----------
Securities and Exchange Commission
----------------------------------
FORM 20-F
---------
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES
EXCHANGE ACT OF 1934.
OR
[X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 2003
.................................................................................
OR
[_] TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period
.................................................................................
Commission File Number: 0-29031
-------------------------------
SINOVAC BIOTECH LTD.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Not Applicable
- --------------------------------------------------------------------------------
(Translation of registrant's name into English)
Antigua, West Indies
- --------------------------------------------------------------------------------
(Jurisdiction of incorporation or organization)
No. 39 Shangdi Xi Road, Haidian District, Beijing, P.R.C. 100085
- --------------------------------------------------------------------------------
(Address of principal executive offices)
----------
II
Securities to be registered pursuant to Section 12(b) of the Act.
None.
----
Securities to be registered pursuant to Section 12(g) of the Act.
Common shares with par value $0.001
-----------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None.
----
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
27,091,033 common shares (as at the financial year ended December 31, 2003)
---------------------------------------------------------------------------
34,770,233 common shares (as at May 31, 2004)
---------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes: Not applicable. No: Not applicable.
-------------- --------------
Indicate by checkmark which financial statement item the registrant has elected
to follow:
Item 17: |X|. Item 18: .
--- ---
i
FORM 20-F INDEX
---------------
Item Page No.
- ---- --------
FORWARD LOOKING STATEMENTS...................................................1
PART I.......................................................................1
ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS..................................................................1
ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE.............................1
A. Offer Statistics.................................................1
B. Method and Expected Timetable....................................1
ITEM 3 - KEY INFORMATION.....................................................1
A. Selected Financial Information...................................1
Exchange Rates...................................................2
B. Capitalization and Indebtedness..................................3
C. Reasons for the Offer and Use of Proceeds........................3
D. Risk Factors.....................................................3
ITEM 4 - INFORMATION ON THE COMPANY..........................................6
A. History and Development of the Company...........................6
B. Business Overview................................................7
Cash Resources and Liquidity................................7
Stated Business Objectives..................................7
Description of Business.....................................8
Principal Products.........................................14
Research and Development...................................16
Safety and Quality Assurance...............................16
Market Prospects...........................................17
The Company's Market.......................................18
Customer Types.............................................19
Marketing Strategy.........................................20
Competition................................................22
Administration.............................................23
C. Organizational Structure........................................24
D. Property, Plants and Equipment..................................24
ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS.......................26
A. The Company.....................................................26
ITEM 6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.........................29
A. Directors and Senior Management.................................29
Aggregate Ownership of Securities..........................31
Other Reporting Issuers....................................31
Individual Bankruptcies....................................31
Conflicts of Interest......................................31
Other Information..........................................32
ii
Item Page No.
- ---- --------
B. Compensation....................................................32
The Company's Executive Compensation.......................32
Compensation of the Company's Directors....................40
C. Board Practices.................................................40
D. Employees.......................................................40
E. Share Ownership.................................................41
Directors and Officers.....................................41
Public and Insider Ownership...............................42
ITEM 7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..................42
A. Major Shareholders..............................................42
B. Related Party Transactions......................................43
C. Interests of Experts and Counsel................................43
ITEM 8 - FINANCIAL INFORMATION..............................................43
A. Financial Statements and other Financial Information............43
B. Significant Changes.............................................43
ITEM 9 - THE OFFERING AND LISTING...........................................43
A. Offer and Listing Details.......................................43
B. Plan of Distribution............................................44
C. Markets.........................................................44
D. Selling Shareholders............................................44
E. Dilution........................................................44
F. Expenses of the Issue...........................................44
ITEM 10 - ADDITIONAL INFORMATION............................................44
A. Share Capital...................................................44
B. Memorandum and Articles of Association..........................45
C. Material Contracts..............................................49
D. Exchange Controls...............................................49
E. Taxation........................................................49
F. Dividends and Paying Agents.....................................51
G. Statement by Experts............................................51
H. Documents on Display............................................51
I. Subsidiary Information..........................................51
iii
Item Page No.
- ---- --------
ITEM 11 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK..............................................................51
ITEM 12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES...............................................................52
A. Debt Securities.................................................52
B. Warrants and Rights.............................................52
C. Other Securities................................................52
D. American Depositary Shares......................................52
PART II.....................................................................52
ITEM 13 - DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES...................52
ITEM 14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS..............................................52
ITEM 17 - FINANCIAL STATEMENTS..............................................52
ITEM 18 - FINANCIAL STATEMENTS..............................................52
ITEM 19 - EXHIBITS..........................................................53
(A) Financial
Statements.............................................................53
(B) Exhibits...........................................................53
SIGNATURES..................................................................76
EXHIBIT INDEX...............................................................77
----------
1
FORWARD LOOKING STATEMENTS
--------------------------
Sinovac Biotech Ltd. (the "Company") cautions readers that certain
important factors (including, without limitation, those set forth in this Form
20-F) may affect the Company's actual results and could cause such results to
differ materially from any forward-looking statements that may be deemed to have
been made in this Form 20-F annual report (the "Annual Report"), or that are
otherwise made by or on behalf of the Company. For this purpose any statements
contained in this Annual Report that are not statements of historical fact may
be deemed to be forward-looking statements. Without limiting the generality of
the foregoing, words such as "may," "except," believe," anticipate," "intend,"
"could," estimate" or "continue," or the negative or other variations of
comparable terminology, are intended to identify forward-looking statements.
PART 1
------
ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable
ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
A. Offer Statistics
----------------
This Annual Report does not relate to any offering of the Company's shares.
Therefore, this section is not applicable to the Company.
B. Method and Expected Timetable
-----------------------------
This Annual Report does not relate to any offering of the Company's shares.
Therefore, this section is not applicable to the Company.
ITEM 3 - KEY INFORMATION
A. Selected Financial Information
------------------------------
The following table summarizes certain selected financial information with
respect to the Company on a consolidated basis as of December 31, 2003,
subsequent to the acquisition of Sinovac Biotech Co., Ltd. by Net Force Systems
Inc. and is qualified in its entirety by reference to the financial statements
of the Company and the Notes thereto; a copy of which is attached to this Annual
Report:
2
Apr. 28/01
Year Ended Year Ended (inception)
Dec. 31/03 De. 31/02 Dec. 31/01
--------------------------------------------
Net Sales $ 2,838,933 $ 649,319 $ -
Net Loss from Continuing Operations
US GAAP $ (461,539) $ (592,208) $ (77,408)
Net Loss from Continuing Operations per Share
US GAAP $ (0.03) $ (0.07) $ (0.01)
Total Assets
US GAAP $ 14,897,716 $ 13,048,009 $ 11,052,343
Long Term Obligations
Bank Loan $ 603,865 $ - $ -
Weighted Average Common Shares Outstanding
US GAAP 13,842,225 8,104,767 7,502,000
The following table summarizes certain selected financial information with
respect to Net Force Systems Inc. (the former name of the Company prior to
reverse takeover of Net Force Systems Inc. by Sinovac Biotech Co., Ltd.) up to
April 30, 2003 and is qualified in its entirety by reference to the financial
statements of Net Force Systems Inc. and the Notes thereto; a copy of which is
incorporated by reference to audited financial statements of Net Force Systems
Inc. for the fiscal year ended April 30, 2003, which were filed with Net Force
Systems Inc.'s Form 20-F Annual Report on August 12, 2003:
Year Ended Year Ended Year Ended
April 30/03 April 30/02 April 30/01
--------------------------------------------
Net Sales $ - $ - $ -
Net Loss from Discontinued Operations
US GAAP $ (125,564) $ (174,206) $ (484,597)
Net Loss
US GAAP $ (125,564) $ (174,206) $ (484,597)
Net Loss per Share
US GAAP $ (0.01) $ (0.01) $ (0.07)
Total Assets
US GAAP $ 130,157 $ 236,254 $ 269,194
Long Term Obligations
$ - $ - $ -
Weighted Average Common Shares Outstanding
US GAAP 17,066,033 13,375,186 7,171,233
Exchange Rates
- --------------
In this Annual Report, unless otherwise specified, all dollar amounts are
expressed in United States dollars. The high and low exchange rates, the average
rates (average of the exchange rates on the last day of each month during the
period) and the end of the period rates for Chinese dollars, expressed in U.S.
dollars, from April 28, 2001 to December 31, 2003, based on the noon buying rate
3
in New York City for cable transfers payable in Chinese dollars as certified for
customs purposes by the Federal Reserve Bank of New York, were as follows:
U.S. Dollars per $1.00 Yuan (RMB)
---------------------------------
Year ended December 31
----------------------
2003 2002 2001
---- ---- ----
High .1208 .1210 .1209
Low .1208 .1208 .1208
Average .1208 .1208 .1208
End of Period .1208 .1208 .1208
June 25, May April March Feb. Jan. Dec.
2004 2004 2004 2004 2004 2004 2003
------------ ----------- ----------- ----------- ---------- ----------- ------------
High .1208 .1208 .1208 .1208 .1208 .1208
Low .1208 .1208 .1208 .1208 .1208 .1208
.1208
Conversion Table
----------------
For ease of reference the following conversion factors are provided:
1 mile = 1.6093 kilometres 1 metric ton = 2,205 pounds
1 foot = 0.305 metres 1 troy ounce = 31.103 grams
1 acre = 0.4047 hectare 1 imperial gallon = 4.546 litres
1 long ton = 2,240 pounds 1 imperial gallon = 1.2010 U.S. gallons
B. Capitalization and Indebtedness
-------------------------------
This is an Annual Report, and therefore, this information is not
applicable.
C. Reasons for the Offer and Use of Proceeds
-----------------------------------------
This Annual Report does not relate to any offering of the Company's shares.
Therefore, this section is not applicable to the Company.
D. Risk Factors
------------
The following risk factors are those concerned with the business of the Company.
4
Reliance on Key Management
--------------------------
The success of the Company is very much dependent on the talents and
commitment of a core management team. The loss of the services of any key
management figure such as Sinovac's President Dr. Yin or the CEO, Professor Pan,
of Sinovac's 51% owned subsidiary, Sinovac Biotech Co. Ltd., could negatively
impact the Company's progress.
Regulatory Environment
----------------------
There can be no assurance that all of the clinical trials pertaining to
several of Sinovac's in-development vaccines will be completed within the
anticipated time frame. Furthermore, such trials may be delayed or suspended at
any time by regulatory agencies if unforeseen health risks become an issue with
the participants of clinical trials.
Proprietary Technology
----------------------
The Company's success will largely depend on its ability to maintain trade
secret protection, particularly with regards to avoiding patent infringement by
other parties. The Company must also ensure that it operates without infringing
on the proprietary rights of other immunology companies.
Potential Product Liability
---------------------------
Human vaccine products involve an inherent risk of product liability and
associated adverse publicity. A product liability claim or a product withdrawal
could have a material adverse effect on the Company.
Political Risk
--------------
The value of the Company's assets and business ventures in China could be
adversely impacted by any reversal of China's longstanding policy of economic
reforms. For instance, a change in leadership or social disruption could
jeopardize Sinovac's business endeavors in this communist regime.
Cash Flow and Requirements for New Capital
------------------------------------------
As with most companies in the biotechnology/biopharmaceutical industry,
Sinovac will need to raise further funds from the capital markets to continue
the development and commercialization of its product pipeline. The Company has
adequate near-term cash requirements, however, the Company may need to undertake
significant future financings to complete clinical trials for its SARS vaccine,
as well as to facilitate the large-scale commercial rollout of its other vaccine
products. The currently strong biotechnology financing environment mitigates
these financial risks. However, the prospect of meeting these future financial
requirements in the capital markets cannot be guaranteed.
5
Reliance on Partnerships for Promotion and Marketing of Products
----------------------------------------------------------------
The Company's first international licensing/marketing partner is the Korean
immunology company, Innopath International Inc. The signing of other similar
partnerships, particularly with large European and North American pharmaceutical
companies, is key to achieving meaningful market share in these lucrative
marketplaces. Indeed, the successful monetization of Sinovac's product pipeline
will depend to an extent on how proactive these future partners are in promoting
and marketing Sinovac's proprietary vaccine products.
Risk of "Penny Stock"
---------------------
The Company's common shares may be deemed to be "penny stock" as that term
is defined in Regulation Section "240.3a51-1" of the Securities and Exchange
Commission (the "SEC"). Penny stocks are stocks: (a) with a price of less than
U.S. $5.00 per share; (b) that are not traded on a "recognized" national
exchange; (c) whose prices are not quoted on the NASDAQ automated quotation
system (NASDAQ - where listed stocks must still meet requirement (a) above); or
(d) in issuers with net tangible assets of less than U.S. $2,000,000 (if the
issuer has been in continuous operation for at least three years) or U.S.
$5,000,000 (if in continuous operation for less than three years), or with
average revenues of less than U.S. $6,000,000 for the last three years.
Section "15(g)" of the United States Securities Exchange Act of 1934, as
amended, and Regulation Section "240.15g(c)2" of the SEC require broker dealers
dealing in penny stocks to provide potential investors with a document
disclosing the risks of penny stocks and to obtain a manually signed and dated
written receipt of the document before effecting any transaction in a penny
stock for the investor's account. Potential investors in the Company's common
shares are urged to obtain and read such disclosure carefully before purchasing
any common shares that are deemed to be "penny stock.".
Moreover, Regulation Section "240.15g-9" of the SEC requires broker dealers
in penny stocks to approve the account of any investor for transactions in such
stocks before selling any penny stock to that investor. This procedure requires
the broker dealer to: (a) obtain from the investor information concerning his or
her financial situation, investment experience and investment objectives; (b)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (c) provide the investor with a written statement
setting forth the basis on which the broker dealer made the determination in
(ii) above; and (d) receive a signed and dated copy of such statement from the
investor confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult for investors in the Company's
common shares to resell their common shares to third parties or to otherwise
dispose of them.
6
ITEM 4 - INFORMATION ON THE COMPANY
A. History and Development of the Company
--------------------------------------
Incorporation
- -------------
Sinovac Biotech Ltd. (the "Company") was incorporated on March 1, 1999,
under the laws of Antigua under the name "Net Force Systems Inc.." By special
resolution of the Company dated October 8, 2003, the Company changed its name to
"Sinovac Biotech Ltd."
Corporate Information
- ---------------------
The Company's business address and executive offices are located at No. 39
Shangdi Xi Road, Haidian District, Beijing, P.R. China 100085. The Company's
telephone number is 86-10-82890088 and the Company's fax number is
86-10-62966910. The Company's agent for service in Canada is Devlin Jensen,
Barristers & Solicitors, who are located at Suite 2550, 555 West Hastings
Street, Vancouver, British Columbia, V6B 4N5, and who can be contacted at (604)
684-2550 or via facsimile at (604) 684-0916.
On September 24, 2003, the Company and Ms. Lily Wang, a natural person of
the United States entered into a share purchase agreement whereby the Company
acquired a 51% ownership interest in Sinovac Biotech Co., Ltd., a company
organized under the laws of the People's Republic of China, from Ms. Wang in
exchange for the issuance of 10,000,000 newly issued shares of common stock of
the Company at a state value of $0.60 per share for a total of $6,000,000
constituting approximately 37% of the Company's outstanding capital stock on a
fully-diluted basis at that time.
On January 26, 2004, the Company entered into a formal share purchase
agreement (the "Share Purchase Agreement") to acquire 100% of the issued and
outstanding shares of Tangshan Yian Biological Engineering Co., Ltd. ("Tangshan
Yian"), a corporation organized under the laws of the People's Republic of
China, through the issuance of 3,500,000 shares of common stock of the Company
plus $2,200,000 in cash, which will be payable by the Company within 12 months
from the date of entering into the Share Purchase Agreement, to Mr. He Ping
Wang, the sole shareholder of Tangshan Yian and also a director of the Company.
A the time of completion of the Share Purchase Agreement, Mr. He Ping Wang held
approximately 11.45% of the Company's outstanding shares of common stock. On
January 30, 2004, all of the terms and conditions of the Share Purchase
Agreement had been satisfied and the acquisition of Tangshan Yian by the Company
was completed.
Legal Proceedings
- -----------------
There are currently no legal proceedings involving Sinovac Biotech Ltd. The
Company is not aware of any proceedings being contemplated by any governmental
authority.
7
B. Business Overview
-----------------
The Company specializes in the research, development, commercialization,
and sales of human vaccines for infectious illnesses such as Hepatitis A and
Hepatitis B, influenza and "SARS". The Company is one of the leading emerging
biotechnology companies in China. Working closely with Chinese public health
officials, the Company focuses on manufacturing and marketing human-vaccines and
related products, and currently markets its vaccine for Hepatitis A. The Company
is the first and currently the only company in the world to have been granted
permission to begin clinical trials for a vaccine to prevent SARS.
Cash Resources and Liquidity
- ----------------------------
As of May 31, 2004, the Company had approximately US$2,608,368 in cash and
a positive working capital position of approximately US$3,153,873.
