20-F 1 netforce20f2003.txt NET FORCE SYSTEMS 20-F, 2003 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 20-F [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the year ended April 30, 2003. COMMISSION FILE NUMBER: 0-29031 NET-FORCE SYSTEMS INC. ---------------------- (Name of Registrant in its charter) ANTIGUA and BARBUDA ------------------- (State or other jurisdiction of incorporation or organization) Suite #10-Epicurean, Woods Centre --------------------------------- P.O. Box W-645 -------------- St. John's, Antigua ------------------- West Indies ----------- (Address of principal executive offices and zip code) (268) 562-3452 -------------- (Issuer's telephone number) Securities registered or to be registered under Section 12(b) of the Act: NONE ---- Securities registered or to be registered pursuant to Section 12(g) of the Act: Securities for which there is a reporting obligation pursuant to section 15(d) of the Act: Common Stock having a par value of $0.001 per share. The number of outstanding shares of each of the issuer's classes of capital or common stock as of April 30, 2003 was 17,066,033 Common Stock. Indicate by check mark whether the registrant (1) has filed all the reports required to be filed by Section 13 or 15(d) of The Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days: [ ] Yes [X] No Indicate by check mark which financial statements item the registrant has elected to follow: ITEM 17 [X] ITEM 18 [ ] NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- TABLE OF CONTENTS ----------------- PART I.......................................................................1 Introduction............................................................1 Accounting Periods and Principles.......................................1 Cautionary Statement Regarding Forward-Looking Information..............1 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS...........1 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.........................1 ITEM 3. KEY INFORMATION.................................................1 A. NET FORCE SYSTEMS INC. SELECTED FINANCIAL DATA.....................1 B. RISKS RELATED TO THE BUSINESS......................................2 Risks Related to the Industry...........................................5 Risks Related to Securities Market......................................7 ITEM 4. INFORMATION ON THE COMPANY......................................8 A. BUSINESS...........................................................8 Business Development....................................................8 B. Business of the Issuer............................................10 C. Business and Marketing Strategies.................................11 D. The Company's Services and Products...............................12 E. Marketing.........................................................14 F. INDUSTRY OVERVIEW.................................................15 G. Internet Gambling Industry........................................17 H. International Outlook on Internet Gaming..........................18 I. Competition.......................................................19 J. Description of Property...........................................19 K. Government Regulation.............................................20 L. Current Internet Gambling Enforcement.............................22 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS....................22 Forward Looking Statements.............................................22 Plan of Operations.....................................................23 Balance Sheet Data.....................................................27 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.....................28 Directors and Senior Management........................................28 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..............32 Related Party Transactions.............................................33 ITEM 8. FINANCIAL INFORMATION..........................................34 ITEM 9. THE OFFER AND LISTING..........................................34 ITEM 10. ADDITIONAL INFORMATION.........................................34 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK......39 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.........39 PART II.....................................................................39 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES................39 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS............................................39 PART III....................................................................40 ITEM 17. FINANCIAL STATEMENTS...........................................40 ITEM 18. FINANCIAL STATEMENTS...........................................40 ITEM 19. EXHIBITS.......................................................40 SIGNATURES...............................................................40 CERTIFICATIONS*..........................................................41 EXHIBIT 99.1.............................................................42 SCHEDULE "A" - CONSOLIDATED FINANCIAL STATEMENTS.........................43 -------------------------------------------------------------------------------- Annual Report - 2003 Page i NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- PART I ------ Introduction ------------ This annual report on Form 20-F relates to the common shares of Net Force Systems Inc. a corporation registered to carry on business in Antigua. In this annual report, except as otherwise indicated or as the context otherwise requires, the "Company", "we", "us" and "our" refers to Net Force Systems Inc. Accounting Periods and Principles --------------------------------- We have prepared our audited annual consolidated financial statements as of April 30, 2003 and for the previous two years in U.S. dollars in accordance with United States generally accepted accounting principles (U.S. GAAP). Percentages and some amounts in this annual report have been rounded for ease of presentation. Any discrepancies between totals and the sums of the amounts listed are due to rounding. Cautionary Statement Regarding Forward-Looking Information ---------------------------------------------------------- Net-Force Systems Inc. (the "Company" or "Net-Force") 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 return, or that are otherwise made by or on behalf of the Company. For this purpose, any statements contained in the annual return 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", "expect", believe", "anticipate", "intend", "could", "estimate" or "continue" or the negative or other variations of comparable terminology, are intended to identify forward-looking statements. ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS ------------------------------------------------------------- Not Applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE ----------------------------------------------- Not Applicable. ITEM 3. KEY INFORMATION ----------------------- A. NET FORCE SYSTEMS INC. SELECTED FINANCIAL DATA ------------------------------------------------- The following financial information of our company is only a summary and should be read in conjunction with, and is qualified in its entirety by reference to, the audited annual consolidated financial statements of our company and the related notes which are included in this annual report. We selected historical financial data set forth below as of and for each of the years ended April 30, 2003, 2002, and 2001 have been derived from our consolidated financial statements, which have been audited by HJ & Associates LLC, Certified Public Accountants, Salt Lake City, Utah, USA, independent accountants. We only represent these particular years because the Company commenced operations subsequent to April 30, 1999 even though it was incorporated and in good standing as of March 1, 1999. Our financial statements have been prepared in U.S. dollars in accordance with U.S. GAAP. -------------------------------------------------------------------------------- Annual Report - 2003 Page 1 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- Our U.S. GAAP audited annual consolidated financial statements as of April 30, 2003, 2002, and 2001 are included in this annual report. The following is a summary of the discontinued operations for the years ended April 30, 2003, 2002, and 2001. See Note 11 - Subsequent Events, of the Consolidated Financial Statements for a summary of the Discontinued Operations for the years ended April 30, 2003, 2002. 2003 2002 2001 ---- ---- ---- Income $ 288,613 $ 519,237 $ 318,490 Cost of Sales (212,445) (282,020) (217,769) Gross Profit 76,168 237,217 100,721 Net Loss From Operations (126,302) (140,552) (406,798) Net Loss (125,564) (174,206) (484,597) Net (loss) per common share (0.01) (0.01) (0.07) Total Assets 130,157 236,254 269,194 Total Shareholders Equity (26,123) 99,441 (682,956) Common Stock 17,066 17,066 7,500 Paid-in Capital 1,145,037 1,145,037 198,000 No. of Shares 17,066,033 17,066,033 7,500,000 Dividend Declared per Share - - - Net Income (Loss) per Share (0.01) (.01) (.07) B. RISKS RELATED TO THE BUSINESS -------------------------------- As of June 3, 2003, we have disposed of our operating subsidiary and re-entered ------------------------------------------------------------------------------- the development stage as a company. Therefore, we cannot guarantee our ---------------------------------------------------------------------- profitability. -------------- The Company was recently formed in the year 2000 and has limited operating history. Since incorporation, the Company has expended resources on technology, license fees, website development, hiring of personnel and startup costs. As a result, losses were incurred since incorporation and management expects to experience operating losses and negative cash flow for the foreseeable future. We anticipate losses will continue to increase from current levels because we expect to incur additional costs and expenses related to: brand development, marketing and other promotional activities; the addition of customer service personnel; the continued development of the websites; the expansion of service offerings and website content; and development of relationships with strategic business partners. Current losses to date for the 12 month period ended April 30, 2002 are $(125,564). Cumulative Losses from inception at March 1, 1999 to date to April 30, 2003 are $(1,188,226). There can be no assurance at this time that we will operate profitably or that we will have adequate working capital to meet our obligations as they become due. We believe that our success will depend in large part on our ability to (i) offer aesthetic, interesting and diverse casino-style games on our websites, as well as sports and pari-mutuel wagering, (ii) attract players and provide them with outstanding service, (iii) instill consumer confidence, and (iv) achieve name recognition. Accordingly, we intend to invest heavily in site development, technology and operating infrastructure, as well as marketing and promotion. As a result, we expect to incur operating losses in the initial stages of our business and for the foreseeable future. Our business is speculative and dependent upon the acceptance of our websites and the effectiveness of our marketing program. Our only assets will be the offshore Internet gaming websites, some administrative office furniture and equipment and the revenues derived from the websites. There can be no assurance that our Internet gaming and sports wagering websites will be successful or result in revenue or profit. There is no assurance that we will earn significant revenues or that investors will not lose their entire investment. If we fail to respond to change our clients may use competitors products and ---------------------------------------------------------------------------- services. --------- If we face material delays in introducing new services, products and enhancements, customers may forego the use of our services and use those of competitors. To remain competitive, we must continue to enhance and improve the functionality and features of the websites. The Internet and the online commerce -------------------------------------------------------------------------------- Annual Report - 2003 Page 2 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- industry are rapidly changing. If competitors introduce new products and services, or if new industry standards and practices emerge, the existing websites, technology and systems may become obsolete. To develop the websites and technology entails significant technical and business risks. We may use new technologies ineffectively or may fail to adapt the technology to meet customer requirements or emerging industry standards. Because we use intellectual property, claims may be asserted against the company -------------------------------------------------------------------------------- for infringing intellectual property rights. -------------------------------------------- Other parties may assert infringement or unfair competition claims against the Company. We cannot predict whether they will do so, or whether any future assertions or prosecutions will harm the business. If we are forced to defend against any infringement claims, whether they are with or without merit or are determined in our favor, then we may face costly litigation, diversion of technical and management personnel, or product shipment delays. Further, the outcome of a dispute may be that management would need to develop non-infringing technology or enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may be unavailable on terms acceptable to management, or at all. If the trademarks, copyrights and trade secrets we rely on fail others will --------------------------------------------------------------------------- benefit reducing our competitive advantage. ------------------------------------------- We intend to take steps to protect proprietary rights which steps may be inadequate. Management regards copyrights, service marks, trademarks, trade secrets and similar intellectual property as critical to its success. We intend to rely heavily on trademark and copyright law, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect proprietary rights. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which we intend to provide its services. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of intended trademarks and other proprietary rights. The Internet and Internet-based casinos are new industries and therefore we do ------------------------------------------------------------------------------ not know if they will continue to be accepted by the public in the future. -------------------------------------------------------------------------- Both the Internet and Internet-based casinos are relatively new industries. The market for Internet and Sports wagering has only recently begun to develop, is rapidly evolving and is characterized by an increasing number of market entrants. As is typical in the case of a new and rapidly evolving industry, demand and market acceptance for recently introduced services are subject to a high level of uncertainty. There can be no assurance that gaming and wagering on the Internet will become widespread, or that our websites will become widely used. If the market fails to develop, develops more slowly than expected or becomes saturated with competitors or if our services do not achieve market acceptance, our business, operating results, and the financial condition will be materially adversely affected. Because of the uncertainty regarding the legality of Internet wagering in the United States, and the existing or possible prohibitions in other jurisdictions, we will not permit play by Canadian residents, and may be precluded from offering play to residents of other countries. Because e-commerce transactions are subject to security risks it may inhibit the -------------------------------------------------------------------------------- growth of the industry and the acceptance of our products and services. ----------------------------------------------------------------------- Concerns over the security of transactions conducted on the Internet and other on-line services as well as user's desires for privacy may also inhibit the growth of gaming and wagering on the Internet. The activities of the Company are expected to involve the storage and transmission of proprietary information, such as credit card numbers and other confidential information. Any such security breaches could damage our reputation and expose us to a risk of loss, litigation and possible liability. There can be no assurance that our security measures will prevent security breaches or that failure to prevent such security breaches will not have a material adverse effect on the Company's business, financial condition and results of operations. The Company is dependent on World Gaming for its software and the hosting of its websites. Businesses on the Internet are subject to the risk of credit card fraud and other types of theft and fraud perpetrated by "hackers" and on-line thieves. Credit card companies may hold merchants fully responsible for any fraudulent purchases made when the signature cannot be verified. Although credit card -------------------------------------------------------------------------------- Annual Report - 2003 Page 3 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- companies and others are in the process of developing anti-theft and anti-fraud protections, and while the Company itself will continually monitor this problem, at the present time the risk from such activities could have a material adverse effect on us. A party who is able to circumvent our security measures could misappropriate confidential information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against such security breaches or to alleviate problems caused by such breaches. If a compromise of our security were to occur, or if World Gaming's software or website hosting fails, there could be a material adverse effect on our business, financial condition and the results of operations. Because Consumer's may lack confidence in how we set our odds our business may ------------------------------------------------------------------------------ not be accepted. ---------------- Concerns that a virtual casino's odds can be easily and arbitrarily manipulated may deter customers from using our website. There can be no assurance that we will be able to instill customer confidence in and alleviate negative perceptions about Internet gaming. If our efforts are unsuccessful, it could have a material adverse effect on our business, financial condition and the results of operations. We are subject to competition from other gaming and sports wagering operators ----------------------------------------------------------------------------- that are larger and have more resources to compete in the gaming industry and ----------------------------------------------------------------------------- that have been operating in the industry for longer. ---------------------------------------------------- The market for our Internet gaming and sports wagering services is intensely competitive. Our principal competitors include other on-line Internet casinos. These competitors have longer operating histories, greater name recognition, larger installed customer bases, and substantially greater financial, technical and marketing resources than us. We believe that the principal factors affecting competition in its proposed market include name recognition, ability to develop aesthetic and diverse casino-style games, customer confidence, ability to respond to changing customer needs, and ease of use. Other than technical expertise and the limited time available to enter the market, there are no significant proprietary or other barriers of entry that could keep potential competitors from developing or acquiring similar tools and providing competing services in our proposed market. Our ability to compete successfully in the on-line casino and sports wagering business will depend in large part on its ability to attract new players and respond effectively to continuing technological changes by developing more sophisticated on-line casino games. There can be no assurance that we will be able to compete successfully in the future, or that future competition will not have a material adverse effect on the business, operating results and financial condition of the Company. Because we may have to borrow in the future to keep our business operating we ----------------------------------------------------------------------------- may not be able to satisfy our debt obligations or to obtain debt financing that -------------------------------------------------------------------------------- allows us to remain in business. -------------------------------- There is no assurance that we will not incur debt in the future, that it will have sufficient funds to repay its indebtedness or that we will not default on our debt, jeopardizing our business viability. Furthermore, we may not be able to borrow or raise additional capital in the future to meet our needs or to otherwise provide the capital necessary to conduct our business. As of the period ended April 30, 2003, the total outstanding long-term indebtedness is $zero. Total liabilities are $156,280, comprised of $156,280, in current liabilities. Because we do not intend to pay any dividends on our common shares, investors ----------------------------------------------------------------------------- seeking dividend income or liquidity should not purchase common shares in this ------------------------------------------------------------------------------ offering. --------- We do not currently anticipate declaring and paying dividends to our shareholders in the near future. It is our current intention to apply net earnings, if any, in the foreseeable future to increasing our capital base and marketing. Prospective investors seeking or needing dividend income or liquidity should therefore not purchase the Shares. There can be no assurance that we will ever have sufficient earnings to declare and pay dividends to the holders of our common stock, and in any event, a decision to declare and pay dividends is at the sole discretion of our Board of Directors. Because we are subject to government regulation we could have our license ------------------------------------------------------------------------- revoked at anytime. ------------------- The wagering and casino industry is subject to extensive government regulation and licensing requirements in certain jurisdictions of the world. Legal uncertainties may preclude us from offering our planned Internet gaming in certain jurisdictions like Canada. Some jurisdictions may impose restrictions, licensing requirements or prohibitions on Internet wagering. No assurance can be made that such restrictions, prohibitions or licensing requirements will not arise which would materially adversely effect our business, operating results and financial condition of the Company. Also see Item 4. - L., Recent Regulatory Developments In the Internet Gambling Industry. -------------------------------------------------------------------------------- Annual Report - 2003 Page 4 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- Because we depend on a small group of qualified people, if we cannot hire and ----------------------------------------------------------------------------- retain qualified personnel, we might be forced to discontinue our operations. ----------------------------------------------------------------------------- Our success is substantially dependent on the performance of our executive officers and key employees. Given our early stage of development in the Internet gaming business, we are dependent on our ability to retain and motivate high quality personnel. Although we believe we will be able to attract, retain and motivate qualified personnel for such purposes, an inability to do so could materially adversely affect the Company's ability to market, sell, and enhance our services. The loss of one or more of our employees or our inability to hire and retain other qualified employees could have a material adverse effect on the Company. Currently, we identify Mr. Terry G. Bowering, President and Chief Executive Officer, as a key person, as he is involved in the direction of all aspects of the daily operations of the Company. Mr. Bowering does not have an employment contract in place, nor is there any key person insurance on himself. We also depend on Mr. Derek C. Ferguson, Internet Technology Consultant, Mr. Clint Jendyk, Director of Website Design and Development, and Mr. Richard Pestes, Internet Marketing Consultant. We have not entered into any employment or management contracts with our employees nor do we maintain "key-person" insurance of any kind. Because our current or proposed insurance coverage may not be adequate uninsured -------------------------------------------------------------------------------- losses may occur. ----------------- There is no assurance that we will not incur uninsured liabilities and losses as a result of the conduct of its proposed business. We plan to maintain comprehensive liability and property insurance at customary levels. We will also evaluate the availability and cost of business interruption insurance. However, should uninsured losses occur, the shareholders could lose their invested capital. There is no assurance that we can pay our