-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I+rhOViujmdAT1w9r7ULS33WYN5JVc2DI/bsYVRfIATE6SFcfhJfjinWh+BwcZ+n NLx2s+7tt4/dEcLwGC7urA== 0001127855-03-000476.txt : 20030926 0001127855-03-000476.hdr.sgml : 20030926 20030926112038 ACCESSION NUMBER: 0001127855-03-000476 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030924 FILED AS OF DATE: 20030926 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NET FORCE SYSTEMS INC CENTRAL INDEX KEY: 0001084201 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 000000000 STATE OF INCORPORATION: B9 FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-29031 FILM NUMBER: 03911401 BUSINESS ADDRESS: STREET 1: SUITE #10-EPICUREAN, WOODS CENTRE STREET 2: P.O. BOX W-645 CITY: ST. JOHN'S STATE: B9 ZIP: 00000 BUSINESS PHONE: (268) 562-3452 MAIL ADDRESS: STREET 1: SUITE #10-EPICUREAN, WOODS CENTRE STREET 2: P.O. BOX W-645 CITY: ST. JOHN'S STATE: B9 6-K 1 net6k092203.txt NET FORCE SYSTEMS 6K, 09.22.03 FORM 6-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Report of Foreign Private Issuer -------------------------------- Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 6-K Report of Foreign Private Issuer Pursuant to Rules 13a-16 and 15d-16 under the Securities Exchange Act of 1934 COMMISSION FILE NUMBER: 0-29031 NET-FORCE SYSTEMS INC. (Name of Registrant in its charter) ANTIGUA and BARBUDA (State or other jurisdiction of incorporation or organization) Suite #10-Epicurean, Woods Centre P.O. Box W-645 St. John's, Antigua, West Indies (Address of principal executive offices and zip code) Tel: (268)562-3452 Fax: (268)562-3453 (Issuer's telephone and fax numbers) For the month of September 2003 Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. Form 20-F X Form 40-F ----- ---- Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes No X ----- ----- If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-______ INDEX - ----- Item - ---- 1. Recent Developments - Change in Control 2. Recent Developments - Acquisition of Business 3. Other Material Events 4. Audited Financial Statements - Sinovac Biotech Co. Ltd. and Net Force Systems Inc. 5. Share Purchase Agreement - Exhibit 10.1 6. Letter of Director's Resignation - Exhibit 17.1 Signatures - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 24, 2003 By: /s/ Wei Dong Yin ----------------------------- President Item 1. Recent Developments - Changes in Control of Registrant. - --------------------------------------------------------------- On September 24, 2003, Mr. Wei Dong Yin entered into a share purchase agreement with Geneva Overseas Holdings Ltd. whereby Mr. Yin acquired 6,544,830 shares from Geneva Overseas Holdings Ltd. at $0.03 per share for a total of $195,000. On September 24, 2003, the Board of Directors of Net Force Systems Inc. appointed Mr. Wei Dong Yin, Ms. Lily Wang, and Mr. He Ping Wang to fill vacancies on the Board. Mr. Yin is President, Chief Executive Officer and Ms. Wang is Chief Financial Officer. Mr. Wei Dong Yin is a director and the General Manager of Sinovac Biotech Co., Ltd. He is responsible for the State Model Project for Hi-tech Industrialization. Mr. Yin has devoted 20 years to the Hepatitis A virus research and is the technological inventor of Inactive Hepatitis A Vaccine. Mr. Yin is also heading the research on Inactivated SARS Vaccine. Mr. Yin is not a director of any other company. Mr. Wang is Vice General Manager with Beijing Fuhua Construction. Mr. Wang commenced employment with Beijing Fuha in 1993. Mr. Wang obtained is Bachelor's Degree from the Beijing Instrument Industrial University. Mr. Wang is not a director of any other company. Ms. Lily Wang is President of USA Xinyu Co. Ltd. Ms. Wang commenced employment with USA Xinyu in 1993. Ms. Wang completed the MBA program in 1993 at The School of Business Administration of USA- University of Hawaii. Ms. Wang is not a director of any other company. On September 24, 2003, Mr. Terry Bowering, Director, President, Chief Executive Officer and Chief Financial Officer, Mr. Trevor Bowering, Director, Mr. Dwight Lewis, Director and Mr. Derek Ferguson, Director, each tendered their resignation to the Board and the Board of Directors accepted each resignation. Upon the Board's acceptance of Mr. Terry Bowering's resignation, Mr. Yin was appointed President and Chief Executive Officer and Ms. Lily Wang was appointed Chief Financial Officer. On September 24, 2003, the Net Force Systems Inc., ("Net Force") a corporation organized under the laws of Antigua and Barbuda and Lily Wang, ("Wang") a natural person of the United States entered into a share purchase agreement together with schedules and exhibits. Ms. Lily Wang owns approximately 51% ownership interest in Sinovac Biotech Co. Ltd. ("Sinovac") a company organized under the laws of the Peoples Republic of China. Wang desired to sell her Sinovac shares and Net Force desired to acquire her Sinovac shares. Upon completion of this transaction, Net Force gained controlling indirect ownership interest in Sinovac for the consideration of 10,000,000 newly-issued shares of common stock of Net Force, at a stated value of $0.60 per share for a total of $6,000,000 constituting approximately 37% of Net Force's outstanding capital stock after such issuance on a fully-diluted basis. Net Force's Board of Directors approved this transaction and it was executed on September 24, 2003. A copy of the Stock Purchase Agreement is attached as Exhibit 10.1. Item 2. Recent Developments - Acquisition of Business. - ------------------------------------------------------ Pursuant to the Stock Purchase Agreement, Net Force will acquire from the Sinovac shareholders approximately 51% of the issued and outstanding capital stock of Sinovac. In so doing, Net Force acquired a controlling indirect ownership interest in Sinovac. Sinovac specializes in the research and development of commercialization of human vaccines for infectious illnesses such as Hepatitis A, Hepatitis A&B, influenza and "SARS". This acquisition is essential to the future growth of the Net Force and will fit into the overall strategy of Net Force to expand into the biotechnology industry. In completing this transaction, the company is taking the first step of this strategic shift into this industry. Net Force intends to leverage off such an important base and further expand in the biomedical and biotechnology industries. The acquisition will be treated for accounting purposes as a purchase and is a tax-free exchange under the United States Internal Revenue Code of 1986, as amended. About Sinovac Biotech Co. Ltd - ----------------------------- In 2002, Sinovac Biotech Co. Ltd., successfully launched its Hepatitis A vaccine - - the first of its kind developed by Chinese scientists using their proprietary technology with its primary market in China. Sinovac is also currently working towards the near-term launch of a combined Hepatitis A&B vaccine for domestic and foreign markets. Clinical trials for this proprietary biomedical innovation have recently been completed and are currently been evaluated. To date only one combined vaccine (Twinrix) has been developed by multinational pharmaceutical giant Glaxo Smith Kline. Sinovac will compete in this market with Glaxo Smith Kline. Sinovac's proprietary, cost-effective vaccines are expected to keep the company at the forefront of China's emerging biopharmaceutical industry and to offer developing Southeast Asian nations with low-cost alternatives to the more expensive vaccines offered today. A survey conducted by Glaxo Smith Kline suggests that China's market for the Hepatitis A vaccine will be work approximately $US1.5 billion by 2005. While expanding the domestic market for vaccines, Sinovac and Sino Pharma are committed to aggressively targeting overseas markets for such in-development vaccines as the combined Hepatitis A&B and the awaited SAR biotechnologies. A joint venture marketing agreement has already been signed with Best Invent Technology - a subsidiary of Indonesia's leading pharmaceutical company, P Kalbe Farma tbk. Item 3. Other Events and Regulation FD Disclosure - ------------------------------------------------- This current report contains forward-looking statements regarding future events and future performance of the Company, including statements with respect to consummation of a proposed transaction and commercialization of products, all of which involve risks and uncertainties that could materially affect actual results. Such statements are based on Management's current expectations and actual results could differ materially. Investors should refer to documents that the Company files from time to time with the Securities and Exchange Commission for a description of certain factors that could cause the actual results to vary from current expectations and the forward-looking statements contained in this report. Such Filing includes, without limitation, the Company's Form 20F and Form 6-K reports. Item 4. Financial Statements - ---------------------------- Filed herewith are the audited financial statements of Net Force Systems for year ended March 31 - Exhibit 99.1 and Sinovac Biotech Co. Ltd. for the year ended June 30, 2003 - Exhibit 99.2. Item 5. Share Purchase Agreement - Exhibit 10.1 - ----------------------------------------------- Item 6. Letter of Director's Resignation - Exhibit 17.1 - ------------------------------------------------------- EX-10 3 net6kexh10_1.txt NET FORCE SYSTEMS 6K, SHARE PURCHASE AGREEMENT Exhibit 10.1 - ------------ SHARE PURCHASE AGREEMENT ------------------------ THIS SHARE PURCHASE AGREEMENT (together with all schedules, exhibits and all ancillary agreements contemplated herein are hereinafter referred to as this "Agreement"), is entered into as of the ____ day of September, 2003, by and between Net Force Systems Inc., a corporation organized under the laws of the Country of Antigua (the "Net Force") and Lily Wang ("Wang"), a natural person. Net Force and the Wang are referred to collectively as the "Parties". WHEREAS, Wang owns not less than 51% ownership interest in Sinovac Biotech Co, Ltd ("Sinovac"), a company organized under the laws of the People's Republic of China ("PRC"); WHEREAS, Wang desires to sell and Net Force desires to acquire the Wang Shares equalling 57,120,000 shares and represents not less than 51% ownership interest in Sinovac in consideration for 10,000,000 newly-issued shares of common stock of Net Force, at a stated value of $0.60 per share, constituting approximately 37% of Net Force's outstanding capital stock after such issuance on a fully-diluted basis, on the terms and conditions hereinafter provided; NOW THEREFORE, on the stated premises and for and in consideration of the mutual covenants and agreements hereinafter set forth and the mutual benefits to the Parties to be derived herefrom, it is hereby agreed as follows: ARTICLE I REPRESENTATIONS AND WARRANTIES OF THE SINOVAC SHAREHOLDER -------------------------- The Sinovac Shareholder represents and warrants as follows: Section 1.01 - Organization of Sinovac. Sinovac is a company duly organized ----------------------- and validly existing under the laws of PRC and has the corporate power and is duly authorized, qualified, and licensed under all applicable laws, regulations, ordinances, and orders of public authorities to undertake the transactions contemplated by this Agreement, to own all of its properties and assets to carry on its business. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby will not, violate any provision of Sinovac's articles of incorporation or bylaws (or the foreign equivalent thereof). Sinovac has taken, or will have taken prior to Closing (as described in Article III herein), all actions required by law, its articles of incorporation, or otherwise, to authorize the execution and delivery of this Agreement. Sinovac has, or will have prior to Closing (as described in Article III herein), full power, authority, and legal right and has, or will have prior to Closing (as described in Article III herein), taken all action required by law, its bylaws, articles of incorporation (or the foreign equivalent thereof) and otherwise to consummate the transactions herein contemplated. Section 1.02 - Capitalization and Outstanding Shares. The authorized ---------------------------------------- capitalization of Sinovac consists of 250,000,000 authorized common shares, $0.001 par value per share, of which 112,000,000 are issued and outstanding as of August 31, 2003. All outstanding share of Sinovac are validly issued, fully paid, and non-assessable and not issued in violation of the preemptive or other rights of any person. Section 1.03 - Options or Warrants or Subscriptions. There are no existing ------------------------------------ options, warrants, calls, subscriptions or commitments of any character relating to any authorized and unissued stock of any class of Sinovac. Section 1.04 - Ownership of Sinovac Shares. With respect to herself, the ---------------------------- Sinovac Shareholder is the legal and beneficial owner of that number of Sinovac shares set forth opposite her name in the attached Schedule A (which together constitute 51% of all of Sinovac's outstanding shares), free and clear of any claims, charges, equities, liens, security interests, and encumbrances whatsoever. - -------------------------------------------------------------------------------- Share Purchase Agreement Page 1 Section 1.05 - Shares Validly Issued. With respect to the Sinovac Shares ----------------------- issued to her the Sinovac Shares have been validly issued to the Shareholder and are fully paid, fully vested, non-assessable and not issued in violation of the pre-emptive or other rights of any person. Section 1.06 - Valid Transfer of Fully Vested Shares. With respect to ---------------------------------------- herself, the Sinovac Shareholder has full right, power, and authority to transfer, assign, convey, and deliver its Sinovac Shares. With respect to herself, delivery by the Sinovac Shareholder of such shares at the Closing (as described in Article III herein) will convey to Net Force good and marketable title to such Sinovac Shares, free and clear of any claims, charges, equities, liens, security interests, and encumbrances whatsoever. Section 1.07 - Underlying Transaction Lawful. All transactions contemplated ----------------------------- by this Agreement are lawful under the laws of Antigua and are enforceable in the courts of Antigua. This Agreement and each of its terms are lawful under the laws of Antigua and are enforceable in Antigua courts. Section 1.08 - Enforceable Obligation. The transactions contemplated by ----------------------- this Agreement are the valid and binding obligations of the