Stated Business Objectives
- --------------------------
The overall strategic mission of the Company is to become a world leader in
the innovation, development and manufacturing of vaccines for historical viruses
such as hepatitis, influenza, and for fast-emerging viruses such as "SARS" and
Avian Influenza (a.k.a. "bird flu").
The Company believes that it is possible and financially viable to provide
safe, efficient vaccines to all countries regardless of wealth. Through careful
financial management, low production costs and modern, innovative techniques,
the Company intends to continue to produce high quality vaccines and
successfully service market sectors that many pharmaceutical giants are unable
to service.
The following represents the Company's short-term objectives (i.e., the
next 12 months) for research, development and marketing.
Objectives
----------
2004:
- -----
- - Expand domestic marketing for the company's Hepatitis A vaccine, "Healive;"
- - Expand Healive's regional marketing into Southeast Asian countries;
- - Gain government (SFDA) licensing approval of the Company's Combined Hepatitis
A&B vaccine, "Bilive" during Q3 or Q4 of 2004. Once approved, initiate
marketing plan immediately; and
- - The Company anticipates signing agreements for third world marketplaces that
are not currently serviced by the Company, or by Innopath International Inc.
8
2005:
- -----
- - In the event of a global SARS outbreak, nations worldwide would need to adopt
the Company's in-development vaccine as a first line of defense;
- - Develop strategic alliances with established pharmaceutical companies that
have significant sales and distribution channels;
- - The Company expects to gain federal-government approval and commercialize its
proprietary influenza vaccine by 2005, with the additional goal of targeting
the majority of other developing Southeast Asian markets within the next five
years; and
- - The Company expects to register and license its Hepatitis A (Healive) and
Combined Hepatitis A&B (Bilive) vaccines in at least 34 countries by 2009.
Marketing Objectives
--------------------
The Company's marketing strategy is based on two capabilities, organic
growth, augmented as necessary, and strategically beneficial acquisitions. The
Company will combine and organize these capabilities into a bifurcated marketing
plan (regional and global). Each branch of this plan is intended to focus on
public and private sectors in order to achieve sales and growth objectives. The
public sector consists of government and non-government organization ("NGO")
programs, and the private sector consists of independent/ private health
insurance companies and private citizens.
First the Company intends to target progressive geographic expansion with
its family of vaccines that target historically devastating viruses. The Company
is building a sales organization in the Chinese domestic market. Concurrently
with its domestic marketing plan, the Company is establishing a marketing and
sales presence in South East Asia and other developing countries.
The second prong of the Company's marketing strategy is contingent on
creating a blockbuster vaccine for defeating emerging viruses such as SARS or
the Avian Flu. In such case, the first to market advantage opens the door for
sales to the international market. In such a scenario, the Company intends to
enter the international market, with a worldwide sales network of professional
sales teams, well-organized selling channels, a sound customer-credit management
scheme, and an efficient logistics system.
Description of the Business
- ---------------------------
General
-------
The Company specializes in the research, development, commercialization,
and sales of human vaccines for infectious illnesses such as Hepatitis A and
Hepatitis B, influenza and "SARS". The Company is one of the leading emerging
biotechnology companies in China. Working closely with Chinese public health
officials, the Company focuses on manufacturing and marketing human-vaccines and
related products, and currently markets its vaccine for Hepatitis A. The Company
is the first and currently the only company in the world to have been granted
permission to begin clinical trials for a vaccine to prevent SARS.
9
The Global Viral Environment
----------------------------
Global Viral Background
-----------------------
Although `virus' and `vaccine' are common terms that most people are
familiar with, several variations of both exist. To ensure a clear understanding
of the Company's business and market sector some definitions and explanations
are provided.
Viruses:
- --------
A virus is best described as an infectious agent characterized by its
inability to reproduce outside of a living host cell. Viruses may subvert the
host cells' normal functions, causing the cell to behave in a manner determined
by the virus.
When a virus attacks the body for the first time, the immune system
attempts to identify and produce antibodies to fight the virus. The immune
system's success depends on whether it has encountered the virus before and how
aggressive the virus is.
Some viruses will mutate or change vital characteristics as they migrate to
a new host. This mutation can make it difficult to create new, safe vaccines or
treatments that keep pace with the spread of the virus.
Vaccine:
- --------
Vaccines contain antigenic components. These components (live or dead parts
of a virus) antagonize or stimulate the immune system to produce antibodies. By
stimulating an immune response (but not the disease), vaccination leads to
immunity for a certain micro-organism and protects against subsequent infection
by that organism.
If a virus mutates as discussed earlier, it is likely that a new vaccine
will have to be created to match the characteristics of that virus.
There are two types of vaccine, activated and inactivated. The key
difference is that inactivated vaccines (such as those produced by Sinovac) use
inactive (dead) components of the actual virus. Inactive vaccines provide enough
genetic material for the body to recognize and successfully create antibodies
but do not carry the obvious risk of using live or active components.
A virus often needs certain basic nutrients and conditions in order to
survive and replicate. The most basic of those is water, which is why viruses
are most commonly transmitted through fluid, be it a water supply or bodily
fluids.
To give some idea of how fast and effectively a virus can spread, Hepatitis
A infects between 1.5 and 10 Million people every year and more than 2 Billion
people have been infected by Hepatitis B which is one hundred times more
infectious than AIDS.
10
Human Suffering:
- ----------------
The toll on humans is physical, emotional and of course financial.
Influenza, Hepatitis and, more recently, SARS have all had a significant impact
on human life.
Hepatitis B leads to liver diseases that kill more than 500,000 people
every year. Adding to these historical viruses are new types such as Avian Flu
and SARS that are increasing the stresses, costs and losses across industry and
health care sectors.
Pervasive Pan-Viral Transmission Patterns:
- ------------------------------------------
Because viruses like Influenza, Hepatitis and SARS spread so rapidly and
effectively, international health authorities and over numerous countries have
recognized that prevention through mass vaccination is more cost effective than
cure.
With increasing national and international travel combined with carriers
that never show symptoms as well as lengthy incubation periods the need for
prevention is becoming increasingly clear. World governments, medical
associations and international health authorities are all pushing for increased
vaccination policies to prevent the problem before it occurs.
Historic Recurring Viruses
--------------------------
Hepatitis A
-----------
Hepatitis A is endemic in developing nations like China. Hepatitis A is a
liver disease that makes the liver swell and prevents it from functioning
properly. It is caused by the hepatitis A virus (HAV). Often, a person with
hepatitis A shows no signs or symptoms. If symptoms are present, these may
include jaundice (yellowing of eye and skin) and fever. Hepatitis A will leave a
person incapacitated or weakened for a long time, up to several weeks, even
months.
The Hepatitis A virus is shed in the stool of an infected person during the
incubation period of 15-45 days before symptoms occur and during the first week
of the illness. Blood and other bodily secretions may also be infectious.
Hepatitis A is contagious and can be spread by close personal contact with
someone carrying the virus. Hepatitis A can also be contracted by consuming food
that has been prepared by someone with the disease or by drinking water that has
been contaminated by Hepatitis A (in parts of the world with poor hygiene and
sanitary conditions). The virus does not remain in the body after the infection
has resolved, and there is no carrier state (i.e. a person who spreads the
disease to others but does not become ill).
Hepatitis A can be passed to anyone but those who are more likely to
contract the virus are persons who live with someone who has Hepatitis A,
children who attend daycare, daycare personnel, homosexual men, people who
travel to foreign countries where Hepatitis A is common and intravenous drug
users.
Good personal hygiene and proper sanitation, such as washing hands before
eating, can help prevent hepatitis A. The safest and most effective form of
protection is vaccination.
11
Hepatitis B
-----------
Hepatitis B is one of the major diseases of mankind and continues to be a
serious global public health issue. It is preventable with safe and effective
vaccines that have been available since 1982, yet information, education and
cost have often prevented the necessary mass vaccination programs that would
help defeat the virus.
Of the estimated 2 billion people who have been infected with the hepatitis
B virus (HBV), more than 350 million have chronic (lifelong) infections. These
chronically infected persons are at high risk of death from cirrhosis of the
liver and liver cancer, diseases that kill about one million people each year.
Although the vaccine will not cure chronic hepatitis, it is 95% effective
in preventing chronic infections from developing, and is the first vaccine
against a major human cancer.
Unfortunately, however, the children in the poorest countries, who need the
vaccine the most, have not been receiving it because their governments cannot
afford it. Fortunately, a hepatitis B vaccine will soon be available in these
countries with the assistance of the Global Alliance for Vaccines and
Immunization (GAVI) and the Global Fund for Children's Vaccines.
Sinovac's safe and effective Bilive product can be priced to support such
international programs and still provide significant net profit.
Influenza
---------
Influenza (commonly called "the flu") is a contagious respiratory illness
caused by influenza viruses. Infection with influenza viruses can result in
illness ranging from mild to severe and life-threatening complications.
There are three types of the virus:
- Influenza A viruses that infect mammals (humans, pigs, ferrets, horses) and
birds
- Influenza B viruses that infect only humans
- Influenza C viruses that infect only humans
All type A influenza viruses, including those that regularly cause seasonal
epidemics of influenza in humans, are genetically labile and well adapted to
elude host defenses. Influenza viruses lack mechanisms for the "proofreading"
and repair of errors that occur during replication. As a result of these
uncorrected errors, the genetic composition of the viruses changes as they
replicate in humans and animals, and the existing strain is replaced with a new
antigenic variant. These constant, permanent and usually small changes in the
antigenic composition of influenza A viruses are known as antigenic "drift".
The tendency of influenza viruses to undergo frequent and permanent
antigenic changes necessitates constant monitoring of the global influenza
situation and annual adjustments in the composition of influenza vaccines.
12
Influenza viruses have a second characteristic of great public health
concern - influenza A viruses, including subtypes from different species, can
swap or "re-assort" genetic materials and merge. This re-assortment process,
known as antigenic "shift", results in a novel subtype different from both
parent viruses. As populations will have no immunity to the new subtype, and as
no existing vaccines can confer protection, antigenic shift has historically
resulted in highly lethal pandemics. For this to happen, the novel subtype needs
to have genes from human influenza viruses that make it readily transmissible
from person to person for a sustainable period.
Research has shown that antiviral drugs are effective for both the
prevention (chemoprophylaxis) and early treatment of influenza, if administered
within 48 hours following the onset of illness. During normal seasonal
epidemics, antivirals are considered an important adjunct to vaccination as a
strategy for reducing the medical and economic burden of influenza. Their use
can reduce the duration of uncomplicated disease and the likelihood of
complications requiring anti-microbial treatment and possibly hospitalization.
Sinovac intends to launch its Split Flu Influenza vaccine by the first
quarter of the 2005 calendar year.
New Viruses
-----------
SARS
----
The SARS epidemic, which claimed 774 lives worldwide earlier this year,
further fuelled individual interest for various vaccine shots. Demand for
different vaccine shots in Beijing, for instance, went up by 10 times since the
outbreak of SARS, government statistics indicate.
The continuing appearance of new infectious diseases, especially the SARS
outbreak in 2002, has resulted in a heightened worldwide demand for vaccines.
At a convention of leading SARS researchers from 15 nations in late 2003,
the greatest concern was that no country is adequately prepared to face the
grave health threats posed to their urban populations by such viruses. Nor are
their regional and national economies braced for the seriously negative
financial impact that SARS has already caused in many places. For instance, it
is estimated that SARS cost Southeast Asian nations approximately US $60 billion
in economic losses in 2003. Scientists at the convention concluded that a
recurrence of SARS (which spread to over 35 countries in a matter of months in
2003) could develop into a full-blown global pandemic.
Avian Flu
---------
Avian influenza (also known as the "bird flu") is a type of influenza
virulent in birds. It was first identified in Italy in the early 1900s and is
now known to exist worldwide.
The causative agent is the avian influenza (AI) virus. AI viruses all
belong to the influenza virus A genus of the Orthomyxoviridae family and are
13
negative-stranded, segmented RNA viruses. Avian influenza spreads in the air and
in manure. Wild fowl often act as resistant carriers, spreading it to more
susceptible domestic stocks. It can also be transmitted by contaminated feed,
water, equipment and clothing; however, there is no evidence that the virus can
survive in well cooked meat.
The incubation period is 3 to 5 days. Symptoms in animals vary, but
virulent strains can cause death within several days.
Avian Influenza in Humans
-------------------------
While avian influenza spreads rapidly among birds, it does not infect
humans easily, and there is no confirmed evidence of human-to-human
transmission. Of the 15 subtypes known, only subtypes H5 and H7 are known to be
capable of crossing the species barrier.
Conditions favorable for the emergence of antigenic shift have long been
thought to involve humans living in close proximity to domestic poultry and
pigs. Because pigs are susceptible to infection with both avian and mammalian
viruses, including human strains, they can serve as a "mixing vessel" for the
scrambling of genetic material from human and avian viruses, resulting in the
emergence of a novel subtype. Recent events, however, have identified a second
possible mechanism. Evidence is mounting that, for at least some of the 15 avian
influenza virus subtypes circulating in bird populations, humans themselves can
serve as the "mixing vessel".
The symptoms of avian influenza in humans are akin to those of human
influenza, ie. fever, sore throat, cough and in severe cases pneumonia. Human
deaths from avian influenza were unknown until 1997, when six people in Hong
Kong died from the particularly virulent H5N1 strain.
In January 2004, a major new outbreak of H5N1 avian influenza surfaced
again in Vietnam and Thailand's poultry industry, and within weeks spread to ten
countries and regions in Asia, including Indonesia, South Korea, Japan and
China. Intensive efforts were undertaken to slaughter chickens, ducks and geese,
and the outbreak was contained by March, but the total human death toll in
Vietnam and Thailand was 23 people.
It is feared that if the avian influenza virus undergoes antigenic shift
with a human influenza virus, the new subtype created could be both highly
contagious and highly lethal in humans. In February 2004, avian influenza virus
was detected in pigs in Vietnam, increasing fears of the emergence of new
variant strains.
In North America, the presence of avian influenza was confirmed at several
poultry farms in British Columbia, Canada in February 2004.
Avian influenza in humans can be detected reliably with standard influenza
tests. Antiviral drugs are clinically effective in both preventing and treating
the disease. Vaccines, however, take at least four months to produce and must be
prepared for each subtype.
14
Principal Products
- ------------------
The Company has one licensed product, Healive(TM), selling in China and the
international community. The Company expects the Chinese FDA to approve its
combined Hepatitis A&B vaccine, Bilive(TM) in the summer of 2004. The Company
also expects the Chinese FDA to approve its influenza Split Flu Vaccine by 2005.
In addition to these, the Company is on the leading edge of vaccine
research and development for SARS and Avian flu viruses.
Healive(TM)
-----------
Healive(TM) - is the first high-quality Inactivated Hepatitis A (IHA)
vaccine in China with private corporation intellectual property rights. Healive
provides 1.3 billion Chinese citizens, with a safe, efficient,
environment-friendly vaccine. The number of the potential customers keeps
increasing when 20 million babies are born each year. As an IHA vaccine that
meets international regulatory standards, Healive is an excellent match to meet
the Chinese government's goal of eradicating Hepatitis A throughout the country.
Scientific testing indicates that the safety and immunogenicity of Healive
is excellent for both adults and children.
Healive is produced by the Company's 51% owned subsidiary, Sinovac Biotech
Co., Ltd., a company organized under the laws of the People's Republic of China.
Bilive(TM)
----------
Bilive(TM) - Hepatitis B virus (HBV) infects about 50-70% of China's
1.3-billion citizens at some point in their lives. To address this problem, the
Company is planning a near-term launch of its combined Hepatitis A&B vaccine,
Bilive, for the domestic market and later for the international marketplace.
Bilive(TM) is a combined vaccine formulated by purified inactivated
Hepatitis A virus antigen and recombinant (yeast) Hepatitis B surface antigen
(HBsAg), adsorbed onto aluminium hydroxide. This vaccine induces the body's
immune system to generate antibodies as a reaction against Hepatitis A virus and
Hepatitis B viruses. As such it can be used for prevention of infection caused
by Hepatitis A virus and Hepatitis B virus. The vaccine comes in two forms based
on the age of the patient.
Bilive(TM) junior is suitable for use in non-immune infants, children and
adolescents from one year up to and including 15 years who are at risk of both
Hepatitis A and Hepatitis B infection.
Bilive(TM) adult is suitable for use in non-immune adults and adolescents
16 years of age and above who are at risk of both Hepatitis A and Hepatitis B
infection.
Bilive(TM) can be recommended for persons who remain in the vicinity of HAV
and/or HBV, users of illicit intravenous drugs, homo and bisexuals, hemophiliacs
who receive therapeutic blood products, persons with nephropathy who receive
dialysis treatment, and those who receive long term blood dialysis.
15
The standard primary course of vaccination with Bilive(TM) consists of
three doses. The first administered at the selected date, the second one-month
later and the third six months after the first dose. Once initiated, the primary
course of vaccination should be completed with the same vaccine. Booster
vaccination with the combined vaccine can be recommended 5years after initiation
of the primary course.