liabilities. ------------------------------------------------------ We have liabilities to affiliated and unaffiliated lenders. As at April 30, 2003, our total amount of liabilities is $156,280. Current liabilities to unaffiliated lenders (accounts payable) consist of accrued wages payable, International telephone and Internet service payable to Cable and Wireless Telecommunications Company, and fees payable to Pannell Kerr Forster for accounting and auditing services. Customer account deposits account for $51,637 or 33% of total liabilities. Accrued wages payable for Terry G. Bowering, President and Chief Executive Officer, account for $53,387, or 34% of total liabilities. Stock subscription payable for legal and consulting services rendered accounts for $12,500 or 8% of total liabilities. We currently have no long term debt. Our liabilities represent fixed costs, which are required to be paid regardless of the level of profitability experienced by us. There is no assurance that we will be able to pay all of our liabilities. Furthermore, we are always subject to the risk of litigation from players, employees, suppliers or others because of the nature of our business. Litigation could cause us to incur substantial expenses and, if cases are lost, judgments and awards could add to the Company's costs. Because Net Force and its officers and directors are located in NON-U.S. JURISDICTIONS, investors may have no effective recourse against Net Force or its management for misconduct and you may not be able to enforce judgments and civil liabilities against Net Force and its officers, directors, experts and agents. Net Force Systems Inc. has been incorporated under the laws of Antigua and Barbuda, and our executive offices are located in Antigua. Our directors, controlling persons and officers, and representatives of the experts named in this prospectus, are not residents of the Unties States of America, and a substantial portion of their assets and all of our assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us, the directors, controlling persons, officers and representatives of experts who are not residents of the United States or to enforce against them judgments of courts of the United States based upon civil liability under the federal securities laws of the United States. There is doubt as to the enforceability in Antigua against us or against any of our directors, controlling persons, officers or representatives of the experts who are not residents of the United States, in original actions or in actions for enforcement of judgments of United States courts and of liabilities based solely upon the federal securities laws of the United States. Risks Related to the Industry ----------------------------- Our business is dependent upon the continued acceptance of our e-commerce gaming -------------------------------------------------------------------------------- industry by the public. ----------------------- Our future revenues substantially depend upon the increased acceptance and use of the Internet and other online services as a medium of commerce. Rapid growth in the use of the Internet, the Web and online services is a recent phenomenon. -------------------------------------------------------------------------------- Annual Report - 2003 Page 5 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- As a result, acceptance and use may not continue to develop at historical rates and a sufficiently broad base of customers may not adopt, and/or continue to use, the Internet and other online services as a medium of commerce and entertainment. Demand and market acceptance for recently introduced services and products over the Internet are subject to a high level of uncertainty and there exist few proven services and products. In addition, the Internet may not be accepted as a viable long-term commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. If the Internet continues to experience significant expansion in the number of users, frequency of use or bandwidth requirements, the infrastructure for the Internet may be unable to support the demands placed upon it. In addition, the Internet could lose its viability as a commercial medium due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or due to increased governmental regulation. Changes in, or insufficient availability of, telecommunications services to support the Internet also could result in slower response times and adversely affect usage of the Internet generally. Our business, financial condition and results of operations would be seriously harmed if: use of the Internet, the Web and other online services does not continue to increase or increases more slowly than expected; the infrastructure for the Internet, the Web and other online services does not effectively support expansion that may occur; the Internet, the Web and other online services do not become a viable commercial marketplace; or traffic to the websites decreases or fails to increase as expected or if management spends more than was expected to attract visitors to the websites. Because we may not be able to maintain or obtain present and future domain names -------------------------------------------------------------------------------- we may not be able to prevent third parties from benefiting from our domain --------------------------------------------------------------------------- names. ------ We may be unable to acquire or maintain Web domain names relating to the brand in the jurisdictions in which management may conduct business. As a result, we may be unable to prevent third parties from acquiring and using domain names relating to our brand, which could damage our brand and reputation and take customers away from our websites. Governmental agencies and their designees generally regulate the acquisition and maintenance of domain names. The regulation of domain names in the United States and in foreign countries is subject to change in the near future. The changes in the United States are expected to include a transition from the current system to a system that is controlled by a non-profit corporation and the creation of additional top-level domains. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. Because laws may change in the future to protect the public there may be a -------------------------------------------------------------------------- requirement to change the manner of how we do business. ------------------------------------------------------- The adoption or modification of laws or regulations relating to the Internet could adversely affect the manner in which we propose to conduct our business. In addition, the growth and development of the market for online gaming may lead to more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on the Company. Laws and regulations directly applicable to communications or commerce over the Internet are becoming more prevalent. The United States Congress recently enacted Internet laws regarding children's privacy, copyrights, taxation and the transmission of sexually explicit material. The European Union recently enacted its own privacy regulations. Laws regulating the Internet, however, remain largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel, and taxation apply to the Internet. In order to comply with new or existing laws regulating online commerce, we may need to modify the manner in which we propose to do business, which may result in additional expenses. For instance, we may need to spend time and money revising the process by which we intend to accept players' wagers to ensure that each wager complies with applicable laws. We may need to hire additional personnel to monitor compliance with applicable laws. We may also need to modify our software to further protect players' personal information. The Company and the industry as a whole are under threat from certain factions within the U.S. Congress that seek to ban Internet gambling. We may be subject to regulation or prohibition of Internet Gaming in certain jurisdictions, including the United States, which could have a significant adverse effect on our business. If this legislation passes and becomes law, it would have an immediate detrimental effect on the industry and would pose a serious threat to -------------------------------------------------------------------------------- Annual Report - 2003 Page 6 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- the company's continued operation in the Internet gaming industry. (See Item 4. - K., L., Government Regulation, Recent Regulatory Developments) Because we are liable for the content of our website we may be subject to regulation and law suits arising from the content. As a publisher of online content, we face potential liability for defamation, negligence, copyright, patent or trademark infringement, or other claims based on the nature and content of materials that we publish or distribute. If we face liability, then our reputation and our business may suffer. In the past, plaintiffs have brought these types of claims and sometimes successfully litigated them against online companies. In addition, we could be exposed to liability with respect to the unauthorized duplication of content or unauthorized use of other parties' proprietary technology. Although we intend to carry general liability insurance, such insurance may not cover claims of these types. We cannot be certain that we will be able to obtain insurance to cover the claims on reasonable terms or that we will be adequate to indemnify the management or the Company for all liability that may be imposed. Any imposition of liability that is not covered by our insurance or is in excess of insurance coverage could harm the business. Because government regulation may force us to collect and remit taxes we may ---------------------------------------------------------------------------- have to modify our system which would be expensive and reduce potential ----------------------------------------------------------------------- profitability. -------------- If one or more states or any foreign country successfully asserts that we should collect taxes on the winnings earned by players, the financial position and results of operations could be harmed. If we become obligated to collect taxes, we will need to update our system that processes wagers and winnings to calculate the appropriate sales tax for each player and to remit the collected sales to the appropriate authorities. These upgrades will increase operating expenses. In addition, players may be discouraged from utilizing our websites because they have to pay tax, causing net sales to decrease. As a result, we may be adversely materially affected. Risks Related to Securities Market ---------------------------------- We cannot be certain that additional financing will be available on favorable ----------------------------------------------------------------------------- terms when required, or at all. ------------------------------- If we raise additional funds through the issuance of equity, equity-related or debt securities, the securities may have rights, preferences or privileges senior to those of the rights of the common stock and those stockholders may experience additional dilution. We expect to require substantial working capital to fund the business. Since inception, we have experienced negative cash flow from operations and expect to experience significant negative cash flow from operations for the foreseeable future. Management currently anticipates that the private financing done to date, together with expected revenues, and additional shareholder loans if necessary, will be sufficient to meet anticipated needs for working capital and capital expenditures through at least the next 12 months. After that, we may need to raise additional funds. The market price for our common stock is likely to be highly volatile and ------------------------------------------------------------------------- subject to wide fluctuations. ----------------------------- As a result of this volatility some or all of the following can occur: actual or anticipated variations in the quarterly operating results; announcements of technological innovations or new services by us or our competitors; changes in financial estimates by securities analysts; conditions or trends in the Internet and/or online commerce or gaming industries; changes in the economic performance and/or market valuations of other Internet, online gaming companies; announcements by management or competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; additions or departures of key personnel; release of lock-up or other transfer restrictions on the outstanding shares of common stock or sales of additional shares of common stock; and potential litigation. In addition, the stock market has from time to time experienced extreme price and volume fluctuations. These broad market fluctuations may adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of their stock, -------------------------------------------------------------------------------- many companies have been the subject of securities class action litigation. --------------------------------------------------------------------------- If we were sued in a securities class action, it could result in substantial costs and a diversion of management's attention and resources and would cause the stock price to fall. -------------------------------------------------------------------------------- Annual Report - 2003 Page 7 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- ITEM 4. INFORMATION ON THE COMPANY ---------------------------------- A. BUSINESS ----------- Business Development -------------------- Net-Force Systems Inc. ---------------------- Net-Force Systems Inc. was incorporated in March 1999 under the laws of Antigua and Barbuda as Net-Force Systems Inc. Our corporate website can be viewed on the World Wide Web at www.netforcesystems.com. We sub-license online gaming software ----------------------- and provide marketing and support services for Internet gaming website operators, through our wholly owned subsidiary, Netforce Entertainment Inc. Netforce Entertainment sub-licenses Internet gaming software that offers a variety of casino-style gaming options as well as an on-line sports wagering service, utilizing the rapidly expanding medium known as the Internet. Netforce Entertainment Inc. acts as the operating company for all business activities relating to the online gaming operations. Netforce Entertainment Inc. has entered into a non-exclusive software agreement to license proprietary Internet casino software and systems from World Gaming Plc., a publicly traded corporation domiciled in the United Kingdom and formerly known as Starnet Systems, Inc. Included in this software agreement is a contract between Netforce Entertainment Inc. and EFS Caribbean Inc., a secure online financial transaction processor, to collect and process revenues generated from our Internet gaming websites. The agreement with EFS Caribbean Inc. includes the payment processing fees, terms, and conditions (see Exhibit 10.1). Any reference to the term 'master agreement' or 'master license' should be defined as having a direct software license agreement with a software provider (World Gaming). A sub-license agreement is defined as being an agreement whereby Netforce Entertainment Inc. acts as licensor of a software provider's (World Gaming) software to a third-party operator in exchange for an up-front fee plus a negotiated a revenue sharing agreement. Typically, there are web-site design and development costs incurred for initial set up and custom-designing a prospective sub-licensee's casino website. The commission paid to a sub-licensee starts at 50% of net revenue and moves up incrementally as volume increases. There are currently no sub-licence agreements in place at this time. A marketing agreement (also known as "Partners" or "Affiliates" or "Resellers") is defined as an agreement between Netforce Entertainment Inc. and either a webmaster with an Internet site that has established customer traffic of their own or another casino site linked to our primary casino site as a partner. There is no up-front fee charge for a partner. A monthly commission starting at 25% of the net revenues is paid to these as compensation for sending playing customers to our sites. Special online tracking software provided by World Gaming accounts for an affiliate's customer activity and calculates net revenue upon which the commission is based. We currently have approximately 200 registered partners with marketing agreements in place. Agreements are consummated online by accepting the `terms and conditions' prior to completing the online registration form. We oversee a number of Internet gaming websites under marketing agreements and we have implemented a substantial marketing program with initial advice from World Gaming. Headquartered in Antigua, EFS Caribbean, Inc. is a wholly owned offshore subsidiary of World Gaming Plc. We intend to engage in additional software agreements with other online gaming software providers with the objective of offering a wide variety of online gaming and wagering products and services thus reducing our reliance on any single technology provider and/or software platform. The Company, including our subsidiaries, employs 4 full time persons on a contract as-needed basis. The individuals are either involved in developing and implementing a marketing strategy for us or are providing website maintenance and development and customer support. Net-Force Systems Inc. Corporate History ---------------------------------------- In March 1999, we filed our Articles of Incorporation with the Director of International Business Corporations, Government of Antigua and Barbuda as Net-Force Systems Inc., in which, among other things, the Board of Directors was elected as follows: Terry G. Bowering and Douglas N. Bolen. The authorized capital of the Company consists of 100,000,000 Common Shares and 50,000,000 Preferred Shares. On March 15, 1999, the Directors, by way of Organizational Consent of the Directors of the Company, accepted the stock subscriptions and payment for the number of shares issued to the individuals referred to above at a price of $0.001 per share. In addition, the Directors appointed Terry G. Bowering to the office of President, CEO and Chairman of the Board, and Douglas -------------------------------------------------------------------------------- Annual Report - 2003 Page 8 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- N. Bolen to the office of Secretary. On December 20, 1999, Mr. Dwight Lewis was appointed to the Board of Directors. On March 15, 1999, we accepted subscription agreements from six entities to acquire securities of the Company pursuant to a Rule 504 offering under Regulation D. The Board authorized the Company to proceed with the sale of its shares pursuant to the subscriptions received for the sale of 3,000,000 Common Shares at a price of $0.01 per Common Share. Pacific Stock Transfer Company was appointed as the Transfer Agent of the Common Shares of the Company. On July 15, 1999, we signed a software licensing agreement with Softec Systems Caribbean Inc., now known as World Gaming Plc., to launch and market a turnkey Internet Gaming website. On July 15, 1999, we issued a promissory note to Mountain High Management Inc. to borrow $495,000 at an interest rate of 15%. August 5, 1999 marked the date of incorporation of Netforce Entertainment Inc., wholly owned subsidiary of Net-Force Systems Inc., under the laws of Antigua and Barbuda. Netforce Entertainment Inc. acts as the operating subsidiary for the Internet Gaming web site operations. The Internet Gaming website www.aogaming.com was initially launched on April 7, ---------------- 2000. On June 1, 2000, the Board of Directors resolved to authorize the redemption of the common stock, which was issued pursuant to Rule 504 on or about March 15, 1999 and the same was effected shortly thereafter. On the same date, pursuant to Regulation S, the Board authorized the issuance of 2,500,000 Units comprised of one (1) $0.001 par value common stock and one (1) warrant that allows the holder to purchase one (1) share of the Company's $0.001 par value common stock at an exercise price of $2.00 per share, to be exercised no later than December 31, 2002 after which the warrants would become null and void. Each Unit was offered at the price of $0.10. This offering was sold out on or about June 30, 2000. On October 26, 2000, Douglas Bolen resigned as Director and secretary of the Company. On August 15, 2001, Mr. Trevor Bowering was appointed to the Board of Directors. On September 10, 2001, Mr. Derek Ferguson was appointed to the Board of Directors. On September 15, 2001, all long-term debt and promissory notes including related party shareholder loan from Geneva Overseas Holdings Ltd. were converted to equity for a total of 8,706,0333 shares issued at $0.10 per share. (See Financial Statements, Note 6 - Stock Transactions and Note 11 - Subsequent Events). On November 15, 2001, pursuant to a Rule 506 Offering, the Board authorized the Company to proceed with the sale of its shares pursuant to subscriptions received at a price of $0.10 per Common share. The Company accepted subscription agreements from U.S. residents from states including California, Arizona, and Florida. On January 29, 2002, the offering was closed and the Board resolved to authorize the issuance of 160,000 Common shares at $0.10 per share. On November 2nd, 2002, Net-Force Systems Inc. was declared effective as a Fully Reporting Foreign Issuer by the United States Securities and Exchange Commission by virtue of the filing of its F-1 Registration Statement (file #333-96561). On December 31st, 2002, J. Alexander Securities filed a 15c211 application to the NASD on behalf of Netforce Systems Inc. On February 21st, 2003, Net-Force Systems Inc. officially received the trading symbol NTFSF from the NASD to trade publicly on the Over-the-Counter Bulletin Board Exchange (OTC:BB). No shares have been traded to date. On June 1st, 2003, through an Extraordinary Shareholders Resolution dated June 1st, 2003, Net-Force Systems Inc. approved the sale of all of the 100 issued shares of Net Force Entertainment Inc., the operating subsidiary of Net Force Systems Inc., for total proceeds of $100.00 plus the assumption of debt, to Geneva Overseas Holdings Ltd., a British Virgin Islands Corporation. The company no longer has any control over Net-Force Entertainment Inc. See Subsequent Events in Note 11 to the Consolidated Financial Statements for a summary of the Discontinued Operations for the years ended April 30, 2003, 2002, 2001. On June 3rd, 2003, Net-Force Systems Inc. created a new subsidiary named Atlantica Resorts Ltd., in the jurisdiction of the territory of the British Virgin Islands pursuant to the International Business Corporations Act. The -------------------------------------------------------------------------------- Annual Report - 2003 Page 9 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- purpose of this corporation is to pursue opportunities in the resort properties marketing industry in the Caribbean. See Item 5 - Operating and Financial Review and Prospects: Operations Over the Next Twelve Months. On June 10, 2003, the Company authorized the issuance of 25,000 shares of common stock for conversion of debt to equity valued at $0.10 per share or $2,500. B. Business of the Issuer ------------------------- Netforce Entertainment Inc. was incorporated on August 5, 1999 pursuant to the International Business Corporations Act of Antigua and Barbuda and is based in Antigua. Netforce Entertainment is a wholly owned subsidiary of the Company and acts as the operating entity for our online gaming operations. Netforce Entertainment Inc. currently maintains an international gaming website called Antigua Online Gaming located on the World Wide Web at www.aogaming.com. ---------------- Netforce Entertainment Inc. has entered into agreements with software vendors, including, World Gaming, Plc. for the rights to use its proprietary Internet gaming software, and with Electronic Financial Services Caribbean, Inc. for the use of its electronic financial conversion system in relation to the processing of credit cards. Electronic Financial Services Caribbean, Inc. is a wholly owned subsidiary of World Gaming, Plc. (see Exhibit 10.1). For specific terms and fees for payment processing under Electronic Financial Services Caribbean Inc., see Exhibit 10.1. World Gaming, Plc., a United Kingdom, publicly-traded corporation with operating subsidiaries in Antigua is in the business of licensing complete, customized Internet gaming systems to third-party offshore gaming license holders. World Gaming currently supports in excess of 20 such licensees operating worldwide and has endorsed Net-Force Entertainment as a master licensee. World Gaming provides customized software, website development and management on its network, custom database systems to manage player accounts, and technical support. Netforce Entertainment Inc., has entered into a software licensing agreement with World Gaming (See Exhibit 10.1) whereby World Gaming licenses certain Internet casino software to Netforce Entertainment Inc. and has developed the graphical front end of the gaming site in exchange for a one-time payment and an on-going percentage of the gross revenues from our website. (See Exhibit 10.1). World Gaming hosts our offshore subsidiary's websites. World Gaming also provides and maintains all hardware necessary for the