Shareholder, enforceable against the respective Shareholder, by Net Force in accordance with the terms of this Agreement. Section 1.9 - No Conflicts. The execution and delivery by each Sinovac ------------- Shareholder of this Agreement, the performance by each Sinovac Shareholder of his, her or its obligations under this Agreement and the consummation of the transactions contemplated hereby do not and will not: (i) conflict with or result in a violation or breach of, (ii) constitute (with or without notice or lapse of time or both) a default under, (iii) require any Sinovac Shareholder to obtain any consent, approval or action of, make any filing with or give any notice to any person as a result or under the terms of, (iv) result in or give to any person any right of termination, cancellation, acceleration or modification in or with respect to, (v) result in or give to any person any additional rights or entitlement to increased, additional, accelerated or guaranteed payments under, or (vi) result in the creation or imposition of any lien upon any Sinovac Shareholder or any of their respective assets and properties under any contract to which any Sinovac Shareholders is bound. Section 1.10 - Voting Trusts. The Sinovac Shares are not subject to any -------------- voting trust agreement or other contract restricting or otherwise relating to the voting or disposition of the Sinovac Shares. Section 1.11 - Governmental Authorizations and Licenses. The Sinovac ------------------------------------------- Shareholder has, or will have upon Closing (as described in Article III herein), all licenses, franchises, permits, and other governmental authorizations that are legally required to enable it to conduct its business in all material respects as conducted. No authorization, approval, consent, or order of, or registration, declaration, or filing with, any court or other governmental body is required in connection with the execution and delivery by the Sinovac Shareholders of this Agreement and consummation by the Sinovac Shareholders of the transaction contemplated hereby. Section 1.12 - Compliance with Laws and Regulations. The Sinovac ----------------------------------------- Shareholder has complied with all applicable statutes and regulations of any applicable laws except to the extent that noncompliance would not result in the occurrence of any material liability for any Sinovac Shareholder. Section 1.13 - Power of Stock Transfer. The Sinovac Shareholder has duly ------------------------ executed a stock transfer power in the substantial form as set forth in Schedule B. ARTICLE II REPRESENTATIONS, COVENANTS AND WARRANTIES OF NET FORCE ----------------------- Net Force represents and warrants as follows: Section 2.01 - Organization and Due Authorization. Net Force is a ------------------------------------- corporation duly organized, validly existing, and in good standing under the laws of the Country of Antigua and has the corporate power and is duly authorized, qualified, and licensed under all applicable laws, regulations, ordinances, and orders of public authorities to own all of its properties and assets. The execution and delivery of this Agreement does not, and the - -------------------------------------------------------------------------------- Share Purchase Agreement Page 2 consummation of the transactions contemplated hereby will not violate any provision of Net Force's articles of incorporation or bylaws. Net Force has taken all action required by law and under its articles of incorporation, its bylaws, or otherwise to authorize the execution and delivery of this Agreement, and Net Force has full power, authority, and legal right and has taken all action required by law, its articles of incorporation, bylaws, or otherwise to consummate the transactions herein contemplated. Section 2.02 - Capitalization and Outstanding Shares. Net Force's ------------------------------------------ authorized capitalization currently consists of 100,000,000 shares of common stock, par value $.001, of which 17,066,033 shares of common stock are issued and outstanding as of the date hereof and 50,000,000 shares of preferred stock of which no shares are outstanding as of the date hereof. All issued and outstanding shares are legally issued, fully paid, non-assessable and not issued in violation of the pre-emptive or other rights of any person. Section 2.03 - Options or Warrants or Subscriptions. There are no existing ------------------------------------ options, warrants, calls, subscriptions or commitments of any character relating to the authorized and unissued stock of Net Force. Section 2.04 - Approval of Agreement. The board of directors of Net Force ---------------------- has approved this Agreement and the transactions contemplated hereby. Section 2.05 - Underlying Transaction Lawful. All transactions contemplated ----------------------------- by this Agreement are lawful under the laws of the Country of Antigua and are enforceable in the courts of Antigua. This Agreement and each of its terms are lawful under the laws of the Country of Antigua and are enforceable in Antigua courts. Section 2.06 - Enforceable Obligation. The transaction contemplated by this ---------------------- Agreement is a valid and binding obligation of Net Force, enforceable against it, by the other Parties in accordance with the terms of this Agreement. Section 2.07 - Compliance with Laws and Regulations. Net Force has complied ------------------------------------ with all applicable statutes and regulations of any applicable laws except to the extent that noncompliance would not result in the occurrence of any material liability for Net Force. Section 2.08 - No Information Statement on 14C Required. Net Force --------------------------------------------- represents and warrants to the Sinovac Shareholders that under to the laws of the Country of Antigua, Net Force is not legally required to file an information statement on Schedule 14C promulgated under the Exchange Act of 1934, as amended. ARTICLE III PLAN OF PURCHASE AND SALE OF THE SINOVAC SHARES ----------------------------------------------- Section 3.01 - The Purchase and Sale of the Sinovac Shares. ------------------------------------------- (a) Wang agrees to assign, transfer, and deliver to Net Force, free and clear of all liens, pledges, encumbrances, charges, restrictions or known claims of any kind, nature, or description, 57,120,000 shares of the capital stock of Sinovac, constituting 51% of the issued and outstanding capital stock of Sinovac as of August 31, 2003. (b) Net Force agrees to issue and deliver to the Wang 10,000,000 newly-issued shares of Net Force's common stock, par value $.001 and stated value of $0.60 per share, to Wang. The shares issued by Net Force under this Section 3.01(b) shall be issued with the rights of registration contained in that certain registration rights agreement between the Wang and Net Force attached hereto as Schedule D. Section 3.02 - Closing. The closing ("Closing") of the transactions ------- contemplated by this Agreement shall occur after the signing of this Agreement, after the fulfillment of all conditions precedent set forth in Article III hereof and at such time and place as the parties may mutually agree ("Closing ------- Date"). - ---- Section 3.03 - Closing Events. At the Closing, each of the respective --------------- Parties hereto shall execute, acknowledge, and deliver (or shall ensure to be executed, acknowledged, and delivered), as applicable, the following: (a) In the case of the Wang: (i) a completed Schedule A containing a list indicating the number of shares owned by her, and the number of shares to be transferred by her under this Agreement; (ii) a stock transfer power and authorization of designee executed by Wang listed on Schedule B in the substantial form set forth in Schedule A; (iii) a certificate of registration - -------------------------------------------------------------------------------- Share Purchase Agreement Page 3 issued by the office of registration of the PRC evidencing the approximate 51% ownership interest of Sinovac by Wang; and (iv) an opinion of counsel satisfactory to Net Force in substantial form attached hereto as Schedule C; (b) In the case of Net Force; (i) an opinion of counsel as required by Section 2.07 of this Agreement; and (ii) to Wang set forth on Schedule E that number of newly issued Net Force Shares set forth beside Wang's name on Schedule D. ARTICLE IV SPECIAL REPRESENTATIONS AND COVENANTS WITH RESPECT TO COMMON SHARES ISSUED BY THE COMPANY TO THE SHAREHOLDERS ----------------------------------------- Section 4.01 - Shares Issued by Net Force to Wang Not Registered. The ----------------------------------------------------- consummation of this Agreement and the transactions herein contemplated, including the issuance of common shares by Net Force to Wang as set forth in Article III, constitute the offer and sale of securities under the Securities Act of 1933, as amended (the "Securities Act") and applicable state statutes. Wang acknowledge that the shares of Net Force to be delivered to Wang pursuant to this Agreement have not been registered under the Securities Act or the laws of any other jurisdiction, and that therefore the stock is not fully transferable except as permitted under various exemptions, if any, contained in the Securities Act and the rules of the Securities and Exchange Commission interpreting the Securities Act. Under US law, Net Force's common stock cannot be sold or transferred by Wang unless they are subsequently registered under applicable law or an exemption from registration is available. The provisions contained in this paragraph are intended to ensure compliance with the Securities Act. Section 4.02 - Regulation S Representations. For purposes of this Section ----------------------------- 4.02, "United States" includes the United States, its territories and possessions, any state, and the District of Columbia. Each Shareholder is not a "U.S. Person", defined in Rule 902(k) of the Securities Act as any one of the following: (i) any natural person resident in the United States; (ii) any partnership or corporation organized under the laws of the United States; (iii) any estate of which any executor or administrator is a U.S. person; (iv) any trust of which any trustee is a U.S. person; (v) any agency or branch of a foreign entity located in the United States; (vi) any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or the account of a U.S. person; (vii) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated or (if an individual) resident in the United States; (viii) any partnership or corporation, if such entity was formed under the laws of a foreign jurisdiction by a U.S. person principally for the purpose of investing in securities not registered under the Securities Act, unless it is organized or incorporated, and owned, by accredited investors. Each Shareholder did not receive offering materials with respect to the transactions contemplated by the Agreement. At the time of this Agreement, each Shareholder is outside of the United States. Therefore Wang agrees not to sell or otherwise dispose of any of the common shares of Net Force received pursuant to this agreement unless such Shareholder: (a) has delivered to Net Force a written legal opinion in form and substance satisfactory to counsel for Net Force to the effect that the disposition is permissible under the terms of the Securities Act and the rules and regulations promulgated thereunder; (b) has complied with the registration and prospectus requirements of the Securities Act relating to such disposition; or (c) has presented Net Force satisfactory evidence that such a disposition is exempt from registration under the Securities Act. The Net Force shall place a stop transfer order against transfers of shares until one of the conditions set forth in this paragraph have been met. Furthermore, Wang agrees that the certificates evidencing the common shares that each will receive under this Agreement will contain the following legend or one substantially similar: (begin boldface) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE FEDERAL SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED (1) ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER THE ACT; OR (2) ABSENT AN OPINION OF COUNSEL, WHICH OPINION IS REASONABLY SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY AND ITS COUNSEL, TO THE EFFECT - -------------------------------------------------------------------------------- Share Purchase Agreement Page 4 THAT SUCH REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR SUCH STATES OR THAT SUCH TRANSACTION COMPLIES WITH THE RULES PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER SAID ACT OR SUCH STATES. (end boldface) Section 4.03 - Third Party Consents and Certificates. The Parties agree to ------------------------------------- cooperate with each other in order to obtain any required third party consents to this Agreement and the transactions herein and therein contemplated. Section 4.04 - Indemnification. ---------------- (a) Wang hereby agrees to indemnify Net Force, its respective officers, agents and directors as of the date of execution of this Agreement against any loss, liability, claim, damage or expense (including, but not limited to, any and all expenses whatsoever reasonably incurred in investigating, preparing, or defending against any litigation, commenced or threatened, or any claim whatsoever), to which it or they may become subject arising out of or based on any inaccuracy appearing in or misrepresentations made under Article I of this Agreement. The indemnification provided for in this paragraph shall survive the Closing and consummation of the transactions contemplated hereby and termination of this Agreement. (b) Net Force hereby agrees to indemnify Wang as of the date of execution of this Agreement against any loss, liability, claim, damage or expense (including, but not limited to, any and all expenses whatsoever reasonably incurred in investigating, preparing, or defending against any litigation, commenced or threatened, or any claim whatsoever), to which they may become subject arising out of or based on any inaccuracy appearing in or misrepresentations made under Article II of this Agreement. The indemnification provided for in this paragraph shall survive the Closing and consummation of the transactions contemplated hereby and termination of this Agreement. ARTICLE V CONDITIONS PRECEDENT TO OBLIGATIONS OF NET FORCE ------------------------------------------------ The obligations of Net Force under this Agreement are subject to the satisfaction, at or before the Closing Date, of the following