Bilive side effects are rare and of low intensity. The most common
reactions were those at the site of injection, which included transient pain,
redness and swelling. Systemic adverse events seen were fever, headache,
fatigue, nausea and vomiting. These events were transient, only rarely reported
and were considered by the subjects as mild.
Split Flu Influenza Vaccine
---------------------------
Split Flu Influenza Vaccine - The influenza vaccines used in the world
include whole-particle, split and subunit vaccines. For children under 12 years
whole-particle vaccine is prohibited since its has severe adverse reactions.
Split vaccine is the one that will be used most widely all over the world. The
Company began the development of influenza split vaccine 2 years ago. Clinical
trials for this product have recently been completed and are currently being
evaluated. 500,000 doses of split flu vaccine are expected to be produced in its
first year after finishing the construction of the manufacturing facility, and
then 2 millions doses per year thereafter.
SARS
----
SARS - In May of 2003, the "Programs of Key Technology and Products
Research and Development for SARS Prevention and Control" included "Inactivated
SARS vaccine Research and Development" into the important "863 Plan" of China's
"Tenth Five-Year Plan". One year later, on May 23, 2004 - the Company announced
that it had commenced Phase I human clinical trials of its SARS vaccine. The
first subjects were injected with the vaccine on the 22nd of May 2004 at the
China-Japan Friendship Hospital in Beijing, China.
If Phase I testing is successful, then the second phase of clinical testing
will have more participants from a wider demographic range and will include
double blind trials involving control groups to determine the efficacy of the
trial drug in multiple trial centers. Phase III of clinical trials is expected
to be much the same as Phase II but will be conducted on a much larger scale (if
a major outbreak of SARS presents the opportunity for these pivotal trials). The
successful completion of such an initiative could conceivably lead to the
commercialization of a SARS vaccine within 18 months - one that also meets
Western standards of safety and efficacy. Notably, a pharmaceutical product's
approval timeline in the United States may sometimes be expedited to as little
as six months if it is designed to treat or prevent a life-threatening illness
for which there are few or no alternative therapies.
Avian Flu
---------
Avian Flu - The Chinese government assigned the task of Avian Flu R&D to
the Company and the Center for Disease Control of China on the latest Key
Science-Technology Project of the National 'Tenth Five-Year-Plan' of China,
called "Research and Development of a New Human Influenza Vaccine". The Company
16
finished the research protocol early in 2004 and started working towards a
vaccine. The leading world health authority influenza network provided the
prototype bird flu virus to vaccine makers around the world.
Research and Development
- ------------------------
Disease prevention is a long march. The Company will strive to integrate
our research & development, and marketing strategies, so as to supply more and
more new products to eliminate human diseases.
The Company, through the co-operation with local and internationally
well-known universities, colleges and institutes, and in consideration of the
need of disease control in China, researches on and develops new vaccines, takes
benefits from the mature technology in the world, reconstructs the existing
vaccine products, participates in world-wide competition in vaccine markets, and
makes effort to achieve more abundant and perfect products.
In this regard, a number of leading Chinese scientific and medical
institutions, such as Beijing University and the Chinese Academy of Medical
Sciences, are collaborating with the Company in the research and development of
new and improved vaccine biotechnologies. In particular, the Chinese government
is marshalling all of its scientific resources to the Company's aid in a
collaborative effort to develop on an expedited basis a safe and effective
vaccine for SARS.
Safety and Quality Assurance
- ----------------------------
In accordance with FDA Good Manufacturing Practice ("GMP") requirements,
the Company has written and implemented a quality assurance validation plan,
procedures, and a complete documentation system. The Company's manufacturing
facilities for Hepatitis vaccines, HealiveTM and BiliveTM, have both received
the Certificate of Good Manufacturing Practices for Pharmaceutical Products (n.
2515 and 2514) issued by Chinese State Food and Drug Administration ("SFDA").
Sinovac's facilities also meet the GMP requirements of the US Food and Drug
Administration. The Company has strict control management of its staff, plant
environment, support facilities, raw materials, hygiene, validation,
documentation, manufacturing process, quality control, product selling, post
selling, and pharma-covigilance. The Company's personnel are trained on these
procedures and documentations routinely to ensure a finely running comprehensive
quality assurance system and the quality of the finished products.
The Company bases all its operations on its excellence in service concept.
To meet the Company's high goals, the Company has established a team of
nationwide well-known experts, professors and doctors to provide vaccine
customers with support. This team of experts provides the core of the Company's
emergency advisory response center, which promises to take action within 24
hours in case of emergency, 365-days a year.
The Company's facilities are fully compliant with world advanced GMP
Quality Assurance System (QAS), international standards on bio-pharmaceutical
manufacturing. The design of the plant for the production of the Healive vaccine
was done by a well-known European company in accordance with the U.S. FDA and EU
GMP requirements, with major equipment and facilities imported from Europe, and
17
the installation and debugging processes completed in a key-handing-over way by
an European pharmaceutical engineering company. The Company's plant has passed
the validation done by SVS - a FDA designated GMP validation consulting company.
Market Prospects
- ----------------
The global statistics speak for themselves, billions infected, millions
more every year and a continually growing population providing new vulnerable
hosts.
The massive increase in international travel through airports over the past
forty years and a minimum incubation for any of the major viruses of three days
means that an infected individual can pass a virus onto multiple continents
before he realizes he is ill. If he only passes on the virus to one person in
each continent, it's enough to start a global epidemic.
This is why the leading international health authorities and governments
around the world have stated that vaccination is the most cost effective way to
deal with viral threat.
116 countries have now initiated childhood vaccination programs and more
are following. The only barriers that stand in the way of success for these
initiatives are cost and quality. There are few of the `inactive' safer vaccines
available and they are costly despite significant price drops over the last 15
years.
The existing vaccine suppliers use the lack of competition to keep the
price high. Research and development for existing products took place many years
ago with less advanced technology and as a result there are still costs to
recover. Subsequently, many western pharmaceutical companies will not enter
poorer countries, as their pricing structures do not give them the flexibility
to make an effective bid. This means that despite global vaccination
initiatives, only the more financially able countries can implement programs
using western vaccine suppliers.
According to the U.S. investment dealer, Merrill Lynch, the global vaccine
market was worth about US $5.4 billion in 2001. Merrill Lynch forecasts that
this figure will reach US $10 billion within 5 years. This represents an
increase of almost 100% -- a figure that eclipses forecasts for any other
pharmaceutical sector, including the prescription drug market. A key driver for
the growth in vaccine sales is the fear of the emergence or new potentially
lethal "super viruses" such as SARS and avian influenza.
Many biotechnology and pharmaceutical companies are vying to capitalize on
this booming market. Accordingly, the Company is in an enviable position in that
the company is ideally positioned to be a market leader in China and elsewhere
in Southeast Asia -- collectively the fastest growing and most prolific vaccine
marketplaces in the world.
18
The Company's Market
- --------------------
The Company has three markets, each with three subsections. The first of
these, as with most companies is the local domestic market - that being China.
China has a population of approximately 1.3 billion, with 15-20 million
babies born each year and an increasing elderly population. These two
demographic groups are the largest vaccine consumers. According to official
data, the population aged 60 and over has reached 134 million with an annual
rate of increase of about 3.2 %. Hence, the need to address healthcare costs to
an aging population is a pressing concern of China's federal government. One of
the most effective ways of containing such costs is through government-supported
vaccine inoculations against such infectious diseases as hepatitis and
influenza.
The Chinese government has targeted disease prevention as a key sector of
the country's pharmaceutical industry development plans and the reforms will
further accelerate demand growth. According to Wang Hexiang, former minister of
public health for China's federal government, the federal government is infusing
1.2 billion yuan (US$145 million) in 2004 to set up a nationwide disease
prevention system. In 2002, government funding was only 800 million yuan
(US$96.4 million.).
According to studies conducted by the pharmaceutical giant, SmithKline
Beecham, China's biopharmaceutical market is predicted to be the largest in the
world by 2010. Moreover, the most vibrant sector in this industry is expected to
be the market for immunology biotechnology.
The vaccine marketplace in China can be sub divided into three different
marketing channels as described below:
Public market: central or local government funding for vaccines
-------------- to combat common virile diseases such as Hepatitis
B (for infants and school children).
Private market: "Out-of-pockets" cash market for individuals who
--------------- can personally afford vaccines for Hepatitis A,
rabies, influenza, pneumonia and other
opportunistic illnesses.
Third party market: This would involve payment of inoculations for all
------------------- types of common viral illnesses by privately
funded or government-assisted medical insurance
programs.
Local Influenza Market
----------------------
In China, the demand for influenza vaccines is growing exponentially.
During the 2002/03 influenza season, a total of 6.7 million doses were sold.
Last year, that figure is estimated to have more than doubled to about 15
million doses. A continued surge in demand is anticipated during the next few
years as a result of a number of factors, which include new initiatives on the
part of the federal government to encourage citizens to reinforce their immune
systems against influenza, as well as a possible resurgence in SARS. In
19
addition, the advent of Chinese citizens having greater access to disposable
income means that tens of millions of Chinese can now afford influenza shots.
The Company estimates that demand could reach 20 to 30 million doses within
a couple of years. A current shortage in the supply of influenza shots in China
is an imperative that the Company intends to address once approval is granted
for the launch of its proprietary influenza vaccine. The current Chinese supply
of influenza vaccines, at approximately six million doses annually, falls far
short of meeting China's demand for at least 15 million doses by 2005. At
present there are several domestic suppliers and three foreign suppliers with no
market leader.
Southeast Asian Region and Developing Countries
-----------------------------------------------
The Company's second market sector is still close to home, where there
exists one of the most epidemic areas of the Hepatitis A virus, and in at least
one regard, cost is equally as important as safety. Many low income or poor
health infrastructure countries all require safe, efficient vaccines. Currently,
the Company is preparing the registration information for each country
co-ordinated with their international market developing arms. The first eight
countries for which we intend to submit registration information are Thailand,
Vietnam, Malaysia, Philippines, Mexico, Brazil, Indonesia and Sri Lanka.
The Southeast Asian region and other developing countries together are at
least equal to the local Chinese market and have similar statistics for birth
rates and those above 60 years of age.
Global Consumers
----------------
For many years now, health authorities, practitioners and governments in
western countries have been under pressure to improve medical care and keep
costs down if not reduce them. News stories in most countries complain about the
ever-increasing costs, longer waiting lines and reduced quality of service. As a
result, the purchasing power within these institutions is being exercised more
by accountants and contract negotiators as they search for savings. This creates
a growing demand for cost effective drugs and treatments that are not locally
sourced. Provided the quality is seen as equivalent, more and more western
medical service providers will look to source their provisions from the most
cost effective source.
Customer Types
- --------------
Government
----------
Governments across the globe are pledging their support, financially and
organizationally to vaccine initiatives. Where Rubella (measles) and Smallpox
were the traditional child vaccinations, Hepatitis and Influenza are now being
added to increase the scope of preventative medicine. Government sponsored
programs tend to be aimed at `most at risk' groups and are often directed at
children more than the elderly.
20
International Nongovernmental Organizations
-------------------------------------------
Since 1991, international health authorities have urged all countries to
add Hepatitis B vaccines into their national immunization programs. As of March
2000, 116 countries had included Hepatitis B vaccine in their national programs
including most countries in Eastern and South- East Asia, the Pacific Islands,
Australia, North and South America, Western Europe and the Middle East. However,
many low income countries in sub-Saharan Africa, the Indian subcontinent and in
the Newly Independent States do not use the vaccine. The price of the Hepatitis
B vaccine has been one of the main obstacles to its introduction in many of
these countries.
An organization committed to the vaccination of children against diseases
is The Global Alliance for Vaccines and Immunization (GAVI) which was created in
1999. GAVI has introduced a new approach to international health funding - the
Global Fund for Children's vaccines (GFCV). This fund will help 74 low-income
countries to reinforce their national vaccine programs and introduce Hepatitis
B, yellow fever and hemophilia influenza type B (HIB) vaccines into their
national immunization programs.
The Company is planning to develop the vaccines which are on the order list
of those nongovernmental organizations and EPI in order to capture the market of
low-price, but big-demand vaccine.
Private Citizens
----------------
Rising incomes have contributed to the increased demand for commercial
vaccines. Many of those in the higher wage bracket choose to pay for
vaccinations. This growing market is supplied by increasingly cost conscious
physicians in private health centers.
Marketing Strategy
- ------------------
First the Company intends to target progressive geographic expansion with
its family of vaccines that target historically devastating viruses. The Company
is building a sales organization in the Chinese domestic market. Concurrently
with its domestic marketing plan, the Company is establishing a marketing and
sales presence in South East Asia and other developing countries through local
distributors, who have over 10 years experience of commercialization and
registration for vaccines and other pharmaceuticals through their well
established governmental relationship and local selling channels.
The second prong of the Company's marketing strategy is contingent on
creating a blockbuster vaccine for defeating emerging viruses such as SARS or
the Avian Flu. In such case, the first to market advantage opens the door for
sales to the international market. In such a scenario, the Company intends to
enter the international market, with a worldwide sales network of professional
sales teams, well-organized selling channels, a sound customer-credit management
scheme, and an efficient logistics system.
21
Domestic Market Strategy
------------------------
The Company's domestic marketing is greatly enhanced by Chinese government
programs for inactivated Hepatitis A Vaccine, inactivated SARS vaccine and new
Human Influenza vaccine.
As part of the Company's private marketing strategy, it intends to continue
to pursue a strategy of first launching its vaccine products in market segments
in China that present the highest concentrations of people with higher earnings
bases. Subsequent to this initiative, the Company intends to systematically
expand its sales reach into less affluent urban areas and less populated rural
provinces. Accordingly, the Company intends to penetrate these various markets
in descending order with Segment A representing the most affluent, high density
areas and Segment D representing lesser populated areas with the lowest per
capita average incomes.
These market demographics are outlined below:
Segment A: Beijing / Guangdong / Jiangsu / ZhejiangTianjin
Segment B: Liaoning / Hebei / Shandong / Fujian / Shanghai / Hainan /
Shaanxi / Chongqing / Guangxi
Segment C: Helongliang / Jilin/Shanxi / Sichuan / Yunnan / Anhui
Segment D: Henan / Hunan / Jiangxi / Guizhou/
Southeast Asia Regional Market Strategy
---------------------------------------
The Company intends to develop an overseas sales strategy initially
targeting Southeast Asian nations by way of a joint venture licensing/marketing
agreement with a successful South Korean pharmaceutical company called Innopath
International ("Innopath"). Many management personnel in Innopath have over 20
years experience in international vaccine marketing and they have over 10 years
working experience with distributors with many South Asian countries.
International Market Strategy
-----------------------------
The Company intends to register with the European Union (EU) and the U.S.
Food and Drug Administration (FDA) with the goal of meeting FDA and EU approvals
for one or more of its in-development vaccine biotechnologies. The most obvious
candidates at this time are the Company's experimental avian flu and SARS
vaccines as there are presently no viable immunology treatments to protect
against SARS and avian flu in the United States or anywhere else. The prospect
of being "first to market" with potentially life saving immunology
biotechnologies offers the Company a clear competitive advantage in terms of
gaining significant market share.
The Company expects to primarily target developing nations where Western
manufactured hepatitis vaccines are typically prohibitively expensive. The
Company expects to be registered for the sale of its Hepatitis A and Combined
Hepatitis A&B immunology biotechnologies in at least 34 countries by the year
2009.
22
Similarly, the Company expects to commercialize its proprietary human
influenza vaccine by the first quarter of 2005 with the goal of also targeting
the majority of other developing Southeast Asian markets within the next five
years.
The Company has also signed a marketing agreement with China National
Medicine & Health Products Import/Export Corporation (MEHECO) to represent its
products in Brazil. MEHECO is one of the largest medical import/export companies
in China, specializing in pharmaceuticals, health products, hospital supplies
and chemicals. It has achieved more than US$6.3 billion in sales since its
inception 18 years ago. MEHECO is a global leader in vaccine sales in more than
one hundred countries.
The Company intends to accelerate its international market growth by
placing a priority on sales agreements with companies that can take advantage of
the Company's R&D capabilities.
Competition
- -----------
Domestic Chinese Competition
----------------------------
The existing domestic vaccine industry in China only caters to a small
fraction of the Chinese population at this time. Most Chinese vaccine
manufacturers are very small-scale operations that use dated biotechnologies and
experience high operating costs. Furthermore, due to the technological
limitations of these companies, most of their vaccines have a relatively low
efficacy rate (compared to Western counterparts), as well as a significant
incidence of potent side effects. For instance, cheap live attenuated Hepatitis
A vaccine has poor stability profile. It requires strict conditions when
delivering. When the surrounding temperature is above 8 degrees Celsius, it is
very possible for the Hepatitis A vaccine to lose its efficacy. And in many
undeveloped areas in China, it is unlikely to guarantee the delivery conditions
for live attenuated vaccine. Therefore, when the vaccine is delivered to the
destination, it has been ineffective. It is very important to notice that none
of the countries in the world, except China have approved live attenuated
vaccine to be used.