operation of the websites and provides a complete transaction processing system that allows players to deposit funds for use of the games. The hardware is maintained in World Gaming's offices and co-location facilities located in Antigua. To ensure the security of funds transfers over the Internet, Netforce Entertainment, Inc. utilizes the services of Electronic Financial Services Caribbean, Inc. Electronic Financial Services Caribbean, Inc., also an Antigua corporation and wholly owned subsidiary of World Gaming, is in the business of securely converting electronic funds between financial institutions and other companies. Through alignments with major banks, Electronic Financial Service Caribbean processes conversions of worldwide currencies into "e-cash." Electronic Financial Service Caribbean utilizes World Gaming's proprietary STAR-MX encoding and processing technology to process tens of thousands of Internet credit card transactions per month. The World Gaming software license agreement allows us to pursue our objective of establishing ourselves as one of the leading providers of Internet gaming and sports wagering services. Through our subsidiary, Netforce Entertainment, Inc. we currently offer via the Internet up to 25 casino-style gaming opportunities, including baccarat, Japanese Pachinko, Chinese Pai Gow Poker, Blackjack and Video Poker as well as a variety of live betting lines on all of the world's major sporting events. The initial term of the master license is one year, renewable indefinitely unless we give the licensor written notice of termination of the license at least 45 days prior to the end of any one-year period. On August 5, 1999, Netforce Entertainment Inc. was approved for and received an official gaming license from the Antigua and Barbuda Free Trade and Processing Zone enabling us to legally conduct Virtual Casino and Sports Wagering operations. Antigua is a jurisdiction that has clearly defined Internet Gaming legislation in place that licenses and regulates Internet Gaming Operators. Antigua charges license holders an annual license fee to maintain the gaming license in good standing. -------------------------------------------------------------------------------- Annual Report - 2003 Page 10 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- The International Press recognizes Antigua and Barbuda as the leader in the regulation of the Internet Gaming industry. At a time when the issue of regulation is being focused upon by the US media, a reputation of this kind is of great importance to the Company and most especially to the Internet gambler. Antigua and Barbuda is an independent country that has deemed Internet Gaming to be a legitimate and legal business activity protected and supported under enacted legislation on that Caribbean island nation. Of vital importance, Cable and Wireless (West Indies) Telecommunications Company has established Antigua as a primary hub to facilitate the Internet Gaming industry for its regional network of submarine fiber-optic cables laid across the Atlantic and Caribbean enabling Antigua to offer diversified high quality Internet connections into North America. Net-Force Entertainment Inc. was fully licensed under the Antigua and Barbuda Offshore Gaming Commission up to the fiscal period ending April 30th, 2002. For the fiscal period of May 1st, 2002 to April 30, 2003, Net-Force Entertainment Inc. operated under an umbrella master gaming license obtained by World Gaming from the Government of Curacao, in the Netherlands Antilles. Netforce Entertainment's primary casino and sportsbook gaming website URLs can be found on the World Wide Web at www.aogaming.com, www.aocasino.com, and ---------------- ---------------- www.aosportsbook.com. -------------------- Our policy for the gaming websites we oversee is to accept subscriptions only from persons over the age of 18 years and believed to reside in jurisdictions that are not explicitly known to expressly prohibit Internet gaming. The development of our primary gaming website, www.aogaming.com, was initially ---------------- completed and launched on April 7, 2000. Through the software license acquired from World Gaming, we offer up to 25 virtual casino games and live sportsbook wagering on most of the world's major sporting events. Included with the software license is the procurement of an initial Internet gaming license, concept development and design of the Web based casino(s), all odds-making rules and regulations, complete graphical user interface with sophisticated visual and sound effects to create a total gaming experience, real time wagering, complete secure electronic funds transfer, retention and analysis of all gaming data, including win/loss, game preferences and monitoring of player activities, administration and complete 24 hour per day, 7 days per week customer support services, ongoing customization of the websites, the monitoring of all funds flow, the hosting of server software, customization and server integration, the provision of credit card processing and other banking services, discussion, liaison and co-operation with testing agencies, regulatory boards, governing bodies and governments and marketing consulting. All of the above functions are undertaken and managed by the software provider, World Gaming. Net-Force Entertainment Inc., as a software 'licensee', is essentially focused on Internet marketing activities which maximize traffic to the web-sites for the purpose of establishing and developing a large customer database. C. Business and Marketing Strategies ------------------------------------ We intend to capitalize on the evolving opportunities on the Internet by developing and marketing Internet casinos and sports wagering websites to small and medium sized third-party operators at a reduced initial investment. To capitalize on this lucrative opportunity, Netforce Entertainment Inc., a wholly owned subsidiary of Netforce Systems Inc., and based in Antigua West Indies, was established. Netforce Entertainment Inc.'s corporate mission is to deliver efficient and entertaining online gaming services to a global market of end user customers. Netforce Entertainment Inc. will provide online gaming software licensing through third-party marketing agreements. Netforce Entertainment Inc. will also provide marketing, support, and web-site design capabilities for online gaming operators. Netforce Entertainment Inc. will utilize the Internet to deliver these products in a cost-effective, efficient and profitable manner. Netforce Entertainment Inc. aims to accomplish its objectives by applying the following Business strategy: o Netforce Entertainment Inc. will only enter into primary master software license agreements with the world's premiere online gaming software systems providers. o To enhance the Company's reach on the Internet and to accelerate market penetration on the Internet, Netforce Entertainment Inc. will enter into agreements to market the gaming software technology to third party operators. Netforce Entertainment Inc. intends to establish a sales department solely responsible for marketing its turnkey Internet Casino and gaming systems packages to potential -------------------------------------------------------------------------------- Annual Report - 2003 Page 11 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- third-party sub-licensee operators. NE will target small to medium-sized operators and entrepreneurs and high-traffic web-site operators ('webmasters') that have experience in Internet commerce, hence increasing their odds of successfully adding to the company's customer base and income stream. This complete system will include a custom-designed themed graphic user interface and gaming Web-site, access to a legitimate Gaming License, transaction processing and accounting system, customer service support, marketing consultation, and offshore administrative services. In exchange for this package, Netforce Entertainment Inc. intends to receive an up-front fee and a percentage of ongoing revenues. o Accelerated growth through acquisition. The offshore online gaming industry is currently fragmented and made up of a number of predominantly smaller private companies offering a variety of gaming services to a growing global customer base. Expected future industry consolidation provides an opportunity for Netforce to execute a strategy of actively seeking acquisitions of these small to medium-size established Internet gaming websites and operations, and therefore continually adding to the company's database of active customers at an accelerated pace. Netforce Entertainment Inc. will seek to acquire operations that present an opportunity for value creation through enhanced marketing and operational initiatives and synergies. This will further enhance the value of the Company's portfolio of Internet properties. o Offer superior 24/7 customer support services to all of the playing customers that fall under the umbrella of Netforce Entertainment Inc.'s web site operations. This is essential to maintain and grow the customer database and to differentiate the Company's product offering in the market place. Customer service support for the websites is provided by World Gaming through Electronic Financial Services Caribbean Inc. as a condition of the software agreement. Customer support representatives deliver 24-hour customer and technical support to deal with casino games problems, deposit and payment inquiries, system downtime problems, and general questions. Netforce Entertainment Inc. provides secondary customer support via e-mail dealing with marketing, special promotions, and customer retention programs. Customers cannot place wagers over the telephone with either of the above customer service options. Our business strategy is designed to promote the Net-Force brands and strive for the industry leadership position by focusing on gaming, providing an innovative and easy to use concept, acquiring players on an efficient basis, maximizing player retention and expanding and leveraging our player base through multiple marketing channels and third-party operators. We believe that this strategy enables us to reduce reliance on any one source of players, maximize brand awareness and lower average player acquisition costs. By combining expertise in marketing, sophisticated computer software systems and a focus on excellent customer service, we believe that we deliver an entertaining online gaming experience for players. With our mandate of providing a gaming experience with unmatched options and technology allowing for three-dimensional displays and a wide gaming selection, Management believes customers are provided with a product unparalleled in the marketplace. Management believes that the Internet is a well-suited medium for the provision of entertainment products and services, especially those related to user-friendly, innovative casino-style games. We note that the auditor's opinion contains a going concern statement as of the April 30, 2003 year-end audit (see Independent Auditor's Report, of the Audited Financial Statements for April 30, 2003, also see note 4 to the financial statements of the financial statements). However, long-term debt remains at zero as at April 30, 2003. Total expenses including general and administrative expenses and other expenses for the fiscal period ending April 30, 2003 were $201,732 representing a decrease of 51%, as compared to the same period in the previous year. To ensure the ongoing viability of Netforce Systems Inc., we plan to raise additional capital through a private placement equity issuance or engage in a viable merger transaction with a private or public company with an established revenue and earnings profile during the second or third quarter of fiscal period 2004. However, there can be no assurance that we will be successful in finding a suitable merger/acquisition candidate. D. The Company's Services and Products -------------------------------------- We have established websites, located on the Internet at www.aogaming.com, ---------------- www.aocasino.com and www.aosportsbook.com that offer a comprehensive interactive ---------------- -------------------- gaming service including a virtual casino and live online sportsbook wagering service. The websites are accessible to the general public, however only established customers or players are permitted to play the gaming opportunities offered for money. Established customers are defined as being customers who; have agreed to the online terms and conditions by affirming and submitting, have completed an online application (i.e. the "join" form) providing complete -------------------------------------------------------------------------------- Annual Report - 2003 Page 12 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- identity and address information, and have submitted via fax a photocopy copy of his/her credit card, signature, and identification to the customer service department of Electronic Financial Services Caribbean Inc. This procedure both verifies the identity of the customer and reduces risk of credit card fraud. Customers who wish to try the games for fun are not required to go through this procedure and are therefore not considered established customers. Our websites are accessible by a minimum hardware configuration consisting of a 486 personal computer with Windows 95 or greater, with 16 Mega Bites RAM, 20 Mega Bites free hard disk space, a 14,400 modem and a direct PPP Internet connection. All games are provided in a Windows-based, menu driven format with "point and click" interactivity. Players who wish to conduct gaming operations at the websites are able to subscribe over the Internet by completing an application appearing on the websites. Part of the application process requires that the subscriber open an account and make a minimum deposit with the company of $20. Our websites are designed to invite the players to sign up and apply for a casino and sports book wagering membership. After a player's membership application is received and reviewed by us, it is either accepted or rejected based on criterion including, but not limited to, age and geographic location of the player. Upon accessing our Websites, every new customer must review and accept our online terms and conditions agreement which states that only players over the age of 18 will be accepted and proof of age and identification will be required. Our policy is to accept subscriptions only from players over the age of 18 years and believed to reside in jurisdictions that are not known to expressly prohibit Internet gaming. To monitor this policy, the online financial transaction processor for our Websites, Electronic Financial Services Caribbean Inc., utilizes a staff of customer service personnel who are available 24 hours per day, 7 days per week, to administer a policy of requiring personal identification documents (via fax or e-mail scanned copy) from each new customer who deposits funds using a credit card. This typically includes a faxed photocopy of front and back of the credit card used for the account along with a copy of the signature, and a photocopy of both a driver's license and/or a utility bill, as proof of both identity and address. The customer service individual is also able to identify the customer's card-issuing bank to confirm or verify any customer credit card information. Upon acceptance, the approved player is allowed to download the gaming software over the Internet for installation on their personal computer. We then provide the player with a username and password through which the player is able to access the computer servers on which the software is hosted, over the Internet through their Internet service provider. This policy has proved to be adequate in identifying and verifying a prospective customer's true identity and address. World Gaming's Internet gaming software currently allows for acceptance of account applications from all countries except Canada. It is our policy that in the event that we become aware that any country or jurisdiction by law expressly prohibits gaming activities over the Internet, we will block our services from being offered to such countries and/or jurisdictions. A list of countries from which we have accepted member subscriptions to date include Australia, France, Germany, United Kingdom, Italy, Greece, Spain, Mexico, Argentina, Switzerland, United States, Venezuela, The Netherlands, Singapore, Thailand, New Zealand, Brazil, Panama, Ukraine, Israel, China, India, Belgium, Austria, Sweden, Finland, and Turkey. Our website allows the player to review all the terms, rules and conditions applicable to gaming and other uses at the websites. All gaming winnings and losses are debited and credited to the player's account on a real-time basis. All games are conducted pursuant to house rules and advantages that are published at the websites and which are at least favorable or more favorable than those used by the major casinos in Las Vegas, Nevada. We completed the process of designing the interfaces between the players and the World Gaming software for Antigua Online Casino and Sportsbook by March 2000. We beta tested the website for ease of use, clarity and accuracy prior to officially launching the same on April 7, 2000. The gaming opportunities offered at the website have been designed, in conjunction with World Gaming, to evoke sights and sounds similar to a Las Vegas style casino. We include in these menu choices the various gaming rooms, including black jack, baccarat, slot machines, roulette and video poker. In addition, the player has the option to use the sports betting option to place bets on sports events taking place around the world. The players use the Windows format of commands to carry out the gaming activities. The websites also include special effects such as three-dimensional displays, sounds of cards shuffling, coins falling from virtual machines and other generally familiar background casino sounds. In addition to English, we also intend to offer players the ability to engage in the proposed gaming activities in such languages as Spanish, German, Japanese and Chinese or in whatever languages and/or ethnic identities as Management deems practical in order to facilitate worldwide expansion of its player base. -------------------------------------------------------------------------------- Annual Report - 2003 Page 13 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- We intend to conduct continuing development of our websites (and such additional websites as we deem appropriate with varying themes and languages) and the products offered thereat in accordance with our customers' demonstrated preferences, demographics, and the evolution of new technologies. Our goal is to utilize the World Gaming software and such other software, which may be identified by us as useful in order to provide the players with gaming services, which is competitive, innovative and easy to use in the Internet gaming industry. E. Marketing ------------ We have implemented a comprehensive marketing program in conjunction with our software provider. We believe that international markets will represent a significant portion of our revenues in the near future since many of the products and services intended to be offered are not currently available in these markets. Our websites are intended in the future to contain translations of account registration forms and playing instructions and the proposed customer service representatives are intended to be fluent in all languages offered at the websites. We have established our offices in St. John's, Antigua, British West Indies at Suite #10, Woods Centre, Friars Hill Road, PO Box W-645, St. John's, Antigua, British West Indies. From these offices, the Company conducts all head office administrative activities. Also, from these offices, Netforce Entertainment Inc. conducts all marketing and customer support activities for the Internet Gaming sites that we oversee. The marketing program incorporates the following strategies to target its players: Strategic Alliances with Major Content and Service Providers. We intend to seek ------------------------------------------------------------ to enter into strategic alliances with major Internet content and service providers in order to enhance our new customer acquisition efforts, increase purchases by current customers and expand brand recognition. We are striving to enter into alliances with Internet search engines services that provide for us to be the premier online gaming provider on certain of their sites with the exclusive right to place gaming banner advertisements and integrated links to the Net-Force sites on certain gaming-related Web pages. To date, no such alliances have been identified or entered into by us. We currently do not advertise with any major Internet content and/or service providers. However, in the past, we have placed advertising on Internet sports content sites such as The Sports Network, Football.com, Basketball.com, and Rotonews.com. We have not advertised in the past with any Internet Service Providers. On-Line and Traditional Advertising. We have promoted our brands through an ----------------------------------- aggressive marketing campaign using a combination of on-line and traditional advertising. We advertise on the websites of major Internet content and service providers, and targeted gaming-related websites. Our traditional advertising efforts include print advertising in major magazines and gaming related publications, and may also include radio advertising and television advertising. We have advertised in the past in the following publications: High Roller Magazine - Spring 2000 Special Issue, Time Magazine/Atlantic Edition, April 17, 2000, Special Advertising Section - World Focus: Antigua and Barbuda, Alaska Airlines In-Flight Magazine (scheduled flights to Las Vegas), April, June, and August 2000 Issues. We currently have no print advertising placed. Direct Marketing. We use direct marketing techniques to target new and existing ---------------- players with communications and promotions. We send a personalized e-mail newsletter to registered players that includes, recommendations based on demonstrated player preferences and prior usage. Banner Advertisements. Banner advertisements are rectangular graphical/text --------------------- images that can be positioned in various strategic places on Web pages and search engines on the Internet. When a potential player clicks on the banner advertisement, the player's Web Browser points the player to the advertiser's home page. We pay for such banner advertisements on a variety of Web pages and search engines, and participate in a banner exchange program. Examples of sites where the company has placed banners for the casino sites it oversees including www.football.com, www.basketball.com, www.tsn.com, www.rotonews.com, ---------------- ------------------ ----------- ---------------- www.rgtonline.com, casino and sports categories on www.about.com, ----------------- ------------- www.gambling.net, as well as other gaming portal sites such as Wager Talk, ---------------- Wagerline, and Talk Sports. As of the current date, we have no banner advertising in place. We are focused on developing our webmaster/affiliate network base to drive Internet traffic and customers to our websites. We intend to continue to enter into agreements with Webmasters in which Webmasters agree to place our banner advertisements on their Web pages in exchange for a commission for each unique player who clicks through banners to our home page or for a percentage of the profits generated by the Webmaster. -------------------------------------------------------------------------------- Annual Report - 2003 Page 14 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- Submissions to Search Engines. Potential players often learn about websites on ----------------------------- the Internet from listings on search engines. We have submitted its URL's and a brief description of its Internet casino gaming and sports wagering websites to various search engines so that our information is available to potential players who use search engines to locate Internet gaming sites. Examples of the search engines that the company's URLs have been submitted to include: www.yahoo.com, ------------- www.altavista.com , www.lycos.com, www.dmoz.com, www.directhit.com, ----------------- ------------- ------------ ----------------- www.euroseek.com , www.google.com , www.excite.com, www.looksmart.com, ---------------- -------------- -------------- ----------------- www.hotbot.com. The websites have also been submitted to the following Internet -------------- casino directories including but not limited to www.gamblingregistry.com, ------------------------ www.casinolocator.com, www.casinoseek.com, www.gambling.com, and --------------------- ------------------ ---------------- www.top100casinos.com. These Directories are centralized search tools for --------------------- locating Web sites in a particular industry. Player Incentive Programs. In order to attract new players, we have instituted ------------------------- an initial balance credit promotion. This program is designed to attract new players by offering a credit to new player accounts in amounts based on a percentage of the amount of the initial deposit by the player. To attract repeat players to the website, we institute periodic prizes, cash draws, special jack pots, competitions and/or a frequent player program where the player would be rewarded based on the frequency and dollar amount of play. Development