conditions: Section 5.01 - Accuracy of Representations. The representations and ----------------------------- warranties made by Wang in this Agreement were true when made and shall be true at the Closing Date with the same force and effect as if such representations and warranties were made at and as of the Closing Date (except for changes therein permitted by this Agreement), and Wang shall have performed or complied with all pre-closing covenants and conditions required by this Agreement to be performed or complied with by them prior to or at the Closing. Section 5.02 - No Material Adverse Change. Prior to the Closing Date, there -------------------------- shall not have occurred any material adverse change in the financial condition, business, or operations of Sinovac nor shall any event have occurred which, with the lapse of time or the giving of notice, may cause or create any material adverse change in the financial condition, business or operations of Sinovac. Section 5.03 - Deliverables. Each deliverable required to be delivered by ------------ Wang under Article I and/or Section 3.01 of this Agreement has been delivered. ARTICLE VI MISCELLANEOUS ------------- Section 6.01 - Governing Law. This Agreement shall be governed by, -------------- enforced, and construed under and in accordance with the laws of the County of Antigua. Section 6.02 - Resolution of Disputes. ---------------------- (a) Any dispute, controversy or claim arising out of or relating to this Agreement, or the interpretation, breach, termination or validity hereof, shall first be resolved through friendly consultation, if - -------------------------------------------------------------------------------- Share Purchase Agreement Page 5 possible. Such consultation shall begin immediately after one party has delivered to the other party a written request for such consultation (the "Consultation Date"). If the dispute cannot be resolved within 30 days following the Consultation Date, the dispute shall be submitted to arbitration upon the request of either party, with written notice to the other party. (b) Arbitration. The arbitration shall be conducted in New York, New York ----------- under the auspices of the American Arbitration Association ("AAA") in accordance with the commercial arbitration rules and supplementary procedures for international commercial arbitration of the AAA. There shall be three arbitrators--one arbitrator shall be chosen by each party to the dispute and those two arbitrators shall choose the third arbitrator. All arbitration proceedings shall be conducted in English. Each party shall cooperate with the other in making full disclosure of and providing complete access to all information and documents requested by the other party in connection with the arbitration proceedings. Arbitration shall be the sole, binding, exclusive and final remedy for resolving any dispute between the parties; either party may apply to any court of competent jurisdiction in the State of New York for enforcement of any award granted by the arbitrators. (c) During the period when a dispute is being resolved, except for the matter being disputed, the parties shall in all other respects continue to abide by the terms of this Agreement. Section 6.03 - Notices. Any notice or other communications required or ------- permitted hereunder shall be sufficiently given if personally delivered to it or sent by registered mail or certified mail, postage prepaid, or by prepaid telegram addressed as follows: (a) If to Net Force, address as follows: Net Force Systems Inc. C/O Stepp Law Group 1301 Dove Street, Suite 460 Newport Beach, CA 92660 Telephone: 949-660-9700 Fax: 949-660-9010 Attn: Thomas E. Stepp, Jr. (b) If to Wang, address as follows: Lily Wang Suite 202 - 300 Murchison Drive Millbrae, CA 94030 USA Telephone: 650-259-9688 Fax: or such other addresses as shall be furnished in writing by any party in the manner for giving notices hereunder, and any such notice or communication shall be deemed to have been given as of the date so delivered, mailed or telegraphed. Section 6.04 - Attorney's Fees. In the event that any party institutes any ---------------- action or suit to enforce this Agreement or to secure relief from any default hereunder or breach hereof, the breaching party or parties shall reimburse the non-breaching party or parties for all costs, including reasonable attorney's fees, incurred in connection therewith and in enforcing or collecting any judgment rendered therein. Section 6.05 - Schedules Knowledge. Each party is presumed to have full -------------------- knowledge of all information set forth in the other party's schedules delivered pursuant to this Agreement. - -------------------------------------------------------------------------------- Share Purchase Agreement Page 6 Section 6.06 - Entire Agreement. This Agreement represents the entire ----------------- agreement between the parties relating to the subject matter thereof. Section 6.07 - Survival Termination. The representations, warranties, and -------------------- covenants of the respective parties shall survive the Closing Date and the consummation of the transactions herein contemplated for a period of three months. All rights and obligations under this entire Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators and assigns of the parties. Section 6.08 - Counterparts. This Agreement may be executed in multiple ------------ counterparts, each of which shall be deemed an original and all of which taken together shall be but a single instrument. For purposes of this Agreement, facsimile signatures may be deemed originals. Section 6.09 - Amendment or Waiver. Every right and remedy provided herein ------------------- shall be cumulative with every other right and remedy, whether conferred herein, at law, or in equity, and may be enforced concurrently herewith, and no waiver by any party of the performance of any obligation by the other shall be construed as a waiver of the same of any other default then, theretofore, or thereafter occurring or existing. At any time prior to the Closing Date, this Agreement may be amended by a writing signed by all parties hereto, with respect to any of the terms contained herein, and any term or condition of this Agreement may be waived or the time for performance may be extended by a writing signed by the party or parties for whose benefit the provision is intended. [The remainder of this page intentionally left blank] ----------------------------------------------------- - -------------------------------------------------------------------------------- Share Purchase Agreement Page 7 SIGNATURES - ---------- IN WITNESS WHEREOF the parties hereto have duly executed this Agreement. VENDOR NET FORCE SYSTEMS INC. Per: /s/ He Ping Wang - ---------------------------- ---------------------------- (Witness/Seal) He Ping Wang Director Per: /s/ Lily Wang - ---------------------------- ---------------------------- (Witness/Seal) Lily Wang Director Per: /s/ Wei Dong Yin - ---------------------------- ---------------------------- (Witness/Seal) Wei Dong Yin Director PURCHASER LILY WANG /s/ Lily Wang - --------------------------- -------------------------------- (Witness/Seal) Lily Wang [The remainder of this page intentionally left blank] ----------------------------------------------------- - -------------------------------------------------------------------------------- Share Purchase Agreement Page 8 SCHEDULE A ---------- SINOVAC SHAREHOLDER ------------------- Number of Shares Name and Address Number of Shares Owned to Be Transferred - ---------------- ---------------------- ----------------- Lily Wang 57,120,000 57,120,000 Suite 202 - 300 Murchison Drive Millbrae, CA 94030 USA - -------------------------------------------------------------------------------- Share Purchase Agreement Page 9 SCHEDULE B ---------- SHAREHOLDERS' STOCK TRANSFER POWER AND AUTHORIZATION OF DESIGNEE ------------------------- FOR VALUE RECEIVED, the undersigned ("Assignor") hereby sells, transfers ------------------ and assigns unto Net Force Systems Inc. ("Assignee"), a corporation organized under the laws of the Country of Antigua, 57,120,000 shares of the common stock representing not less than 51% of Sinovac, a corporation organized under the laws of the PRC and does hereby irrevocably constitute and appoint each of Net Force's officers and directors as its attorney-in-fact to transfer the said shares on the books and records of Net Force, with full power of substitution in the premises. This Stock Transfer Power shall be subject to the terms and conditions of that certain Share Purchase Agreement by and between, inter alia, Assignor and Assignee dated as of September 24, 2003. Dated: September 24, 2003 By: /s/ Lily Wang -------------------------- Name: Lily Wang - -------------------------------------------------------------------------------- Share Purchase Agreement Page 10 SCHEDULE C ---------- Stock Ownership Transfer Agreement ---------------------------------- Assignor: Sino Pharma Co., Ltd. (hereinafter referred to as "Party A") Address: Room 605-6, Chengxin Mansion, #130-136. Middle Gannuo Road, Hongkong Name of the legal representative: Li Keying Position: Chairman of the Board Nationality: Singapore Assignor: Tangshan Yian Biological Engineering Co., Ltd. (hereinafter referred to as "Party B"). Address: the High and New Technology Development Zone in Tangshan City Name of the legal representative: Li Keying Position: Chairman of the Board Nationality: Singapore Assignor: Beijing Keding Investment Co., Ltd. (hereinafter referred to as "Party C") Address: Beijing University Biology Tower, #39, West Shangdi Road, Haidian District, Beijing Name of the legal representative: Yin Weidong Position: Chairman of the Board Nationality: China Assignee: Lily Wang (hereinafter referred to as "Party D") Nationality: America This agreement is signed by Party A and Party B on September, 2003 in Beijing. Party A legally owns 25% of the stock ownership of Sinovac Biotech Co., Ltd. (hereinafter referred to as "Sinovac"). Party B legally owns 18.75% of the stock ownership of Sinovac. Party C legally owns 10.71% of the stock ownership of Sinovac. Sinovac is founded on April 28, 2001 with the approval of the Industrial and Commercial Administration of Beijing Municipality. Party A now intends to transfer all of its stock ownership of Sinovac, namely 28 million shares; Party B now intends to transfer all of its stock ownership of Sinovac, namely 21 million shares; and Party C now intends to transfer part of its stock ownership of Sinovac, namely 8.12 million shares. The transfer of the stock ownership by Party A, Party B and Party C has been agreed by other share holders of Sinovac and been approved by the board of Sinovac according to its meeting resolution. Party D herein agree to accept the 57.12 million shares (51%) of the stock of Sinovac transferred by Party A, Party B, and Party C. The board of Sinovac also agree to Party D's acceptance of the 57.12 million shares (51%) of the stock of Sinovac owned by Party A, Party B, and Party C. Based on the principle of equality and mutual benefits, Party A, Party B, Party C and Party D reached following agreements on the transfer of the 51% stock ownership, namely 57.12 million shares of the stock of Sinovac owned by Party A, Party B, and Party C after friendly consultation: I. Stock Ownership Transfer Price - -------------------------------------------------------------------------------- Share Purchase Agreement Page 11 Party A, Party B, and Party C jointly agree to transfer their 57.12 million shares of the stock of Sinovac to Party D with the price of six (6) million USD pursuant to the terms and conditions of this agreement. Party D agree to accept the 57.12 million shares (51%) of the stock of Sinovac owned by Party A, Party B, and Party C with the price of six (6) million USD. II. Agreement Violation Liability 1. If any Party of this agreement failed to fulfill its obligations reasonably and completely pursuant to the regulations of this Agreement, the violating Party shall bear relative liabilities for the violation of the Agreement. Any obligations and damages thus brought upon the non-violation Party shall be remedied by the Party violating this Agreement. III. Modification and Termination of This Agreement If any one of the following circumstances aroused, this Agreement can be modified or terminated, however, the modification or termination shall become valid only after the signing of the modification or termination agreement by Party A, Party B, Party C and Party D. 1. It is impossible to carry out the terms and conditions of this Agreement due to force majeure, or external causes the Party cannot prevent and not resulted from the Party's negligence. 