Despite low price points for their immunology biotechnologies, combined
sales for all of these manufacturers only amount to about US$60-73 million a
year, as compared to the equally small US$24.2 million generated by Western
vaccine manufacturers (whose products are prohibitively expensive for most
Chinese citizens). Furthermore, most Chinese vaccine manufacturers are legally
required to allocate up to 70% of production capacity to the manufacturing of
vaccines for federal government immunology programs. The profit margins for such
initiatives tend to be slender.
Ultimately, the greatest limitation faced by Chinese vaccine manufacturers
concerns an inability to access major financing for expansion purposes. The
venture capital market is still in its infancy in China and accessing funds is
problematic, particularly when these companies are marketing inferior
biotechnologies. Accordingly, China suffers from a major shortfall in the supply
of safe and efficacious vaccine biotechnologies. For instance, only about 1.5% -
2.5% of the Chinese population are consumers of influenza vaccines. By
comparison, this figure is as high as 26% in the United States and up to 20% in
23
neighbouring South Korea. Such statistics attend to the largely untapped
marketplace for the Company's anticipated soon-to-be-launched influenza vaccine.
Whereas this marketing opportunity also extends to Western pharmaceutical
companies with influenza vaccines that are comparable in safety and efficacy to
the Company's influenza vaccine, however, the Company's lower price point offers
a clear competitive advantage. Influenza vaccines may be sponsored or subsidized
by many Western governments or by private medical insurance programs. However,
most Chinese citizens have to pay for these vaccines out of their own pockets.
Therefore, the Company believes that this price-sensitive consumer market will
favour the company's influenza vaccine over more expensive Western competitors.
The same rationale likely applies to the Chinese municipal governments that are
beginning to allocate funds to provide influenza shots to low income municipal
dwellers. Furthermore, the advent of private medical insurance programs in China
also promises to benefit the Company for similar cost-related reasons.
International Competition
-------------------------
Competition from other biomedical companies in the global vaccine
marketplace is a risk factor. In a rapidly changing field, this competition is
most likely to come from well-established biopharmaceuticals with deep pockets
and a proven track record for successful product development and
commercialization. Therefore, there can be no assurance that such potential
rivals will not develop more proficient and more affordable vaccine products.
Also, the prospect of another immunology company in North America or elsewhere
commercializing the world's first SARS or avian influenza vaccines is a distinct
possibility.
Administration
- --------------
During the period commencing January to December of 2003 the average
monthly administration costs are approximately US$157,059 and the total
administration costs were US$1,629,118.
The average monthly administration costs were as follows:
24
Category Monthly Cost
-------- ------------
(Approximate)
-------------
Wages, benefits and
subcontractors: $ 49,208
Legal $ 6,842 (1)
Marketing: $ 9,970
Travel: $ 18,577
Shareholder Information and $ 13,313 (1)
Investor Relations:
Audit and accounting: $ 7,105 (1)
General and Administrative: $ 18,720
Occupancy costs: $ 3,531
Transfer Agent fees: $ 2,253
Advertising and promotion: $ 1,240
Filing fees: $ 2,253
Automobiles: $ 9,632
Consulting fees: $ 14,415
-----------
Total: $157,059 (2)
----- -----------
Notes:
(1) These services were mainly engaged in the last three months of 2003, and
therefore, the total cost for these services are presented based on the
total costs divided up over the last three months of 2003, which does not
necessarily indicate the average monthly administration cost over the
fiscal year ended December 31, 2003.
(2) Variations in the administration costs are mainly due to increases in wages
and benefits, professional fees (legal and auditing), shareholder
communication and regulatory compliance.
C. Organizational Structure
------------------------
The Company is a 51% majority owner of Sinovac Biotech Co., Ltd., a company
organized under the laws of the People's Republic of China, and a 100% owner of
Tangshan Yian Biotechnology Engineering Co., Ltd., a company organized under the
laws of the People's Republic of China. Therefore, the Company has two
subsidiaries - one which is wholly owned and one which is majority owned.
D. Property, Plants and Equipment
------------------------------
Office Space
- ------------
The Company utilizes about 22,264.21 square meters of land in PKU Biocity,
Beijing, China, of which 4,540.77 square meters is for the use of building
constructed by Sinovac Biotech Co., Ltd. Over 1,000 square meteres is used as an
office building and over 2,000 square meters is the production plant for
Hepatitis A vaccine.
25
Plants
- ------
The design of the Sinovac Biotech Co., Ltd. plant in Beijing for the
production of the Healive vaccine was done by a well-known European company in
accordance with the US FDA and EU GMP requirements. The major equipment and
facilities were imported from Europe, and the installation and debugging
processes were completed in a key-handing-over way by a European pharmaceutical
engineering company. The plant has the validation done by SVS - a FDA designated
GMP validation consulting company.
The Sinovac manufacturing plant for Inactivated Hepatitis A vaccine has
obtained the GMP certificate issued by the China State Food and Drug
Administration (SFDA) in March 2002.
Tangshan Yian Biological Engineering Co., Ltd. ("Tangshan Yian") was
founded in 1993. Its facility is located in the New Hi-tech Development Zone of
Tangshan City, connected by superhighways to Beijing, 150 kilometers to the
east. Tangshan Yian's plant was built in accordance with the Pharmaceutical
Industrial Standards and Regulations of China, which are based on international
standards. The plant itself is 4300 square meters, which includes a level III
Biological Safety Laboratory, Cell Culturing Workshop, Pilot Trial Production
Workshop, Reagents Manufacture Workshop, and Research Lab for R&D of the Split
Flu Vaccine. The plant is situated on 20,000 square meters of land, and has
reserved an additional 10,000 square meters in anticipation of future expansion.
Tangshan Yian provides the Company with a low-cost R&D and manufacturing
base. The advantages of Tangshan Yian's state-of-the-art facilities expanded
manufacturing capabilities and its talents will enhance the competitive ability
of the Company on research and production.
The clinical trials on split flu vaccine have been finished. A production
line with GMP standards is being built at the Tangshan Yian plant.
Chinese State Food and Drug Administration approved the Company to commence
the clinical research on its Inactivated SARS vaccine. The Company's subsidiary,
Tangshan Yian, will produce the first 20,000 doses at its world-class P3 Lab
(BL3). Currently, there are only a few of such laboratories in the world.
The Company will work on New Human Influenza Vaccine (Human Used Avian Flu
Vaccine) Development Project with the Chinese Center for Disease Control and
Prevention at its Tangshan Yian facility. The Company has already finished the
research protocol and has started working towards a vaccine.
Equipment
- ---------
Steel furring is used for the main body of the manufacturing workshop. And
the architecture is concise and vivid. The manufacturing workshop is designed
based on Chinese GMP requirements, which is divided into clean zone and
non-clean zone. The class of cleanness are class 100,000, class 10,000, and
class 100. High class facilities are selected for the establishment of the
manufacturing workshop. Key facilities are overseas advanced products. And the
subsidiary facilities are mainly made in China. Temperature control is designed
26
to be automatic control. And the production control is designed to be
centralized. It also includes the necessary establishment, such as dressing room
and air brake. The design, preparation, fire control, environment protection,
labor protection, and energy saving of heating, ventilation, and air
conditioning are based on GMP standards and relative domestic requirements.
ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. The Company
-----------
Year ended December 31, 2003 compared with the year ended December 31, 2002
---------------------------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
Our primary liquidity requirements are for working capital, capital
expenditures, research and development. Our primary sources of liquidity have
been cash provided by operations, borrowings and stock plan. The availability
and attractiveness of any outside source of financing will depend on a number of
factors, some of which relate to our financial condition and performance, and
some of which are beyond our control, such as prevailing interest rates and
general economic conditions. There can be no assurance that additional financing
will be available, of if available, that it will be on terms we find acceptable.
Cash and cash equivalents increased by $1,107,453 to $1,420,047 in 2003,
from $312,594 in 2002.
Net cash provided by financing activities increased by $1,443,134 to
$2,895,793 in 2003, from $1,452,659 in 2002. This increase is primarily related
to the subscription received of $1,031,959.
In 2003, cash used by investing activities decreased by $1,318,392 to
$758,959. This cash was used to purchase plant equipment, totalling $348,190,
and payment for Licenses and permits, $410,769.
Cash used in operating activities decreased by $23,798 to $1,029,143 in
2003, from $1,052,941 in 2002. The decrease is primarily related to the increase
of sales.
Results of Operation
- --------------------
Vaccine manufacturing is a special industry, which requires high open-end
investment in order to establish the proper production line to meet high
requirements. From building the manufacturing workshop to selling the product
into the market, Good Manufacturing Practice certification is required, as well
as application for New Drug Approval for commercialization. Therefore, it is
expected that there will be a significant period of time from the beginning of
investment until we realize return. For Sinovac, the construction of the
manufacturing workshop was completed in 2002. The Hepatitis A vaccine was
initially launched into the market in Q4 of 2002. Profits for the sales of this
27
vaccine were not realized by the end of 2003. However, we expect to gain profit
by the end of 2004, since market share and sales numbers for HealiveTM continue
to increase. Concurrently, we are going to launch the combined Hepatitis A&B
vaccine in the market. Part of the production of combined vaccine is going to be
completed in our manufacturing workshop for Hepatitis A vaccine, which helps to
lower production costs.
In 2003, total sales were $2,838,933, fourfold from $649,319 in 2002, and
net cash inflow in 2003 was $1,107,453.
Cost of sales was $1,085,881 in 2003, and gross margin was 61.75%, compared
to the $251,711, 61.23% in 2002 respectively.
Expenditures on sales and general administration was $1,629,118 compared to
$792,078 in 2002. Expenditures were $354,173 for salaries and benefits compared
to $218,613 in 2002, $357,503 on marketing compared to $181,935 in 2002.,
$399,317 on office expenses compared to $226,961 in 2002, $211,819 on travel
compared to $138,147 in 2002, $40,765 on rentals compared to $24,005 in 2002 and
$265,538 on professional and consulting fees compared to nil in 2002.
Research and Development, Patents and Licenses, etc.
- ----------------------------------------------------
Research and Development expenditures totaled $232,785 in 2003, compared to
$24,535 in 2002. The increase in spending from last year primarily reflects
ended Split Flu clinical development activity and Hepatitis A&B obtained new
drug license.
The Company's most important Research and Development achievement is the
inactivate SARS vaccine. The SARS Research and Development expenditures was
granted by China government for $664,251 (RMB 5,500,000) which was deducted from
the total in Research and Development expenditures.
Trend Information
- -----------------
The Company's corporate strategy is aggressively directed towards
increasing sales during 2004. There are, however, some external factors that can
materially affect the final sales figures for 2004. These external factors
include the government approval process, possible reoccurrence of diseases such
as SARS and new competition.
Understandably, government delays in the sales approval for the Company's
combined Hepatitis A&B vaccine will correspondingly reduce sales figures for the
2004 period. In addition, the reoccurrence of SARS or similar viruses cannot be
guaranteed and as such neither can sales of any respondent vaccine. Finally, the
market sector available to the Company may be reduced if a new competitor
obtains approval to sell an equivalent product into the Company's market and the
Company does not increase promotional investment to compensate.
28
Net Force Systems Inc.'s Year ended April 30, 2003 compared with the year
---------------------------------------------------------------------------
ended April 30, 2002
--------------------
Liquidity and Capital Resources
- -------------------------------
As at April 30, 2003, available unrestricted cash on hand plus net accounts
receivable due in less than 30 days amounted to $35,617 versus $84,085 for April
30, 2002, a decrease of 58%. Current assets less player deposits as at April 30,
2003 were $66,544 and current liabilities less players deposits were $104,643.
Total liabilities as at April 30, 2003 were $156,280 versus $136,813 as at April
30, 2002. Approximately 75 % of the current liabilities as at April 30, 2003
consists of wages payable to Chairman , President, and Chief Executive Officer
Terry G. Bowering ($53,387), customers deposits ($51,637), and stock
subscription payable ($12,500). Total stockholders Equity was ($26,123) as at
April 30, 2003 versus $99,441 as at April 30, 2002.
The company received its trading symbol (NTFSF) from the NASD on February
21st, 2003. The Company now has a ready market for its issued shares which
greatly enhance opportunities for additional equity financing in fiscal period
2004.
Material Commitments for Capital Expenditures
- ---------------------------------------------
There were no material commitments for capital expenditures as of the end
of the latest fiscal period ended April 30, 2003. The existing administrative
office and computer hardware includes personal computers, printers, fax
machines, and backup power supply units, which maintain operation of the
electronic office equipment during short power outages. This office equipment is
adequate to conduct current business operations.
From this office, the Company conducts web-site design, marketing, customer
service support services for the company's websites. The Company also manages
corporate communications and investor relations from this office. The Company
maintains access to the Internet, which requires personal computers,
communications hardware and software, and backup power supply units. All of the
above commitments were settled in full payment in cash from the proceeds of
initial share issuances and from the proceeds from the initial promissory note
issued on July 15, 1999.
During the fiscal period ended April 30, 2003, no further payments were
made to World Gaming under the software license agreement for the initial
software setup and configuration. As stated, the major capital expenditure for
software was a one-time setup and configuration fee of US$100,000 payable to
Starnet Systems International (formerly Softec Systems). An initial payment of
US$10,000.00 was paid upon execution of the agreement on July 15, 1999 leaving a
balance of US$90,000.00 payable upon completion of the configuration/design of
the software and commencement of live operations. In September of 2000, the
balance of this one-time initial setup fee was subsequently negotiated to zero
as a result of a compensation agreement with Starnet Systems International.
During the fiscal period 2003, only monthly royalty fees (as a percentage of
monthly total revenues), were paid to World Gaming.
29
Material Commitments for Resources
- ----------------------------------
No material commitments of resources were made during the fiscal period
ended April 30, 2003.
Any material commitments of resources over the next year will be funded
from an additional financing which may consist of a combination of equity
financing and issuing a promissory note with a possible convertible equity
component attached.
Impact of Inflation
- -------------------
The Company believes that inflation will not materially affect its
business.
ITEM 6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
-------------------------------
The names, municipality of residence and principal occupations in which
each of the Directors, Executive Officers and other members of management of the
Company have been engaged during the immediately preceding five years are as
follows:
- ----------------------------- -------------------- ---------------- -------------------
Name, Municipality Number of Shares of
of Residence and Principal Occupation Director/ the Company
Positions, if any, or Employment Officer of the Beneficially Owned,
held with the during the Past Five Company Controlled or
Company Years Since Directed(1)
- ----------------------------- -------------------- ---------------- -------------------
Weidong Yin Businessman President, CEO, 6,544,833
Beijing, P.R.C. Secretary and a
Director since
President, CEO, Secretary September 2003
and a Director of the Company
Heping Wang Businessman Director since 3,500,000
Beijing, P.R.C. September 2003
Director of the Company
Lily Wang Retired CFO and a 10,000,000
Beijing, P.R.C. Businesswoman Director since
September 2003
CFO and a Director of the
Company
30
Dr. Kim Kiat Ong Businessman Director since Nil
Singapore November 2003
Director of the Company
Notes:
- ------
(1) These figures are as of May 31, 2004
The following are brief profiles of the Directors and Executive Officers of
the Company:
> Mr. Wei Dong Yin (age 40) has been the President, CEO, Secretary and a
-----------------
Director of the Company since September 24, 2003. Mr. Yin is also the General
Manager of the Company's subsidiary, Sinovac Biotech Co., Ltd. Mr. Wei Dong Yin,
has been dedicated to hepatitis research for over 20 years. He is credited with
developing the intellectual property that led to the development of the
Company's Hepatitis A vaccine. In addition, Mr. Yin has been appointed to be the
principal investigator by the Chinese Ministry of Science and Technology for
many key governmental R&D programs such as "Inactivated Hepatitis A vaccine
R&D", "Inactivated SARS vaccine R&D" and "New Human Influenza Vaccine (H5N1)
R&D". He obtained his Masters degree in Business Administration from the
Singapore State University.
> Mr. Heping Wang (age 53) has been a Director of the Company since September
---------------
24, 2003. Mr. Wang graduated from Beijing University of Apparatus Technology. He
has been working in real estate industry for over ten years. Mr. Wang developed
the Beijing Fuhua Mansion, which is the first European style architecture in
Beijing with over 200,000 square meters. Recently, Mr. Wang has started to
invest in the biotech industry and the information technology industry.
> Ms. Lily Wang (age 46) has been the CFO and a Director of the Company since
-------------
September 24, 2003. Ms. Wang graduated from Chamnide University of Honolulu in
1992 with a Masters degree in Business Administration. Ms. Wang has been working
in accounting and finance area for over 10 years since she graduated. She was an
accounting manager from 1992 - 1995 with AJAX United, a US company and a
Vice-President and Secretary for over nine years with Xinyu Enterprise
Development Inc. Ms. Wang is also a general partner of Tiancheng International
Investment Company.
> Dr. Kim Kiat Ong (age 52) has been a Director of the Company since November
----------------
12, 2003. Dr. Ong has been in the medical field for over 30 years and has
specialized as a Cardiothoracic and Vascular Surgeon for 18 years. He has been a
member of several national committees and is currently a Member of the Advisory
Committee, for the Singapore Ministry of Health (2003-2005). As a seasoned
lecturer, teacher and writer in the medical profession, Dr. Ong offers a high
level of quality experience to the management team at Sinovac.