of Related Websites. We may design related websites such as a site ------------------------------- containing tips on how to play certain casino games or a site providing interesting gaming news. We intend to design, develop, and promote a sports information portal site which will feature up-to-date sports information content including scores, statistics, news, headlines, and odds on all of the world's major sporting events. This site will be linked to the online sportsbook to generate traffic with the intention of enhancing revenues. Banner advertisements would then be placed on all pages of each related website to attract players to our Internet gaming and sports wagering websites. Distribution of a CD-ROM. We have, in conjunction with World Gaming, produced a ------------------------ CD-ROM on which our casino games are contained. When an individual obtains the CD-ROM, they are able to play all our casino games without the necessity of wagering real money. This promotional idea is intended to give us the ability to distribute, to a large number and variety of potential players, quality examples of the services and products offered at its websites. Once a potential player plays the games offered for fun, we hope that the potential player may make an application on our websites and eventually play the same games for money. We intend to distribute such CD-ROM's by direct mail-outs, insertions in magazines, distributions through Internet Service Providers to their subscribers and distributions at tradeshows. F. INDUSTRY OVERVIEW -------------------- Global Gaming Industry ---------------------- United States of America ------------------------ In the U.S., Americans legally wager over $500 billion per year. This level of legalized gambling is the result of rapid expansion in the industry over the past decade. Since 1988, the number of states allowing casino gambling has increased from two, Nevada and New Jersey, to 24, (including those with Native American Casinos). At this time, only the states of Utah and Hawaii prohibit all forms of gambling. U.S. casino revenues were projected to be about $24 billion in 1998, reflecting an expected 6% growth from 1997, lower than the double-digit increases earlier in the decade. Gambling in the U.S. has many forms, including casinos, horse and dog racing, government run lotteries, riverboat casinos and Jai Alai, all of which are highly regulated. At the present time, there is no existing regulation of Internet gambling in the U.S. The U.S. House of Representatives and the U.S. Senate have recently passed bills to largely prohibit Internet Gambling by stifling the various payment mechanisms used by U.S. gamblers to make financial deposits to offshore Internet Gambling operators. (Also see Item 4. - L., Recent Regulatory Developments in The Internet Gambling Industry). International Gaming Markets ---------------------------- Gaming outside of the U.S. and Canada is a mixture of active markets, large and small resort destinations, and strictly regulated, often state-run, operations. Asia and South Africa provide the most dynamic markets and opportunities for growth, with Latin America and the Caribbean also active in the gaming industry. Western Europe consists mostly of mature, state-controlled markets. In discussing the potential worldwide Internet Gaming market, it must be noted that -------------------------------------------------------------------------------- Annual Report - 2003 Page 15 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- we have not yet done business with all of the countries and jurisdictions discussed in the following International Market overview and we may never do business with more than the countries we have accepted member subscriptions from to date. For a list of countries from which we currently have registered members, see "The Companies Products and Services" section. The following is an overview of selected foreign markets: Europe ------ There were a total of 531 European Casinos generating gross Revenues of $5,336,971,600 US as of February 1999 (International Gaming and Wagering Business, 1999 European Casino Report, February 1999). The European Commission last reviewed the issue of gambling in 1991 and found no need for EU-wide regulation. This position has remained in accordance with the many of the EU's member states' positions that gaming, including Internet gambling, should remain an issue for the sovereign state (Cabot, Anthony, THE INTERNET GAMBLING REPORT III, "European Overview," by Steven Philippsohn, (Trace Publications, Las Vegas), 1999, P.211-216). Among the member nations of the EU, views on Internet gambling vary widely. Some states are slowly accepting the idea of interactive gaming. For example, the Dutch government recently allowed telephone betting, while certain European states, notably Finland and Sweden, are allowing providers to offer Internet gambling, but only to their own respective residents. Conversely, the German position on Internet gaming reflects the view taken on traditional forms of gambling. That is, games of chance are morally corrupting and should only be allowed in connection with charitable purposes. Countries such as France, Italy, Spain, England and Portugal are merely monitoring Internet gambling development to see if it becomes a problem. This is consistent with these nations' actions toward e-commerce in general, of which, they have no immediate plans to introduce new legislation. Prospects for growth in Europe are brightest in Scandinavia, Spain and Eastern Europe. Sweden is setting up its regulatory system for its new casino market, and state-sanctioned monopolies are being challenged in Norway and Finland in the casino and machine markets. In Spain, a more relaxed regulatory climate is emerging, and new casino operations are coming on line. Three Spanish firms dominate this market: Cirsa/Unidesa, Recreativos Franco and Sega. Eastern Europe continues to grow and refine is regulatory structures. Uncertainty and prohibitions against foreign investment, however, hamper participation by international operators. Casino Austria is a major player, although its activity there is shrinking. The path, which European regulation of Internet gambling is taking is more akin to that which the Australian states are taking. The cultural differences between European countries, however, are more marked than between the Australian states. The consequent diversity in attitudes to gambling may slow down the process (Steven Philippsohn, Internet Gambling, European Overview," 1998, p.215). Asia ---- Large capital projects and debt levels in Australia left many casinos highly exposed to the Asian economic crisis. Stung by a US$150 million drop in revenues from international players, stock prices for Australia's leading casinos are now a fraction of previous levels. The domestic market remains solid, however, and long-term prospects are optimistic. The next year should bring the beginning of a recovery and a more realistic assessment of the international market. Despite the economic crisis, the casino industry in the Philippines is experiencing the strongest expansion in the region, with three new operations having opened in recent years. The Manila market is being reorganized and partially privatized, providing the opportunity for change and market growth. Three publicly traded companies are active in the Philippines casino market: Starwood Hotels & Resorts, Malaysian-based Metroplex and Manila-based Belle Bay Corporation. Taiwan offers the most interesting potential for change. The government took another step toward legislation in 1998 by commissioning a report recommending a tightly regulated industry of casinos in recreational areas. Foreign investment would be permitted up to 40%. -------------------------------------------------------------------------------- Annual Report - 2003 Page 16 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- Africa and the Middle East -------------------------- The most significant activity is occurring at opposite ends of the region. South Africa is progressing with the transformation of its casino industry and the opening of a route market for gaming devices. The current estimated size of this market is US$1.5 billion, with the majority of revenues coming from casino gaming operations (US$935 million). The Middle East market is growing in response to the closing of gaming operations in Turkey and limited choices in Northern Europe. With gaming illegal in Israel, further growth in border areas is expected. New operations are expected to grow quickly in Palestine-controlled Jericho to support public demand. In Egypt, across the border from Eilat, major project development is underway in the Taba Heights. Additional operations have also opened recently in North Africa, with more than the planning stages. Latin America ------------- Gaming in Latin America remains decentralized and difficult for operators. However, for patient companies with deep pockets, the market potential in the region is large, especially in countries such as Argentina and Peru. The level of optimism has been raised in Brazil and Mexico for gaming legislation in the near future. Legislation in Brazil, the most populous country in Latin America, would affect regional markets that target Brazilian players, notable Argentina, Uruguay and Paraguay. Sodak Gaming, International Thunderbird, Starwood, Hilton Hotels (Conrad International), IGT and also very active, especially Recreativos Franco, Cirsa/Unidesa and Leisure & Gaming. Caribbean --------- Although dominated by small hotel and resort-based casino operations, gaming in the Caribbean is expanding into new areas, as well as growing in established markets. The Bahamas offers the most substantial casinos in the region, followed by Puerto Rico and Aruba. Casinos can also be found on other islands such as St. Maarten, Curacao, and Antigua. G. Internet Gambling Industry ----------------------------- Internet gambling offers people the opportunity to play virtual sports, horseracing, slot machines and other casino games without the inconvenience of leaving their home. While Internet gambling provides some amount of competition for existing casinos, it is not a substantial threat to the traditional gaming industry. The social aspect of gaming - the primary reason for the transformation of the Las Vegas gaming market into a destination leisure market - - cannot be replicated in the artificial environment of the Internet. Most visitors to casinos are motivated by the ambiance of the casinos, not just the opportunity to gamble. Small markets, however, may incur negative impacts associated with Internet gambling as these markets have been established themselves as leisure destinations. The popularity of gaming has transcended beyond the physical boundaries of the casinos to the borderless and unregulated realm of the Internet. Gambling websites, offering computer users the opportunity to wager on such games as bingo, sports and horse wagering, poker and roulette, are beginning to thrive on the Internet. To participate as one of these websites, the player needs only to set up an account, typically supplying credit card information, wire transfers or E-cash. With a click of the mouse, the player is now able to gamble. Losses are typically deducted from the players' credit cards or established credit line, and winnings, upon the request of the player, can be electronically transferred or mailed to the person. Modern technology has eliminated the physical requirement of visiting a casino or racetrack before engaging in such games as slot machines, black jack, roulette and thoroughbred or harness racing. With Internet gambling, patrons need not leave the comfort of their homes or offices. Currently, it is estimated that more than 2,000 gambling websites are offered on the Internet, which Management estimates are owned by approximately 500 operators. With the current licensing of gambling websites by foreign governments and increased usage of Internet services, this market will continue to grow. It is estimated that almost 300 million people have used the Internet as of the year 2000. With casino gambling garnering public acceptance as a form of entertainment and Internet usage increasing, every personal home computer now has the capacity to become a "cybercasino." -------------------------------------------------------------------------------- Annual Report - 2003 Page 17 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- Due to pending prohibition legislation combined with a dramatically increased rate of major financial institutions declining credit card payments for online gambling, Wall Street analysts have recently decreased their growth estimates for the Internet Gambling industry. Bear, Sterns Inc., scaled its 2003 estimates down from $6.2 billion to $4.2 billion, while Christenson Capital Advisors has cut its estimate by 5%, to $6.03 billion. Much of the offshore wagering industry traffic is generated by Americans. See Marc Falcone, Bear, Stearns & Co., Gaming Industry 12 (Mar. 2001). In 2000, an estimated $1.5 billion was wagered on the Internet, of which approximately $553.3 million was wagered on sporting events, and those amounts are estimated to have nearly doubled in 2001; the number of websites that offer wagering is now believed to be 1,200 to 1,400, half of which have appeared in just the last 2 years. See Falcone, supra, at 6, 48. In Antigua and Barbuda alone, there are more than 50 on-line sportsbooks in current operation, see http://www.tbwsport.com/bookmakers/america.html, and more than 50 jurisdictions all over the world license and regulate sports betting websites and wagering operations. See Mike Brunker, On-Line Gambling Goes Global, MSNBC, Apr. 10, 2001, at http://www. msnbc.com/news . Based on industry data on the Internet Gambling industry produced by Christenson Capital Advisors, the year 2003 estimated industry revenue was $6.03 Billion. For the April 30, 2003 year-ended fiscal period, our total revenues did not exceed US$ 500,000. Therefore our current position in the worldwide market is approximately 0.0083 of one percent. H. International Outlook on Internet Gaming ------------------------------------------- On May 15, 1998, European gambling regulators from 18 European countries signed a recommendation on good practices for Internet gambling services. In the non-binding statement, the countries agreed that European countries should be free to regulate Internet gambling services. In addition, the countries should ensure that Internet gambling is not used for money laundering or under-aged gambling. Most Internet gambling websites are located in the Caribbean and South America, along with other sites in Australia, South Africa, the Netherlands and New Zealand. The Caribbean governments charge Internet "casino" operators up to $100,000 annually for a license and require operators to post bonds. In Antigua, the government requires the employment of local residents and payment of education taxes. The governments of Liechtenstein and Finland operate their national lottery via the Internet. In April of 2001, Australia introduced bill 1062 to ban internet gambling within --------- ---- Australia and certain other countries. This bill passed in July of 2001, meaning that there is no internet gambling within Australia. There are two main prohibitions under the Act. First, there is a general prohibition on both Australian and foreign persons from providing interactive gambling services to customers in Australia. Second, Australian-based interactive gambling services are prohibited from providing interactive gambling services to customers in certain designated countries. The list is very short (and does not include the USA). As a result, many internet casinos actually set up shop in some of the island-states (i.e. Tasmania) and actively take bets from all over the world, at the same time complying with the laws of the Act. Sports betting on the internet in Great Britain is prolific and regulated by the ------------- government. Large Multinational corporations (including Rupert Murdoch's British Sky Broadcasting) are involved in online sports betting. On March 7, 2001, Chancellor Gordon Brown proposed in the budget to eliminate the current 6.75% tax on all sports bets placed. He also proposed to replace the tax with a 15% corporate tax on the gross profits of the bookmaker. Britain has recently made it easier for entrepreneurs to start an online sportsbook business, provided they have the minimum capital requirements. For these reasons, more companies in this industry are considering to move or begin their operations in the United Kingdom. This is one of the fastest growing regions of the world for I-gaming companies. As of May 31, 2002, online gambling in Hong Kong is illegal. The Home Affairs --------- ------- Bureau is responsible for formulating gambling policy and monitoring its implementation. Hitherto, the gambling policy is to restrict gambling opportunities to a limited number of authorized and regulated outlets. At present, such authorized gambling outlets include horse racing organized by the Hong Kong Jockey Club (HKJC), the Mark Six Lottery organized by the Hong Kong Lotteries Board and gaming activities authorized by the Commissioner for ---------------- Television and Entertainment Licensing (CTEL) (e.g. mahjong parlors). Under the --------------------------------------------- Gambling Ordinance (Cap. 148), all gambling activities are illegal except those expressly authorized by the Government under the Betting Duty Ordinance (Cap. -------------------------------------------------------------------------------- Annual Report - 2003 Page 18 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- 108) (i.e. the HKJC horse racing and the Mark Six Lottery), those licensed by the CTEL (e.g. mahjong parlors) and those exempted under Section 3 of the Gambling Ordinance (mainly social gambling). I. Competition -------------- The online commerce market is new, rapidly evolving and intensely competitive, and we expect that competition will further intensify in the future. Barriers to entry are minimal, and current and new competitors can launch new sites at a relatively low cost. Management estimates that there are over 2,000 online gaming and related sites in operation today with potentially thousands more "affiliate" sites. . However, the majority of these sites do not produce substantial revenues as compared to the established, brand name sites, whose operators have invested heavily in their marketing, affiliate, and customer service programs to continuously increase their customer bases and maximize customer retention. Some of the more established Internet Gaming sites that provide similar gaming services as Netforce Entertainment's web sites and that the Company has identified as its competitors include http://globalinteract.com, http://www.intertops.com/, http://www.playersonly.com/, ------------------------- --------------------------- http://www.goldclubcasino.com/, http://www.intercasino.com/, ------------------------------ --------------------------- http://www.englishharbourcasino.com/, http://www.usacasino.com/, ------------------------------------ ------------------------- http://www.thesandscasino.com/, http://www.betonsports.com/, ------------------------------ --------------------------- http://www.sportingbet.com/, http://www.wwts.com/, and http://www.poker.com/. --------------------------- -------------------- --------------------- In addition, the broader gaming industry is intensely competitive. We compete with a variety of companies, including (i) online vendors of gaming and gaming related products, (ii) online service providers which offer gaming products directly or cooperation with other retailers, (iii) traditional providers of gaming products, including specialty gaming providers, and (iv) other retailers that offer gaming products. Many of these traditional providers also support dedicated websites, which may compete directly with us. We believe that the principal competitive factors in our online market are brand recognition, selection, variety of value-added services, ease of use, site content, quality of service, technical expertise and product availability. Many of our intended and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than us. We are aware that certain of our proposed competitors have and may continue to adopt more aggressive pricing or marketing policies and devote substantially more resources to website and systems development than us. Increased competition may result in reduced operating margins, loss of market share and a diminished brand franchise. There can be no assurance that we will be able to compete successfully against intended and future competitors. New technologies and the expansion of existing technologies may increase the competitive pressures of the Company. There can be no assurance of the economic success of any marketing effort by us since the revenues derived from the Internet casino gaming and sports wagering websites depend primarily upon the site's acceptance by the international public, which cannot be predicted with certainty. To be ultimately successful, we will be faced with the challenge of marketing our gaming websites to a variety of foreign cultures. Our websites will compete for consumer acceptance with similar websites hosted by other companies. As a result, the success of our marketing efforts is dependent not only on the quality and acceptance of the our virtual casino games and on-line sports wagering websites, but also on the acceptance of other competing virtual casino games and websites offered in the marketplace during the same time period. J. Description of Property -------------------------- The Company occupies 240 square feet of commercial office space at Suite #10-Epicurean, , Friars Hill Road, Woods Centre, St. John's, Antigua, West Indies. This office houses our operations including workstations for four individuals engaged in customer support, production, marketing, website development, and accounting, and administration functions. All gaming transaction servers website hosting facilities are physically housed and maintained by World Gaming's co-location facilities in Antigua. The building in which we leased space is in the heart of St. John's and is home to several other Technology and Internet based companies. This arrangement and proximity to other similar companies is expected to lend itself well to promoting the Company as being in the right area and on the leading edge of technology. As well, our offices are in close proximity to banking services, the post office, money transfer services, courier services, and other essential business service providers and their offices. -------------------------------------------------------------------------------- Annual Report - 2003 Page 19 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- The terms of the Woods Centre office lease are as follows: We currently lease 240 square feet of office space on a month-to-month basis allowing for flexibility to expand to larger office space in the same complex should the need arise. The annual rent is $8,400 USD. K. Government Regulation ------------------------ In July 1998, the U.S. Senate voted to largely prohibit gambling on the Internet. Under the legislation, operators of illegal Internet gambling sites could be sentenced to up to four years in jail and fined up to $20,000. Gamblers who illegally bet via the Internet could receive a jail sentence of up to three months and a fine of either $500 or three times the amount of the bet. Some Internet-based "fantasy" or "rotisserie" sports league activities would be exempt from the ban. However, in August 1998 the U.S. House of Representatives overwhelmingly voted down the legislation. Recent efforts on the part of the federal government to ban Internet gambling is a departure from previous gambling policy. The federal government has typically left the issue up to the authority of the state governments, resulting in a wide range of attitudes towards gambling. Most states allow some type of gambling whether it be full casinos, card rooms, pari-mutuel tracks or state-operated lotteries. Only two states, Hawaii and Utah, prohibit all forms of gaming. While passage of the Internet prohibition laws in the future are possible, in one form or another, practical enforcement of the law is a separate matter. The Internet is a global information and communications medium operating without boundaries. Due to the global nature of this medium, no regulatory agency has control over the content of information accessible to users. The inability of governments to regulate materials it deems offensive or illegal results in political and social frustration. Measures to remove offensive materials, such as those classified as containing adult content, have been unsuccessful to date. The same enforcement problems will be encountered with gambling sites. These are three avenues through which law enforcement officials may attack the problem: the gaming website, the ISP or the user. The enforcement of anti-Internet gambling laws through each of the avenues presents interesting social and technological problems. In the United States, the ownership and operation of land-based facilities has traditionally been regulated on a state-by-state basis. According to a recently published industry report by Bear Stearns, the Federal Government's role in regulating gambling appears to be changing. Increased Federal interest may not result in new regulations for the traditional forms of