EX-99.1 3 exhibit99-1.htm ANNUAL CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 2003 Filed by Automated Filing Services Inc. (604) 609-0244 - Sungold Entertainment Corp. - Exhibit 99.1

SUNGOLD ENTERTAINMENT CORP.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)

(Presented in Canadian Dollars)

LOEWEN, STRONACH & CO.
Chartered Accountants

AUDITORS' REPORT

To The Shareholders of Sungold Entertainment Corp.:

We have audited the consolidated balance sheet of Sungold Entertainment Corp. (a development stage company) as at August 31, 2003 and 2002 and the consolidated statements of loss and deficit and cash flows for the years ended August 31, 2003, 2002 and 2001 and for the cumulative period from April 7, 1986 (inception) to August 31, 2003. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards and United States 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, 2003 and 2002 and the results of its operations and cash flows for the years ended August 31, 2003, 2002 and 2001 and for the cumulative period from April 7, 1986 (inception) to August 31, 2003 in accordance with Canadian generally accepted accounting principles which differ in certain respects from United States generally accepted accounting principles (refer to Note 13). As required by the Company Act of British Columbia, we report that, in our opinion, these principles have been applied on a consistent basis.

  “Loewen, Stronach & Co.”
   
  Chartered Accountants
   
Vancouver, BC  
December 4, 2003  

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 4, 2003 is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditors’ report when these are adequately disclosed in the financial statements.

  “Loewen, Stronach & Co.”
   
  Chartered Accountants
Vancouver, BC  
December 4, 2003  

SUNGOLD ENTERTAINMENT CORP.

CONSOLIDATED BALANCE SHEET

AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

2003   2002  
$   $  
ASSETS
         
CURRENT ASSETS        
         Cash 47,928   23,772  
         Prepaid expenses and deposits 4,154   374,953  
52,082   398,725  
PRE-DEVELOPMENT COSTS (Note 3) 762,042   2,768,316  
CAPITAL ASSETS (Note 4) 604,282   541,484  
1,418,406   3,708,525  
         
LIABILITIES
         
CURRENT LIABILITIES        
         Accounts payable and accrued liabilities 175,238   32,824  
         Loans payable (Note 7 a) 17,390   282,187  
         Obligation under capital leases (Note 5) 17,253   19,423  
209,881   334,434  
OBLIGATION UNDER CAPITAL LEASES (Note 5) -   17,253  
209,881   351,687  
         
SHAREHOLDERS’ EQUITY
         
SHARE CAPITAL (Note 6) 18,574,369   16,156,646  
CONTRIBUTED SURPLUS 51,922   -  
DEFICIT ACCUMULATED DURING DEVELOPMENT STAGE (17,417,766 ) (12,799,808 )
1,208,525   3,356,838  
1,418,406   3,708,525  

APPROVED BY THE DIRECTORS:

“Art Cowie”                                    Director

“Anne Kennedy”                           Director

(See accompanying notes to consolidated financial statements)

SUNGOLD ENTERTAINMENT CORP.

CONSOLIDATED STATEMENT OF LOSS AND DEFICIT

FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

  April 7, 1986              
  (inception) to              
  August 31, 2003   2003   2002   2001  
  $   $   $   $  
                 
REVENUE                
         Sales 33,179   1,305   19,446   12,428  
         Interest income and miscellaneous 43,336   12   11   2  
         Gain on disposition of marketable securities 838,947   -   -   -  
  915,462   1,317   19,457   12,430  
                 
EXPENSES                
         Advertising and promotion 3,139,255   594,941   808,511   714,709  
         Management fees 1,829,253   286,603   246,000   246,000  
         Professional and consulting fees 1,966,833   547,829   242,565   118,716  
         Investor relations 1,001,315   214,843   169,935   93,927  
         Travel and conferences 865,849   201,229   138,468   77,504  
         Internet services 746,184   184,249   410,144   151,791  
         Office and miscellaneous 733,970   164,044   60,936   70,096  
         Amortization 527,210   144,616   161,923   142,669  
         Office rent and services 456,467   80,595   69,017   48,990  
         Transfer agent and filing fees 292,320   33,078   34,902   24,916  
         Insurance 262,390   61,470   71,552   51,449  
         Financing fees 218,000   -   -   -  
         Finder fees 154,031   -   -   -  
         Interest and bank charges 139,221   8,314   4,923   4,149  
         Stock based compensation 51,922   51,922   -   -  
         Settlement agreement 40,000   -   -   -  
         Prizes 34,726   5,641   29,085   -  
         Fees and commissions 29,741   -   -   -  
         Interest on capital leases 25,623   11,962   10,543   3,118  
         Corporate capital tax 500   250   250   -  
         Foreign exchange loss (gain) (13,640 ) 10,269   4,526   (12,098 )
  12,501,170   2,601,855   2,463,280   1,735,936  
         Impairment write-down of pre-development                
            costs and investment 5,832,058   2,017,420   158,817   460,574  
  18,333,228   4,619,275   2,662,097   2,196,510  
LOSS 17,417,766   4,617,958   2,602,640   2,184,080  
DEFICIT ACCUMULATED DURING                
         DEVELOPMENT STAGE – beginning -   12,799,808   10,197,168   8,013,088  
DEFICIT ACCUMULATED DURING                
         DEVELOPMENT STAGE – ending 17,417,766   17,417,766   12,799,808   10,197,168  
                 