31
Aggregate Ownership of Securities
- ---------------------------------
There are presently an aggregate of 20,044,833 common shares of the Company
owned by all of the Directors, Officers and promoters of the Company
representing 57.65% of the total issued and outstanding common shares of the
Company.
Other Reporting Issuers
- -----------------------
The following Directors, Officers, promoters or other members of management
of the Company have held a position as a director, officer, promoter or other
member of management of other reporting issuers within five years prior to the
date of this Annual Report:
Member Position with Other Reporting Issuer
- -------------------------- ------------------------------------------
Weidong Yin N/A
Heping Wang N/A
Lily Wang N/A
Dr. Kim Kiat Ong N/A
Individual Bankruptcies
- -----------------------
None of the Directors, Officers, promoters or members of management of the
Company have, within the five years prior to the date of this Annual Report,
been declared bankrupt or made a voluntary assignment in bankruptcy, made a
proposal under any legislation relating to bankruptcy or insolvency, or been
subject to or instituted any proceedings, arrangement or compromise with
creditors, or had a receiver, receiver manager or trustee appointed to hold the
assets of that individual.
Conflicts of Interest
- ---------------------
Some of the Directors and Officers of the Company also serve as directors
and/or officers of other companies and may be presented from time to time with
situations or opportunities which give rise to apparent conflicts of interest
which cannot be resolved by arm's length negotiations but only through exercise
by the Directors and Officers of such judgement as is consistent with their
fiduciary duties to the Company which arise under Antigua and Barbuda corporate
law, especially insofar as taking advantage, directly or indirectly, of
information or opportunities acquired in their capacities as Directors or
Officers of the Company. All conflicts of interest will be resolved in
accordance with the appropriate business corporation statute. Any transactions
with Directors and Officers will be on terms consistent with industry standards
and sound business practices in accordance with the fiduciary duties of those
persons to the Company and, depending upon the magnitude of the transactions and
the absence of any disinterested board members, may be submitted to the
shareholders for their approval.
32
Other Information
- -----------------
There are no family relationships between any of the Directors or Officers
of the Company except for Ms. Lily Wang and Mr. Heping Wang, who are brother and
sister. The approximate percentage of business time that each Director and
Officer will devote to the Company's business is as follows:
Name Percentage of Time
-------- ------------------
Wei Dong Yin 100%
Heping Wang 30%
Lily Wang 50%
Kim Kiat Ong 10%
B. Compensation
------------
The Company's Executive Compensation
- ------------------------------------
The Company's fiscal year end is the 31st day of December.
The Company has created four Executive Offices, namely that of President,
Secretary, CEO and CFO. In this regard the Company's named Executive Officers
(collectively, the "Named Executive Officers") are as follows:
Wei Dong Yin - Mr. Yin was appointed the President, CEO and Secretary of the
- ------------
Company on September 24, 2003 and served as a Director since the same date.
Lily Wang - Ms. Wang was appointed the CFO of the Company on September 24, 2003.
- ---------
For the purpose of this Annual Report, except as otherwise expressly
provided or unless the context otherwise requires, the following words and
phrases shall have the following meanings:
"Equity security" means securities of a company that carry a residual right
to participate in earnings of that company and, upon liquidation or winding
up of that company, its assets;
"Option" means all options, share purchase warrants and rights granted by a
company or any of its subsidiaries (if any) as compensation for services
rendered or otherwise in connection with office or employment;
"LTIP" means a long-term incentive plan, which is any plan providing
compensation intended to serve as incentive for performance to occur over a
period longer than one financial year, whether the performance is measured
by reference to financial performance of the company or an affiliate of the
company, the price for the company's securities, or any other measure, but
does not include Option or SAR plans or plans for compensation through
restricted shares or restricted share units; and
33
"SAR" means stock appreciation right, which is a right granted by a company
or any of its subsidiaries (if any) as condensation for services rendered
or otherwise in connection with office or employment to receive a payment
of cash or an issue or transfer of securities based wholly or in part on
changes in the trading price of publicly traded securities.
The following table details the compensation paid to the Company's Named
Executive Officers during the fiscal year ended December 31, 2003:
Summary Compensation Table
--------------------------
Annual Compensation Long-Term Compensation
--------------------------- ---------------------------------------
All other Securities
and annual under Restricted
Fiscal Compensation Options/ Shares or
Name and Principal Year and LTIP SARS Restricted
Position(1) End Salary Bonus Payouts Granted Share Units
----------- --- ------ ----- ------------ ---------- -----------
($) ($) ($) (#) (#)
- ------------------------- ------ -------- ------- ------------ ---------- -----------
Wei Dong Yin (2) 2003 $ 4,000 Nil Nil 300,000 Nil
President, CEO, Secretary
and a Director
Lily Wang (3) 2003 $ 48,265 Nil Nil 200,000 Nil
CFO and a Director
<FN>
Notes:
(1) Refer to the disclosure found above the Summary Compensation Table
hereinabove for a detailed description of the Company's Named Executive
Officers.
(2) Mr. Wei Dong Yin was appointed as the President, CEO and Secretary on
September 24, 2003.
(3) Ms. Lily Wang was appointed as the CFO on September 24, 2003.
</FN>
The Company anticipates that compensation will be provided by the Company
during the Company's next financial year to certain of the Named Executive
Officers of the Company and in conjunction with certain management and
administrative services to be provided to the Company by such Named Executive
Officers.
Long-term Incentive Plans - Awards in most recently completed Financial Year
- ----------------------------------------------------------------------------
During its most recently completed financial year, and for the two
previously completed financial years, the Company has not awarded or instituted
any LTIPs in favour of its Named Executive Officers.
Options/SAR Grants during the most recently completed Financial Year
- --------------------------------------------------------------------
As of May 31, 2004, the Company had granted the following options to
purchase common stock of the Company as follows:
34
Name of Optionee Position Number Exercise Date Expiry
---------------- Of Price Granted Date
Optioned
Shares
- ---------------------- ------------ ---------- ------------ --------------- ------------------
Jianguo Wei Employee 20,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Yi Bao Employee 20,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Xuguang Han Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Xudong Lu Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Shuguang Huang Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Zijing Zhang Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Qian Zhang Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Zhibin Gao Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Chunyan Hu Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Fanzhuo Kong Employee 10,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Heqing Gao Employee 10,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Xiulan Zheng Employee 10,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Chen Wei Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Huiwen Wang Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Zhengyou Lu Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Yan Liu Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Lili Song Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Ran Wu Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Yi Wu Employee 500 US$1.31 Nov. 13, Nov. 13, 2008
2003
Tingting Zhang Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
35
Yulong Qu Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Linging Xu Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Li Xu Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Hongmei Sun Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Yanmei Yin Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Lin Wang Employee 5,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Weidong Yin Director 300,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Lily Wang Director 200,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Heping Wang Director 200,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
K.K. Ong Director 200,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Aihua Pan Employee 300,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Jiansan Zhang Employee 90,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Nan Wang Employee 80,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Yingqun Wang Employee 70,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Xuejie Gong Employee 80,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Changjun Fu Employee 80,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Jingling Qin Employee 60,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Jiangting Chen Employee 60,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Jingning Wang Employee 60,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Xiaomei Zhang Employee 60,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Wei Zhao Employee 60,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Zhenshan Zhang Employee 60,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
36
Liangxiang Hu Employee 40,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Jinfeng Huang Employee 40,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Zhiguo Niu Employee 40,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Xuebin Li Employee 40,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Ming Xia Employee 40,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Yuxuan Liu Employee 30,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Yingjun Wei Employee 30,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Lan Wei Employee 30,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Qiang Gao Employee 30,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Yanru Pei Employee 20,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Baoxiang Gong Employee 30,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Yanwei Zhao Employee 20,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Xu Wang Employee 20,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Ziqiang Zhang Employee 20,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Zhongshan Han Employee 20,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Jian Li Employee 20,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Jing Li Employee 20,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Yufen Liu Employee 20,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Jinshui Yin Employee 30,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Guoxing Liang Employee 30,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Xiaojun Zhou Employee 30,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Chuan Qing Employee 20,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
37
Xiaopin Dong Employee 10,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Weidong Yin Director 275,000 US$1.31 Nov. 13, Nov. 13, 2008
2003
Weidong Yin Director 500,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Xianping Wang Employee 400,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Heping Wang Director 400,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Sinoglobe Worldwide Consultant 100,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Michael Tan Consultant 100,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Technique Capital Consultant 100,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Viking Investment Consultant 100,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Jiansan Zhang Employee 13,500 US$4.55 Apr. 14, Apr. 14, 2009
2004
Nan Wang Employee 12,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Yingqun Wang Employee 12,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Xuejie Gong Employee 12,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Changjun Fu Employee 12,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Jingling Qin Employee 9,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Jianting Chen Employee 9,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Jingning Wang Employee 9,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Xiaomei Zhang Employee 9,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Wei Zhao Employee 9,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Zhenshan Zhang Employee 9,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Liangxiang Hu Employee 6,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Jinfeng Huang Employee 6,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
38
Zhiguo Niu Employee 6,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Xuebin Li Employee 6,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Ming Xia Employee 6,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Yuxuan Liu Employee 4,500 US$4.55 Apr. 14, Apr. 14, 2009
2004
Yingjun Wei Employee 4,500 US$4.55 Apr. 14, Apr. 14, 2009
2004
Lan Wei Employee 4,500 US$4.55 Apr. 14, Apr. 14, 2009
2004
Qiang Gao Employee 4,500 US$4.55 Apr. 14, Apr. 14, 2009
2004
Yanwei Zhao Employee 4,500 US$4.55 Apr. 14, Apr. 14, 2009
2004
Jianguo Wei Employee 3,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Yi Bao Employee 3,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Shujuan Zhang Employee 5,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Changjiu Zhang Employee 5,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Hanbo Chen Employee 5,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Zheng Chen Employee 5,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Lin Gao Employee 5,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Xiangjun Li Employee 5,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Maolin Peng Employee 5,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Xiaobing Wang Employee 5,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Laichun Zhang Employee 5,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Li Sun Employee 5,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Yujing Zhu Employee 5,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Wei Hu Employee 5,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
39
Guang Yang Employee 10,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Hong Gao Employee 10,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Ye Ning Employee 10,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Xiaoping Dong Employee 5,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Wei Xu Employee 3,500 US$4.55 Apr. 14, Apr. 14, 2009
2004
Jing Li Employee 4,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Xiaojuan Lian Employee 4,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Luqiu Li Employee 4,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Xuyang Feng Employee 3,500 US$4.55 Apr. 14, Apr. 14, 2009
2004
Peng Wang Employee 4,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Shaoqian Liu Employee 4,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Jia Luo Employee 4,000 US$4.55 Apr. 14, Apr. 14, 2009
2004
Guang Yang Employee 4,500 US$3.36 June 9, June 9, 2009
2004
Notes:
(1)
A total of 5,000,000 shares are issuable pursuant to stock options.
Defined Benefit Plans
- ---------------------
The Company does not have, and at no time during its most recently
completed financial year had, any defined benefit or actuarial plans in respect
of which any of its Named Executive Officers were eligible to participate.
40
Compensation of the Company's Directors
- ---------------------------------------
For the Company's most recently completed fiscal year:
(a) no compensation of any kind was accrued, owing or paid to any of the
Company's current Directors for acting in their capacity as such;
(b) no arrangements of any kind existed with respect to the payment of
compensation of any kind to any of the Company's current Directors for
acting in their capacity as such;
(c) no compensation of any kind was accrued, owing or paid to any of the
Company's current Directors for services rendered to the Company as
consultants or experts;
(d) no arrangements of any kind existed with respect to the payment of
compensation of any kind to any of the Company's current Directors for
services rendered, or proposed to be rendered, to the Company as
consultants or experts;
(e) no SARs or LTIPs were outstanding or in effect in favour of any of the
Company's Directors; and
(f) there were Options which were outstanding and in favour of certain
Directors of the Company who are not also Named Executive Officers of
the Company as set out in the options table above.
No directors have received any compensation other than option grants and
travelling expenses.
C. Board Practices
---------------
The Board of Directors meet quarterly to set policy and review the progress
as well as review and approve budgets and expenditures.
The Directors of the Company are elected by the shareholders at each annual
general meeting of the Company, or, in the event of a vacancy, they are
appointed by the Board of Directors then in office, to serve until the next
annual general meeting of the Company or until their successors are elected and
ratified.
The Company's executive officers are appointed by the Board of Directors
and serve at the discretion of the Board of Directors.
D. Employees
---------
The Company has 115 full time employees as at December 31, 2003. The
following is a description of the number of employees in each department:
41
Department No. of Employees
-------------------------- ----------------------
Senior Management 6
Human Resources 2
Administration 6
Financial Dept. 6
Business Development 3
R&D 1
P3 Lab 2
Clinical Research 4
Quality Assurance 3
Production 16
Quality Control 8
QA for R&D 3
Engineering and Facility 10
Sales 40
Marketing 3
Business 2
Total: 115
In addition to these employees, the Company also retains the services of
certain consultants on an "as needed" basis.
E. Share Ownership
---------------
Directors and Officers
- ----------------------
The share ownership in the Company held directly or indirectly by the
Directors and Executive Officers of the Company are as indicated in the table
below:
Number of
Name Office Shares (1)
---- ------ ------
Wei Dong Yin President, CEO, Secretary and 6,544,833
a Director
Lily Wang CFO and a Director 10,000,000
Heping Wang Director 3,500,000
Dr. Kim Kiat Ong Director Nil
Note:
- ----
(1) These figures are as of May 31, 2004.
42
As a group the Directors and Executive Officers of the Company hold
20,044,833 common shares; which is 57.65% of the total amount of issued and
outstanding common shares of the Company (see the section captioned "Options"
hereinbelow for a detailed description of any and all Options held by the
Directors and Executive Officers in and to the Company.)
Public and Insider Ownership
- ----------------------------
The Directors, Officers and insiders of the Company hold an aggregate of
20,044,833 common shares of the Company on a non-fully diluted basis, being
57.65% of the then issued and outstanding common shares of the Company, as
opposed to the public owning an aggregate of 14,725,400 common shares of the
Company, or 42.35% of the then issued and outstanding common shares of the
Company, assuming that no Warrants to acquire common shares of the Company are
exercised.
ITEM 7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
------------------
To the knowledge of management of the Company, as at December 31, 2003 the
following beneficially own directly or indirectly, or exercise control or
direction, over common shares carrying 5% or more of the voting rights attached
to any class of voting securities of the Company:
Number of Common Percentage of Common
Member Shares Shares
------------ -------------------- --------------------
Lily Wang 10,000,000 36.91%
Wei Dong Yin 6,544,833 24.16%
All the shareholders of the Company have the same voting rights.
To the best of the Company's knowledge, the Company is not owned or
controlled, directly or indirectly, by another corporation or by any foreign
government.
To the best of the Company's knowledge, there are no arrangements, the
operation of which at a subsequent date will result in a change in control of
the Company other than as stated in this Annual Report.
43
B. Related Party Transactions
--------------------------
None of the current Directors or Officers of the Company nor any associate
or affiliate of the foregoing persons, has any material interest, direct or
indirect, in any transactions of the Company or in any proposed transaction
which, in either case, has or will materially affect the Company, except for Ms.
Lily Wang and Mr. Heping Wang.
On September 24, 2003, Ms. Lily Wang and the Company entered into a share
purchase agreement, whereby the Company purchased Ms. Lily Wang's 51% ownership
interest in Sinovac Biotech Co., Ltd., a company organized under the laws of the
People's Republic of China, for consideration of 10,000,000 shares of the
Company's common stock issued to Ms. Lily Wang at a deemed price of $0.60 per
share constituting approximately 37% of the Company's outstanding capital stock
after such issuance.
On January 26, 2004, Mr. Heping Wang and the Company entered into a share
purchase agreement, whereby the Company acquired Mr. Heping Wang's 100%
ownership interest in Tangshan Yian Biological Engineering Co., Ltd., a company
organized under the laws of the People's Republic of China, for consideration of
3,500,000 shares of the Company's common stock issued to Mr. Heping Wang plus
$2,200,000 in cash, which will be payable by the Company on or before January
26, 2005.
C. Interests of Experts and Counsel
--------------------------------
This section is not applicable to the Company.
ITEM 8 - FINANCIAL INFORMATION
A. Financial Statements and other Financial Information
----------------------------------------------------
The audited financial statements for the Company for the fiscal years
ending December 31, 2003, and 2002 form a material part of this Annual Report.
See Item "19" hereinbelow.
B. Significant Changes
-------------------
There have not been any significant changes in the Company since the date
of the most recent audited financial statements other than those disclosed in
this Annual Report.
ITEM 9 - THE OFFERING AND LISTING
A. Offer and Listing Details
-------------------------
This Annual Report does not relate to any offering of the Company's shares.