gambling that are easily subject to police power of the individual states, may result in a redefined role for the Federal Government in dealing with Internet gaming. The U.S. Department of Justice has maintained that, technically, there are no specific U.S. Federal provisions against placing of bets overt the Internet. However, the Justice Department also maintains that it is illegal to operate Internet Gaming Websites and servers from within the United States. We are not physically located in the United States nor do we house any computer servers or other such computer hardware within the United States. The United States Federal Wire Act contains provisions that make it a crime for anyone engaged in the business of betting or wagering to knowingly use telephone wires to transmit bets or wagers or information assisting in the placing of bets or wagers on any sporting event, unless the wagering is legal in the jurisdiction from which, and into which, the transmission is made. There are other Federal laws impacting gaming activities, including the Wagering Paraphernalia Act, the Travel Act, and the Organized Crime Control Act. However, it remains unresolved whether these laws apply to gaming conducted over the Internet. All aspects of our operations specifically involve the Internet for delivery of our online gaming support services. We do not operate a telephone wagering facility for the purpose of accepting and booking bets on sporting events. March 4, 1998 marked the first federal prosecution for gambling on the Internet as 21 American gambling site operators were charged with conspiring to illegally transmit bets over the Internet and the telephone. The men were owners or managers of eight Caribbean and Central American-based companies that accepted telephone and Internet wagers on sporting events. The individuals were charged with felonies under the Wire Act, which explicitly prohibits placing sports wagers over State lines via telephone wire. However, the Wire Act does not directly identify or address the use of the Internet with its logistical factors including the question of global borders and jurisdiction as it relates to where a wager is actually received and/or processed. The common factor in all of the operators indicted was the fact that all were clearly directly accepting and booking sports wagers via telephone lines from the U.S. Only one of these indictments resulted in a trial. Jay Cohen took the matter to trial and was convicted of seven counts of violating the Wire Act and one count of conspiracy. Mr. Cohen received a $5,000 fine and a 21-month prison sentence. In June of -------------------------------------------------------------------------------- Annual Report - 2003 Page 20 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- 2002, Mr. Cohen's appeal to the U.S. Supreme court was rejected and he must serve the full sentence. The only known federal case against an Internet gambling operator prior to the March 1998 federal prosecutions involved the Interactive Gaming and Communications Corporation in Pennsylvania. The company operated a virtual gambling operation in Grenada, which reportedly handled over $58 million in wagers. In February 1997, FBI agents seized company records and froze company assets. ("Can Lawmakers Control Online Gambling?" New York Times, Peter Lewis, September 22, 1997). The company is also involved in legal issues with the state Attorney General's Office. No formal charges were filed by the Department of Justice, although the company eventually sold its gambling assets to a Canadian-based company. The following are excerpts from an article by Fred Faust of Rolling Good Times Online entitled "U.S. Judge Backs Visa and MasterCard in Internet Gambling --------------------------------------------------------- Ruling", submitted on March 12, 2001. This article highlights an important ------ federal ruling: More than 11 federal cases against the credit card companies and several of the issuing banks were consolidated and assigned to Judge Stanwood R. Duval Jr. in New Orleans. The plaintiffs were people who lost money gambling online. If the casinos had not accepted credit cards, the plaintiffs argued, they wouldn't have gambled online. On Feb. 23, (2001) Duval dismissed the cases outright, before they even got to trial. That's an unusually strong step for a judge, but Duval ruled that the plaintiffs had no grounds to bring these cases. Perhaps more significantly, he also ruled that Internet casinos do not violate federal law. "Plaintiffs in these cases are not victims," the judge stated in his ruling. "At this point in time, Internet casino gambling is not a violation of federal law." In an opinion shared by many lawyers, Duval ruled that the 1961 federal Wire Act, under which telephone and Internet bookmaker Jay Cohen was convicted, applies only to sports betting and "does not prohibit Internet casino gambling." In addition to the aforementioned regulations pertaining specifically to gaming, we may become subject to any number of laws and regulations that may be adopted with respect to the Internet in general as the Internet becomes widely used. These laws may cover issues such as user privacy, freedom of expression, pricing, content and quality of services, taxation, advertising, intellectual property rights and information security. Furthermore, the growth of online commerce may prompt calls for more stringent consumer protection laws. Several states have proposed legislation to limit the uses of personal user information gathered online or require online services to establish privacy policies. The Federal Trade Commission has also initiated action against at least one online service regarding the manner in which personal information is collected from users and provided to third parties. Management does not contemplate providing personal information regarding our customers to third parties. However, the adoption of additional consumer protection laws could create uncertainty in Web usage and reduce the demand for our products and services. We are not certain how our business may be affected by the application of existing laws governing issues such as property ownership, copyrights, encryption and other intellectual property issues, taxation, libel, obscenity and export or import matters. The vast majority of these laws were adopted prior to the advent of the Internet. As a result, they do not contemplate or address the unique issues of the Internet and related technologies. Changes in laws that are intended to address these issues could create uncertainty in the Internet market place. This uncertainty could reduce demand for our services or our cost of doing business may increase as a result of litigation costs or increased service delivery costs. In addition, because our services are intended to be made available over the Internet in multiple foreign countries, other jurisdictions may claim that we are required to qualify to do business in that foreign country. We intend to qualify to do business only in Antigua and Barbuda. Our failure to qualify in a jurisdiction where it is required to do so could subject us to taxes and penalties. It could also hamper our ability to enforce contracts in these jurisdictions. The application of laws or regulations from jurisdictions whose laws do not currently apply to the business could have a material adverse effect on the business, results of operations and financial condition -------------------------------------------------------------------------------- Annual Report - 2003 Page 21 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- L. Current Internet Gambling Enforcement ---------------------------------------- Recent Regulatory Developments in the Internet Gambling Industry ---------------------------------------------------------------- On March 13, 2003, Congressman Conyers from the US House of Representatives introduced HR 1223 (also known as the "Internet Gambling Licensing and ------- Regulation Commission Act"). The first of such bills introduced to the US House of Representatives, it proposes creating a 12 month commission to study the possibility of regulating internet gambling in the USA. What is important is that no less than 18 months after the act is passed can US Congress make any changes to the existing laws regarding internet gambling. The governments major concerns are (1) that minors will be prevented from Gambling online and (2) the money generated from Internet Gambling will not be used for money laundering and terrorism. The bill is currently in committee. Around the same time as Conyers was introducing his bills, On January 7, 2003, the US House of Representatives introduced HR 21 (also known as the "Unlawful ----- Internet Gambling Funding Prohibition Act"), proposed legislation to amend the Wire Act of 1961 (Title 18 of the US Code) to cover internet wagering as well. ---------------- The US Senate on March 13 introduced a similar bill, S 627. Both S627 and HR21 ----- define illegal gambling and acts to prevent monetary commerce for "unlawful" gambling purposes by making unlawful financial transactions for gambling in both an online and wireless environment where no legislation exists. HR 21 is similar to HR 556 (also known as the "Leach-LaFalce Act") and HR 2579. Both were ------ ------- submitted in 2001 and failed in 2002 as they were not voted on in the US Senate during that year. On June 11, 2003, HR 2143 was passed in the House of Representatives. On July 31, 2003, the Senate Banking Committee passed S.627, the Internet Gambling prohibition bill proposed by Sen. Jon Kyl, R-Ariz. The bill was unanimously to be reported to the full Senate. Kyl's bill will block online gambling merchants from taking credit cards or other bank instruments as payment from American online gamblers. Changes to the bill adopted on the day of the vote eliminate an exemption for state-sanctioned betting operations that is included in the House version. The Senate amendments continue to allow wagers on horse and dog racing on secure "closed-loop" systems or private networks that require gamblers to subscribe to the system, verify their ages and assure that they are in a state or American Indian reservation where the form of gambling is legal. Our Internet operations and corporate structure are structured in such a fashion that we do not directly process wagers and facilitate payments of betting customers, nor do we accept wagers via the telephone on sporting events. Further, we do not physically operate within the boundaries of the United States. Therefore, we are of the view that we are not in violation of or specifically subject to the Wire Act of 1961 or future laws that may result from regulatory bills recently passed in the U.S. House of Representatives as well as the U.S. Senate. However, this may not preclude the United States or other jurisdictions from initiating criminal or civil proceedings against us and these proceedings could involve substantial litigation expense, penalties, and fines. In addition, these proceedings may divert the attention of our key executives, and may result in injunctions or other prohibitions against us. These proceedings could have a material adverse effect on the business, revenues, operating results, and financial conditions. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS ---------------------------------------------------- Forward Looking Statements -------------------------- Some of the information in this section contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward looking words such as "expect", "anticipate", "believe", "seek", "estimate" and similar words. Statements that we make in this section that are not statements of historical fact also may be forward looking statements. Forward looking statements are not guarantees of our future performance, and involve risks, uncertainties and assumptions that may cause our actual results to differ materially from the expectations we describe in our forward looking statements. There may be events in the future that we are not accurately able to predict, or over which we have no control. You should not place undue reliance on forward looking-statements. We do not promise to notify you if we learn that our assumptions or projections are wrong for any reason. We disclaim any obligation to update our forward-looking statements. See "Risk Factors" for more information. -------------------------------------------------------------------------------- Annual Report - 2003 Page 22 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- The following discussion should be read in conjunction with our consolidated financial statements and the related notes appearing at Schedule "A" in this annual return. Plan of Operations ------------------ Revenues and Financing ---------------------- Our principal source of revenue for the fiscal period ended April 30th, 2003, was generated from our operating subsidiary, Netforce Entertainment, Inc. Netforce Entertainment Inc. is a gaming company, which oversees Internet wagering websites. It is anticipated that the Internet will continue to become more accessible and that the market opportunities for us will continue to expand. This tremendous growth will also attract many potential new competitors. In order to maintain revenue growth, we intend to expand the content and to improve the services on the Internet websites on a global basis, as well as researching and developing other projects that will utilize our existing facilities and expertise. Revenue Generation Process. Revenues for the Company were generated each time a customer makes a wager on the website. Net monthly revenues are calculated as the total dollar amount wagered by customers in the virtual casino and/or the sportsbook wagering website less winnings by customers in the virtual casino and/or sportsbook wagering website for a given calendar month. The software royalty fee and transaction processing fees are included in the cost of sales. Transaction processing fees consist of credit card discount fees of 5.50 % per deposit, $1.60 per transaction, $5.00 fee for each check processed, and a $25.00 fee to process each credit card chargeback. As well, deposit bonus credits used to encourage customer deposits are also included in cost of sales. See Exhibit 10.1, Software License Agreement, Section 2.3 Financial Transactions, and Schedule A. Netforce Entertainment Inc. does not directly process player deposits and winnings. Electronic Financial Services Caribbean, Inc., the transaction processing subsidiary of World Gaming, is under contract to Netforce Entertainment to process all deposits and credits on behalf of the Company's gaming websites. Daily online activity reports of all financial transactions are produced by Electronic Financial Services Caribbean, Inc. These reports include an account summary and an exposure report. The account summary details dollar amounts deposited and withdrawn for each individual customer account for the date queried. The exposure report provides an actual detailed breakdown of the total dollar amounts wagered (i.e., total bets) and total winnings (i.e., payouts to winners of successful wagers) by each specific casino game played and by each sports wagering type and event. The net amount (i.e., wagers less payouts) is recognized as revenue. Electronic Financial Service Caribbean, Inc. produces a monthly summary report of total net monthly revenue (i.e., total dollar amount wagered less winnings) less transaction processing fees less calculated software licensing fees (i.e., a percentage of net revenues calculated according to the terms of the Software Licensing Agreement attached hereto as an Exhibit). We have been funded to date through debt financing from private arm's length lenders. The Company has secured approximately $495,000 US through debt financing. The sum was received by us pursuant to a note payable dated July 13, 1999 payable to Mountain High Management Inc. The loan was unsecured, with interest at the rate of 15% per annum and was due on July 29, 2001. The Company received the sum on or about July 13, 1999. On June 1, 2000, pursuant to Regulation S, the Board authorized the issuance of 2,500,000 Units comprised of one (1) $0.001 par value common stock and one (1) warrant that allows the holder to purchase one (1) share of the Company's $0.001 par value common stock at an exercise price of $2.00 per share, to be exercised no later than December 31, 2002 after which the warrants would become null and void. Each Unit was offered at the price of $0.10. This offering was sold out on or about June 30, 2000. Subsequent to the due date of July 13, 2001, the promissory note was acquired from Mountain High Management Inc. by IFG Investments Inc. On September 15, 2001, Netforce Systems Inc. entered into an agreement with IFG Investments Inc. to convert the total principal and accrued interest on the note to equity at a value of $0.10 per share for a total of 6,027,870 shares issued. Related-party unsecured shareholder loans with an interest rate of 8.0% made by Geneva Overseas Holdings Ltd. totaled $208,121 as at September 15, 2001. Geneva Overseas Holdings Ltd. is controlled by the President of Net-Force Systems Inc., Terry G. Bowering. On September 15, 2001, Net-Force Systems Inc. entered into an agreement with Geneva Overseas Holdings Ltd. to convert the principal plus accrued interest of $214,483 of the loan to equity at a share value of $0.10 per -------------------------------------------------------------------------------- Annual Report - 2003 Page 23 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- share for a total of 2,144,830 shares issued. On November 20, 2000, Net-Force Systems Inc. issued a promissory note for $50,000 with interest rate of 8.0% to Low Tide Investments Inc. On September 15, 2001, Net-Force Systems Inc. converted the loan payable plus accrued interest to Low Tide Investments Inc. to equity at a value of $0.10 per share for a total of 533,333 shares issued. (See Financial Statements, Note 6 - Stock Transactions and Note 11 - Subsequent Events). Management believes that the reduction of total long-term debt burden to zero combined with existing cash resources and ongoing revenues from operations will enable the Company to meet its financial obligations for the next 12 months. No assurance can be given that revenues from gaming activities and/or proposed secondary revenues will enable us to meet our financial obligations. As such, we may solicit and arrange for additional debt financing from private arm's length lenders in the event existing financing and revenues do not meet our financial obligations. In addition, we may consider raising additional equity financing through the sale of common stock of the Company through private placements to sophisticated investors. The combination of existing financing, expected revenues from operations and additional debt and/or equity financing is intended to provide us with sufficient operating capital for a period of approximately two years. Historical Expenditures. Historical expenditures up to the period ending April 30, 2003 have consisted primarily of monthly expenditures for such costs as office overhead, office rent, utilities, marketing expenditures, wages, ongoing web-site design and maintenance, and accounting services. A major expenditure has been the cost of seeking to obtain a public listing for the company. Costs of going public include legal expenses, consultants' fees, auditing services, and general public listing filing fees. The period consisted of comparatively less expenditures on organizational/set-up costs such as office leasehold improvements, security deposits for rent, utilities, and licenses, financing costs, and legal services. Payments to be made to World Gaming for the gaming software are comprised of the following 2 components: 1. Payment for the software: a one-time US$100,000 fee for the set-up and --------------------------------------------------- configuration. This fee includes all future versions and upgrades of the software at no additional cost. Actual payments made by Netforce Systems Inc. to Softec Systems to date consist of a deposit of US$ 10,000.00 upon the signing of the software agreement. This payment was the first installment of the total US$100,000.00 one-time software set-up and configuration fee. The balance of payments as detailed in the software agreement called for the balance of US$90,000 to be paid in monthly installments @ US$10,000 until fully paid. The payment schedule for the software commenced on the date of `live' operations, the design and testing of the gaming website is complete and the first wager. That date was April 7th, 2000. Subsequent to this date, during the three months of operations after the launch date, a number of software configuration problems were experienced which substantially stifled customer acquisition. As compensation, Starnet Systems/World Gaming agreed to reduce the balance of payments due for the one-time setup and configuration fee to zero. Consequently, no further payments were made under the software agreement in fiscal period 2001, 2002 and 2003. 2. Ongoing royalty payments to World Gaming consisting of a percentage of ---------------------------------------- the net revenue generated on a monthly basis. As detailed in the software agreement, these payments will begin upon commencement of live operations of the gaming website. The schedule of royalty payments payable to World Gaming as detailed in Schedule "A" of the software agreement is as follows: *Net Monthly Revenue (US$) Royalty Fee Payable 0 to < or = $500,000 25% $ 500,000 to < = $1,000,000 20% $1,000,000 to < = $5,000,000 15% $5,000,000 < = $10,000,000 12.5% $10,000,000 plus 10% *Net Monthly Revenue is calculated as the total dollar amount wagered in the virtual casino and/or the sportsbook wagering site LESS winnings in the virtual casino and/or sportsbook wagering site LESS transaction processing fees, for a given calendar month. 