Weight Average Number of Shares     63,900,867   42,409,898   27,991,260  
Adjusted for Sept 8, 2003, 21 for 20 stock split                
         (Note 10)     3,993,531   3,993,531   3,993,531  
      67,894,398   46,403,429   31,984,791  
                 
Loss per share     0.0680   0.0560   0.0682  

(See accompanying notes to consolidated financial statements)

SUNGOLD ENTERTAINMENT CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

  April 7, 1986              
  (inception) to              
  August 31   2003   2002   2001  
  2003   $   $   $  
  $              
                 
OPERATING ACTIVITIES                
         Loss (17,417,766 ) (4,617,958 ) (2,602,640 ) (2,184,080 )
         Items not involving cash:                
                  Amortization 527,210   144,616   161,923   142,669  
                  Debt settled by issuance of private                
                     placements units 582,561   582,561   -   -  
                  Stock-based compensation 51,922   51,922   -   -  
                  Write-down of pre-development costs and                
                     investment 5,832,057   2,017,420   158,817   460,574  
                  Gain on disposition of marketable securities (838,947 ) -   -   -  
                  Loss on disposition of capital assets 14,032   -   -   -  
  (11,248,931 ) (1,821,439 ) (2,281,900 ) (1,580,837 )
         Cash provided by changes in non-cash                
                  Working capital items:                
                  Prepaid expenses and deposits (4,154 ) 370,799   (329,186 ) (4,718 )
                  Accounts payable and accrued liabilities 175,238   142,414   (82,886 ) (20,977 )
                  Loans payable 17,390   (264,797 ) 282,187   -  
  (11,060,457 ) (1,573,023 ) (2,411,785 ) (1,606,532 )
INVESTING ACTIVITIES                
         Pre-development costs (5,206,715 ) (11,146 ) (32,908 ) (316,358 )
         Acquisition of capital assets (1,103,025 ) (207,414 ) (7,690 ) (416,489 )
  (6,309,740 ) (218,560 ) (40,598 ) (732,847 )
                 
FINANCING ACTIVITIES                
         Repayment of obligation under capital leases (39,776 ) (19,423 ) (16,049 ) (4,304 )
         Issuance of shares 15,717,808   1,835,162   2,388,010   2,391,331  
         Proceed of disposition of marketable securities 1,725,747   -   -   -  
         Proceeds of disposition of capital assets 14,346   -   -   -  
  17,418,125   1,815,739   2,371,961   2,387,027  
                 
INCREASE (DECREASE) IN CASH 47,928   24,156   (80,422 ) 47,648  
CASH – beginning -   23,772   104,194   56,546  
CASH – ending 47,928   47,928   23,772   104,194  

Notes to statement of cash flows:                
                   
1) Cash consists of balances with banks                
                   
2) Interest and income taxes paid: 164,844   20,276   15,466   7,267  
  Interest paid                
  Income taxes paid -   -   -   -  
                   
3) During the year, the Company issued 11,750,000 private placement units to settle $582,561of debts    

(See accompanying notes to consolidated financial statements)

SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(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) (See Note 11 a), and its principal activity is developing and promoting horseracing, virtual horseracing, internet payment systems 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 put its pre-development projects into economically viable products in the future. The Company plans to meet anticipated financing needs in connection with its obligations by the exercise of stock options, share purchase warrants, and through private placements, public offerings or joint-venture participation by others.

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.

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, online jackpot wagering copyrights, trademarks and patents. These regulations are continually changing. The Company believes its activities comply in all material respects with all applicable laws and regulations.
     
 
b)

Use of estimates

The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities at the date of financial statements and revenue and expenses for the period reported. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant. Actual results will likely differ from those estimates.
     
 
c)

Basis of Consolidation

These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, SafeSpending Inc. (formerly Sungold Entertainment USA, Inc.), Horsepower Broadcasting Network Inc., Horsepower Broadcasting Network (HBN) International Ltd. and Racing Unified Network (R.U.N.) Inc. (incorporated June 26, 2003). All inter-company transactions and balances have been eliminated.
     
 
d)

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.

SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
       
  d)

Translation of Foreign Currencies (continued):

Gains and losses resulting from the fluctuation of foreign exchange rates are included in the determination of income.

     
  e)

Pre-development costs

The Company is in the development stage and capitalizes all costs related to its pre-development projects in accordance with Accounting Guideline No. 11, “Enterprises in the Development Stage”, issued by the Canadian Institute of Chartered Accountants. The management assess annually whether the recovery of the unamortized balance of these costs from the future operations can continue to be regarded as probable. When the unamortized balance is determined to exceed the expected amount of recovery through future related revenues, less relevant costs, the deferred pre-development costs are impaired and are written down to fair value.