The following table indicates the annual high and low market prices over
the last fiscal year since the Company's common stock was not listed in the
OTCBB until February 21, 2003:
44
Year Annual High Annual Low
---------------- ------------------- ------------------
2003(1) $1.80 $0.75
Notes:
(1) The Company commenced trading on the OTCBB on February 21, 2003.
The following table indicates the high and low market prices for each full
financial quarter since February 21, 2003:
Quarter Ended High Low
------------------------- ------------ -----------
Dec. 31, 2003(1) $1.80 $0.75
Sept. 30, 2003(1) $0.78 $0.75
June 30, 2003(1) No trading No trading
Notes:
(1) The Company commenced trading on the OTCBB on February 21, 2003.
B. Plan of Distribution
--------------------
This Annual Report does not relate to any offering of the Company's shares.
Therefore, this section is not applicable to the Company.
C. Markets
-------
The Company's securities have been trading on the U.S. OTC Bulletin Board
since February 21, 2003, and do not trade on any other exchange or market.
D. Selling Shareholders
--------------------
This Annual Report does not relate to any offering of the Company's shares.
Therefore, this section is not applicable to the Company.
E. Dilution
--------
This Annual Report does not relate to any offering of the Company's shares.
Therefore, this section is not applicable to the Company.
F. Expenses of the Issue
---------------------
This Annual Report does not relate to any offering of the Company's shares.
Therefore, this section is not applicable to the Company.
ITEM 10 - ADDITIONAL INFORMATION
A. Share Capital
-------------
This section is not applicable to the Company as this is an Annual Report.
45
B. Memorandum and Articles of Association
--------------------------------------
Objects and Purpose
- -------------------
The Company is registered at the companies registry in Antigua, and has
been assigned company number 011949, having its registered office situated at
No. 6 Temple Street, P.O. Box 2372, Septimus A Rhudd Law Office, St. John's,
Antigua and Barbuda. The objects for which the Company is established allow at
Article IV:
a. To conduct any and all business activities permitted by the Laws of
Antigua/Barbuda as an International Business Corporation;
b. To acquire and deal with any property, real or personal, to erect
buildings, and generally to do all acts and things which, in the opinion of the
Corporation or the Directors, may be conveniently or profitably, or usefully,
acquired and dealt with, carried on, erected or done by the Corporation in
connection with said property.
c. To generally have and exercise all powers, rights and privileges necessary
and incident to carrying out properly the objects herein mentioned.
The Company shall not engage in International banking, Trust, Insurance,
Betting, and Bookmaking or any other activity which requires a Licence under the
International Business Corporation Act.
The Company shall be primarily engaged in research, development and
commercialization of human vaccines for infectious diseases.
Directors and Powers
- --------------------
Bylaw 8.3 of the Corporation states a director may hold any other office or
place of profit under the Corporation and he or any firm of which he is a member
may act in a professional capacity for the Corporation in conjunction with his
office of director of the Corporation for such period and in such terms as to
remuneration and otherwise as the Board may determine. No director or intending
director shall be disqualified by his office from contracting with the
Corporation, either with regard thereto, as a vendor, purchaser or otherwise,
nor shall any such contract, or any contract or arrangement entered into by or
on behalf of the Corporation in which any director so contracting or being so
interested be liable to account to the Corporation for any profit realized by
any such contract or arrangement by reason of such director holding such office,
or of the fiduciary relationship thereby established so long as the director
notifies the Corporation in accordance with the requirements of the Act. To the
extent permitted by the Act, any director may vote as a director or shareholder
in respect of any such contract or arrangement; provided that such director must
disclose his interest in the contract or arrangement, the contract or
arrangement must be entered into by the Corporation in an Annual or Special
Shareholders' Meeting, and before the contract or arrangement is so entered
into, the directors must disclose their interests to the meeting.
Directors of the company do not have to retire under an age limit
requirement and are not required to own shares of the company in order to serve
as directors.
46
Bylaw 8.2 states each of the Directors shall be paid out of the funds of
the Corporation such remuneration for his services as a director as the
Corporation in an Annual Shareholders' Meeting may from time to time determine.
The directors may also be paid all traveling, hotel and other expenses properly
incurred by them in attending and returning from meetings of the directors or
any committee of the directors or meetings of the Corporation or in connection
with the business of the Corporation.
Bylaw 8.9 states the business of the Corporation shall be managed by the
Board, who may exercise all such powers of the Corporation as are not by the Act
or by these By-Laws required to be exercised by the Corporation in an Annual
Shareholders' Meeting, subject nevertheless to any regulation of these By-Laws,
to the provisions of the Act as may be prescribed by special resolution of the
Corporation, but no regulation so made by the Corporation shall invalidate any
prior act of the Board which would have been valid if such regulation had not
been made. The general powers given by this by-law shall not be limited or
restricted by any special authority or power given to the Board by any other
By-Law.
Rights and Privileges of Common Shares
- --------------------------------------
Bylaw 5 states the Board may from time to time declare, and the Corporation
may pay, dividends on its outstanding shares in the manner and upon the terms
and conditions provided by law. Bylaw 7.8 states every shareholder shall have
one vote for each share of which he is the holder. All elections for directors
shall be decided by majority vote; all other questions shall be decided by
majority vote except as otherwise required by the Act. Bylaw 12 states if the
Corporation shall be wound up (whether the liquidation be voluntary, under the
supervision of or by the Court) the Liquidator may, with the required authority,
divide among the shareholders in specie or kind the whole or any part of the
assets of the Corporation, and whether or not the assets shall consist of
property of one kind or properties of different kinds, and may for such purpose
set such value as he deems fair upon one or more or classes of property, and may
determine how such different classes of shareholders. The Liquidator may, with
the like authority, vest any part of the assets in trustees upon such trusts for
the benefit of shareholders as the Liquidator with the like authority shall
think fit, and the liquidation of the Corporation may be closed and the
Corporation dissolved. Article III states no share shall have a pre-emptive
right. Article VII states the liability of a shareholder is limited to the
amount, if any, unpaid on the shares held or subscribed to by said shareholder.
The Articles and Bylaws are silent regarding redemption provisions, sinking fund
provisions or any provision regarding discrimination against any existing or
prospective holder of such securities as a result of such shareholder owning a
substantial number of shares.
A special resolution (requiring a 2/3 majority or signature of all
shareholders entitled to vote) is required to amend the Company's articles in
such circumstances as to change any maximum number of shares that the Company is
authorized to issue, to create new classes of shares, to change the designation
of all or any of its shares and add, change or remove any rights privileges,
restrictions and conditions including rights to accrued dividends, in respect of
all or any of its shares, whether issued or unissued pursuant to section 161 and
163 of the International Business Corporations Act of Antigua and Barbuda.
47
The conditions governing the manner in which annual general meetings and
special general meetings of shareholders are convoked are contained in Bylaw 7.2
to 7.12:
7.2 Annual Shareholders' Meeting
--------------------------------
An Annual Shareholders' Meeting of the Corporation shall be held every year
after the incorporation of the Corporation at such time and place within
Antigua and Barbuda as shall from time to time be prescribed by the Board.
7.3 Special Shareholders' Meeting
---------------------------------
The Board may, whenever it thinks fit, convene a Special Shareholders'
Meeting. The Board shall also on the requisition of the holders of not less
than one-twentieth (1/20) of the issued share capital of the Corporation
proceed to convene a special Shareholders' Meeting of the Corporation.
7.4 Proceedings
---------------
All business shall be deemed special that is transacted at a Special
Shareholders' Meeting, and also that is transacted at any Annual
Shareholders' Meeting, with the exception of the consideration of the
accounts and auditor's report, if any, the election of directors and the
reappointment of any incumbent auditor.
7.5 Quorum
----------
No business shall be transacted at any shareholders' meeting unless a
quorum of shareholders is present at the time when the meeting proceeds to
business. Save as is herein otherwise provided, shareholders present in
person or by proxy representing a majority of the Corporation's shares
shall constitute a quorum.
7.6 Chairman
------------
All meetings shall be chaired by a Director appointed by the Board to act
as Chairman.
7.7 Minutes
-----------
Minutes of the proceedings of every Annual Shareholders' Meeting shall be
kept, and shall be signed by the Chairman of the same meeting, or by the
Chairman of the next succeeding meeting, and the same, when so signed,
shall be conclusive evidence of all such proceedings and of the proper
election of the Chairman.
7.8 Votes of Shareholders
-------------------------
Subject to any rights or restrictions for the time being attached to any
class or classes of shares, every shareholder shall have one vote for each
share of which he is the holder. All elections for directors shall be
decided by majority vote; all other questions shall be decided by majority
vote except as otherwise required by the Act.
48
7.9 Informal Action by Shareholder
----------------------------------
Unless otherwise provided by law, any action required to be taken at a
meeting of the shareholders, or any other action which may be taken at a
meeting of the shareholders, may be taken without a meeting if a consent in
writing, setting forth the action so taken, shall be signed by all of the
shareholders entitled to vote with respect to the subject matter thereof.
7.10 Proxies
------------
Votes may be given either personally or by proxy. The instrument appointing
a proxy shall be in writing under the hand of the appointer or his attorney
duly authorized in writing, or if the appointer is a corporation, either
under seal or under the hand of an officer or attorney duly authorized. A
proxy need not be a shareholder of the Corporation. The instrument
appointing a proxy and the power of attorney or other authority, if any,
under which it is signed or a certified copy of that power of attorney
shall be deposited at the office or at such other place within Antigua as
is specified for that purpose in the notice convening the meeting.
7.11 Notice of Meeting
----------------------
Written or printed notice stating the place, day and hour of the meeting
and, in case of a special meeting, the purpose or purposes for which the
meeting is called, shall be delivered not less that Twenty-One (21) days
before the date of the meeting, either personally by mail or facsimile, to
each shareholder on record entitled to vote at such meeting. If mailed,
such notice shall be deemed to be delivered when deposited in the mail,
addressed to the shareholder at his address as it appears on the stock
transfer books of the Corporation, with postage thereon prepaid.
7.12 Waiver of Notice
---------------------
Unless otherwise provided by law, whenever any notice is required to be
given to any shareholder, a waiver thereof in writing, signed by the person
or persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice.
Article X states no securities of the Corporation will be distributed to
the public in Antigua and Barbuda in contravention of Section 365 of the
International Business Corporations Act, 1982.
There is not Article or Bylaw that directly deals with would delay, defer
or prevent a change in control of the Corporation and that would operate only
with respect to a merger, acquisition or corporate restructuring involving the
Corporation.
There is no Bylaw provisions governing the ownership threshold above which
shareholder ownership must be disclosed.
Article IV paragraph 4 describes the conditions imposed by the Articles of
Incorporation governing changes in the capital. Paragraph specifically states:
49
4. The Corporation shall have the power to increase or reduce said capital,
and to issue any part of its capital, original or increased, with or
without any preference, priority, or special privilege, or subject to any
postponement of rights, or to any conditions or restrictions, and so that,
unless the conditions of issue shall otherwise expressly declare, every
issue of shares, whether declared to be preference or otherwise shall be
subject to the power herein contained.
C. Material Contracts
------------------
During the preceding two years, the Company entered into the following
material contracts:
1. Share Purchase Agreement entered into between Net Force Systems Inc.
and Lily Wang, dated September 24, 2003.
2. Consulting Agreement entered into between the Company and Sinoglobe
Worldwide Limited, dated November 1, 2003.
3. Consulting Agreement entered into between the Company and Michael Tan,
dated November 1, 2003.
4. Consulting Agreement entered into between the Company and Technique
Capital Corp., dated November 1, 2003.
5. Share Purchase Agreement entered into between the Company, Tangshan
Yian Biological Engineering Co., Ltd. and Mr. Heping Wang, dated
January 26, 2004.
6. Consulting Services and Finder's Fee Agreement entered into between
the Company and Roberto Ebrahimi, dated April 23, 2004
D. Exchange Controls
-----------------
Not applicable.
E. Taxation
--------
United States security holders of the registrant company are not subject to
taxes or withholding provisions. Sections 271- 274 of the International Business
Corporations Act, 1982, Antigua and Barbuda, Division G: Special Taxation
Provisions detail the relevant tax provisions under the Act.
Section 271, "Exempt corporations" states the following:
"For the purposes of this Division, an exempt corporation shall mean any
corporation formed or continued under this Act."
Section 272, "Exemption from tax" states the following:
50
(1) No income tax, capital gains tax, or other direct tax or impost may be
levied in Antigua and Barbuda upon the profits or gains of an exempt
corporation, in respect of the international trade and business it carries on
from within Antigua and Barbuda.
(2) No income tax, capital gains tax, or other direct tax or impost may be
levied in Antigua and Barbuda in respect of any securities or assets of an
exempt corporation that are beneficially owned by an exempt corporation or by a
person who is not a resident.
(3) No estate, inheritance, succession or similar tax or impost may be levied
in Antigua and Barbuda in respect of any securities or assets of an exempt
corporation that are beneficially owned by an exempt corporation or by a person
who is not a resident.
(4) No tax, duty or other impost may be levied upon the increment in value of
the property, or other assets in Antigua and Barbuda or elsewhere of an exempt
corporation other than upon such of them as are distributed to residents.
Section 273, "No assets transfer tax".
(1) No tax, duty or other impost may be levied upon an exempt corporation, its
security holders or transferees in respect of the transfer of all or any part of
it's securities or other assets to another exempt corporation or to a person who
is not a resident.
(2) When an exempt corporation or a person who is not a resident transfers
securities or assets of an exempt corporation that are held by that exempt
corporation, or person to another exempt corporation, or to another person who
is not a resident, the transfer is exempt from the payment of any tax, duty, or
other impost thereon.
(3) No income tax or capital gains tax, and no other direct tax or impost, may
be levied or collected in Antigua and Barbuda, in respect of any dividends
interests or other returns from any securities, deposits or borrowings of an
exempt corporations or any assets managed by the exempt corporation if the
dividends, interest or other returns are in respect of securities, deposits,
borrowings or assets beneficially owned by another exempt corporation, or a
person who is not a resident; but the onus of establishing ownership, lies upon
the exempt corporation holding or managing the deposits, borrowings or assets.
Section 274, "Withholding tax and report"
(1) Notwithstanding, any provision of the Income Tax Ordinance, but subject to
subsection (2), no exempt corporation need withhold any portion of any dividend,
interest or other returns, payable of any person in respect of any borrowings of
the exempt corporation from that person or in respect of securities of the
exempt corporation held by that person.
(2) All dividends interest or other returns attributable to the securities of,
or the management of, assets by an exempt corporation that are payable to a
resident who is known to be a resident, by the exempt corporation or who, with
the exercise of reasonable care by the exempt corporation, could be known by him
to be a resident, must be reported to the Commissioner of Inland Revenue by the
exempt corporation.
51
Section 276 of the Act, "Duration of tax exemption" states the following:
"Any tax exemption provided under this Act, shall continue in effect for a
period of fifty years from the date of incorporation of the exempt corporation."
There is no reciprocal tax treaty in existence between the United States
and Antigua and Barbuda regarding withholding taxes.
F. Dividends and Paying Agents
---------------------------
This section is not applicable to the Company as this is an Annual Report.
G. Statement by Experts
--------------------
This section is not applicable to the Company as this is an Annual Report.
H. Documents on Display
--------------------
The above contracts respecting the Company may be inspected at the
Company's Canadian counsel's office in the Province of British Columbia, located
at Suite 2550, 555 West Hastings Street, Vancouver, British Columbia, V6B 4N5
for a period of 30 days following the filing of this Annual Report.
I. Subsidiary Information
----------------------
The Company is a 51% majority owner of Sinovac Biotech Co., Ltd., a company
organized under the laws of the People's Republic of China, and a 100% owner of
Tangshan Yian Biotechnology Engineering Co., Ltd., a company organized under the
laws of the People's Republic of China. Therefore, the Company has two
subsidiaries - one which is wholly owned and one which is majority owned.
ITEM 11 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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 consolidated balance sheets. 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
15.83% of total sales for the year ended December 31, 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 provisions for potential credit losses
52
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.
ITEM 12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
---------------
This section is not applicable to the Company as this is an Annual Report.
B. Warrants and Rights
-------------------
This section is not applicable to the Company as this is an Annual Report.
C. Other Securities
----------------
This section is not applicable to the Company as this is an Annual Report.
D. American Depositary Shares
--------------------------
This section is not applicable to the Company as this is an Annual Report.
PART II
-------
ITEM 13 - DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
This Annual Report does not relate to any offering of the Company's
securities. Therefore, this section is not applicable to the Company.
ITEM 17 - FINANCIAL STATEMENTS
The audited balance sheet of the Company as at December 31, 2003 and 2002,
the statements of shareholders' equity, loss and cash flows for the three years
ended December 31, 2003, 2002 and 2001 are attached hereto and form a material
part of this Annual Report.
ITEM 18 - FINANCIAL STATEMENTS
Not applicable.
53
ITEM 19 - EXHIBITS
A. Financial Statements
--------------------
This Annual Report contains the following financial statements and
information respecting the Company:
1. Auditors' Report for the Company's financial statements for the period
ended December 31, 2003 dated February 17, 2004, except for Note 16(b)
which is as of April 14, 2004.