3. Payment Processing Agreement: Section 2.3.1 of the software agreement ---------------------------- states: "Softec shall provide a transaction processing system that will allow the licensee's customers to deposit funds for use of the Games (the "Transaction Processing System").". Deposits are made -------------------------------------------------------------------------------- Annual Report - 2003 Page 24 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- electronically by Visa or Mastercard credit cards and by other methods such as bank wire transfer and bank draft. This transaction processing system is provided by Electronic Financial Services Caribbean Inc., wholly owned subsidiary of World Gaming. Electronic Financial Service Caribbean, Inc. will also facilitate payouts of winnings for the licensee by processing credits to credit cards and by bank draft. As stated, actual cost to the company for payment processing include transaction fees of 5.50 % and a flat fee of US$1.60 per transaction. As well, there is a monthly 10% rolling reserve held which is rolled back to the licensee after 180 days. This deposit reserve is required to offset any credit card chargebacks that may occur. Finally, there is a US$5.00 charge for each bank draft that is processed for payouts of winnings. A significant trend in expenditures in this industry of note, relate to marketing expenditures and its direct relationship with net revenues generated. Marketing expenditures are a variable cost, so it is anticipated that as these expenditures are increased revenues will respond as a direct result, further enhancing the company's liquidity. It is important to note that the revenues generated are entirely of a cash nature as no credit is extended to customers. Therefore since there are no customer receivables generated of a material nature, there is no need to establish an allowance for doubtful accounts. Any accounts receivable carried on the balance sheet consists of monthly net revenues payable by Electronic Financial Services Caribbean Inc. and World Gaming Plc. Typically net revenue is due and payable at month-end but not actually paid until the 15th of the following month. As was stated in the previous paragraph, EFS Caribbean Inc., the credit card transaction processor, maintains a 10% rolling reserve hold on credit card deposits on behalf of the company. These reserved funds are released after a 180-day period on a monthly rolling basis. EFS had increased the rolling reserve to 10% of deposits from 5% to allow for a slightly increased level of credit card chargebacks industry-wide. For the twelve-month period ended April 30, 2003, Net-Force Systems Inc. recorded revenues of $288,613, a decrease of 44% as compared to revenues of $519,237 for the previous fiscal period ended April 30, 2002. The primary reason for the decline in revenues for the period was the decision by most of the major credit-card companies and banks to block online gambling transactions on their own. American Express, Citigroup Inc., Bank of America Corp., MBNA Corp., and other credit-card issuers that together control more than 80 percent of the market no longer allow payments to gambling sites. Other major payment services such as PayPal have blocked transactions for online gambling as well. Our revenues are directly dependent on the amounts of funds deposited by our customers. A substantial portion of these deposits are made by credit cards. As stated above, many issuing banks of major credit cards (i.e., Visa and MasterCard) such as MBNA, Bank of America, Chase Manhattan Bank and Citibank over the last year have announced that they will decline authorization to U.S. persons who try to use their credit cards for online gaming. Non-U.S. Banks processing the online gaming transactions can become targets of U.S. criminal proceedings under the newly enacted Patriot Act. The jurisdiction of the United States, under the Patriot Act, now extends to all non-U.S. banks that have correspondent accounts in the United States. The United States can freeze the non-U.S. bank's U.S. correspondent account, if that bank is processing U.S. gaming transactions or holding operating funds or the profits of an operator accepting U.S. wagers, because the U.S. Department of Justice currently views all offshore gaming funds as tainted, and all offshore gaming as illegal. This creates a serious disincentive to the banks to process online gaming transactions which adversely impacted our revenues over the last year of operation. Additionally, many banks currently will not process transactions with the industry code for Internet gaming when the credit card is not physically presented to the merchant, due to the perceived increased risk of charge-backs by end users for reasons including card sequencing and unauthorized use of credit card. If additional issuing banks also decide not to process such transactions, this will make it more difficult for customers to deposit funds for betting. This will most certainly have a negative effect on our revenues. Gross margin for the period was 26.4% versus 46% for the previous period, due to significant decrease in total sales combined with an increase in affiliate commission payouts over previous periods. This negative change in gross margin was a direct result of the current policy of major U.S. banks and financial institutions towards online gambling, with regard to declining online gambling credit card transactions of their card-issued customers. Total expenses, including General and Administrative expenses, Depreciation and Amortization, and Interest expense, were $201,732 for 2003 versus $411,423 for 2002, a decrease of 51% year over year. Due to the reorganization and elimination of long- term debt and total liabilities on the balance sheet during the previous fiscal period, interest expense on notes payable decreased from $34,141 in 2002, to $1,537 in 2003, a %95 decrease. The total annual net loss -------------------------------------------------------------------------------- Annual Report - 2003 Page 25 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- for the period was ($125,564) versus a total net loss of ($174,206) in period ended April 30, 2002, representing a decrease (improvement) of 28%. Advertising and marketing costs have been significantly reduced compared to previous periods as we anticipate a future exit from the Internet Gambling industry due to increasing regulatory pressures in the U.S. Most of the major initial costs of obtaining a public listing such as legal fees, consulting fees, filing fees, accounting and auditing fees, for the company have been expended in the most recent period ended April 30, 2003, and the previous fiscal period. We have obtained a trading symbol from the NASD on February 21st, 2003 (NTFSF) which increases the marketability of our common shares for our existing shareholders and enhances greatly our opportunities for future equity financings. Other than the ongoing reporting requirements and associated costs, we do not expect that costs associated with the public listing will affect results from operations in the next fiscal period 2004, as has been the case in past periods. Our gross margin tends to fluctuate from period to period. There are two primary factors that influence our cost of sales, which in turn affects the gross margin from period to period. First, we use deposit bonus credits in promotions in order to generate new member signups and to encourage customer deposits. Bonus credits given are typically 10% to 20% of the customer's deposit and will vary from period to period depending on the promotion and season of the year. Higher deposit bonus credits result in a higher cost of sales. Second, the credit card charge back rate varies from period to period which can adversely affect the gross margin. As a result of more efficient fraud controls undertaken by the transaction processor, Electronic Financial Services Caribbean Inc., the most recent financial quarters showed a much lower rate of credit card chargebacks than previous fiscal periods. However, as stated, we have experienced increased credit card declines due to the major banks refusing to accept transactions for their card-issued customers who attempt to make payments to online gambling operators. As a result, our revenues derived from credit card deposits have been significantly adversely impacted. The afore-mentioned revenues and operating expenses primarily resulted from Discontinued Operations. On June 3, 2003, we disposed of our operating subsidiary, Net-Force Entertainment Inc. See Subsequent Events in Note 11 to the Consolidated Financial Statements for a summary of the Discontinued Operations for the years ended April 30, 2003, 2002, and 2001. Operations for the Next Twelve Months ------------------------------------- Our primary on-line wagering website, www.aogaming.com, went live on the ---------------- Internet on April 7th, 2000. Since that time, the Web site has gone through several changes, re-designs, and upgrades as management had deemed necessary as a result of evolving customer needs and competitive influences. The gaming website customer database has grown steadily from the initial launch date. However, to continue to grow our gaming websites' customer traffic, member base and revenues, and to stay viable in the current competitive and regulatory environment, we will need to increase our investment in marketing expenditures to target global markets. We may therefore find it necessary to raise additional funds as is deemed necessary by management through private placements of stock issued out of our treasury to individuals or corporations who have expressed interest in obtaining stock in the Company. To ensure the ongoing viability of Netforce Systems Inc., we plan to raise additional capital through a private placement equity issuance and engage in a viable merger transaction with a private or public company with an established revenue and earnings profile during the second or third quarter of fiscal period 2004. However, we can give no assurance of our success in finding and acquiring a viable entity that will ultimately ensure our profitability in the fiscal period ended April 30, 2004.. On June 1st, 2003, through an Extraordinary Shareholders Resolution dated June 1st, 2003, Net-Force Systems Inc. approved the sale of all of the 100 issued shares of Net Force Entertainment Inc., the operating subsidiary of Net Force Systems Inc., for total proceeds of $100.00 plus the assumption of debt, to Geneva Overseas Holdings Ltd., a British Virgin Islands Corporation. The company no longer has any control over Net-Force Entertainment Inc. This event signifies Net-Force Systems Inc.'s official exit from the Internet Gambling Industry. See Subsequent Events in Note 11 to the Consolidated Financial Statements for a summary of the Discontinued Operations for the years ended April 30, 2003, 2002, 2001. On June 3rd, 2003, Net-Force Systems Inc. created a new subsidiary named Atlantica Resorts Ltd., in the jurisdiction of the territory of the British --------------------- Virgin Islands pursuant to the International Business Corporations Act. The purpose of this corporation is to pursue opportunities in the resort properties marketing industry in the Caribbean. The company intends on utilizing its management and business experience in the Caribbean region combined with its Internet marketing expertise to capitalize on opportunities available in the -------------------------------------------------------------------------------- Annual Report - 2003 Page 26 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- tourism industry. During the second or third quarter of fiscal period 2004, the company intends to make a test-market acquisition of a small resort hotel of between 10 to 25 rooms. We will then intend to enter the large and growing time-share industry with these types of properties. Specific Caribbean region islands that management will target include Antigua and Barbuda, Sint. Maarten/St. Martin, Dominica, St. Kitts, St. Lucia, as well as certain resort areas in the Dominican Republic. A number of studies have demonstrated a strong interest in the Caribbean as a foreign destination of interest for United States consumers considering a timeshare purchase. In fact, according to the Future Timeshare Buyers: 2001 Market Profile, the latest research of prospective purchasers commissioned by Interval International, the Caribbean is ranked as the top foreign destination among consumers considering a timeshare purchase. When considering destinations in which they might like to purchase timeshare, 64 percent of consumers would consider purchasing in the Caribbean. The 2001 Market Profile project was developed from data collected in the Yesawich, Pepperdine & Brown/Yankelovich Partners 2001 National Leisure Travel Monitor, a strategic marketing tool for the travel and leisure industry. Market research also indicates that 14 percent of pleasure travelers, about 11.3 million people, are interested in purchasing timeshare in the next two years. Only five percent of this total market has been penetrated. Because vacationers have paid for their lodging in advance, timeshare has proven more resilient to economic downturns and international tension, such as the September 11 event, than other leisure sectors, and it is anticipated the industry will hold its own in the intermediate future. The timeshare industry as a whole has enjoyed a double-digit annual growth rate during the past two decades. Today, there are more than 5,100 resorts in 110 countries around the world, with annual sales estimated at nearly $7 billion. Public interest is rising as travelers learn about the flexibility of timeshare; the variety of products offered at different price ranges and the innovative programs and services introduced each year. Barbados Travel News (Press Release July 15, 2003): The Caribbean's tourism industry is showing signs of recovery after two difficult years, according to figures released by the Caribbean Tourism Organization (CTO), in its quarterly publication, Key Tourism Statistics (Keystats). "Caribbean tourism now appears to be past the lowest point of the downswing and the numbers coming in from member countries show that there are signs of recovery," said Jean Holder, secretary general of the CTO. Stayover arrivals to the region increased by an estimated seven percent during the winter of 2003 over the same period last year. The Caribbean registered increases of around seven percent from the United States; 21 percent from Canada and six percent from the European market for the winter of 2003. Travel and tourism makes up 5 percent of global GDP with more than 650 million international tourist arrivals registered last year, making it the largest single industry on the planet. In some parts of Latin America and the Caribbean (Bahamas, Costa Rica, Mexico, Cuba) tourism is the largest employer and one of the largest sources of foreign capital. More than most industries, tourism dollars trickle down to small-scale business and help develop isolated regions. Latin America and the Caribbean together hold a 10 percent market share in terms of total international arrivals in the world. Balance Sheet Data ------------------
At April 30, 2003 At April 30, 2002 At April 30, 2001 ------------------- ------------------- ------------------- Total Assets 130,157 236,254 269,194 Shareholders' Equity (deficit) (26,123) 99,441 (682,956)
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. Proceeds from a future equity offering in the second or third quarter of fiscal -------------------------------------------------------------------------------- Annual Report - 2003 Page 27 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- period 2004 will be used to generate working capital to increase liquidity and to engage in a merger acquisition transaction with a viable private or public company with an established cash flow stream. 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. We anticipate that we will have material capital expenditures in the next fiscal period. Now that we have obtained a trading symbol from the NASD (NTFSF), we intend to engage in an acquisition of a viable private or public company during the second or third quarter of fiscal period 2004. Alternatively, our new subsidiary, Atlantica Resorts, Ltd., will be seeking to engage in an acquisition of an income- producing resort or investment property (see: `Operations Over The Next Twelve Months'). These prospective transactions will be funded primarily through equity financings. 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 -------------------------------------------------- Directors and Senior Management ------------------------------- The daily affairs of Net Force Systems Inc. are under the direction of its senior management: Mr. Terry Bowering, President. -------------------------------------------------------------------------------- Annual Report - 2003 Page 28 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- The directors, officers and senior management of Net Force Systems Inc. are as follows: Name Age Position Residency Term as Director Terry Bowering 42 President St. Johns 03/99 - present Antigua Dwight Lewis 42 Director St. Johns 12/99 - present Antigua Derek Ferguson 31 Director Vancouver, BC 10/01 - present Canada Trevor Bowering 44 Director Regina, Sk. 08/01 - present Canada Terry G. Bowering ----------------- Chairman, President and Chief Executive Officer Dove Cove, Dry Hill P.O. Box W-645 St. John's, Antigua, West Indies DOB: August 30, 1960 (Age 42) Regina, Saskatchewan, Canada Terry G. Bowering, B.Admin, M.B.A. ---------------------------------- Mr. Bowering brings over fifteen years of experience in business management. Mr. Bowering has considerable experience in both large corporations and entrepreneurial enterprises and is qualified in the areas of business development, finance, information systems, marketing, and sales. From January 1998 until his resignation June 20, 1999, Mr. Bowering was Vice President, Offshore Operations for Starnet Communications International Inc., a Delaware corporation, which is a fully reporting issuer on the NASD OTC:BB. Described as being the "Microsoft of Internet Gaming", Starnet Communications International, Inc., now World Gaming, is one of the world's leading Internet Gaming Software providers. Mr. Bowering was instrumental in establishing and developing offshore operations and foreign government relations for World Gaming in Antigua and for establishing worldwide offshore banking relationships in concert with the corporate development of World Gaming's subsidiaries, Electronic Financial Services Caribbean Inc. and its group of International companies. Mr. Bowering has been interviewed and quoted in the International press including FOX TV, COMPUTER WORLD MAGAZINE, SHIFT MAGAZINE, TIME MAGAZINE (Atlantic Edition), and ESPN, specifically on the subject of offshore Internet Gaming. From 1996 to 1998, Mr. Bowering was an Investment Advisor, Vancouver office, with Levesque Securities Inc., a major Canadian brokerage firm. From May 1992 to June 1996, Mr. Bowering was a financial analyst with the Asset Management Group Dept. of Crown Life Insurance in Regina, Saskatchewan, Canada. Mr. Bowering holds a Bachelor of Administration in Finance from the University of Regina, and a Master of Business Administration with a concentration in Strategic Management from the University of Saskatchewan. Mr. Bowering resides in Antigua, West Indies. Mr. Bowering was appointed to the above positions on March 1, 1999 to serve until his successor has been elected and qualifies. Dwight Lewis ------------ Director Cassada Gardens P.O. Box W-386 St. John's, Antigua, West Indies DOB: May 24, 1961 (Age 42) St. Lucia, West Indies -------------------------------------------------------------------------------- Annual Report - 2003 Page 29 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- Dwight Lewis, MA, BSc. ---------------------- Mr. Lewis is presently engaged as a Financial Consultant to Hanson International Investment Services Ltd., an investment advisory organization. He also is Managing Director of Mahaut Ltd., a corporation that provides offshore financial services to its clients. Most recently Mr. Lewis was engaged as a Financial Consultant and Interim Manager of RYO International Corporation and SAGA Corporation, which were eventually merged to form International Data Processing. This corporation owns and operates a number of Internet Casinos based and licensed in Antigua. On behalf of the corporation's overseas principals, Mr. Lewis was responsible for establishing these operations from conception to live operation, having dealt with all aspects of the company's operations and providing ongoing management and supervisory services. From 1992 to 1997, Mr. Lewis was employed with the Bank of Antigua Ltd. as a Senior Manager dealing with management of the investment portfolio and general supervision of all bank operations. From 1988 to 1992, Mr. Lewis was employed with the Eastern Caribbean Central Bank, located in St. Kitts, as a Senior Bank Examiner. This entailed general supervision of commercial banking activities in all member banks of the Eastern Caribbean Central Bank. From 1986 to 1988, Mr. Lewis worked as a Budget Analyst with the Ministry of Finance, Government of St. Lucia, and with Barclays Bank, St. Lucia, from 1980 to 1983. Mr. Lewis graduated from the University of West Indies, Cave Hill Campus, Barbados, with a Bachelor of Science Degree in Economics and Management. Mr. Lewis also attended the University of Sheffield, Management School, England, where he obtained an MA in Banking and International Finance. Mr. Lewis resides in Antigua, West Indies. Mr. Lewis was appointed to the position of Director on December 20, 1999 to serve until his successor has been elected and qualifies. Derek C. Ferguson ----------------- Director 512-1238 Seymor St. Vancouver, B.C., V6B 6J3 Canada DOB: August 12, 1972 (Age 31) Vancouver, Canada Derek C. Ferguson, B.Comm ------------------------- Mr. Ferguson advises on and oversees technical and systems-related issues and initiatives for Netforce Systems Inc. Mr. Ferguson is presently a Director and Chief Operations Officer for eTunnels Inc., a Delaware corporation that delivers mass-market and corporate virtual private networking solutions over the Internet. From April 1998 to October of 1999, Mr. Ferguson acquired in-depth experience in the online gaming industry in his role as Senior Systems Administrator for Starnet Communications International Inc., an International Internet Technology company. Starnet is recognized as the world's leading Internet Gaming Software provider. In addition to providing technical design and maintenance leadership for the Systems Administration department, Mr. Ferguson redesigned its systems infrastructure to dramatically improve the reliability and scalability of Starnet's Internet services. Mr. Ferguson was also Network Manager for I.D. Internet Direct Ltd., a division of Look Communications Inc., a publicly traded Canadian company operating in the fields of broadcast distribution services and Internet solutions. At Internet Direct, Mr. Ferguson directed technical design and support operations for their national consumer dial and corporate broadband services, helping to grow the service to 35,000 subscribers. Mr. Ferguson received his Bachelor of Commerce degree with a concentration in Management and Information Systems (MIS) from Dalhousie University, Halifax, Canada. Mr. Ferguson resides in Vancouver, Canada. Mr. Ferguson was appointed to the position of Director on September 10, 2001 to serve until his successor has been elected and qualifies. -------------------------------------------------------------------------------- Annual Report - 2003 Page 30 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- Trevor L. Bowering ------------------ Director 370 Cedar Meadow Drive Regina, Saskatchewan, Canada, S4X 3J5 DOB: March 14, 1959 (Age 44) Regina, Canada Trevor L. Bowering - Technical Consultant ----------------------------------------- Mr. Bowering has been employed in the telecommunications field with SaskTel for over 22 years. With assets of over $1.2 billion, SaskTel has been in operation for 90 years and provides a full range of hi-tech communication solutions for more than 454,000 business and residential customers worldwide. SaskTel is a crown corporation, wholly-owned by the province of Saskatchewan, Canada, and a world leader in providing the latest technological and software solutions telecommunications expertise as well as Internet and Interactive services. Mr. Bowering currently manages SaskTel's Local and Long-distance switching network including DMS100's, DMS200, STP, DC Power Plants, Operator Services, Interexchange Carriers (Telus, ATT, Bell, Nexia), 911, Mobility (cellular), CCS7, and Network Management. He personally oversees a staff of staff of 39 Trunking and Switching Technicians responsible for installing, maintaining and trouble shooting on a 24/7 basis. SaskTel's entire high-speed Internet system interfaces to its customers via this Switching equipment. Mr. Bowering and his staff have been on assignment with SaskTel International in England, Italy, Spain, Chile, Belgium, and France. Mr. Bowering currently resides in Regina, Saskatchewan, Canada. Mr. Bowering was appointed to the position of Director on August 15, 2001 to serve until his successor has been elected and qualifies. Compensation ------------ Our directors receive reimbursement of all their reasonable expenses incurred in connection with attending meetings of the board of directors. As of the date of this annual report no employee or executive stock option plans have been designed or approved by us. For the fiscal period ended April 30, 2003, Terry G. Bowering, Chairman and President, accrued $50,000 in wages payable during the period for a total accrued wages payable of $53,387 as at April 30, 2003. Dwight Lewis, Director, received a total of $5,000 in Director's fees for the period. No other persons who served either as directors of Net Force Systems Inc. or members of its administrative, supervisory or management bodies during fiscal 2003 received salary remuneration from Net Force System Inc. These individuals received reimbursement for travel and business expenses only except for Mr. Trevor Bowering who received 200,000 shares for services to be rendered as a director. Board Practices --------------- All directors hold office until their respective successors are duly elected and qualified or their positions are earlier vacated by resignation or otherwise. Executive officers of Net Force Systems Inc. serve in their positions until their respective successors have been duly elected or qualified or their positions are earlier vacated by resignation or otherwise. There are no service contracts between our company and any of our directors providing for benefits upon termination of their employment. Committees ---------- Our audit committee is comprised of Mr. Terry Bowering, Mr. Trevor Bowering and Mr. Dwight Lewis. Employees --------- As of April 30, 2003 we employed on a full-time basis approximately 2 persons located in the Caribbean. -------------------------------------------------------------------------------- Annual Report - 2003 Page 31 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- As of April 30, 2002 we employed on a full-time basis approximately 2 person located in Caribbean. As of April 30, 2001, we employed on a full-time basis approximately 2 persons located in the Caribbean. As of April 30, 2000, we employed on a full-time basis approximately 5 persons located in the Caribbean. We are not party to any collective bargaining agreements. Share Ownership --------------- The following tables set forth certain information regarding beneficial ownership of our common stock as of April 30, 2003 by each of our directors and executive officers.
Name and Address Amount and Nature Percent of Beneficial Owner of Beneficial Owner (1) of Class ---------------------------------------------------------------------------------------------- Terry G. Bowering 6,544,830 40.0% Dove Cove, Dry Hill. beneficial owner (2) P.O. Box W-645 St. John's, Antigua, West Indies Chairman,/President/Chief Executive Officer Terry G. Bowering 500,000 3.1% C/o ABI Trust , Ltd. beneficial owner (3) High Street & Corn Alley, P.O. Box 1679 St. John's, Antigua, West Indies Dwight Lewis, Director 50,000 0.30% Cassada Gardens P.O. Box W 386 St. Johns, Antigua West Indies Derek C. Ferguson, Director 50,000 0.30% 512-1238 Seymor St. Vancouver, British Columbia, Canada, V6B 6J3 Trevor Bowering, Director 200,000 1.2% 370 Cedar Meadow Drive Regina, Sask. Canada S4X 3J5 (1) No member of Management has the right to acquire within sixty days through options, warrants, rights, conversion, privilege or similar obligations any security of the Company. (2) Geneva Overseas Holdings Ltd., of which Terry G. Bowering is beneficial owner, enjoys legal ownership of said securities. (3) JPKT Metro Investment Corporation, of which Terry G. Bowering is a beneficiary, enjoys legal ownership of said securities.