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.

     
  f)

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%  
      Furniture and fixtures 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.
     
  g)

Income Taxes

Income taxes are provided for in accordance with the liability method. Under this method of tax allocation, future income tax assets and liabilities are determined based on differences between the financial statements carrying values and their respective income tax bases (temporary differences). Future income tax assets and liabilities are measured using the enacted tax rates expected to be in effect when the temporary differences are likely to reverse. The effect on future income tax assets and liabilities of a change in rates is included in operations in the 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.

     
  h)

Loss Per Share

Loss per share is determined using the treasury stock method on the weighted average number of shares outstanding during the year. All outstanding options, purchase warrants and private placement units are anti-dilutive, and therefore have no effect on the determination of loss per share.


SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
     
  i)

Stock-based Compensation Plans

The Company has adopted prospectively the recommendations of the Canadian Institute of Chartered Accountants (the “CICA”) Section 3870 – stock-based compensation and other stock-based payments regarding accounting for stock-based compensation, which requires the use of fair value based method prospectively.

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. The Company has a stock-based compensation plan, which is described in Note 6 b).

     
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. In 1999, the Band beached the agreement. As a consequent, the Company filed a comprehensive lawsuit in the Michigan courts against the Band. In 2002, the Michigan Court of Appeals court dismissed the appeal on the basis of the Defendants’ claim of sovereign immunity. During the current fiscal year, the Michigan Supreme Court denied the Company an application to appeal the Michigan Court of Appeals court decision and the Company decided not to appeal to the United States Supreme Court..

The management believes that the Company could receive compensation of damages from parties that caused the beach of agreement, but the likelihood for the success of a lawsuit cannot be determined. After assessing the Michigan courts decisions; and considering the project has been delayed for more than three years, the management decided to provide an impairment write-off on the Gun Lake project.


            Impairment    
      2002 Additions Write-off   2003
      $ $ $   $
               
    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 ) -
               
  b)

Vancouver Racecourse / Richmond Equine Training Centre project

In November 2002, the option to purchase 227 acres in Richmond, British Columbia, Canada for the purpose of developing a horse training complex expired, and the Company did not obtain a new option to purchase 100 acres on the same property. Consequently, the Company wrote-off all deferred expenditure that were related directly to the option property.


SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

  b)

Vancouver Racecourse / Richmond Equine Training Centre project (Continued)

The Company is continuously lobbying with the regulatory authorities on its proposal to renovate the Hastings Park horse track facility in Vancouver, British Columbia, in conjunction with the construction of a one-mile thoroughbred training centre in Richmond.

In September 2003, 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 Cities of Vancouver and 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, 2004. (See Related Party Transactions Note 7 a).


             Impairment    
      2002 Additions Write off   2003
      $ $ $   $
    Consulting and legal fees 807,626 1,680 (195,507 ) 613,799
    Architectural fees 32,752 - (32,752 ) -
    Other direct costs 20,972 - (19,444 ) 1,528
      861,350 1,680 (247,703 ) 615,327
               
  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 (BC) to develop a virtual Horserace wagering system - HorsepowerTM. 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. (“HBNI”). Sungold reserves the rights to all intellectual property.

HBNI acquired computer hardware for developing software and leased a hosting facility that enables HorsepowerTM to operate the $US based World wagering pool at licensed racetracks and licensed teletheatres worldwide. HBNI engaged it’s sister company Horsepower Broadcasting Network (HBN) International Ltd. to test run their US $ wagering program through the World Wide Web. The hardware and software development costs are capitalized under capital assets and amortized annually.


            Impairment  
      2002 Additions Write off 2003
      $ $ $ $
    Legal and consulting fees 58,999 - - 58,999

SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

NOTE 3 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”), in the Province of Quebec under the Canada Business Corporation Act. HBN operated under the Horsepower World Pool pari-mutual licensing system licensed by the Kahnawake Gaming Commission and operates on the Kahnawake Territory in Quebec. In March 2003, HBN made a strategic decision to offer Horsepower pari-mutual wagering and the Horsepower World Pool, exclusively through licensed, land based Racetrack and Teletheatres and to grant 20 year licenses for Horsepower Parimutual World Pool Wagering, to authorized racing affiliates worldwide. During the year no predevelopment costs were capitalized under HorsepowerTM operating project. 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 acquired the entire world wide right, title and interest to the internet payment system technology of SafeSpending from SafeSpending Services Inc. The SafeSpending internet payment system will be a prepaid spending system that uses a unique and personalized PIN number which can be used to make anonymous purchases online from merchants and individuals. The acquisition agreement includes all copyrights, trademarks, source codes and SafeSpending’s intellectual property. Under the terms of agreement the 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.

In May 2003, the Company changed the name of its US subsidiary, Sungold Entertainment USA Inc., to SafeSpending, Inc. and intends to set up a SafeSpending operation in USA.