2. Party A, Party B, Party C and Party D all agree to modify or terminate this Agreement after consultation due to the change of conditions. IV. Others This Agreement is in six originals. one for Party A, Party B, Party C, Party D and Sinovac, and the rest being kept by relative government department. - -------------------------------------------------------------------------------- Share Purchase Agreement Page 12 [SINO PHARMA COMPANY LIMITED] [STAMP] Assignor (Party A) (Seal) Legal Representative or Authorized Trustor (signature): Date: [STAMP] Assignor (Party B) (Seal) Legal Representative or Authorized Trustor (signature): Date: Assignor (Party C) (Seal) Legal Representative or Authorized Trustor (signature): Date: [STAMP] Assignor (Party D) (Seal) Legal Representative or Authorized Trustor (signature): Date: - -------------------------------------------------------------------------------- Share Purchase Agreement Page 13 SCHEDULE D ---------- DESIGNEES OF THE NEWLY-ISSUED CAPITAL STOCK OF NET FORCE -------------------------------------------------------- Number of Shares to be Issued Name Address by Net Force - ---- ------- ----------------------------- Lily Wang Suite 202 - 300 Murchinson Dr. 10,000,000 Millbrae, CA 94030 USA - -------------------------------------------------------------------------------- Share Purchase Agreement Page 14 SCHEDULE E ---------- SHAREHOLDERS' STOCK TRANSFER POWER AND AUTHORIZATION OF DESIGNEE ------------------------- FOR VALUE RECEIVED, the undersigned ("Assignor") hereby sells, transfers ------------------ and assigns unto Lily Wang ("Assignee"), a natural person, 10,000,000 (ten ---------- million) shares of the common stock, $.001 par value and a stated value of $0.60 per share, of Net Force Systems Inc., a corporation organized under the laws of the Country of Antigua and does hereby irrevocably constitute and appoint Lily Wang as its attorney-in-fact to transfer the said shares on the books and records of Net Force, with full power of substitution in the premises. This Stock Transfer Power shall be subject to the terms and conditions of that certain Share Purchase Agreement by and between, inter alia, Assignor and Assignee dated as of September 24, 2003. Dated: September 24, 2003 Per: /s/ He Ping Wang -------------------------- He Ping Wang Director Per: /s/ Lily Wang -------------------------- Lily Wang Director Per: /s/ Wei Dong Yin -------------------------- Wei Dong Yin Director - -------------------------------------------------------------------------------- Share Purchase Agreement Page 15 EX-17.1 4 netexh17_1.txt NET FORCE SYSTEMS 6K, RESIGNATION, D. FERGUSON Exhibit 17.1 Derek C. Ferguson 3183 Ash St., Vancouver, B.C., V5Z 4L1, Canada ------------------------------------------------------------------------ Net-Force Systems Inc. Suite #10-Epicurean, Woods Centre P.O. Box W-645 St. John's, Antigua Attention Net-Force Systems Inc. Board of Directors, I hereby tender my resignation of Director of Netforce Systems Inc. effective as at the date indicated below. Regards, Signed at Vancouver, B.C., Canada, on the 24th day of September, 2003; /s/ Derek C. Ferguson - ---------------------- ----------------------- Derek C. Ferguson Witness EX-17.2 5 netexh17_2.txt NET FORCE SYSTEMS 6K, RESIGNATION, T. BOWERING Exhibit 17.2 Terry G. Bowering Dove Cove, Dry Hill, P.O. Box W-645, St. John's, Antigua, West Indies ------------------------------------------------------------------------ Net-Force Systems Inc. Suite #10-Epicurean, Woods Centre P.O. Box W-645 St. John's, Antigua Attention Net-Force Systems Inc. Board of Directors, I hereby tender my resignation as Director of Net-Force Systems Inc. and all the offices held by me with Net-Force Systems Inc. effective as at the date indicated below. Regards, Signed at St. John's, Antigua, on the 24th day of September, 2003; /s/ Terry G. Bowering - ---------------------------- ------------------------------ Terry G. Bowering Witness EX-17.3 6 netexh17_3.txt NET FORCE SYSTEMS 6K, RESIGNATION, D. LEWIS Exhibit 17.3 Dwight Lewis Cassada Gardens, P.O. Box W-386, St. John's, Antigua, West Indies --------------------------------------------------------------------- Net-Force Systems Inc. Suite #10-Epicurean, Woods Centre P.O. Box W-645 St. John's, Antigua Attention Net-Force Systems Inc. Board of Directors, I hereby tender my resignation of Director of Netforce Systems Inc. effective as at the date indicated below. Regards, Signed at St. John's, Antigua, on the 24th day of September, 2003; /s/ Dwight Lewis - ---------------------------- ------------------------------ Dwight Lewis Witness EX-17.4 7 netexh17_4.txt NET FORCE SYSTEMS 6K, RESIGNATION, T. BOWERING Exhibit 17.4 Trevor L. Bowering 370 Cedar Meadow Drive, Regina, Sask., Canada S4X 3J5 ------------------------------------------------------------------------ Net-Force Systems Inc. Suite #10-Epicurean, Woods Centre P.O. Box W-645 St. John's, Antigua Attention Net-Force Systems Inc. Board of Directors, I hereby tender my resignation of Director of Netforce Systems Inc. effective as at the date indicated below. Regards, Signed at Regina, Sask., Canada, on the 24th day of September, 2003; /s/ Trevor L. Bowering - ------------------------- --------------------------- Trevor L. Bowering Witness EX-99.1 8 netexh99_1.txt NET FORCE SYSTEMS 6K, FINANCIALS, NET FORCE Exhibit 99.1 NET-FORCE SYSTEMS INC. AND SUBSIDARY CONSOLIDATED FINANCIAL STATEMENTS April 30, 2003 and 2002 F-1 C O N T E N T S --------------- Independent Auditors' Report............................................... F-3 Consolidated Balance Sheets................................................ F-4 Consolidated Statements of Operations.......................................F-6 Consolidated Statements of Stockholders' Equity (Deficit).................. F-7 Consolidated Statements of Cash Flows...................................... F-8 Notes to the Consolidated Financial Statements............................ F-10 F-2 INDEPENDENT AUDITORS' REPORT ---------------------------- To the Board of Directors Net-Force Systems Inc. and Subsidiary Antigua, West Indies We have audited the accompanying consolidated balance sheets of Net-Force Systems Inc. and Subsidiary as of April 30, 2003 and 2002 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years ended April 30, 2003, 2002, and 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Net-Force Systems Inc. and Subsidiary as of April 30, 2003 and 2002, and the consolidated results of their operations and their cash flows for the years ended April 30, 2003, 2002, and 2001 in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the consolidated financial statements, the Company's recurring losses from operations as well as the subsequent disposal of all operations and a working capital deficit raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 4. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. HJ & Associates, LLC Salt Lake City, Utah July 2, 2003 F-3
NET-FORCE SYSTEMS INC. AND SUBSIDARY Consolidated Balance Sheets ASSETS ------ April 30, ------------------------------------ 2003 2002 ---------------- ---------------- CURRENT ASSETS Cash $ 31,714 $ 68,462 Accounts receivable, net 3,903 15,623 Reserves and deposits with credit card processors (Note 7) 30,927 63,953 Gaming license (Note 9) - 18,333 ---------------- ---------------- Total Current Assets 66,544 166,371 ---------------- ---------------- PROPERTY AND EQUIPMENT, NET (Note 2) 7,183 18,088 ---------------- ---------------- OTHER ASSETS Player deposits (Note 8) 51,637 47,002 Deposits 4,793 4,793 ---------------- ---------------- Total Other Assets 56,430 51,795 ---------------- ---------------- TOTAL ASSETS $ 130,157 $ 236,254 ================ ================ The accompanying notes are an integral part of these consolidated financial statements. F-4 NET-FORCE SYSTEMS INC. AND SUBSIDARY Consolidated Balance Sheets (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- April 30, ------------------------------------ 2003 2002 ---------------- ---------------- CURRENT LIABILITIES Accounts payable $ 31,802 $ 62,847 Accrued expenses 17,917 18,000 Accrued expenses - related parties 53,387 6,352 Interest payable - related party - 112 Interest payable 1,537 - Player deposits (Note 8) 51,637 47,002 Current portion note payable - related party (Note 3) - 2,500 ---------------- ---------------- Total Current Liabilities 156,280 136,813 ---------------- ---------------- Total Liabilities 156,280 136,813 ---------------- ---------------- COMMITMENTS AND CONTINGENCIES (Note 6) STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock: 50,000,000 shares authorized of $0.001 par value, zero issued and outstanding - - Common stock: 100,000,000 shares authorized of $0.001 par value, 17,066,033 shares issued and outstanding 17,066 17,066 Additional paid-in capital 1,145,037 1,145,037 Accumulated deficit (1,188,226) (1,062,662) ---------------- ---------------- Total Stockholders' Equity (Deficit) (26,123) 99,441 ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 130,157 $ 236,254 ================ ================
The accompanying notes are an integral part of these consolidated financial statements. F-5
NET-FORCE SYSTEMS INC. AND SUBSIDARY Consolidated Statements of Operations For the Years Ended April 30, -------------------------------------------------------- 2003 2002 2001 ---------------- ---------------- ---------------- REVENUE $ - $ - $ - ---------------- ---------------- ---------------- EXPENSES - - - ---------------- ---------------- ---------------- LOSS FROM OPERATIONS - - - ---------------- ---------------- ---------------- OTHER INCOME (EXPENSE) - - - ---------------- ---------------- ---------------- PROVISION FOR INCOME TAX - - - ---------------- ---------------- ---------------- LOSS BEFORE DISCONTINUED OPERATIONS - - - ---------------- ---------------- ---------------- LOSS FROM DISCONTINUED OPERATIONS (NOTE 11) (125,564) (174,206) (484,597) ---------------- ---------------- ---------------- NET LOSS $ (125,564) $ (174,206) $ (484,597) ================ ================ ================ BASIC LOSS PER SHARE - DISCONTINUED OPERATIONS $ (0.01) $ (0.01) $ (0.07) ================ ================ ================ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 17,066,033 13,375,186 7,171,233 ================ ================ ================
The accompanying notes are an integral part of these consolidated financial statements. F-6
NET-FORCE SYSTEMS INC. AND SUBSIDARY Consolidated Statements of Stockholders' Equity (Deficit) Common Stock Additional --------------------------- Paid-In Accumulated Shares Amount Capital Deficit ------------ ------------ ------------ ------------ Balance, April 30, 2000 8,500,000 $ 8,500 $ 27,000 $ (403,859) July 1, 2000, common stock repurchased and canceled at $0.01 per share (3,000,000) (3,000) (27,000) - September 30, 2000, common stock issued for cash at $0.10 per share 2,000,000 2,000 198,000 - Net loss for the year ended April 30, 2001 - - - (484,597) ------------ ------------ ------------ ------------ Balance, April 30, 2001 7,500,000 7,500 198,000 (888,456) August 15, 2001, common stock issued for services at $0.10 per share 200,000 200 19,800 - September 15, 2001, common stock issued for conversion of related party debt at $0.10 per share 2,144,830 2,145 212,338 - September 15, 2001, common stock issued for conversion of debt at $0.10 per share 6,027,870 6,028 596,759 - September 20, 2001, common stock issued for conversion of debt at $0.10 per share 533,333 533 52,800 - October 2, 2001, common stock issued for conversion of debt at $0.10 per share 500,000 500 49,500 - January 31, 2002, common stock issued for cash at $0.10 per share 160,000 160 15,840 - Net loss for the year ended April 30, 2002 - - - (174,206) ------------ ------------ ------------ ------------ Balance, April 30, 2002 17,066,033 17,066 1,145,037 (1,062,662) Net loss for the year ended April 30, 2003 - - - (125,564) ------------ ------------ ------------ ------------ Balance, April 30, 2003 17,066,033 $ 17,066 $ 1,145,037 $(1,188,226) ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-7
NET-FORCE SYSTEMS INC. AND SUBSIDARY Consolidated Statements of Cash Flows For the Years Ended April 30, -------------------------------------------------------- 2003 2002 2001 ---------------- ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (125,564) $ (174,206) $ (484,597) Adjustments to reconcile net loss to net cash used by operating activities: Common stock issued for services - 20,000 - Depreciation and amortization 7,499 101,873 18,241 Loss on sale of asset 523 205 (491) Loss on abandonment of leasehold improvements - - 6,700 Changes in assets and liabilities: (Increase) decrease in reserves and deposits 28,391 (6,269) (30,858) (Increase) decrease in accounts receivables 11,720 (5,818) (7,212) Decrease in prepaid expenses - - 34,698 (Increase) in other assets (1,667) (1,600) (64,960) (Increase) in license - - (100,000) Increase (decrease) in accounts payable (11,045) 448 5,243 Increase in accrued interest 1,537 29,413 26,017 Increase (decrease) in accrued interest - related party (112) 4,732 4,243 Increase (decrease) in accrued expense (83) - 24,351 Increase in accrued expenses - related party 47,035 - - Increase (decrease) in player deposit 4,635 (26,826) 73,828 ---------------- ---------------- ---------------- Net Cash Used by Operating Activities (37,131) (58,048) (494,797) ---------------- ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets - (800) (3,704) Proceeds from sale of fixed assets 2,883 518 1,927 ---------------- ---------------- ---------------- Net Cash Provided (Used) by Investing Activities 2,883 (282) (1,777) ---------------- ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on notes payable- related party (2,500) (36,300) - Proceeds from notes payable - related party - 113,800 128,597 Proceeds from notes payable - - 50,000 Increase in stock subscription payable - - 50,000 Common stock issued for cash - 16,000 200,000 Repurchase of and cancellation of common stock - - (30,000) ---------------- ---------------- ---------------- Net Cash Provided (Used) by Financing Activities $ (2,500) $ 93,500 $ 398,597 ---------------- ---------------- ---------------- The accompanying notes are an integral part of these consolidated financial statements. F-8 NET-FORCE SYSTEMS INC. AND SUBSIDARY Consolidated Statements of Cash Flows (Continued) For the Years Ended April 30, -------------------------------------------------------- 2003 2002 2001 ---------------- ---------------- ---------------- NET INCREASE (DECREASE) IN CASH $ (36,748) $ 35,170 $ (97,977) CASH AT BEGINNING OF PERIOD 68,462 33,292 131,269 ---------------- ---------------- ---------------- CASH AT END OF PERIOD $ 31,714 $ 68,462 $ 33,292 ================ ================ ================ CASH PAID FOR: Interest $ 112 $ - $ 50,000 Income taxes $ - $ - $ - NON-CASH FINANCING ACTIVITIES: Issuance of common stock for services $ - $ 20,000 $ - Issuance of common stock for conversion of debt $ - $ 706,120 $ - Issuance of common stock for conversion of related party debt $ - $ 214,483 $ -
The accompanying notes are an integral part of these consolidated financial statements. F-9 NET-FORCE SYSTEMS INC. AND SUBSIDARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS The Company was incorporated on March 1, 1999 under the International Business Corporations Act No. 28 of 1982 of the laws of Antigua and Barbuda as Net-Force Systems Inc. The Company will be engaged in all business activities permitted under the International Business Corporations Act of 1982 except International Banking, Trust and Insurance. It will generally carry on the business of an investment and holding company. On August 5, 1999, a wholly-owned subsidiary, Net Force Entertainment Inc. (Entertainment), was incorporated under the International Business Corporations Act No. 28 of 1982 of the laws of Antigua and Barbuda. This subsidiary company will be engaged in all aspect of International betting, gaming, sports betting and bookmaking but with a major emphasis on internet gaming. The Company reentered the development stage in the first fiscal quarter of 2004 due to the sale of Entertainment to a company controlled by the Company's president (See Note 11). NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES a. Accounting Method The Company's financial statements are prepared using the accrual method of accounting. The Company has elected an April 30 year-end. b. Basic Loss Per Share Basic loss per share has been calculated based on the weighted average number of shares of common stock outstanding during the period.