Note: The table does not reflect the stock options that may be granted to Employees, Officers, Directors or Consultants nor does it reflect the warrants that may be offered. ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS --------------------------------------------------------- The following table sets forth certain information regarding beneficial ownership of our common stock as of April 30, 2003 by (i) each person who is known to us to own beneficially more than 5% of our outstanding common stock, (ii) each of our directors, (iii) executive officers and (iv) all current directors and executive officers as a group. -------------------------------------------------------------------------------- Annual Report - 2003 Page 32 NET FORCE SYTEMS, INC. --------------------------------------------------------------------------------
Name and Address Amount and Nature Percent of Beneficial Owner of Beneficial Owner (1) of Class -------------------------------------------------------------------------------------------- Terry G. Bowering 6,544,830 40.0% Dove Cove, Dry Hill. beneficial owner (2) P.O. Box W-645 St. John's, Antigua, West Indies Chairman,/President/Chief Executive Officer Terry G. Bowering 500,000 3.1% C/o ABI Trust Ltd. beneficial owner (3) High Street & Corn Alley, P.O. Box 1679 St. John's, Antigua, West Indies IFG Investments Services Inc. 6,027,870 36.8% Suite #4 - Temple Building beneficial owner (4) Main & Princess William St. Charelstown, Nevis, West Indies Dwight Lewis, Director 50,000 0.30% Cassada Gardens P.O. Box W 386 St. Johns, Antigua West Indies Derek C. Ferguson, Director 50,000 0.30% 512-1238 Seymor St. Vancouver, British Columbia, Canada, V6B 6J3 Trevor Bowering, Director 200,000 1.2% 370 Cedar Meadow Drive Regina, Sask. Canada S4X 3J5 All Directors & Executive Officers And control persons as a Group (5 persons) 13,272,700 81.7% ---------- ----- Total shares outstanding 17,066,033 100% ========== ==== (1) No member of Management has the right to acquire within sixty days through options, warrants, rights, conversion, privilege or similar obligations any security of the Company. (2) Geneva Overseas Holdings Ltd., of which Terry G. Bowering is beneficial owner, enjoys legal ownership of said securities. (3) JPKT Metro Investment Corporation, of which Terry G. Bowering is a beneficiary, enjoys legal ownership of said securities. (4) IFG Investments Services Inc., of which Daniel MacMullin is beneficial owner, enjoys legal ownership of said securities.
Note: The table does not reflect the stock options that may be granted to Employees, Officers, Directors or Consultants nor does it reflect the warrants that may be offered. Related Party Transactions -------------------------- A related party transaction took place between Geneva Overseas Holdings Ltd. and Net-Force Systems Inc. Geneva Overseas Holdings Ltd. is controlled by the President of Net-Force Systems Inc., Mr. Terry G. Bowering. Geneva Overseas Holdings Ltd. provided a total of $214,483 in shareholder loans to Net-Force Systems Inc. On September 15, 2001, Geneva Overseas Holdings Ltd. entered into an agreement with Net-Force Systems Inc. to convert the principal and accrued -------------------------------------------------------------------------------- Annual Report - 2003 Page 33 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- interest at that date on the loans to equity at $0.10 per share. The total shares issued to Geneva Overseas Holdings Ltd. was 2,144,830. In June 2003, the Company's Board of Directors entered into an agreement to sell its wholly-owned subsidiary, Net Force Entertainment, Inc. (Entertainment) to Geneva Overseas Holdings Ltd., a company owned by the Company's President and CEO. The consideration for the sale per the sales agreement was $100 plus the assumption of all outstanding debt. The Company no longer has any control over Entertainment. This event signifies Net-Force Systems Inc.'s official exit from the Internet Gambling Industry. See Note 11-Subsequent Events, in Notes to the Consolidated Financial Statements. We are not aware of any other transactions or proposed transactions in respect of which we were or are to be a party, in which any director, executive officer, nominee for election as a director, 5% security holder, member of the immediate family of any of the previously named persons had a direct or indirect interest in the transaction. ITEM 8. FINANCIAL INFORMATION ----------------------------- Financial Statements -------------------- See "Financial Statements" for our audited Consolidated Financial Statements and Financial Statement Schedule filed as part of this report. Legal Proceedings ----------------- We are not involved in any material legal proceedings. Dividend Policy --------------- We have not declared dividends from our inception and do not foresee declaring any dividends in the foreseeable future. The payment of any future dividends will be paid by us based on conditions then existing, including our earnings, financial condition and capital requirements as well as other conditions we deem relevant. ITEM 9. THE OFFER AND LISTING ----------------------------- Our ordinary shares have never been quoted on any exchange or quotation service. On February 21st, 2003, we received a stock trading symbol (OTC:BB NTFSF) from the NASD. No shares have been traded to date. ITEM 10. ADDITIONAL INFORMATION ------------------------------- Memorandum and Articles of Association Objects and Purpose ------------------- 1. 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 carry on the business of an investment and holding company and for that purpose to acquire and hold either in the name of the Corporation or in that of any nominee, shares, stocks, debentures, debenture stock, script bonds, notes, obligations, investments and securities and warrants or options in respect of any shares, stocks, debentures, debenture stock, script bonds, notes, obligations, investments or securities, of all kinds issued in any country in any part of the world. -------------------------------------------------------------------------------- Annual Report - 2003 Page 34 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- c. 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. d. The Corporation shall not engage in International Banking, Trust, Insurance, Betting and Book making or any activity which requires a License under the International Business Corporations Act. e. To generally have and exercise all powers, rights and privileges necessary and incident to carrying out properly the objects herein mentioned. Directors and Powers -------------------- 2. 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. 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 is 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 -------------------------------------- 3. 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 -------------------------------------------------------------------------------- Annual Report - 2003 Page 35 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- 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. 4. 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. 5. 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. 7.9 Informal Action by Shareholder -------------------------------------------------------------------------------- Annual Report - 2003 Page 36 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- 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. 6. 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. 7. 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. 8. There is no Bylaw provisions governing the ownership threshold above which shareholder ownership must be disclosed. 9. Article IV paragraph 4 describes the conditions imposed by the Articles of Incorporation governing changes in the capital. Paragraph specifically states: 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. Material Contracts ------------------ Please refer to our exhibits in our registration statement dated October 24, 2002 and all prior amendments for copies of our material agreements: 10.1 Starnet Systems Inc. (formerly Softec Systems Caribbean Inc.) Amendment to Software License Agreement 10.2 Government of Antigua and Barbuda Gaming License -------------------------------------------------------------------------------- Annual Report - 2003 Page 37 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- 10.3 Software and Marketing License Agreement 10.4 Antigua Online Gaming Wagering and Gaming Reseller Agreement 10.5 IFG Investments Services Inc. Debt to Equity Conversion Agreement 10.6 American International Bank (Lease Agreement) 10.7 Geneva Overseas Holdings Ltd. Debt to Equity Conversion Agreement Exchange Controls ----------------- Not applicable. 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: (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. -------------------------------------------------------------------------------- Annual Report - 2003 Page 38 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- 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. 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. Documents On Display -------------------- Documents which are referred to in this annual return and that are not confidential to our company, all of which are or will be in effect may be obtained and/or reviewed at our offices by contacting Mr. Terry Bowering at netforce@candw.ag. We may require a prospective investor's prior execution of confidentiality and nondisclosure agreements before accessing certain of our documents. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ------------------------------------------------------------------ (a) Quantitative and Qualitative information about market risk. We are not subject to market risk as referred to in this item because we use the United States of America dollar in all transactions we conduct and operate in jurisdictions that utilize the American dollar as the unit of measure. Other than being a foreign issuer our company would satisfy the definition of a Small Business Issuer under the Securities Exchange Act of 1934. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES --------------------------------------------------------------- Not applicable. 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 -------- Not applicable. -------------------------------------------------------------------------------- Annual Report - 2003 Page 39 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- PART III -------- ITEM 17. FINANCIAL STATEMENTS ----------------------------- Not applicable. ITEM 18. FINANCIAL STATEMENTS ----------------------------- FINANCIAL STATEMENTS AND SCHEDULE The following Consolidated Financial Statements and Financial Statement Schedule are included at the end of this report: FINANCIAL STATEMENTS (Schedule "A" and "B") ------------------------------------------- o Report of Independent Auditors o Consolidated Balance Sheets as of April 30, 2003, 2002, 2001 and 2000 o Consolidated Statements of Operations for the years ended April 30, 2003, April 30, 2002, April 30, 2001 and April 30, 2000 o Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the years ended April 30, 2003, April 30, 2002, April 30, 2001 and April 30, 2000. o Consolidated Statements of Cash Flows for the years ended April 30, 2003, April 30, 2002, April 30, 2001 and April 30, 2000. o Notes to Consolidated Financial Statements ITEM 19. EXHIBITS ----------------- Exhibit 99.1 - Certification of Chief Executive Officer and Chief Financial Officer 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. Net Force Systems Inc. ---------------------- /s/ Terry Bowering ------------------ Terry Bowering - President and Director Authorized U.S. Representative Date: August 15, 2003 -------------------------------------------------------------------------------- Annual Report - 2003 Page 40 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- CERTIFICATIONS* --------------- I, Terry Bowering, certify that; 1. I have reviewed this annual report on Form 20-F of Net Force Systems, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other facts that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 8, 2003 /s/ Terry Bowering ------------------ Terry Bowering, Chief Executive Officer, Chief Financial Officer, President & Director *Provide a separate certification for each principal executive officer and principal financial officer of the registrant. See Rules 13a-14 and 15d-14. The required certification must be in the exact form set forth above. -------------------------------------------------------------------------------- Annual Report - 2003 Page 41 NET FORCE SYTEMS, INC. -------------------------------------------------------------------------------- EXHIBIT 99.1 ------------ CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Terry Bowering, Chief Executive Officer and Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 20-F of Net Force Systems, Inc for the annual period ended April 30, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Annual Report on Form 20-F fairly presents in all material respects the financial condition and results of operations of Net Force Systems, Inc. By: /s/ Terry Bowering ------------------ Terry Bowering, Chief Financial Officer, Chief Executive Officer, President & Director Date: August 8, 2003 -------------------------------------------------------------------------------- Annual Report - 2003 Page 42 SCHEDULE "A" - CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------ NET-FORCE SYSTEMS INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS April 30, 2003 and 2002 -------------------------------------------------------------------------------- Annual Report - 2003 Page 43 C O N T E N T S Independent Auditors' Report............................................. 3 Consolidated Balance Sheets.............................................. 4 Consolidated Statements of Operations.................................... 6 Consolidated Statements of Stockholders' Equity (Deficit)................ 7 Consolidated Statements of Cash Flows.................................... 8 Notes to the Consolidated Financial Statements........................... 10 -------------------------------------------------------------------------------- Annual Report - 2003 Page 44 INDEPENDENT AUDITORS' REPORT To the Board of Directors Net-Force Systems Inc. and Subsidiary Antigua, West Indies We have audited the accompanying consolidated balance sheets of Net-Force Systems Inc. and Subsidiary as of April 30, 2003 and 2002 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years ended April 30, 2003, 2002, and 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Net-Force Systems Inc. and Subsidiary as of April 30, 2003 and 2002, and the consolidated results of their operations and their cash flows for the years ended April 30, 2003, 2002, and 2001 in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the consolidated financial statements, the Company's recurring losses from operations as well as the subsequent disposal of all operations and a working capital deficit raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 4. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. HJ & Associates, LLC Salt Lake City, Utah July 2, 2003 F-3 -------------------------------------------------------------------------------- Annual Report - 2003 Page 45
NET-FORCE SYSTEMS INC. AND SUBSIDIARY Consolidated Balance Sheets ASSETS April 30, 2003 2002 ---------------- ---------------- CURRENT ASSETS Cash $ 31,714 $ 68,462 Accounts receivable, net 3,903 15,623 Reserves and deposits with credit card processors (Note 7) 30,927 63,953 Gaming license (Note 9) - 18,333 ---------------- ---------------- Total Current Assets 66,544 166,371 ---------------- ---------------- PROPERTY AND EQUIPMENT, NET (Note 2) 7,183 18,088 ---------------- ---------------- OTHER ASSETS Player deposits (Note 8) 51,637 47,002 Deposits 4,793 4,793 ---------------- ---------------- Total Other Assets 56,430 51,795 ---------------- ---------------- TOTAL ASSETS $ 130,157 $ 236,254 The accompanying notes are an integral part of these consolidated financial statements. F-4 -------------------------------------------------------------------------------- Annual Report - 2003 Page 46 NET-FORCE SYSTEMS INC. AND SUBSIDIARY Consolidated Balance Sheets (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) April 30, 2003 2002 ---------------- ---------------- CURRENT LIABILITIES Accounts payable $ 31,802 $ 62,847 Accrued expenses 17,917 18,000 Accrued expenses - related parties 53,387 6,352 Interest payable - related party - 112 Interest payable 1,537 - Player deposits (Note 8) 51,637 47,002 Current portion note payable - related party (Note 3) - 2,500 ---------------- ---------------- Total Current Liabilities 156,280 136,813 ---------------- ---------------- Total Liabilities 156,280 136,813 ---------------- ---------------- COMMITMENTS AND CONTINGENCIES (Note 6) STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock: 50,000,000 shares authorized of $0.001 par value, zero issued and outstanding - - Common stock: 100,000,000 shares authorized of $0.001 par value, 17,066,033 shares issued and outstanding 17,066 17,066 Additional paid-in capital 1,145,037 1,145,037 Accumulated deficit (1,188,226) (1,062,662) ---------------- ---------------- Total Stockholders' Equity (Deficit) (26,123) 99,441 ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 130,157 $ 236,254 ================ ================
The accompanying notes are an integral part of these consolidated financial statements. F-5 -------------------------------------------------------------------------------- Annual Report - 2003 Page 47
NET-FORCE SYSTEMS INC. AND SUBSIDIARY Consolidated Statements of Operations For the Years Ended April 30, 2003 2002 2001 ---------------- ---------------- ---------------- REVENUE $ - $ - $ - ---------------- ---------------- ---------------- EXPENSES - - - ---------------- ---------------- ---------------- LOSS FROM OPERATIONS - - - ---------------- ---------------- ---------------- OTHER INCOME (EXPENSE) - - - ---------------- ---------------- ---------------- PROVISION FOR INCOME TAX - - - ---------------- ---------------- ---------------- LOSS BEFORE DISCONTINUED OPERATIONS - - - ---------------- ---------------- ---------------- LOSS FROM DISCONTINUED OPERATIONS (NOTE 11) (125,564) (174,206) (484,597) ---------------- ---------------- ---------------- NET LOSS $ (125,564) $ (174,206) $ (484,597) BASIC LOSS PER SHARE - DISCONTINUED OPERATIONS $ (0.01) $ (0.01) $ (0.07) ================ ================ ================ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 17,066,033 13,375,186 7,171,233
The accompanying notes are an integral part of these consolidated financial statements. F-6 -------------------------------------------------------------------------------- Annual Report - 2003 Page 48
NET-FORCE SYSTEMS INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity (Deficit) Common Stock Additional ------------------------------- Paid-In Accumulated Shares Amount Capital Deficit -------------- -------------- -------------- -------------- Balance, April 30, 2000 8,500,000 $ 8,500 $ 27,000 $ (403,859) July 1, 2000, common stock repurchased and canceled at $0.01 per share (3,000,000) (3,000) (27,000) - September 30, 2000, common stock issued for cash at $0.10 per share 2,000,000 2,000 198,000 - Net loss for the year ended April 30, 2001 - - - (484,597) -------------- -------------- -------------- -------------- Balance, April 30, 2001 7,500,000 7,500 198,000 (888,456) August 15, 2001, common stock issued for services at $0.10 per share 200,000 200 19,800 - September 15, 2001, common stock issued for conversion of related party debt at $0.10 per share 2,144,830 2,145 212,338 - September 15, 2001, common stock issued for conversion of debt at $0.10 per share 6,027,870 6,028 596,759 - September 20, 2001, common stock issued for conversion of debt at $0.10 per share 533,333 533 52,800 - October 2, 2001, common stock issued for conversion of debt at $0.10 per share 500,000 500 49,500 - January 31, 2002, common stock issued for cash at $0.10 per share 160,000 160 15,840 - Net loss for the year ended April 30, 2002 - - - (174,206) -------------- -------------- -------------- -------------- Balance, April 30, 2002 17,066,033 17,066 1,145,037 (1,062,662) Net loss for the year ended April 30, 2003 - - - (125,564) -------------- -------------- -------------- -------------- Balance, April 30, 2003 17,066,033 $ 17,066 $ 1,145,037 $ (1,188,226)
The accompanying notes are an integral part of these consolidated financial statements. F-7 -------------------------------------------------------------------------------- Annual Report - 2003 Page 49
NET-FORCE SYSTEMS INC. AND SUBSIDIARY Consolidated Statements of Cash Flows For the Years Ended April 30, 2003 2002 2001 ---------------- ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (125,564) $ (174,206) $ (484,597) Adjustments to reconcile net loss to net cash used by operating activities: Common stock issued for services - 20,000 - Depreciation and amortization 7,499 101,873 18,241 Loss on sale of asset 523 205 (491) Loss on abandonment of leasehold improvements - - 6,700 Changes in assets and liabilities: (Increase) decrease in reserves and deposits 28,391 (6,269) (30,858) (Increase) decrease in accounts receivables 11,720 (5,818) (7,212) Decrease in prepaid expenses - - 34,698 (Increase) in other assets (1,667) (1,600) (64,960) (Increase) in license - - (100,000) Increase (decrease) in accounts payable (11,045) 448 5,243 Increase in accrued interest 1,537 29,413 26,017 Increase (decrease) in accrued interest - related party (112) 4,732 4,243 Increase (decrease) in accrued expense (83) - 24,351 Increase in accrued expenses - related party 47,035 - - Increase (decrease) in player deposit 4,635 (26,826) 73,828 ---------------- ---------------- ---------------- Net Cash Used by Operating Activities (37,131) (58,048) (494,797) ---------------- ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets - (800) (3,704) Proceeds from sale of fixed assets 2,883 518 1,927 ---------------- ---------------- ---------------- Net Cash Provided (Used) by Investing Activities 2,883 (282) (1,777) ---------------- ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on notes payable - related party (2,500) (36,300) - Proceeds from notes payable - related party - 113,800 128,597 Proceeds from notes payable - - 50,000 Increase in stock subscription payable - - 50,000 Common stock issued for cash - 16,000 200,000 Repurchase of and cancellation of common stock - - (30,000) ---------------- ---------------- ---------------- Net Cash Provided (Used) by Financing Activities $ (2,500) $ 93,500 $ 398,597 ---------------- ---------------- ---------------- The accompanying notes are an integral part of these consolidated financial statements. F-8 -------------------------------------------------------------------------------- Annual Report - 2003 Page 50 NET-FORCE SYSTEMS INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (Continued) For the Years Ended April 30, 2003 2002 2001 ---------------- ---------------- ---------------- NET INCREASE (DECREASE) IN CASH $ (36,748) $ 35,170 $ (97,977) CASH AT BEGINNING OF PERIOD 68,462 33,292 131,269 ---------------- ---------------- ---------------- CASH AT END OF PERIOD $ 31,714 $ 68,462 $ 33,292 ================ ================ ================ CASH PAID FOR: Interest $ 112 $ - $ 50,000 Income taxes $ - $ - $ - NON-CASH FINANCING ACTIVITIES: Issuance of common stock for services $ - $ 20,000 $ - Issuance of common stock for conversion of debt $ - $ 706,120 $ - Issuance of common stock for conversion of related party debt $ - $ 214,483 $ -
The accompanying notes are an integral part of these consolidated financial statements. F-9 -------------------------------------------------------------------------------- Annual Report - 2003 Page 51 NET-FORCE SYSTEMS INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS The Company was incorporated on March 1, 1999 under the International Business Corporations Act No. 28 of 1982 of the laws of Antigua and Barbuda as Net-Force Systems Inc. The Company will be engaged in all business activities permitted under the International Business Corporations Act of 1982 except International Banking, Trust and Insurance. It will generally carry on the business of an investment and holding company. On August 5, 1999, a wholly-owned subsidiary, Net Force Entertainment Inc. (Entertainment), was incorporated under the International Business Corporations Act No. 28 of 1982 of the laws of Antigua and Barbuda. This subsidiary company will be engaged in all aspect of International betting, gaming, sports betting and bookmaking but with a major emphasis on internet gaming. The Company reentered the development stage in the first fiscal quarter of 2004 due to the sale of Entertainment to a company controlled by the Company's president (See Note 11). NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES a. Accounting Method The Company's financial statements are prepared using the accrual method of accounting. The Company has elected an April 30 year-end. b. Basic Loss Per Share Basic loss per share has been calculated based on the weighted average number of shares of common stock outstanding during the period.