            Impairment    
      2002 Additions Write off   2003
      $ $ $   $
    Acquisition cost 62,300 - -   62,300
    Legal and consulting fees 15,950 9,466 -   25,416
      78,250 9,466 -   87,716
               
          Impairment    
      2002 Additions Write off   2003
      $ $ $   $
               
  TOTAL PRE-DEVELOPMENT COSTS 2,768,316 11,146 (2,017,420 ) 762,042

SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

Note 4 CAPITAL ASSETS

          2003   2002
      Cost Less Net Book Net Book
        Accumulated Value Value
        Amortization    
      $ $ $ $
    Internet software – HorsepowerTM 761,104 289,407 471,697 385,902
    Computer equipment 266,340 180,721 85,619 118,463
    Computers under capital leases 54,834 31,050 23,784 37,119
    Furniture and fixtures 25,758 2,576 23,182 -
             
      1,108,036 503,754 604,282 541,484
     
Note 5

OBLIGATION UNDER CAPITAL LEASES

The Company has two lease agreements for computers accounted for as capital leases. Current payments are $1,822 monthly, expiring April 2004 through June 2004. The following is a schedule of future lease payments


      2003   2002  
      $   $  
    Total minimum lease payments 18,252   41,834  
    Less amount representing interest (999 ) (5,158 )
    Balance of obligations 17,253   36,676  
    Less current portion (17,253 ) (19,423 )
    Non-current portion -   17,253  
             
  In August 2003, the Company exercised a buy option to purchase a computer under capital lease.
   
Note 6

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 2003. The authorized common shares were then increased to unlimited from 100,000,000 shares (See subsequent event note 11 c).


2003 2002
$ $
    Authorized:    
             Unlimited 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:    
                 79,871,209 common    
                      (2002 – 50,121,209 common) 18,574,369 16,156,646

SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

Note 6 SHARE CAPITAL (continued)
     
  a) Shares issued during the year:

   2003   2002  
#   $   #   $  
    For cash – private placements 16,000,000   1,673,938   13,270,000   2,028,381  
        – exercise of share                
           purchase warrants 2,000,000   161,224   516,666   48,162  
        – exercise of incentive share                
           purchase options -   -   1,880,000   311,467  
18,000,000   1,835,162   15,666,666   2,388,010  
    For debt – private placements 11,750,000   582,561   -   -  
29,750,000   2,417,723   15,666,666   2,388,010  
     
  b)

Stock options and stock based compensation

The Company has a fixed stock option plan on the issuance of options of up to 10% of the Company’s issued share capital. The following are outstanding incentive share purchase options:


Date of Grant Price Balance
Aug 31, 2002		 Granted Exercised
/ Expired		 Balance
Aug 31, 2003		 Expiration date
Feb. 16, 2001 US$0.1500 100,000 - - 100,000 February 16, 2006
Feb. 28, 2001 US$0.0600 1,050,000 - - 1,050,000 February 28, 2006
Mar. 5, 2001 US$0.0850 79,900 - - 79,900 March 5, 2006
Aug. 10, 2001 US$0.1200 300,000 - - 300,000 August 10, 2006
Oct. 22, 2001 US$0.1000 100,000 - - 100,000 October 22, 2006
Oct. 23, 2001 US$0.1200 100,000 - - 100,000 October 23, 2006
Dec. 20, 2001 US$0.0900 100,000 - - 100,000 December 20, 2006
Jan. 4, 2002 US$0.0800 802,764 - - 802,764 January 4, 2007
Jan. 24, 2002 US$0.0725 400,000 - - 400,000 January 24, 2007
Mar 26, 2002 US$0.2300 136,000 - 136,000 - Cancelled
May 17, 2002 US$0.0200 272,000 - - 272,000 May 17, 2007
Oct. 11, 2002 US$0.1500 - 200,000 - 200,000 October 11, 2007
Oct. 16, 2002 US$0.1500 - 300,000 - 300,000 October 16, 2007
Jan. 23, 2003 US$0.1100 - 136,000 - 136,000 January 23, 2008
Jan. 28, 2003 US$0.1000 - 750,000 750,000 - Cancelled
May 27, 2003 US$0.0500 - 64,000 - 64,000 May 27, 2008
May 28, 2003 US$0.0500 - 150,000 - 150,000 May 28, 2008
             
    3,440,664 1,600,000 886,000 4,154,664  

   

In 2001, the Canadian Institute of Chartered Accountants issued Section 3870 for Stock-based Compensations, which requires the use of fair value based method for fiscal years beginning on or after January 1, 2002 and applied to awards granted on or after the date of adoption. The Company adopted the recommendations prospectively for the fiscal year starting September 1, 2002.

Under this fair value based method, the value of 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.

SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

Note 6 SHARE CAPITAL (continued)
       
  b) Stock options and stock based compensation (continued)
       
     
Since September 1, 2002, the Company granted 850,000 share purchase options to employees and non-employees as follows:

Date of Grant Price Granted
#		 Exercisable
#		 Exercised
#		 Compensation
$		 Expiration date
Oct. 11, 2002 US$0.1500 200,000      200,000      - 16,600      October 11, 2007
Oct. 16, 2002 US$0.1500 300,000      300,000      - 24,900      October 16, 2007
Jan. 23, 2003 US$0.1100 136,000      136,000      - 8,282      January 23, 2008
May 27, 2003 US$0.0500 64,000      64,000      - 640      May 27, 2008
May 28, 2003 US$0.0500 150,000      150,000      - 1,500      May 28, 2008
             
    850,000      850,000      - 51,922       

     
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 3.00%  
             Dividend yield 0  
             Estimated hold period prior to exercise (years) 3  
             Volatility in the price of the Company’s common shares 150%  
           
     

Between January 1, 2002 and August 31, 2002, the Company granted 946,764 share purchase options to directors at US$0.08 per share until Jan 4, 2007, 136,000 share purchase options to a director at US$0.08 per share until Jan 15, 2007, 400,000 share purchase options to a director at US$0.0725 per share until Jan 24, 2007, 136,000 share purchase options to a director at US$0.23 per share until March 26, 2007 and 272,000 share purchase options to a director at US$0.20 per share until May 17, 2007.

