write-down of investments 3,814,638
-------------
13,737,862
-------------
LOSS AND DEFICIT UNDER CDN GAAP 12,799,808
US GAAP material adjustments:
Effect of the write-off of pre-development costs 2,768,316
Share-based compensation 4,710,738
Foreign currency adjustments 23,909
-------------
LOSS AND DEFICIT UNDER US GAAP 20,302,771
=============
Loewen, Stronach & Co. Chartered Accountants
LS
LOEWEN, STRONACH & CO.
Chartered Accountants
A partnership of incorporated professionals
7th Floor, 2695 Granville Street, Vancouver, B.C. V6H 3H4
Fax (604) 736-1225 - Telephone (604) 736-1221 - E-mail Isco@telus.net
- --------------------------------------------------------------------------------
March 12, 2003
Sungold Entertainment Corp.
Use of Financial Statements
We hereby consent to the use of the following financial statements in the Form
20-F for the fiscal year ended:
- Audited financial statements for the year ended August 31, 2002;
/s/ Loewen Stronach & Co.
-----------------------------
Loewen, Stronach & Co.
CA Members of
Institute of Chartered Accountants of British Columbia
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 ENTERTAINMENT CORP.
Date: March 12, 2003 By: /s/ Kim N Hart
British Columbia, Canada President and C.E.O.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Kim N. Hart, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form
20-F of Sungold Entertainment Corp. for the year ended August 31, 2002 fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that the information contained in the Annual Report on
Form 20-F fairly presents in all material respects the financial condition and
results of operations of Sungold Entertainment Corp.
By: /s/ Kim N. Hart
----------------------------
Name: Kim N. Hart
Title: Chief Executive Officer
Date: March 10, 2003
I, Donald R. Harris, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report on Form 20-F of Sungold Entertainment Corp. for the year ended August 31,
2002 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that the information contained in the Annual
Report on Form 20-F fairly presents in all material respects the financial
condition and results of operations of Sungold Entertainment Corp.
By: /s/ Donald R. Harris
----------------------------
Name: Donald R. Harris
Title: Chief Financial Officer
Date: March 10, 2003
CERTIFICATONS
I, Kim N. Hart, certify that:
1. I have reviewed this annual report on Form 20-F of Sungold Entertainment
Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14 for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 10, 2003 /s/: Kim N. Hart
--------------------------------
Kim N. Hart
Chief Executive Officer
I, Donald R. Harris, certify that:
1. I have reviewed this annual report on Form 20-F of Sungold Entertainment
Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14 for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 10, 2003 /s/: Donald R. Harris
-------------------------------
Donald R. Harris
Chief Financial Officer