For the Years Ended April 30, 2003 2002 2001 ---------------- ---------------- ---------------- Basic loss per share: Numerator - net loss from discontinued operations $ (125,564) $ (174,206) $ (484,597) Denominator - weighted average number of shares outstanding 17,066,033 13,375,186 7,171,233 Loss per share $ (0.01) $ (0.01) $ (0.07) ================ ================ ================
F-10 -------------------------------------------------------------------------------- Annual Report - 2003 Page 52 NET-FORCE SYSTEMS INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued) c. Provision for Taxes The Company's operations are within the Jurisdiction of St. John's, Antigua, where there is no corporate income tax. d. Cash and Cash Equivalents The Company considers all highly liquid investment with a maturity of three months or less when purchased to be cash equivalent. e. Principles of Consolidation The April 30, 2003 financial statements are consolidated with the Company and Entertainment. All significant intercompany accounts and transaction have been eliminated. f. Property and Equipment Office equipment and leasehold improvements are recorded at cost. Minor additions and renewals are expensed in the year incurred. Major additions and renewals are capitalized and depreciated over their estimated useful lives. Depreciation of office equipment is computed using the straight-line method over the estimated useful life of the asset of 5 years. Vehicles are depreciated over a life of 5 years using the straight-line method. Software is depreciated over a life of 5 years. Depreciation expense for discontinued operations for the years ended April 30, 2003, 2002 and 2001 was $7,499, $8,539, and $9,908, respectively. Property and equipment consists of the following: April 30, 2003 2002 ---------------- ---------------- Vehicles $ - $ 3,704 Computer equipment 16,450 18,450 Computer software 10,000 10,000 Office furniture and equipment 6,521 6,741 Accumulated depreciation (25,788) (20,807) ---------------- ---------------- Net Property and Equipment $ 7,183 $ 18,088 ================ ================ F-11 -------------------------------------------------------------------------------- Annual Report - 2003 Page 53 NET-FORCE SYSTEMS INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued) g. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. h. Recent Accounting Pronouncements SFAS No. 145 -- On April 30, 2002, the FASB issued FASB Statement No. 145 ------------ (SFAS 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS 145 rescinds both FASB Statement No. 4 (SFAS 4), "Reporting Gains and Losses from Extinguishment of Debt," and the amendment to SFAS 4, FASB Statement No. 64 (SFAS 64), "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." Through this rescission, SFAS 145 eliminates the requirement (in both SFAS 4 and SFAS 64) that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. However, an entity is not prohibited from classifying such gains and losses as extraordinary items, so long as it meets the criteria in paragraph 20 of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Further, SFAS 145 amends paragraph 14(a) of FASB Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between the accounting for sale-leaseback transactions and certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The amendment requires that a lease modification (1) results in recognition of the gain or loss in the 9 financial statements, (2) is subject to FASB Statement No. 66, "Accounting for Sales of Real Estate," if the leased asset is real estate (including integral equipment), and (3) is subject (in its entirety) to the sale-leaseback rules of FASB Statement No. 98, "Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease Term, and Initial Direct Costs of Direct Financing Leases." Generally, FAS 145 is effective for transactions occurring after May 15, 2002. The Company does not expect that the adoption of SFAS 145 will have a material effect on its financial performance or results of operations. F-12 -------------------------------------------------------------------------------- Annual Report - 2003 Page 54 NET-FORCE SYSTEMS INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued) h. Recent Accounting Pronouncements (Continued) SFAS No. 146 -- In June 2002, the FASB issued SFAS No. 146, "Accounting for ------------ Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002 and early application is encouraged. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS 146. The effect on adoption of SFAS 146 will change on a prospective basis the timing of when the restructuring charges are recorded from a commitment date approach to when the liability is incurred. The Company does not expect that the adoption of SFAS 146 will have a material effect on its financial performance or results of operations. SFAS No. 147 -- In October 2002, the FASB issued Statement No. 147 -------------- "Acquisitions of Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9" (SFAS 147). SFAS 147 removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of this Statement. In addition, this Statement amends FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that Statement 144 requires for other long-lived assets that are held and used. SFAS 147 is effective October 1, 2002. The Company does not expect that the adoption of SFAS 147 will have a material effect on its consolidated financial statements. F-13 -------------------------------------------------------------------------------- Annual Report - 2003 Page 55 NET-FORCE SYSTEMS INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued) h. Recent Accounting Pronouncements (Continued) SFAS No. 148 -- In December 2002, the FASB issued SFAS No. 148, "Accounting ------------ for Stock-Based Compensation -- Transition and Disclosure"(SFAS 148"). SFAS 148 amends SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for fiscal years beginning after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company is currently evaluating the effect that the adoption of SFAS 148 will have on its results of operations and financial condition. SFAS No. 149 - In April 2003, the FASB issued Statement of Financial ------------- Accounting Standards No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", to provide clarification on the meaning of an underlying, the characteristics of a derivative that contains financing components and the meaning of an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. This statement will be applied prospectively and is effective for contracts entered into or modified after June 30, 2003. The statement will be applicable to existing contracts and new contracts relate to forward purchases or sales of when-issued securities or other securities that do not yet exist. The Company does not expect that the adoption of SFAS 149 will have a material effect on the Company's consolidated financial statements. SFAS No. 150 - In May 2003, the FASB issued Statement of Financial -------------- Accounting Standards No 159 ("SFAS 150"), Accounting for certain financial instruments with characteristics of both liabilities and equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement will be effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principal for financial instruments created before the issuance date of the statement and existing at the beginning of the interim period of adoption. The Company does not expect that the adoption of SFAS 150 will have material effect on the Company's consolidated financial statements. F-14 -------------------------------------------------------------------------------- Annual Report - 2003 Page 56 NET-FORCE SYSTEMS INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued) i. Revenue Recognition Policy The Company has recognized as revenue the net winnings from gaming activities, which is the difference between gaming winnings and losses. The earnings process is complete upon receipt of the net winnings, and no further obligations exist to the customer. Cost of sales includes royalties payable to Softec, incurred on Casino activity and bank discount fees incurred by the Company for the acceptance of credit cards. The formula for net revenue sharing is as follows: (Casino gain (loss) less adjustment for incentives less charge backs) times a royalty factor to be paid to Softec. The royalty factor used depends on net monthly revenue. The following table lists the schedule of royalty payments: Net Monthly RevenueRoyalty Fee Payable 0 to $500,000 25% $500,001 to $1,000,000 20% $1,000,001 to $5,000,000 15% $5,000,001 to $10,000,000 12.5% $10,000,001 plus 10% The Company renegotiated the 25% factor down to 15% for the period from September 2000 through August 2000, after which the factor rose to 25% again. j. Advertising The Company follows the policy of charging the costs of advertising to expense as incurred. Advertising expense for the years ending April 30, 2003, 2002 and 2001 was $7,890, $34,681 and $174,859, respectively. k. Long-Lived Assets In Accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. SFAS 144 supercedes SFAS Statement No. 121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of". SFAS 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30 (APB 30), "Reporting Results of Operations Reporting the Effects of Disposal of a Segment of a Business". SFAS 144 develops one accounting model (based on the model in SFAS 121) for long-lived assets that are to be disposed of by sale, as well as addresses the principal implementation issues. SFAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. That requirement eliminates the requirement of APB 30 that discontinued operations be measured at net realizable value or that entities include under `discontinued operations' in the financial statements amounts for operating losses that have not yet occurred. F-15 -------------------------------------------------------------------------------- Annual Report - 2003 Page 57 NET-FORCE SYSTEMS INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued) l. Foreign Currency Translation Monetary assets and liabilities denominated in foreign currencies are translated into United States dollars at the period end exchange rate. Non-monetary assets are translated at the historical exchange rate and all income and expenses are translated at the exchange rates prevailing during the period. Foreign exchange currency translation adjustments are included in the stockholders' equity section as other comprehensive income. The Company operates with East Caribbean Dollars (EC). The exchange rate between the EC and the United States Dollar (USD) is always constant at .37453. This constant exchange rate makes it unnecessary to have a foreign exchange translation adjustment in the stockholder's equity section. m. Concentrations of Risk - Foreign Operations The Company operates in St. John's which has a developing economy. Hyperinflation and rapid political and legal change, often accompanied by military insurrection, have been common in certain emerging markets in which the Company may conduct operations. The Company may be materially adversely affected by possible political or economic instability in St John's. The risks include, but are not limited to terrorism, military repression, expropriation, changing fiscal regimes, high rates of inflation and the absence of industrial and economic infrastructure. Changes in development or investment policies or shifts in the prevailing political climate in St. John's in which the Company operates could adversely affect the Company's business. Operations may be affected in varying degrees by government regulations with respect to development restrictions, price controls, export controls, income and other taxes, expropriation of property, maintenance of claims, environmental legislation, labor, welfare, benefit policies, land use, land claims of local residents, water use and mine safety. The effect of these factors cannot be accurately predicted. NOTE 3 - NOTE PAYABLE - RELATED PARTY
April 30, --------- 2003 2002 ---------------- ---------------- Geneva Overseas Holdings Ltd. (A company controlled by the president of the Company) made advances to the Company totaling $2,500. These advances have an interest rate of 8% annually. This note was unsecured. $ - $ 2,500 Less Current Portion - 2,500 ---------------- ---------------- Total Long-Term Debt -Related Party $ - $ - ================ ================ Interest expense for the years ending April 30, 2003, 2002 and 2001 was $-0-, $4,732 and $4,243, respectively.
F-16 -------------------------------------------------------------------------------- Annual Report - 2003 Page 58 NET-FORCE SYSTEMS INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 4 - GOING CONCERN The Company's consolidated financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has incurred losses from its inception through April 30, 2003 and has a significant working capital deficit. The Company does not have an established source of revenues sufficient to cover its operating costs to allow it to continue as a going concern. It is the intent of the Company to sell its wholly-owned subsidiary to exit from the internet gaming business and to seek another valid business to become a wholly-owned subsidiary. The major shareholders are committed to provide the necessary funds to operate the Company. NOTE 5 - STOCK TRANSACTIONS On July 1, 2000, the Company repurchased and canceled 3,000,000 shares of common stock at $0.01 per share or $30,000 of cash. On September 30, 2000, the Company issued 2,000,000 shares of common stock at $0.10 per share for $200,000 of cash. On August 15, 2001, the Company issued 200,000 shares of common stock valued at $0.10 per share, to a director for services and consulting. On September 15, 2001, the Company converted the related party note payable of $208,121 and accrued interest of $6,362 into equity by issuing 2,144,830 shares of common stock at $0.10 per share for a total of $214,483. On September 15, 2001, the Company converted a note payable of $495,000 and accrued interest of $107,787 into equity by issuing 6,027,830 shares of common stock at $0.10 per share for a total of $602,787. On September 20, 2001, the Company converted a note payable of $50,000 and accrued interest of $3,333 into equity by issuing 533,333 shares of common stock at $0.10 per share for a total of $53,333. On October 2, 2001, the Company issued 500,000 shares of common stock for the subscription payable of $50,000 at $0.10 per share. On January 31, 2002, the Company issued 160,000 shares of common stock at $0.10 per share for cash of $16,000. F-17 -------------------------------------------------------------------------------- Annual Report - 2003 Page 59 NET-FORCE SYSTEMS INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 6 - COMMITMENTS AND CONTINGENCIES Software Licensing Agreement ---------------------------- In the first quarter of 1999, the Company entered into a software licensing agreement with Softec Systems Caribbean Inc. (Softec), to provide online-gaming software and hardware services. The license agreement calls for a commitment by the Company to spend a minimum of 10% of the previous months net revenue (based on a yearly average) for ongoing promotion and marketing. The marketing obligation only applies to the first 365 days of operation. The license agreement also calls for sharing of net revenues based on a specific formula agreed to by the Company and Softec. The license agreement may be terminated by the Company at the end of any one-year term or by Softec at the end of any one-year term subsequent to the first year of the agreement. All of the Company's websites and advertising are directly linked to Softec's software. Softec manages the software as well as the upkeep and maintenance. The Company is highly dependent, therefore, on Softec's ability to maintain the software and keep it running. In the event that the software fails, the Company's business and operations could be strongly affected. NOTE 7 - RESERVES AND DEPOSITS WITH CREDIT CARD PROCESSORS Reserves and deposits with credit card processors consist of rolling reserves held by merchant banks and funds for transactions processed and awaiting transfer to the Company's bank accounts. As of April 30, 2003 and 2002, the balance of these reserves and deposits were $30,927 and $63,953, respectively. NOTE 8 - PLAYER DEPOSITS As of April 30, 2003 and 2002, the Company had $51,637 and $47,002, respectively, in cash representing funds held on deposit in the form of e-cash balances. These deposits are non-interest bearing and repayable on demand. These deposits are actually held by a third party for the benefit of the Company. NOTE 9 - GAMING LICENSE The Company was required to purchase a gaming business license on an annual basis. The cost of the license was $20,000 for 2002 and was $100,000 in 2001, and is amortized over twelve months. Amortization expense for the years ending April 30, 2003, 2002, and 2001 was $-0-, $93,334 and $8,333, respectively. During 2003, the Company operated under the Master license of World Gaming, thus they were not required to purchase their own license. NOTE 10 - OPERATING LEASE Office lease ------------ On August 1, 2001, the Company signed a one-year lease agreement for office space. This lease ran through July 3, 2002. The monthly rental amount is $629. Subsequent to July 3, 2002, the Company went to a monthly office lease. F-18 -------------------------------------------------------------------------------- Annual Report - 2003 Page 60 NET-FORCE SYSTEMS INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 11 - SUBSEQUENT EVENTS Discontinued Operations ----------------------- In June 2003, the Company's Board of Directors entered into an agreement to sell its wholly-owned subsidiary, Net Force Entertainment, Inc. (Entertainment) to Geneva Overseas Holdings Ltd., a company owned by the Company's President and CEO. The consideration for the sale per the sales agreement was $100 plus the assumption of all outstanding debt. The Company no longer has any control over Entertainment. The following is a summary of the discontinued operations for the years ended April 30, 2003, 2002 and 2001.
For the Years Ended April 30, --------------- 2003 2002 2001 ---------------- ---------------- ---------------- REVENUE Sales $ 288,613 $ 519,237 $ 318,490 Cost of sales 212,445 282,020 217,769 ---------------- ---------------- ---------------- Gross Margin (Deficit) 76,168 237,217 100,721 ---------------- ---------------- ---------------- EXPENSES General and administrative 194,975 275,896 489,278 Depreciation and amortization 7,499 101,873 18,241 ---------------- ---------------- ---------------- Total Expenses 202,474 377,769 507,519 ---------------- ---------------- ---------------- LOSS FROM OPERATIONS (126,306) (140,552) (406,798) ---------------- ---------------- ---------------- OTHER INCOME (EXPENSE) Loss on abandonment of leasehold improvements - - (6,700) Gain on sale of assets - - 491 Loss on sale of assets (523) (205) - Interest income 1,135 198 1,013 Other income 1,667 494 7,656 Interest expense (1,537) (34,141) (80,259) ---------------- ---------------- ---------------- Total Other Income (Expense) 742 (33,654) (77,799) ---------------- ---------------- ---------------- PROVISION FOR INCOME TAX - - - ---------------- ---------------- ---------------- NET LOSS $ (125,564) $ (174,206) $ (484,597) ================ ================ ================ LOSS ON DISPOSAL OF SUBSIDIARY $ - $ - $ - ================ ================ ================
F-19 -------------------------------------------------------------------------------- Annual Report - 2003 Page 61 NET-FORCE SYSTEMS INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements April 30, 2003, 2002 and 2001 NOTE 11 - SUBSEQUENT EVENTS (Continued) New Subsidiary -------------- In June 2003, the Company approved the creation a wholly-owned subsidiary Atlantica Resorts Ltd. (Atlantica) to be incorporated in the Jurisdiction of the Territory of the British Virgin Islands, pursuant to the International Business Companies Act. Common Stock ------------ On June 10, 2003, the Company authorized the issuance of 25,000 shares of common stock for conversion of debt to equity valued at $0.10 per share or $2,500. F-20 -------------------------------------------------------------------------------- Annual Report - 2003 Page 62