Had compensation cost of the stock based employee compensation been recorded, based upon the fair value of share options, additional compensation expense for the year ended August 31, 2002 would have been $111,430. The pro forma loss per share, assuming this additional compensation expense would have been ($0.0584). The Pro forma results may be materially different than actual results realized.

The Black-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.


SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

Note 6 SHARE CAPITAL (continued)
     
  c) Share purchase warrants:

Date of Grant Price Balance
Aug 31, 2002		 Granted Exercised Cancelled
/ Expired		 Balance
Aug 31, 2003		 Expiration date
Oct. 12, 1999 US$0.250 136,000 - - 136,000 - October 12, 2002
Oct. 12, 1999 US$0.320 150,000 - - 150,000 - October 12, 2002
Apr. 20, 2000 US$0.330 500,000 - - 500,000 - Voluntary request
May 24, 2000 US$0.250 400,000 - - 400,000 - Voluntary request
Jun. 28, 2000 US$0.420 200,000 - - 200,000 - Voluntary request
Jul. 31, 2000 US$0.300 400,000 - - 400,000 - Voluntary request
Aug.24, 2000 US$0.300 240,000 - - 240,000 - Voluntary request
Aug. 29, 2000 US$0.250 100,000 - - 100,000 - Voluntary request
Sep.6, 2000 US$0.300 100,000 - - 100,000 - Voluntary request
Sep.21, 2000 US$0.200 800,000 - - 800,000 - Voluntary request
Oct.12, 2000 US$0.200 919,000 - - 600,000 319,000 (1)October 12, 2003
Dec.22, 2000 US$0.200 100,000 - - 100,000 - Voluntary request
Mar.23, 2001 US$0.200 900,000 - - 900,000 - Voluntary request
Mar.19, 2001 US$0.200 600,000 - - 600,000 - Voluntary request
April 5, 2001 US$0.200 550,000 - - 550,000 - Voluntary request
May 8, 2001 US$0.200 1,000,000 - - 1,000,000 - Voluntary request
May 29, 2001 US$0.200 1,000,000 - - 1,000,000 - Voluntary request
Jun.27, 2001 US$0.200 1,000,000 - - 1,000,000 - Voluntary request
Sep.7, 2001 US$0.200 1,000,000 - - - 1,000,000 September 7, 2004
Oct.24, 2001 US$0.150 420,000 - - - 420,000 October 24, 2004
Nov.4, 2001 US$0.150 1,000,000 - - - 1,000,000 November 4, 2004
Dec.14, 2001 US$0.060 2,333,334 - - - 2,333,334 December 14, 2004
Jan.7, 2002 US$0.060 1,700,000 - - - 1,700,000 January 7, 2005
Jan.30, 2002 US$0.060 1,000,000 - - - 1,000,000 January 30, 2005
Mar.1, 2002 US$0.110 300,000 - - - 300,000 March 1, 2005
Mar.26, 2002 US$0.170 1,000,000 - - - 1,000,000 March 26, 2005
Apr. 4, 2002 US$0.165 1,000,000 - - - 1,000,000 April 4, 2005
May 7, 2002 US$0.160 400,000 - - - 400,000 May 7, 2005
May 30, 2002 US$0.150 600,000 - - - 600,000 May 30, 2005
Jul. 10, 2002 US$0.075 2,500,000 - - - 2,500,000 July 10, 2005
Jul. 24, 2002 US$0.080 250,000 - - - 250,000 July 24, 2005
Aug. 21, 2002 US$0.090 100,000 - - - 100,000 August 21, 2005
Jul. 23, 2002 US$0.080 - 1,500,000 - - 1,500,000 July 23, 2005
Sep. 27, 2002 US$0.080 - 3,000,000 - - 3,000,000 September 27, 2005
Nov. 1, 2002 US$0.070 - 3,000,000 - - 3,000,000 November 1, 2005
Dec. 12, 2002 US$0.060 - 1,000,000 1,000,000 - - December 12, 2005
Dec. 18, 2002 US$0.050 - 1,000,000 1,000,000 - - December 18, 2005
Jan. 24, 2003 US$0.100 - 2,000,000 - - 2,000,000 January 24, 2006
Mar. 26, 2003 US$0.050 - 3,000,000 - - 3,000,000 March 26, 2006
Apr. 10, 2003 US$0.040 - 3,750,000 - - 3,750,000 April 10, 2006
May 16, 2003 US$0.030 - 3,000,000 - - 3,000,000 May 16, 2006
Jun. 11, 2003 US$0.030 - 3,000,000 - - 3,000,000 June 11, 2006
Jul. 7, 2003 US$0.031 - 2,500,000 - - 2,500,000 July 7, 2006
Aug. 21, 2003 US$0.075 - 1,000,000 - - 1,000,000 August 21, 2006
               
    22,698,334 27,750,000 2,000,000 8,776,000 39,672,334  

                (1) See Subsequent Events note 11 (d)

SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

Note 7 RELATED PARTY TRANSACTIONS
     
  a)
Loans payable of $17,390 (US$12,250) [2002 - $282,187 (US$181,028)] are from a director and officer of a subsidiary of the Company.
     
  b)
The Company extended an intention agreement with a company with a common director, for its Richmond / Vancouver Horseracing project. (See Pre-development Costs Note 3 c).
     
  c) During the year management fees of $286,603 [2002 - $246,000] were paid to the directors and officers.
     
  d)
During the year consulting fees of $286,645 [2002 - $76,102] were paid to the directors or companies with common directors.
     