2. Balance Sheet for the Company dated December 31, 2003.
3. Statement of Shareholders' Equity for the Company for the years ended
December 31, 2003, 2002 and 2001.
4. Statement of Loss for the Company for the years ended December 31, 2003,
2002 and 2001.
5. Statement of Cash Flows for the Company for the years ended December 31,
2003, 2002, and 2001.
6. Notes to the Financial Statements for the Company.
B. Exhibits
--------
This Annual Report contains the following Exhibits respecting the Company:
Additional Exhibits:
- --------------------
3.1 Articles of Amendment dated October 21, 2003.
10.1 Audited financial statements of Net Force Systems Inc. for the
fiscal year ended April 30, 2003, 2002 and 2001.(1)
10.2 Share Purchase Agreement entered into between Net Force Systems
Inc. and Lily Wang, dated September 24, 2003.
10.3 Consulting Agreement entered into between the Company and
Sinoglobe Worldwide Limited, dated November 1, 2003.
10.4 Consulting Agreement entered into between the Company and Michael
Tan, dated November 1, 2003.
10.5 Consulting Agreement entered into between the Company and
Technique Capital Corp., dated November 1, 2003.
54
10.6 Share Purchase Agreement entered into between the Company,
Tangshan Yian Biological Engineering Co., Ltd. and Mr. Heping
Wang, dated January 26, 2004.
10.7 Consulting Services and Finder's Fee Agreement entered into
between the Company and Roberto Ebrahimi, dated April 23, 2004.
31.1 Certification of Disclosure in Sinovac Biotech Ltd.'s Annual
Report by Weidong Yin.
31.2 Certification of Disclosure in Sinovac Biotech Ltd.'s Annual
Report by Lily Wang.
32.1 Certification of Weidong Yin pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Lily Wang pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Notes:
(1) Incorporated by reference to the Form 20-F Annual Report filing for the
period ended April 30, 2003, which included such audited financial
statements of Net Force Systems Inc. and were filed with the SEC on August
12, 2003.
55
SINOVAC BIOTECH LTD.
--------------------
(formerly Net-Force Systems Inc.)
Consolidated Financial Statements
(Expressed in U.S. Dollars)
December 31, 2003 and 2002
Index
-----
Report of Independent Registered Public Accounting
Firm
Consolidated Balance Sheets
Consolidated Statements of Stockholders' Equity
Consolidated Statement of Operations
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
56
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 REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------
To the Board of Directors and Stockholders of
- ---------------------------------------------
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
We have audited the consolidated balance sheets of Sinovac Biotech Ltd.
(formerly Net-Force Systems Inc.) ("the Company") as at December 31, 2003 and
2002, and the related consolidated statements of stockholders' equity,
operations and cash flows for the years then ended and the 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 consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
2003, and 2002 and the results of its operations and its cash flows for the
years then ended and the period from April 28, 2001 (inception) to December 31,
2001 in conformity with generally accepted accounting principles in the United
States of America.
Vancouver, Canada "MOORE STEPHENS ELLIS FOSTER LTD."
February 17, 2004, except as to Chartered Accountants
Note 16(b) which is as of
April 14, 2004
- --------------------------------------------------------------------------------
MSAn 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.
57
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Consolidated Balance Sheets
December 31, 2003 and 2002
(Expressed in U.S. Dollars)
=====================================================================================================
2003 2002
- -----------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 1,420,047 $ 312,594
Accounts receivable - net 1,470,761 469,179
Inventories 1,047,920 1,355,049
Prepaid expenses and deposits 13,723 6,722
- -----------------------------------------------------------------------------------------------------
Total current assets 3,952,451 2,143,544
Property, plant and equipment 7,459,883 7,600,755
Due from related parties 947,267 982,175
Licenses and permits 2,538,115 2,321,535
- -----------------------------------------------------------------------------------------------------
Total assets $ 14,897,716 $ 13,048,009
=====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Loans payable $ 752,415 $ 2,074,070
Accounts payable and accrued liabilities 1,483,690 1,944,596
Due to related parties 1,170,474 1,232,454
- -----------------------------------------------------------------------------------------------------
Total current liabilities 3,406,579 5,251,120
Bank loan 603,865 -
- -----------------------------------------------------------------------------------------------------
Total liabilities 4,010,444 5,251,120
- -----------------------------------------------------------------------------------------------------
Minority interests 4,737,656 -
- -----------------------------------------------------------------------------------------------------
Commitment (Note 13)
STOCKHOLDERS' EQUITY
Preferred stock - -
Authorized 50,000,000 shares at par value of $0.001 each
Issued and outstanding: nil
Common stock 27,091 -
Authorized: 100,000,000 shares at par value of $0.001 each
Issued and outstanding: 27,091,033
Subscription received 1,031,959 -
Additional paid in capital 5,798,220 8,466,505
Accumulated other comprehensive income 206 -
Accumulated deficit (707,860) (669,616)
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 6,149,616 7,796,889
- -----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 14,897,716 $ 13,048,009
=====================================================================================================
The accompanying notes are an integral part of these financial statements.
58
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Consolidated Statements of Stockholders' Equity
(Expressed in U.S. Dollars)
==============================================================================================================================
Accumulated
Compre- other
Common stock Additional hensive compre-
-------------------------- paid in income Deficit hensive
Shares Amount capital (loss) accumulated income
- ------------------------------------------------------------------------------------------------------------------------------
Recapitalization as a result of reverse
acquisition (Note 1) - $ - $ 8,007,871 $ - $ (77,408) $ -
Constribution of drug licenses for shares
at transferor's cost - - 458,634 - - -
Subscriptions receivable received - - - - - -
Component of Comprehensive income (loss)
- - Net (loss) for the period - - - (592,208) (592,208) -
- ------------------------------------------------------------------------------------------------------------------------------
Comprehensive (loss) $ (592,208)
=============
Balance, December 31, 2002 - - 8,466,505 (669,616) -
Debt exchange for shares (Note 10c) - - 2,608,696 - - -
Recapitalization adjustment (Note 1) 10,000,000 10,000 (5,436,848) - 423,295 -
Recapitalization to effect the acquisition
of Net-Force (Note 1) 17,091,033 17,091 (16,991) - - -
- ------------------------------------------------------------------------------------------------------------------------------
Balance after recapitalization adjustment 27,091,033 27,091 5,621,362 - (246,321) -
Imputed interest on advances from
related parties - - 57,277 - - -
Stock-based compensation - - 119,581 - - -
Subscriptions received - - - - - -
Component of Comprehensive income (loss)
- - Foreign currency translation - - - 206 - 206
- - Net (loss) for the period - - - (461,539) (461,539) -
- ------------------------------------------------------------------------------------------------------------------------------
Comprehensive (loss) $ (461,333)
=============
Balance, December 31, 2003 27,091,033 $ 27,091 $ 5,798,220 $ (707,860) $ 206
===================================================================================== =========================
59
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Consolidated Statements of Stockholders' Equity (con't)
(Expressed in U.S. Dollars)
=======================================================================
Subscrip-
tions Total
(receivable) stockholders'
and received equity
- -----------------------------------------------------------------------
Recapitalization as a result of reverse
acquisition (Note 1) $(1,020,139) $ 6,910,324
Constribution of drug licenses for shares
at transferor's cost - 458,634
Subscriptions receivable received 1,020,139 1,020,139
Component of Comprehensive income (loss)
- - Net (loss) for the period - (592,208)
- -----------------------------------------------------------------------
Comprehensive (loss)
Balance, December 31, 2002 - 7,796,889
Debt exchange for shares (Note 10c) - 2,608,696
Recapitalization adjustment (Note 1) - (5,003,553)
Recapitalization to effect the acquisition
of Net-Force (Note 1) - 100
- -----------------------------------------------------------------------
Balance after recapitalization adjustment - 5,402,132
Imputed interest on advances from
related parties - 57,277
Stock-based compensation - 119,581
Subscriptions received 1,031,959 1,031,959
Component of Comprehensive income (loss)
- - Foreign currency translation - 206
- - Net (loss) for the period - (461,539)
- -----------------------------------------------------------------------
Comprehensive (loss)
Balance, December 31, 2003 1,031,959 $ 6,149,616
=======================================================================
The accompanying notes are an integral part of these financial statements.
60
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Consolidated Statements of Operations
(Expressed in U.S. Dollars)
===========================================================================================================
April 28, 2001
Year Ended Year Ended (inception) to
December 31 December 31 December 31
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------
Sales $ 2,838,933 $ 649,319 $ -
Cost of sales 1,085,881 251,711 -
- -----------------------------------------------------------------------------------------------------------
Gross profit 1,753,052 397,608 -
- -----------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 1,629,118 792,078 124,344
Stock-based compensation 119,581 - -
Research and development expenses 232,785 24,535 -
Interest and financing expenses 268,758 81,009 -
Depreciation of property, plant and equipment
and amortization of licenses and permits 271,115 143,337 9,917
- -----------------------------------------------------------------------------------------------------------
Total operation expenses 2,521,357 1,040,959 134,261
- -----------------------------------------------------------------------------------------------------------
Operating loss (768,305) (643,351) (134,261)
Interest income 40,869 51,143 56,853
- -----------------------------------------------------------------------------------------------------------
Net (loss) before minority interests (727,436) (592,208) (77,408)
Minority interests 265,897 - -
- -----------------------------------------------------------------------------------------------------------
Net (loss) for the period $ (461,539) $ (592,208) $ (77,408)
===========================================================================================================
(Loss) per share - basic and diluted $ (0.03) $ (0.07) $ (0.01)
===========================================================================================================
Weighted average number of
common stocks outstanding
- Basic and diluted 13,842,225 8,104,767 7,502,000
===========================================================================================================
The accompanying notes are an integral part of these financial statements.
61
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Consolidated Statements of Cash Flows
(Expressed in U.S. Dollars)
=================================================================================================================
April 28, 2001
Year Ended Year Ended (inception) to
December 31 December 31 December 31
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Cash flows from (used in)
operating activities
Net (loss) for the period $ (461,539) $ (592,208) $ (77,408)
Adjustments to reconcile net (loss) to net cash
used by operating activities:
- stock-based compensation 119,581
- provision for doubtful debts 148,551 - -
- imputed interest on advances received from
related parties 57,277 - -
- depreciation of property, plant and equipment
and amortization of licenses and permits 683,795 337,099 9,917
- minority interests (265,897) - -
Change in other assets and liabilities:
- accounts receivable (1,150,133) (461,600) (7,579)
- inventories 307,129 (1,229,140) (125,909)
- prepaid expenses and deposits (7,001) (1,185) (5,537)
- accounts payable and accrued liabilities (460,906) 894,093 1,050,503
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (1,029,143) (1,052,941) 843,987
- -----------------------------------------------------------------------------------------------------------------
Cash flows from (used in) financing activities
Loans proceeds 1,207,730 1,409,819 966,183
Loans repayment (1,261,269) (966,183) -
Proceeds from issuance of shares - 1,020,139 7,192,421
Proceeds from shares subscribed 1,031,959 - -
Government grant received - - -
Advances from (to) related parties 1,917,373 (11,116) 925,646
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,895,793 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 (348,190) (2,188,025) (7,809,220)
Acquisition of drug licenses and related costs (410,769) (18,116) -
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (758,959) (2,077,351) (7,938,010)
- -----------------------------------------------------------------------------------------------------------------
Change on cash held in foreign currency (238) - -
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,107,453 (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 $ 1,420,047 $ 312,594 $ 1,990,227
=================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for interest, net of interest capitalized $ 180,180 $ 1,490 $ -
=================================================================================================================
The accompanying notes are an integral part of these financial statements.
62
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(Expressed in U.S. Dollars)
================================================================================
1. Nature of Business and Continuation of Operation
- -----------------------------------------------------
These consolidated financial statements presented are those of Sinovac
Biotech Ltd., formerly Net-Force Systems Inc., ("parent company") and its
51% owned subsidiary Sinovac Biotech Co., Ltd. ("Sinovac China").
Collectively, they are referred to herein as "the Company".
Sinovac China 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.
On September 24, 2003, Net-Force Systems Inc. ("Net-Force"), a company
incorporated on March 1, 1999 under the International Business Corporations
Act No. 28 of 1982 of the laws of Antigua and Barbuda, entered into a Share
Exchange Agreement ("Agreement") with Sinovac China, whereby Net-Force
issued 10,000,000 shares of its common stock in exchange for a 51% interest
in Sinovac China. As part of the agreement, Net-Force disposed of its
wholly owned subsidiary, Net Force Entertainment, Inc. and all of its
assets and liabilities to a company controlled by its president and Chief
Executive Officer for $100 and then become a non-operating shell company.
Immediately prior to the Agreement, Net-Force had 17,091,033 shares of
common stock issued and outstanding. The acquisition was accounted for as
recapitalization of Sinovac China because the shareholders of Sinovac China
controlled Net-Force after the acquisition. Sinovac China was treated as
the acquiring entity for accounting purposes and Net-Force was the
surviving entity for legal purposes. The combined company is considered to
be a continuation of the operations of Sinovac China. The issued and
outstanding common stock of Sinovac China prior to the completion of
acquisition was restated to reflect the 10,000,000 common stock issued by
Net-Force. Effective on October 21, 2003, Net-Force changed its name to
Sinovac Biotech Ltd. The Company has an office in Vancouver, Canada.
Net-Force had no operations between May 1, 2003 and September 23, 2003.
2. Significant Accounting Policies
- ------------------------------------
(a) Base of Presentation
These consolidated financial statements include the accounts of the
parent company and its 51% owned subsidiary, Sinovac China. All
significant inter-company transactions have been eliminated.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States 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.
63
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(Expressed in U.S. Dollars)
================================================================================
2. Significant Accounting Policies (continued)
- ------------------------------------------------
(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.
(d) 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.
(e) Property, plant and Equipment
Property, plant and equipment are recorded at cost, including
capitalized interest and internal engineering costs. Significant
additions and improvements are capitalized, while repairs and
maintenance are charged to expenses as incurred. Equipment purchased
for specific research and development projects with no alternative
uses are expensed. 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)
(f) 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. Carrying values of
such assets are reviewed at least annually by comparing the carrying
amounts to their estimated undiscounted net future cash flows. There
were no impairment adjustments to the carrying value of the licenses
and permits for the years ended December 31, 2003 and 2002 and the
period from April 28, 2001 (inception) to December 31, 2001.
64
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(Expressed in U.S. Dollars)
================================================================================
2. Significant Accounting Policies (continued)
- ------------------------------------------------
(g) Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets". Long-lived assets and intangible assets subject to
amortization are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recoverable from the future, undiscounted net cash flows expected to
be generated by the asset. If the asset is not fully recoverable, an
impairment loss would be recognized for the difference between the
carrying value of the asset and its estimated fair value based on
discounted net future cash flows or quoted market prices. There were
no impairment losses recognized in 2003, 2002 and 2001.
(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 when persuasive evidence of an arrangement
exists, the price is fixed and final, delivery has occurred and there
is reasonable assurance of collection of the sales proceeds. The
Company generally obtains purchase authorizations from its customers
for a specified amount of products at a specified price and considers
delivery to have occurred when the customer takes possession of the
products. The Company provides its customers with a limited right of
return. Revenue is recognized upon delivery and a reserve for sales
returns is recorded. The Company has demonstrated the ability to make
reasonable and reliable estimates of products returns in accordance
with SFAS No. 48, Revenue Recognition When Right of Return Exists.
(j) Advertising Expenses
Advertising costs are expensed as incurred and included in selling
expenses. Approximated advertising costs are $14,886, $77,790 and
$24,802 for the years ended December 31, 2003 and 2002 and the period
from April 28, 2001 (inception) to December 31, 2001, respectively.
65
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(Expressed in U.S. Dollars)
================================================================================
2. Significant Accounting Policies (continued)
- ------------------------------------------------
(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.
(l) Foreign Currency Transactions
The parent company and its subsidiary, Sinovac China, maintain their
accounting records in their functional currencies, i.e. U.S. dollars
and Renminbi Yuan respectively. 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) Foreign Currency Translations
The assets and liabilities of the foreign subsidiary, Sinovac China
(whose functional currency is Renminbi Yuan), are translated into U.S.
dollars at exchange rates in effect at the balance sheet date. Revenue
and expenses are translated at average exchange rate. Gain and losses
from such translations are included in stockholders' equity, as a
component of other comprehensive income.
(n) Stock-based Compensation
The Company adopted the fair value method of accounting for
stock-based compensation recommended by of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-based
Compensation". On November 1, 2003, the board of directors approved a
stock option plan that is described more fully in Note 11. The Company
did not grant stock options for the period from April 28, 2001
(inception) to December 31, 2002.
66
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(Expressed in U.S. Dollars)
================================================================================
2. Significant Accounting Policies (continued)
- ------------------------------------------------
(o) 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. For the years ended December 31, 2003 and 2002
and the period from April 28, 2001 (inception) to December 31, 2001,
the Company's comprehensive income consists of net earnings (loss) and
foreign currency translation adjustments.