For the Years Ended April 30, -------------------------------------------------- 2003 2002 2001 -------------- -------------- -------------- Basic loss per share: Numerator - net loss from discontinued operations $ (125,564) $ (174,206) $ (484,597) Denominator - weighted average number of shares outstanding 17,066,033 13,375,186 7,171,233 -------------- -------------- -------------- Loss per share $ (0.01) $ (0.01) $ (0.07) ============== ============== ==============
F-10 NET-FORCE SYSTEMS INC. AND SUBSIDARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued) c. Provision for Taxes The Company's operations are within the Jurisdiction of St. John's, Antigua, where there is no corporate income tax. d. Cash and Cash Equivalents The Company considers all highly liquid investment with a maturity of three months or less when purchased to be cash equivalent. e. Principles of Consolidation The April 30, 2003 financial statements are consolidated with the Company and Entertainment. All significant intercompany accounts and transaction have been eliminated. f. Property and Equipment Office equipment and leasehold improvements are recorded at cost. Minor additions and renewals are expensed in the year incurred. Major additions and renewals are capitalized and depreciated over their estimated useful lives. Depreciation of office equipment is computed using the straight-line method over the estimated useful life of the asset of 5 years. Vehicles are depreciated over a life of 5 years using the straight-line method. Software is depreciated over a life of 5 years. Depreciation expense for discontinued operations for the years ended April 30, 2003, 2002 and 2001 was $7,499, $8,539, and $9,908, respectively. Property and equipment consists of the following: April 30, -------------------------------- 2003 2002 -------------------------------- Vehicles $ - $ 3,704 Computer equipment 16,450 18,450 Computer software 10,000 10,000 Office furniture and equipment 6,521 6,741 Accumulated depreciation (25,788) (20,807) -------------- -------------- Net Property and Equipment $ 7,183 $ 18,088 ============== ============== F-11 NET-FORCE SYSTEMS INC. AND SUBSIDARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued) g. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. h. Recent Accounting Pronouncements SFAS No. 145 -- On April 30, 2002, the FASB issued FASB Statement No. 145 (SFAS 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS 145 rescinds both FASB Statement No. 4 (SFAS 4), "Reporting Gains and Losses from Extinguishment of Debt," and the amendment to SFAS 4, FASB Statement No. 64 (SFAS 64), "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." Through this rescission, SFAS 145 eliminates the requirement (in both SFAS 4 and SFAS 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. However, an entity is not prohibited from classifying such gains and losses as extraordinary items, so long as it meets the criteria in paragraph 20 of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Further, SFAS 145 amends paragraph 14(a) of FASB Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between the accounting for sale-leaseback transactions and certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The amendment requires that a lease modification (1) results in recognition of the gain or loss in the 9 financial statements, (2) is subject to FASB Statement No. 66, "Accounting for Sales of Real Estate," if the leased asset is real estate (including integral equipment), and (3) is subject (in its entirety) to the sale-leaseback rules of FASB Statement No. 98, "Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease Term, and Initial Direct Costs of Direct Financing Leases." Generally, FAS 145 is effective for transactions occurring after May 15, 2002. The Company does not expect that the adoption of SFAS 145 will have a material effect on its financial performance or results of operations. F-12 NET-FORCE SYSTEMS INC. AND SUBSIDARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued) h. Recent Accounting Pronouncements (Continued) SFAS No. 146 -- In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002 and early application is encouraged. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS 146. The effect on adoption of SFAS 146 will change on a prospective basis the timing of when the restructuring charges are recorded from a commitment date approach to when the liability is incurred. The Company does not expect that the adoption of SFAS 146 will have a material effect on its financial performance or results of operations. SFAS No. 147 -- In October 2002, the FASB issued Statement No. 147 "Acquisitions of Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9" (SFAS 147). SFAS 147 removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of this Statement. In addition, this Statement amends FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that Statement 144 requires for other long-lived assets that are held and used. SFAS 147 is effective October 1, 2002. The Company does not expect that the adoption of SFAS 147 will have a material effect on its consolidated financial statements. F-13 NET-FORCE SYSTEMS INC. AND SUBSIDARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued) h. Recent Accounting Pronouncements (Continued) SFAS No. 148 -- In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure"(SFAS 148"). SFAS 148 amends SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for fiscal years beginning after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company is currently evaluating the effect that the adoption of SFAS 148 will have on its results of operations and financial condition. SFAS No. 149 - In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", to provide clarification on the meaning of an underlying, the characteristics of a derivative that contains financing components and the meaning of an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. This statement will be applied prospectively and is effective for contracts entered into or modified after June 30, 2003. The statement will be applicable to existing contracts and new contracts relate to forward purchases or sales of when-issued securities or other securities that do not yet exist. The Company does not expect that the adoption of SFAS 149 will have a material effect on the Company's consolidated financial statements. SFAS No. 150 - In May 2003, the FASB issued Statement of Financial Accounting Standards No 159 ("SFAS 150"), Accounting for certain financial instruments with characteristics of both liabilities and equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement will be effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principal for financial instruments created before the issuance date of the statement and existing at the beginning of the interim period of adoption. The Company does not expect that the adoption of SFAS 150 will have material effect on the Company's consolidated financial statements. F-14 NET-FORCE SYSTEMS INC. AND SUBSIDARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued) i. Revenue Recognition Policy The Company has recognized as revenue the net winnings from gaming activities, which is the difference between gaming winnings and losses. The earnings process is complete upon receipt of the net winnings, and no further obligations exist to the customer. Cost of sales includes royalties payable to Softec, incurred on Casino activity and bank discount fees incurred by the Company for the acceptance of credit cards. The formula for net revenue sharing is as follows: (Casino gain (loss) less adjustment for incentives less charge backs) times a royalty factor to be paid to Softec. The royalty factor used depends on net monthly revenue. The following table lists the schedule of royalty payments: Net Monthly Revenue Royalty Fee Payable --------------------------------------- 0 to $500,000 25% $500,001 to $1,000,000 20% $1,000,001 to $5,000,000 15% $5,000,001 to $10,000,000 12.5% $10,000,001 plus 10% The Company renegotiated the 25% factor down to 15% for the period from September 2000 through August 2000, after which the factor rose to 25% again. j. Advertising The Company follows the policy of charging the costs of advertising to expense as incurred. Advertising expense for the years ending April 30, 2003, 2002 and 2001 was $7,890, $34,681 and $174,859, respectively. k. Long-Lived Assets In Accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. SFAS 144 supercedes SFAS Statement No. 121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of". SFAS 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30 (APB 30), "Reporting Results of Operations Reporting the Effects of Disposal of a Segment of a Business". SFAS 144 develops one accounting model (based on the model in SFAS 121) for long-lived assets that are to be disposed of by sale, as well as addresses the principal implementation issues. SFAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. That requirement eliminates the requirement of APB 30 that discontinued operations be measured at net realizable value or that entities include under `discontinued operations' in the financial statements amounts for operating losses that have not yet occurred. F-15 NET-FORCE SYSTEMS INC. AND SUBSIDARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued) l. Foreign Currency Translation Monetary assets and liabilities denominated in foreign currencies are translated into United States dollars at the period end exchange rate. Non-monetary assets are translated at the historical exchange rate and all income and expenses are translated at the exchange rates prevailing during the period. Foreign exchange currency translation adjustments are included in the stockholders' equity section as other comprehensive income. The Company operates with East Caribbean Dollars (EC). The exchange rate between the EC and the United States Dollar (USD) is always constant at .37453. This constant exchange rate makes it unnecessary to have a foreign exchange translation adjustment in the stockholder's equity section. m. Concentrations of Risk - Foreign Operations The Company operates in St. John's which has a developing economy. Hyperinflation and rapid political and legal change, often accompanied by military insurrection, have been common in certain emerging markets in which the Company may conduct operations. The Company may be materially adversely affected by possible political or economic instability in St John's. The risks include, but are not limited to terrorism, military repression, expropriation, changing fiscal regimes, high rates of inflation and the absence of industrial and economic infrastructure. Changes in development or investment policies or shifts in the prevailing political climate in St. John's in which the Company operates could adversely affect the Company's business. Operations may be affected in varying degrees by government regulations with respect to development restrictions, price controls, export controls, income and other taxes, expropriation of property, maintenance of claims, environmental legislation, labor, welfare, benefit policies, land use, land claims of local residents, water use and mine safety. The effect of these factors cannot be accurately predicted. NOTE 3 - NOTE PAYABLE - RELATED PARTY
April 30, 2003 2002 -------------- -------------- Geneva Overseas Holdings Ltd. (A company controlled by the president of the Company) made advances to the Company totaling $2,500. These advances have an interest rate of 8% annually. This note was unsecured. $ - $ 2,500 Less Current Portion - 2,500 -------------- -------------- Total Long-Term Debt -Related Party $ - $ - ============== ==============
Interest expense for the years ending April 30, 2003, 2002 and 2001 was $-0-, $4,732 and $4,243, respectively. F-16 NET-FORCE SYSTEMS INC. AND SUBSIDARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 4 - GOING CONCERN The Company's consolidated financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has incurred losses from its inception through April 30, 2003 and has a significant working capital deficit. The Company does not have an established source of revenues sufficient to cover its operating costs to allow it to continue as a going concern. It is the intent of the Company to sell its wholly-owned subsidiary to exit from the internet gaming business and to seek another valid business to become a wholly-owned subsidiary. The major shareholders are committed to provide the necessary funds to operate the Company. NOTE 5 - STOCK TRANSACTIONS On July 1, 2000, the Company repurchased and canceled 3,000,000 shares of common stock at $0.01 per share or $30,000 of cash. On September 30, 2000, the Company issued 2,000,000 shares of common stock at $0.10 per share for $200,000 of cash. On August 15, 2001, the Company issued 200,000 shares of common stock valued at $0.10 per share, to a director for services and consulting. On September 15, 2001, the Company converted the related party note payable of $208,121 and accrued interest of $6,362 into equity by issuing 2,144,830 shares of common stock at $0.10 per share for a total of $214,483. On September 15, 2001, the Company converted a note payable of $495,000 and accrued interest of $107,787 into equity by issuing 6,027,830 shares of common stock at $0.10 per share for a total of $602,787. On September 20, 2001, the Company converted a note payable of $50,000 and accrued interest of $3,333 into equity by issuing 533,333 shares of common stock at $0.10 per share for a total of $53,333. On October 2, 2001, the Company issued 500,000 shares of common stock for the subscription payable of $50,000 at $0.10 per share. On January 31, 2002, the Company issued 160,000 shares of common stock at $0.10 per share for cash of $16,000. F-17 NET-FORCE SYSTEMS INC. AND SUBSIDARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 6 - COMMITMENTS AND CONTINGENCIES Software Licensing Agreement In the first quarter of 1999, the Company entered into a software licensing agreement with Softec Systems Caribbean Inc. (Softec), to provide online-gaming software and