Note 8

FINANCIAL INSTRUMENTS

The Company’s financial instruments consist of cash, receivables, accounts payable and accrued liabilities, loans payable and obligation under capital leases. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial statements. The fair value of these financial instruments approximates their carrying value, unless otherwise noted.

   
Note 9

ACCUMULATED LOSSES AND INCOME TAXES

The company has accumulated non-capital losses for income tax purposes of $9,559,268 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  
        $  
           
    2004   543,932  
    2005   474,086  
    2006   653,279  
    2007   1,273,366  
    2008   1,714,246  
    2009   2,427,247  
    2010   2,473,112  
        9,559,268  
   
 

The company has accumulated capital losses for income tax purposes of $3,143,556 that may be carried forward indefinitely and used to reduce capital gains in the future.

The Company follows the asset and liability method of accounting for income taxes. Future income taxes assets and liabilities are determined based on temporary differences between the accounting and tax bases of existing assets and liabilities, and are measured using tax rates expected to apply when these differences reverse. A valuation allowance is recorded against any future tax asset if it is more likely than not that the asset will not be realized.


SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

Note 9

ACCUMULATED LOSSES AND INCOME TAXES (continued)

In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion of all of the future tax assets will not be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of future tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The amount of future tax asset considered realizable could change materially in the near term based on future taxable income during the carry forward period.

     
Note 10

EARNINGS PER SHARE

A 21 for 20 stock split occurred after the August 31, 2003 year-end but before the completion of the financial statements, CICA handbook section 3500 – Earning per Share requires the computations of earning per share should be based on the new number of shares and adjusted retroactively for all periods presented to reflect that change. (See also subsequent events note 11c).
   
Note 11
SUBSEQUENT EVENTS
   
 
a)
The Company is in the process of changing its name to Sungold International Holdings Corp. and continuing under the Canada Business Corporate Act from the British Columbia Company Acts. In connection with the Company’s name change and continuation, the Company will change its trading symbol from “SGGNF” to “SGIHF” on the OTC Bulletin Board. The change is subject to government agency and regulatory approval.
     
 
b)
On September 5, 2003, the Company announced a private placement of 2,000,000 units at US$0.06 each and subsequently issued the units for a total of $161,100 (US$120,000) for debt in September and October.
     
 
c)
On September 8, 2003, the Company issued 3,993,531 shares to its shareholders, record date September 1, 2003, pursuant to a 21 for 20 stock split approved by the Board of Directors on July 28, 2003.
     
 
d)
On October 12, 2003, 319,000 share purchase warrants expired after the year end.
     
 
e)
On October 31, 2003, the Company announced a private placement of 2,000,000 units at US$0.06 each and subsequently issued the units for a total of $158,064 (US$120,000) for debt in October and November.
     
Note 12

COMPARATIVE FIGURES

The comparative figures have been reclassified where applicable in order to conform to the presentation used in the current year.


SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

Note 13

UNITED STATES ACCOUNTING PRINCIPLES

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“CDN GAAP”) which differ in certain respects from those principles that the Company would have followed had its consolidated financial statements been prepared in accordance with generally accepted accounting principles in United States (“US GAAP”). The Company is considered to be a pre-operational Company under US GAAP.

The significant differences related principally to the following items and the adjustments necessary to restate the loss and shareholders’ equity in accordance with US GAAP are outlined as follows:
     
 
a)

Pre-Development Costs

Under CDN GAAP, pre-development expenditures are capitalized and amortized over the benefit period of the deferred expenditures once operations commence or written off if abandoned or impaired. US GAAP requires that pre-development expenditures be expensed as incurred until it is determined that commercially viable operations exist and the expenses then incurred are recoverable.

     
 
b)

Foreign Currency Translation

Under US GAAP, all asset and liability accounts are translated at the exchange rates in effect at the balance sheet dates. Income statement amounts are translated at the average rate of exchange for the year. The resulting differences are accumulated in a separate component of shareholders’ equity.

     
 
c)

Share Options

In December 2002, Financial Accounting Standards Board issued FASB No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB No. 123 “Accounting for stock-based Compensation””. FASB No. 148 allows a change to the fair value based method of accounting for stock-based employee compensation prospectively. The Company adopted the new FASB No. 148 for the year-end August 31, 2003. There are no differences between CDN GAAP and US GAAP on stock-based compensation presentation..

     
 
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.