(p) Earnings (Loss) Per Share
Basic earning (loss) per share is computed using the weighted average
number of shares outstanding during the period. The Company adopted
SFAS No. 128, "Earnings Per Share". Diluted loss per share is equal to
the basic loss per share for the year ended December 31, 2003 because
common stock equivalents consisting of options to acquire 3,000,000
common stocks that are outstanding at December 31, 2003 are
anti-dilutive, however, they may be dilutive in future.
(q) 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 consolidated
balance sheets. 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
15.83% of total sales for the year ended December 31, 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.
67
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(Expressed in U.S. Dollars)
================================================================================
2. Significant Accounting Policies (continued)
- ------------------------------------------------
(r) 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 option of this
pronouncement does not have an impact on its consolidated financial
statements.
(s) New Accounting Pronouncements
In January 2003, the Financial Accounting Standard Board released FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities." FIN 46 requires that all primary beneficiaries of variable
interest entities consolidate that entity. FIN 46 is effective
immediately for variable interest entities created after January 31,
2003 and to variable interest entities in which an enterprise obtains
an interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003 to variable interest
entities in which an enterprise holds a variable interest it acquired
before February 1, 2003. In December 2003, the FASB published a
revision to FIN 46 ("FIN 46R") to clarify some of the provisions of
the interpretation and to defer the effective date of implementation
for certain entities. Under the guidance of FIN 46R, entities that do
not have interests in structures that are commonly referred to as
special purpose entities are required to apply the provisions of the
interpretation in financial statements for periods ending after March
14, 2004. The Company did not create a variable interest entity after
January 31, 2003 and does not have a variable interest entity as of
December 31, 2003. The Company expects that the full adoption of FIN
46R does not have an impact on its financial position or results of
operations
68
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(Expressed in U.S. Dollars)
================================================================================
2. Significant Accounting Policies (continued)
- ------------------------------------------------
(s) 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
consolidated 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. The Company
does not have any financial instruments that fall under the guidance
of SFAS No. 150 and, therefore, the adoption does not have any effect
on the Company's consolidated financial statements.
In a December 11, 2003 speech at the American Institute of Certified
Public Accountants, the Securities and Exchange Commission ("SEC")
expressed that rate-lock commitments represent written put options
and, therefore, be valued as a liability. The SEC expressed that they
expect registrants to disclose the effect on the financial statement
of recognizing the rate-lock commitments as written put options, for
quarters commencing after March 15, 2004. Additionally, the SEC
recently issued Staff Accounting Bulletin (SAB) No. 105. SAB No. 105
clarifies the SEC's position that the inclusion of cash flows from
servicing or ancillary income in the determination of the fair value
of interest rate lock commitments is not appropriate. The adoption of
SAF No. 105 will not have an impact on the Company's consolidated
financial statements.
3. Accounts Receivable
- ------------------------
---------------------------------------------------------------------------
December 31 December 31
2003 2002
---------------------------------------------------------------------------
Trade receivables $ 1,609,209 $ 449,676
Allowance for doubtful accounts (148,551) -
---------------------------------------------------------------------------
1,460,658 449,676
Other receivables 10,103 19,503
---------------------------------------------------------------------------
$ 1,470,761 $ 469,179
===========================================================================
69
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(Expressed in U.S. Dollars)
================================================================================
4. Inventories
- ----------------
---------------------------------------------------------------------------
December 31 December 31
2003 2002
---------------------------------------------------------------------------
Raw materials $ 237,974 $ 260,377
Finished goods 692,673 972,218
Work in progress 117,273 122,454
---------------------------------------------------------------------------
$ 1,047,920 $ 1,355,049
===========================================================================
5. Property, Plant and Equipment
- ----------------------------------
--------------------------------------------------------------------------
December 31, 2003
-----------------------------------------
Cost Accumulated Net book
Amortization Value
--------------------------------------------------------------------------
Land-use rights $ 365,510 $ 19,892 $ 345,618
Plant and building 4,191,009 189,342 4,001,667
Machinery and equipment 3,134,007 412,862 2,721,145
Motor vehicles 166,219 48,834 117,385
Office equipment and furniture 174,847 51,326 123,521
Leasehold improvements 167,274 16,727 150,547
--------------------------------------------------------------------------
$ 8,198,866 $ 738,983 $ 7,459,883
==========================================================================
--------------------------------------------------------------------------
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
==========================================================================
Depreciation for the years ended December 31, 2003 and 2002 and the period
from April 28, 2001 (inception) to December 31, 2001 was $489,452, $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 7).
70
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(Expressed in U.S. Dollars)
================================================================================
6. Licenses and Permits
- -------------------------
-----------------------------------------------------------------------
2003 2002
-----------------------------------------------------------------------
Inactive Hepatitis A $ 1,941,879 $ 1,941,879
Recombinant Hepatitis A&B 506,460 476,750
Influenza Virus HA Vaccine 381,058 -
-----------------------------------------------------------------------
2,829,397 2,418,629
Less: accumulated amortization (291,282) (97,094)
-----------------------------------------------------------------------
$ 2,538,115 $ 2,321,535
=======================================================================
(a) In March 2003, Sinovac China acquired the Influenza Virus HA Vaccine
drug license from a company called Tangshan Yian Biological
Engineering Co., Ltd. ("Tangshan Yian") at the vendor's cost. Tangshan
Yian owned an 18.75% interest in Sinovac China and there were two
common directors between the companies at the time of the transaction
(Also see Note 15). Sinovac China 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
early 2005.
(b) In April 2002, Sinovac China 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
Sinovac China and paying $18,116 (RMB150,000) in cash. Beijing Keding
is owned by a director, president and three other senior officers of
Sinovac China. As at December 31, 2003, $10,487 remained unpaid and
was recorded in due to related parties (see Note 10a). Sinovac China
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 mid-2004. The drug license was recorded at
the vendor's cost.
(c) The Inactive Hepatitis A drug license was contributed by Tangshan Yian
in 2001 as its capital contribution to Sinovac China. The drug license
was recorded at $1,941,879, which was the transferor's cost.
71
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(Expressed in U.S. Dollars)
================================================================================
6. Licenses and Permits (continued)
- -------------------------------------
(d) Amortization expense for the licenses and permits was $194,343,
$97,094 and nil for the years ended December 31, 2003 and 2002 and the
period from April 28, 2001 (inception) to December 31, 2001
respectively.
The estimated amortization expenses for each of the five succeeding
fiscal years are as follows:
2004 $220,000
2005 $283,000
2006 $283,000
2007 $283,000
2008 $283,000
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.
7. Loans Payable
- ------------------
-------------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------------
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 a
non-controlling shareholder of the Company - 603,865
Employees loan: RMB 1,230,000 (2002 - RMB 1,673,300)
bearing interest at 15% per annum and due on demand. 148,550 202,089
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 is a non-controlling shareholder of the
Company - 60,386
-------------------------------------------------------------------------------------
Total $ 752,415 $ 2,074,070
=====================================================================================
The weighted average interest rate was 8.52% and 5.47% for years ended
December 31, 2003 and 2002 respectively.
72
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(Expressed in U.S. Dollars)
================================================================================
8. Bank Loan
- --------------
Bank loan in the amount of $603,865 (RMB 5,000,000) is bearing interest at
5.49% per annum. The interest is payable quarterly and the principal is due
on December 19, 2005.
9. Income Taxes
- -----------------
Sinovac China 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, it 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. No income taxes was
charged on Sinovac China for each of the two years ended December 31, 2003
and the period from April 28, 2001 (inception) to December 31, 2001. The
parent company is not subject to Income taxes.
The tax effect of temporary differences that give rise to the Company's
deferred tax asset (liability) are as follow:
---------------------------------------------------------------------------------------
2003 2002 2001
---------------------------------------------------------------------------------------
Tax losses carried forward $ 139,000 $ 100,000 $ 12,000
Excess of tax cost over the net book value
of the certain long-lived assets 711,000 753,000 611,000
Less: valuation allowance (850,000) (853,000) (623,000)
---------------------------------------------------------------------------------------
$ - $ - $ -
=======================================================================================
The potential tax benefits arising from the losses have not been recorded
in the financial statements. The Company evaluates its valuation allowance
requirements on an annual basis based on projected future operations. When
circumstances change and this causes a change in management's judgement
about the realizability of deferred tax assets, the impact of the change on
the valuation allowance is generally reflected in current income.
73
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(Expressed in U.S. Dollars)
================================================================================
10. Related Party Transactions
- -------------------------------
Related party transactions not disclosed elsewhere in the consolidated
financial statements are as follows:
(a) Due from and to related parties consist of the following:
---------------------------------------------------------------------------------------
2003 2002
---------------------------------------------------------------------------------------
Due from related parties (Notes 6 & 7):
o Advances to Tangshan Yian, a company related by a
common director, bearing interest at 5% per annum
(secured by the floating charge on the property,
plant and equipment of Tangshan Yian) $ 786,300 $ 982,175
o Due to Shenzhen Biological Investment Co., Ltd.
("Shenzhen Co."), a non-controlling shareholder of
the Company, bearing interest at 5% per annum
(paid in January 2004) 32,178 -
o Due to Beijing Xinfu, a non-controlling
shareholder of the Company, bearing interest at 5%
per annum (paid in January 2004) 128,789 -
---------------------------------------------------------------------------------------
$ 947,267 $ 982,175
=======================================================================================
Due to related parties, unsecured, interest free and no
stated terms of repayment (Notes 6 & 7):
o Due to Beijing Weiming, a non-controlling
shareholder of the Company $ 1,135,045 $ 1,191,569
o Due to Beijing Keding, a non-controlling
shareholder of the Company 10,487 10,529
o Due to Beijing Xinfu, a non-controlling
shareholder of the Company - 24,728
o Due to a director 24,942 5,628
---------------------------------------------------------------------------------------
$ 1,170,474 $ 1,232,454
=======================================================================================
74
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(Expressed in U.S. Dollars)
================================================================================
10. Related Party Transactions (continued)
- -------------------------------------------
(b) The Company entered into the following transactions
with related parties:
---------------------------------------------------------------------------------------------
Year Year April 28, 2001
Ended Ended (inception) to
December 31 December 31 December 31
2003 2002 2001
---------------------------------------------------------------------------------------------
Purchased raw materials from Tangshan Yian $ - $ 403,698 $ -
Interest income earned on the advances
to related parties $ 38,764 $ 44,063 $ 56,853
Rent paid to Beijing Weiming $ - $ 4,019 $ 61,967
Interest expenses incurred on the advances
from related parties (including interest
imputed at the rate of 5% per annum on the
interest-free advances received): $ 155,334 $ 34,059 $ 8,424
---------------------------------------------------------------------------------------------
(c) In June 2003, Sinovac China completed two debt
settlements, totalling $2,608,696, with corporations
controlled by one of its directors by issuing shares
equal to approximately 16% interest in Sinovac China.
11. Stock Option Plan
- ----------------------
The board of directors approved a Stock Option Plan (the "Plan") effective
on November 1, 2003, pursuant to which directors, officers, employees and
consultants of the Company are eligible to receive grants of options for
the Company's common stock. The plan has a life of ten (10) years and is
expiring on November 1, 2023. Maximum of 5,000,000 common stocks have been
reserved under the plan. Each stock option entitles its holder to purchase
one common share of the Company. Options may be granted for a term not
exceeding ten years from the date of grant. The Plan is administered by the
board of directors.
In 2003, 3,000,000 stock options under the Plan were granted to its
directors, officers and employees with the exercise price of $1.31 per
share, being the market price at the time of the grant. These options are
vested from April 1, 2004 to July 1, 2006 and expire on November 12, 2008.
75
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(Expressed in U.S. Dollars)
================================================================================
11. Stock Option Plan (continued)
- ----------------------------------
A summary of the Company's stock options activities is presented below:
-----------------------------------------------------------------------------------
Weighted
Number of Average
Common Shares Exercise Price
-----------------------------------------------------------------------------------
Options outstanding at December 31, 2001 and 2002 - -
Granted 3,000,000 $ 1.31
-----------------------------------------------------------------------------------
Options outstanding as at December 31, 2003 3,000,000 $ 1.31
===================================================================================
Options exercisable as at December 31, 2003 - -
===================================================================================
The Company charged $119,581 stock-based compensation to operations by
applying the fair value method in accordance with SFAS No.123. The fair
value of the options granted in 2003 was estimated at $0.74 per share,
using the Black-Scholes Option Pricing Model with the following weighted
average assumptions: risk-free interest rate of 3.42%, dividend yield of
0%, volatility of 74% and expected lives of 4 years.
12. Segmented Information
- --------------------------
The Company 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 revenues are generated in China. The Company's
assets by geographical location are as follows:
------------------------------------------------------------------------
2003 2002
------------------------------------------------------------------------
Assets
North America $ 342,268 $ -
China 14,555,448 13,048,009
------------------------------------------------------------------------
Total $ 14,,897,716 $ 13,048,009
========================================================================
13. 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.
76
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(Expressed in U.S. Dollars)
================================================================================
14. Non Cash Transactions
- --------------------------
(a) In 2003, Sinovac China issued its shares for debt settlement in the
amount of $2,608,696 (Note 10c).
(b) In 2002, Sinovac China acquired the Recombinant Hepatitis A & B drug
licence by issuing its shares (see Note 6b).
(c) In 2001, the Inactive Hepatitis A drug licence was transferred to
Sinovac China as the transferor's capital contribution (see Note 6c).
15. Acquisition of Tangshan Yian Biotech Engineering Co., Ltd. ("Tangshan
- --------------------------------------------------------------------------------
Yian")
- ------
On October 20, 2003, The Company signed a letter of intend to acquire 100%
interest in Tangshan Yian, a company incorporated under the law of China on
February 9, 1993, by issuing 3,500,000 common shares of the Company and
paying $2,200,000 cash with a total approximate fair value of $4.8 Million.
The $2.2 Million cash is payable on or before January 26, 2005. Tangshan
Yian is in the business of research and development, production and sales
of certain pharmaceutical products in China. The acquisition was completed
subsequent to the year-end. Tangshan Yian is in the process of obtaining an
independent valuation of certain tangible assets, thus, the allocation of
the purchase price has not been finalized as at the report date.
16. Subsequent Events
- ----------------------
(a) Subsequent to the year-end, the Company completed a private placement
by issuing 3,800,000 units at the price of $1.25 per unit for total
proceeds of $4,750,000, of which $1,031,959 were received as at
December 31, 2003. Each unit consists of one share of common stock of
the Company and one share purchase warrant. Each warrant entitles its
holder to purchase one additional share of common stock of the Company
at $1.50 per share until November 14, 2004, and receive one piggyback
warrant to purchase a further one share of common stock of the Company
at $3.00 per share until November 14, 2005 only if the holder thereof
exercises the share purchase warrant. The Company also issued 379,200
units bearing the same terms as the aforementioned units as a finder's
fee.
(b) Subsequent to the year-end, the Company granted 2,000,000 stock
options to its directors, officers, employees and consultants with the
exercise price of $4.55 per share. These options have a term of 5
years expiring on April 13, 2009. For the stock options granted to
directors, officers and consultants, 20% of which vested immediately
and the remaining 80% of the options vest in equal bi-monthly
proportions over a period of 16 months from the grant date. For the
stock options granted to employees, 10% of which vested immediately
and the remaining 90% of the options vest in equal quarterly
proportions over a period of 27 months from the grant date. Each stock
options entitles its holder to purchase one common share of the
Company.
76
SIGNATURES
----------
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this Annual Report on its behalf.
ON BEHALF OF THE COMPANY, SINOVAC BIOTECH LTD.
----------------------------------------------
Per:
/s/ Weidong Yin
-------------------------------
Weidong Yin
President, CEO and a Director
Date: June 30, 2004
-------------------
77
EXHIBIT INDEX
-------------
Exhibit # Description of Exhibit Page No.
----------------- ------------------------------------------------------------ --------
3.1 Articles of Amendment dated October 21, 2003. 77
10.2 Share Purchase Agreement entered into between Net Force
Systems Inc. and Lily Wang, dated September 24, 2003. 81
10.3 Consulting Agreement entered into between the Company and
Sinoglobe Worldwide Limited, dated November 1, 2003. 99
10.4 Consulting Agreement entered into between the Company and
Michael Tan, dated November 1, 2003. 103
10.5 Consulting Agreement entered into between the Company and
Technique Capital Corp., dated November 1, 2003. 107
10.6 Share Purchase Agreement entered into between the Company,
Tangshan Yian Biological Engineering Co., Ltd. and Mr.
Heping Wang, dated January 26, 2004. 111
10.7 Consulting Services and Finder's Fee Agreement entered into
between the Company and Roberto Ebrahimi, dated April 23,
2004. 143
31.1 Certification of Disclosure in Sinovac Biotech Ltd.'s Annual
Report by Weidong Yin. 162
31.2 Certification of Disclosure in Sinovac Biotech Ltd.'s Annual
Report by Lily Wang. 165
32.1 Certification of Weidong Yin pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. 168
32.2 Certification of Lily Wang pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. 170