hardware services. The license agreement calls for a commitment by the Company to spend a minimum of 10% of the previous months net revenue (based on a yearly average) for ongoing promotion and marketing. The marketing obligation only applies to the first 365 days of operation. The license agreement also calls for sharing of net revenues based on a specific formula agreed to by the Company and Softec. The license agreement may be terminated by the Company at the end of any one-year term or by Softec at the end of any one-year term subsequent to the first year of the agreement. All of the Company's websites and advertising are directly linked to Softec's software. Softec manages the software as well as the upkeep and maintenance. The Company is highly dependent, therefore, on Softec's ability to maintain the software and keep it running. In the event that the software fails, the Company's business and operations could be strongly affected. NOTE 7 - RESERVES AND DEPOSITS WITH CREDIT CARD PROCESSORS Reserves and deposits with credit card processors consist of rolling reserves held by merchant banks and funds for transactions processed and awaiting transfer to the Company's bank accounts. As of April 30, 2003 and 2002, the balance of these reserves and deposits were $30,927 and $63,953, respectively. NOTE 8 - PLAYER DEPOSITS As of April 30, 2003 and 2002, the Company had $51,637 and $47,002, respectively, in cash representing funds held on deposit in the form of e-cash balances. These deposits are non-interest bearing and repayable on demand. These deposits are actually held by a third party for the benefit of the Company. NOTE 9 - GAMING LICENSE The Company was required to purchase a gaming business license on an annual basis. The cost of the license was $20,000 for 2002 and was $100,000 in 2001, and is amortized over twelve months. Amortization expense for the years ending April 30, 2003, 2002, and 2001 was $-0-, $93,334 and $8,333, respectively. During 2003, the Company operated under the Master license of World Gaming, thus they were not required to purchase their own license. NOTE 10 - OPERATING LEASE Office lease On August 1, 2001, the Company signed a one-year lease agreement for office space. This lease ran through July 3, 2002. The monthly rental amount is $629. Subsequent to July 3, 2002, the Company went to a monthly office lease. F-18 NET-FORCE SYSTEMS INC. AND SUBSIDARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 11 - SUBSEQUENT EVENTS Discontinued Operations ----------------------- In June 2003, the Company's Board of Directors entered into an agreement to sell its wholly-owned subsidiary, Net Force Entertainment, Inc. (Entertainment) to Geneva Overseas Holdings Ltd., a company owned by the Company's President and CEO. The consideration for the sale per the sales agreement was $100 plus the assumption of all outstanding debt. The Company no longer has any control over Entertainment. The following is a summary of the discontinued operations for the years ended April 30, 2003, 2002 and 2001.
For the Years Ended April 30, -------------------------------------------------- 2003 2002 2001 -------------- -------------- -------------- REVENUE Sales $ 288,613 $ 519,237 $ 318,490 Cost of sales 212,445 282,020 217,769 -------------- -------------- -------------- Gross Margin (Deficit) 76,168 237,217 100,721 -------------- -------------- -------------- EXPENSES General and administrative 194,975 275,896 489,278 Depreciation and amortization 7,499 101,873 18,241 -------------- -------------- -------------- Total Expenses 202,474 377,769 507,519 -------------- -------------- -------------- LOSS FROM OPERATIONS (126,306) (140,552) (406,798) -------------- -------------- -------------- OTHER INCOME (EXPENSE) Loss on abandonment of leasehold improvements - - (6,700) Gain on sale of assets - - 491 Loss on sale of assets (523) (205) - Interest income 1,135 198 1,013 Other income 1,667 494 7,656 Interest expense (1,537) (34,141) (80,259) -------------- -------------- -------------- Total Other Income (Expense) 742 (33,654) (77,799) -------------- -------------- -------------- PROVISION FOR INCOME TAX - - - -------------- -------------- -------------- NET LOSS $ (125,564) $ (174,206) $ (484,597) ============== ============== ============== LOSS ON DISPOSAL OF SUBSIDIARY $ - $ - $ - ============== ============== ==============
F-19 NET-FORCE SYSTEMS INC. AND SUBSIDARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 11 - SUBSEQUENT EVENTS (Continued) New Subsidiary -------------- In June 2003, the Company approved the creation a wholly-owned subsidiary Atlantica Resorts Ltd. (Atlantica) to be incorporated in the Jurisdiction of the Territory of the British Virgin Islands, pursuant to the International Business Companies Act. Common Stock ------------ On June 10, 2003, the Company authorized the issuance of 25,000 shares of common stock for conversion of debt to equity valued at $0.10 per share or $2,500. F-20 EX-99.2 9 netexh99_2.txt NET FORCE SYSTEMS 6K, FINANCIALS, SINOVAC Exhibit 99.2 SINOVAC BIOTECH CO., LTD. (A Company Incorporated in China) Financial Statements (Expressed in U.S. Dollars) June 30, 2003, December 31, 2002 and 2001 Index ----- Report of Independent Accountants Balance Sheets Statements of Stockholders' Equity Statement of Operations Statements of Cash Flows Notes to Financial Statements F-1 MOORE STEPHENS ELLIS FOSTER LTD. - -------------------------------- CHARTERED ACCOUNTANTS 1650 West 1st Avenue Vancouver, BC Canada V6J 1G1 Telephone: (604) 734-1112 Facsimile: (604) 714-5916 Website: www.ellisfoster.com - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of SINOVAC BIOTECH CO., LTD. We have audited the balance sheets of Sinovac Biotech Co., Ltd. ("the Company") as at June 30, 2003, December 31, 2002 and 2001, and the related statements of stockholders' equity, operations and cash flows for the six months ended June 30, 2003, year ended December 31, 2002 and period from April 28, 2001 (inception) to December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at June 30, 2003, December 31, 2002 and 2001 and the results of its operations and its cash flows for the six months ended June 30, 2003, year ended December 31, 2002 and period from April 28, 2001 to December 31, 2001 in conformity with generally accepted accounting principles in the United States of America. Vancouver, Canada "MOORE STEPHENS ELLIS FOSTER LTD." August 6, 2003 Chartered Accountants - -------------------------------------------------------------------------------- MS An independently owned and operated member of Moore Stephens North America, Inc. Members in principal cities throughout North America. Moore Stephens North America, Inc. is a member of Moore Stephens International Limited, members in principal cities throughout the world. F-2
SINOVAC BIOTECH CO., LTD. Balance Sheets (Expressed in U.S. Dollars) ======================================================================================================= June 30 December 31 December 31 2003 2002 2001 - ------------------------------------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents $ 730,150 $ 312,594 $ 1,990,227 Restricted cash - - 128,790 Accounts receivable - net 1,020,096 469,179 7,579 Inventories 1,552,210 1,355,049 125,909 Prepaid expenses and deposits 12,990 6,722 5,537 - -------------------------------------------------------------------------------------------------------- Total current assets 3,315,446 2,143,544 2,258,042 Property, plant and equipment 7,706,783 7,600,755 5,652,735 Due from related parties 677,487 982,175 1,199,687 Licenses and permits 2,578,345 2,321,535 1,941,879 - -------------------------------------------------------------------------------------------------------- Total assets $ 14,278,061 $ 13,048,009 $ 11,052,343 ======================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Loans payable $ 872,282 $ 2,074,070 $ 1,570,048 Accounts payable and accrued liabilities 1,760,714 1,944,596 1,050,503 Due to related parties 1,246,344 1,232,454 1,521,468 Deferred research grants 121,850 - - - -------------------------------------------------------------------------------------------------------- Total current liabilities 4,001,190 5,251,120 4,142,019 - -------------------------------------------------------------------------------------------------------- Commitment (Note 12) STOCKHOLDERS' EQUITY Paid-in capital 11,075,201 8,466,505 8,007,871 Subscription receivable - - (1,020,139) Accumulated deficit (798,330) (669,616) (77,408) - -------------------------------------------------------------------------------------------------------- Total stockholders' equity 10,276,871 7,796,889 6,910,324 - -------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 14,278,061 $ 13,048,009 $ 11,052,343 ========================================================================================================
The accompanying notes are an integral part of these financial statements. F-3
SINOVAC BIOTECH CO., LTD. Statements of Stockholders' Equity (Expressed in U.S. Dollars) ============================================================================================================================ Total Paid-in Deficit Subscription stockholders' capital accumulated receivable equity - ---------------------------------------------------------------------------------------------------------------------------- Contribution in cash for shares $ 8,212,560 $ - $ (1,020,139) $ 7,192,421 Contribution of drug license for shares at transferor's cost (Note 7c) 1,941,879 1,941,879 Excess of transfer price of land-use rights over transferor's cost (Note 10c) (2,146,568) (2,146,568) Comprehensive income (loss) - - Net (loss) for the period - (77,408) - (77,408) - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001 8,007,871 (77,408) (1,020,139) 6,910,324 ============================================================================================================================ Contribution of drug license for shares at transferor's cost (Note 7b) 458,634 - - 458,634 Subscription receivable received - - 1,020,139 1,020,139 Comprehensive income (loss) - - Net (loss) for the year - (592,208) - (592,208) - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2002 8,466,505 (669,616) - 7,796,889 ============================================================================================================================ Debt exchange for shares (Note 10d) 2,608,696 - - 2,608,696 Comprehensive income (loss) - - Net (loss) for the period - (128,714) - (128,714) - ---------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 2003 $ 11,075,201 $ (798,330) $ - $ 10,276,871 ============================================================================================================================
The accompanying notes are an integral part of these financial statements. F-4
SINOVAC BIOTECH CO., LTD. Statements of Operations (Expressed in U.S. Dollars) ========================================================================================================== Six months April 28, 2001 Ended Year Ended (inception) to June 30 December 31 December 31 2003 2002 2001 - ---------------------------------------------------------------------------------------------------------- Sales $ 1,090,856 $ 649,319 $ - Cost of sales 357,386 251,711 - - ----------------------------------------------------------------------------------------------------------- Gross profit 733,470 397,608 - - ----------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses 615,615 792,078 124,344 Research and development expenses 18,099 24,535 - Interest and financing expenses 118,690 81,009 - Depreciation of property, plant and equipment and amortization of licenses and permits 132,994 143,337 9,917 - ----------------------------------------------------------------------------------------------------------- 885,398 1,040,959 134,261 - ----------------------------------------------------------------------------------------------------------- Operating loss (151,928) (643,351) (134,261) Interest income 23,214 51,143 56,853 - ----------------------------------------------------------------------------------------------------------- Net (loss) for the period $ (128,714) $ (592,208) $ (77,408) ===========================================================================================================
The accompanying notes are an integral part of these financial statements. F-5
SINOVAC BIOTECH CO., LTD. Statements of Cash Flows (Expressed in U.S. Dollars) ============================================================================================================== Six months April 28, 2001 Ended Year Ended (inception) to June 30 December 31 December 31 2003 2002 2001 - -------------------------------------------------------------------------------------------------------------- Cash flows from (used in) operating activities Net (loss) for the period $ (128,714) $ (592,208) $ (77,408) Adjustments for item not involving cash: - depreciation of property, plant and equipment and amortization of licenses and permits 328,786 337,099 9,917 - -------------------------------------------------------------------------------------------------------------- 200,072 (255,109) (67,491) Change in non-cash working capital items: - accounts receivable (550,917) (461,600) (7,579) - inventories (197,161) (1,229,140) (125,909) - prepaid expenses and deposits (6,268) (1,185) (5,537) - accounts payable and accrued liabilities (183,882) 894,093 1,050,503 - research grants 121,850 - - - -------------------------------------------------------------------------------------------------------------- (616,306) (1,052,941) 843,987 - -------------------------------------------------------------------------------------------------------------- Cash flows from (used in) financing activities Loans proceeds 1,406,908 504,022 1,570,048 Proceeds from paid-in capital - 1,020,139 7,192,421 Advances from (to) related parties 318,578 (71,502) 321,781 - -------------------------------------------------------------------------------------------------------------- 1,725,486 1,452,659 9,084,250 - -------------------------------------------------------------------------------------------------------------- Cash flows from (used in) investing activities Restricted cash - 128,790 (128,790) Acquisition of property, plant and equipment (337,720) (2,188,025) (7,809,220) Acquisition of drug licenses (353,904) (18,116) - - -------------------------------------------------------------------------------------------------------------- (691,624) (2,077,351) (7,938,010) - -------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 417,556 (1,677,633) 1,990,227 Cash and cash equivalents, beginning of period 312,594 1,990,227 - - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 730,150 $ 312,594 $ 1,990,227 ==============================================================================================================