     
 
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 year except those resulting from investments by owners and distribution to owners. There is no similar concept under Canadian GAAP. The Company has determined that it had no comprehensive income other than the loss in any of the years presented.


SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

Note 13 UNITED STATES ACCOUNTING PRINCIPLES (Continued)
     
  f) The following are balance sheet items under US GAAP that differ from Canadian GAAP:

      2003   2002   2001  
      $   $   $  
                 
    Pre-development costs -   -   -  
    Share capital 23,285,107   20,867,384   18,479,374  
    Foreign currency adjustments 13,640   23,909   28,435  
    Deficit (22,904,186 ) (20,302,771 ) (17,830,566 )
     
  g) The following table summarizes the effect on Deficit of differences between CDN GAAP and US GAAP:

2003   2002   2001  
$   $   $  
    Deficit - CDN GAAP (17,417,766 ) (12,799,808 ) (10,197,168 )
              Cumulative effect of previous            
              years’ adjustments (7,502,963 ) (7,633,398 ) (7,765,516 )
(24,920,729 ) (20,433,206 ) (17,962,684 )
    US GAAP material adjustments:            
       · Effect of the write-off of pre-            
           development costs on net loss 2,006,274   125,909   144,216  
       · Foreign currency adjustments 10,269   4,526   (12,098 )
2,016,543   130,435   132,118  
    Deficit - US GAAP (22,904,186 ) (20,302,771 ) (17,830,566 )

SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

Note 13 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  
      •    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  

SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

Note 13 UNITED STATES ACCOUNTING PRINCIPLES (continued)

        Foreign   Total  
Common   Accumulated   Currency   Shareholders’  
Shares   Deficit   Translation   Equity  
Amount       Adjustments      
$   $   $   $  
August 31, 1996 – balance forward 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  
      •    Shares for cash 2,417,723           2,417,723  
      •    Foreign currency         (10,269 ) (10,269 )
      •    Net loss under US GAAP     (2,601,415 )     (2,601,415 )
August 31, 2003 23,285,107   (22,904,186 ) 13,640   394,561  

SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

Note 13 UNITED STATES ACCOUNTING PRINCIPLES (continued)
     
  i) The following table summarizes the effect on Net Loss of differences between CDN GAAP and US GAAP:

    Cumulative   2003   2002   2001  
Amounts              
From              
Apr 7/86 to              
Aug 31/02              
$   $   $   $  
    Net loss under CDN GAAP (17,417,766 ) (4,617,958 ) (2,602,640 ) (2,184,080 )
    US GAAP material adjustments:                
          •    Effect of the write-off of pre-                
                 development costs on net loss (762,042 ) 2,006,274   125,909   144,216  
          •    Share-based compensation (4,710,738 ) -   -   -  
          •    Foreign currency adjustments (13,640 ) 10,269   4,526   (12,098 )
    Net loss under US GAAP (22,904,186 ) (2,601,415 ) (2,472,205 ) (2,051,962 )
    Loss per share under US GAAP     0.0383   0.0533   0.0642  
        `      
    Weighted average number of shares     67,894,398   46,403,429   31,984,791  

SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

Note 13 UNITED STATES ACCOUNTING PRINCIPLES (continued)
     
  k)

New Accounting Standards

Under the Securities and Exchange Commission’s Staff Accounting Bulletin No.74, the Company is required to disclose certain information related to recently issued accounting standards. The recently issued accounting standards are summarized as follows:

U.S. Standards

In June 2001, Financial Accounting Standards Board (“the FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 143 Accounting for Asset Retirement Obligations (SFAS 143). SFAS 143 addresses financial accounting and reporting for obligations and costs associated with the retirement of tangible long-lived assets and the associated asset retirement costs, and is effective for fiscal years beginning after June 15, 2002. The Company does not expect that adoption of SFAS No. 143 will have a material impact on its results from operations or financial position.

In April 2002, the FASB issued Statement No. 145 Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS 145). Among other things, SFAS 145 rescinds both SFAS No. 4 Reporting Gains and Losses from Extinguishment of Debt and the amendment of SFAS No. 4, and SFAS No. 64 Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. Through these rescission, SFAS 145 eliminates the requirement (in both SFAS No. 4 and SFAS No. 64) that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. Generally, SFAS 145 is effective for financial statements issued after May 15, 2002. The Company does not expect that adoption of SFAS 145 will have a material impact on its results from operations or financial position.

In June 2002, the FASB issued Statement No. 146 Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146), which is effective for exit or disposal activities after December 31, 2002. Under SFAS 146, liabilities arising from exit or disposal activities are recognized only when incurred, and measured at their fair value. The Company does not expect that adoption of SFAS 146 will have a material impact on its results from operations or financial position.

In November 2002, the FASB issued FASB Interpretation No. 45 Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34 (FIN 45). FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. Initial recognition and measurement provisions are effective for guarantees issued or modified after December 31, 2002. The Company does not expect that adoption of FIN 45 will have a material impact on its results from operations or financial position.

In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of FASB Statement No. 123 (SFAS 148). This amendment provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation, and amends disclosure requirements to require prominent disclosure in both annual and interim financial statements about the method adopted for stock compensation accounting and its effect on reported results. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements. The Company has adopted the recommendation for current year.

SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

Note 13 UNITED STATES ACCOUNTING PRINCIPLES (continued)
     
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New Accounting Standards (continued)

In January 2003, the FASB issued Interpretation No. (‘‘FIN’’) 46 – ‘‘Consolidation of Variable Interest Entities’’ (‘‘FIN 46’’). FIN 46 clarifies the application of Accounting Research Bulletin No. 51 – Consolidated Financial Statements to those entities defined as ‘‘Variable Interest Entities’’ (more commonly referred to as special purpose entities) in which equity investors do not have the characteristics of a ‘‘controlling financial interest’’ or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to all Variable Interest Entities created after January 31, 2003, and by the beginning of the first interim or annual reporting period commencing after June 15, 2003 for Variable Interest Entities created prior to February 1, 2003. The Company does not expect that adoption of FIN 46 will have a material impact on its results from operations or financial position.

In April 2003, the FASB issued SFAS 149, which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The amendments are intended to improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this Statement clarifies the circumstances under which a contract with an initial net investment meets the characteristics of a derivative as discussed in SFAS 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except as stated below, and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The Company does not expect that adoption of SFAS 149 will have a material impact on its results from operations or financial position.

On May 15, 2003, the FASB issued SFAS 150, which aims to eliminate diversity in practice by requiring that mandatorily redeemable instruments, forward purchase contracts, and certain financial instruments that include an obligation that (1) the issuer may or must settle by issuing a variable number of its equity shares and (2) has a "monetary value" at inception that (a) is fixed, (b) is tied to a market index or other benchmark (something other than the fair value of the issuer's equity shares), or (c) varies inversely with the fair value of the equity shares (e.g., a written put option) be reported as liabilities. The provisions of SFAS 150, which also include a number of new disclosure requirements, are effective for (1) instruments entered into or modified after May 31, 2003 and (2) pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. The Company does not expect that adoption of SFAS 150 will have a material impact on its results from operations or financial position.

Canadian Standards

In 2002, the Canadian Institute of Chartered Accountants (CICA) issued Accounting Guideline 13 Hedging Relationships (AcG-13), which requires that in order to apply hedge accounting, all hedging relationships must be identified, designated, documented, and effective. Where hedging relationships cannot meet these requirements, hedge accounting must be discontinued. AcG-13 is applicable for fiscal years beginning on or after July 1, 2003. The Company does not expect that adoption of AcG-13 will have a material impact on its results from operations or financial position.

SUNGOLD ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2003

(A Development Stage Company)
(Presented in Canadian Dollars)

Note 13 UNITED STATES ACCOUNTING PRINCIPLES (continued)
     
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New Accounting Standards (continued)

Canadian Standards

In 2002, the CICA issued revised Handbook section 3475 Disposal of Long-Lived Assets and Discontinued Operations. The revised standard establishes criteria for the classification of long-lived assets as “held for sale” and requires that long-lived assets that are to be disposed of by sale be measured at the lower of carrying value or fair value less cost to sell. It eliminates the previous recommendation that companies include under “discontinued operations” in the financial statements amounts for operating losses that have not yet occurred. Additionally, the revised standard expands the scope of discontinued operations to include all components of a company with operations that can be distinguished from the rest of the company and will be eliminated from the ongoing operations of the company in a disposal transaction. Section 3475 is effective for disposal activities initiated by the Company’s commitment to a plan on or after May 1, 2003. The Company does not expect the adoption of CICA section 3475 to have a material impact on its results from operations or financial position.

In 2002, the CICA issued Handbook section 3063 Impairment of Long-Lived Assets, harmonizes with the impairment provisions of FASB Statement No. 144 – Accounting for Impairment or Disposal of Long-Lived Assets, which requires that impairment of long-lived assets held for use be determined by a two-step process, with the first step determining when an impairment is recognized and the second step measuring the amount of the impairment. Under Handbook Section 3063 an impairment loss is recognized when the carrying amount of a long-lived asset exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition and is measured as the amount by which the long-lived asset’s carrying amount exceeds its fair value. Section 3063 is effective for fiscal years beginning on or after April 1, 2003. The Company does not expect the adoption of CICA section 3063 to have a material impact on its results from operations or financial position.

In 2003, the Canadian Institute of Chartered Accountants (CICA) issued Accounting Guideline 14 Disclosure of Guarantees (AcG-14), which is generally consistent with the disclosure requirements in FASB Interpretation No. 45 Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, except it does not apply to product warranties. It requires entities to disclose key information about certain types of guarantee contracts that require payments contingent on specified types of future events. The Guideline is applicable to annual and interim periods beginning on or after January 1,2003. The Company does not expect that adoption of AcG-14 will have a material impact on its results from operations or financial position.

In 2003, the Canadian Institute of Chartered Accountants (CICA) issued Accounting Guideline 15 Consolidation of Variable Interest Entities (AcG-15), in harmony with FASB Interpretation No. 46, with the same title, to provide guidance for applying the principles in Subsidiaries, Section 1590, to certain special-purpose entities. The consolidation requirement in the Guideline will be effective for all annual and interim periods beginning on or after November 1, 2004. The Company does not expect that adoption of AcG-15 will have a material impact on its results from operations or financial position.