The accompanying notes are an integral part of these financial statements. F-6 SINOVAC BIOTECH CO., LTD. Notes to Financial Statements June 30, 2003, December 31, 2002 and 2001 (Expressed in U.S. Dollars) ================================================================================ 1. Nature of Business - ----------------------- The Company was incorporated under the laws of China on April 28, 2001. It is in the business of research and development, production and sales of pharmaceutical products in China. 2. Currency of Presentation - ----------------------------- These financial statements have been prepared in Renminbi ("RMB"), which is the currency of the Company's functional and reporting currency. US dollars equivalent figures presented in these financial statements are determined by translating the amounts at the exchange rate of US$1 = RMB8.28 for the convenience of the readers. 3. Significant Accounting Policies - ------------------------------------ (a) Principles of Accounting These financial statements have been prepared in accordance with generally accepted accounting principles accepted in the United States of America. (b) Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) Cash and Cash Equivalents Cash equivalents usually consist of highly liquid investments that are readily convertible to cash with maturities of three months or less when purchased. As at June 30, 2003, December 31, 2002 and 2001, cash and cash equivalents consist of cash only. (d) Restricted Cash Restricted cash is cash held as collateral for letters of credit and is classified based on the expected expiration of such facilities. F-7 SINOVAC BIOTECH CO., LTD. Notes to Financial Statements June 30, 2003, December 31, 2002 and 2001 (Expressed in U.S. Dollars) ================================================================================ 3. Significant Accounting Policies (continued) - ------------------------------------ (e) Inventories Inventories are stated at the lower of cost or market with cost generally determined on a first-in, first-out basis. Cost includes direct material, direct labour and overheads. (f) Property, plant and Equipment Property, plant and equipment are recorded at cost, including capitalized interest and internal engineering costs. Depreciation of property, plant and equipment generally is computed using the straight-line method based on the estimated useful lives of the assets as follows: Land-use rights 49 years Plant and building 30 years Machinery and equipment 8 - 10 years Motor vehicles 5 years Office equipment and furniture 5 years Leasehold improvements Term of lease (5years) Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset's carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 144. This statement retains the requirements of SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" to recognize impairments on Property, Plant and Equipment, but removes goodwill from its scope. The adoption of SFAS No. 144 did not have a material impact on the Company's financial statements. F-8 SINOVAC BIOTECH CO., LTD. Notes to Financial Statements June 30, 2003, December 31, 2002 and 2001 (Expressed in U.S. Dollars) ================================================================================ 3. Significant Accounting Policies (continued) - ------------------------------------ (g) Licenses and Permits Licenses and permits, in relation to the production and sales of pharmaceutical products in China, are amortized on a straight-line basis over their useful lives of ten (10) years. Licenses and permits are evaluated for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the assets carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. (h) Income Taxes The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which requires the Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns using the liability method. Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. (i) Revenue Recognition Sales revenue is recognized upon the delivery of goods to customers. (j) Advertising Expenses Advertising costs are expensed as incurred and included in selling expenses. Approximated advertising costs are $108,933, $154,591 and $24,802 for the six months ended June 30, 2003, year ended December 31, 2002 and period from April 28, 2001 (inception) to December 31, 2001, respectively. (k) Research and Development Research and development costs are charged to operations as incurred. Research and development costs are listed as a separate line item on the Company's statements of operations. Research grants are taken into income as a reduction of research and development expenses when conditions imposed by the government authorities are fulfilled. F-9 SINOVAC BIOTECH CO., LTD. Notes to Financial Statements June 30, 2003, December 31, 2002 and 2001 (Expressed in U.S. Dollars) ================================================================================ 3. Significant Accounting Policies (continued) - ------------------------------------ (l) Foreign Currency Transactions The Company's functional currency is Renminbi. The Company translates foreign currency transactions into its functional currency in the following manner: At the transaction date, each asset, liability, revenue and expense is translated into the functional currency by the use of the exchange rate in effect at that date. At the period end, foreign currency monetary assets, and liabilities are re-evaluated into the functional currency by using the exchange rate in effect at the balance sheet date. The resulting foreign exchange gains and losses are included in operations. (m) Stock-based Compensation The Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-based Compensation". SFAS 123 encourages, but does not require, companies to adopt a fair value based method for determining expense related to stock-based compensation. The Company accounts for stock-based compensation issued to employees and directors using the intrinsic value method as prescribed under Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. The Company did not incur any stock-based compensation for the period from April 28, 2001 (inception) to June 30, 2003. (n) Comprehensive Income The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. The Company is disclosing this information on its Statement of Stockholders' Equity. Comprehensive income comprises equity except those resulting from investments by owners and distributions to owners. (o) Earnings Per Share Earnings per share number is not presented as the Company is a private corporation. F-10 SINOVAC BIOTECH CO., LTD. Notes to Financial Statements June 30, 2003, December 31, 2002 and 2001 (Expressed in U.S. Dollars) ================================================================================ 3. Significant Accounting Policies (continued) - ------------------------------------ (p) Financial Instruments and Concentration of Credit Risks Fair value of financial instruments are made at a specific point in time, based on relevant information about financial markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgement, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair values. The carrying value of cash and cash equivalents, accounts receivable, loans payable, accounts payable and accrued liabilities approximate their fair value because of the short-term nature of these instruments. The Company is operating in China, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between US dollars and the Chinese currency RMB. Financial instruments that potentially subject the Company to concentration of credit risks consist principally of cash and trade receivables, the balances of which are stated on the balance sheet. The Company places its cash in high credit quality financial institutions. The Company's customers are primarily pharmaceutical and biotechnology companies. One customer accounted for 16.45% of total sales for the six months ended June 30, 2003 and two customers accounted for 41.42% of total sales for the year ended December 31, 2002. Concentration of credit risks with respect to trade receivables are limited to a degree due to the Company's large number of diverse customers in different locations in China. Ongoing credit evaluations of customers' financial condition are performed and the Company maintains provision for potential credit losses if necessary. The Company does not require collateral or other security to support financial instruments subject to credit risks. The Company is not subject to significant interest risks. (q) Accounting for Derivative Instruments and Hedging Activities The Company has adopted the Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, which requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. The Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes. The Company does not anticipate that the adoption of the statement will have a significant impact on its financial statements. F-11 SINOVAC BIOTECH CO., LTD. Notes to Financial Statements June 30, 2003, December 31, 2002 and 2001 (Expressed in U.S. Dollars) ================================================================================ 3. Significant Accounting Policies (continued) - ------------------------------------ (r) New Accounting Pronouncements In December 2002, the Financial Accounting Standard Board issued Statement of Financial Accounting Standard No. 148 (SFAS 148), Accounting for Stock-based Compensation - Transition and Disclosure. SFAS 148 amends SFAS 123, Accounting for Stock-based Compensation, to provide alternative methods for voluntary transition to SFAS 123's fair value method of accounting for stock-based employee compensation. SFAS 148 also requires disclosure of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income (loss) and earnings (loss) per share in annual and interim financial statements. SFAS 148 is effective for fiscal years beginning after December 15, 2002. The adoption of SFAS 148 does not have an impact on the Company's financial statements. In November 2002, the Financial Accounting Standard Board issued FASB Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of indebtedness of Others - An Interpretation of FASB Statements of No. 5, 57 and 107 and rescission of FASB Interpretation No. 34. This interpretation clarifies the requirements for a guarantor's accounting for and disclosures of certain guarantees issued and outstanding. FIN 45 also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of a guarantee. FIN 45 is effective for guarantees entered into or modified after December 31, 2002. The adoption of FIN 45 does not have impact on the Company's financial statements. In January 2003, the Financial Accounting Standard Board issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities - An Interpretation of Accounting Research Bulletin (ARB) No. 51. This interpretation addressed the requirements for business enterprises to consolidate related entities in which they are determined to be the primary economic beneficiary as a result of their variable economic interest. The interpretation is intended to provide guidance in judging multiple economic interests in an entity and in determining the primary beneficiary. The interpretation outlines disclosure requirements for VIEs in existence prior to January 31, 2003, outlines consolidation requirements for VIEs created after January 31, 2003. The company has reviewed its major commercial relationship and its overall economic interests with other companies consisting of related parties, manufacture vendors, loan creditors and other suppliers to determine the extent of its variable economic interest in these parties. The review has not resulted in a determination that the Company would be judged to be the primary economic beneficiary in any material relationships, or that any material entities would be judged to be Variable Interest Entities of the Company. F-12 SINOVAC BIOTECH CO., LTD. Notes to Financial Statements June 30, 2003, December 31, 2002 and 2001 (Expressed in U.S. Dollars) ================================================================================ 3. Significant Accounting Policies (continued) - ------------------------------------ (r) New Accounting Pronouncements (continued) In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 addresses certain accounting issues related to hedging activity and derivative instruments embedded in other contracts. In general, the amendments require contracts with comparable characteristics to be accounted for similarly. In addition, SFAS No. 149 provides guidance as to when a financing component of a derivative must be given special reporting treatment in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 does not have an impact on the Company's financial statements. In May 2003, the Financial Accounting Standards Board (FASB) approved SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for how to classify and measure financial instruments with characteristics of both liabilities and equity. It requires financial instruments that fall within its scope to be classified as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and, for pre-existing financial instruments, as of July 1, 2003. We do not have any financial instruments that fall under the guidance of SFAS No. 150 and, therefore, the adoption does not have any effect on our financial position or results of operations. 4. Accounts Receivable - ------------------------
June 30 December 31 December 31 2003 2002 2001 -------------------------------------------------------------------------------------------- Trade receivables $ 1,034,909 $ 449,676 $ - Allowance for doubtful accounts (43,478) - - -------------------------------------------------------------------------------------------- 991,431 449,676 - Other receivables 28,665 19,503 7,579 -------------------------------------------------------------------------------------------- $ 1,020,096 $ 469,179 $ 7,579 ============================================================================================
5. Inventories - ----------------
June 30 December 31 December 31 2003 2002 2001 -------------------------------------------------------------------------------------------- Raw materials $ 262,228 $ 260,377 $ 125,909 Finished goods 1,064,552 972,218 - Work in progress 225,430 122,454 - -------------------------------------------------------------------------------------------- $ 1,552,210 $ 1,355,049 $ 125,909 ============================================================================================
F-13 SINOVAC BIOTECH CO., LTD. Notes to Financial Statements June 30, 2003, December 31, 2002 and 2001 (Expressed in U.S. Dollars) ================================================================================ 6. Property, Plant and Equipment - ----------------------------------
June 30, 2003 -------------------------------------------------------- Cost Accumulated Net book Amortization Value --------------------------------------------------------------------------------------------------------- Land-use rights $ 365,510 $ 16,162 $ 349,348 Plant and building 4,191,009 124,350 4,066,659 Machinery and equipment 3,166,155 273,048 2,893,107 Motor vehicles 150,618 31,799 118,819 Office equipment and furniture 163,115 36,255 126,860 Leasehold improvements 151,990 - 151,990 --------------------------------------------------------------------------------------------------------- $ 8,188,397 $ 481,614 $ 7,706,783 =========================================================================================================
December 31, 2002 -------------------------------------------------------- Cost Accumulated Net book Amortization Value --------------------------------------------------------------------------------------------------------- Land-use rights $ 365,510 $ 12,433 $ 353,077 Plant and building 4,191,009 60,612 4,130,397 Machinery and equipment 3,022,536 135,806 2,886,730 Motor vehicles 112,066 19,400 92,666 Office equipment and furniture 159,556 21,671 137,885 --------------------------------------------------------------------------------------------------------- $ 7,850,677 $ 249,922 $ 7,600,755 =========================================================================================================
December 31, 2001 -------------------------------------------------------- Cost Accumulated Net book Amortization Value --------------------------------------------------------------------------------------------------------- Land-use rights $ 365,510 $ 4,973 $ 360,537 Plant and building, construction in progress 3,200,585 - 3,200,585 Machinery and equipment 1,930,280 - 1,930,280 Motor vehicles 73,810 3,321 70,489 Office equipment and furniture 92,467 1,623 90,844 --------------------------------------------------------------------------------------------------------- $ 5,662,652 $ 9,917 $ 5,652,735 =========================================================================================================
Depreciation for the six months ended June 30, 2003, year ended December 31, 2002 and period from April 28, 2001 (inception) to December 31, 2001 are $231,692, $240,005 and $9,917 respectively. Machinery and equipment totalling $556,000 (RMB 4,600,000) are pledged as collateral for a bank loan (Note 8). F-14 SINOVAC BIOTECH CO., LTD. Notes to Financial Statements June 30, 2003, December 31, 2002 and 2001 (Expressed in U.S. Dollars) ================================================================================ 7. Licenses and Permits - -------------------------
June 30 December 31 December 31 2003 2002 2001 ------------------------------------------------------------------------------------------- Inactive Hepatitis A $ 1,941,879 $ 1,941,879 $ 1,941,879 Recombinant Hepatitis A&B 476,750 476,750 - Influenza Virus HA Vaccine 353,904 - - ------------------------------------------------------------------------------------------- 2,772,533 2,418,629 1,941,879 Less: accumulated amortization (194,188) (97,094) - ------------------------------------------------------------------------------------------- $ 2,578,345 $ 2,321,535 $ 1,941,879 ===========================================================================================
(a) During the six months ended June 30, 2003, the Company acquired the Influenza Virus HA Vaccine drug license for $353,904 from a company called Tangshan Yian Biological Engineering Co., Ltd. ("Tangshan Yian") at the vendor's cost. Tangshan Yian owns an 18.75% interest in the Company. There are two common directors between the two companies. The Company is applying for a production permit for this pharmaceutical product. The cost of the license will be amortized based on an estimated useful life of ten (10) years commencing with the production of the drug, which is expected to be in 2004. (b) During the year ended December 31, 2002, the Company acquired the Recombinant Hepatitis A&B drug license from a company called Beijing Keding Investment Co., Ltd. ("Beijing Keding") by issuing shares equal to a 10.71% interest in the Company and paying $18,116 (RMB150,000) in cash. Beijing Keding is owned by a director, president and three other senior officers of the Company. As at June 30, 2003, $10,523 remains unpaid and is recorded in due to related parties (see Note 10a). The Company is applying for a production permit for this pharmaceutical product. The cost of the license will be amortized based on an estimated useful life of ten (10) years commencing with the production of the drug, which is expected to be in 2004. The drug license was recorded at $476,750, which was the vendor's cost. (c) The Inactive Hepatitis A drug license was contributed by Tangshan Yian as its capital contribution. The drug license was recorded at $1,941,879, which was the transferor's cost. Amortization expenses for the licenses and permits for the six months ended June 30, 2003, year ended December 31, 2002 and period from April 28, 2001 (inception) to December 31, 2001 are $97,094, $97,094 and $nil, respectively. The estimated amortization expenses for each of the five succeeding fiscal years are as follows: 2004 $236,000 2005 $277,000 2006 $277,000 2007 $277,000 2008 $277,000 F-15 SINOVAC BIOTECH CO., LTD. Notes to Financial Statements June 30, 2003, December 31, 2002 and 2001 (Expressed in U.S. Dollars) ================================================================================ 7. Licenses and Permits (continued) - ------------------------- The above amortization expense forecast is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, changes in foreign currency exchange rates, impairment of intangible assets, accelerated amortization of licenses and permits, and other events. 8. Loans Payable - ------------------
June 30 December 31 December 31 2003 2002 2001 -------------------------------------------------------------------------------------------------------- Bank loan: RMB8,000,000, bearing interest at 5.85% per annum and due on November 12, 2002 $ - $ - $ 966,183 Bank loan: RMB 10,000,000, bearing interest at 5.04% per annum and due on May 21, 2003. - 1,207,730 - Bank loan: RMB 5,000,000, bearing interest at 5.84% per annum and due on June 26, 2004. The loan is secured by certain machinery and equipment. 603,865 - - Loan payable to Beijing Xinfu Investment Co., Ltd. ("Beijing Xinfu"): RMB 5,000,000, bearing interest at 5.58% per annum and due on demand. Beijing Xinfu is controlled by a director of the Company (Note 10d). - 603,865 603,865 Employees loan: RMB 1,722,500 (2002 - RMB 1,673,300) bearing interest at 15% per annum and due on demand. 208,031 202,089 - Loan payable to Beijing PKU Weiming Biological Engineering Group ("Beijing Weiming"): RMB 500,000 bearing interest at 6.45% per annum and due on demand. Beijing Weiming owns 45.54% interest of the Company 60,386 60,386 - -------------------------------------------------------------------------------------------------------- Total $ 872,282 $ 2,074,070 $ 1,570,048 ========================================================================================================
The weighted average interest rate was 6.16%, 5.47% and 5.71% for the six months ended June 30, 2003, year ended December 31, 2002 and period from April 28, 2001 (inception) to December 31, 2001, respectively. F-16 SINOVAC BIOTECH CO., LTD. Notes to Financial Statements June 30, 2003, December 31, 2002 and 2001 (Expressed in U.S. Dollars) ================================================================================ 9. Income Taxes - ----------------- The Company is subject to income taxes in China on its taxable income as reported in its statutory accounts at a tax rate in accordance with the relevant income tax laws applicable to sino-foreign investment enterprises. Pursuant to the same income tax laws, the Company is exempt from income tax for two years starting from its first profit-making year followed by a 15% corporation income tax rate for the next three years. 10. Related Party Transactions - ------------------------------- (a) Due from and to related parties consist of the following:
June 30 December 31 December 31 2003 2002 2001 ------------------------------------------------------------------------------------------------------- Due from related parties, unsecured (Notes 7 & 8): o Advances to Tangshan Yian, a shareholder, bearing interest at 5% per annum $ 677,487 $ 982,175 $ 1,193,918 o Due from Beijing Keding, a shareholder - - 5,769 ------------------------------------------------------------------------------------------------------- $ 677,487 $ 982,175 $ 1,199,687 ======================================================================================================= Due to related parties, unsecured (Notes 7 & 8): o Due to Beijing Weiming, a shareholder (Note 10c) $ 1,191,569 $ 1,191,569 $ 1,509,662 o Due to Beijing Keding, a shareholder (Note 7b) 10,523 10,529 - o Due to Beijing Xinfu, a corporation controlled by a director of the Company 18,690 24,728 8,423 o Due to Shenzhen Biological Investment Co., Ltd. (Shenzhen Co."), a corporation controlled by a director of the Company 17,553 - - o Due to a director 8,009 5,628 3,383 ------------------------------------------------------------------------------------------------------- $ 1,246,344 $ 1,232,454 $ 1,521,468 =======================================================================================================
F-17 SINOVAC BIOTECH CO., LTD. Notes to Financial Statements June 30, 2003, December 31, 2002 and 2001 (Expressed in U.S. Dollars) ================================================================================ 10. Related Party Transactions (continued) - ------------------------------ (b) The Company entered into the following transactions with related parties:
Six months Year April 28, 2001 Ended Ended (inception) to June 30 December 31 December 31 2003 2002 2001 ------------------------------------------------------------------------------------------------------- Purchased raw materials from Tangshan Yian $ - $ 403,698 $ - Interest income earned on advances to Tangshan Yian $ 22,386 $ 44,063 $ 56,853 Rent paid to Beijing Weiming $ - $ 4,019 $ 61,967 Interest expenses: - Beijing Weiming $ 1,930 $ 363 $ - - Beijing Xinfu $ 16,709 $ 33,696 $ 8,424 - Shenzhen Co. $ 39,323 $ - $ - -------------------------------------------------------------------------------------------------------
(c) During the year 2001, the Company acquired certain land-use rights from Beijing Weiming, a 51% shareholder of the Company at the date of the transaction, for $2,415,459 (RMB 20,000,000). As at June 30, 2003, $1,191,569 remained unpaid and is included in due to related parties (see Note 10a). The land-use rights were recorded at $268,891, which was the vendor's cost and estimated fair market value. The excess of purchase price over the transfer cost was charged to paid-in capital. (d) On June 30, 2003, the Company completed two debt settlements, totalling $2,608,696, with corporations controlled by a director of the Company by issuing shares equal to approximately 16% interest in the Company. (e) Other related party transactions have been disclosed elsewhere in these financial statements. 11. Segmented Information - -------------------------- The Company's operates exclusively in the biotech sector. The Company's business is considered as operating in one segment based upon the Company's organizational structure, the way in which the operation is managed and evaluated, the availability of separate financial results and materiality considerations. All the Company's assets are located in China and all the revenues are generated in China. F-18 SINOVAC BIOTECH CO., LTD. Notes to Financial Statements June 30, 2003, December 31, 2002 and 2001 (Expressed in U.S. Dollars) ================================================================================ 12. Commitment - --------------- The Company has entered into an operating lease agreement with Tangshan Yian, with respect to a laboratory, for an annual lease of $176,400 (RMB 1,460,400). The lease starts on July 1, 2003 and has a term of five years. 13. Non Cash Transactions - -------------------------- (a) The Company acquired the Recombinant Hepatitis A & B drug licence by issuing shares (see Note 7b). (b) The Inactive Hepatitis A drug licence was transferred to the Company as the transferor's capital contribution (see Note 7c). (c) The Company issued shares for debt settlement in the amount of $2,608,696 (see Note 10d). F-19 -----END PRIVACY-ENHANCED MESSAGE-----